Homepage     Pasture the Company     Portfolio

Manpower and Auditor     Listed Investment Companies

Precautions, disclaimers and reference     Horizon     Contact us

Subsidiary investing

Ordinary shareholders cannot visit a company’s headquarters to interview CEOs. But they still have several external and public ways to know whether the management is doing a good job. There are three ways to test the management tenet: Rational allocation of net profits,  Candor,  and Institutional immaturity.

Rational allocation of net profits?

Pasture will avoid managers who invest the extra cash into unrelated business simply because they don’t know what to do with the money or just because of peer pressure. Diversification is fine. But blind expansion is a sin. A company that must integrate and manage a new business that is growing faster than itself, is apt to make mistakes which could be costly to shareholders. If the managers don’t know what to do with the extra cash, Pasture prefers them to return the cash to shareholders or purchase more on their shares. Life is that simple.

Candor

Can the board of directors (BOD) and the CEO answer five key questions? Pasture will read company annual reports to figure out

• The company's worth

• The company’s likelihood to meet its future obligations

• Are managers doing fine? Why do they resign from their jobs? (e.g. Some bankers advise investors to stay away from companies that change their Chief Finance Officer every year!)

• Is there any mistake so far? How does the company acknowledge and explain failures? Is it using facts but not reasons for failures, or simply excuses?

• Is there any hidden information using GAAP? Are there any accounting games? Pasture prefers the company to disappoint shareholders by its earnings rather than its accounting tricks.

By comparing annual reports of different companies involved in the same kind of business, Pasture may compare the relative strength and candor of the BOD and CEO.

The institutional immaturity

Surprisingly, companies can make mistakes like an immature human being. We have heard of a deputy general manager of a well-respected insurance company in Hong Kong said: “Other insurance companies are doing the same thing, it is not that rare.” He was talking about his company's poor performance in customer services. This statement is like saying that others are smoking too, so what?

Pasture will avoid any company with serious immaturity. There are four kinds of institutional immaturity:

1: Institution which keeps heading to the wrong direction but resists change: It is often easier to follow other companies down the same path leading to failure than altering the direction of the company.

2: Institution which constantly pays too much effort to please mutual fund managers: Nowadays, fund managers sometimes say what the company should or shouldn't do. We understand that some funds hold a considerable interest in a company, although they seldom run it. The CEO of a company may be forced to please the fund managers but mislead himself in private and the shareholders in public. It is good for the stock price in the short run, but not in the long run. We understand that the CEO has no better choice if he wants his job, since changing CEO annually is not an unusual practice in today’s business.

3: Institution which acts like a housewife: it does a lot of shopping whenever it has cash. In fact, it is playing the game of finance trick. We hear lots of news about merging and acquiring. The CEO tries to boost up the stock price by carrying out merging and acquiring. That trick is good for the stock price in short term, but not the business in long term.

4: The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation such as stock options or whatever, will be mindlessly imitated. If companies A, B, and C are behaving in a similar manner, CEO of company D may think that it must be all right for his company to behave the same way.

_{Pasture Investment Corporation Limited}