Why Shareholders Shouldn’t Speak With Management. This is part II of three serious of articles. To view the first article click here.
In my last piece I briefly touched upon the idea of speaking with the managers of a company to jump between the financial ratios and numbers, in order to get a sense of what is truly going on in the company. And, while speaking with the day-to-day operations leaders and decision makers could give you a sense of what is truly going on, there are reasons why this might not be a major suggestion for everyone to follow. I was playing devil’s advocate in the previous article. There are many reasons why it is bad to speak to management. This article will look at a few of them.
I quoted the Oracle of Omaha in my prior article. However, I only used a partial quote, below is the full quote from Warren Buffett (2003 shareholder meeting):
“About 40 or 50 years ago, I did a lot of talking to managements. I used to go out and take a trip every now and then and drop in on maybe 15 or 20 companies. I haven’t done that for a long, long time. Today, everything we do, pretty much, I find through public documents.
I try to understand the business and not have any preconceived notions. There is adequate information out there to evaluate a great many businesses.
We do not find it particularly helpful to talk to managements. Managements frequently want to come to Omaha. And they usually have a variety of reasons why they say they want to talk to me. But what they’re really hoping is that we get interested in their stock. And that never works.”
What qualifies the manager to understand exactly what is going on with the company? Just because he is a supervisor or a leader at some level, it does not mean that he (or she) understands how their role fits into the rest of the organization. In a company of 10,000 employees across a dozen plants (which could all be located around the United States or even internationally), how can one manager of a few hundred (or maybe only a few dozen) understand what the most major issues are? Maybe they are dealing with a missed deadline, a broken down machine, or trying to schedule makeup hours for a pending shutdown or holiday. That may be their largest problem, but it might only be the bat of an eye to the president and CEO who have much larger issues to deal with.
A good example of this is AIG (AIG, Financial). AIG’s collapse was largely due to their financial products division (AIGFP) in London, led by Joe Cassano. The office consisted of a total of 377 employees. AIGFP caused AIG to suffer enormous losses after issuing credit default swaps that produced enormous losses. This was a massive company with over 116,000 employees (at the time), spanning the globe, very few people in the company likely knew what was going on at AIGFP. Even assuming that management was telling the truth; many probably were unaware of the problems in one small office overseas.
Another strong trait is whether or not the management will lie to you; either through flat out or sugar coated white lies. If thing are not running smoothly, they always paint things in a more favorable light to them. Just as an example, look at all the financial institutions and some of the European countries, which stated emphatically they did not need a bailout only to receive one several days later.
Even if things are going well, management might not want to say how good things are (upcoming projects, new goals being hit, buy-out proposal, prototype technology discovered, etc.) because maybe they don’t want to be held to a higher benchmark or they might legally not be allowed to discuss it. Management will likely tell you just enough of what they think you want to hear. In short, management at companies act as salespeople and the product they sell is their stock.
You could also be dealing with a manager who is biased. What if you are speaking to someone who has put 30 years of their best work into making things run better? Do you really expect them to point out all of the flaws or to downgrade their own best efforts?
It is important to remember that bias exists in general. The viewpoint of a manager is not important simply for their thoughts; they must have reasonable facts and information to support the claims they make. If a manager has an opinion based upon what he heard through the grape vine of the company, is it really valid? What if his outlook was based upon a news article that he read, does that mean it is imminent, related to the industry, or even unbiased itself? It is important to remember that the attitudes of management are important as they might have some information that could be useful. However, it is also important to remember that just because they have information, they probably are not approaching their jobs from the same viewpoint that you are. Therefore, while their information might be very beneficial, you probably have to dig through a lot of irrelevant stories and statements until you even find something that is worthwhile.
Disclosure: No position in any companies mentioned
http://www.valuewalk.com/
In my last piece I briefly touched upon the idea of speaking with the managers of a company to jump between the financial ratios and numbers, in order to get a sense of what is truly going on in the company. And, while speaking with the day-to-day operations leaders and decision makers could give you a sense of what is truly going on, there are reasons why this might not be a major suggestion for everyone to follow. I was playing devil’s advocate in the previous article. There are many reasons why it is bad to speak to management. This article will look at a few of them.
I quoted the Oracle of Omaha in my prior article. However, I only used a partial quote, below is the full quote from Warren Buffett (2003 shareholder meeting):
“About 40 or 50 years ago, I did a lot of talking to managements. I used to go out and take a trip every now and then and drop in on maybe 15 or 20 companies. I haven’t done that for a long, long time. Today, everything we do, pretty much, I find through public documents.
I try to understand the business and not have any preconceived notions. There is adequate information out there to evaluate a great many businesses.
We do not find it particularly helpful to talk to managements. Managements frequently want to come to Omaha. And they usually have a variety of reasons why they say they want to talk to me. But what they’re really hoping is that we get interested in their stock. And that never works.”
What qualifies the manager to understand exactly what is going on with the company? Just because he is a supervisor or a leader at some level, it does not mean that he (or she) understands how their role fits into the rest of the organization. In a company of 10,000 employees across a dozen plants (which could all be located around the United States or even internationally), how can one manager of a few hundred (or maybe only a few dozen) understand what the most major issues are? Maybe they are dealing with a missed deadline, a broken down machine, or trying to schedule makeup hours for a pending shutdown or holiday. That may be their largest problem, but it might only be the bat of an eye to the president and CEO who have much larger issues to deal with.
A good example of this is AIG (AIG, Financial). AIG’s collapse was largely due to their financial products division (AIGFP) in London, led by Joe Cassano. The office consisted of a total of 377 employees. AIGFP caused AIG to suffer enormous losses after issuing credit default swaps that produced enormous losses. This was a massive company with over 116,000 employees (at the time), spanning the globe, very few people in the company likely knew what was going on at AIGFP. Even assuming that management was telling the truth; many probably were unaware of the problems in one small office overseas.
Another strong trait is whether or not the management will lie to you; either through flat out or sugar coated white lies. If thing are not running smoothly, they always paint things in a more favorable light to them. Just as an example, look at all the financial institutions and some of the European countries, which stated emphatically they did not need a bailout only to receive one several days later.
Even if things are going well, management might not want to say how good things are (upcoming projects, new goals being hit, buy-out proposal, prototype technology discovered, etc.) because maybe they don’t want to be held to a higher benchmark or they might legally not be allowed to discuss it. Management will likely tell you just enough of what they think you want to hear. In short, management at companies act as salespeople and the product they sell is their stock.
You could also be dealing with a manager who is biased. What if you are speaking to someone who has put 30 years of their best work into making things run better? Do you really expect them to point out all of the flaws or to downgrade their own best efforts?
It is important to remember that bias exists in general. The viewpoint of a manager is not important simply for their thoughts; they must have reasonable facts and information to support the claims they make. If a manager has an opinion based upon what he heard through the grape vine of the company, is it really valid? What if his outlook was based upon a news article that he read, does that mean it is imminent, related to the industry, or even unbiased itself? It is important to remember that the attitudes of management are important as they might have some information that could be useful. However, it is also important to remember that just because they have information, they probably are not approaching their jobs from the same viewpoint that you are. Therefore, while their information might be very beneficial, you probably have to dig through a lot of irrelevant stories and statements until you even find something that is worthwhile.
Disclosure: No position in any companies mentioned
http://www.valuewalk.com/
