Both companies and investors need to focus on corporate governance to promote the health and well-being of companies
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| Amit Tandon |
In
America, the 5,000 or so public (or listed companies) account for a third of
the employment and half of the capex. If the US is to continue to sit at the
high table “(we) think it essential that our public companies take a long- term
approach to the management and governance of their business (the sort of
approach you’d take if you owned 100 per cent of a company)”. Clearly the
health and well- being of listed companies is important for nation building.
With this objective, the chief executive
officer (CEO) of some of the largest asset management firms (Blackrock,
Capital, Vanguard, State Street, J P Morgan Asset Management and T Rowe Price),
a public pension plan (CPP), an activist investor (ValueAct), as well as a few
CEOs of some large publicly- owned companies (J P Morgan Chase, Berkshire
Hathaway, GE, Verizon and General Motors), last month presented aseries of
corporate governance principles for listed companies, their boards and
shareholders. Called the “Commonsense Corporate Governance
Principles”, [www.governanceprinciples.org]
these are a “framework for sound, long- term- oriented governance”.
Most noteworthy about this exercise is
companies and investors coming together to jointly focus on governance. For
long, markets have assumed that since corporates need to adhere to these, they
alone are responsible for their drafting and implementation. But companies need
money that investors have, and investors need well- governed companies to invest
in.
The applicability of the principles spelt out
here is universal and not in any way linked to the regulatory framework.
While parts of it are US- specific, for the
most part these principles can be applied everywhere, including in India, as
these are not overly prescriptive in how to achieve goals. An example: A
company should not feel obligated to provide earning guidance — and should
determine whether providing earning guidance for the company’s shareholder does
more harm than good.
In the US, management and ownership generally
tend to be separated. As aresult, the dialogue between a company’s shareholders
and its management is through the board. Consequently, three sections in the
document deals with the board: Board of directors — composition and internal
governance, board of directors’ responsibilities and later in the document,
board leadership (including the lead independent director’s role). These talk
about not just the composition, election, compensation and effectiveness of the
board but also about its responsibilities focusing on the directors’
communication with third parties and setting the board agenda. In India, as
owners tend to manage their business, the focus on the board is relatively low.
However, companies and shareholders are doing themselves a large disservice by
not holding Indian board sufficiently accountable.
The other items included are:
Shareholder rights: This deals with proxy
access and dual class of shares. I have written about dual class shares earlier
for this newspaper (“Governance norms: Direction or diktat”, July 21). While
the document highlights that dual class is not the best practice, it recognises
that there might be circumstances when such shares have to be issued. In such
situations, it’s desirable to insert triggers when dual shares will cease to
exist. It makes a strong case for all shareholders to be treated equally in any
corporate transaction — a clear reminder that there is no place for payment of
non- compete fees.
Public reporting: This focuses on transparency
around financial reporting but also encourages commentary around long- term
goals being “disclosed and explained in specific and measurable ways”. One of
the strengths — and possibly, weakness as well — of the Indian corporate sector
is family ownership, which enables owner- mangers to take a generational view
of their business.In this context, the recommendation that a
company should take a “longterm strategic view, as though the company were
private” should resonate with corporate India.
Given that listed companies fall under the
tyranny of quarterly reporting, in a separate missive the group has questioned
the need for quarterly reporting: but corporations still have some way to gain
unbridled investor trust in India, so it’s not certain how this one will go
down.
Succession planning: Clearly, this is one of
the most important decisions the board will take. Unfortunately, the principles
enumerated here are sketchy.Nevertheless, the lesson for Indian companies
is that boards need to continuously plan succession. More so, because most
companies in India are ownermanaged, boards tend to have a dynastic approach
that tends to favour the bloodline. Indian boards need to learn from their
global counterparts and prepare for eventualities, including protecting the
company from its owner.
Compensation of management: There are some
interesting points regarding CEO compensation. First, that a substantial
portion, that is 50 per cent or more, should be in the form of stock options or
their equivalent; second, that these should be made at a fair market value or
higher, with “particular attention given to any dilutive effect of such grants
on existing shareholders”.In India, while owner- mangers do not get
stock options, they often forget their wealth is tied to their shareholding in
companies and extract huge salaries for themselves. Regarding ESOPs to
employees, the prevailing trend is that if the share price has fallen, the
exercise price needs to adjust: this only goes towards protecting the downside
risk of employee wealth and does not become an incentive for value creation.
Independent directors are ignoring that shareholders are starting to vote
against egregious pay and ESOP re- pricing, leading to these getting voted down
and red faces in the boardroom.
Given their ownership of business, asset
managers’ role in corporate governance is now critical. They have the ability
to influence behaviour and shape outcomes. Therefore, asset managers must act
thoughtfully. They must be proactive and raise issues with companies as early
as possible, and be constructive in their approach.
Considering the heft of the institutional
investors signing on these recommendations, Iexpect theseto gain currency
across all markets, including India. And, in adopting them we, too, can hope to
achieve what the signatories expect in the US. “(Our) effort will be the
beginning of a continuing dialogue that will benefit millions by promoting
trust in our nation’s public companies.
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