Softer skills elude financial managers

The next generation of financial managers will need to learn converting thoughts and skills into a numerical value.

Sep 11, 2007, 03.46 PM IST

By Sumit Jalan

Finance professionals can give you a precise answer to the nth decimal place from their increasingly complicated financial models (they can give NASA scientists a run for their money) when you discuss tangible attributes of a business.

But they will give you a retarded look (that can put blondes to shame) the moment you start discussing softer aspects of any business. They can be “precisely correct” with numbers, but struggle with intangibles such as understanding skills and experience, which is why most literature in finance has shied away from professing on the “value of intangibles”. The closest efforts in this direction lie in attempts to value brands.

To my mind, businesses are made of people and by people. You move a Carlos Goshn to a Nissan and the value of Nissan business zooms through the roof; you get Renault under his belt and Renault becomes one of the most talked about turnaround story.

A Mittal would acquire tangibles assets and then with his set of turnaround wizards do wonders to ailing steel mills across the globe. Ask any analyst on the street to value this skill and they will be dumbfounded.

As valuation pundits, we are slaves of numbers. We won’t assign any value to intangibles of businesses and management unless they are translated into bottom line and alas, by then it is too late. I believe unsophisticated wagers at a race course understand the importance of intangibles better than finance professionals do.

They look at the jockey and not the horse to predict the winner. We look at the horse and are oblivious to the jockey. Management and employees are the jockey of the tangible assets the horse, of businesses.

You let loose a born entrepreneur, and he will create value out of nothing while you hand over the best of the assets to anyone else and he will invariably destruct value. Governments, the world over, destroyed great steel assets, which one man (Mittal) bought and created significant value.

We wait for jockey to take the horse to the last lap successfully to predict the winner. It’s a conventional wisdom in the parlance of finance that Jockey doesn’t matter. I feel very apologetic to differ from the greatest investor of our time, Warren Buffet, when he mentions that it is the reputation of business which survives over the reputation of managers.

I strongly believe that we need to hone our skills to predict winners by looking at the jockey, the managers and employees of the organisation and develop adequate financial techniques to value such assets of organisations. While the last two centuries have largely enabled us to master the art of converting tangibles into value, we will now need to learn converting thoughts and skills into a numerical value.

A Google was always a strong buy with multibillion dollars of valuation merely because of the immense managerial talent, but all financial analysts wait for bottom line to support their valuation. Result: most of us missed the chance to benefit from one of the greatest and possibly predictable success story.

The next generation of financial analyst will evolve into understanding these and hopefully formulate an E=mc2 like existential equation which will establish the link between tangibles and intangibles the way Einstein did with mass and energy. We are still awaiting Einstein of our generation.

(The author is an investment banker with CLSA. Views expressed are personal.)

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Softer skills elude financial managers

The next generation of financial managers will need to learn converting thoughts and skills into a numerical value.

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