The issue of shareholder value never ceases to generate intense and heated debate. And so it was recently, at the launch of Debashis Basu?s latest book, Face Value: Creation and destruction of shareholder value in India, when some of the finest brains in the financial sector ? from Uday Kotak, Ravi Narain, GN Bajpai to Mr Basu himself and Cyrus Guzder ? got together to discuss the issue threadbare. Of late, the Securities and Exchange Board of India (SEBI) and its chairman, Mr Bajpai, have been according great emphasis on corporate governance as a tool for enhancing shareholder value, but there has been, according to most analysts, no concrete empirical evidence yet of a clear link between high standards of corporate governance and shareholder value. It was only apt for Mr Bajpai to be present at that debate, since he is at the forefront of the best practices movement these days and has been pushing for corporate governance ratings, a topic this column has also discussed in much detail.
The experts at that debate did point out, for instance, that some of the world?s finest investors themselves did not follow the best governance practices and their own firms were riddled with friends, golfing partners and even relatives. But the stocks they invested in were at the top of the heap in terms of high governance standards. Mr Bajpai, for instance, believes that these stocks, where star investors have invested, have typically very high ethical and governance standards, and yield high shareholder value.
It was pointed out, for instance, that over a time period of, say, five years, it is difficult to come to a conclusion over which of two companies, both of which are frontline stocks, would yield greater value. It would probably be better to give a slightly longer time frame to arrive at a fair conclusion.
One of the most important points emanating from that debate was the issue of why the stock market indices do not always reflect economic growth. For instance, why does the economic growth of about five per cent year after year not map into similar growth in the index. This vital question has foxed even seasoned finance brains like National Stock Exchange managing director Ravi Narain, who has seen the key indices move in a narrow band despite all the figures on economic growth. The answer, as Mr Basu explains, lies elsewhere. Most of the economic growth these days, is taking place outside the ambit of listed companies. And, as SEBI?s executive director Pratip Kar points out, even within listed companies, outside index stocks. For instance, sectors like business process outsourcing (BPO), restaurants, education and the like ? which can broadly be categorised under the umbrella ?services? ? are hardly listed on the bourses. So, while there may be booming activity in the services sector contributing to economic growth, shareholder value, in the traditional sense of rising stock prices, does not get enhanced. The ?listed space? is not a correct barometer for economic growth. Is this frustrating for the markets regulator SEBI? Undoubtedly!
Also, Mr Basu?s contention that there is no real ?compulsion? these days for large foreign companies to list in India, and to stay listed, is valid. Hence, a cola or a car multinational, which may be adding to frenetic economic activity in India, does not necessarily have to be listed on the bourses. Therefore, bad luck for those investors who hoped to capitalise on this and enhance shareholder value. Contrast this with the compulsion of the Foreign Exchange Regulation Act (FERA) of the mid-seventies, and one understands why markets and shareholder value, even today, are largely delinked.
AFL Ltd boss Cyrus Guzder, however, raises an important point on the corporate governance-shareholder value debate. Mr Guzder?s contention is that it?s still too early to come to any firm conclusion about a correlation between corporate governance and enhancement of shareholder value. Data is still coming in, even as corporations under the new liberalised environment shed their legacies of the past and restructure their businesses, often unwinding portfolios which no longer make sense. This is true of the largest groups and also the smallest. Once the process is near completion can it be clearly understood whether the governance standards the newly recast corporations follow have generated shareholder value. And rightly, he calls the ?independent director? the cornerstone of the corporate governance initiative.
For the Indian markets, these points hold important lessons. Unless economic activity is translated into the listed space, true shareholder value would be difficult to achieve. Maybe Sebi has an important role in ensuring this.