An ode to Indian promoters

India's finest promoters are awe-inspiring and under-appreciated.

Preamble

Over the past fortnight, I’ve listened to many conference calls where fine Indian companies reported a near-normal June. While an unimpressed audience quickly moved onto “Nice, but what’s Q2 guidance?”, I was awe-struck at what it would’ve taken, behind the scenes, to achieve ‘nice’. I am less concerned about near-normal in a numerical sense, as that varies by industry, than in an operational sense. It’s easy for people like me, who shuffle bytes and money around while working from home without consequences, to underestimate what it takes for real companies to get back to work.

Imagine the context. Whatsapp groups have been hijacked by doomsday duffers dousing groceries with whisky, something that bugs me in more ways than one. Sanitizer cabinets feature in selfies. UV light has returned to healthy status. Office bearers in housing societies have discovered their inner Kim Jong Un, as have local bureaucrats. Psycho parents go mental at the slightest mention of restarting school. Amidst this absurdity, we’re talking about normalcy for companies that make, ship and sell widgets all across India, with far-flung, complex, unwieldy operations.

Our finest companies have run factories, supply chains, distribution, warehousing, logistics and retail at a near-normal level, without compromising health or safety. They’ve been more than fair to employees, suppliers, channel partners and customers. They’ve managed capricious bureaucrats and fickle regulations. They had the foresight to create resilient businesses with balance sheet cushion. Still, they had to make difficult calls, on lay-offs, which costs to cut, where to continue investing, how quickly to ramp up production, whether to trade-off brand positioning for an aggressive online push etc. They’ve generally done what’s right over what’s expedient. Everything I’ve said so far traces back to those the buck stops at – promoters. It’s hard enough doing this in normal times. In extraordinary times, it’s remarkable. So, it felt appropriate to re-publish my essay on how highly I view India’s finest promoters.

Essay

“Run your business as if it were the only asset your family will own over the next hundred years” – Warren Buffett’s message to Berkshire Hathaway’s business managers (2004 letter)

The best Indian promoters are awe-inspiring. Yet, they get a raw deal. Because the worst draw all the attention. Headlines seem entirely about misdemeanours and defaults. Even the word ‘promoter’ seems to have a negative connotation. Without denying that many deserve the opprobrium, the ones at the other end are grossly underappreciated. I write this essay to convey my unabashed appreciation for the finest Indian promoters. They have demonstrated exceptional character and competence in building sustainably great businesses while treating everyone fairly. The finest promoter-led companies in India embody capitalism at its best.

I cannot possibly do justice to this topic, but here’s why I think the best promoters walk on water:

They are permanent owners with soul-in-the-game.

As a part-owner seeking reasonable long-term risk-reward, my only route is to align with a principal owner who has my back. It’s hard to do better than the finest Indian promoters on this front. With substantial permanent ownership in a business they’ve nurtured over decades, they have what Taleb calls soul-in-the-game. The health of their business drives not merely their net-worth but their self-worth. Their permanent-owner mindset allows them to simply do whatever will strengthen the business for the long run, without the corrosive short-termism that comes with markets.

They place company’s interests over their own.

The best promoters have consistently prioritized company’s interests over theirs. In tough times, they have invested their own money at unfavourable terms to safeguard the company and its reputation. They have voluntarily addressed legacy issues, without any personal consideration. Even in deeply emotional areas such as family succession or discontinuing pet projects, they’ve acted in the company’s best interests. In my experience, the best promoters have proven to be far better stewards of other people’s money than fund managers.

They are prime custodians of intangibles that matter.

Investors often wonder about relative roles played by promoters vis-à-vis senior management. While the answer is fuzzy, there’s one pivotal role that lies primarily with promoters. They’re the custodian of key intangibles: reputation, brand, values, culture, risk, relationships (with channel), long-term orientation. They draw the red-lines not to be crossed. They walk away from L1 tender business of a kind that compromises risk and values. They veto anything that could irredeemably dilute the brand. They follow Buffett’s maxim of rather losing money than a shred of reputation.

