The best company in the brightest industry with an ultimate economic moat is meaningless when the management pulls the money for themselves – or not behave accordingly. Here we take a look at management – about good corporate governance or management stewardship.
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In This Issue
- Business is About The People
- In Shareholder Shoe
- Capital Deployment
- Warren Buffett
- Investor Key Takeaway
So long we have talked about the company, business, financial report, economic moat, business model – it is all-important. Yet, there is one thing that should not be overlooked – it is management. Business – the desk in the office, the factory – is just a thing. The truth is – you throw your money to a person or a group of people we called the manager. Like the stock market, business is just about the people.
Moving into the more technical area, management control business strategy. They have privilege access to capital, they decide how much the company pays their salary before paying the shareholder. Moreover, they make a decision about how they deploy capital, how they get it, and how they use it – dividend policy, use of debt, capital allocation. To assess whether management practices the best decision for shareholders and businesses, we need to examine those matrices.
Before getting too technical, lets take a look the fundamental things for a while.
In Shareholder Shoe: Good Corporate Governance is about Integrity and Honesty
This is our first catch.
Ideally, the manager should be extremely competent and at the same time has integrity and honesty. But this kind is rare. Therefore, if we have to choose, we choose integrity over competency. Which one you will invest your money in if the choice is limited? To the one who has competency and experience but lacks integrity or the one who – yeah, average – but has the integrity as his identity.
Integrity is works and acts in shareholder and firm’s shoes.
Maybe that definition is less formal and less textbook doesn’t matter. Indeed, we aren’t good at defining something formally so let us give you examples.
Look at Disney, it has a great economic moat (sustainable business advantage) – strong balance sheet, pay a dividend. Our problem is when the revenue and earnings hit severely by pandemic (thus dividend is trimmed), the management still gets the bonus paid at pra-corona level, as if nothing happens.
Another example is Starbuck – the coffee maker is in expansion mode – opening a new flagship location every year – but the management dried up the retained earnings to fund its stock buyback and dividend (for their favor), detail here.
You’re right. There are several listed companies that worse than those two, but it will be too technical – we will talk about it later.
Let’s move to the second criteria (remember, never invest in the business if the first criteria don’t meet)
Another thing to consider is how management treats your money – which accounted in shareholder equity in the financial report. Even if you are a minority shareholder with no voice, it doesn’t mean that management could waste it.
We make a hierarchy of how management should use the money.
- The best case is your money is invested to create another money – in other words, it is invested in the business. Whether it is acquisition, merger, or capital spending. When a company spends a reasonable amount of money on its business, it is a good sign that management has capability: Microsoft build a new server room, Amazon build a new warehouse, Apple develops a new chip. We are pursuing the business that has pour capital in its core operation. But remember, invest in company business doesn’t necessarily at any cost – it has to be cost-efficient, for instance, Google’s acquisition of Youtube.
- If there is a situation in which management can’t invest in its own business – the case when a business enters the saturation, mature phase, or no growth – management should give the money back to shareholders as a dividend- if possible. We say “if possible” since sometimes, due to a catastrophic business climate, Covid-19 for instance, or natural disaster the company could not generate profit and it is okay.
Shortly speaking – as value investors – we seek management that creates value for shareholders in the long run.
The Text Book of good Corporate Governance: Warren Buffett, The Value Creator.
There are so many great managers or CEOs today, even their name is a representation of the company itself – When you heard Tesla – your memory recalls Elon Musk, so does with Gates and Microsoft, Steve Job and Apple, Bezos and Amazon, Buffett and Berkshire.
They bring passion, intensity, innovation, energy – they bring, life.
But, if we have to mention a name that represents good stewardship of management (or, technically speaking, good corporate governance), we will take no other than Warren Buffett.
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 for 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 more dramatic if we compare Berkshire stock and Boeing stock.
Warren Buffett has respect for the money invested in Berkshire Hathaway – though he deserves it, he doesn’t take the chance to exploit Berkshire for his own interest. Can you give me another example of this kind of leadership?
Moreover, Warren Buffett is very careful in his investing decision – for Buffett, this isn’t his money. The shareholder – the old man with a pension plan, a single mom to fund her daughter college, put the money in Berkshire – and Warren knows it. He doesn’t chase the popular stock – he doesn’t chase the booming one, he doesn’t chase the hype…
This is the man who you can trust.
He doesn’t make a bet, speculate…he invest with calculation.
And, by the way, Warren Buffett drives himself a 7 years old Cadillac XTS – not Lamborghini Aventador J – and has MacDonald for breakfast which he gets free. We can’t find another man like him.
- Company with sustainable competitive advantage and manager with integrity – that is our only choice for investing, and you should too.
- Manager integrity could be assessed through their business decision and mostly reflected in the financial reports.
- Managers with integrity prioritize company and shareholder value and treat firm capital (including investors’ money) gently.
More Consideration of Good Corporate Governance
- Business still the first line of defense in our investing approach. A great manager for a no-moat business is useless, on the contrary, great business with a dumb manager still has hope.
- There is no “strict rule” for the good or bad managers, our rule is “integrity” and it could be very personal and subjective.
- What we have presented is the preliminary one, there is more case study which we will deliver in the future.
- Saying good corporate governance is too technical for a street investor like us, we prefer to call it management stewardship. We believe that what we have written here is a little guide about good corporate governance.
- doesn’t mean that Disney stock isn’t buy, but it will be a warning note for us