India: Calling The Shots: Promoters Vs Managers–Getting The Right Mix

Last Updated: 24 August 2017
Article by Corp Comm Legal

So, there is a final outcome of the promoters vs professional manager saga in Infosys. The promoter has been able to demoralise the CEO enough to call it quits.

Few months back, it was Tatas vs Mistry – the saga is still being played in NCLT and business deals with Tata group issuing a diktat to all group companies to sever all ties with Shapoorji Pallonji group, breaking away from a century old association.

The debate over the management powers with promoters vs those with the professionals (outsiders, as they are fondly called by the promoters, as if inferior to those with the money pots to initiate or run a business) may be as old as corporate entities came into being.

While it may be a worldwide phenomenon, it is much bigger an issue in India.

The Sethji or Lalaji (the sobriquets may not be as prevalent today as were there till a couple of decades back) would never let the manager exercise an iota of control. This applies across the board, be it a small shop, a professional firm (CAs, lawyers) and biggest of corporates.

The Lalaji would expect the employees to keep working loyally for ages, he would keep the tijori (safe vault containing all the money, often ill-gotten) keys himself and kick out the employees at his whims and fancies.

The Indian promoter mindset has never developed to co-opt professional managers as one of their own. The promoters only take professional managers as employees, or rather servant, if I may use the term, howsoever low it sounds. This comes from my experience of a quarter century, mind it. We have seen the best of professional managers belittled, humiliated and eased out in most unprofessional manners in Indian corporates.

Promoters also tend to have a big say in making all the critical calls for the company, while professionals are there to be blamed for everything that goes wrong. It may be a professional's mandate to turn around a dud project or infuse energy in a dead atmosphere, if he succeeds, the credit goes to the visionary promoter. A professional is as good as his last assignment and as long as he can manage to be in good books of the promoter. We have seen so many compliant professionals facing the music vis a vis the regulatory authorities for all wrongdoings of the company, whereas it is actually the promoters who mostly force the management to do such things. Not many promoters are actually taken to task for their misdeeds and professionals are easy and gullible scapegoats.

This issue keeps getting in limelight frequently in the Indian corporate sector.

Despite the promoters controlling not more than 15-20% stake in listed companies, they continue to call the shots even if they are proven to be inefficient, selfish, unscrupulous, cheats and frauds. Investors (also called outsiders, as in the case of professional management, in promoters' words) who invest with an astronomical premium and have much bigger financial stakes in the company are left high and dry. Today, the quality of management and key management persons ('KMPs") at the helm are among the investment criteria for serious investors. The name of promoters is not enough any more to drive valuations and investments. We already see so many promoters (particularly real estate development sector) queueing up before courts.

The investors, in many cases, are fed up with the promoters or founders tantrums and unprofessional ways and want the company to run in clean, open, transparent, professional ways. However, their pleas fall on deaf ears and the promoters, hand in gloves with banks or financial institutions, carry on undeterred. We have seen investors being used, misused, abused, called names, denied entry to the companies by many Indian promoters quite unashamedly.

While the role of promoters or founders cannot be undermined in a corporate entity, the professional managers have an equal or a bigger stake in the operations. They are professionally qualified and trained to run and turn around business, which acumen and knowledge the promoters may be lacking. The promotes may have many business lines (babies, as they insist every project is to them) but the professionals have a limited domain of operation and they want their company to be at the top. They do not have many babies to call their own, nor can balance failure of some babies to be compensated by other successful, paying babies.

Unless given a free hand, a professional cannot optimise the resources made available by the promoters. If there is insecurity, distrust, one-upmanship playing in the minds of the promoters, it does not translate into a conducive atmosphere for the management team.

Promoters and managers have to be in sync for any institution or corporate to succeed. Beyond a level, the promoters' engagement should be limited and the management should be best left to professional managers. It is beneficial for all stakeholders.

Yes, power corrupts and absolute power corrupts absolutely. With delegation of powers, there should be equivalent amount of accountability. Reasonable checks and balances on management powers and genuine questioning of decisions must be incorporated. However, a fine balance between powers and accountability is a must.

While there may not be an optimal or perfect solution, at least an effort should be there to work in an amicable way to ensure good returns for the promoters, investors, society, government while complying with decent corporate governance norms. Each stakeholder should adhere to certain boundaries.

Else, the saying goes – Don't fall in love with your job, you are there till you are needed. Too much interference by promoters will deter passionate professionals from the job!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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