Moneycontrol Pro Panorama | Can greed be checked?

Bringing in a culture of corporate governance is not easy if the incentives of all involved don’t match.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

Investors have simple needs from the companies they invest in: preserve the value our capital, deploy it well and give us returns—the more outsized the better—in the form of capital appreciation preferably but dividends will do as well. Since these two parties—the investor and the company—are on two sides of the fence, trust plays a huge role in making an investor’s dreams come true. While trust can be implicit with verbal assurances and handshakes, it’s also given an explicit role through law, listing agreements and other forms too such as shareholder agreements. But as history shows these are only as good as the people signing them.

Consider this weekend’s development of a startup Mojocare. Its investors released a statement that they have uncovered financial irregularities and that the business model is not sustainable. A Moneycontrol news report said that the founders appear to have inflated sales because of pressure to meet targets. It’s another addition to a growing list of startups that appear to have lost their way on the corporate governance highway. Employees bear the brunt of these events, with 200 being let go by the startup, according to the report.

PE/VC firms and high net worth individuals are investors in such startups and can recover their monies from other investments. The growing number of cases brings forth a question of whether these practices themselves are new or they are coming to light because investors are asking more questions and are not taking answers at face value. Also, are they asking more questions because they have become less trusting now or is it an outcome of the startup funding winter? The answers could decide if there’s a lasting shift in the approach to governance or it will recede once ‘good’ money starts chasing ‘bad’ startups all over again.

Bringing in a culture of corporate governance is not easy if the incentives of all involved don’t match. Why, even for listed companies the governance landscape continues to evolve even now, despite multiple legal frameworks in place and experience from governance failures that have cropped up over the decades.

For instance, Sebi recently okayed amendments to the disclosure regulations governing listed companies. Our columnist Jayant Thakur writes that the objective is to end entrenched and vested interests in companies, give a greater say to shareholders, quickly end rumours but some changes will be needed to remove difficulties caused by these amendments.

One amendment pertains to ‘permanent’ board directorship. Sebi has now made it mandatory for directors to seek shareholder approval for reappointment at least once in five years. This will not affect independent directors or government nominees on boards. This seeks to ensure that directors will have to justify their place on the board and not hold on to it as a matter of right. This will give greater say to shareholders on the constitution of a board.

Sebi’s move is important because the management reports to the board, which in turn is meant to safeguard the interests of all shareholders. Another change is on disclosing material developments to stock exchanges. While Sebi had already made changes on this front, it has sought to make the process more ironclad by developing quantitative criteria, such as a certain percentage of revenue, net worth and so on to determine what are material events. Also, any news report in a ‘mainstream’ media has to be denied, confirmed or clarified by the company within 24 hours. At present, it is applicable to the top 100 listed companies

There are other key changes too, with private shareholder agreements granting a special right subject to shareholder approval every five years. Do read Thakur’s column for more details.

Corporate governance is that intangible factor that investors sometimes also refer to as quality of management. In India, since promoters are also managers in most family-owned companies, it also refers to the quality of promoters. Even as the legal framework evolves and investors become smarter—both in the private and public market—governance lapses will continue to occur. Investors can only assess these risks in their portfolio and ensure they have not overdosed on it, in the bid to earn higher returns.

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Ravi AnanthanarayanMoneycontrol Pro