So, the wonderful companies are not the end. Right? Here is TLDR for good corporate governance:
- Sometimes there is a condition in which the superb management team could do almost nothing impactful.
- Capital allocation plays an important role.
. . .
Chapter 1: The Unimportance of Management.
Why does good corporate governance come after a competitive advantage discussion?
Because the business always comes first.
The superb execution of Chevron’s CEO can do nothing about the oil price. No matter how good the plan, idea, acquisition, or innovation – the oil price is dictated by the market. When the market says that the oil per barrel is $10, then it will be $10. Like Marry said to Gabriel. Let it be.
This is the limitation of management.
The CEO of Honda could not make a significant difference against the competitive nature of the auto industry. When they build a new car with new technology, in just a few months the competitor will replicate it. When they come up with a new revolutionary model, the competitors will copy it (1).
There are a lot of things that can’t be overcome even with a genius.
And as you’ve guessed, the opposite is also true.
Under Steve Balmer, Microsoft makes a lot of mistakes. A lot. So many fail and flops like Windows Vista, Windows 8, Nokia acquisition, Windows Phone Lumia, and Windows Phone OS. The only reason why The Redmond Giant is still relevant today is its ecosystem that locks the customer. People stick with Microsoft Office and Windows OS, businesses could not migrate from Windows servers. So there is always forgiveness for Microsoft’s sin.
Now,
If the management is less superior to the business, what we will talk about here?
- The same fate also holds true for a business like PC and laptop manufacturers. Dell, Lenovo, HP, Asus, and MSI are on the same path. The barrier to new entry is low and the competition within is cruel. The waiting list does not stop there.
Chapter 2: The Importance of Management.
At the end of the day, it is management who decides where the money goes. To their own pocket, or to shareholders.
Let’s begin the discussion.
Ok, Suppose you have a wonderful business: A company with impenetrable market share. Businesses that have a decent competitive advantage that lasts for a long duration.
What if…
The money generated by that great business is exploited by management as a bonus for them instead of paying you a dividend.
What if…
Management raises their salary even when sales tumble?
What do you think when you know your CEO has a holiday with sexy girls on a luxury yacht? Or private jet?
Need a real-world example?
Look at Disney, it has a great economic moat, has a strong balance sheet, and pays a dividend. Seems perfect. But when the revenue and earnings are hit severely by the pandemic the dividend is trimmed. Yet, the management still gets the bonus at the pre-corona level, as if nothing happens.
We have discussed it in our earning analysis of Disney here (this doesn’t mean that Disney stock isn’t ‘buy’, but it will be a warning note for us)
Another example is Starbucks. Popular and strong brand. Growing business with the opening of a new flagship location every year. Another perfect potential investment. Yet the management dried up the retained earnings to fund its insane stock buyback and dividend (for their favor).
We also have Lyft.
The ride-sharing company still doesn’t deliver positive earnings in FY 2021, but the management gets an 18% bonus on company sales. You – shareholder, get nothing.
You don’t want that.
Finding a wonderful business that compounds the money, in the long run, is the first and foremost task, finding management that delivers that money back to you as a shareholder is the second task.
Chapter 3: The Priority
Good Corporate Governance takes Company and Shareholder as a priority
Now the question, what is good management?
Good management invests company capital to accelerate company growth.
For better earning, better cash flow, better balance sheet. To return that to you – shareholder. Whether it is a buyback program or a growing dividend. The better and growing earning is talk about competency while returning to you is talk about stewardship.
Apple develops the M series chip that makes breakthroughs in the laptop and PC world. This will generate more revenue for the iPad and MacBook. Apple also returns what it gets to the shareholder as a buyback and dividend program.
Good management should do this. Give more protection on market share – ignite more growth and most importantly, return it back to the investor.
You hear me.
The most important thing for management is returning back to you.
Chapter 3: How investingdeck.com Help analyze the good corporate governance
Acquisition and capital allocation
As we talk a lot about competitive advantage, we also talk a lot about management. One of our covered topics is acquisition. The acquisition could strengthen the economic moat, like in the Apple case that we have discussed at https://investingdeck.com/acquisition-strategy-of-apple-gcg-analysis/
In short, that article explains how Apple plans to develop its own chip from the beginning of its iPhone. And what we really love is that acquisition is cheap.
On the contrary, if the acquisition is too costly, it will destroy value for shareholders. Like what happened with GE. In short, we explain that GE eats all industry it can but in the end, it fails due to complexity. The detail could be read at https://investingdeck.com/gcg-in-acquisition-destroying-value/
We also talk about stewardship in the Starbucks case, detailed here. The coffee giant has no sustainable plan for its retained earnings.
See?
We, investingdeck.com, cover the two most important topics in investing world: competitive advantage and management. This is what separates us from the other.
Chapter 4: Bonus, Our Old Man, Warren Buffett
Good Corporate Governance in Berkshire Hathaway
All critical topics have been covered in the previous section, so you could skip this part since we will talk about our old man Warren Buffett. You, Millennials, maybe not be interested.
The first thing we love about Warren Buffett is his integrity.
Warren Buffett is paid by Berkshire Hathaway for just 100,000 (no bonus). With his capability that brings value to shareholders and the firm, we can say that Warren Buffett is underpaid. As a comparison, Dennis Muilenburg – Boeing CEO – gets almost 20 M (including compensation) in a year. The difference between Buffett and Muilenburg gets even more dramatic if we compare Berkshire stock and Boeing stock.
And, by the way, Warren Buffett drives himself a 7-year-old Cadillac XTS – not Lamborghini Aventador J – and has MacDonald for breakfast which he gets free. We can’t find another man like him.
Find a man like Buffett for your investment.