Foreign investors are demanding consistent growth as well as socially responsible behavior from companies
By Mohan Sule
What do investors want from a stock? Those who are risk-averse would prefer companies in mature industries despite their sluggish growth as against the unknowns. The other category would be of investors not afraid of opting for stocks in the emerging sectors, content in holding the shares for a few years for those bumper gains down the line. Buying low and selling high would be the strategy of those who look for a steady source of income from the stock market. Whatever maybe the appetite, almost all investors would examine the trailing track record of the company, outlook for the sector, how the promoters are going about exploiting opportunities and executing projects in hand, amount of loans, cash-flow and reserves, and payout record. While some may be wary of companies accumulating debt to fund expansion, others would be happy if there is no foreseeable equity dilution. Most would be satisfied as long as the company continues declaring healthy numbers, preferring to sidestep issues such as its role in preserving the environment or absence of any meaningful giveaways to society. Of late, however, an intangible parameter is growing in importance as a measure against which a stock is judged fit for investment. This is a nebulous concept called corporate governance. It comprises a whole gamut of criteria including the number of independent directors, the tenure of auditors, transparency in disclosures, and even social responsibility. For instance, large investors are known to shun certain sectors where bagging of contracts involves much more than just bidding despite the ability of stocks in these high-growth areas tend to outperform the market handsomely during good times.
Aware of the risks and stigma associated in such kind of wheeling-dealing, the US Congress has banned its companies from underhand dealings to secure overseas orders. Walmart shares tumbled on revelation that it had paid bribes to expand business in Mexico. Sometimes activists shame a company to improve its governing practices by launching a vociferous campaign through the social media. A series of critical reports in the US media on the eve of launch of the newest version of its tablet had Apple scurrying to improve employees’ working conditions at its main Chinese component supplier. A few years ago, some western cloth labels were at the receiving end of consumers’ ire for sourcing garments from Indian vendors employing child labor. The US government is currently probing if retailers of digital books in collusion with publishers are keeping prices high. Recently, public sector undertaking Coal India was under pressure as a presidential decree forced it to sign a fuel-supply agreement with power producers to supply coal at subsidized rate, a move not viewed kindly by the largest non-government shareholder, The Children’s Fund of the UK. The fund contended that the company’s decision not to increase coal prices was against the interest of the minority shareholders. This means that what is good for the shareholders of a company need not hold true for its consumers and vice versa.
Of late, even Infosys Technologies has been in a spot of trouble not only because of concern over its outlook due to the slow recovery of the US market, its major revenue stream, but also over the result of the US Department of Homeland Security investigating the company’s alleged misuse of visas. Considering that the software services exporter is held as an example of probity for rest of Corporate India to emulate, the charges are indeed disappointing. Yet, the issue also calls for introspection. Companies increasingly are coming under pressure from institutional investors to notch growth quarter after quarter. Holding too much cash is criticized and pressure is mounted to return it to the shareholders or utilize it to grow. At the same time, taking on debt in the quest for expansion or diversification weighs on valuation. The same set of investors is ready to pounce if companies stray into high-growth areas where there is too much competition or which requires extracurricular skills to pry open. The backlash against real estate developers using their cash pile to venture into telecom, both sectors are tightly controlled by government, to grow as well as a hedge against uncertainty in their main areas of operation, could be held as an example for companies to stick to their core competency. But the Infosys case shows the dangers of this strategy. How companies navigate this era of 24x7 news cycle, Twitter, and Facebook would determine their ability to please all investors all the time.
Mohan Sule
