Wednesday, December 10, 2014

Satyam case judgement and independent directors

I had a post yesterday on the judgement in the Satyam case in a trial court in Hyderabad. I said it was not clear from media reports what the independent directors were fined for and why Krishna Palepu of HBS was fined Rs 2.66 crore while the other independent directors were fined Rs 20,000 each.

I am still waiting to get my hands on the court judgement. In the meantime, we have a report in BS that sheds some light on the matter:
The court on Monday imposed a fine of Rs 2.6 crore on Palepu for conflict of interest in providing professional services to the company and  remaining on the board of Satyam as an independent director and for failing to get the government's nod for providing professional services. Palepu has to pay the fine within two months.....Palepu was fined by the court as he had received Rs 87 lakh from Satyam towards consultancy fees, while each individual director was paid around Rs 13 lakh for the year 2007, according to Satyam’s annual report.

If the report is correct and the reason for Palepu's attracting a heavier fine is that he helped himself to a consulting fee as independent director, I must say the judgement is very interesting indeed. What the court is saying is that when you get paid by a company for something other than your work as independent director on the board, it creates a conflict of interest. It compromises your independence. And if that is what the court is implying, it has hit the nail on the head.

An independent director is defined as somebody who has not had a pecuniary relationship with the company for a certain number of years before he gets on to the board. Given this definition, it beats me how you can have a pecuniary relationship with the company after you get on to the board. You can collect your fee and commission but not anything else. And yet here we have Palepu, who is said to be a expert on corporate governance, providing consultancy services to Satyam and making a tidy pile. In my view, it was incumbent on other independent directors to have objected to this arrangement if they were aware of it. And the markets regulator, SEBI, should have been alert to such goings-on in companies (as I mention further on, I did raise an alarm at SEBI).

This is a matter that has troubled me for years. How can a so-called independent director earn consulting fee from a company whose board he is sitting on? I happened to be a member of the Primary Markets Advisory Committee of SEBI a few years ago. Deepak Parekh was the Chairman. When we were discussing the issue of corporate governance, I brought up this matter. I argued that we could not allow independent directors to compromise themselves in this way. I asked that SEBI write to listed companies and ask for details of consultancy fee paid to independent directors. Such companies and their directors, I said, needed to be named and shamed.

To my astonishment, my point was brushed aside. It was not even considered fit for further discussion. I heard people say that the sums involved were small, so what was the fuss about? Well, if the sums involved are small, then the independent directors should not been charging them in the first place!

I guess the Satyam judgement- again, going by the BS report- is another instance of the court having to step in where there is an executive or regulatory failure. I hope SEBI wakes up now and does what I asked them to do- collect details of consultancy fee paid to independent directors. After that, it should do two things. One, pass strictures against or issue warnings to the companies and directors concerned. Two, amend clause 49 to make it abundantly clear that independent directors are not supposed to milking the companies whose boards they sit on for personal gain.

Tuesday, December 09, 2014

Satyam case judgement

The judgement in the Satyam case has been poorly reported in the media. Two things are noteworthy.

First, the judgement in a trial court in Hyderabad relates to six relatively minor offences for which charges had been brought by the Serious Fraud Investigation Office. The  main trial is going on in a CBI court and the judgement in that trial is expected towards the end of the month. The fact that B Ramalinga Raju got six months in jail in the trial court should not give the impression yet that he's getting off lightly in the case.

Secondly, the independent directors haven't been let off . HBS prof Krishna Palepu has been fined Rs 2.66 crore. The other independent directors have all been fined Rs 20,000. Unfortunately, the papers don't tell us what the fine is for and why Palepu has attracted such a big fine.

The BS report suggests that Palepu was paid professional charges without obtaining the opinion from the central government. Does this pertain to the consulting fee that was paid to him? It's not clear.

But the message for independent directors is an ominous one. It has often been contended that the independent directors on the Satyam board could not have possibly known about the accounting fraud. Nevertheless, the court has imposed a fine. 

Friday, December 05, 2014

Shareholder activism in India- a new dawn?

Finally, finally, is something changing in the realm of corporate governance in India? I'm seeming a glimmer of hope.

