Management’s Responsibility to Shareholders

(This was first written on 25 May 2007, reproduced here.)
Management’s Responsibility to Shareholders

Sometimes, it is not clear whether management of Indian companies recognise that they owe a fiduciary responsibility to their shareholders. But for competitive reasons, management should ideally conduct business in a transparent manner and keep shareholders informed of material developments to the company. Of course, the line between management and shareholders blurs when the promoters of the company, usually the single largest shareholder, run companies as their own fiefdom.

I just take a few instances of recent times:

  1. The stock of Bajaj Auto crashed on the date the company management announced a trifurcation of the company. Investors were caught on the wrong foot when they found that they had valued the stake of Bajaj Auto in the insurance joint ventures assuming a much higher shareholding. Bajaj Auto had given Allianz AG, it partner, an option to increase its shareholdings at a pre-determined price. Mr. Rahul Bajaj, the chairman of Bajaj Auto, was reported to have said “What can we do? We were bound by confidentiality clauses in our agreement. How can we declare it of our own?”
  2. After Mylan, an American company, bought out the promoter shareholdings in Matrix Laboratories Limited, the stock price of Matrix declined by almost 50%. The reason purportedly was the uncertainty over transfer pricing between Matrix and Mylan.

There are a number of other examples if one goes looking for them.

Historically, Indian financial institutions – typically large shareholders in any Indian company – tended to adopt a benign attitude towards the way management run companies. Very rarely was management decisions questioned, much less opposed.

However, the shareholding pattern of Indian corporates has changed dramatically in the past decade or so. It is well known that Foreign Institutional Investors – on average – own about 30% shareholding, and, Indian financial institutions own about 15% of leading Indian corporates. These institutions should demand more transparent workings of these corporates. Shouldn’t Bajaj Auto have revealed the arrangement with Allianz right from the time the insurance joint ventures were signed? After all, wasn’t shareholders permission sought to make these investments? Aren’t these arrangements material in nature, directly impacting the imputed value of Bajaj Auto’s shareholdings? Mr.Bajaj should realise that he owes it to all shareholders for the value erosion.

In India, institutional shareholders rarely ever drag the company and its management to the courts, suing them for misinformation and non-transparency. While we don’t need a litigious corporate world, we need active shareholders that seek and demand better corporate governance from their investee companies.

Disclaimer: As of today, the author has never owned shares in any of the above mentioned companies.

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