How to Evaluate Management Like a Pro

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Dear Friend,

Happy Wealth Wednesday.

When I look at a company, I always start with one question: who’s running it?

Because no matter how strong the business model looks on paper, the people behind the numbers are what make or break it. Great management teams can turn average businesses into compounding machines. Bad management teams can destroy even the best products in the world.

Over the years, I’ve learned that evaluating management isn’t about charisma or how polished someone sounds on CNBC. It’s about alignment, discipline, and honesty. The best CEOs are not just operators. They are owners, capital allocators, and truth tellers.

There are three traits I look for every single time I research a company:

1. They have real skin in the game. Their personal wealth moves with the stock.

2. They know how to allocate capital. Every dollar earned gets deployed wisely.

3. They are candid and transparent. They tell shareholders the truth, even when it hurts.

These three principles can help you identify leaders who build lasting value, not just short-term excitement. Let’s break them down one by one.

1. Skin in the Game

When you buy a stock, you become an owner. But the real question is, does the CEO see themselves the same way?

The best CEOs don’t just work for a paycheck. They have skin in the game. Their personal wealth rises and falls with the company’s stock price. That alignment changes everything. It turns every decision into something personal.

There’s a big difference between a hired executive and a true owner. When the CEO has millions of their own dollars invested, you can bet they think twice before making risky acquisitions or overpaying for growth.

A study by Institutional Investor found that companies with high insider ownership outperformed peers by 2.3% annually over the last decade. Harvard’s research showed that CEOs who own more than 5% of their company’s stock are 15% less likely to engage in unethical behavior and have 7% higher employee satisfaction across the board. That’s not a coincidence.

Look at Elon Musk. He owns roughly 13% of Tesla, or about 410 million shares, worth close to $90 billion. That means every operational misstep, every product delay, and every new model launch directly affects his net worth. When the person at the top has that much at stake, they are far more likely to focus on long-term success.

Or take Mark Zuckerberg at Meta. Through a dual-class share structure, he controls over 50% of the voting power while holding a 13-14% economic stake, worth more than $240 billion. That ownership allowed him to pursue big, long-term bets like AI and the metaverse while most executives would have caved to short-term shareholder pressure.

Founder-led companies like these often outperform because incentives are perfectly aligned. In fact, founder-led businesses in the S&P 500 generate 31% more patents and deliver 12% better market-adjusted returns over three years compared to companies run by professional CEOs.

As an investor, I pay close attention to ownership levels. The sweet spot tends to be between 5% and 25%. That’s where the CEO is heavily invested but not so powerful that they can’t be held accountable.

If the CEO owns almost nothing, I lose interest immediately. If they’ve been dumping shares year after year, that’s an even bigger red flag.

When the person running the company has real skin in the game, their goals align with yours. That’s the kind of management I want to partner with.

2. Capital Allocation

Once a company starts making money, the next question is simple: what do they do with it?

Capital allocation is one of the most important skills a CEO can have. Every dollar that flows through a business has to go somewhere. It can be reinvested, used to pay down debt, returned to shareholders, or wasted on poor acquisitions. The difference between those outcomes determines whether your investment compounds or stalls.

William Thorndike, in The Outsiders, outlined five basic options a CEO has for allocating capital:

1. Invest in existing operations

2. Acquire other businesses

3. Pay dividends

4. Pay down debt

5. Repurchase stock

The great CEOs know how to balance those levers better than anyone else. They understand that not every dollar is created equal, and that the price you pay always matters.

One of my favorite examples is Henry Singleton, who ran Teledyne from the 1960s through the 1980s. Singleton built one of the best track records in American business history, compounding at 20.4% annually over 28 years, compared to 8% for the S&P 500. He used overvalued Teledyne stock in the late 1960s to buy 130 companies at cheaper valuations, then flipped the playbook in the 1970s and bought back over 90% of Teledyne’s shares when the stock was undervalued.

