Good corporate governance in bad times

If you haven’t been living under a pebble, then you must have heard of the Depression, global recession, subprime crisis and more closer to home – the case of corporate hoodwinking by Ramalinga Raju, the founder of the now beleaguered company – Satyam Computers. It is a case of corporate fraud and cooked up accounting books. Ironically the corporate governance award was feted to the culprit in question. The latter intrigues me and here is my take on corporate governance.

Corporate governance and corporate management are two sides of the same coin. You can’t survive with one for long. Corporate governance means the processes, structures, and relationships through which the board of directors oversee what its executives do. Corporate management means what the executives do to define and achieve the objectives of the company. Hence there is a definite need for a strong Board of Directors (BOD’s).

If good corporate management is the face of the coin, then good corporate governance will be the other side. The board of directors is the Achilles heel of the company. Every time you find a business in trouble, you find the BOD’s either unwilling or unable to fulfil their responsibilities.

Interests of Shareholders

The Company Law Board (CLB) and SEBI that define the laws of Corporate Governance should refine the rules of the game(some suggestions by me in second half of the article), include more stricter policies on the responsibilities of independent directors (the underpinning of the Satyam fiasco or rather the lack of it). For a start, SEBI has now made mandatory for all the listed companies to show pledging of shares by promoters if any, bringing more transparency to the shareholders.

Ultimately, almost all major decisions are to be taken in the interests of the shareholders. I can say with conviction that when investors start looking at a company in long term nature of investment, the Corporate Governance factor would play a strong role.

Consider a future scenario of an investment analyst reading out the conclusion of his report about a company XYZ:

“In addition to its excellent strategic decisions and management strength, XYZ has a premier concept of governance and a premier board of directors, which together offer the best hope for ensuring the corporation’s future. So, if you want to buy a share of stock for your grandchildren, this would be a company to select.”

When some analyst says that about a company—it will, at last, be an indication that the market is beginning to look beyond this year’s (or even next quarter’s) estimate of earnings. If that day ever does come, it will bring recognition that corporate governance is every bit as important as corporate management to ensuring the future of corporate India.

Regressive tax laws

The tax laws in India are beyond my intellectual net worth, but capital gains tax (the tax that you pay on your income generated from capital investments like selling of stocks) should be made more rational by above logic. Currently the division is short term capital gain tax (selling share and mutual funds within one year) and long-term capital gains tax (after one year). We can have a regressive flat tax rate where in the investors pay ordinary income tax rate if you hold it for one year, the rate will go to 90% of ordinary income tax rate if you hold it for 2 years, 80% if you hold for 3 years and so on. Not to say that after 10 years there should be no tax at all but a similar principle can be followed if you consider investment for 15 years of 25 years.

What such tax rates will do is have a dramatic effect on the mindsets of shareholders. They will once again become owners rather than just speculators that they are today.  People are betting against someone else that the stock will go up or down. That betting makes them a speculator rather than an owner. They just want to make a fast buck.

Think, instead, of buying a stock with the idea that you will get a premium for holding it for 10 to 20 years. Think how differently you would analyze the company’s strategy, its management, its board of directors and its system of governance.

This is what I call – creating a “value continuum”.

The No.2 Man

There have been few and far in between players who have promised to make the leap of faith to stardom in sports but have left unimpressionable imprints on the minds that they bear no significance to the sports followers. Ok now for the simpler explanation of the first sentence – There have been sports players who have promising talent to be the best but did not become famous because they were not able to beat/overcome the No.1 Player in that respective field/position/category.

To put things in perspective, take the case of Roger Federer and Rafael Nadal. ‘FedXpress’ was unbeatable at one stage going through brilliant tennis form and was almost on the brink of breaking the 14 Grand Slam title record of Pete Sampras(men’s singles), when one man decided the other way. Nadal was thriving in the shadows for long and remained No.2 for quite some weeks whilst Roger remained No.1 seed for around 70 weeks continuously. Then came the leap of faith that has made a difference beyond recognition and has made tennis more competitive in recent times. Rafeal Nadal(the king of clay court) won the French Open (2008), Australian Open(2009) to become the No.1 seed. There are very few players in the sports fraternity who can make that jump across the Grand Canyon and that is what I admire about Rafa – the fighter.

Fast-track to IPL 2009 , Delhi Daredevils my fav team’s wicketkeeper Dinesh Karthik is one of such “shadow” cricketers. He has been playing exceptionally well for the past few games. (He reads the game to perfection and plays accordingly). Sometimes irrational shots get him out but you can grant the batsman such errors. Dhoni has occupied the No.1 wicketkeeper slot of India and has bolstered his future chances now by becoming a successful Indian captain. His place in the team is a certainty. And it will require Dinesh Karthik – a massive, extraordinary effort to beat the blues and come out trumps. Let’s see how the man performs and any doubts about him - put it aside. My vote is for Dinesh Karthik. Go Delhi Go.