Monday, January 12, 2009
A new order
Indiaís markets are slowly but surely bringing changes on how companies are governed

India is looking for a new order in 2009. It needs political managers who would make us feel safe and secure every time we enter a railway station, airport or restaurant. Also required are financial managers who would be quick on the uptake on spotting signs of slowdown and introduce fiscal measures to stem the downturn instead of keeping on insisting that India is immune from any crisis in the global financial markets. If the huge domestic market is a bulwark against malevolent forces ruining economies from the US to Japan to Iceland, our automobile manufacturers would not be truncating production at a time crude oil prices have fallen 70% from the peak. The absence of payment defaults or funding scandals give the impression that the stock markets are running smoothly. Dearth of investors could be the contributing factor rather than enhanced monitoring by the exchanges and the regulators. Volumes are meager as stock lending is still to take off and banks are going slow in lending against shares despite regulatory guidelines in place. As a result, vulnerable promoters are pledging shares with the informal sector to raise funds to increase their holding only to achieve the opposite result as prices keep on sliding. Another myth of the independence of independent directors too has been busted by the market meltdown. What was long suspected has only been confirmed: independent director is just a nom de plume for cronyism.

Sebi may have had lofty ideas when it laid down the composition of board of a company with executive and non-executive chairman. The investing community welcomed the development, particularly taking comfort from the fact that even family-owned businesses would have one-third directors non-aligned to the promoter group. Though some promoters feared these directors could be more of a nuisance than catalysts, the protests died down as the selection of the directors was left to the promoters. This was better than government-controlled financial institutions converting their loans into equity and thrusting their nominees on the board during the permit era. The first roadblock was the paucity of qualified independent directors. This resulted in well known faces gracing boards of companies with whose promoters they were familiar but not with their operations. For the promoters, the recall value of these veterans eased the access to the corridors of power and cheque books of investors. In fact, the trend of requesting a couple of known personalities to join the companyís board was in vogue even before the capital market regulatorís focus on the issue. The resultant delusion would be termed comic if it were not so tragic. After retiring from the battlefield with an iconic halo, Field Marshal Sam Maneckshaw had to spend the autumn of his life embroiled in legal cases slapped on the food processing company on whose board he was included. There were also instances of promoters roping in a cricketing legend and a beautiful actress with a dazzling smile to adorn their boards. Fortunately, the companies have faded from the limelight and the thespians, too, lost interest, thus escaping the ignominy that befell on the much decorated soldier.

Yet the attempts by unknown promoters to latch on to famous faces could be viewed charitably as their objective of fame by association was transparent. What is dangerous is academicians, professionals and economists failing to do their jobs of acting as devilís advocate as their presence lulls non-promoter shareholders into believing that the company is fully committed to good corporate governance. If independent directors cannot assert themselves in a company with a nominal promoter stake, their ability to withstand the pressure from promoters with a controlling stake will remain a suspect. Here the dilemma faced by dissenters is similar to a cabinet minister who disagrees with the majority. Resigning would be a principled stand but goes against the objective behind creating positions of independent directors to act as a pressure group to slow, speed up or recalibrate the tempo of the companyís affairs. Instead, making the minutes of the board meeting public could bring in transparency without turning the event into a moral dilemma for the independent directors just like the US Supreme Court justices rule by numbers, publishing both the majority and dissenting arguments. With the growing clout of institutional investors, the market is either wholeheartedly embracing decisions or forcing a reversal as seen in the recent Satyam Computer Services episode. A step further would be prompting the eviction of obstructionist directors or insulating the dissenting directors from being jettisoned from the board. The message is clear: change or be prepared to be changed.
 Other Stories
Capital Market
Volume No23 Issue No 23
A new order
(Cover Story)
(Apna Money)
Investment Strategy
(Apna Money)
(Apna Money)
Commodity Watch
(Apna Money )
Tax Matters
(Apna Money)
Colgate Palmolive (India)
(Capitaline Corner)
Consolidated Scoreboard
(Consolidated Scoreboard)
As credit market softens, stocks harden
(Global Markets)
Creeping acquisition
(In Focus)
Family truce turns Bajaj Hindustan sweet
(Market Blockbuster)
Market Snapshot - Part I
(Market Snapshot)
Market Snapshot - Part II
(Market Snapshot)
Market Snapshot - Part III
(Market Snapshot)
Movers and shakers - I
(Market Snapshot )
Movers and shakers - II
(Market watch)
Interest in MMTC on currency futures foray
(Stocks in Action)
On a recovery trail
(Market Report)
Watch list
(Stock Watch)