The ultimate goal of management should be to maximise shareholder value. This means returning as much cash (discounted to the present) as possible to shareholders over time. 

Finding the right management team that can do this is key to good long-term returns.

Constellation Software

One of the best examples of a management team that is great at maximising shareholder value is that of Constellation Software. 

Headed by Mark Leonard, the team behind Constellation Software has been consistently finding ways to grow free cash flow per share for shareholders by using the cash it generates to acquire companies on the cheap. Constellation’s secret is that it buys companies with low organic but at really cheap valuations. Although growth is low, the investments pay off very quickly due to the low valuations they were acquired for. 

The consistent use of available cash for new investments mean that Constellation’s dividend payouts have been lumpy and relatively small. But this strategy should pay off over time and enable Constellation’s shareholders to receive a much bigger dividend stream in the future. 

Not only are Leonard and his team good allocators of capital and excellent operators, they are also careful with spending shareholders’ money. In his 2007 shareholders’ letter, Leonard wrote:

“I recently flew to the UK for business using an economy ticket. For those of you who have seen me (I’m 6’5”, and tip the non-metric scale at 280 lbs.) you know that this is a bit of a hardship. I can personally afford to fly business class, and I could probably justify having Constellation buy me a business class ticket, but I nearly always fly economy. I do this because there are several hundred Constellation employees flying every week, and we expect them to fly economy when they are spending Constellation’s money. The implication that I hope you are drawing, is that the standard we use when we spend our shareholders’ money is even more stringent than that which we use when we are spending our own.”

This attitude on safeguarding shareholders’ money is exactly what Constellation’s shareholders love. This reliability is also part of the reason why Constellation has been such a big success in the stock market. The company’s stock price is up by more than 14,000% since its May 2006 IPO.

Singapore Press Holdings

On the flip side, there are companies that have management teams that do not strive to maximise shareholder value. Some hoard cash, or use the cash a company generates for pet projects that end up wasting shareholders’ money. And then, there are some management teams that have other priorities that are more important than maximising shareholder value.

Singapore Press Holdings (SPH), for example, was a company that I think did not do enough to maximise shareholder value. SPH, which is based in Singapore but delisted from the country’s stock market in May 2022, was a company that published Singapore’s most widely-read newspapers, including The Straits Times. The company also owned the online news portal, straitstimes.com, as well as other local media assets such as radio channels and magazines. In addition, SPH owned real estate such as its print and news centre that were used for its media business. SPH also had investments in SPH REIT and other real estate.

In 2021, SPH spun off its entire media arm, including its print and news centre, to a new non-profit entity. Unlike normal spin-offs or sales, SPH shareholders did not receive any shares in the new entity, nor did SPH receive any cash. Instead, SPH donated its whole media segment to the new entity for just S$1. To rub salt into shareholders’ wounds, SPH donated S$80 million in cash, S$20 million in SPH REIT units, and another $10 million in SPH shares, to the new entity. 

After the spin-off, SPH’s net asset value dropped by a whopping S$238 million. The restructuring clearly was not designed to maximise shareholder value.

Management said that SPH had to give away its media segment as selling it off or winding up the media business was not a feasible option given the “critical function the media plays in providing quality news and information to the public.”

In other words, management was torn between the interests of the country the company is in, and its shareholders. Ultimately, shareholders’ hard-earned money was squandered in the process. This was possibly one of the more brazen mishandlings of shareholder money I’ve witnessed in the last decade.

Bottom line

As minority shareholders in public companies, we often have little to no say on how things are run within a company. Our votes during shareholder meetings are overshadowed by other major shareholders who may also have conflicting interests. As such we rely on the honesty and integrity of management to put minority shareholders’ interests as a priority. 

Unfortunately, conflicts of interest do occasionally occur. As an investor, you may want to consider only investing in companies that will protect shareholders’ interests fervently such as the example shown by Mark Leonard.

On the other hand, we should avoid situations where conflicts of interest may encourage the misuse of funds or even promote dishonest behaviour.

Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.

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Disclosure: Jeremy Chia does not have an interest in any of the companies mentioned.