An institution to protect shareholders

The Satyam saga saw enough pundits preaching corporate governance. Enough critics lamented on inadequate regulatory oversight. And we came down on the role of the independent directors. Except for an efficient bailout by the government to save the company, there has been no proactive steps to prevent recurrence of such scandals. A new Companies Act is on the anvil, trying to tighten some dimensions. But why can���t Satyam case catalyse new institutions for shareholders��� protection?

Let us face it. There is no way investors can retrieve what they lost in Satyam. They went by audited cash and profits in the company���s books. Some consolation exists in the US for investors seeking class action suits. But the poor Indian investors will get no relief. And that still leaves the gullible Indian investors vulnerable if the controlling shareholders decide to turn greedy. That is where the proposed Act needs to dig deeper. So can there be a new bridge to serve the stranded shareholders, protect the value of a business and indeed all the stakeholders?

A systemic change can be brought to counter ingenuity of greed. The answer may lie in debating and introducing a new entity called ���a shareholders��� trust��� between the shareholders and the board of directors. These trusts can help seed and strengthen adequate structures for good corporate governance and see through manipulation, if not make it impossible. It can also have triggers with self-exerting levers. Such a trust is different from a two-tier boards in Europe and is intended to be an active institution across companies like auditors are.

Such trusts can be be a harbinger of widely held corporations that will offer twin promises ��� real public control and ownership of large corporations and a serious incubator for professional entrepreneurs. Rightly nurtured, it can help realise large entrepreneurial dreams that suffer from several constraints including large capital. Further, it would have a stabilising influence on the corporate culture. But it requires an enabling law.

So how is this construct different from what we already have in law?

First, it is conceived to encourage the arrival of a widely held corporation without one single controlling shareholder. It could have several, and at best some influential, shareholders.

Second, the shareholders will vest their significant, but not all, rights and powers in these trusts, run by qualified trustees. The trustees could be chosen on the basis of a well laid out criteria and process. It could be an engaging avenue for accomplished professionals whose wealth of experience will be handy.

Third, this trust resides somewhere between the board of directors and shareholders. It can be common to more than one company, but not to an unlimited number. This is thus different from the concept of supervisory and executive boards practised in Europe, as it responds more to our reality. Conflict of interest rules out auditors for this role.

Fourth, it would have clearly defined relationship between the shareholders and the board of directors and their inter se rights and duties. As this institution evolves, some trustees could also double up as independent directors.

Fifth, there is much debate on the office of independent directors. Often, whether they do act independently is questioned. The appointment of such independent directors can also be subject to ratification by these trusts to strengthen this office.

Sixth, with this trust, ordinarily, board of directors would need to go to shareholders only once a year to get its approval on key issues such as capital, business restructuring, new directors, etc. The shareholders can vest their broad mandate on subordinate issues. This would save expense of frequent but meaningless shareholders meetings.

Seventh, these trusts will act as a bridge between the shareholders and boards of directors. They could update shareholders with a six-monthly brief. They can raise a red flag when required. Their report would focus on specific areas of the company to ensure good corporate governance.

Eighth, these trusts should be subjected to punitive action should they be found wanting in their duties. In fact, our law should facilitate class action suits against institutions like these trusts and statutory auditors who are credited with fiduciary responsibilities.

Ninth, leading investment banks or accredited placement companies that even today search for independent directors can run a repository of names of qualified people to run these trusts. A trust, like an audit firm, could oversee a number of companies to spread its expense.

Tenth, these trusts can be made mandatory with listing requirements for public companies with a minimum capital base, say, Rs 1,000 crore.

And finally, the new enactment should also provide of a separate takeover code that discourages easy targeting of such corporations with trusts to discourage disruptive and unduly hostile takeovers.
The Satyam episode has another pertinent point. Before a show controlled and managed by a large shareholder becomes a widely held one comes a point where a single, large, controlling shareholder dilutes significant shareholding while retaining management control. This is the turning point for the company truly turning widely held. The law should provide that a decline in controlling shareholders interest below 20-25% should trigger appointment of shareholders trust as mentioned above.

The Satyam story suggests that our regulation had no extra requirements when the company reached this turning point. But this is the point where the gullible investors stood exposed and lost crores in the value of their shares. Looking around, there are hardly few widely held, Indian corporations like HDFC, ICICI, and L&T. They can claim professional leadership, depth of management and established governance. But then these are far and few. Given that growth of these corporations coincided with the opening up of the economy, their story is not replicable.

A widely held corporation is a more enduring institution to withstand business cycles and any individualism. The likes of Motorola, AT&T, Unilever, Pfizer, GSK (the erstwhile Glaxo) have all reincarnated several times, surviving all macro and micro attacks. Such a construct can catalyse good governance across India Inc. Even the government can take a leaf from here for managing the public sector.

(The author is chairman SA & JVs, MGRM Technologies Inc, USA)