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Feature / Columns                                                                                     MAGAZINE | JUL 09, 2...
theory but needs to be made effective in practice.Don’t ignore dividends: Investors expect dividends. And when companies p...
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Business.Outlookindia Mr Shah


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Business.Outlookindia Mr Shah

  1. 1. Feature / Columns MAGAZINE | JUL 09, 2011Pradip Shah, Founder, Indasia AdvisorsCOLUMN“Get Your Strategy Right”PRADIP SHAHK eep the investor profile in mind: The first challenge in managing investor expectations is that the investor base ofyoung and fast-growing companies is quite different from that of a mature business with steady cash flows and a slowergrowth rate. Often acquisitions and divestments lead to an imbalance in investor expectations and the company’s ownambitions.As a member of the board, if a company is pursuing a move that leads to a change in its profile—cash flow movement,dividend profile, risk profile—you should be worried. That is not to say that you should ignore business opportunities.Given the requirements of a fast changing world, inorganic growth and even diversification into new business lines maybe inevitable. But the management has to articulate its strategy at its AGMs and in the annual reports rather than wait forits actions to take investors by surprise.Fairness to minority shareholders: There is one aspect of fairness that is vital but often ignored. In India, in particular,where you get 8-9% growth, you are bound to see capital raising going on continuously in fast-growing large companies.But companies often do not raise cash from existing shareholders; they go outside, which means dilution for existingshareholders.Companies should give the first chance to existing shareholders and offer shares to outsiders only if there is still ashortage of funds. Usually, the logic that a board of directors will give is that existing shareholders can go and buy in theopen market. That is fine, but a win-win will be to minimise the dilution yet increase growth for the company. Worse thanthe follow-on public offer is preferential allotment to promoters, which again ends up diluting the stake of publicshareholders. It may be legally permitted, but is it fair to minority shareholders? Managing minority rights is key, whetherit is equity rights or non-entity dilution or rights to pre-emption. For that, we need corporate democracy, which exists in
  2. 2. theory but needs to be made effective in practice.Don’t ignore dividends: Investors expect dividends. And when companies pay dividends, they send the vital messagethat the company is in good health, quite apart from the cash-flow value to those dividends. But in a high-growtheconomy, when companies are expanding furiously, cash-flow requirements and so on may constrain the managementfrom declaring dividends. The board has to take a pragmatic view keeping in view the larger interest of shareholders.Don’t pay attention to analysts: In a high-growth economy, where you are making investments, you may not be able tomatch upto the expectations of investors on a quarterly basis. Unfortunately, managerial behaviour is affected by thisquarterly reporting requirement. And there is inordinate attention given by the CEOs—not necessarily by the board—towhat analysts say. Analysts are number driven. They are not business driven. And yet, CEOs are driven by them. Theundue power of analysts over CEOs, the undue power of a corporate reporting deadline over CEOs and the continuingchallenge of managing minority shareholders are all heightened imperatives today.Keep a tab on managerial remuneration: India has some astronomical salaries and commissions—even by worldstandards. In a country where 410 million people are below the poverty line, can this be justified? Remunerationcommittees would say pay is by performance. But if that is the case, how do you justify paying a higher amount to theexecutive director from the promoter family than to a professional holding the same position in the company? There areseveral such instances. The question boards must ask is, how much would this director get if he were to look foremployment outside this company—that is his true worth.Click here to see the article in its standard web format