Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Steady hand on the tiller or captain of a rudderless ship?

Glenn Freeman  |  20 Jan 2017Text size  Decrease  Increase  |  

Page 1 of 1

The quality of a company's leadership team is a key determinant of its success, and analysis of senior executives should form an important part of your investment decision-making process.


Undertaking in-depth research and due diligence is vital to successful investing, but there are always unknowns that create risk for investors.

"One way to help reduce this risk is to analyse the management and leadership of companies before investing in them," says Chris Bedingfield, principal and joint managing director, Quay Global Investors--a fund manager owned by Bennelong Capital.

Such considerations are an important component of Morningstar's equity research methodology, with each company under coverage awarded a stewardship rating of Exemplary, Standard or Poor.

This has been part of the equity analyst toolkit at Morningstar Australia since 2014, having been first rolled out in the US in 2012.

The stewardship rating looks at whether management's capital-allocation decisions have enhanced or eroded a company's competitive position and shareholder value over time. It is closely linked with the moat rating, which measures a company's competitive advantage, and which in turn should translate into excess returns.

The longer these excess returns are expected to endure, the wider or stronger the economic moat. Exemplary stewards of shareholder capital will invest in moat-widening projects.

Adam Fleck, regional director of research, Morningstar Australasia, says the emphasis is on how individual companies are "stewards of capital, not of governance and board structure".

He says how a company's board is organised is often not material to its performance. "But if its chairman and CEO together are doing a terrible job of managing the company, then of course, we'll take that into account," Fleck says.

Australia's corporate sector is littered with examples of the correlation between senior executive performance and company value, and even collapse.

Steelmaker Arrium is one prominent example. Before its collapse, the board of the now-liquidated company was broadly criticised by corporate investors, shareholders and other stakeholders for numerous examples of poor financial stewardship, compounded by off-kilter senior executive remuneration.

In years gone by, companies like HIH and OneTel, once market darlings, collapsed under the weight of mismanagement.

However, as Morningstar's research shows, a reduced stewardship rating doesn't necessarily spell disaster.

Just this week, the stewardship rating of healthcare company Sirtex (ASX: SRX) was reduced to Standard from Exemplary, after the termination of long-standing CEO Gilman Wong. The board dismissed Wong after an investigation into his trading of Sirtex shares.

While Sirtex's stewardship rating was reduced, Morningstar equity analyst Chris Kallos notes the company remains in a strong financial position, with cash and cash equivalents of $107 million, and no debt.

"We maintain our $28 per share fair value estimate for Sirtex and view the shares as undervalued at current levels, given the over-40 per cent discount to our intrinsic assessment," Kallos says.

More from Morningstar

4 stocks to watch amid pre-Trump jitters

How to beat the market noise


Glenn Freeman is Morningstar's senior editor.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.