Promoters, managers have to be in sync for an institution to succeed

October 25, 2019 2:47 AM

While the role of promoters or founders cannot be undermined in a corporate entity, professional managers have an equal or a bigger stake in operations.

We are witnessing many promoters (particularly in the real estate development sector) queuing up before courts.

By Vijay Kumar Gupta  

Indian corporate world, which till a decade ago was well-ensconced as overtly owner-driven with absolute powers, had to change tack as aspirations grew to go global. Many large Indian conglomerates packed their leadership team with professionals backed by varied experience in India and abroad. The combination worked successfully during transformative times despite executive powers lying with owners. Global ambitions, capital accessibility, collaboration and operational competence aided Indian conglomerates to expand footprints outside India through organic and inorganic ways. Corporates have bolstered global corporate governance practices by inducting independent directories and appointment of global auditors. Global capital raising was smoother and foreign institutional investors flocked. Times seem to be good for all.

But good times do not last forever. As tide turned against them, situation became hot to handle. Boardrooms became uneasy settings. Someone had to bite the bullet for all strategic decisions that turned against the corporates. First it was professional CEOs, followed by independent directors and auditors. In majority cases, owners with executive powers remained unscathed. On the other hand, shareholder value and owners’ wealth witnessed a downward spiral. Instances are Infosys, Tata, Indigo, Religare Group, Fortis, etc.
In the Infosys saga, the promoter was able to demoralise the CEO enough to call it quits. Then there was the Tata versus Mistry story—the saga was played in NCLT and business deals with the Tata Group issuing a diktat to all group companies to sever ties with the Shapoorji Pallonji group, breaking away from a century-old association.

In the Indigo dispute, both promoters put out things in the open and it also involved regulatory bodies and the government. Not only do such incidents impact stocks, but also affect the morale of employees. In the Religare saga, the dirty linen is being so publicly washed that all have become fed of the story itself. But the worst part is promoters blaming the former management for it. Management prudence towards professionals has been cast aside and professional managers have been wronged for all ills of owner’s misdeeds.
The debate over management powers with promoters versus those with professionals may be as old as corporate entities came into being. While it may be a worldwide phenomenon, it is much bigger an issue in India.

The issue that is being raised in boardrooms is whether the Indian promoter’s mindset has developed to co-opt professional managers as one of their own. Promoters only take professional managers as employees, or subservient. We have seen the best of professional managers belittled, humiliated in most unprofessional manners in Indian corporates. Promoters tend to have a big say in making all critical calls for a company, while professionals are there to be blamed for everything that goes wrong. It may be a professional’s mandate to turn around a dud project or infuse energy in a dead atmosphere; if he succeeds, the credit goes to the visionary promoter. A professional is as good as his last assignment and as long as he can manage to be subservient of the promoter. We have seen so many competent and experienced professionals in cross hairs of regulatory authorities.

Despite promoters controlling 15-20% stake in listed companies, several promoters continue to wield power even if they are proven to be inefficient, selfish. Today, the quality of management and key management persons at the helm are among the investment criteria for serious investors. The name of promoters is not enough any more to drive valuations. We are witnessing many promoters (particularly in the real estate development sector) queuing up before courts.

Investors, in many cases, want the company to run in clean, open, transparent, professional ways. However, their pleas fall on deaf ears, and promoters carry on undeterred.

While the role of promoters or founders cannot be undermined in a corporate entity, professional managers have an equal or a bigger stake in operations. They are professionally qualified and trained to run and turnaround business, which promoters may be lacking.

Unless given a free hand, a professional cannot optimise the resources made available by promoters. If there is insecurity, distrust, oneupmanship playing in the minds of promoters, it does not translate into a conducive atmosphere for the management team.

Promoters and managers have to be in sync for any institution or corporate to succeed. Beyond a level, promoters’ engagement should be limited and the management should be best left to professional managers.

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