Clearly, most shareholders believe it is essential for Musk to be in the driving seat at Tesla to achieve its autonomous car ambition. In fact, Ark Invest’s Cathie Wood, who has long been upbeat on this product’s prospects, expects robotaxis to account for 90% of Tesla’s valuation by 2029. And she’s got a lofty $2900 target price for the Tesla stock in 2029, as against the current tab of around $178 per share.
But why are we talking about Musk and Tesla? Well, investing is the same everywhere. More often than not, we are betting on a company because we believe its promoter or CEO has the chops or are following successful investors like the late Rakesh Jhunjhunwala or the reclusive RK Damani, believing that they have backed another multi-bagger.
At the end of the day, when it really comes down to it. In investing, we back companies that are managed by people. And the people factor must not be underemphasised at any point. In fact, history shows that individuals have a significant role in creating wealth for businesses. And today, in a fast-changing world where business models are being upturned by technology—quick commerce for one—and the future is being reimagined with AI, one needs to have even more confidence in the leadership of a business to deliver.
THE CHANGE EFFECT
Several companies in India have witnessed turns in fortunes on a change of guard. The Tata Group is replete with examples of how N Chandrasekaran at Tata Sons and his new crop of business heads across companies like Tata Steel, Tata Motors, Tata Power and Indian Hotels have been able to engineer sharp turns in prospects and create value for shareholders. At Mahindra & Mahindra too, a more disciplined capital allocation policy and a focus on leadership in businesses has driven a big improvement in performance across businesses. This, even as some like TechMahindra, which recently saw a change of guard, is yet to witness the impact of changes underway.
Such instances raise shareholders’ expectations on a change of guard, as seen in the case of Godrej Consumer and Colgate, where some changes are already visible, and in companies like L&T Finance, where the parent recently bought out private investors. But change doesn’t always lead to a better outcome. Wipro has struggled with the leadership problem for many years and has now fallen back on an internal hand to do the job. Hopefully, Wipro will deliver this time.
A LONG RUNWAY
Investors hate uncertainty. It is, therefore, important for them to have confidence that a company that has been performing well will continue to do so. Here, the longevity of the present management becomes an important factor to consider. In other words, how many more years does the current leadership have at the helm, barring imponderables and Acts of God? Continuity gets to command a premium.
Let’s look at a few examples of companies where the leadership still has a fairly long runway ahead. Godrej Properties is led by 38-year-old Pirojsha Godrej, Macrotech Developers is helmed by 37-year-old Abhishek Lodha, TVS Motor has 35-year-old Sudarshan Venu driving it, Zomato’s Deepinder Goel is delivering at 41, and Vinati Organic’s Vinati Saraf Mutreja is just 40. These companies can, therefore, expect to continue doing business with some form of continuity and consistency for many years to come. This is not to say that other companies may not. In fact, with professional managers at the helm of most large organisations, their role and tenure becomes equally critical.
Concerns arise when the business’s key driver(s) are nearing the end of their terms. In such businesses, the biggest question for investors is: who next?
ORGANISATION BANDWIDTH
When it comes to continuity, the organisation’s bandwidth is also an important aspect to track. Does the company have a culture of nurturing and grooming leaders for bigger roles? Such a culture is a big plus for an organisation as it ensures that future leaders can come from within, and these would be leaders who understand the organization and its business principles, systems, culture, strategies, and goals. Having an outsider come in to run a company is always a risk. This is why organisations like Hindustan Unilever, Tata Group, ITC and ICICI Bank enjoy a good deal of investor confidence. Many of them are management factories that have spawned leaders who have led other organisations successfully.
GOVERNANCE IS KEY
The quality of management and governance are the most critical factors for a business’s growth and shareholder returns. You can analyse a business’s prospects and dissect its numbers as closely as you wish, but at the end of the day, the management has to realise that business and make good on the opportunity. Also, numbers are strange; they can be cooked in many ways. So, without a high degree of confidence and trust in the management, much of what is reported can be meaningless.
This is why businesses with recognised governance standards continue to command premium valuations. For investors in equities, it is a lot about taking a call on the leadership of a business rather than on historical numbers or investor presentations.
And that requires a leap of faith.
