Should promoters also manage their companies? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Should promoters also manage their companies? 

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In this issue:
» Food Bill finally!
» States in US turn to gold & silver as legal currencies
» Wall Street reforms an opportunity for Indian IT industry
» FDI in retail to help curb inflation?
» ...and more!

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00:00
 
Whenever we talk of a good investment, we always mention a few things. Strong fundamentals, cheap valuations and most importantly good management. The third criterion is what we would focus on today. Which is a better managed company? One which has its promoter managing at the helm? Or the one which is managed by professionals other than the promoters?

There are different schools of thought that support one or the other of these conditions. Some feel that it is better if the promoters themselves manage the affairs. It is their money that is invested into the company. Therefore, they would not do anything outright foolish to destroy the wealth that they have built over the years. As a result, the company would earn money and cash would build. In the end the shareholders benefit.

Another school of thought states that if the promoters themselves are at the helm then it does not bode well for the shareholders. The promoters tend to work for their own vested interests and do not really care for the shareholder interest. In addition to this, they lack the professional outlook that can actually help them in taking unbiased decisions which benefit all the stakeholders. The level of education and professional training that comes in with professional management are the added advantages.

In India there are perfect examples of successful companies in both these schools of thought. Wipro is a classic example wherein the promoter is the head of management as well. On the other hand ITC is a classic example where promoter and management are separate. In our opinion, it is good if the promoter has his own money invested in the company. This would ensure that he would not allow the company to do anything that would destroy his own wealth. But at the same time, he should allow professionals to take the main managerial decisions. This is what would work best for the shareholders' interest.

Do you think that the promoter should be at the helm of management in the company or do you think the promoter and management should be separate? Share your comments with us or post your views on our facebook page.

01:10  Chart of the day
 
A picture of the future is something we all love to see. Forbes magazine carried a study conducted by Standard Chartered that tries to establish what the world would look like in 2020. As per the study, China's GDP (Gross Domestic Product) would exceed that of United States, making it the largest economy in the world. It is expected to grow to US$ 24.6 trln from its 2010 level of US$ 5.7 trln. India would rank third with a GDP of US$ 9.6 trln compared to its 2010 level of US$ 2 trln. As per the study, India's growth would help it overtake Japan to take up the third position.

Data source: Forbes Magazine

01:30
 
With the way food prices have soared in the past few years, it has indeed become a big issue for the UPA government. This government came into power on the strength of its promises to introduce reforms and improve the plight of farmers as well as the nation's poor. But so far the government has yet to deliver significantly on these promises. A slew of scams and scandals and party politics have kept the UPA government tied without the leeway to focus on the growth and development of the Indian economy. Meanwhile, food prices have refused to ease off. Hence, now is the time for the government to begin its reform agenda by introducing the food bill. That said, effective implementation of the food law will be the most challenging act for the UPA government. For instance, the quantum of food subsidy spend and the extent of participation by the private sector are some of the issues that it will have to address. Either ways, the government will have to give a serious thought to food and its availability given that food shortage is likely to become a global phenomenon in the wake of climate change, rise in population and unpredictable weather patterns.

02:15
 
First, hitting the debt ceiling, then the data pointing to a brewing housing crisis and now a case for legalizing gold and silver to be used as currencies. Nothing seems to be going right for US economy. The buzz about use of gold and silver as legal currencies in American states is a testimony to the failing monetary policies of the government. The state where this has already been done is Utah. The idea is spreading fast among others. It is just a manifestation of the public protests towards monetary and fiscal policies and its lack of faith in the US government to remain solvent.

In what seems like a backward move in monetary evolution cycle, some are pitching to go back to the Gold standard. This will peg the value of the dollar to certain amount of gold. It is expected to stabilize dollar by discouraging government's reckless fiscal spending and printing of money. However, we have come a long way to revert back to the previous standard. The move may cause the whole monetary system to go for a toss by making it difficult for the government to adjust exchange rates when needed. Is this an obituary to the dollar? Time will tell.

02:45
 
Banks and financial players, especially in the US, are going to face stiffer regulatory environments. This is a result of the global crisis. The proposed Dodd Frank Act is considered to be a very comprehensive reform in the US financial arena. It will impact the functioning of financial players like traders, hedge funds, asset managers, consumer banks etc. These players may face some difficulties in fulfilling new regulatory needs, but it opens a new door for the Indian IT industry.

Now all the IT systems employed by these players will need some fundamental changes. Financial players will look for those IT players who can work as a business consultants and offer solutions. At the same time, they will look for cost effective solutions. All these create a great opportunity for Indian IT players, who are known for their cost effectiveness. However, they need to go a long way to build a domain competency led business model.

03:15
 
A lot has been said about the pros and cons of allowing FDI (Foreign Direct Investment) in multi-brand retail in India. The latest argument in favour of this comes from none other than the chief economic adviser, Mr Kaushik Basu himself. Mr Basu heads an inter-ministerial group set up to suggest anti-inflation measures. The committee feels that food inflation can be kept under check by opening up of FDI in retail. In the latest union budget, the Finance Minister had stated that nearly 40% of food produce gets wasted in India. The gap between farm gate prices of agricultural produce and the retail prices in India are amongst the highest in the emerging countries and the world at large. FDI in retail especially food retail could provide a solution to all this. Foreign players will bring in robust supply chain methods and create a more competitive environment. This will help in bringing down the intermediate costs and thus, the final product prices. Also, more long term foreign funds will flow into India. In future, the global retailers may decide to source goods from India. It will then help in reducing the gap between imports and exports of goods and services.

