What does judging management mean?
A listed company is owned by thousands of shareholders, but day-to-day decisions are made by the board of directors and the management team led by the managing director or CEO. Where money is invested, how much dividend is paid, how much is borrowed and how the accounts are presented are all in their hands.
The interests of owners and managers are not always the same. Judging management means asking: are they capable, are they honest, and do they act with ordinary shareholders’ interests in mind?
Say you work in Dhaka and have hired someone to look after the family fish pond in the village. You cannot visit every day, so you judge by the account book, whether what he promised matches what he did, whether the money from fish sales arrives properly, and whether he buys fish feed at inflated prices from his own relatives. A shareholder is in exactly this position. The example is imaginary.
Why it matters to an investor
- Management decides where the profits go: invested well, they add value; invested badly, they are wasted.
- The accounts you read are prepared by them: without honest management, even good-looking numbers can mislead.
- Related-party deals can move value away from ordinary shareholders.
- But the business’s basic economics matter even more: in Buffett’s words, when a management with a reputation for brilliance takes on a business with a reputation for poor economics, it is the reputation of the business that remains intact.
What to look at
- Words against deeds: how much of what earlier annual reports promised (a new factory, a new product) actually happened.
- Use of profits: how much extra income the profits kept back, instead of being paid as dividends, went on to earn.
- Candour: whether they explain bad years and admit mistakes, or only put good news forward.
- Related-party transactions: how large the purchases, loans or rents involving directors’ own or relatives’ businesses are, and on what terms.
- Directors’ shareholdings and pay: how many shares they own, whether that is rising or falling, and how their pay compares with the company’s results.
- The auditor’s opinion: whether the audit report raises any objection or gives a “qualified” opinion.
Rules that help in Bangladesh
Under the Bangladesh Securities and Exchange Commission (BSEC) Corporate Governance Code 2018, at least one-fifth of a listed company’s board must be independent directors; the chair and the MD/CEO must be different people; and the audit committee is chaired by an independent director. The MD/CEO and CFO must certify in writing that the financial statements are fair, and the directors’ report must give details of related-party transactions.
In addition, under a 2011 BSEC directive, sponsors and directors must together hold at least 30% of a company’s paid-up capital. This information is in the annual report and on the DSE website. Rules can change, so check the latest on the BSEC website. And remember that complying on paper is not the same as being well run.
Worked example
- Say an imaginary company, “Rupsha Foods Limited”, kept back a total of Tk 50 crore of profit over five years instead of paying it out as dividends.
- Over the same period its annual profit rose from Tk 20 crore to Tk 21 crore. Extra profit: Tk 1 crore.
- Return on the money kept back: 1 crore ÷ 50 crore = just 2% a year. Had shareholders received the money, they could probably have earned more than that somewhere safe.
- If instead the extra profit had been Tk 10 crore, the return would be 10 ÷ 50 = 20%, which would support keeping the profits back.
Result: this simple sum shows how well management is putting shareholders’ money to work. But big investments can take years to pay off, and one-off events can distort the figure, so read the reasons too. The numbers are only an example.
Common mistakes
- Judging management good from media presence, speeches or a well-known name.
- Never checking afterwards whether promises made at the AGM were kept.
- Skipping the sections on related-party transactions and the auditor’s comments.
- Looking only at management and ignoring a business’s weak economics.
Judge management by deeds, not words: past promises, what kept-back profits earned, and dealings with themselves tell you the most.