10 Commandments for promoters of Listed Companies

If You are a promoter of a listed company and your basic idea is to loot the gullible public by privatising profits and socialising losses as recently done by Uber and tried hard by we-work this piece is a waste of time for you. If not read on…..

Google.v top wealth destroyers in last 2 years and You will deduce that the behavioral pattern of all companies and their promoters is shockingly congruent. Malafide intent of promoters has resulted in almost entire market capitalization being eroded away and gullible minority shareholders left holding just an entry in their demat statement.

At least 1-2 friends/acquaintances send me their portfolios each day for a review and the list of defunct companies in those, is shockingly long. Thousands of companies have just vanished since early 90’s and the erstwhile promoters must all be sipping mojitos in some Caribbean country such as Antigua. A sampler of these is pasted here for nostalgia. Some names were the darling of markets - Pentamedia graphics, Aftek Infosys, Crest communication.........

In a short life where the vicissitudes of health, fate or accident could just kill you instantly doing a Houdini on your minority shareholders, wont take You anywhere. But philosophy of life later or in some other piece.

This is not Your Pop’s company

Even if you own more than 50% of the company you are responsible for and towards the minority shareholder who has no access to your operations, books, has no say in management decisions and sometimes millions of shareholders end up trusting their hard earned money by investing in your company in the belief that You would do justice to the job that you are supposed to do. You are a representative of the smallest shareholder who doesn’t have a voice.

Don’t overdraw Your salary and misuse Your perks

It was shocking to hear way back in Sep 18 that the promoters of Apollo Tyres were drawing close to 12 million dollars in salary + perks (upto 300% of the salary) . Obviously minority shareholders revolted and the stock price tumbled and never ever recovered from there. More erosion happened in the market capitalization of Apollo Tyres when investors realized that the promoters were running a public company like their piggy bank rather than by the loss through their skyhigh salary, despite the muted cyclical performance QoQ.

Are You kidding me - Its appalling, when as a minority shareholder I learn that the manager of my company (call him promoter for the purpose of respect) is drawing more salary than the base salary of CEO of Google , Apple and Microsoft.

The company is struggling for growth, costs are increasing and the father son duo are breaking all records while owning only 41% of the company. Nothing gives them the right to short change the rest of the 60% shareholders – just because they don’t have a voice. Obviously the company’s EPS is falling with religious regularity over the last few years.

I know of a popular Entrepreneur in India who claims that he hasn't taken a salary hike in 10 years and only  draws some 2 Mil USD per annum. Its public knowledge that his electricity bill is 1.3 Mil USD. Isnt it obvious that minority shareholders are unknowingly paying for all his lifestyle and his expenses? 

Lesson – No one ever gets a second chance in life and in corporate world unless you are making a movie – life isn’t a film shoot where you can keep taking a retake unless you achieve a perfect shot. You f%$# up once you will never be pardoned.

Never take personal holidays in the garb of an official trip

I know a lot many promoters who travel along with families on company expense. And mostly in the garb of an official trip. Imagine giving a pro-rata travel subsidy to all shareholders. You can get away with all this for a while, but one day it will catch up with you because its just not right. And You and Your share price will be punished.

Don’t load the company with expenses of personal staff

Your being at the helm doesn’t give you a right to seek subsidy for your personal staff expenses from the minority shareholders. Lead a lifestyle that’s afforded by Your salary that’s approved by the board and is in public domain. There is a verified story that our Ex Prime Minister Sh. L B Shastri ji personally paid when family used the official car in sharp contrast to today's national political leaders and CEO s and promoters of listed companies who use the nation and their corporate authority as their personal piggy bank – and that too shamelessly.

Watch Your words in Public Domain

You Gentlemen are the custodians of the company’s public image and reputation. Your public conduct and character and any tongue malfunction can have ramifications that are sometimes hard to fathom. If Paytm was a listed company I would have been very very wary of buying its common stock and if bought – holding the same after the stellar performance of its founder Vijay Sharma.

Demonstrate benevolence and humility

What goes around, comes around is well known to everyone. But very few can fathom the intensity and quickness of ‘coming around’. If You are riding a crest of success, you will most certainly see a trough and a tempest sometime later in Your journey as a promoter. Build reputation and relationships through benevolence and humility so that the world conspires to give you support when required. Lehman Brothers was the big daddy when it opposed the bailout of Bear Sterns in March 2008 when BSC was going down and while there is very little evidence or data, the rumor has it that Lehman was left alone when it needed the support a few months later and while Lehman’s assets and liabilities matched to a great extent, the powers that be – allowed Lehman to sink while teaching them a lesson.

The lifestyle of Dick Fuld would have put God to shame and when his company was in trouble this CEO who was like a tiger riding a tiger just couldn’t get off – and neither was he allowed to – by his alleged friends.

Don’t flash your expensive toys and lifestyle

In an ideal world the promoter is really the Chief Servant of the minority shareholders and in good times the media christens You as the Branson of Your respective country ala Mr. Vijay Mallaya but don’t sympathise with You when You ever land on thin ice. On the contrary media pulls the carpet under  your feet when you would least expect it. If Mr. Mallaya had kept a low profile during his tough times, he would have easily come out of his troubles and could have still been enjoying his envious Villa in tropical Candolim rather than weathering the biting cold of the Hertfordshire. Does anyone know that Mallaya’s 1 Billion USD in debt is a fraction of the top defaulting companies in India. If only he had postponed Eminems trip for his 60^th he could have gained some sympathy and some reprieve.

The system and the regulator comes after You even more harshly when they see a diluted intent. Naresh Goyal of Jet smartly offloaded his headache to the Govt and the Banks (SBI) and maintained a low decibel lifestyle and almost took that proverbial Houdini flight recently while on the other hand the regulators are still counting cars and houses of the Wadhawan clan ( HDIL and DHFL ). One hell of a capacity - this Wadhawan family has to create a systemic faultline.

Lead a frugal meaningful life

Inspite of being billionaires, all the founders of Infosys lead a simple inspiring life. Help the society thru genuine foundations and philanthropy. They talk of values more than the wealth they have created, they talk of their social responsibility and they don’t hesitate to call a spade a spade (even at the cost of wealth erosion in stock price) when they see anything wrong. The analysts have written off Infosys many times but I have always tanked up on the share when its going thru the seemingly ‘baddest’ time - to my financial advantage.

The culture and character of organisations that is usually set and left to flourish by the promoters is often unshakable and its like the stuxnet virus that keeps flowing in the proverbial veins and arteries of the organisations for infinite periods of time to achieve the end objective and common compelling goals of the organisations. And that’s why Infy always emerges stronger from every momentary crisis thereby creating swathes of loyal shareholders who don’t ditch its stock or the ‘proud part ownership’.

Don’t borrow based on excel sheets and best case scenario

I have professed before (in a lighter vain) that the biggest disservice to the corporate world has been done by Bill Gates for making Excel program that allows the new age CFO s and analysts to make specious assumptions of growth and plot it for tens and tens of years by just dragging the formula across infinitely convenient columns and make anything look rosy.

The gullible promoters fall for the elusive growth trap and start expanding to achieve what?? More promoters fail because of leverage than the ones who are able to manage leverage to their advantage.

I knew of a CFO at close quarters who would tell his battery of analysts to just make up the numbers to borrow from financial institutions thereby putting both the promoter and the business in harms way. The CFO moved on to meet his eventual fate of karma etc but the promoter was left holding a cluster of hot potatoes and an unmanageable debt portfolio.

In this VUCA world and environment – even if someone is God s gift to mankind, an unknown variable or an unknown disruption will take the wind out of Your sail and at that time margin of safety is what would hold You in good stead rather than being hit by the train – head-on from which the recovery is impossible. Simply follow what Buffet says “find a reason not to invest and then find a compelling investment” rather than the other way round.

Don’t frivolously announce buybacks to hide Your mess

We have seen in Indian markets that the moment a promoter is caught with his pants down they announce a buy back as a distraction and diversion (D&D) tactic. Markets are intelligent and now the investors even more. And D&D will oft be punished brutally and sometimes it becomes terribly difficult to emerge victorious from that. PC Jewellers announced a buyback to skittle away attention from its abysmal corp governance when it was caught.

Of course it was D&D and the stock that was the darling of the analysts and traded at some Rs 600 is now trading at Rs 20, a 96% wealth erosion…..

Declare dividends as evidence of performance and real cash

Only hard cash in the hands of minority shareholders is an evidence of your performance and intent. The translation of EBIDTA to PAT is the only real evidence of performance. Don’t hide your mess in the below the EBIDTA line items. Investors are wise and investors are unforgiving. Share the company profits with shareholders. Declare dividends to allow cash to flow to the mute believers in your performance. Cash is tangible and its rewarded. Promise of just the elusive capital appreciation doesn’t hold water with today’s well informed investor.

Above all – Don’t ever lie

When in doubt – Disclose, has been Mr. Narayan Murthy’s dharma for the longest period of time and is gospel truth for corporate conduct. No matter how bad the news is – Disclosure will always hold You and Your company in good light

As we see hundreds of companies that are trading at abysmally low valuations struggle to emerge from even the realms of nothingness, some of the top companies where the quality of promoter and management team is impeccable, continue to outperform the indices and are rewarded through very rich valuations.

And Lastly

Watch the movie – Snowden / Enemy of the State

Rules are tightening and technology is so advanced that most of us cannot fathom. Surveillance agencies can listen to every conversation, track every movement, map all spending patterns to draw conclusions. Basically hiding and doing a Houdini on the Bankers and Shareholders will become more and more difficult. What the MD of Bhushan Steel recently did like many of his brethren in the past will become almost impossible as new Govt policies come into effect and whats the point in hiding in a remote island / country , away from the family, not able to return with a solace that You have billions stashed somewhere.

A noble life full of respect and love from the people around You, cannot be founded on the bedrock of fraud and diluted intent. When we die ( which we most certainly will – sooner than we think ) we become a body in a second from Mr. So and So. Remember this and life will be just fine and world will become a better place.

Manu also writes for the Huffington Post