In an earlier article, I had talked about the importance of management quality. When I buy a share, I become a co-owner of the business. The share price will over time, behave as the business behaves which in turn is dependent on the management. Thus, my fortunes are hitched to what the promoter manager does. Often, the promoters managers do things that benefit themselves exclusively and the other shareholders suffer. The suffering can be of two kinds A reduced return which may still be good or a disaster in the making where the promoter manager takes the cake and leaves the others with crumbs.
The persons in charge of the affairs have a fiduciary responsibility to every shareholder. Every act should have an equal impact on all the shareholders. When it hurts one at the cost of the other, we can say that governance has failed and trust betrayed. It is truly a criminal breach of trust when the shareholder is diddled out of money by the persons at the helm.
In today’s corporate world, CEOs are extremely well paid, with incentives linked to performance. CEO pay has to be decided upon by “independent” director. However, thus far, the ‘independent’ directors have excelled by their silence rather than speech. Not just any one company, but every company you come across.
How much can we blame the “independent” directors? In general, the independent director is chosen by the promoter. There is no way someone will pick up a person who will speak up against the promoter. And today, the ‘independent’ directors are paid well, given a lot of free perquisites etc. And by speaking up against the promoter, there is a very high probability that no other company will like to have you on the board. This is common sense. So most often, the independent directors keep quiet or prefer not to speak up. Unless of course, they see that the risk of not speaking could make them an accomplice. Let us understand one thing. An ‘independent’ director can only know what the CEO or the promoter chooses to tell him. Other than statutory accounts, he is not privy to much.
However, there are situations when these honorable gentlemen have a role to play. Let us take the case of Fortis Healthcare Ltd. Here is a company, with the promoter having lost all his stake by pledging and no clear owner visible. Add to that some dents to reputation that this industry will give to every player. In such a situation, they are the guar-dians. They should guide and advice the shareholders about various options available. Instead, they just acceded to the first offer for acquisition that came about. They should have found out what are other options and advised what is best for the shareholders. Their role should not extend to decision making. The decision making should be by the shareholders.
Regulations or rules cannot bring about corporate governance. If there are harsh punishments on independent directors, surely no one would want to be in that position. Maybe it is best to do away with the concept of ‘independent’ directors. That way, there will be no illusion of governance. Even with independent directors, capital allocation decisions are always the prerogative of the promoter director and the independent director can only nod. Often, capital allocation decisions are a fait accompli by the time it reaches the Board rooms. So let us be on our guard. It pays to be skeptical. You cannot be disappointed.
(The writer is a veteran investment advisor. He can be reached at balakrishnanr@gmail.com)
