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Narayana Murthy on respect and governance

February 27, 2009

You mentioned rules. We have lots of rules but there are loopholes.

I would, as an independent director, be wary of promoters of a listed company who have interest in subsidiaries which are not owned 100 per cent by the listed corporation.

There is always a temptation to transfer resources from the listed company to the unlisted subsidiaries where the promoters have interests. This is, in fact, the most popular way of creating asymmetry of benefits between promoters and shareholders.

This is one of the important reasons of violation of corporate governance.

Second is, creating asymmetry of benefits for owner-managers. That is, you get yourself a lot of options and then you know the company is not doing well, but you go and sell your shares. There are two ways of creating asymmetry of benefits in favour of owner-managers. One is by the owner-managers accruing to themselves disproportionate benefits from the corporation directly. Second is, owner-managers using related-party transactions to accrue unjustifiable benefits to themselves.

Any related-party transaction which is material will have to be approved by the shareholders because there are minority shareholders and if a promoter, who is a minority shareholder, wants to create a transaction that will benefit him, then it has to be looked at by all shareholders.

Image: An investor monitors the stock market index on his broker’s computer terminal at a brokerage firm in Mumbai. | Photograph: Punit Paranjpe/Reuters

Also read: Indian billionaires: Biggest losers & gainers

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