cyrusmistry_ratantata_afpCorporate Governance and good behavior by senior executives is not so easy find. The number of sexual abuse cases in corporate India has not been brought to light, ever. RNT’s personal behavior in case of Air Asia, Nano, Corus, is now being questioned. The real question to ask is what was the Board doing?

What was the Tata Sons Board doing? Why should (and how long) should TCS bear the Tata Son’s burden? Mr. RNT who thought it necessary to talk to NaMo about what is happening thinks he need not do anything by way of communication with the shareholder?

I must share this…from an ISARELI paper..

“Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries’ economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested – creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets.” (Randall Morck)

Tatas are not the only group which has done misallocation of resources – all big groups have done it. Birlas have done it. Mahindra and Mahindra group has done that. Finance companies have done it to a lesser extent – so Hdfc has not done as much as say a big manufacturing group, but we must also understand that in Hdfc Ltd and Hdfc bank we have not seen a change in the power structure. It is a change in the power structure that brings out such misallocation. ITC and Larsen&Toubro are other examples too.

This is the reason why it is easy to respect companies run by MNCs – the Indian counterparts do not (or are not) allowed to get into messy JV or ‘diworsifications’ – so a Colgate or Cummins will not get into unrelated businesses. For e.g. ITC would have been much better off if it had just put all the surplus from tobacco into an index fund. Larsen&Toubro’s ambitious dream of building a world class finance company in 7 years started about 10 years ago. It is likely that a change in top leadership will see many skeletons come out of the board and a big purge in the top management. A good question to ask is why is LIC helping or supporting such poor misallocation of funds?

I do think that corporate India has many questions to answer.

Ratan Tata vs. Cyrus Mistry is going to be a good wake up call for Corporate India to relook at their own Corporate Governance – or the absence of Corporate Governance.

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Leave a Reply