Management is everything


Director, Banyan Tree Advisors

December 20, 2011

An honest and capable management could make a world of difference to a company’s performance on the bourses.

A FRIEND recently pointed out to me that the charts of Himachal Futuristic and Infosys look almost alike. At a cursory glance, there did seem a lot of similarities — the graphs have almost the same shape. There is one vital difference though.
One share of Himachal was worth Rs 88 on April 1, 1999, rose to Rs 2,600 in March 2000 and is now back to square one. Infosys, in the same timeframe, started at Rs 1,300, rose to Rs 13,000 and even now, at its worst, is worth a good
two times more than its value on April 1, 1999. There are, perhaps, many factors responsible for this, but the one I would single out above all others is the quality of management.

The integrity and ability of the management of a company is the last word in an investment decision. In my book, this is the most important factor going into the investment decision making process. An honest management that does not know
how to run its business profitably is as bad as a dishonest one that makes brilliant business decisions but none of the increased profits actually flow to you, the shareholder.

If you remember, one of the central tenets of security analysis that we established was that an investor is a part owner of the business. This tenet is valid only if the management also thinks likewise. You can be a part owner in a business only if
the management believes that the minority shareholders are owed their share of the business profits. Most Indian managements believe that the shareholder is just some faceless stupid fellow who keeps coughing up money to fund their
expansion plans. Some of the smarter ones are realising the folly of their erroneous beliefs. For shareholders are now learning to vote with their feet.

Let us also debunk the myth here that all Indian managements are chors and all firangs or MNCs are managed well. We have enough examples of MNC managements taking shareholders for a ride. Witness the recent merger of Indian
Shaving with Geep and Wilkinson at a swap ratio that is grossly unfair to minority shareholders. (Read more about that here) The stock price is now almost one-eighth the value recorded in February 2000. And this is a company that was the
investors’ darling just a couple of years ago. A fine way to pay investors for their enthusiasm.

This is not one stray case – Indian corporate history is littered with numerous such examples where the interest of the minority shareholder has been sacrificed for the benefit of the majority owner. Just a few years ago, a lot of MNCs decided to put their new product launches into 100 per cent subsidiaries (For more on that, follow this link). These managements could never even dream of doing something similar in the US (the most transparent capital market of all) because not only would their stock crash, they would be rapped by the regulator. Here, alas, chori is so rampant in all parts of society that nobody even sits up to notice that there has been one more.

Honesty is a necessary condition, but is not the only one by which to judge a management. An honest but incapable management is like putting your most trusted chowkidar behind the driver’s seat on a cross-country drive in the
mountains. For, while the chowkidar may be extremely loyal to you, he may not have the slightest idea of how to manoeuvre a vehicle on treacherous, hilly terrain.

Top management ability is tested especially in a crisis, but also on a daily basis because good managements put systems and processes in place which allow for the smooth functioning of the company at all times. Let us take the example of
Hindustan Lever, which has systematically hired the best graduates from the premier management and engineering institutes, put them through a gruelling training programme and groomed them over many, many years into good
managers. It is not surprising that HLL has provided the Indian private sector with more CEOs than any other company. HLL is not the only one either. A number of corporate houses (HDFC, Sundaram group, to name but two) have an
impeccable managerial record and the market has usually rewarded these companies with significantly higher price earnings multiples.

Why is it that despite India having a track record of more than 5 per cent GDP growth through the 1990s (when we slow down, we grow at 5 per cent and when we are on a high growth path, we are growing at 7 per cent. Somehow, I can
never understand talk of recession), the BSE Sensex is below the high touched in 1991? The answer is pure and simple – the market is not sure about the quality of management of the corporate sector as well as that of the country. And unless we use the current crisis to clean the system once and for all, we will find ourselves coming back to these levels again and again.