It is important for private investors to assess a company’s culture, strategy and governance when it comes to deciding on its potential for inclusion in their portfolio. Unfortunately this may be hard when executives are busy and chances to see them in the flesh are few and far between.

But some straightforward “scratch and sniff” tests when reading the accounts or results statements, or when watching webcasts from the company, could make all the difference.

Culture

Warren Buffett expects three things of management teams and if they are good enough for him, they are good enough for us. He expects bosses and boards to behave like shareholders (and thus think long-term, rather than go for short-term profit maximisation and enrichment through triggering profit-driven share awards); to exercise tight cost control at all times; and to do ordinary things extraordinarily well.

Strategy

Nothing – but nothing – gets this column’s goat like a chief executive who says his or her strategy is “growth” or “to create shareholder value”. They are what result from a good strategy, well implemented.

It is easy to grow: just make acquisitions. But paying the right price for them and managing and integrating them well are what matter. Otherwise, growth can be destructive, as shareholders in NatWest will attest when they reflect on the long-term damage wrought by former boss Fred Goodwin’s “growth” strategy.

Companies exist to find customers. They do that by providing a solution to a problem, or fulfilling an essential or discretionary need, at a price customers find acceptable. Investors must therefore ensure that a company has a clear idea of what it does, or wants to do, why, and how it is going to be very, very good at it.

In this context, it is important to discover what key performance indicators managers use to judge performance of their business – and how those KPIs are used to trigger pay packages (of which more later).

Ultimately, strategy is about competitive position. Companies must develop a distinctive product or service and then nurture its skills so it can deliver them to customers to best effect. If a company can do that, it can be a “price giver” – and earn fat margins and generate plenty of cash. If it cannot, it will be a “price taker”: margins will be thinner, earnings more volatile and cash flow less predictable.

Governance

This 10-point checklist can help investors judge whether a company is sufficiently well run to merit your financial involvement. The annual report should yield the information needed. If it does not, just move on to the next potential investment.

1. Check that the roles of chair and chief executive are separate to ensure that no one individual has too much power and influence.
2. Look at the mix of the board between executives and non-executive directors to ensure there is an appropriate degree of supervision of, and support for, the chief executive and that proper checks and balances are in place.
3. Ensure that the executive directors bring experience and skills suitable for the company and its industry, even if they may not look related at first sight.
4. Check the background, experience and skill set of the non-executive directors to ensure there is a diverse and broad range on offer. Non-execs must be able to contribute with positive input but also risk management. Independent thought must be welcomed by the executive directors and the danger of groupthink lessened.
5. Ensure that executive and non-executive pay is not excessive and is triggered by suitably demanding metrics related to the key performance indicators for the company over the long term. “Clawback” clauses for poor performance or behaviour are desirable, too.
6. Non-executive pay must be subject to the same stringent tests as executive remuneration to again make sure the non-execs act appropriately in the long-term interests of the business and its shareholders.
7. Investors need to check what committees are in place at a company, who runs them, how frequently they meet and whose attendance levels are good (or not so good).
8. Research the record of a company’s broker and advisers. If they are associated with a list of successes, all well and good. If they have a string of dud deals, scandals and governance disasters next to their name, walk away.
9. Find out why a firm chose to list where it did.
10. Look at who the biggest shareholders are and how much influence they may be able to exert, either to the benefit or detriment of other investors.

Russ Mould is investment director at AJ Bell, the stockbroker