Tough love

Indian companies’ stormy transition to transparency should be welcomed despite some short-term capital loss

Less than 10 months following the boardroom turbulence at one of India’s oldest conglomerates in the country, another high-profile exit has rocked the stock market. Parallels are being drawn between the spat involving the board and larger-than-life former honchos. The conflict at the Tata group and Infosys revolved around the direction of the companies under the successors. If the proposed write-downs and deleveraging of the balance sheet angered Ratan Tata, N R Narayana Murthy was annoyed with the splurging on compensation packages and an expensive acquisition. Both have been criticized for interference. In the meantime, the market value of their companies eroded as panicky investors dumped the stocks, unsure of future. The trigger for the bloodletting seems to be the downturn in the businesses. The global fund crunch turned the Tatas’ strategic buys to ramp up growth into costly mistakes. The shift in the market mood from back-office support to digital innovations after recovery from a decade-long slowdown caught the Indian tech sector including Infosys off-balance. The five large businesses of the Tatas that were the cause of the misery and the subsequent coup seem to have bottomed out due to the turn in the global economy. Though a massive buyback has failed to stem the slide in the stock for now, the turmoil at the tech major will be a distant memory shortly. The market is back with its preoccupation of how global and domestic winds will affect the flagships of the Tata group. In another couple of months, analysts will be examining Infosys’s revenue guidance for the second half of the fiscal to gauge the outlook of the sector.

An evolved market should really not care who the boss is as long as the company is delivering capital gains consistently. Transfer of power should take place without much ado, with replacements spotted and groomed at least a year in advance. Big investors are constantly pushing controlling shareholders to broad-base the pool to run their companies to ensure longevity. The Tata group was often cited as an excellent example of a promoter-driven enterprise managed by professionals. Some of them assumed legendary proportions till Ratan Tata arrived on the scene and carried out a putsch. JRD Tata’s choice of a relative to succeed him rather promoting one of the competent managers within the fold was disappointing but understandable. Who else but a part-owner to hold together disparate companies? Vishal Sikka was a lateral appointment and only after the co-founders had their turn at the wheel. The decision did not signal a desire to voluntarily step back but reluctance to let go the reins. The market is divided over Tata’s and Murthy’s refusal to lead a quite retired life despite both holding some equity. The irritation over the events leading to the departure of the new recruits in less than four years of their anointment is because of the uncertainty ahead and not out of concern for accountability. Surprisingly, there is no introspection over the inherent contradiction of exiting a counter that is the midst of cleansing process. Rather than wishing the issues to be swept away, investors who grumble being bypassed at annual general meetings should be using the opportunity to let their voices be heard. A debate is necessary to learn lessons.

The market’s reaction to succession points to an over-riding desire for a smooth transition irrespective of the choice. Despite their distaste for family-dominated businesses due to their opaque operations, the only time apart from financial performance that institutional investors take flight is when there are squabbles. The RIL stock suffered volatility post Dhirbubai Ambani’s failure to make public his preference for either of the two sons laying a claim on the business. Ordinary investors, who are told to prefer companies with large non-promoter presence for liquidity and enhanced scrutiny, cannot be faulted if they feel bewildered by the recent events. The combined shareholding of foreign and domestic institutional investors in Tata companies and Infosys is more than those of the promoters. Till the explosion, there was no hint from these investors about the shape of things. The regulatory emphasis on corporate governance is an acknowledgement of the limits of the auditors. They can only point to lapses in book-keeping. The recognition of the role of whistle blowers underscores the importance of corporate culture. The market is known to assign better discounting to transparent companies over peers. There is plenty of scope to earn fat profits from cyclicals such non-ferrous metals and sugar. Yet most risk-averse stay away from these counters because of their dependence on government support. How a company achieves growth is the crux.

Mohan Sule