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Management No. 1

Jun 14, 2002

Value investing is easier said than done. Invest for a long term, they say. But in today's world where business is done at the speed of thought, a longer time frame implicitly implies that the exposure your investments have to a rapidly 'mutating' environment is more. Thus, the businesses you own stand a greater risk of being impacted by rapidly changing technology and business environment. Thus, one of the key criteria for evaluating potential candidates for your portfolio should be the ability to successfully manage through fast changing operating environment. Why do some companies manage to adapt themselves to the ground realities, while some others don't? The answer is not very complicated. It is the leadership at the helm, the management.

Jim Collins in his book, 'Good To Great' identifies some common factors among companies that made a transition from being merely good companies to great companies. The first factor he identifies is 'level 5' leadership. A leadership that is not obsessed about itself but about what the company has set out to do. More importantly, a management that has institutionalized leadership. The organisations performance is not a one-man show. Thus, when the leader departs the organisation continues to work unaffected.

Now comes the more difficult part. How does one gain an insight about a company's leadership? Well, annual reports are a very good place to begin with. While some companies print their annual reports because it is mandatory to do so, others use it as an opportunity to communicate with their shareholders. This is the first differentiator. Then of course comes the content of the communication that speaks volumes about the management.

While talking about annual reports, does the next thing have to do something with Infosys? You guessed right, it has. Infy's FY02 annual report begins with four brilliant essays. Each one of them provides a brilliant insight into ingredients for managing in turbulent environment. While Mr. Shibulal, Head, Customer Delivery, talks about a maintaining skills sets cross a wide spectrum of technologies and the ability to attract right people, Prof. Marti Subrahmanyam, Independent Director, talks about financial flexibility as a key competitive advantage. And then there is an essay by Mr. Phaneesh Murthy, who talks about technology driven leadership. But what is more striking is that the man, who started it all, Mr. Naryana Murthy, has hardly anything to in the whole of the annual report. He has moved on. And is now busy creating the next generation of leaders for the company.

And then there is Satyam's annual report that has a hundred pages more, mostly due to the astronomical number of subsidiaries the company has. Did you know that Kheladi.com, E-chem.com were all Satyam's subsidiaries? The company talks a lot about customer delight, but nowhere does it talk about what it can do for its customers. There is hardly any communication from any member of the company's board other than the mandatory directors report.

Businesses are made up of organisations and organisations are made of people. And numbers alone can't evaluate people. While numbers are important, very important, but once a company's credibility and integrity has been well established, a long-term investor has to look beyond numbers. Jim Collins in his study found that many organisation made the transition from good to great even when the industry from which the company was from, performed very badly. The moral: When times are bad for an industry, it is perhaps the best time to buy the consistent outperformer in that industry.


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