He never sold a single share personally. That’s what capital allocation discipline looks like.

A more recent example is AutoZone. Since 1998, the company has spent more than $36 billion on buybacks, reducing its share count by nearly 90%. The result is a 10x gain in earnings per share, achieved by pairing consistent earnings growth with fewer outstanding shares. When done right, buybacks are one of the most powerful wealth creation tools in the market.

The best capital allocators share a few traits. They think independently. They act patiently. They avoid wasteful acquisitions. They rarely issue stock. And they are laser focused on increasing per-share value, not just total revenue.

When I study management, I always look for CEOs who think like investors. The numbers I watch most closely are Return on Invested Capital (ROIC) and Free Cash Flow (FCF). If ROIC consistently exceeds the company’s cost of capital, and FCF is being reinvested wisely or used for buybacks at attractive prices, that tells me leadership knows what it’s doing.

Capital allocation is where vision meets execution. It’s easy to spot companies that grow fast. It’s much harder to find those that grow profitably and know how to reinvest in ways that actually make shareholders richer.

3. Candor and Transparency

The last thing I look for in great management is candor.

It sounds simple, but real honesty in corporate America is rare. Too many CEOs sugarcoat problems, dodge hard questions, or use buzzwords to hide bad results. The ones who tell it like it is stand out because they understand something most don’t: trust compounds just like capital does.

When I read a shareholder letter or listen to an earnings call, I’m not just looking for numbers. I’m listening for tone. Are they being straight with investors? Do they admit mistakes? Do they take responsibility when things go wrong, or do they hide behind excuses?

One of the best examples of transparency in business is Brian Chesky at Airbnb. When the pandemic hit, Airbnb lost 80% of its bookings almost overnight. Chesky didn’t hide. He personally reviewed every layoff decision, wrote an open letter to employees explaining what happened, and walked investors through how the company planned to rebuild. A few years later, Airbnb was back to posting record cash flow. That’s what real leadership looks like.

Another strong example is Jamie Dimon at JPMorgan. His annual letters are long, but they’re worth the read because they’re brutally honest. He talks about regulation, competition, and mistakes just as much as he does success. That kind of candor builds confidence because investors know they’re getting the full story, not just the highlight reel.

As an investor, I’ve learned to respect leaders who admit when they were wrong. It shows self-awareness. It also means they’re more likely to course correct before a small problem becomes a big one.

Now, here’s what I watch out for aka the red flags.

If a CEO constantly blames the economy, regulators, or the industry for poor results, that’s a warning sign. Great leaders take accountability. If every quarter sounds overly optimistic while results keep missing expectations, that’s another one. And if management avoids taking analyst questions or gives vague answers on earnings calls, that’s usually a sign they’re hiding something.

Research shows that 27% of executives admit to manipulating earnings at least once in the past five years. Another 18% said they adjusted operations just to meet short-term targets. That’s why candor matters so much. Transparency builds trust, and trust is what keeps shareholders around when the market gets rough.

When you find a CEO who’s honest about both wins and losses, that’s someone worth investing with. Candor may not show up on a balance sheet, but over time it’s one of the strongest indicators of long-term success.

Conclusion

When I study a company, I never start with the product. I start with the people running it. Because the truth is, great management can turn an average business into a winner, while bad management can destroy even the best idea on earth.

The CEOs I trust the most all have the same three traits. They have skin in the game, so every decision affects their own wealth. They know how to allocate capital, turning profits into long-term value. And they communicate with candor, treating shareholders like true partners instead of outsiders.

When those three things come together, you get companies that compound over time. They survive market cycles, make smart decisions, and keep building even when things get tough.

If one of those traits is missing, that’s when I start asking questions.

Evaluating management isn’t glamorous, but it’s one of the most underrated skills in investing. It helps you filter out hype and focus on leadership that actually builds value year after year.

At the end of the day, the numbers will change, but character doesn’t. And the best investments almost always start with great people.

Cheers!

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