Value creation and disclosure practices

There is a significant difference in the big stock rally, which was kicked off by Yashwant Sinha's February budget and is led by foreign ...

There is a significant difference in the big stock rally, which was kicked off by Yashwant Sinha8217;s February budget and is led by foreign financial institutions and newly rich mutual funds. For the first time in India, there is a clear distinction between companies that have created value for investors and those that have, over the year, systematically destroyed value. Not only is the stock valuation different, but the significant difference is that, this time, by and large, even speculators and punters are unable to rig up shady scrips within an industry category which has sought after companies.

The message from the market is unambiguous. Either a company is creating value for shareholders and doing it transparently, or it is out in the cold. Investor disinterest in value destroyers is so dramatic, that even punters and speculators have limited interest in making a quick buck by short selling decaying companies which continue to siphon off assets. Naturally, blue chip companies are out to underline thedistinction through the disclosure in their annual reports. But, corporate compensation practices continue to confound and remain a dead give away. Most companies continue to be coy about disclosing the remuneration of top managers. Even top managers have dropped the disclosures required under Sec. 217 2A on the pretext that shareholders who ask for the information will be supplied the information.

Clearly increasing remuneration, which is totally delinked from performance will only lead to disenchantment among investors. Let8217;s look at a few examples. Among the best compensation disclosures are those by Nicholas Piramal India Ltd., but are restricted to the board of directors. The company has listed members of the board, its relationship with other directors, their business relationship with the company, if any, and the sum total of their income from the company. This includes sitting fees, salary and perks and commission. For instance, how many investors would know that Swati Piramal as director andchief scientific officer of the company is also entitled to a commission of Rs nine lakhs from the company.

Infosys Technologies , the darling of the stock markets is, of course, leagues ahead in terms of transparency and disclosure. Its disclosures also enable interesting comparisons. For instance, take a look at what the millionaires in the company earn as salary. Chairman, N.R.Narayan Murthy, is paid Rs 13,12,601 per annum and Nandan Nilekani, the Chief Executive Officer to whom he relinquished charge earns a little over Rs 12 lakhs. This is less than a quarter of the pay packets earned by all the other blue chips in the corporate sector. Interestingly, Narayan Murthy8217;s view on compensation is obviously dramatically different when it comes to companies on which he is a director. We understand that Naraynmurthy headed the compensation committee of ICICI which cleared a remuneration package of a hefty Rs one crore to CEO K.V. Kamath and Rs 72 lakhs each for Joint MD Lalita Gupte and deputy MD S.H.Bhojani. The compensation packages of the ICICI top brass had to be cleared by a vote, since several shareholders objected, but their numbers were not large enough to block the move. The ICICI share, which has been on a long continuous decline except for the perplexing spurt after announcement that it plans to issue GDRs.

On the other hand, Narayan Murthy and his colleague Nandan Nilekani, have not only become millionaires because of the tremendous performance of their share price, but have also donated a hefty Rs five crores and six crores respectively to their alma maters. While Infosys had made millionaires not only of its employees but also a vast body of its investors, the ICICI pay hike has led to enormous disparities in salaries with other financial institutions, where the government had refused to divest its holding and give them the freedom to fix their own salaries.

There is another aspect to the compensation business, which needs scrutiny. This is the increasing trend of top managementusually to directors from the promoter family paying itself huge compensations, which are totally out of proportion with that paid out others in the management cadre. The market is rarely fooled by management tricks it only fools government babus or lending banks and institutions. But it would go a long way towards improving corporate disclosures, if all companies were forced to follow the Piramal system of disclosure of directors remuneration, and if Section 217 2A was modified to provide the salaries of the top 50 employees. The latter would provide a basis of comparison and expose managements where the salaries of the top five to 10 persons, are disproportionately higher than the wage structure of the company.

Finally, if companies are truly serious about value creation, the one way of impressing the market is to opt for the Infosys route of linking their own wealth to the market value of their shares. Nobody is saying that all managing directors should be paid as little as Narayan Murthy is paid,but surely there is a case for compensation beyond a point being linked to stock performance and profits.