Management Does Matter!


Early this morning as I opened my email, there were a few unhappy comments from former colleagues at UBS. It seems there has been a rogue trader who lost and covered up (all allegedly at this point) $2 billion in trading losses. Besides the fact there will be consequences throughout the company for those employees who had nothing to do with the trades (stock options, awards and bonuses not being paid this year, etc), there is a general sense of “Aw man! When are we going to get it right?”

As I thought about the question, it occurs to me “What does ‘get it right’ mean? As a management consultant our goal is to increase the economic value added to the enterprise with whom we are consulting. Meaning, we want our efforts and implementation to add value above and beyond the value the enterprise would have gained without our involvement. For those quantitatively minded out there, this means adding alpha. Senior Managers of publicly traded are expected to add value by making good decisions.

Another way of looking at this is through the lens of the mutual fund industry. The first mutual funds were actively managed. Professionals were paid to invest because they had knowledge, access and abilities not available to everyone. So they were paid well for it. The fund industry grew through to the 70’s when a certain Mr Bogle at Vanguard realized professionals weren’t providing value by outperforming the market, so why pay for it through high fees to the professionals? Thus the index mutual fund industry was born. Passive returns at a low fee to get near-market returns consistently.

Take this concept to the company level. Assume a hypothetical investor has the choice of buying but one company completely or putting the money into a market index representing a basket of managers of companies. Will the managers of the one business make decisions that will lead the company’s results to outperform the index representing a basket of other professional managers? And how do we measure the impact of their decision making? I recommend using the principles of economic value analysis.

Using UBS’s Annual Reports for the years 2006 to 2010, calculating the increases or decreases in market value and comparing it to the returns for the Dow Jones Industrials during the same period a couple of interesting items pop out; 1) UBS had a market valuation of $127 billion at the end of FY 2006. By the end of FY 2008 the market valuation was $42 billion. A drop of $85 billion. Remember UBS had to write down $50 billion in equity due to toxic assets. The extra $35 billion resulted from investors bidding the shares down in price as a result of the write downs (read: senior management decisions adding negative alpha). 2) Since the end of FY 2008 UBS has added a little more than $12 billion in market valuation through the end of 2010. That same equivalent investment in the Dow would have gained just under $14 billion (read: new management making decisions adding positive alpha).

Lessons to learn from this, management does make a difference! An area that does not receive enough attention is an analysis of the senior management team to the same level as all the spreadsheets analysts use to analyze companies. Another lesson, there is a way to measure the effectiveness of senior managers, I recommend Economic Value Analysis for measuring that impact.

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About Consulting With Results
Experienced Consultant focused on delivering results across various industries, and throughout the value chain.

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