04:00
 
It was another disappointing week for the world stock markets. Other than Brazil which managed to close the week in the green (up 2.7%), the remaining world markets ended in the red. The biggest loser of the week was China (down 5.2%) extending the biggest weekly drop in 10 months. The country continues to battle inflation. This is putting pressure on the central banks to continue raising interest rates. Investors are worried that the tightening is overdone and higher interest rates would slow economic growth.

In Europe the biggest loser was Germany (down 1.4%) followed by France (down 1%). In Asia, Singapore was down by 1% while Japan was down by 0.9%. Hong Kong closed the week down 0.4%. Indian stock markets remained choppy during the week and closed down 0.3%. Foreign funds have been pulling out money from the Indian markets on stubborn price pressures and the central bank's aggressive monetary tightening which threatens to restrict growth and dent corporate profits. US closed the week down 0.6%.

Source: CNNfn, Yahoo finance, Kitco
Countries are representative of their benchmark indices


04:55  Weekend investing mantra
"The fact that people will be full of greed, fear, or folly is predictable. The sequence is not predictable." - Warren Buffett
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15 Responses to "Should promoters also manage their companies?"

Babu Philipose

Jun 5, 2011

Promoter at the helm gets an opportunity to promote his vested interests at the expense of the shareholders by bribing the concerned personnel at ministries & SEBI, which was what happened in the case of companies started up during eighties & nineties. You will find that 75% of those companies started during those period have become sick, but the Promoters are still making money without giving anything to their Shareholders as they are not traded in the Stock Market, and have become personal property of those promoters.

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Jigar Parekh

May 30, 2011

In my opinion promoters should avoid being the managers into their own company. It always creates the conflict of interest between their own interest and the interest of other share holders. They might even manipulate the books of account and that way they might try to either inflate or deflate the balance sheet, which is not good for all the stakeholders. Classic example is that of Satyam.

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Naveen

May 29, 2011

On the helm of a company One will be making a decision but not both promoter & management. And thats how it has been.
It may be wrong to think that in ITC management makes the big picture decisions. It is the Promoters who take the call there if management were able to convinve them of it. Ultimately for an outsider it looks to be management. However, the promoters take the call.
Even at berkshire its on agreement. management is on ideas and execution of strategy. Nice to say that CEO takes the call. But not true when its decision making time.
Old saying. One head is better than two as it would be a monster... is it true? should be...

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G.P.Sangal

May 29, 2011

Company should be managed by professionals. There should be adequate representation of promoters on the Board of Directors. Promoters will thus have say in policy formulation, monitoring of performance selection & appointment of top management positions.

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R K Sachdeva

May 28, 2011

In a public limited company, it is necessary to ensure separation of the corporate interests of the company from the personal ambitions of the promoter family, and provide a fair deal to the small shareholders and other stakeholders. The role of the promoter should be confined to the board level. The chief executive and other executives should be professionally selected from outside the family and influence of promoter.

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shome suvra

May 28, 2011

For better governance individual promoter's share should be reduced.

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Andre

May 28, 2011

It is irrelevant whether a company is managed by professionals or the promoters. There are enough success stories, bankruptcy filings, an closures of companies that were run by professionals and the promoters. All that matters is that the management competent and has the company interest at heart and in action.

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N.Baskaran

May 28, 2011

The Promoter should take care of relations outside the company like Political leaders,Ministers, Top Notch Foreign investers and Some of the Influencial Share brokers.

Professional Should look at New Technologies, Creative Manufacturing, New Markets ,New Products, Product Life Cycle,Top honchos of like minded firms and day-to-day operations.

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Adi Daruwalla

May 28, 2011

Azim Premji has his morals and value system well placed. The problem is the people appointed under him to manage the Empire. Initially they may have shared the same value and morals but later on became power and money crazy inspite of having 7 crores severence packages. How did Premji control them or the consequent mis doings in his company by being at the Helm. The Quoran says that if a community or settlement becomes too big where you dont recognize the people then you have to start making new settlements. The same is the case with Wipro, and other corporates where they have become so big that no one is able to decide and these are important that the flow of information is smooth from top to bottom and vice cersa and that there was an adequate time frame for actioning the flow of information. In this push mail and push button age the quality of managing has detiriorated, thats why fudging and frauding is happening more often than not. Why are the heads given titles of VPs and Presidents they should be labelled pirates. So professional management, Investors themselves and proper time frames for actioning well reasearched projects (projects need to be resaerched before jumping into them 6 months to a year) will benefit the Promoters, management and shareholders and avoid skull duggery amongst company appointed professionals

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Punit

May 28, 2011

There's no right or wrong here.
One possibility is that if the promoter is a serial entrepreneur, he is better at new venture conceptualisation, than running the day to day affairs of a company. So he should hire management and move away from an operating role.
On the other hand, if the promoter is passionate and focussed on a single industry, his venture in this industry is more likely to be better managed by him. He is likely to be able to give strateic and operational directions, like a Steve Jobs for Apple.

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