Tuesday, January 13, 2009

Three zones in corporate governance

I have an opinion piece in Financial Express today about getting the right architecture for corporate governance.

10 comments:

  1. I think the important factor is the delta of promoter holding (unencumbered). A lot of people had the impression of Satyam to be closer to Zone 1 than Zone III and apparently Raju could also run the company as if it was. The best solution can possibly come through a more even handed takeover code.
    Regards,
    Anonymous1

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  2. Fantastic post

    Also - there are essentially two kinds of scams - one where money is siphoned off by paying higher to related parties as suppliers

    second where profits are added to show higher performance.

    The interesting part of Satyam (assuming Mr Raju's statement to be true) is that it went from second type to first type scam.

    I think thats where it became unmanagable. I would like to believe it is an isolated case but I would not bet my money on this.

    this is usual practice and affects Zone I and Zone II in big way - just that powerless individual investors are involved hence not much is impacted.


    We are surely going to see more of this types in coming months.

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  4. "Individual shareholders are too dispersed and generally do not have either the competence or the interest for governance. So the institutional shareholders must recruit the board of directors."
    While this was true before the advent of communication medium like Internet which can now be used as a governance medium. I am sure I am not the only shareholder with a digital lifestyle who gets annoyed due to un-environment friendly, expensive and wasteful deadtree format ( on paper ) Annual Reports and board resolution approvals with post-paid envelopes. The board resolutions requiring a vote should be tied up with online access to the depository with an option for dinosaurs who want paper.

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  5. Fantastic Post.

    I was wondering where one can get data on the share holdings of "owners or Promotors" in large firms. I am curious s to how many of these large firms in India belong to Zone I.

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  6. Addressing the problem of corporate governance in this fashion, I understand, is probably practical. However, there could be a principles based objection to abandoning Zone I minority shareholders. No minority shareholders, regardless of which zone they are in, should have to worry that the promoters are emptying the coffers out.

    Which is why all corporate governance cannot begin and end at teh composition of the board and voting rights. Audits, better financial reporting and an investigating authority that has teeth and uses them - that's what the minority shareholders deserve and what the markets need.

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  7. If large institutional investor representatives were to be appointed on the Board's of listed companies, will there be a situation where these very representatives (who now being a part of the Board have access to price sensitive information) use it to their fund's (or group of funds) advantage, by either selling out (if the development is negative) and conversely making large purchases (if the development is positive).

    Further, if the company in question is a sector bellwether, like a Infy or Tisco, etc., then the representative need not directly make purchases in the stock where he/she is a representative....they can simply take a call on the entire sector...and make basket purchases.

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  8. It is fascinating. Love your analysis about 3 zones. That is the heart of the issue.

    What was the esteemed board at Satyam doing? Obviously collecting salary. and look at the affiliations: Harvard, IBS, etc.!

    in zone III, which board in the world today does any due diligence of the type ideally required?

    it is due diligence which roots out fraud. These board of directors meet max 2-3 times A YEAR, for about 3-4 HOURS each time.

    Can u imagine Palepu (HBS) walking the halls checking up on Satyam, doing diligence, EVEN IF HE WAS ON THE BOARD'S "AUDIT" committee? Impossible.

    is this change towards a due diligence culture to be legislated? Because these stuffy guys in suits simply will not do it.

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  9. i had an afterthought:

    Under what authority does the INDIAN GORMINT seat the NEW BOARD at SATYAM?

    They are making full mockery of company laws Indian-ishtyle.

    it is useless having satyam meetings at racecourse road! Imagine sonia gandhi is deciding what shoudl happen! MOCKERY.

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  10. As mentioned in your article in Financial express on the 3 zones of corporate governance, the recent announcement of Siemens Ltd a 55% subsidiary of Siemens AG. The former has decided to sell the 100% stake in Siemens Information Systems ltd for an undisclosed valuation & consideration to Siemens Corporate Finance Pvt Ltd a subsidiary of Siemnes AG. The Investors are powerless here.

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