Management really does matter for companies – and for investors, argues Gabriel Sacks, co-manager of abrdn Asia Focus.
It is well known that most individuals who have watched more than a few hours of football believe themselves eminently capable of managing a top-flight team. Countless radio phone-ins and over-a-pint debates offer near-scientific proof of this phenomenon.
At the pinnacle of the game – the rarefied realm of trophy-winning, history-making sides – the tendency is notably rife. Self-proclaimed experts are convinced, for instance, that they, too, could have steered Pep Guardiola’s all-conquering Barcelona line-up to six titles in 2009.
Part of the inference here is that such a team really needs no management whatsoever. With Messi up front and a peerless midfield of Xavi, Iniesta and Busquets, what could go wrong?
The same thinking is sometimes applied to the corporate world. Casual observers suppose that great businesses essentially run themselves and that the identities and contributions of those at the helm count for precious little, if anything at all.
The prevalence of this view is of no mean relevance to those of us who regard direct engagement with management as a vital component of diligent stock-picking and informed portfolio construction. Why do we go out of our way to get to know executives if their roles are nigh on ceremonial and their companies could easily plough on without them?
This is a tricky question to answer – but only because its premise is entirely wrong. The reality is that in business, as in sport, management almost always makes a difference.
The big challenge for investors is to understand whether that difference is likely to be positive or negative. This can be particularly important when dealing with smaller companies and emerging markets (EMs), both of which attract comparatively scant investment analysis and therefore demand further investigation from potentially interested parties.
In Asia, the region in which my colleagues and I specialise, there are many examples of growing businesses whose board-level managers have been central to continued success. Meeting with them underpins our conviction that these companies constitute promising investment opportunities over the long term.
Take Century Pacific, a family-owned food business in the Philippines. Having studied at top American universities, many of its executives have a highly entrepreneurial outlook and a fierce commitment to sustainability and good governance.
These attributes have helped Century Pacific see off a succession of would-be rivals and so maintain its domestic dominance. Even several multinationals have been sent packing in recent years.
Vietnam’s Mobile World, which is principally a computer and electronics retailer, provides another illustration of the benefits of sound stewardship. Its management team has consistently kept it ahead of the curve.
An ability to discover new sources of growth in an intensely competitive sector has been key. The most eye-catching innovations of late have included delivering mobile phones to consumers by moped within 20 minutes of purchase.
Naturally, we also engage with numerous companies whose management representatives inspire far less confidence. Such encounters are also of value, since they give us reasons not to invest.
These businesses shall, of course, remain nameless here. Suffice it to say that a large number of them might best be filed under “style over substance”.
As active managers, my colleagues and I are most likely to invest in a business if its CEO, CIO and other leading figures are willing to meet us and able to clearly articulate their organisation’s strengths and weaknesses. Perhaps most significantly, we are looking for a coherent strategic vision.
Cynics may argue that the salient details could be gleaned from annual reports, financial statements and the shreds of analysis sporadically supplied by the “sell side” of the investment industry. They might even claim sufficient information is often to be found tucked away somewhere on a corporate website.
But such once-over-lightly approaches are seldom conducive to gaining a meaningful edge in investment circles. At least as far as smaller companies and EMs are concerned, there is much to be said for having an on-the-ground presence and developing first-hand knowledge.
So are there any businesses that can genuinely run themselves and whose executives are no more than figureheads? Maybe this scenario is conceivable if a company is well established and conspicuously process-driven, but it is extremely rare. I am not sure I have ever witnessed it.
Besides, if we accept this possibility, logically, we must also accept the Barça of 2009 could have won La Liga, the Copa del Rey, the Supercopa de España, the Champions League, the UEFA Super Cup and the Club World Cup with absolutely anyone in charge – say, a caller from Radio 5 Live’s 606, a bar-stool sage from the snug of the Red Lion or even Sam Allardyce. All things considered this seems somewhat unlikely.
Main image: harles-forerunner-3fPXt37X6UQ-unsplash
