A strong management is the backbone of any successful company. The management of a publicly traded company is in charge of creating value for shareholders. You would have to pay a lot of attention to the management of a company before investing your hard earned money in the stock of the company. A well managed company generates shareholder value, attracts the best talent, spends on future growth and all this further increases shareholder value.
In India, shareholders are not active in ousting underperforming management and hence it is best to avoid poor management or management that is seen losing its way.
The top management team of a company controls decision making that affects everyone from the president down to entry-level employees. Those decisions, along with the way the management members treat the staff, affect the success of the company. Understanding those effects helps the management team make changes as necessary to improve the achievement of the company. The success of the company directly benefits the shareholders in delivering healthy returns on investment.
The top management has to be forward looking in a dynamic world, be innovative to outpace competiton and be nimble to embrace new growth areas.
The top management of a company leads by example and affects the motivation felt by the employees. A management team that takes a sincere interest and connects with the staff is more likely to inspire the employees to achieve.
There are examples of companies in the stock market that have gained significant value due to strong decision making by an efficient and effective management team and there are some companies that have seen erosion in the trust of investors due to management issues for a very long period of time. Some of the companies still continue to suffer from management issues and hence have underperformed their peers on delivering returns to investors.
The big example of erosion in value for the shareholders in relation to its peers is observed in the management issues faced by Infosys Ltd. The company has seen 9 top level exits in a period of 1 year and as a result the stock price has underperformed its peers. Tata Consultancy Ltd. which is the largest IT Company has outperformed Infosys by a wide margin in the same time period.
TCS has delivered a 326.84% return in comparison to a return of only 69.51% by Infosys in a five year time period. The chart below shows relative outperformance by TCS in the five year time period from 2009 to 2014.
Another example of stark underperformance is shown by State Bank of India in comparison to the private HDFC Bank. HDFC Bank has delivered a 154.87% return in comparison to a return of only 0.5% by SBI in a five year time period. The chart below shows gross outperformance by HDFC Bank in the five year time period from 2009 to 2014.
In the telecom space Reliance Communication has grossly underperformed Idea Cellular in delivering returns to shareholders. Management decisions implemented and issues faced by the company have taken a toll on the earnings and profitability has been reduced a result. The same is reflected in the stock performance in the last five year time period. Idea Cellular has delivered a 182.41% return in comparison to a decline of 57.87% by Reliance Communications in a five year time period. The chart below shows gross outperformance by Idea Cellular and stark underperformance by Reliance Communications in the five year time period from 2009 to 2014.
Infrastructure Companies that have found it difficult to manage debt have seen gross underperformance relative to its peers and the benchmark indices of Sensex and Nifty. An example of Larsen and Toubro and Jaiprakash Associates gives us a clear idea about how an effective and efficient management can steer the company towards delivering shareholder value. Larsen and Toubro has declined by 16% in comparison to a decline of 82.23% by Jaiprakash Associates in a five year time period. The chart below shows gross outperformance by Larsen and Toubro with stark underperformance by Jaiprakash Associates in the five year time period from 2009 to 2014. Infrastructure sector as a whole has gone through a rough patch but it has affected poorly managed companies more than well managed companies.
Sun Pharmaceuticals recently acquired the troubled Ranbaxy Laboratories in a USD 3.2 billion deal with an intention to solve issues regarding Ranbaxy and become a bigger and better company in the pharma space. Sun Pharmaceuticals gave a return of 492.59% in comparison to a return of 60% by Ranbaxy Laboratories in a five year time period. The chart below shows gross outperformance by Sun Pharma with stark underperformance by Ranbaxy Laboratories in the five year time period from 2009 to 2014.
The above analysis shows us the importance of studying the Management aspects about a company in which one would like to invest. Improper management and decision making may lead to erosion of invested capital for the shareholders while a strong management and decision making can drive stock prices higher relative to its peer companies.