They’re sharply focused on input metrics that strengthen their business.

I’ve been in two-hour meetings where promoters didn’t even mention revenues, let alone share price. Outside of warped settings such as quarterly earnings calls, their mindshare is entirely on process, not outcome. They focus on controllable input metrics: organization, technology, supply chain, brand, distribution, R&D, handling disruptions. Despite having a surplus of cash and capability, they swat away numerous M&A proposals so as to not dilute this focus. They are publicity shy, avoiding extraneous activities that don’t strengthen the business.

They’re the only ones who can make the big judgment calls.

There’s one business role that only promoters can do justice to: taking 3-4 consequential judgment-calls each year. In a bad economy, what compromises are acceptable? How to handle a catch-22 problem like e-commerce presence amidst rampant discounting? In the face of an external shock, how much slack to cut to channel partners? It takes an owner’s lens to appropriately view long-run consequences of such decisions. Undiluted focus enables great promoters to spot material problems and apply their full mindshare to addressing them. 

They’re paranoid in avoiding ruin.

Promoters understand risk more holistically than anyone else, investors included. As permanent owners, they’re especially paranoid in recognizing and avoiding ruin. They intuitively know that optimal capital structure isn’t the nonsense that finance professors spout but what lets them sleep well at night. To them, a cash cushion is for survival and strategic flexibility in inevitable bad times. While they accept lower margins when appropriate, balance sheet strength is non-negotiable.

They drive a perfect balance between aggression and conservatism.

While well-run listed companies may seem stodgy, many have silently transformed their businesses over time. Engineering companies have taken exports from an insignificant part to a major part, while holding their own against the world’s best. Old economy brands have over a third of revenue from products and segments that didn’t exist a decade back. When a sizeable segment disappeared due to external stresses, companies have proactively penetrated alternate segments without compromising business quality. In each case, promoters have been aggressive in capturing adjacencies playing to innate strengths, while doing so in a no-fuss, low-risk, step-by-step, organic manner. I’ve consistently been amazed at the magnitude of this cleverly-hidden aggression and innovation.

They’re brutally honest, with themselves and others.

Promoters have shown amazing candour in admitting mistakes and promptly communicating bad news. They guide conservatively, and often act as a sobering influence when analysts get carried away after a good quarter. Many promoters have invited outsiders who disagree with their strategy to formally present views to board and senior management. Promoters are secure enough to give a patient, respectful hearing to devil’s advocates and have sometimes even reversed a publicly committed course of action if the arguments made sense.

They foster an owner’s mindset across the board.

In business, agency problem is an absolute killer (who better to know this than investors guilty of the same crime). Our promoters, through example and custody of key intangibles, haven’t merely avoided this trap but created a cadre of professionals who are truly owner-like in their mindset. In India’s best businesses, senior management display the same willingness to take short-term pain for long-term gain that owners do. While owners have cut a lot of slack to senior management even in strategic matters, management has displayed great responsibility to go with great power.

For reasons discussed above, investing behind a focused, enlightened promoter is the ideal construct for a minority shareholder.  This construct beats, by a wide margin, other ownership models that are fraught with conflict of interest such as conglomerate, private-equity-owned, MNC-subsidiary, PSU or board-managed. With inherent alignment of interest, the promoter-led model ensures highest odds of sustained, low-risk compounding of intrinsic business value.

On a holistic assessment, over a hundred promoters in India would merit respect for being stellar stewards of businesses. Naturally, all of them have delivered excellent business performance, based on financial, operating and qualitative metrics. I’ve tried to focus this essay less on the performance itself and more on the promoter characteristics that have enabled this performance without any compromise on risk, values, quality, safety or sustainability. Being a part-owner alongside such fine promoters has been a joy and a privilege. I sleep well at night, knowing that my money will compound in perpetuity in the very safe hands of those fully aligned with my interests.

(Preamble is new, while essay was originally published in January at https://www.linkedin.com/pulse/ode-indian-promoters-anand-sridharan/)