In the early Eighties, S.P. Acharya, the chairman and managing director of Shaw Wallace Limited, fought valiantly to protect his company’s shareholders from the predatory Manu Chhabria. He lost and quietly retired. The Chhabria years, in this as in many other companies that he bought, are well known for corporate decline and loss of shareholder value. Shaw Wallace, once a cash rich company and a blue chip, is a shadow of its past glory. Ultimately Acharya gave in because that appeared to be the will of the regulators and shareholders. If shareholders decide to change a good management that has been producing results, it is their prerogative. They own the company.
It was also around this time that Britannia was sold by a fuddy-duddy British company, Huntley-Palmer, to the American Nabisco. The giant American cigarette company, R.J. Reynolds, then bought Nabisco, and Britannia came under its control. “Barbarians at the gate” gave control over Britannia to Rajan Pillai who was backed by the former RJR chairman, Ross Johnson. When they fell out, the managing director was sacked. He enabled the entry of the present principal shareholders, Bombay Dyeing. Danon, the French foods giant was the other main shareholder. Together they brought him back as managing director, and he stayed for almost ten years.
Principal shareholders in India are usually Indian families, banks and financial institutions, mostly state-owned, or foreign companies that own large chunks of shares. These, and especially the last two, control the companies and take all decisions. The remaining shareholders have little choice and hope that they will benefit if principal shareholders and the concerned companies benefit from the connection.
It is for this reason that there are regulators like the securities and exchange board of India, the department of company affairs and the company law board, investigative agencies like income-tax, enforcement directorate, and so on, and new corporate governance norms like that of independent directors. These are supposed to ensure that everybody’s interests are protected and that shareholder groups that have control over companies use it in a manner that is within the law and benefits all shareholders, the company and society.
The happenings at Tata Finance Limited paint a classic picture of how large controlling shareholders must behave. An errant managing director was given a chance to explain, then sacked, criminal charges were filed, the shareholders were kept informed and the principal shareholders pumped in funds to safeguard the company’s survival and the interests of the other shareholders.
The happenings at Britannia in the last few weeks are a more normal picture of how controlling shareholders and regulators behave in similar situations. Serious allegations have appeared in the media against the managing director. Even bills and expense vouchers have been shown. He is supposed to have spent large amounts of company money on television serials that featured his actress wife, given advertising film contracts to individuals without going through the procedure of tendering and of lowest quotations getting the contracts. There are rumours of commissions on a corporate takeover and sale of a company division, of personal expenditures on company account far in excess of those permitted by shareholders in approving his contract, and other similar allegations.
It does not require a Sherlock Holmes to presume that these details could have reached the media only from controlling shareholders and the remaining top management. But shareholders have not been formally told how much the loss to the company is. Since the managing director was summarily sacked, the amounts must be substantial and the nature of the offences extremely serious. The money lost rightfully belongs to all shareholders. They must be told how much was lost. Normally media-conscious regulators and investigating agencies have so far not said or done anything about the charges.
This is not a case of shareholders versus managers. The principal shareholders of Britannia have the power to sack a successful managing director if they can carry the majority of shareholders with them. The media allegations suggest that there is much more to it than a battle for succession or ego of the principal shareholders. Misuse of company funds cheats shareholders. There must be a genuine attempt to recover the stolen or misused funds. The shareholders in the general meeting must ratify the sacking of the managing director. Criminal charges must be filed if the facts warrant it. The company must reassure shareholders and others that systems and controls are in place that prevent such misuse of power. None of this has happened so far.
A long line of able managing directors and managers built Britannia. The outgoing managing director has served the company as managing director for ten years. In this period of fast economic growth, he has also added to shareholder value. Britannia shares are worth a lot more today and shareholders have gained by good dividends. The company’s products command high market shares. Shareholders have to worry whether all this is now in jeopardy.
This is a company in the consumer products market. The challenge for such products is to continue sales growth and maintain high margins. Marketing, advertising, distribution and promotion are their tools for growth. There is no magic formula that can say how much of expenditure will give what results. Intuition, hunch, gut-feel, creativity, imagination of exceptional managers and their support staff hit on the right mix that produces results.
Enormous expenditures might result in little effect on sales and market share. There is then nothing to show for the expenditures except a few worthless advertising film prints, press clippings, point of purchase material and hoardings. Analysts can pontificate but there is no way to be sure as to what will be the results of the expenditure. A managing director and his managers take big risks with shareholder funds. When it works they are heroes. When it does not they are in danger of being discarded. No internal audit committee or auditors are competent to judge whether a particular film producer should have been given a film contract instead of someone else. The proof lies only in the results. What they can do and probably do not is to check with other companies whether the amount paid was comparable to that paid by the others.
Regulators exist to ensure that there is no misuse or abuse of the trust that shareholders have placed in managing director and controlling shareholders. In the instance of Britannia, they have so far shown little sign of activity. Nor have the other powerful shareholders like the state-owned financial institutions.
If the managing director was not adequately compensated legally, he could have protested or left for a better job. But inadequate remuneration does not seem to have been the issue here. It is difficult to believe that a managing director who is alleged to have taken a lot more out of the company than he was allowed by the shareholders, in many imaginative ways, could have done so without the knowledge of senior managers, auditors, and even the controlling shareholders.
Families that control businesses have ways of getting information on what is going on within the company. They meet managers, big suppliers of goods and services, talk to competitors, investment analysts and others, and study what the media has to say about their company and its managers. Britannia’s managing director has been frequently in the news for a variety of social and business reasons. This company has been much written about. Surely a lifestyle that was felt not to be in keeping with that of a working managing director would have been noticed and investigated a long time ago' Or was it that the controlling shareholders permitted many of the now discovered illegal expenses'
There appears to be an attempt by some to say that under-the-table expenses are permissible if they are with the permission of the controlling shareholders. Even if that had some justification in the old days of high taxes and limited remuneration, they are totally unjustifiable in these more liberal times. The sleaze that has been alleged makes this a case for investigation and public scrutiny. It reflects badly on professional employee managers, controlling principal shareholders, regulators and others. With all the new stress on corporate governance and social responsibility, we must not allow this story to wind down without getting at the facts and dealing with whoever has misbehaved.