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”.
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