Warren Buffett Tenet #5. : Is management Candid?

Till yesterday I was not agree with this but now I am convinced.

There are many companies born every day. But not all of them will be successful. So what is the reason behind it?

Resources? No.

Promoter? Maybe but not all companies from Tata, Birla group are successful.

Debt level? May be.

Management! YES.

If there is management capable to handle company then no matter how less the resources are, or weather promoter stake is low or Zero or less. Housing Development Finance Corp. No promoter but they are successful.

We saw many examples about it and here I want to mention One type of investors.

Activist Investor.

If they realise that Company is not able to reward shareholders then they enter into company by buying Small Stake, Force management to change what is wrong with the company.

Recent examples is Yahoo. Carl Icahn enter into the business and ask for rewards for shareholders.

Yes. Everything is right. But what is connecting Candid management with activist shareholders?

Simple. If the management is not candid he will try to hide many things. Will not give right number. It’s very easy to manipulate or Cook the Balance Sheet and many times it’s difficult to understand for many general Investors. It affects them as the return on investment is low. At the same time investors may losing opportunity to earn return. Plus maybe management is taking rewards wrongly.

Warren Buffett, maybe that is why make Birkshire Hathaway report, is very open about his performance. In many of his letter to shareholders, he Accepted his mistakes. As per him even buying Birkshire Hathaway was mistake. The reason is The payment in insurance business is front loaded. Birkshire Hathaway was Textile firm.

More important point here that Warren Buffett, Mukesh Ambani etc are Manager and also holding big Stake. Easy for them to reward in unethical way. But there is one statement which increases importance of this tenet. That is

The CEO who misleads shareholders in Public, may Eventually misleads himself in private.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter