Shareholder value as altruism

"Shareholder value" has become a catch-all term that corporations use to explain a whole gamut of decisions -- from cutting the size of their workforces to hiring CEOs at exorbitant salaries.

With the AGM "season" nearing, a random speed-read through any of the CEO speeches that crowd the newspapers and magazines will reveal the term liberally peppering carefully banal explanations of key management decisions to shareholders.

The speeches suggest that senior corporate managements are resolutely striving hard to "leverage" shareholder value, "enhance" it, "maximise" it, in some cases even "optimise" it, and so on.

Doing all of these things to shareholder value is somehow perceived as a virtuous, almost noble act on the part of corporations -- the equivalent of helping the common man.

Is it really? In the Indian context at least, the reason for the doubt is two-fold. One, the bulk of corporate holdings in Indian companies still lie overwhelmingly with the promoters.

As Jayant M Thakur pointed out in an excellent article, albeit in another context, unlike in the West, where promoter holdings rarely exceed 8 per cent, the holding of Indian promoters "is in the range of 35 to 50 per cent or more".

Often, this percentage goes up to 70 to 80 per cent.

Second, should shareholders be regarded in quite so sacrosanct a manner? Leave aside the promoters, few general shareholders stick with a company for years, indeed shares change hands several times over in the lifetime of a company.

Like anywhere in the world, retail shareholder commitment is, by the very nature of the stock market, speculative, lasting only as long as the value of the investments rise, and their buy and sell decisions are based on how much money they can earn.

And this applies as much to the Infosyses and Wipros as to the Reliances and ONGCs. Shareholder value, in most cases, rarely exceeds the value of the daily stock quote, and the most managements can contribute here is through their public statements and quarterly results.

This is particularly the case in India, where direct retail investment in the markets is less than 2 per cent of overall turnover.

Most retail investment is routed through mutual funds and fund managers tend to focus on short-term capital gains as much as any investor.

All of this suggests that this overtly stated commitment to "shareholder value" is more than a little phony, a way of paying lip service to a concept that focuses on promoter enrichment with one eye on the regulatory authorities.

To be fair, this can hardly be considered a fault. Promoters should want to enhance the value of investments, since that is the basic raison d'etre of business.

The fault perhaps lies in the flawed notion of shareholder altruism that corporate managements seek to project.

The reason the spurious implication of this term irks is that it is often used as a proxy for transgressions that impact other stakeholders -- employees, vendors, creditors, small-time fixed deposit holders, and so on.

As the dot-com boom demonstrated and the erupting corporate scandals in Enron, Tyco and scores of others proved, aligning shareholder interest and corporate interest can sometimes be divergent.

Nowhere is this more strongly demonstrated than in the trend, which gathered pace in the late nineties in India, towards making stock options a substantial part of executive remuneration.

By doing so, it is thought that shareholder value was being synchronised with management interest. But this is sometimes a misleading notion, not least because it encourages decisions focusing on short-term capital gains rather than long-term value.

Yet, this is precisely a key tenet that pervades not just management but has been the cornerstone of B-school teaching for years.

In an article published posthumously in the Journal of the Academy of Management Learning and Education, Sumantra Ghoshal argued that it is precisely such ideas that have contributed to the decline of ethical standards in corporate governance ("Bad Management Theories are Destroying Good Management Practices").

He wrote: "By propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility."

He was writing in the specific context of B-school curricula, but the comment could just as well apply to practising managers and executives.

Indeed, it is difficult to see how this new-found commitment to shareholder value has changed things substantially for shareholders from the amoral, swashbuckling roguery of the pre-Sebi days under the open-outcry system, which had a peculiar transparency all its own.

In those days, when volumes were far smaller and the exchanges resembled a cozy club of vested interests, the appearance of this Big Bull or that Big Bear signalled that a specific company management was playing the market.

A few hand signals on the trading floor and "shareholder value" was enhanced, leveraged, optimised, maximised (and occasionally destroyed) in a matter of minutes.

Today, regulations and technology have truly transformed the way in which transactions are conducted but corporate holding structures have not changed so drastically as to make a material difference to the common man.

Talking about shareholder value in altruistic terms, therefore, makes a mockery of the term.