10 Significant Risk Factors When Investing in a Company

Management Decisions
Steve Jobs gives an update at a press conference in 2010. After the CEO of Apple passed away in 2011, some investment experts wondered about the future of the company. Ryan Anson/AFP/Getty Images

There's a reason why CEOs, presidents and chairmen of the board get paid the big bucks. Top-level management is responsible for making the decisions that can result in huge profits or crushing losses. Sure, their decisions are based on data and advice generated by in-house staff and teams of outside consultants, but the buck has to stop somewhere. Before you invest in a company, you should get to know its leadership team and its penchant for making risky decisions.

Experience is a good place to start. Where have the top managers worked before? Did they successfully helm a similar type of business? Have they shown loyalty by sticking with the same firm for a number of years, or have they bounced around from job to job? Google their names and see what the press has to say. Have they been implicated in any civil lawsuits? Have they been charged or convicted of any crimes? A checkered past isn't necessarily a deal breaker, but it raises the risk level for future bad decisions.

Also remember that even charismatic, visionary leaders can have a downside. What happens when they leave? The passing of Steve Jobs in 2011 is one of many factors that have some investment experts predicting an imminent crash for Apple stock [source: Wasik]. And leaders with too much self-confidence can lead to risky decisions. A 2013 study of CEO signatures found that those with the largest signatures — a sign of narcissism — were prone to "overinvestment," spending too much on fast growth, capital expenditures and pet projects, while letting revenues slide [source: Ham et al.].