Three things seem to have made a difference. One, allowing shareholders to vote electronically. This has empowered shareholders who could not be troubled to attend the AGM especially if it happened to be in another city.

Secondly, the recent amendments to clause 49 requiring that related party transactions be approved by 75% of minority shareholders.

Thirdly, domestic institutional investors beginning to flex their muscles.

Shareholder activism has produced some interesting results in recent months:
  • The rejection of the compensation hike proposed for top management of Tata Motors despite the company making a loss
  • United Spirits management proposal to sell and distribute spirits of its parent Diageo was rejected 
  • Maruti Suzuki is having to bring to vote its proposal to set up a manufacturing plant in Gujarat under the auspices of its parent 
Note that RPTs also need to be screened and approved by the Audit Committee. That may not make a big difference given that independent directors are chosen by the promoters. Indeed, not much can be expected of the board in India, given that independent directors are beholden for their appointment to management or the promoter. It is inconceivable that the board can ask for the removal of the chairman or the CEO as these posts are filled by the promoter or they are appointees of the promoter.

But shareholder activism, abetted by the three advisory services that have come into being, could make up for lapses of the board. This seems to run counter to the trend in the US and elsewhere. In those places, shareholders have been stymied by various regulatory hurdles. It is boards that have begun to be more active compared to the best.

We must be careful, however, not to overdo the celebration. Shareholder activism in India can prevent expropriation of minority shareholders.  However, it is not still not in a position to discipline non-performing management.

See this story in the FT.

Friday, November 28, 2014

Wanna boost the economy? Go for infrastructure spend

The IMF is now telling us that public spending on infrastructure can provide a great stimulus to the economy- and in the developed world as much as the developing world.

 Larry Summers comments on the IMF findings:
Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.
Spending on infrastructure thus involves an increase in government spending and an increase in the ratio of public debt to gdp at the beginning of the period but translates into a reduced debt to gdp ratio at the end of the period.

When this is so obvious, it has never been clear to me why in India the government has been leery of a sharp increase in infrastructure spending- and I am not referring to the recent period where concerns about inflation have come to dominate the debate.

Thursday, November 27, 2014

How should companies and their bosses deal with social media?

Microsoft boss Satya Nadella learnt recentlythat just one faux pas can cause serious damage. His comment on women counting on karma to take care of their pay raise raised an enormous storm on the social media that only just settled after he apologised.

Of course, it's important for companies and their bosses to be careful. But slip-ups on the part of bosses is just one hazard that companies face in the social media. They have to face damaging disclosures, strong criticism and lethal photographs. Schumpeter points out that while anti-corporate types have made the most of social media, companies have been slow to adapt. He cites two reasons from a recent book on the subject:
The first is the nature of the internet. It is a beast that feeds on scandal and particularly delights in the flesh of the powerful and privileged. The media world used to be policed by editors who demanded proof in the form of two sources. Now amateurs can post anything they want online (though they may eventually face prosecution) and editors are subject to the tyranny of the click: the more the stories they publish are clicked on by readers, the longer they are likely to survive in their jobs.

......The second is the nature of companies. They are designed to stay in business rather than to be good at defending their bosses from scandal. No matter what PR resources they throw at killing a story, NGOs and prosecutors will always have more stamina. In America no sensible firm will risk gambling on a jury trial when a negative verdict could bar them from doing business with the government.....No sensible company will go to the mat to protect an embattled boss when there are plenty of replacements waiting in the wings. 
The book has useful tips:
 He tells CEOs to restrict the view into their glass houses: to cover the cameras on their phones and computers with masking tape; avoid the “reply all” function on their e-mail; think twice before sending any strongly worded message. He dismisses the idea that corporate social responsibility (CSR) bestows on firms the PR equivalent of a stock of political capital: digital vigilantes will always assume businesses are guilty and can add the charge of hypocrisy to CSR-obsessed ones, as they did to BP after its spill. He warns against one-size-fits-all approaches to crises: the common prescription to come clean quickly and fully sometimes stokes the fire, he notes.
Both the author and Schumpeter are, in my view, mistaken in seeing the social media entirely as some ugly ogre against whom companies must erect defences. Leaving aside scandals, keeping taps on the social media can help companies in several ways. They can identify typical customer complaints, they can get an idea of how they are viewed by ordinary people, they can see how they stack up against competition, they can identify unmet customer needs and they can get useful ideas for re-designing products or coming up with new ones.They can also the social media to convey the company's viewpoint on particular issues or to respond to negative perceptions.

