In good faith

Promoters of companies who have caused serious wealth destruction should voluntarily step down as managers

Small investors depend on four pillars of the capital market to shield them from the headwinds of governance missteps. Auditors are the gatekeepers who ensure that the numbers provided by the companies are accurate and complete. They are supposed to flag off any divergence in the standards prescribed for book-keeping. The market regulator is trusted to crack the whip when the dissemination of information is asymmetric and prices are manipulated. Institutional investors are expected to form a bulwark against corporate actions that benefit the promoters against the ordinary shareholders. The board is at the pinnacle of the pyramid for the power it wields and responsibility it shoulders. The directors are the representatives of the ordinary shareholders to steer the company to create wealth in an ethical and transparent manner. Being the first responder to any crisis within the company, half of them have to be appointed from outside to maintain their independence. They are many known episodes of how seriously these custodians of investors’ confidence take their role. The most widely recounted of course is the firing of Apple co-incubator Steve Jobs after a showdown with CEO John Scully over the pricing of the Macintosh computer. The most recent is of the board ejecting Elon Musk, the electric vehicle pioneer, from his position as chairman after he recklessly tweeted his intention of taking the company he built private. In the process, he triggered an investigation for fraud by the FBI and had to share half of the US$40-million fine slapped by the Securities and Exchange Commission.

Several owners have been fired for poor performance. David Neeleman, who started the discount airline JetBlue, was ousted as CEO after the carrier cancelled 1,700 flights and stranded 1.30 lakh passengers during a winter storm on the east coast. The fiasco cost the airline about US$22 million, capping two consecutive years of losses. Yahoo co-founder Jerry Yang had to step down as CEO for turning down a US $45-billion buy-out by Microsoft and Google walking away from an ad-revenue-sharing plan. The men behind Research-in-Motion Mike Lazaridis and Jim Balsillie, were the casualty of a management shakeout after the struggling Blackberry-maker lost market share to rivals Apple and devices run by Google’s Android software. Comparable examples are rare in India. Chanda Kochhar, from whom the board has demanded back her compensation after an independent probe panel believed the loan to the Videocon group stemmed from her husband’ business ties, was the MD and CEO of a bank with diversified holdings. The sacking of the first non-family chairman of Tata Sons, Cyrus Mistry, and the departure under pressure of the first non-promoter to head Infosys, Vishal Sikka,are not comparable. While Mistry’s family is the second largest strategic investor, Sikha was a professional manager. So also was Ashok Leyland’s MD who was denied another term by institutional shareholders annoyed with his pay package.

The closest parallel is the abrupt resignation of Binny Bansal, one of the two entrepreneurs who started e-commerce giant Flipkart, following an internal investigation into an allegation of “serious personal misconduct”.  He, however, remains a director and  a shareholder. Earlier, business partner Sachin Bansal had a bitter fall-out with the then board during stake-sale talks with US retailer Walmart.  Promoters, otherwise, are gently reprimanded for corporate actions such as unfavourable share-swap ratio during restructuring so to give them greater control at below market price or related-party transactions. They are given a chance to rectify and provide assurance of good behaviour.  Mutual funds and foreign investors prefer to exit rather than get involved in a long-drawn fight that saps the stock’s valuation in the meantime. Of late, even their sell orders are prompting a corrective action. In took just a day for the parent of Jubilant FoodWorks to roll back the proposal to charge a royalty for usage of brand. The huge destruction of wealth in Sun Pharmaceuticals, DHFL, Zee group companies, ADAG companies and Jet Airways would not have been tolerated elsewhere. The distributor of Sun products was a relative. Issues of opacity have followed DHFL. Zee’s backers leveraged the healthy performance of their group companies by pledging shares to raise funds for unrelated activities and Anil Ambani piled on debt in his quest for dominance. Until lenders stepped in, Jet’s controller was unwilling to let go even if it meant unpaid salaries, default on loans and grounding of planes. The promoter-managers of these companies will set an example if they quit from the driver’s seat.     

 

-Mohan Sule