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Verify competence, integrity of management before investing

A recent study revealed that over a ten-year period the most consistent wealth creator was Titan.

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There was a news report a few days ago that a plane being used by Vijay Mallya purchased for over $22 million, decked with paintings of the likes of Picasso and Hussain, was to be auctioned to pay the service tax dues of Kingfisher Airlines.

Kingfisher, which was admired at a time when India had no airlines worthy of being proud of, had dragged its parent company to the dirt with huge losses. Those who finally suffered, without having enjoyed any of the benefits in this sad tale, were the small shareholders – those who had invested their hard earned money in the company. Their concerns (if any) went unheeded by the dominant shareholders.

I remember meeting a member of a prominent business family at a function a couple of years ago. He mentioned that he could not stay late as he had a flight at 6 am to Europe. I wished him an enjoyable holiday. He interjected that he has a Board meeting in Malaga in a week. He, with five others of his immediate family, was flying in the company jet to Turkey, then to Italy and then to Malaga, and would be returning after going to England.

The point I am trying to make here is that many companies in India are majority owned by families or controlled by a family, and often there is a disregard for governance to the extent that the dominant family treats the company as its own, and uses the companies assets to use and dispose of as they will. Some companies have guesthouses in the most beautiful resorts in the country, but they are entirely and always used by family members of the dominant family and their friends. The shareholders are often not aware that these palatial residences are owned by the company. There is no accountability on who uses the company jets and for what or who resides in company residences and the cost of furniture and embellishments in these.

The only persons who can question the unabashed spending of company funds are independent directors. They are supposedly in positions of trust to safeguard the interests of the shareholders. But they meet once in a quarter and they have no access to information such as whether and how the dominant family has used the assets of the company.

Whenever the incumbent chief executive steps down, the mantle in these companies is placed on the shoulders of a family member chosen by the family. No search takes place to find the most competent person for the position.

I am stressing the fact that when you decide to invest in a company, apart from the financials, the economy and the industry, another aspect that it is imperative that you check is ownership and management – who actually calls the shots and ascertain his competence and integrity.

When determining the creditworthiness of a loan, one of the key checks one does is on how keen is the person borrowing on repaying the loan. Creative accounting can hide many flaws. It is the intent that matters and character. Similarly when judging a company, it is integrity, character and competence of the man in charge that matters. Mighty empires have crumbled in the hands of ineffectual rulers. Corporate history resonates with companies that have bit the dust on account of its management – Dunlops, Killick Nixon to name a few.

A recent study revealed that over a ten-year period the most consistent wealth creator was Titan. The biggest wealth creators were TCS, ITC, and HDFC Bank. These are all professionally run companies with professionals at the helm.

It would be wise to think thrice before investing in a company that is yet to professionalise its management. This is especially true for family run companies as their focus may not necessarily be what is good for the company.

Additionally, it is important to ascertain who are the major shareholders and who is the decision maker as on these will rest the fate of the company. One must also avoid investing in companies where a family split is imminent or where there are warring family members.

The bottomline in determining the competence or incompetence of the management is naturally 'the bottomline'. How much has it grown vis-a-vis its peers? This is the real test. In short one must not invest in a company where one has concerns regarding the competence or integrity of its management.

The writer is MD, Cortlandt Rand, and an author

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