Understanding and Influencing Operations as an Investor
Course Number 2135
Professor Ananth Raman
Assistant Professor Nikolaos Trichakis
Winter; Q3; 1.5 credits
Option of exam or paper
This course has two underlying themes. The first theme examines ways in which investors can understand and influence operations. The second theme/module identifies ways in which operators can understand and influence their (partially informed) investors. Consequently, the course is targeted towards students who plan to be investors with a need to understand a firm's operations, and for those in operating companies -including entrepreneurs - who will need to interface with investors.
Most courses in operations management take the operators' perspective. By "operators," we refer to executives and managers who have substantial decision rights on operational activities, and also substantially more information than is available to investors (e.g., in financial statements and other publicly available data and news sources). In contrast, investors usually do not have decision rights on what a firm should do in its operations and also typically have access to less information than operators within the firm.
This first theme in the course focuses on studying operational performance from the investors' perspective. By "investors," we refer to fund-managers and firms who invest in the public equity market or in private equity. Investors need to be able to evaluate investments that could be expected to improve operational performance well before the impact of these changes and investments are apparent in the company's bottom-line. For example, could Toyota's market cap growth in the last 20-30 years have been predicted in the 1980s (when its market cap lagged that of GM but its operational performance was known to be better)? In general, imagine a company that starts making investments in employee training and morale with the (reasonable) expectation that these investments would lead to improved customer service, which in turn would lead to greater loyalty among customers, higher sales, and eventually higher profits. Many years might pass before the investments in employee training could be expected to provide additional profits. Is it reasonable to expect investors to reward such investments in training and morale even before these investments have begun to impact the firm's bottom-line favorably?
The investors' perspective on operations differs from the operators' in several ways. For example, even though they do not have the operators' decision rights and access to information, they have fiduciary duties to get the most of their investments as residual claimants. Second, even when investors have enhanced rights and access-such as in the case of private equity investors-it is unclear to what extent they can and should influence operational decisions without second-guessing management or jeopardizing longer term relations. Third, investors are likely to be aware of or have to manage multiple investments, so this provides an opportunity for investors to improve operations by benchmarking across firms, diffusing best practices, or creating synergies among their portfolios of investments. Fourth, investors often have exogenous incentives to time their exits (e.g., from accounting booking dates or from pressure by limited partners); this timing might be at odds with the timing of operational returns of their operator investees. Finally, investors have to match their investment charters and firms' operational characteristics, keeping in mind that the investment charters and firms' operations can change over time.
Operational decisions are often complicated by partially-informed investors. For example, due to investors being partially informed, the firm's short-term valuation (reflected in stock market prices for example) can often differ from the firm's true value. Moreover, decisions that maximize the firm's intrinsic value might not maximize the firm's short-term valuation. How should a manager trade-off these competing demands? Should the manager ignore the short-term valuation and make choices that maximize the firm's long-term value? On the other hand, should the manager focus on the firm's short-term valuation? The second module in the course explores such questions.
The learning objectives of this course can be summarized as addressing the following issues:
- How can (do and should) investors understand operations, given their limited information?
- How can (do and should) investors influence operations, given their limited decision rights and their own business needs?
- How can (do and should) operators understand and influence investors?
The grade in the course will be based on class participation and an exam.