Corporate Governance Markets Profitability

Management commentaries and what I make of them

Management quality should be at the top of any investment strategy. What they say and how they react is what really matters !

Over the last 20 years, I have interacted with managements across sectors and of varied kinds. I have interacted with them as a credit rating anlalyst, as an equity research analyst and also as an investor.

Initially, I used to take everything on the face value. Over the period, I have learnt my lessons and become more careful.

Good management with average business is preferable over bad management with good business. Click to Tweet

How much media savvy the management is, how they prepare the investor presentations, how they interact during the analyst calls, how they respond to a crisis situation, what kind of information they include in the regulatory announcements, etc – I now try to take cues from everywhere to try take a call on the quality of the management.

Over the years, I have observed some repeated behaviour patterns and have drawn my own investment strategy around them.

1. Am concerned when management has 'ready and clean answers' to everything

When it’s too good to be true, it rarely is !

I have attended multiple calls, where management is extremely professional, experienced and seems to have prepared for every eventuality. This is a big red flag for me – I associate such kinds to over smart and overconfident types. 

The fact remains that the world doesn’t move in a predictable linear fashion. Businesses get impacted by various factors – mostly uncontrollable.

I would rather like managements to be seemingly unprepared towards certain questions – especially towards not so obvious ones.

2. Love it when they choose not to comment on the stock price

Management’s job is to focus on their business and not stock prices.

Yes, they should disclose and communicate all the relevant information to the investors. However, keeping on insisting how their stock is grossly undervalued is not going to help much.

On the contrary, it is an indication that management may indulge in certain activities that may not be in the longer interest of the business and the Company.

Fair valuation should be left to the intelligence of the market. If the business is doing well, stock is going to get it’s due recognition sooner or later.

3. Mostly, I ignore the management guidance
Hence, ok with both kind of Companies – those who provide guidance as well as those who don’t. In fact, by setting expectations, guidance driven companies normally face more volatile stock price movements. 

Guidance normally works well in a buoyant economy and don’t during slowdown. It is provided to help analysts draw their projections on excel. 

I am personally not really bothered about few percentage points of growth here and there. I rather focus more on the historical trends and qualitative commentary by the managements on some key parameters to draw my own outlook – strategy on supply chain, customer acquisition, product launches, competition, business expansion, debt levels etc. 

4. Could have done better VS the best we could do

I prefer the former over the latter. I am sure you would be wondering that this is counterintuitive  – because you are assuming that former didn’t put in their best effort whereas the latter did.

Let me spin it the other way – I believe what both mean is actually different…

The first ones are continuously learning and working to address the weak points in the business. Whereas, the other ones believe that they have achieved nirvana and everything best is already done.

Read again and you will agree.

Let me also assure you, the historical long term performance trends confirm what I just mentioned. Please do analyse any of the best and worst performing stocks in the last 15-20 years. 

5. When management turns astrologer
and makes predictions – e.g., this unit will turn profitable after 3 years, we will capture 20% market share in 5 years etc etc etc.

I have no interest in listening any further. I can’t predict tomorrow and they can predict 3 years in advance. My good wishes to them !

6. Good performance is our efforts, bad performance is market conditions
This is in line with the general human tendency so as such nothing very alarming.

I only try to check the extent of balancing act. Taking credit is fine but what else did they do to work towards long term sustenance. Likewise, macro factors do matter but what else did they do to mitigate the impact. 

For a small company to always hide behind the macro environment may not make sense as even marginal market share gain could have negated the macro impact. 

7. Management's response and attitude during crisis is very important
Businesses operate in an uncertain environment and have to regularly face crisis situations. E.g., worker strikes, large defective order, tight liquidity conditions etc.

Management’s response to those situations as well as timely and transparent disclosure to the stakeholders is important to judge it’s quality.

In the past, I have seen some managements go completely silent in a crisis situation, as if they are on some topmost secret mission. Personally, I am extremely wary of these kind of behaviours. 

8. Controlled arrogance by the management is fine with me

They need to draw a line somewhere. Else sometimes people expect them to disclose anything and everything under the sun.

My only criteria is – they can not choose as per their convenience. The disclosure practices and guidelines should be well laid out for the Company and if they are diverting then there has to be a justifiable logic for the same.

9. Lesser the media time, the better it is
Serious and quality managements rarely spend too much time with the media.

Focus is towards the business and if that is doing well, they will get covered by media automatically.  

No one is perfect and I am not looking to find the most ideal management. Anyways there is none !

I never look at any of the above points in complete isolation. I try to continuously observe management’s reactions, responses, disclosures and interactions and try assess it’s suitability (from my perspective) while taking any investment decision.

Some of my biggest losers and gainers in the past have been solely determined by the quality of the management behind them. So yes, this continues to be my biggest focus area….

Quality management is needed because nothing is simple anymore, if indeed it ever was. Click to Tweet

Please note: In this post ‘Management’ also includes the ‘Promoters’ of a Company. 

Illustration Credit: Illustration Credit: Vecteezy.com

If you liked the post, subscribe free to our exclusive community and share the post in your social network !

About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

4
Comment on the post

avatar
2 Comment threads
2 Thread replies
3 Followers
 
Most reacted comment
Hottest comment thread
3 Comment authors
ShaileshNitin JainJatin Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
Jatin
Guest
Jatin

Nice & informative Article Sir. Body Language of the management while on media and also certain aspects in the investor con call could be also indicative.

Shailesh
Guest
Shailesh

Nice compilation ..would like to add, other means of investor communication viz annual reports , investor presentation also gives colour to the management quality .

Join exclusive inves4 community

SUBSCRIBE 
Your information will never be shared
Join exclusive inves4 community

SUBSCRIBE 
Your information will never be shared
close-link