Investment Shastra

Analyse management – Look at the jockey before you bet on the horse!

Excellent management can make the difference between a mediocre business and an outstanding one. Many a great businesses have been run in to the ground by poor management. Investing in a management which is infamous for a variety of things, giving false information etc will only make you lose your money. With many of India’s corporate honchos being named in various scams that keep cropping up, it has become all the more important to invest your hard earned money in a company run by a trustworthy management; a management that respects the interest of a minority shareholder.

However, while we understand the significance of a strong, capable and unselfish management, assessing its competence is a difficult task. There is no full-proof method available to analyse a management. Think about it. How many of us could have predicted the Satyam fiasco before it actually came up?

With this in mind, we at tried to find some pointers which could help us in arriving at some guidance to assess the worthiness of a management and decide whether this is the kind of management you want to stay invested with. We thought that while it’s difficult to ascertain whether a company’s management is the best or not, it is definitely possible to look at some qualitative and quantitative parameters which can help us separate the wheat from the chaff and objectively assess the quality of management.

With this in mind, we created the Management X-RAY.

So, what is the Management X-RAY?

Management X-RAY is a unique way of analysing the Management of a company similar to the 10 YEAR X-RAY used for analysing the historical financial performance of a company. Management X-RAY consists of 5 key parameters that help us assess the quality of the management of a company. These 5 parameters are:

5 Parameters that make up Management X-Ray

How do we assess these parameters?

To analyse the management of a company, we try to find answers to some questions related to these parameters.  All the parameters are thus studied in detail and are measured against benchmarks we have arrived at after thorough research. They are then individually colour coded GREEN (Very Good), ORANGE (‘Somewhat Good’) and RED (Not Good). Click on the image below to view MoneyWorks4me Management X-Ray.

Snapshot of MoneyWorks4me Management X Ray

Let’s understand what each of these parameters tries to find out.

Corporate Governance – How sound the corporate governance practices of a company are?

Corporate Governance signifies a set of processes or laws that affects the way a company is directed and controlled. The corporate governance practices of a company are analysed by taking in to consideration details such as composition of the board of directors, quality of independence, remuneration paid to the board of directors, etc.

Board credentials – Is the management team equipped in terms of the skills required to run a company?

Management credentials refer to the skill sets (qualification, experience, etc.) that the management team of a company possesses. Relevance of qualification and experience is looked at in this case.

Promoters’ holding – Is it in the substantial interest of the promoter to run a company successfully?

Promoters’ holding refers to the stake that the promoters hold in the capital of a company. A very low promoter stake can indicate reducing control and interest of promoters in the operations of the company; they might exit at any point of time. A very high promoter stake on the other hand could mean that promoters might overlook minority shareholders interests while taking decisions.

Another key criterion that we look at is share pledging by promoters. Often overlooked, pledging has led to the downfall of many companies. Read more about share pledging here.

Transparency – Is a company’s management transparent in sharing its business dealings and financials with investors?

The next parameter we try to assess is how transparent is a company with respect to disclosure of important and necessary information. We look at how comprehensive is the information provided in various media releases such as footnotes and disclosures, management discussion and analysis, Chairman’s speech, quarterly results and conference calls. Further, we also look at how honest and forthcoming the management is with respect to its performance.

Integrity – Is the management of a company trustworthy?

Integrity refers to the application of honest and fair business practices. Here we look if the management is involved in scams, frauds, other doubtful practices etc which would be a warning sign.

Ideally, you would like all these 5 parameters to be Green (Very Good). If however, any of these parameters is Red (Not Good), it is a cause of concern.

Management analysis thus aims to protect you from companies whose management actions are such that they could risk the very existence of the company. Actions such as high pledging, very low promoter stake, excessively high director remuneration, etc. are often overlooked while analysing companies. These actions could hamper the profitability and growth of a company and also the health of your portfolio. A company with a bad management might give you short term gains, but it may turn out to be a bad long term bet.

In a nutshell, Management X-RAY at helps you to gauge the trustworthiness of the management of a company which in turn will increase your confidence in making safe investment decisions.

The Management X-RAY along with the 10 YEAR X-RAY (10 year financial track record) of a company would give you a complete picture of the Company, thus helping you select safe companies to invest in!


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