Forum Archive Index - October 2000

["Steve Moxham" <stevemox@e3.net.nz>]

Brian wrote: "...I have difficulty in attributing the ' destruction of shareholder wealth'  solely to the remuneration of their executives..."

 

Thats a good comment Brian. The performance of a company must have a lot to do with the type of business it's in, and a better indication of management ability to create shareholder wealth (or minimise loss) is to compare it to its peers within an industry. 

Depending on that industry a company may be subject to factors beyond its control, effectively limiting the best efforts of management strategy and direction.    

 

Buffett says of management: "Economic strength is most often found in franchises. One strength is the potential to freely raise prices and earn high rates on invested capital. Another is the ability to survive economic mishaps and still endure. It is comforting, Buffet says, to be in a business where mistakes can be made and still above average returns can be achieved. "Franchises," he tells us, "can tolerate mismanagement. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage."

"A franchise can survive inept management; a commodity business cannot".

[From "The Warren Buffett way"]

 

If remuneration of executives and management gets out of hand it could be a symptom of a greater problem within the business itself and will likely harm shareholder returns. 

At the same time these remuneration schemes are designed to make management think more like owners and increase the returns for all stakeholders.

Rising costs and corporate excesses are often a symptom of misallocation and mismanagement of capital on a larger scale. Hard to believe that BIL once had a 22 seat Falcon 900 bizjet to buzz around in!