A enlightening read on the characteristic issues of corporate governance in family-managed corporates.
My thoughts:-
1. The family has the word in important issues, with the independent directors serving little more than rubber-stamps, advisors at the most. While this is an accepted fact, it in itself speaks against the spirit of corporate governance. The de-facto governing family wants to further its interests through the companies it has promoted, but none of these companies has this particular objective documented into its MOA. Any stakeholder in a family-managed corporate should always be conscious of this antithesis and therefore attach a risk premium to the returns she would otherwise expect from such a company.
2. The government has advised PSBs to invoke promoter's personal guarantees in early NPA stage. While this is indeed against the basic principle of limited liability in general, but appears pretty justified in the case of family managed corporates. Aren't rubber-stamp directors also against the basic principle of corporate governance? PSBs, not being small investors, can dictate terms by going against the established tenets of limited liability. Small investors can do nothing of the sort. They should read between the lines from this government advisory and be extra cautious when it comes to their investments in family-managed corporates.
3. Investment decisions of family-managed corporates represent aspirations of the family. This postulate translates only to one thing-Investing in family-managed Indian corporates is a risky affair. This situation is not going to change soon in India. While resignation of independent directors may serve as a warning signal to stakeholders, such a signal may or may not come in all instances of poor corporate governance.
The lesson I learnt is- Be wary of investing in family-managed corporates. They are machines of furthering family aspirations while incurring limited liability. You may well be duped of your trust (and money) in the process. If this refraining act (of being extra cautious about family companies) becomes widespread among investors, it may also act as a deterrent, better than the pronouncements of law, against poor corporate governance in such companies.
It is well established that in family business, corporate governance cannot be de-linked from family governance. A family promotes a company to translate an idea into business in order to create family wealth. When it uses public money, it is expected to adopt the principle of transparency and accountability. If, it adopts those principles, non-controlling shareholders are able to decide to exit the company by selling shares well in time. An investor should decide investing in a family business by evaluating the family governance. This is easier when the family is in business for quite some time. It is difficult when it enters in business for the first time. Therefore, new venture by a family that is first time entering into the business looks for VC funds rather than public money. SEBI regulations ensure transparency and accountability. Yet it is advisable to invest through mutual funds. This helps to reduce risks through diversified portfolio and secure services of analysts who track company information and analyse family governance almost on a continuous basis.
A enlightening read on the characteristic issues of corporate governance in family-managed corporates.
ReplyDeleteMy thoughts:-
1. The family has the word in important issues, with the independent directors serving little more than rubber-stamps, advisors at the most. While this is an accepted fact, it in itself speaks against the spirit of corporate governance. The de-facto governing family wants to further its interests through the companies it has promoted, but none of these companies has this particular objective documented into its MOA. Any stakeholder in a family-managed corporate should always be conscious of this antithesis and therefore attach a risk premium to the returns she would otherwise expect from such a company.
2. The government has advised PSBs to invoke promoter's personal guarantees in early NPA stage. While this is indeed against the basic principle of limited liability in general, but appears pretty justified in the case of family managed corporates. Aren't rubber-stamp directors also against the basic principle of corporate governance? PSBs, not being small investors, can dictate terms by going against the established tenets of limited liability. Small investors can do nothing of the sort. They should read between the lines from this government advisory and be extra cautious when it comes to their investments in family-managed corporates.
3. Investment decisions of family-managed corporates represent aspirations of the family. This postulate translates only to one thing-Investing in family-managed Indian corporates is a risky affair. This situation is not going to change soon in India. While resignation of independent directors may serve as a warning signal to stakeholders, such a signal may or may not come in all instances of poor corporate governance.
The lesson I learnt is- Be wary of investing in family-managed corporates. They are machines of furthering family aspirations while incurring limited liability. You may well be duped of your trust (and money) in the process. If this refraining act (of being extra cautious about family companies) becomes widespread among investors, it may also act as a deterrent, better than the pronouncements of law, against poor corporate governance in such companies.
It is well established that in family business, corporate governance cannot be de-linked from family governance. A family promotes a company to translate an idea into business in order to create family wealth. When it uses public money, it is expected to adopt the principle of transparency and accountability. If, it adopts those principles, non-controlling shareholders are able to decide to exit the company by selling shares well in time.
ReplyDeleteAn investor should decide investing in a family business by evaluating the family governance. This is easier when the family is in business for quite some time. It is difficult when it enters in business for the first time. Therefore, new venture by a family that is first time entering into the business looks for VC funds rather than public money.
SEBI regulations ensure transparency and accountability. Yet it is advisable to invest through mutual funds. This helps to reduce risks through diversified portfolio and secure services of analysts who track company information and analyse family governance almost on a continuous basis.