No place on board for small investor

D. Sampathkumar

IT IS not often that chambers of commerce and industry associations have identical views on a subject. The most celebrated example in recent times has been the divergence of opinion on the role of foreign capital in Indian industry. The spokesperson of one association described them as `corporate cowboys'.

If cowboys have a tendency to pull the trigger at the slightest excuse, the overseas joint venture partners (according to this view) would tend to pull the rug from under the Indian promoters' feet even before the ink had dried on the joint venture agreement. But, of course, that was not the perception of another industry association, which found nothing wrong with the way foreign enterprises conducted themselves in joint operations with Indian promoters.

No such dichotomy exists in the matter of representation for minority shareholders on a company's board. All of them had represented to the Government that the proposal to have a director elected from among the small shareholders in a company, is retrograde and should be dropped.

Sure enough, when the Companies (Second Amendment) Bill was passed recently, the proposal for minority shareholder representation was dropped. Whether it was a case of the Government seeing merit in the objection or just another manifestation of the strong industry-politician link, in the manner of an alliance between the military and the industry that exists in the US, one can only speculate.

But the point is that none of the arguments against a seat on the board for a representative of small shareholders appear valid. Let us take the first one. The appointment is supposed to lead to a leakage of confidential business information. There is only one thing wrong with this argument. This presumes that integrity resides only in those chosen by the management and put up to the shareholders for approval.

To brand every prospective representative of minority shareholders as somebody out to profit from the vantage position of a seat on the Board is too fatuous to deserve comment. Come to think of it, those nominated to the Board on behalf of the promoter group could be potentially as guilty of private profit-making as those representing small shareholders. The issue here is not really about the questionable behaviour of minority shareholder representatives. In a sense, it is about directors per se.

How does a company ensure that a person is elected to the board truly acts in the interests of the body of shareholders, and not his own or that of a small coterie? The entire `agency theory' _ that of directors pursuing their personal agenda, ignoring the interests of the shareholders rests on that assumption. It is a problem not just of minority shareholder representatives but of the community of directors, as a whole. The chambers of commerce have to come up with a better argument than the risk of leakage of confidential business information.

There are other objections as well. The industry fears that such directors could be needlessly obstructive of the proceedings of the board. Of course, dissent is bound to slow things in the decision-making process. Ideally, they would be looking for a bunch of `yes-men' who could run ventriloquist dummies close in a contest. But then they are not going to be given that freedom. As to the charge that they might obstruct proceedings out of a spirit of cussedness, it does not deserve a response at all.

The vehement opposition to the move is hardly surprising. The reservation of office for any class of members in a society, has always been a subject of some controversy. We have seen how passions have been ignited with regard to reservation of positions in Government for scheduled-caste and backward-class citizens. More recently, the reservation of seats for women in legislature, too, has attracted not a little controversy.

This is because the arguments for and against reservations in any situation, are equally strong. Whether merit should take a back-seat against affirmative action of some kind is a debate that does not lend itself to an easy resolution. But that has not deterred the society to opt for reservation as an instrument of social engineering. Wherever reservation has been granted, the key criterion has been a phenomenon of social exclusion. `Reservation' was thought of as a remedy against past and continuing ills.

Much the same is true of the interests of minority shareholders. They are always `the last to know'. Strategic decisions are taken on behalf of the company on the ground that it is `synergistic'. Yet, the exact opposite decision too is justified on the ground that it is in line with the core competency of the organisation. In the process, considerable amount of shareholder wealth is destroyed. An analysis of trends in corporate governance has shown that minority shareholders have been excluded from positions of power in corporate administration. Viewed from this perspective, a strong case exists for incorporation of a clause on the lines originally contemplated.

There could be operational problems, but these are not insurmountable. In fact, similar arguments were advanced against the election of employee nominees on the boards of companies. But today, employee directors are a standard feature in some countries, notably Germany. Ultimately, such experiments are a mixed bag, combining both pluses and minuses.

In a sense, it is a bit like the institutions of marriage or democracy. They are not perhaps the most perfect instruments for whatever purpose they were meant, in the first place. But the alternatives seem far worse. Much the same can be said of the concept of representatives of small shareholders as a device to promote their interests. A seat on a board may not be the perfect instrument. But history has shown the that the alternatives tried out so far have been much worse.