X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The 'Management' factor - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 16, 2004

    The 'Management' factor

    Often we have heard and read (including on this website) about the necessity of a good and sound company management, which is one of the most important prerequisites before one includes a stock in one's portfolio. But more often than not, this criteria of a good management remains limited to a mere stating of this fact, without any assistance as to how should an investor actually proceed with this valuation parameter (if one can call it) before investing.

    The legendary genius and the world's most successful investor, Warren Buffet, also consistently echoes the importance of competent and honest managements in the letters to his shareholders. Some extracts from the same are brought out here.

    "Maximizing the results of a wonderful business requires management and focus" (1996). "We feel very comfortable owning interests in businesses...that offer excellent economics combined with shareholder-conscious managements" (1984).

    It is a known (and now accepted) fact that it is the good and bad managements that make or mar the fortunes of any company. For a moment, recollect the WorldCom's, the Enron's, the Microsoft's and the GE's of the world and importance of a credible and trustworthy management assumes prime importance. However, it must be noted that evaluating a company's management is never an easy task owing to the various facets with respect to the managements roles and responsibilities, many of which do not have clearly defined boundaries and therefore remain elusive. Further, this exercise of coming to a conclusion with respect to the quality of the management poses even greater problems if the company is a 'new-kid-on-the-block', like the Infosys of the early 1990s.

    Below are just a few points, which do not necessarily confirm the quality of management, but nonetheless, would be important to consider:

    Management term: The service tenure of the management is a good indication of the management's strength and belief of the shareholders in the same. Among the many examples would be that of Berkshire Hathaway, owned by Warren Buffet, where the current management took the reigns of the company in its hand in 1965 and has since served the company dedicatedly! The top management has to be given time in order to successfully implement its plans that add value only over the long-term. Regular replacement at the top can cast a doubt over the continuance of the plans of the previous management thus adding to the uncertainty.

    Management vision: The vision of the management could provide some hint as to the future plans of the company. The goals set by the management, not just for itself but also for its employees, by outlining its strategic goals and broad strategies to achieve the same is a positive sign for shareholders of the company. Also investors could judge the management by continually monitoring the management's progress with regards to its vision statement.

    Management track record: Another parameter to judge the management of a company is by delving into its past track record (if existent). This would give a fair idea about how the executives have managed to steer the company in the past, through good times and bad. Of course, a relevant comparison would be only when comparing the management performances of companies in the same sector for various obvious reasons. A good example here would be comparing the consistent performance (with marginal deviations, of course) of an Infosys with the unpredictable performance a Mastek in a volatile software sector.

    Management qualification/experience: Considering that the management is the 'captain of the ship' and in order to keep the ship sailing, it is of utmost importance that the captain is well versed with the technicalities of running and managing the ship. Similarly, when the management of a company is either qualified and/or experienced, it is in a better position, owing to its skill sets, to chart out relatively better growth plans for the company. However, though desirable, it must be noted that here we do not mean that it is 'only' the qualified and/or experienced management, which would be able to run a company.

    Appropriate use of available resources: It is advisable for the company to use the company's retained earnings to improve the quality of earnings and improve the company's profitability in the future. Otherwise, it is in the best interest of the company and the shareholders that the surplus monies be distributed amongst the shareholders. For example, Hero Honda's strategy of rewarding shareholders with dividends is an indication of the management's shareholder-friendly nature.

    Management focus: While one may argue that in today's dynamic, ever changing and globalised world, it would be wise to spread the business groups risk over diverse areas, we believe that too much of a deviation from the core activities and strengths of the management could prove detrimental to shareholder value. The path a company takes should be guided by the vision of the company's management. Any deviation from the same may be detrimental for the shareholders and shareholders need to critically evaluate any diversification plans of the company.

    Management competence: The management's ability to react to changes, competition, opportunities and threats and take appropriate actions to correct or take advantage of the same is a good indication of its various capabilities. A pro-active management is definitely a big plus as compared to a passive management. For example, Tata Steel (Tisco) has an upper hand on this parameter as compared to SAIL, which took corrective measures only after having sunk into deep waters and having eroded shareholder wealth considerably.

    Management compensation: Since the management comprises of people like us looking after the company for us, they deserve a compensation for the services rendered by them to the company. However, it is the amount of compensation that should be of importance. Top-level executives do deserve handsome pay packages if they continue to deliver time-and-again and through good times and bad. However, obscenely high salaries, and that too when the company fails to sustain its performance over the years, needs to be questioned.

    While one has to agree that there is no specific model or pre-defined guidelines as to decide upon management quality, the above should provide some assistance to the evaluation process. So, from next time onwards, don't just restrict yourselves to the analysis of financial results, but try to find out the people who have carved out the numbers. Who knows, you might be in for some surprises!

    We conclude here with an extract from a letter (1985) by Warren Buffet to his shareholders, which would sum our efforts in one of the most appropriate way:

    "Management cannot determine market prices, although it can, by its disclosures and policies, encourage rational behavior by market participants."

     

     

    Equitymaster requests your view! Post a comment on "The 'Management' factor". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 (Close)

    MARKET STATS