Sucheta Dalal :Games family-run businesses play
Sucheta Dalal

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Games family-run businesses play  

Nov 14, 2005

As the Sebi (Securities and Exchange Board of India) deadline for inducting more independent directors on corporate boards nears, Indian industrialists continue to chafe at what think is an unnecessary interference in their business.


In the last few years, their view has received unexpected corroboration from several international developments. First, a series of corporate scandals among the biggest US companies revealed that professional CEOs are just as capable of creating crony-clubs to ratify their astronomical salaries and retirement benefits wangled at the cost of other stakeholders.


Secondly, two academics Ronald Anderson and David Reeb studied the S&P 500 list and discovered that family-controlled companies substantially outperformed the index. Similar research among European companies confirmed these findings.


In another blow to the concept of aggressive, professional managers, Professor Robert Hare, of the University of British Columbia, an expert in psychology, has concluded that Wall Street’s obsessive pursuit for corporate profits often ends up catapulting psychopathic to mildly psychopathic persons into the CEO’s job.


These CEOs are capable of inflicting enormous pain on hundreds of investors, stakeholders and employees in their relentless pursuit for share-price linked performance bonuses and compensation.


However, as with all research, it would be a folly to look at its conclusions without paying equal attention to the caveats. For instance, the Anderson and Reeb study of the S&P 500 companies found that ‘‘the most valuable public firms are those in which independent directors balance family board representation. In contrast, in firms with continued founding family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms’’.


On the other hand, research by Faccio, Lang, and Young (2001) suggests that ‘‘without vigilant oversight, large shareholders such as founding families are prone to exploit minority shareholder wealth’’. Other research has similarly established that family shareholders in public firms benefit themselves through special dividends, excessive compensation schemes and related party transactions (DeAngelo and DeAngelo, 2000).


The Indian experience seems to validate this trend. Although Indian companies are mostly family-controlled, the freedom granted by economic liberalization has seen Indian industrialists exploit minority shareholder wealth by arrogating direct and indirect benefits for themselves.


The first and immediate example is the manner in which corporate compensation packages have risen despite the massive bull run having substantially increased the value of their core stock holding and consequently boosted their personal wealth.


Under the BJP-led government, most Indian companies were given multiple opportunities to shore up their family holding in order to ward off illusionary takeover threats. Promoters are hence the biggest beneficiaries of the bull run.


This is true of professional managers earning over Rs 1 crore as well. Most of them have been granted hefty stock options that were unheard off until the mid-1990s. Many also earn performance-linked bonuses that are often as much as 100 per cent of the salary.


A recent listing of corporate salaries by Business Standard is illuminating. The paper’s list of those earning Rs 1 crore or more per annum in 2004-05 reveals that promoter-managers “still lead the pack”. The study reveals that just 92 promoter-managers of 44 companies took home Rs 282 crore. Even among these, just 10 managers took home nearly half (Rs 131 crore or 46 per cent) that value.


The Ambani brothers lead the pack of big paychecks with an annual takeaway of Rs 21.7 crore each (before the acrimonious division of assets).


As the sibling war had revealed, the increase in their stock price, hefty dividend cheques and wages form just a portion of the compensation that the Ambanis give themselves. While Reliance Infocomm went to Anil Ambani, the “sweat equity” that Mukesh Ambani had given himself (and later relinquished) in the telecom company is one example. It is a bit of a mystery how Mukesh Ambani and his wife had such a large personal holding in the telecom company.


Much the same is now happening in the Anil Ambani Group. On the one hand, the demerger process has mysteriously increased the younger sibling’s control over his companies. And the corporate grapevine says the separation process has given him a fabulous cash war chest that he is using to expand his business empire. Very little of this is openly disclosed in the public domain.


Another interesting facet to the list of those earning fat paychecks is that it seems unrelated to the size, earnings or even the market share of each company.


For instance, after the Ambani brothers, four top executives from the Hero Honda group (two each from the Munjal family and Honda) take away a whopping Rs 52 crore in wages every year. Again, all four are bound to be getting several other incentives too.

The only other person taking home a nine-digit paycheck (Rs 10.5 crore) is Hemendra Kothari, chairman of the finance and brokerage firm DSP Merrill Lynch, a listed company with low floating stock.


And another surprise in the top ten is Sajjan Jindal of JSW Steel who pays himself over Rs 8 crore. Until the revival in global steel prices, he had sought multiple write-offs and restructuring by banks and financial institutions.


It will need a detailed academic study to examine if there is any pattern to the sort of companies whose promoters reward themselves in multiple ways and whether the companies managed by such promoters perform better or worse than others. What is clear is that several large and respected industry groups and their top employees do not figure in the one-crore club. Does their restraint suggest better corporate governance or stock performance? Again, this too is not clear from the mere listing of numbers.


International research studies have found that the rights and interests of minority shareholders will be better protected if Sebi forces companies to induct more independent directors who can, at least in theory, prevent promoter-managers from expropriating corporate wealth without clear justification.


-- Sucheta Dalal