Tuesday, February 16, 2010

What every stakeholder must make it their business to know

We have all heard and read about the fable of goose and the golden egg in our early childhood. The farmer that owns the golden goose is pleased initially with the golden eggs he is served daily until one day he gets so greedy as to cut open up the goose and regret thereafter for life. Towards the end of 2008, unfortunately for the retail investors and the employees, the farmers in the developed world, comprising of the Government, bankers, regulators, the board members and a few of the auditing firms, in whom they had reposed their faith, were dealt a lethal blow. The farmers had consumed the assets or misstated the earning capabilities to serve them rotten eggs instead of the golden eggs promised as dividends. Worse yet, while the farmers walked away almost scott free, the goose, namely the employers were given the boot. For a while savings, growth, profits and dividends evaporated for most of the unsuspecting lot of the public.

With the growing number of affluent Indians ascending the list of the wealthiest of citizens in the world, the ‘virus’ of mismanagement is beginning to take its toll in India as well. Wealth may have unfortunately gone into the hands of people much faster than their maturity to make responsible use of them. The Satyam fiasco, shocking as it might have been, resulted in over 200 Independent board members being sent marching home. It is still unclear if we learnt our lessons from this failure.

Stakeholders will comprise not merely of the people who invest financially in these companies. There is simply too much at stake for every bod today.

For the corporations, the competitive market conditions allow very little margin of error that they need to employ the best of experts to be doubly sure of the risk they invite and the returns they pursue. With fewer options available to make up for bad decisions and limited avenues for exit options, the managers are under ever greater pressure to perform.

The average retail investor is much more at the mercy of a collective syndicate of sophisticated and powerful coterie of farmers than earlier that they need to wake up and become vigilant. With the interest rates on Public Provident Fund being barely enough to cover up the rate of inflation, there is little incentive to keep the money locked up there. For the first time, while the equities have appreciated by nearly 70% last year, the debt instruments have remained unattractive. With physical limitations to the amount of gold and real estate one may buy, out of necessity, people have to become more knowledgeable about how the corporations make sound decisions, govern their own conduct and resist the temptation to kill the golden goose for short term gains.

Then there are the job seekers and the schools of engineerings and management that undertake to get them placed suitably as they get off the campus. Parents who take justifiable pride in the earning abilities of their children, also need to ensure that their employers stay long enough to provide the job opportunities for them.

While there may be tall proclamations about the public having digested the bad news and the optimists pointing to the euphoria that is fast there is still no evidence in sight of any categorical reassurance from any quarter that we are determined to stay out of woods in future. It is not the confidence of the public that is weak but the credibility of the farmer that is still largely at stake.

The stakeholders comprising of retail investors, job seekers, suppliers and distributors alike need to pay attention to KYC-Know your Corporate client better. We may be intuitively unaware of the price we pay for our collective ignorance and selective incapacity to surface and deal with the reality of the state of health of the businesses may be in. Regardless of the stringency adopted by the corporates to in report and act on the truth, culturally also we suffer the handicap of not wanting to embarrass the powers that be by blowing the whistle too loudly. We can no longer afford to remain blissfully ignorant of the role and competence with which our trustees, i.e the board members and their duly appointed CEO’s and Managing Directors, address the realities of business and assure us of the golden eggs they are meant to deliver to the stakeholders.

Those amongst us that are keen to grow their personal wealth or their inheritance from their ancestors, owe it to our future generations of family heirs to manage the estate better. Since investment in publicly held companies has become more of a compulsion than choice, we have to make it our business to comprehend the use made of our investments and take time actions.

It is about time.

For the discerning, the boardrooms offer lessons on corporate governance and principles of sound business management. It is a well known fact that well before an organization is declared technically bankrupt or morally defunct, the first ones to come to know should be the board members.

We believe that to be forewarned is to be forearmed.

Unless we have responsible investors, we may have no responsible assets as investments left for us to manage.

As a part of my efforts to educate the retail investors and promote business literacy among the readers, I am pleased to bring out a series on the typical decisions that the top management of enlightened corporations are faced with and how they are going about taking decisions that impact the value of their returns to the shareholders.

This is being serialized by Nanayam, a fortnightly magazine on money and finance in TAMIL from the Ananda Vikatan group from February 1, 2010. Stay informed and stay invested.


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