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FINANCE

per cent of the total wealth created by management integrity. said, “In evaluating a common stock, the
top 100 companies. The report states that management management is 90 per cent, the industry
integrity typically gets compromised is 9 per cent, and all other factors are 1
Wealth destroyers when a weak board of directors fails to per cent.“ The Management Integrity can
Ironically, financials sector leads the challenge the senior management on be defined as dealing with all company
wealth destruction pack. The financials issues like accounting policy, related- stakeholders honestly and with a sense
sector has the unusual distinction of be- party transactions, senior management of trusteeship.
ing the biggest wealth creator (thanks to compensation, etc. Other conditions If companies demonstrate only
private banks and NBFCs) and also the are when there are management teams, competence without integrity, there
second biggest wealth destroyer (thanks devoid of checks and balances, invari- is enough evidence to suggest that for
to state-owned banks). Vodafone Idea ably led by an alpha leader who takes all such stocks it’s a race to zero! The man-
was the biggest wealth destructor fol- major corporate decisions and auditors agement integrity gets reflected when
lowed by Tata Motors, ONGC and Sun lacking objectivity, independence and bogus revenue is recorded, expenses
Pharma. Reliance Communication, Ada- due diligence. are shifted to a future date, revenues are
ni Enterprises and Reliance Power also The report mentioned “Auditors must recorded too soon and certain items are
featured in the list of wealth destructors. be made more accountable to minority taken off the balance sheet.
shareholders to avoid Sharp Practices by
Management integrity the management. As an investor, have a The way out
Given the corporate governance issue Raamdeo Agrawal, chairman of Motilal
faced by Indian companies in the last Oswal Financial Services observed that
few years, this study attempts to gain Financial sector firms top the lack of integrity of the management
some insights into management integri- wealth creation, whereas is hurting a lot of investors. He said that
ty. Motilal Oswal’s approach to equity in- top quality business is run by top quality
vesting is called ‘QGLP’ (Quality, Growth, telecom sector companies management, and then growth, longev-
Longevity, reasonable Price). QGL is the perform poorly with only ity and valuation. So all the four compo-
value component, which is then juxta- nents — quality, growth, longevity and
posed with P i.e. reasonable Price. The one company successfully price have been covered in the study.
recent past wealth creation studies have He said that “This time we are hurt
probed into various aspects of QGLP. This creating wealth, finds by a few accidents in our own portfolio
study attempts to gain some insights into the 24th 'Annual Wealth and we realized that despite all the intel-
Creation Study' (2014-2019) ligence, lack of integrity of the manage-
ment is hurting a lot of investors and this
by Motilal Oswal Financial is an opportune time to study that.’
Also tracking of accounts was a good
Services Limited way to understand management integ-
rity. “There is only one way of writing
honest books and there are infinite ways
forensic mindset to get management’s of writing bad books. You cannot have
explanation for all the perceived Sharp a foolproof system to figure out, so you
Practices. Interact with various stake- have to focus on how to find the honest
holders — customers, employees, suppli- guys and to figure out honest guys you
ers and competitors till you arrive at that got to have a forensic mindset.
moment of Management Integrity.” It Agrawal says that this year’s theme,
said that sharp practices may be defined management integrity, is fundamental
as “ways of behaving, especially in busi- to business, but this aspect took the cen-
ness, that are dishonest but not illegal”. tre stage this year as issues of corporate
Rohini Kute Head — Corporate Com- governance have become more visible
munication Motilal Oswal Financial than in the recent past. The report’s con-
Services said that Study of Management clusions include: relying more on cash
Integrity Motilal Oswal’s approach to eq- flows rather than the profit-and-loss
uity investing is called “QGLP” — Quality, statement and a recommendation to
Growth, Longevity and reasonable Price. make the cash flow statement a statutory
The study attempts to gain some insights requirement.
into Management Integrity.
As investment guru Philip Fisher has LETTERS@TEHELKA.COM

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