Rules of promoter-less corporates (Source: HBL)

Rules of promoter-less corporates

With more than 95 per cent of Indian companies being family-owned, the country needs specific rules that efficiently handle this model. The governance rules of promoter-less corporates in the US cannot hold good for promoter-led entities in India, says S. GURUMURTHY
Now, after the Satyam scam, a furious debate on corporate governance is on in India. Like the US had debated it, even more furiously, after Enron and Worldcom scams. The author of the current Indian debate undoubtedly is Ramalinga Raju. To capture the end of the debate at the opening, Raju has proved what was always known. Namely, in India, the owner is the CEO, directly or by proxy. So management functions cannot be neatly separated from corporate ownership in India. Again, the essence of governance is that it hedges against wrongdoing, while the law usually steps in later to punish the wrongdoers. But in Raju’s kingdom of Satyam, all internal and external pillars of governance — independent directors, auditors, regulators, and the government — collectively failed to prevent the wrong. Why? The protagonists of the Anglo-American model of corporate governance failed to see the obvious in India. And that is, here the promoter writes the corporate script and dialogue, and directs the play, regardless of who is the hero in the corporate board. But in the Anglo-American situation, the hero of the corporate play is the professional CEO. Even the principal shareholders, equivalent to promoters here, are side-shows. The Indian establishment had trusted, like the US establishment does, mainly the independent directors and the auditors to oversee governance. So, the governance model meant to contain the professional CEO in the US was adopted to restrain the promoter here. Raju has now proved that the Anglo-American model is inadequate to deal with the Indian promoter, whether he is CEO or not. Economy and corporates Originally, corporate governance was integral to corporate law. But in recent times it has become an obsession in the Anglo-American market economic discourse. This is because, in the last couple of decades, three tectonic changes have altered the character and role of corporates in the Anglo-American economies. First, thanks to the ‘Own a Share of America’ campaign launched by the New York Stock Exchange in the 1950s, American households began investing more and more in the stocks of listed corporates, and over the years, got integrated with them. In the 1950s just about 5 per cent of US households held stocks. This rose to 25 per cent in 1990s and to over 50 per cent in 2000. Households, thus — why, the national economy itself — became annexes of the corporates. Second, the mass invasion into corporate membership led to proliferation in financial intermediaries — mutual funds, hedge funds, asset managers and others. These intermediaries themselves emerged as the de facto shareholders of companies. Individual shareholders who had entrusted their money to them did not even care to know in which company their money stood invested. Finally, the advent of derivatives in stock and financial markets changed scrip-based trading to index-based trading. Result, individual companies and their scrips disappeared from the mind of the investor in index-based trading. Shareholder disconnect These tectonic changes first distanced, later disconnected, the shareholders from specific corporates and stocks. The funds, holding most shares in companies, are now like the principal shareholders of the past, and they hire and fire the CEOs. In the process, the funds and the CEOs tended to become too close for the good of the companies. With corporates dominant in the national economy, their governance centred on the separation of ownership led by the funds, from managements led by CEOs, and soon became a field of study in market economics. Result, what was just a matter of corporate law became integral to market economics. Subsequently, the East Asian crisis, and later, the Enron and Worldcom collapses, turned corporate governance into an obsession in the Anglo-American West. But this obsession did not lead to performance. And despite the decade-old obsession with corporate governance, the crisis in the banks and financial institutions in recent months and the financial meltdown are even now attributed to absence of governance. So, in the Anglo-American economies, the much-hyped corporate governance is yet to take shape as an effective mechanism. In contrast, Japan, which was made fun of by the US as promoting crony capitalism, is better off without the US brand of corporate governance. So much for corporate governance in its Mecca where it has become an obsession!Now, coming to India, with the hype of globalisation and the entry of foreign funds in the Indian stock market, the Anglo-American obsession with corporate governance became part of the domestic discourse. In its anxiety to show that India too has done what the US has, the Indian establishment instituted governance rules based on the Anglo-American model, which depended on the independent directors and auditors for its effectiveness. Multi-national accounting firms were forced on local companies having foreign listing to improve the quality of overseeing the governance. This is despite the very multinational accounting firms having abetted to subvert the rules of corporate governance in the Anglo-American economies. Here too, as the Price Waterhouse role in Saytam and Global Trust Bank has shown, they have done precisely what they do there. Where promoter is king Also, the governance rules in India are blind to the obvious truth that the Indian promoter, whether he is a CEO or not, is like a king with a heritable office. He is neither hired nor fired. In contrast, the CEO in the US is hired and fired like a minister is. Yet, many Indian promoters live, even die, for their companies. In the US the CEO or the fund will desert the sinking ship without a second thought. While most Indian promoters will pray for their companies, for some CEOs in the US-West, the company is itself a prey — like it was for Tyco International’s Kozlowski, who was indicted for stealing millions, buying paintings for $13 million and hosting his wife’s birthday party for $1 million at company’s cost. It was mainly to discipline CEOs like Kenneth Lay and Kozlowski that the Anglo-American economies had to enact their corporate governance rules. See how these very rules, imported from the US, actually helped wrongdoing in India. Corporate law in India disqualifies the promoter-directors from voting on the businesses where they are personally interested. But with the advent of the new corporate governance regime, which celebrates independent directors, this very rule has become the safety-net for promoters. It actually helps them avoid all responsibility for the transactions the company enters into with them because independent directors alone can vote on them. See what happened in Satyam. Ramalinga Raju and associates wanted the merger of the Maytas twins — Maytas Infra and Maytas Properties — with Satyam. But the law asked them to abstain from voting, leaving the independent directors to vote. The independent directors did precisely what Raju wanted done. Imagine the law is the other way round, and had permitted the promoter, Raju, to vote in his favour on condition that he must compensate for damages if the transaction proves bad for the company. Raju voting for himself would have been a warning to shareholders before they approved the deal. But the corporate governance rules helped Raju to hide behind the independent directors and get the board to approve the Maytas deal. That the deal finally failed is not because of corporate governance, but thanks to media exposure and resultant shareholder vigil. So, what is the lesson here? In India, where promoters directly or indirectly run the corporates, the law should allow them to vote on the business they are interested in on full disclosure and on the condition that they will compensate the company for any future damages. Owners taking responsibility for their actions is a better protection for the shareholders than owners hiding behind independent directors. With more than 95 per cent of the companies in India said to be family-owned, India has to live with promoter-managed companies for a long time to come, and needs rules that efficiently handle this model.
QED: The governance rules of promoter-less corporates in the US cannot deal with promoter-led corporates in India.