Are managements really that important?
Quality of a company's management is crucial for its success. Not assessing the quality of management can hurt the investor badly
Jun 5, 2015
The typical Indian investor does not bother too much about company managements. You can see this behaviour particularly evident during times of an IPO deluge. Most IPO investors don't know the antecedents of the managements selling them shares. More disturbing is the fact that most don't care. The only thing that matters is what the premiums are in the grey market. We show how no company can escape the quality of its management.
Busting the myth
The integrity of the management is a concept that is oft repeated yet little sought after. But that's the key thing. Think of Narayana Murthy of Infosys, Azim Premji of Wipro or Ratan Tata. These are all individuals with integrity and people with whom you can trust your money.
Passion is the first thing to look for: Passion and integrity are some of the most important things that Buffett looks out for when prospecting a company to buy. Why? The passion for the business will ensure that managers will breathe, sleep and live for the company. TCS MD, N Chandrasekaran is said to be one of the most passionate leaders of an IT company in India. His unrelenting focus and commitment to his work now put TCS ahead of the industry bellwether - Infosys. Says Buffett, 'Passion is the number one thing that I look for in a manager. IQ isn't that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I'd say intelligence, energy, integrity. If you don't have the last one, the first two will kill you. All you have is a crook who works hard,' (Q&A with six business schools, 2009).
What is the management's key responsibility? The primary responsibility of every manager is to allocate capital effectively. How the manager uses the company's retained earnings or new funds will determine how far the company can go. Yet, as Buffett points out, very few managers are trained in capital allocation. Many Indian promoters got swept up in the boom years between 2003 and 2007. They decided they needed to go global and chased large acquisitions worldwide - actions they would pay dearly for a long time to come.
Suzlon picked up a lot of debt to become one of the largest wind-power companies in the world. Vishal Retail spread itself too thin, too fast and then eventually folded up. Bharti Airtel in recent years made a big acquisition in Africa and it still is paying for it. These are all capital allocations gone wrong. On the other hand, you had conservative managements of companies like Lakshmi Machine Works and Elgi Equipments. They didn't get swept in the euphoria because their managements were conservative and now seemingly more sensible. Companies like these have remained in business for decades and have carved a niche for themselves.
Test of a good management: According to Buffett, there are two ways to assess a management:
- How have their results been?
- How do they treat the company's shareholders? (Berkshire Annual Meeting 1994)
As per Buffett, 'Our prototype for occupational fervour is the Catholic tailor who used his small savings of many years to finance a pilgrimage to the Vatican. When he returned, his parish held a special meeting to get his first-hand account of the Pope. 'Tell us', said the eager faithful, 'just what sort of fellow is he?' Our hero wasted no words: 'He's a 44, medium'.' (Berkshire Annual Letter, 1986).
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