When the time comes, should Mukesh Ambani, the owner of country?s largest company by market cap, be deciding on his successor? More importantly, should he sit in judgement if one of the contenders is his own progeny, as the case will most likely be, given the filial ties that bind succession in family-run businesses in India?
The debate on family vis-?-vis professional management in matters of succession is an old one, and this newspaper has taken a nuanced, pro-family view on it. ?With family-owned businesses accounting for over four-fifths of India Inc?s wealth, it?s unrealistic to expect the families to stay away. While the western model of divorcing ownership from management has positives, this may not work in a developing economy where the rules of the game aren?t as well-defined,? we said in these pages sometime back in the context of a bevy of announcements anointing the next generation into the top echelons of leading family-owned companies?Bharti, Wipro, HCL, Future Group, TVS, RPG, etc (?Babalog brigade? https://www.financialexpress.com/news/fe-editorial-babalog-brigade/677578/).
But this piece is more about the fundamental issue of whether it is ?right in principle? for majority shareholders to foist one of their own into the company, even though they may have been well within their ?business & legal rights? to do so. Let?s examine the issue from a somewhat different perspective, even though mindful of the fact that the capitalist system is based on the bedrock of perpetuating ownership.
It?s in human nature to favour its own in all endeavours, including businesses. So you have laws that govern related party transactions that aim to minimise such subjectivity to promote the spirit of free and fair enterprise, and more importantly, protect the interest of all stakeholders?shareholders yes, but even consumers, suppliers, exchequer et al. Laws that govern business are replete with clauses that lay down clear rules for intra-company sales, disclosures, information use, etc. The underlying assumption is that laws have to keep a check on ?animal spirits? that drive all enterprises.
The companies? law recognises that a company may favour its arm/subsidiary in a transaction and therefore you have strict transfer pricing guidelines in the companies? bill. Essentially, transfer pricing refers to the ?transaction price? between two related companies. Such is the fear of company wrongdoing here that the discipline has spawned a whole business ecosystem around it?from law enforcers, consultants, arbiters, cost accountants et al. And not without reason it seems, for a large number of pending tax arbitrations cases revolve around ?transfer pricing?, where there is a real or perceived violation of the laid-down laws.
Company insiders can trade on sensitive information, and therefore you have strict ?insider trading? clauses in the share listing laws. Business laws define Persons Acting in Concert (PAC), essentially again a ?related party? nomenclature, for various situations?incorporation, takeovers, consolidations, etc. Another clause in the listing agreement, introduced a few years ago, mandates a minimum proportion of directors on a company board to be ?independent?. Independent of whom? Obviously of majority shareholders and management, and therefore acting as virtual emissaries of small shareholders and other business stakeholders. Implicit in this ?independent? moniker is the assumption that majority shareholders and/or management may compromise, knowingly or unknowingly, the interests of other stakeholders in business, and therefore their decisions need to be vetted and policed at the highest level. Though the independent directors here failed in their duty and rubber-stamped the Saytam-Maytas deal, it was the indignation of the whole investor community at this ?related party? transaction (recollect Maytas was then run by sons of the now-disgraced Satyam promoter Ramalinga Raju) that put paid to this deal, and that in a way paved the way for the subsequent unravelling of Rs 7,000 crore accounting scam at the IT major.
The current debate around allowing industrial groups into banking too points to the regulator and government?s uneasiness over the coziness that can build up between the bank and its promoter company or business group upsetting the level playing field in the market. And even strong proponents who argue for letting big companies into banking allow for strict ceiling of ?related-company or group-wise? credit here!
So when all ?related? transactions of a company, whether involving sales, investments, loans or leveraging information are under strict scrutiny, why is it that ?related party? succession has a corporate governance carte blanche? It?s no one?s case that a Rishad (Premji) or a Shravin (Mittal) should or should not join the family firm, but in the spirit of all other ?related party? principles that govern businesses, wouldn?t it be in order for the ?related? shareholders/management to be at arms? length distance to the decision in any such appointments? Or should they be allowed their say but under clearly laid-down rules for ?related-party? succession and appointments?
?shailesh.dobhal@expressindia.com