Minority shareholders have to allow firms to work
Given how promoters have tended to over-compensate themselves, and pass resolutions that have been against minority shareholders in the past, it is not surprising that minority shareholders have been given the kind of powers they have in the new Companies Act. And the best example of how this is bringing promoters in line is the way Suzuki has reworked its plan for the Gujarat investment. Even so, last week’s results of a postal ballot at Tata Motors were a surprise. Shareholders of the country’s largest auto player voted against a resolution that sought minimum remuneration for two executive directors, Ravindra Pisharody and Satish Borwankar—for three years—in the event the company posted no profits or inadequate profits. Given the industry is going through a rough patch, the sales of commercial vehicles falling cannot be the management’s fault—Tata Motors’ performance has to be judged vis-à-vis an Ashok Leyland, not a TCS—so it was natural that the Tata Group was trying to keep the top team together, and compensation is an important part of this strategy. The management has a point when it says that shareholders’ views need to be balanced with the need to recruit and retain proven talent. Knowing chairman Cyrus Mistry’s conservative and prudent approach to business, the proposal must have given some thought. Indeed, 70% of the vote favoured the minimum remuneration, marginally short of the 75% threshold needed for the resolution to be passed.
What possibly irked some shareholders was the fact the incentives were included in the remuneration and that there was no cap put on these although the board was to specify the performance criteria. Had the board given some guidance on these parameters and put a limit on them, shareholders might have been convinced to go along with it. Shareholders were also probably unhappy with the company paying what they thought was excess remuneration for 2013-14 and with the resolutions having been defeated, it’s a tricky situation. Again, the board was simply doing what it needed to in terms of ensuring the top team was compensated.
The results of the postal ballot beg the question as to whether minority shareholders are being given too much power given what they know about running companies—the debate over royalty levels, for instance, had to be informed by a view of how the local company would have done in the absence of the technical support from the foreign parent. While there is no doubt that being alert and active helps, institutional shareholders cannot be allowed to interfere in the running of the companies to an extent where it is disruptive. If this is perceived to be happening too often, there is a chance the pendulum will shift the other way, once again leaving minority shareholders in the cold. With great power comes great responsibility.