COVID2019 and stock investing – Part 3 – Wonderful opportunity to gauge management quality

Revenues are impacted significantly, future remains uncertain, debts are piling up... time to separate wheat from the chaff !

This is my 3rd post in the series.

  • The 1st post (given the steep decline in the markets) was focused on what one should be doing depending upon his own investing style.
  • The 2nd post focused on the key factors that would determine the path to the economic revival.

(Links for the previous posts are provided at the end for the ease of the interested readers)

The current post, as the title says, focuses on a wonderful opportunity thrown by the COVID2019 crises – an opportunity to quickly assess the management quality of any Company… their beliefs… their value systems !

“The ultimate measure of a man is not where he stands in the moments of comfort, but where he stands at times of challenge and controversy.” - Martin Luther King, Jr. Click to Tweet

To invest in Companies run by the right management is an extremely important parameter, especially for any long term investor.

Assessing management quality is easier said than done and we as analysts/ investors always look for the relevant cues. My regular readers would remember one of my previous posts on the topic – Management commentaries and what I make of them (link provided at the end).

The current crises is unprecedented and every single management is scrambling for the answers. So how does one decide which one is doing better than the other?

I understand that some businesses are in a better situation e.g., essentials vs non essentials. Consequently, one should not compare management’s response between the two. The dynamics would be very different.

So how does one assess the management quality especially for businesses where uncertainty remains high?

For me – one factor

How they are treating their employees and how much are they communicating with them !

  • Are they communicating well wrt to the impact of the crises and the plans ahead?
  • Are they being taken into confidence?
  • Are they being treated like an extended family to tide over the crises?
  • Are they being paid on time (even if at reduced levels)?

In the table below, I am highlighting two kind of extremes that I am coming across –

Yes, the above two are extreme kinds and one would expect that most companies will fall somewhere in between. However, based on my research so far –

  • I am finding more and more companies closer to being Type A than Type B.
  • This is more typical of small to medium size Companies with average to high debt. Though, I also came across some large size companies.

Now one can surely argue that when Company has high debt and there are no/ minimal revenues, how can they treat their employees well and pay them on time?

Logical…

However, I think I nowhere am relating management’s response to the salaries and the payments !

Employees in general are aware about the broad financial condition of their Companies. No one in today’s times can hold grudges or complain if they are not being paid full or on time. Likewise, we as analysts/ investors should also not worry too much if there are salary reductions/ delays.

What is unpardonable is… being non communicative !

Type A’s will never be able to retain good employees in the long term. People don’t easily forget how they were treated during bad times !

For me, ability to retain talent is a key characteristic of long term wealth creators

I therefore, continue to keep my eyes open and try to collect as much information around the topic as possible. I try to speak with employees of the subject company, read news reports, management statements/ interviews and regulatory filings on the impact of Covid2019.

Like every analysis, most of the times not everything comes in black and white. However, what I get most bothered is getting information around Type As – they deserve an immediate drop !

Let me conclude by putting on the lyrics from one of my all time favorite song – hope that’s what managements are humming to their employees…

दिल ना उम्मीद तो नहीं, नाकाम ही तो है 
लम्बी है गम की शाम, मगर शाम ही तो है 

ये सफ़र बहुत है कठिन मगर 
ना उदास हो मेरे हमसफ़र 

१) ये सितम की रात है ढलने को 
है अन्धेरा गम का पिघलने को 
ज़रा देर इस में लगे अगर, ना उदास ... 

२) नहीं रहनेवाली ये मुश्किलें 
ये हैं अगले मोड़ पे मंज़िलें 
मेरी बात का तू यकीन कर, ना उदास ... 

३) कभी ढूँढ लेगा ये कारवां 
वो नई ज़मीन नया आसमान 
जिसे ढूँढती है तेरी नजर, ना उदास ...

Links of previous relevant articles –

COVID2019 and stock investing – Part 1 – quarantine your strategy

COVID2019 and stock investing – Part 2 – Critical factors that you must consider

Management commentaries and what I make of them

Illustration Credit: Vecteezy.com

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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Jatin Vora
Jatin Vora
1 month ago

Nice article and absolutely apt lyrics

Kavinder
Kavinder
1 month ago

common sense is quite uncommon……good point

Arvind Malhotra
Arvind Malhotra
1 month ago

Again a very pertinent point but not easy to guage Management quality.

The below observations, are helpful positive indicators. look forward to your next…..

For me, ability to retain talent is a key characteristic of long term wealth creators”

What is unpardonable is… being non communicative !

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