January 7, 2023

Security Analysis - Chapter 44

Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.

This chapter discusses important points about the company's management and director responsibilities and stockholder's rights. 

It is customary to think that management knows more about the business. This could be true but not entirely as management might be incompetent or behave in a manner that benefits him/her. Examples of the latter include management influencing their own compensation, building empires by buying more companies, unsound capital allocation policies, and unequal information sharing among controlling and minority shareholders. Thus, stockholders should scrutinize management actions carefully.

For public companies, the above issues are more important than in private enterprises. Importantly, the board of directors should be inspecting such situations on behalf of shareholders. However, in most cases, this is questionable because either the directors are not independent or have close relationships with the chief executive officer.

Mr. Graham and Mr. Dodd also highlight the management's responsibility to not allow the market price of its stock to go ridiculously high or low. That is because stockholders expect to have a fair price for their shares. The authors lay out various ways in which market price could be corrected including share repurchases. However, such moves should be analyzed carefully given the possibility of management abuses such as discontinuance of dividends despite large cash balance and then buying stock. 

In summary, the stockholders should remember that they are real business owners, management is shareholder-paid officers to run the company and directors should act on behalf of the shareholders. If the stockholder doesn't agree with a major management policy, the appropriate policy would be to sell the stock.

Chapter 45

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