Investors read a lot of equity research. Well, equity analysts produce a lot of research at any rate – whether all of it gets read is another matter!
Anyone with an interest in finance will be familiar with most the performance metrics that are reported and dissected daily, from p/e ratios to dividend cover to leverage ratios to (for banks) net interest margin and capital ratios. They are a staple of annual reports, credit rating agency reviews and business news headlines.
The share price is everything. And yet, I can’t help but think that accountants and equity analysts are missing something. Amongst this veritable flood of statistics, we could do with two more.
And so here are two key efficiency metrics that all shareholders should consider – I make you a free present of them. The first is my value-added time metric, defined thus: Time spent engaged in non-business objective tasks/Total time spent in work
This statistic should be produced for individuals as well as teams, but most especially for senior executives. The denominator is easy: how much time is spent at work (or “in” work – time during weekends spent on the blackberry answering emails counts as time in work).
The numerator may be more problematic, but include in it any time spent engaging in activity that has no connection with the company’s objectives and produces no tangible benefit for the shareholder. What sort of essentially useless activity falls into this category?
Here are some examples: time spent discussing “[team name] leader of the future”, “talent & succession” planning, “team barometer surveys”, staff “communications plans”, team building "offsites", and so on. In other words, endless hours spent on bureaucratic process that the shareholder does not only care little about, but would be concerned that senior management are spending so much time in carrying out.
If this metric is above 30%, the shareholder would, I am sure, be worried. If it is above 50%, as I suspect it is for many large companies, it’s time to undertake a serious review of such activity and consider what if any benefit they actually deliver. The second performance metric is a version of this, but concerned with headcount.
We have heard of “head-to-tail” ratios, a distant cousin of the cost-income ratio that measures number of staff in back-office or support functions compared to the number in front-line customer facing functions. My one is subtly different, and measures: Number of team headcount engaged in non-business objective tasks/Total number in team A good example is the rise of “Change” teams in banks. In theory this is a temporary grouping of people engaged in delivering organisational change in the firm.
But when this team becomes the largest one in the department, one should start worrying. Why? Because what this means is that “change” has become institutionalised and turned into a gigantic bureaucracy in its own right. A bad sign.
We can all construct similar metrics, usually involving the number of management consultants or contractors in a department who have been there longer than many of the permanent staff. Shareholders need to check these metrics because they are very revealing of company culture.
But they aren’t published (for understandable reasons) and equity analysts don’t really discuss them. Time to start doing one’s own digging…
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Professor Moorad Choudhry is CEO of City of London Capital Ltd.