February 28: As a stock picker one of my biggest priorities is the quality of management. But, the problem is: How do we define quality management? The way I see it; a management needs to have a vision of where it wants to go (size of turnover or size of profits or market share), how it intends to get there (acquisitions, mergers, downsizing or greenfield), how much this will cost the company and its owners, whether this cost will create wealth for its shareowners and whether the corporate systems and human resources policies will make this win-win sustainable.Unfortunately, the more companies that one looks at, one finds that even as they quote at an attractively low price earnings multiples, they do represent any proxy for investment. Reason : the management practices within the companies is so woefully below par that it does not tend to create any kind of confidence within the investing public. On the contrary, this only tends to stress the point that such companies quote at ridiculously low p/e ratiosbecause their managements have under performed with respect to their potential or where the internal systems inspire no confidence that the numbers that you see in the profit and loss account are genuine or even sustainable.
Let me give you some instances. How many companies in this country even have a vision document? How many are clear about the reason for their existence? How many can honestly claim that their vision is not material but that the financial is a by product of their mission clarity? How many companies have a focused agenda of what they are going to be achieving in a financial year? How many carry this agenda down to the lowest common denominator within the company (if cost cutting is the agenda, how many have the vision to carry this message down to the last man)?
On the other hand, if cost-cutting indeed is the agenda, does the CEO take an economy flight to all destinations and checks into a three-star hotel, doubling up in rooms with his senior executives or does he fly club class andstay single in a suite?
I ask this because of a blatant hypocrisy amongst Indian managers. Most encash all the perks that earlier came with the jobs - which is the equivalent of using the cost-cutting line in public when it comes to standing in front of 500 employees at the factory asking for a raise and then splurging at dinners at five-star hotels and collecting frequent flyer points in private. The big question : how many Indian companies have character? I have been asking this question of myself especially after having done a little research about one of the best known steel corporations the world over: Nucor. Principally a mini steel company, Nucor has established itself as a legned in the global steel industry : for posting higher margins than most in what has become a diminishing margin industry. `Nucor has become well recognised, says its corporate statement, `for its modern steelmaking techniques that can produce steel and steel products at a cost competitive with steel made anywhere in the world.'The interesting story is how they have done it : It starts with their head office. Not situated in a flashy building but in the corner of a floor of the building in which it is situated, only 16 people make up the corporate office; there are no company planes, company cars, no executive dining rooms or lavatories, no reserved parking and no flying first-class on the company's business. Interestingly for leading steel manufacturer, Nucor has no union.
Production is supervised by a minimum number of management employees. The key to this relatively flat and non-unionised structure is that Nucor is a good employer: For all the savings that it drives in its business, the one area in which it does not cringe is in remunerating its employees. Employees involved directly in manufacturing are paid weekly bonuses on the basis of the production of their work groups, which range from 20 to 40 workers. Interestingly, in some facilities this incentive plan is linked to tardiness and attendance standards.
In additionto the annual take-home pay which is higher than the industry average, the Nucor employee gets a share of 10 per cent of the company's annual profits before taxes, which is out into a deferred payout trust plan for each employee based on his or her total pay.
In the seven years that it takes for an employee to be incorporated into the plan, a production worker can accumulate $ 400,000. Remember: a production worker. Nucor employees can puchase a share in their future by buying Nucor stock which includes a 10 per cent contribution by the company; besides, the company contributes 5 to 25 per cent of the employee's contribution towards the Retirement Saving Plan based on the company's return on shareholders' equity, Nucor also awards five shares for each five years of continuous service. For a company of its size, Nucor is remarkably transparent. Every general manager is required to have at least one dinner a year with every employee in his organisation in groups of no more than 50. The general manager canaddress collectively about business conditions and anything affecting the plant for not more than 20 minutes. The rest of the meeting has to be done face-to-face with the employees on points covering the following agendas : whatever is discussed must be relevant to the business, personalities cannot be discussed, any employee can make any statement about the job however, derogatory - and the company guarantees that there will no reprisal.
One unusual perk of being at Nucor is its scholarship plan providing $ 2200 a year for four years to the children of employees to help pay for the post-high school education or vocational training. The result : some years ago, Nucor had a vacancy for nine people in its plant at Darlington, South Carolina. It put an ad in the papers. Some 1200 applied by turning up the gate of the plant on a Saturday morning. Traffic was thrown out of gear : three policemen were also standing in the queue.
Unless we have managements with a similar vision, dynamism and concern for theemployee in India, not only will the FIIs not buy into our markets, we will be condemned to p/e ratios barely above the ground. Writing an exhaustive annual report will not be enough. Managements will have to recreate themselves around ethical lines with a strong orientation towards shareholder value.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
