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Satyajit Singh's  Instablog

Satyajit Singh
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MBA, University of Chicago, Graduate School of Business --------------------------------------------------------------------------- I am a disciple of Benjamin Graham and use his 'margin of safety' principle in investing. It is insightful to see how people such as Prem Watsa, Seth Klarman and... More
My company:
Singh Investment Funds
  • Corporate Structure... 0 comments
    Aug 15, 2012 11:51 AM

    Financial / Investment analysts tend to look deep into numbers of a company but most investors tend to be soft hearted when it comes to analyzing the management and the corporate structure. This is a slippery slope.

    There are basically three corporate structures:

    1) The promoter / owner is also the CEO of the company.

    In this form of corporate structure the CEO has every incentive to pay himself a big salary, corporate jets and every luxury possible. The investors should watch out for such CEOs. History is full of events where the CEO (and the promoter) has squandered all the wealth at the cost of minority holders.

    2) No majority stakeholder.

    This is a heaven for the CEOs. No one is there to ask for the results. No one cares how the company performs. No one voices for a different CEO. Unfortunately the institutional investors such as pension funds or mutual funds tend to be passive in spite of being a majority holder. A minority investor should watch for two things:

    a) Is there any activist investor pushing for reforms ? If yes, its a good sign.

    b) Has the management performed really well ? Look at ROE or even better (FCF/Book Value of Equity)

    3) There is a majority holder who is a long term investor.

    This is the best structure for a minority investor. The majority holder has every reason and power to align the management.

    Just watch out and invest carefully. Its your hard earned money.

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