Results of a postal ballot, at Tata Motors last week, saw minority shareholders vote against resolutions that allowed a couple of the firm?s executive directors to be paid a minimum remuneration in the future in the event the firm wasn?t able to post profits or these were inadequate. The directors, together with Tata Motors? former managing director, were also to be compensated for FY14 when the remuneration paid to them exceeded the limit under section 197 of the Companies Act.
To say the least, it was disappointing small investors couldn?t be trusted with their newly-won responsibility. To be fair though, it was just a handful of them really, because 70% of the vote favoured the resolutions, marginally short of the 75% threshold needed for the resolution to be passed.
Nevertheless, their decision has left the Tatas in a bit of a spot and calls for some serious discussion on the powers given to small shareholders in the Companies Act 2013. Clearly, they have been given too much of it. After all, all that the Tata Motors management was attempting to do was to ensure it kept its team motivated which is in the interests of business, especially at a time when sales of commercial vehicles are in a slump thanks to a slowing economy; the firm reported a stand-alone loss of R330 crore before tax last year. Performance-based pay is all very well but salaries can?t be tailored to match business cycles. Given that talent, if not scarce, isn?t abundant either and teams need to be built and nurtured, management salaries need to be left to the discretion of the board. The last thing Tata Motors needs?after CEO Karl Slym passed away?is to be constrained while paying its people.
Even otherwise, the group is not known to be extravagant when it comes to compensating executives; it doesn?t pay astronomical salaries unlike many other business houses. One only needs to compare the compensation of N Chandrasekaran, CEO, Tata Consultancy Services (TCS) with that of Vishal Sikka, the CEO-designate at Infosys. Sikka will earn nearly four times what Chandrasekaran makes even though TCS? profits are almost twice those of Infosys. Moreover, the remuneration of executive directors Ravindra Pisharody and Satish Borwankar is not out of sync with that of their peers at around Rs 2.5-3.5 crore.
Indeed, it would have to be a churlish lot of investors that blocked the resolutions because, notwithstanding the company?s financial performance, the Tata Motors stock has been an outperformer over the couple of years; it has returned nearly 100% in the last two years compared with a return of 49% for the Sensex while, in the last one year, it has gained 60% compared with the gain of 34% for the Sensex. The company has distributed over 80% of its net profit as dividend to its shareholders between FY11 and FY13.
To be sure, there are CEOs who take home big pay packets, and at times, it would seem these are completely out of proportion with the size and complexity of the operations they run as also the turnover and profits. Very often, it is the promoters who tend to reward themselves with huge commissions, running into tens of crores, or dividends, when the public float is small. Proxy advisory firm IIAS points out that in the past, shareholders have been asked to vote on resolutions that could, in effect, have resulted in Navin Agarwal?s 2014 commission in Sesa Sterlite crossing R70 crore or Sunil Mittal?s fixed pay in Bharti going up to R30 crore or KP Singh?s overall salary in DLF increasing to R25 crore.
However, it is unfair to penalise all companies for the faults of a few and there has to be some way to differentiate between the professionals and the profligates because some shareholders clearly aren?t able to do so. Of late, shareholders have been demanding details of incentives that are part of the remuneration package and also that a cap be put on these; they aren?t content with the board specifying the performance criteria. There doesn?t appear to be any harm in disclosing the parameters for the incentives or in capping them; managements are free to keep the ceiling high. Also, as some proxy advisory firms have pointed out, compensation should not be merged with re-appointment in the same resolution.
The legal framework regarding compensation is stricter in India than in many Western countries where the ?say on pay? vote is advisory and non-binding. But Indians are also far more adept at tweaking laws which is why it is necessary to put in some checks. The Companies Act and Sebi?s Listing Agreement do require companies to be more specific regarding disclosures on compensation. At the same time, shareholders need to behave responsibly and not disrupt the running of companies; activism is good when it is tempered.
shobhana.subramanian@expressindia.com