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Saturday, 11 February 2017

Best Advisory Company; Promoters vs professional managers: Are Tata, Infosys victims of an age-old puzzle

Promoters vs professional managers: Are Tata, Infosys victims of an age-old puzzle?

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Executive powers with owners or professional managers – which one works better for investors is an old debate, perhaps almost as old as the joint stock corporations.

In fact, when we go through the seventeenth and eighteenth century history of East India Company, we find many incidents when the employees of the company used to indulge in private trade and this used to be one of the primary reasons behind conflicts between the investors in London and the on-ground executives in India.
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It is a different case that since these employees were severely underpaid, private trade was also permitted to some extent. The history of East India Company is also replete with numerous examples when the political involvement of company officials in local events was discouraged by the owners of the company, but still, the executives went ahead with the option, serving their political inclinations in the most optimal manner.

More than 200 years have passed since then and times may have surely changed. But, the debate continues. More recently, there have been events over the past six months in the corporate India where this issue is getting highlighted again and again.

First, the events unfolded at the Tata Group and now when there are reports that all is not well between the board and the founders at InfosysBSE 2.10 %.

We think there are many investors who think that founders' association with the venture beyond a point does more harm than good and things should be left to professional managers completely.

This camp believes that after a point, the founders become a burden on the company and an enhanced role for the capable, in-sync-with-time professional managers would serve everyone well.

However, when we go a little beyond, there are many others who think a little differently on this subject. This school of thought believes when ownership and executive powers are not aligned, accountability suffers and the approach becomes extremely short-term focused.

This view supports the assertion that unlimited and unchecked power in the hands of people, who do not have any long-term interest in the business, could be very bad.

It may be interesting that there are also situations when the board and the chief executive may not be on the same page, especially when there are many so-called outsiders on the board.

Unfortunately, there is no right or wrong answer here and likely, this debate is unlikely to get settled ever.

Ultimately, everyone including founders, members of the promoter family, professional managers and board members are human (hope, Artificial Intelligence is not taking away some of these roles :) and ah! humans are neither perfect nor completely devoid of emotions. In fact, the debate is not about what works better for the company or the investor.

There are several stakeholders and they are not limited to investors. They could be customers, employees, country, society, environment and many more. And hence, the situation gets even more complex. The option in terms of what is good for everyone and keeps all the stakeholders happy may not even be there always.

From the perspective of the investor community, the most prevalent view is perhaps in favour of professional managers. Even if we keep aside the criticism that both investors and managers are only focused on the next quarterly earnings and are in the game only for a very short term, there are enough examples where reckless managers have harmed investors much more than the damage they caused to anyone else.

We think the choice also depends on at what stage of evolution you are as a country or as the corporate world.

When we compare the situation in India now vs that 20 years back, many smart promoters have realised that it doesn’t make practical sense to get greedy in the short term as the personal wealth creation opportunity is much larger when you maintain better standards of corporate governance.

Another important observation we would want to highlight here is purely based on anecdotal experience. We think in the case of first generation entrepreneurs, leaving control to professional managers is much more emotionally difficult for the promoters.

So, once you know as an investor that the promoter is not at the top of his game, it may be better to move on. In the case of second generation promoters, things are always better for investors when the promoters are flexible enough to give enough freedom to managers, but do keep an eye on the broad direction that the company is taking.

However, there is one thing that remains unchanged forever. Don’t bet on people reforming, at least with the same person if not with the same company. That is likely to leave you with disappointment and then you don’t have anyone else to blame either.

Thanks much and enjoy your weekend!

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