Once upon a time (even today it has not really changed much) companies were run for the benefit of the dominant shareholders who were also in management. Even today that happens in companies like Reliance, Birla, Bajaj, Murugappa, – and these are not insignificant in size or contribution to the national kitty.
However in the 1980s one concept got popular in US – the concept of shareholder value. Private equity funds came, took over a company and if the parts of the business was worth more than the market capitalisation, they ripped the company and sold off the parts. One of the biggest companies they tried doing this was Coca Cola – but what happened to the valuation, Warren Buffet’s role, etc. all of you should be knowing.
Normally in my portfolio building also I just bought companies which made money for the shareholder. The other stakeholders did not matter. ESOP was supposed to put the owners and the current managers in synch. Alas Enron, Worldcom, etc. proved that all this is bull.
So what should a company do? I think there should be a balance between creating value for the shareholder, treating employees well, giving good value to the customer, treating vendors with dignity, paying taxes honestly, giving back to the society and being socially responsible as a citizen.
Look at the life insurance industry in India. They were so busy creating ‘shareholder value’ – that they thought they could price poorly, and not worry about the end customer. Suddenly the regulator woke up and has put all kinds of clamps on the industry. The shareholder will not see money for another 4 years even in case of companies like Hdfc Standard Life insurance (the first life insurance company in the private sector) – and a company with a good handle on its policy stickiness.
I liked this statement ‘the top line is VANITY, so the bottom line is INSANITY’ so true of so many fiefdom building CEOs. To build the top line (give away everything and you will get rich was tested in the dot com boom which led to the dot gone doom) you recruit, pay unnecessarily high salaries, ‘grow’ all over and then find you have no money….
Of course now it has gone the full circle and the life insurance industry in the current form cannot survive – the shareholder has to make money or he will just walk away from the business. Currently the employees, the landlords (many branches are shutting down), the vendors, are all paying a part of the price.
Watch this space – the epitaph for a few companies will be written in Jan 2011.
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