You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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How to Analyze the Management of Company

What are the criteria that must be met by a company in order to produce maximum performance? The answer to that question can vary, but definitely, one of them is: A great and reliable management team. No matter how good a company, but if it is controlled and managed by incompetent people, then the result will definitely ugly. In relation to our investments in stocks, this is an important thing to note, considering small-minority holders do not have the power to appoint certain people to sit on the board of directors of the company, unless you are a large investor who can afford to buy a stock in large quantity, let say 20% of the paid-up capital (so that you become a major shareholder).

So what are the criteria of a good and trusthworthy management? Based on my experience, these criteria can be grouped into three parts. To put it simply, a company's management team can be said to be good and can be trusted, if they meet the three 'work':
  1. Work hard
  2. Work good, and
  3. Work fair.
Confused? Okay, here's the explanation.

1. Work Hard

If you have a company and you hire an employee, then what is your first expectation from the prospective? Of course, he or she should be able to work hard for the benefit of the company. The same thing applies if you are an investor, or in other words, the owner of the company that you bought its shares: You would expect the management to work hard to make a maximum profit for the company, and also increases the profits from year to year by way of continuous business development (so they do not just run the existing business only).

But how to identify that our company’s management is a hard-working type? By looking at the work plan and the development of their businesses, as well as the progress of the plan (because sometimes a management team is good at plan-making, but the implementation is zero). See it where? You can open the company's annual report, or by reading the material of public expose. In its public expose materials, the company (or the management) usually telling about their work plans and their business development projects that are being executed, as well as the targets to be achieved (eg, the project will be completed and operational by 2015, etc.). In addition, you can also read the released announcements or press releases related to corporate actions such as mergers, acquisitions, establishment of subsidiaries, etc. all for one purpose: Business development. All of the information can be obtained on the website of the stock exchange, www.idx.co.id.

About the released announcements related to company's business development, if you notice, there are two types of companies. First, the companies that diligently releasing announcements that they are working on a project or a particular corporate action, and second, the companies that rarely say anything. For the first type, it is not necessarily that their corporate actions will have a positive impact on the company, so you should read the relevant action carefully, so you able to assess whether the corporate action will have a significant effect to the company’s financial performance or not. Because sometimes when a company announces a particular corporate action, the goal is only to show to the public that they were 'do something' (but an unimportant thing), or even worse, the corporate action is not for the benefit of the company itself (read: all shareholders, including public investors), but only for the benefit of specific groups, usually the majority shareholder.

Meanwhile, when a company did not say anything about their business development plan, then usually the management is actually did not have any plan, except running the business as usual. While this is illustrates a ‘not-working-too-hard’ management, but it is not necessarily a bad thing, as long as they still meet the other two criteria, namely work good and work fair (we will discussed it below).

One more thing, you have to be careful and meticulous in defining 'work hard', because it is absolutely different from the 'talk hard'. Beware of companies who diligently talk in the media that they would do this and that, when in fact they did not do anything. Certainly a valid information is the information that released by the concerned company, not by analyst opinion or such, and even that you still have to be careful in reading the information, or you may get a wrong perception.

Example of companies with a hard-working-type of management, based on my research, is Bank BJB (BJBR). Since the company appointed a new president director, namely Mr. Bien Subiantoro, the bank became quite exist and active in performing various business development projects, and the result its financial performance is improved in recent year. Another company with a work hard type of management is Garuda Indonesia (GIAA), with their quantum leap project. But unfortunately their financial results are still poor until today.

2. Work Good

I was once advised by a friend, 'Working hard is important, but more importantly working by good way! You see, a corruptor also work hard to steal the people’s tax money, but it is not a right thing to do. In essence, it does not matter how hard you work, it would be useless if you do it the wrong way.’

So a company must be managed in a good way, that is not detrimental to certain parties. A good management are those that generate profits for the company by not taking advantage or harm the certain parties, whoever it is.

In connection with our investment, a company with a good management team would never or rarely involved in a particular case, and had never breaking the law. While a company with a bad management could be seen if they are: 1. Involved in legal cases, 2. Involved in a dispute with other companies, 3. Refuse or delay the payment of the debt, 4. Violate government regulations, 5. Avoid taxes, and so on.

Then how to know that a company ever in such trouble? You may just google it, if there is something wrong, there would be the news. I always do this myself every time I analyze a stock. The example of a bad-ass-company, is Dayaindo Resources (KARK), where they are often caught problems and disputes.

There may be a question, if a company is involved in certain legal cases with other parties, it is not necessarily that the company is the guilty party, is not it? It could be that the other parties that caused the dispute. That's why, if you want to know in detail about specific legal cases that may be experienced by the company you are about to buy the shares, then you can read it in the financial statements, on the contingencies. After reading the explanation, then you can judge, is the company guilty in the case or not (but once again, be careful to read the explanation because it is certainly favoring the company concerned). But if there are no contingencies, then it means that the company is not involved in any legal case.