Service-oriented businesses such as banks have been quick to latch on to the potential of scouring the media. Other businesses can learn too. It would be a good idea to pick somebody who understands the company's key businesses well and appoint him or her Head of Social Media. Getting such a person to interact with top management, the PR dept and the marketing heads could turn to be a good investment for companies.

Monday, November 10, 2014

B-schools: the dethroning of the financial sector

Financial firms, such as banks and investment banks, are out; consulting dominates and high-tech firms are in. This trend, which started post the financial crisis of 2007, now stands confirmed, going by two reports, one in the Economist and another in the FT. 
Mr Lewis charted the ascent into investment banking of the most talented graduates in the 1980s, a situation that still held true as the financial crisis struck in 2007. Then, 44% of Harvard’s MBAs landed a job in finance; 12% became investment bankers. Yet in the class of 2013 only 27% chose finance and a meagre 5% became members of Mr Lewis’s master race.
The trend is the same at other elite business schools. In 2007, 46% of London Business School’s MBA graduates got a job in financial services; in 2013 just 28% did, with investment banking taking a lower share even of that diminished figure. At the University of Chicago’s Booth School of Business, the percentage of students going for jobs in investment banking has fallen from 30% in 2007 to 16% this year.
What are the reasons for these trends? One, of course, is that pay in banking is no longer as attractive as before. Earlier, you put in long hours in the hope that you could quickly cash out and enjoy life. Now, this seems less possible. But there are other reasons.

Investment banks expect long-term loyalty. Consultants are happy to see people leave after five years or so- and give them business from the other side of the table. Moreover, consulting opens up a variety of opportunities whereas in banking, you are stuck in one sector.

Thirdly, there is an odour of disrepute about banks now. What young graduates hear about these places and the adverse publicity they attract because of their tangles with regulators does little for their reputation.

Fourthly, consulting firms and tech firms are seen as good training grounds for those wanting to become entrepreneurs. The tech firms' casual culture is appealing. And they too promise big bucks:
Tech firms and consultants both appeal to the growing number of students who want to gain the right experience to start their own business. A survey by the Graduate Management Admission Council, an association of business schools, found that although only 4% of MBAs have entrepreneurial experience when they enter their course, 26% say they want to start companies after they graduate.
How are banks responding? In several ways. By targeting undergrads instead of grads, by using social media and competition games to attract candidates, encouraging a better work-life balance, etc. Some are even heroically attempting an image make over:
Some are running campaigns urging graduates not to believe media stories portraying them as greedy or evil. Others are trying to lure recruits by persuading them they will help make the world a better place. Goldman Sachs’s job portal advertises opportunities to work on community projects alongside positions for analysts: “That’s why you come and work at Goldman Sachs, because you can make a difference in the world,” trills its recruitment video.
A few banks are trying to change their culture, taking a tougher line on sexual harassment of female staff and advocating a healthier work-life balance, perhaps even allowing the odd work-free Saturday. For the business schools’ brightest and best, though, all this may not be enough.

Friday, November 07, 2014

A contrarian view on Sachin Tendular

An Australian commentator launches a scathing attack on Sachin Tendular following the publication of his memoirs recently. (I must thank for the pointer). He writes:
With a sweet, handsome face and smile that would melt a concrete slab, he always looked more lamb than lion as a man despite his great batting feats.

Align that to his boyish, high-pitched voice that always sounded so inoffensive and the fact that he barely expressed a strong opinion about any cricket matter in his 25-year career you might have Sachin neatly categorised as the choir boy who wandered on to a cricket field and decided to stay.

But when his autobiography was released worldwide on Thursday the choir boy ripped open his robes and pulled a loaded gun from a holster.
I am not in any way endorsing the commentator's views- my interest in cricket is pretty mild these days. Just highlighting a different viewpoint.