View: Kissa Kursi Ka, when guard rails don't work

ET Intelligence Group: A court voiding Tesla CEO Elon Musk’s massive compensation of around $56 billion has yet again raised governance concerns around how the top management of a company is in a position of supreme power in the organisation even as the board and shareholders remain tacit approvers.

An organisation structure vests most of the powers in its top management – the CEO, the chairperson of the board (if playing an active role) and their coterie of CXOs. The top management sits on the intersection of being an employee (drawing a salary), a shareholder (in case of a promoter-led company or due to ESOPs) as well as an executive member of the board. This senior leadership essentially flags off all key decisions – including whom to appoint on the board and whom to hire as an employee in the company as well as how to reward itself and the other stakeholders. While the shareholders’ stamp of approval is required, what to seek their approval for still rests in the domain of the top management. That too only large institutional shareholders matter – the small, retail shareholders essentially are ‘floating’ in nature. Though all the key decisions must be presented to the board of directors for its approval, the independence of the board is largely shaped by whom the management chooses to appoint on the board.

If shareholders can be kept happy with dividends and buybacks, then they tend to approve of aspects like excessive CEO compensation, acquisition, shutting down any operations or cutting down on headcount. For instance, Wipro rolled out a buyback in June 2023, and within a year it is firing hundreds of mid-level employees.
And even when shareholders are not happy with the management, they can do little to change the situation as the investors of Byju’s are realising. The beleaguered edtech company’s key shareholders want to oust the founder & CEO Byju Raveendran on back of concerns related to governance and financial mismanagement. But the founder has held that the concerned investors did not have the voting rights to do so. Incidentally, the company’s senior leadership has reportedly rallied behind the CEO even as he is “moving mountains for months” to pay the salaries of the employees.

Take another instance of how the company’s top management has kept the largest shareholder at bay and prevented it from taking control of the company. In Religare Enterprises, the top management led by an executive chairperson and aided by an independent board is deterring the company’s largest shareholder – the Burmans of the Dabur – from assuming control. Both the opposing camps have made allegations and counter-allegations against each other and now it is for the regulators and courts to figure out who can stake control of the company.

Incidentally, booting out of the CEO or top leadership is often the last measure taken by the shareholders – after developments like acquisitions, brand investment, buyback, sale of a non-core asset and downsizing fails to recover the margins and the base business performance. When shareholders are unhappy with their (lack of) rewards, then they take up issues related to misgovernance or non-compliance. For instance, Byju’s investors did not raise a flag publicly when the company signed up Lionel Messi – one of the world’s highest paid footballers – as its global brand ambassador in November 2022 – just days after sacking 2,500 employees.The very strategic Sony-Zee merger deal got scuttled with the shareholders of Zee Enterprises bearing the brunt of the value erosion in the stock market. But Puneet Goenka, the son of the company’s promoter Subhash Chandra, continued to remain as the company’s CEO. The board and shareholders remained the silent spectators – probably wiser from experience. In 2021, institutional investor Invesco had sought the stepping down of three directors from Zee’s board – including the CEO Puneet Goenka. But before Invesco, the largest shareholder in Zee, could legally move on compelling the company to act on its demands, Zee managed to rope in Sony to merge its business with and thus kept Invesco and its shareholder activism at bay.One may argue that a CEO & his team, which has built the company and created shareholder value, should be allowed to decide what’s best for the company. However, as cliched (and filmi) as it may sound – with power comes responsibility. And it is the job of the board and the large shareholders to act as natural guardrails to rein in any abuse of the power or dereliction of duty by the senior leadership. The problems start simmering when the guard rails don’t work.


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