Fortunately, as far as my research, most of the companies on the Indonesian Stock Exchange implement the 'good work', and there are only a few companies that are problematic in their operations. Okay, now we discuss the last ‘work’.

3. Work Fair

I was once told by a friend, let's call him David, who had met and chatted with the owner of a company in the Stock Exchange, let's call him James. David asked James, 'Bro, your company has a very poor financial performance, how could it be? I don’t see the same problem with other companies in the same sector.' And James replied, ‘I can make a decent financial statement, the profit rising, and so on. But what's in it for me? If the stock price rises, it is the public shareholders who benefited, not me, because I do not intend to sell my shares. Moreover, if the financial statement says that our corporate profits continue to rise, then the public shareholders may ask for dividends.. That’s crap!'

Even though you might think that James is a typical of bad entrepreneur after reading the above story, but his action is actually reasonable, that is more concerned with its own benefit rather than the benefit for another person that he never even met. This is my company, I was the one who painstakingly manage it, so why it is the people who taking the profit? I am a businessman, not a politician who sell out the promise for the welfare of the people!

However, James’ action does not reflect the management that is 'work fair', because a fair management is a management that works for the benefit of all shareholders, not just certain shareholders (usually the majority shareholder). Unfortunately, James is not alone. If you pay attention to several conglomerate groups on the Indonesia Stock Exchange (IDX), especially the big ones, they are mostly not accommodate the interests of public investors, or even worse, they make public investors as a 'commodity' to reap the profit, for example by way of pulling up their own stock prices, to lure public investors to buy it at high price.

But in the IDX, there are also many companies with fair management. Here are the characteristics of a company with a fair management:
  1. Provide its financial statement as it is, without any tricks or manipulation
  2. Pay a decent dividend annually
  3. Not trying to control their share prices in the market, but let it go up and down according to market mechanisms
  4. Do not hold right issues, taking a high interest bank debt, etc. which could potentially harm the public shareholders
  5. Do not hold a weird corporate action, financial engineering, and the like, but only corporate actions that aim to generate maximum profits for the company.
There may be a question, how to know if a company may have manipulated its financial statement? Honestly, it is not easy to know because it requires extra precision in reading the statement. However, there are some tips: The more complicated and the more types of accounts in the financial statement, the greater the tendency that it have been manipulated, or designed. Cannot believe? You can compare the financial statements of Bumi Resources with Astra International, you will understand the difference.

And how do we know if a company has been designing their share prices to be as their wish? Unfortunately, there is no way to know this, because when a stock has been moving improperly (up or down at once in a large percentage, for no apparent reason), it is not necessarily that the mover is the concerned company, but could be other parties. But there is one tip: You should avoid stock of a company that is: 1. Have a very large number of outstanding shares (tens of billions of pieces), while the size of the company itself is not too large (the assets less than Rp5 trillion), and 2. The public ownership of the company is too dominant, sometimes up to above 50%, this can be seen in its financial statements. Based on my research, companies that meet one of the two characteristics, or both, its share prices usually moving unnaturally, and possibly the bookie is the management itself.

Okay, I think that's all. Last, Bro Teguh, you can show us a company with the management that meet the three criteria of 'work' above? Well of course I can, the answer is Unilever Indonesia (UNVR). Check this out:
  1. Work Hard: The management of UNVR, or in this case its parent company, Unilever BV, routinely develop and launch new variant consumer products, at least changing its packaging, so the consumers would not get bored. If you notice some of Unilever products such as Pepsodent, Lifebuoy, Clear Shampoo, Wall's Ice Cream, etc, there always new variant of the products, so that consumers always feel buying a new product.
  2. Work Good: Since the first I know the company until now, I have not heard the news that Unilever getting sued for bankruptcy, getting disputes with other companies, or not paying taxes.
  3. Work Fair: UNVR may be a large company with the simplest financial statements on the Stock Exchange, and they also regularly pay huge dividends (100% of its net profit) for all shareholders without exception. Each time the company made certain corporate actions, the goal is solely to the development of the company, that’s it (last time, UNVR acquired brands 'She' from Sara Lee Body Care).
 
Board of Directors, PT Unilever Indonesia, Tbk

Because the company controlled by a great team and in a way that is very, very professional, it is no wonder that UNVR became the best and the most expensive stock in  IDX. I mean, just think about this: What would happen if UNVR had been controlled by the Bakrie Group, for example?

Fortunatel, UNVR is not the only company with good management, but there are many more others, and our job is just to find them.

Original article was written at February 10, 2013

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