Archaic rule

The Confederation of Indian Industry wants an amendment of the Companies Act to do away with the requirement for companies to name all employees who make more than Rs 6 lakh a year or over Rs 50,000 a month in case they worked for only part of the year in their annual report. It argues that this makes companies vulnerable to poaching by competitors. Now transparency is the buzzword in business these days, and a good thing it is too. But the CII is right in this instance, a retrograde argument though this may seem to doubting Thomases. It is true that shareholders have a right to know what their managers are being paid. For one, it helps them assess whether they are getting their money’s worth from them. But it has to be recognised at the same time that shareholder control does not mean that the management has to reveal all the details of the daily conduct of business to them for this reason. Doing so can even hurt their interests by making public information that it may be crucial to a business’s interests tokeep confidential.

Performance is what should and does concern shareholders. If the management is unable to deliver profits to them, their wrath will be upon the company’s highest executives regardless of whether or not they are made aware of the salaries paid to these people. Indeed it should be. And it goes without saying that the top executives will be well paid people without the company having to disclose exactly how much. Does it really matter whether this is a sum above Rs 6 lakh or more? Where exactly does the rationale lie for demanding such disclosure? This is where the CII’s argument comes in. Publishing the highest salaries in a company in an annual report is like holding a news conference for rivals to tell them who a company’s most valued employees are, and what might be a good strategy to lure them away. It is an open invitation for them to make a beeline for these people. No business in its right mind can want to do that and, what is more, if shareholders know what is good for them, they don’t want the best andthe brightest in their company to be charmed by poachers either.

If that is not reason enough to do away with this well-meaning but misguided rule, perhaps a more convincing argument is that it does not succeed in enforcing the desired transparency in any case. Companies will find a way of getting around so cumbersome a rule, and they do. If there was really a way of making sure that companies tell the truth in this matter, the argument might be different. But it is hardly worth bothering to ask how many companies really come clean about their highest salaries. What such a rule does in effect is to force firms to perpetuate lies that they might not otherwise want to tell. Like all cliches there is some truth in the one about the road to hell being paved with good intentions. Another of these is the clause that requires small investors to be on company boards. As much as it is prompted by the desire to safeguard these investors, what it ends up doing is impeding the smooth functioning of a company, causing avoidable conflict and imparting more nuisance value than real powerto the small investor. Both companies and their shareholders would be better off without such constrictions being imposed on them.