Our take from January 2009

Satyam, in an Indian and emerging market context, also highlights the risk of investing in managements that have parallel – and sometimes multiple - business ambitions. The Raju family has interests in property and infrastructure. Our thesis is that cash flow from Satyam was used to build those fledgling businesses. Political connections (which Mr. Raju seems to have plenty of) are required for most land and infrastructure projects in India. As trustees of your capital and your reputation, we have often stayed away from popular companies which are known to have built their business franchise on political friendships. Though this “hurts” near term performance numbers, we know that a Yukos event is not confined to Russia. India has its share of a potential Yukos and Enron.

Governance Risks Abound

“Shake hands but count how many fingers you get back.”

We did not own any Satyam stock because we were “uncomfortable” with Mr. Raju. We cannot fully quantify our decades of past experience in selecting managements to invest with – and it does not show up in any Sharpe ratio evaluation of our track record. But we have a process that should allow us to continue to avoid companies where we believe the businesses are run by founders and managements that live off their political connections. Or where the rights of minority shareholders are at risk of being compromised. Or are run by crooks.

The collapse of Satyam validates the blunt questions we ask managements in company meetings in order to duck the bad apples. We believe there will be a larger fraud if the government wishes to dig around a bit.