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Posted On Monday, Aug 21, 2017
One of India’s largest IT companies is recently in the news, not because they bagged a multi-billion dollar contract or wrote a game changing algorithm, but because the CEO of that company handed in his resignation. The press has been rife with rumours and reports, letters, counter letters emails etc. to try and figure out what exactly went ‘wrong’ with the CEO and why did he, despite the support of the Board, tender his resignation. It’s like a soap opera playing out in real life!
This comes not even a year after a similar furore erupted around one of India’s largest and most well-respected conglomerates, which asked its Chairman to step down. The debate rages to this day on which side was more aggrieved.
Meanwhile, recently on the international front a seemingly ‘untouchable’ Founder/CEO of one of the largest American technology companies that develops, markets and operates car transportation and food delivery mobile apps was asked to quit by the board of that company after he was said to be encouraging a culture that was not the safest for women employees in that company. That company is still searching for a suitable replacement today.
The Common Thread
The common thread between these 3 companies is that they lost the person at the helm. In two cases, the Board asked the CEO/Chairman to step down, while in the case of the large IT company the resignation came despite the backing of the Board.
There are two things that we believe a Board looks at when it comes to hiring or retaining a CEO. One is obvious: the candidate’s ability to take the company to new highs, not only in terms of innovation but also the quantitative aspects like the bottom line and profitability. The second is the culture fit with the organization. Every organization, no matter how large or small, stands for something. While excellence in the field is something that every organization aspires towards, there are softer aspects that tend to define the organization, such as fiscal prudence or a culture that ensures that every employee is safe and treated equally irrespective of religion or sex. In the case of the IT company where the Founders were examples of fiscal prudence, if the new CEO starts to rent private jets in which to travel then there is bound to be a clash of ideologies.
The CEOs of the IT company and the US based mobile app company were delivering good financial results, but where they ‘failed’ – or at least, where the controversy centered – was their fitting into the existing culture or creating one where everyone is equally respected. Boards nowadays are not only tasked with being custodians who protect shareholder interests, but they are also champions of the culture of that organization and have the power to sack the CEO in case he/she proves to be misfit for that culture, even if the CEO has performed well in terms of the company’s income statement. In the IT company’s case, it was a former board member/founder who took the CEO to task, while the present Board fiercely defended its support for him.
The relationship between the CEO and the Board seems to be changing: while there are many Boards which act as glorified “rubber stampers” merely endorsing what the CEO thinks is right, many Boards are also active and are not afraid to question the person at the helm or the “larger than life” figures from the company’s past, and if they feel that the CEO is not driving the organization in the right direction – and more importantly in the right manner – then uncomfortable questions are bound to be asked, and uncomfortable exchanges bound to occur.
Looking at Financials only
If we were to wear only our financial manager’s hats, then 2 of the 3 CEOs (those of the IT company and the US based mobile app company) were doing a decent job in terms of sheer numbers. Stocks were at a sweet spot in their respective market valuation (public or private) and things were looking good. The conglomerate in question has more than 100 companies, several of which are in the red. The chairman was tasked to bring them back on track, but unfortunately wasn’t around long enough to implement his ideas. So from a financial perspective it is status quo.
What Quantum Does
We can bifurcate Quantum’s operations into two parts:
Overall, in our humble opinion, a strong board that isn’t afraid to court controversy is always preferable to one that merely rubber stamps the decisions of one person so that the Board members can happily collect their Board fees ad infinitum. Quantum recognizes this, has structured itself similarly as an organization, and looks for companies with the same ethos: an emphasis on doing the right thing for the end investor.
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Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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