How to Know if Your Company is the Next Kingfisher Airlines?

Image Source: Economictimes.com

Succeeding in our professional and personal lives requires tremendous confidence.

Our natural desire to be highly confident, however, leaves us at risk of becoming overconfident, which may be the biggest error of judgment that we make.

It is when false confidence drives overconfidence that we become susceptible to hubris.

Such hubris is commonly seen across people in power – like corporate CEOs or Chairmen.

In fact, according to researchers, the most reliable indicator of financial fraud is not good corporate governance practices, but rather, the ego of the chief executive.

A CEO’s hubris fuelled by overconfidence and arrogance is what ignites and accelerates the propensity of his senior managers to commit, or be oblivious to, value destroying behaviour.

You’ve heard the story of ‘King of Good Times’…
Take the case of Kingfisher Airlines (KFA), where chief Dr. Vijay Mallya is busy firing salvos at everyone (except himself) for the destruction that has happened at his airline company.

If you’ve heard Mallya’s sound-bites over the past few days, you must’ve sensed his ego (and a lot of it) playing out through his words. Like, when he said…

• Closing down is not an option. It will not happen!
• Why should we give up as long as we get help? Help is not bailout. (This was really funny!)
• The entire problem surrounding the issue of bailout is of the “media’s making”.
• We were the biggest and the best. We may not be the biggest now but we remain simply the best for our guests.

Amazing, isn’t it?

A man, whose ego first drove him into a business that is notorious for destroying wealth worldwide, and then led the business to actually destroy wealth (see chart below) by pursuing over-the-board growth targets, still dares to come on media and say why he believes he’s right and the world’s wrong!

Data Source: Ace Equity
After huge losses, mounting dues to banks, thousands of harassed customers, and huge destruction in shareholder wealth, KFA is still attempting to keep its head above water in what appears to be a losing battle…

…all because Mr. Mallya is seeing some ‘light at the end of the tunnel’!

But where’s the light for minority investors?
Who cares about minority investors when it comes to financial frauds (I couldn’t find a better word) like the one at KFA?

Not CEOs! A majority of them anyways work to fulfill their ‘personal dreams’ and satisfy their ‘bloated egos’.

What about the regulator? You’ve got to be joking. After all, if you want to risk your money on the equity markets, it’s your problem.

Whether it’s a ‘vanishing’ company or one that is looking to survive on bailout money (sorry, not bailout…‘help’ is the right word!), it does not make too much of a difference.

It’s really ‘your’ problem – the problem of the investor who’s made the choice of buying and holding the stock.

You have no one else but yourself to blame if you are stuck with stocks like KFA, or for that matter a Suzlon or SKS Microfinance that we’d covered earlier.

“But how do I identify a financial fraud?”
Well, one way is to pull out the company’s last 5 years’ annual report. The debt/equity ratio (from the balance sheet) and the operating cash flow (from the cash flow statement) will give you a lot of hints if the company is ‘playing around’ with shareholders’ money.

An easier way is to look at how the CEO talks when he’s in the media.

If he’s charged up talking about the future, or if his eyes light up while announcing his next acquisition, or if he explains why a move into an unrelated business will be great, you know something is wrong (or could go wrong).

I used one such trick while analyzing IPOs during the 2005-2008 era.

A company that held its IPO meet at the most luxurious of hotels and also funded a post-meet lavish dinner (with drinks) for analysts and fund managers, was a sure-shot ‘Avoid’.

Then there were some that offered analysts gifts like perfume bottles, expensive pens, and coffee mugs even as their CEOs talked how they would have to take on more debt on their books to fund their aggressive growth targets!

The subtle hints from such companies was – “We’re treating you with such nice food and a gift so that you overlook what’s wrong with our company and write a positive report.”

It all added up to create a very authentic view of whether there was something fishy that was happening in the corner office (of the CEO).

And more often than not, my ‘Avoid’ or ‘Sell’ views on such companies worked. 🙂

You can try this for yourself as well…with the stocks you already own.

Do Google search for interviews of CEOs of your companies, and read what they have been saying over the past few years. Also take out their annual reports and read the Chairman report. Have a look at the balance sheet and cash flows as well.

If you will do just this, you will be doing a great justice to your hard earned money which you might’ve invested in some companies that might go the KFA route.

But whether you test your companies this way or not, always remember that when a company that you hold goes bust and so does your investment in it, the entire blame lies on you…not the CEO or anyone else.

It was, after all, YOUR choice!