Putting a value on character.
In their evaluation process for making loans, banks and other lending institutions look at the five “C’s” of credit. Aside from Capacity, Capital, Collateral, and recently Conditions which include matters like industry structure, technology change, or external factors, there is “Character.” This “C” focuses on a borrower’s track record in paying up credit cards, utility bills, and caterers to indicate his sense of fiscal responsibility. After all, not all those with money to pay actually settle their bills on time.
Is there too in the valuation of a stock a character premium or discount? Do analysts and investors go beyond financial ratios, industry structures, market shares, and historical performance into the leadership styles, succession plans, or spending habits of management?
There is a case to be made for paying attention to the reputation of the principal behind a company. In the new field of behavioral economics, the value of character in a corporation is becoming part of the metric in picking stocks.
Thomas Schelling, a 2005 Nobel laureate in economics, cited for his conflict-collaboration game theory, used the term “egonomics” to refer to self-management in personal matters, weighing costs and benefits of acquisitions and purchases, or being rid of addictions. The ego of a person in the sense of his core personality as well as striving for status can play a role in economic decisions.
On the supply side, ego plays a part too. Is the listed company of a particular player worthy of a premium or a discount? Some positives driving premium pricing includes the management’s track record of transparency and fiscal prudence combined with a working growth strategy. A character discount can involve fuzzy accounting, weak second-tier management, over-the-top spending habits (how many corporate planes?), and a whimsical strategy of acquisitions by the principal.
Characters as stock pickers (demand side) also affect market sentiment. A market maker like Warren Buffet “betting all-in on the future of the American recovery” with the purchase of railroad stocks, like the Burlington Northern Santa Fe (BNSF) four years ago, can make the bears take flight and change market sentiment for certain stocks.
In our small local market, character reigns.
Stocks are identified by their principals and lumped together as the “XYZ” group, if that combination of letters is a person or family. The difficulties that befall one subsidiary can affect even the group’s holding in unrelated businesses. Rumors of a takeover of a company by a particular character are enough to lift a sleepy stock into the stratosphere or make it go on free fall. The research analysts’ valuations, based on future cash flows and acquisition synergy drive up not just the target stock but also the shares of perimeter companies associated with specific characters.
The effect of character on the value of the stock is a tricky connection.
With corporate reputation now driven just by word of mouth and social media with its fake news, the character impact can be overblown. Matters of a lavish lifestyle with yachts and private jets, and opportunism associated with political connections are random stories told of corporate chiefs.
In a small economy where all the characters and their reputations are well known, change in management and ownership matters a lot. Specific personalities dominate the financial space.
Buying into a company through its shares is a declaration of faith in its principals. As my friend and stock market guru, Wilson Sy, puts it, “Buying a stock is like going into a partnership with the principals of a company.”
Character analysis is not a static science as personalities change too. New names come up and quickly grow into conglomerates. Old names drop out of the picture. New tech companies rise and fall. Still, it is the track record, sometimes a very short one that determines whether character will play a big part in the price of the stock.
In a small market like ours it is a small group of players that needs to be watched as closely as the ticker tape.
Fortunately for the character witnesses, there are just a few players to track and they don’t necessarily talk to each other. And when they do… is it time to buy or sell?
A. R. Samson is chair and CEO of Touch DDB.
