Every time my firm has invested in a company there’s one question on which we never budge.
Can we trust this management? If the answer to this question is shaky, we walk away. We’ve missed out on some good swings, but our life as trustees of others’ wealth is more orderly.
Top management’s behaviour with investors is often well rehearsed, so our analysts discount politeness, passion and sincerity quite cynically nowadays.
We look for behavioural insights when their defences are down: a response to an anonymous call, how top honchos react to public goof-ups made by their chief financial officers and how they react to a trick question.
Let’s see what such a management should (and should not) be doing.
Communicate: A trustworthy management should communicate openly with its shareholders, and the larger investing fraternity. Any listed company is surely large enough to accommodate an employee whose sole job is to periodically communicate management’s position on business and strategic issues to shareholders.
Many companies simply don’t have a process wherein a shareholder or a potential investor can contact the company and get such information.
Democratise information: All shareholder communication must be documented. The Internet makes it possible to share this information with the world at large. Financial results, annual reports, key information and documents on projects, financing arrangements and business development should be available on the website within a few minutes of the statutory disclosures to stock exchanges or Sebi.
Nudge, don’t guide: Have you noticed newly listed companies openly guiding investors about top line and bottom line estimates on listing day? Or how IT companies provide financial “guidance” on their performance for a coming quarter or year? A company is certainly entitled to share its estimates. This should be seen as a target and a likely result, with strong cautionary disclaimers. It is not a god-given fact.
Be transparent: Revenue breakup by product or service line is strangely missing in many annual reports. Many companies have sought exemption for detailed information in this regard, claiming potential loss of competitive strength as an excuse. Ironically, a bad turn of events is the biggest opportunity to prove to your stakeholders that you are sincere and transparent.
Be consistent: Over a few quarters or a few years people begin to notice a pattern that emerges in the “public behaviour” that a company’s management engages in. If this pattern is consistent, it reinforces trust. Equity is different from debt. Shareholders who contribute to equity capital are putting in risk capital, while every banker who lends money to a company secures it with a lien on some of the company’s assets. Yet, it’s the bankers who get daily updates from management! Even unsecured lenders are protected.
A management that can’t be trusted doesn’t deserve to be invested in. Trust me, there are plenty of such managements sitting on public money out there.