Investors must let go of some promoters

The banking sector has seen its fair share of managing director exits — several of these being unplanned and forced by either the regulator or the investors. The recent shareholder vote against the CEOs (managing director and CEO are being used interchangeably) of two banks, although rare, is a welcome change, given how poorly these banks have been performing. At a time when investors are getting increasingly vocal, will corporate India be next and promoter CEO heads roll?

One argument is that it is easier to let go of professionals seated as managing directors or CEOs, since there is a belief that another professional would do just as well. However, this may not equally hold true for promoters. Having promoters in the driver’s seat has generally been considered beneficial for companies because promoters have the most skin in the game. As promoters have a generational view about business, there is reasonable balance between short-term and long-term objectives.

Investors are hesitant in pushing out promoters because of the latent concern on whether the professional that takes over will have the same degree of ownership and foresight. These concerns would be allayed if investors believed the companies had a stronger board, or a strong leadership pipeline and good succession planning. Consistent engagement on these issues will perhaps build greater confidence in the organisation structure.

When promoters are allowed to use the company for their personal gain and destroy shareholder wealth, it is the failure of the board to disassociate the interests of the company from its promoters and protect the company from its promoters. In such instances, investors need to step in — using their shareholder vote and by engaging with the company — to unseat the promoters and push for professionalisation of management. The argument that if the promoters created the mess, they need to stick around to clean it up should come with a ‘best before date’. To this extent, investors have missed the opportunities to unseat promoters of a slew of companies, where performance has repeatedly faltered.