Protection of Minority Shareholders

23.05.2004

A cardinal requirement in corporate governance for public companies is that of ensuring that mechanisms can be built in for protecting minority shareholders.  Of course, these are easier said than done. Public companies in many parts of the world and especially those that have one or two major shareholders, tend to operate a bit  like  the U.S. Presidential form of government. There is so much executive authority vested in the nominees of the majority shareholder that corporate governance, willy-nilly, becomes sandwiched between the boards of directors dominated by the representatives of the majority shareholder(s), and an executive management, that in practice, may well be said to dance to the dictates and the dikdats of this majority shareholder(s).

Other shareholders that invest in such companies are aware, and perhaps even subscribe to their shares, on the merits of an anchor / majority shareholder being there, and the comfort that they derive from his dominating presence in the company.  Therefore, they can hardly complain of any owner-override or seek safeguards against the tyranny of the majority!

In reality however, it does not necessarily mean that in all circumstances, the interests of the majority shareholder must necessarily conflict with that of the minority. The accretion of shareholder value will generally have an equally distributive impact, albeit pro-rata. Other than that, the only few occasions when there could be any significant conflicts of interests, might be if the majority shareholder decides to approve arrangements with related parties that are perceived to siphon out the value of the company, in one form or the other, or indeed other arrangements, that produce a similar seepage effect.  Another area of concern could arise when the majority shareholder wishes to divest a small portion of his equity holdings or through dexterous management repositioning, intends to achieve opportunities as they present themselves, both within and without the company. These may not gel well with the interests of minority shareholders, as they do not have access to the same information, or the ability to control closely, the destiny and the affairs of the company.

Most minority shareholders end up being financial or portfolio investors. They may like the company, the sector it is operating in and are satisfied with the management and the quality delivered year after year.  Of course, if one were to do a post-mortem with hindsight, and especially, if audit firms or accountants are brought in, then anything and everything can be said to be feathering someone’s nests at the expense of others.

Corporate governance therefore, is never black and white in the business arena. There are many shades of grey on a day to day basis and conflicts of interest do abound from the significant to the not so. One of the key objectives of good sound management is to endeavour to act ethically and consistently, and to bring any matters of deviation to the attention of the board of directors and the shareholders; if they are considered material, rather than make a decision there and then on their own steam.

The other aspect to remember is that conflicts of interest are there to be managed. If at the top, especially at the supervisory board members’ level, a clear virtue is demonstrably made of such issues, then down the line in the organization, they will not ride roughshod over the interests of the minority shareholders. 

In the U.S. and Europe, what became a casualty in the various scandals was a benign indifference to callous neglect and scorn on the interests of small investors with little or no voice! Sometimes, the rigours are applied too strictly. One cannot expect saintliness from men in the corporate world. Ultimately, they are human and fallible, and  indeed, are as much buffeted by greed as fear. To apply and with hindsight, exacting standards of moral rectitude, is to be holier than thou, and not helpful. However, no one is suggesting that we should dilute our standards and best practices, but exert for progressive compliance.

In the GCC, these are still early days for corporate governance. In a more innate sense, many senior directors on the boards, practice voluntary actions and restraint, and are conscious of the need to keep themselves above societal blame or from any shareholder, however small the latters’ holdings may be. In a sense, it is their goodness and the grace that are often reflected in the manner that they manage conflicts and congruence of interests. Where they have personal interests, I have witnessed some directors stepping out of board meetings to facilitate a discussion on those issues. Of course, all is not lily white or pure in all instances, and there are often rampant interplays, where conscience does not even enter the psyche!

This is where “independent” directors i.e. who do not represent the major shareholders, can provide valuable input; especially if they are men of integrity and have a good public reputation. They can subtly (and strongly by the force of their personality) impress their board colleagues on the needs to have very strong ethical bent. All corporations can be infused with good social conscience and corrections can be made as and when there is irrational exuberance.  A profitable company cannot ride roughshod. They may lose their status quickly. Many angels have fallen, and all those that were the “most admired” companies in Europe, and in the U.S., have recently bitten the dust.

The GCC companies and their regulators and the Ministries of Economy and Commerce in the various GCC states, can legislate a requirement for companies to have atleast a few independent directors. Perhaps one third might be a tall order initially, and all you need is two, but appointed by an external party, say the regulatory authority in insurance and banking, or by the local government. This way, the independent directors are not beholden to the majority shareholder and can express themselves freely and constructively, without fear or favour.  This move will qualitatively improve corporate governance and more importantly, will be seen to enhance the operating styles and the philosophies of the GCC corporate sector.  Adoption of such a proactive and positive stance by the authorities to conform to best practices; in a gradual and progressive manner, will be welcomed by the GCC business community.

A McKinsey study in the financial markets did confirm that companies practising  corporate governance, get premium on shares traded in the stock markets. I suppose, this is goodwill or a perception of a value and some implicit trust.

These are interesting times in the global economy. Some pressures are building up on the political front from the U.S., who wish to see enhanced focus on human rights and democracy. It will not be long before similar pressures build up, as the GCC states become full members of the WTO with regard to prudent corporate governance. Market practices will come under scrutiny and spotlight especially, as businesses go global and for the more reputable and large companies to set standards in this regard. Just as many of them promptly embraced the International Accounting Standards (IAS) for financial disclosure and without much demur or debate, it would be wise to introduce a robust code of corporate governance, evolved according to the local idiom and suitable to the regional milieu.

TAIL PIECE : Mr. Manmohan Singh becoming the Prime Minister of India, is also a little bit like an independent director now being made the Chairman of a company. The major shareholder (or the vote holder in this case) is Ms. Sonia Gandhi. In fact Manmohan Singh is so far removed from the political shenanigans and stakeholders and the coalition muddle in India, that he can bring a breath of fresh air to the corridors of power.  Having said that he has been a bureaucrat, who knows the system well, especially where it is creaking, he can thus repair the damage with all the scholarly authority and the deep respect that he has obtained thus far. The politicians would rather have their machinations done through the traditional power brokers than approach him! Hopefully, he will retain his simplicity, and yet catholicity of vision. He will certainly need more than his own contribution and clarity to take the country forward.  Political governance therefore, is the better in India with him at the helm!

 The author is General Manager of Emirates Bank.  However, the views expressed in this article are not necessarily shared by the Bank.

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