Why 'anxious vigilance' will only make company managers more trustworthy to shareholders
Adam Smith wrote in The Wealth of Nations that managers of joint stock companies can't be expected to watch over a company with the same anxious vigilance that owners watch over their own company. The wisdom remains relevant in modern day business.
Owners with the money, but who lack expertise or time to run the business, hire professional managers. The anxious vigilance of owners referred by Smith is to ensure that the business generates enough economic value for them-to put it simply, to see it's earning a return on capital that exceeds costs.
Professional managers hired by owners are primarily the capital or asset allocators in the business. If capital allocation within the business is inefficient, then enough economic value won't be generated. As rudimentary as it may sound, it's surprising how awareness of high cost attached to equity capital is often missing in many suave, confident and crafty professional managers in corporate India.
Where there is awareness of high cost, there is often denial under the pretext that, unlike debt, equity is 'patient money' and can hold through a few bad years of business. This is a grave mistake, as prudent capital management is a culture that is essential for sustainable economic value generation in the long run.
Notwithstanding the recent supernormal market returns, the market has been ruthless in dealing with stocks that have failed to add reasonable economic value over time. These stocks have been silent wealth-destroyers for investors over the years.
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