A new threat

Apart from the rocky transition to a rule-based economy,

Indian companies have to brace for smear campaigns

Besides facing headwinds of cyclical demand, out-dating of technology, regulatory changes and shift in consumption pattern, companies have now to brace for another kind of storm: allegations of impropriety. The battle between promoters and activists over compensation packages of top managers is a cause of much grief to the small investors. Crimping on the quality of processes and products is another source of wealth destruction. Giving unsecured loans and favorable terms of trading to related parties is not uncommon. These corporate governance issues can occur without warning unlike industry-specific rumblings that can be heard before they hit the boardrooms. Investors get a whiff of the dodgy practices only from auditor’s qualifications or stock exchange filings. Of late, whistle blowers are playing an important role in shining a light on how companies are run. The problem is ascertaining their motive. Many might be risking going to the authorities due to genuine concern about the effect of the toxic environment at the headquarters on the health of the company. Some might be acting out of spite for some perceived wrong. Another worry is if the informant has fully comprehended the systems and procedures that are causing distress. At the receiving end of undue attention recently has been ICICI Bank. The directors do not feel the CEO and Managing Director acted improperly by clearing a loan as part of a consortium of banks to the Videocon group, whose promoters had invested in her husband’s company.

Whether it was a knowing abuse of power or there was ignorance of what constitutes a conflict of interest will eventually be established. Or it might not as the case winds up through various layers of investigation. The important issue is what happens in the meantime. The erosion in market value in most cases is halted if the protagonist steps down till conclusions are established. Yet there is a loss reputation (of the boss) and opportunity (for the company) as much of the energy and time of the successor is expended in putting the embattled enterprise back on track. The dilemma for those caught in such a rotten situation is whether to make symbolic sacrifices or fight it out.  Credibility of a brand is not based on following established procedures to the letter. Perception of trustworthiness is a combination of tangible (financial performance) and intangible (treatment of various stakeholders) acts over the years. The crux is how quickly it takes for those at the centre of the storm to acknowledge the problem, initiate steps to make amends, and establish communication with the shareholders to shape the narrative. Many times there is diffusion between transgression of moral boundaries and violation of law, making taking a stand difficult. There might be temptation to find scapegoats as impatient institutional investors build pressure on the company to adopt an arm’s-length distance from the controversy to cap any more slide in the share price. Though ICICI Bank is off from its March high and has under-performed the private bank index, the underside has been limited. The message from the market is that the damage is not irreparable.

What the unspooling of the episode tells is that a new type of threat has emerged: smears. The shocking decision of a global technology investor’s founder to bypass his heir-apparent, it is now understood, was influenced by a campaign launched to tarnish the contender’s image. For companies, the danger of theft of intellectual property seems to have been taken over by insidious attempts to spread misinformation in the market place. In the pre-social media days, scorned analysts would rip companies by knitting together pieces of information to paint a portrait of rapacious promoters.  A few years ago, a new-age real estate group with interest in financial services filed a criminal complaint against an overseas research firm for depicting a vivid picture of window-dressing.  Handles, anonymous and known, have to post a few ambiguous tweets to raise doubts about a stock to spur investors to exit till a clarification is forthcoming. In a way, companies have to take some of the blame for increasingly becoming susceptible to accusations of cover-ups in the smug belief that their attempt to trapeze between what is acceptable and what is not will remain private. If the digital era has made conducting business easier, it has also enforced transparency and heightened scrutiny. The recall of high-value notes in November 2016, the roll-out of the goods and services tax from July 2017 and the implementation of the bankruptcy law are steps to a rule-based economy. Those who fail to adapt to the transition will end up losing investors’ confidence.      

Mohan Sule