Business failure is normal and natural. It is part of ‘creative destruction’ in an economy where entrepreneurs play the crucial role, as Joseph Schumpeter elucidated in his classic works. Part of such failure is genuine failure of promoters; failure to get additional finances, to get the right talent to run complex tasks, to foresee/implement technological changes, etc. Still, there are legions of promoters who ensure/d that their legal children succeed, flourish and become great institutions. Examples are of such institutions are aplenty.
However, some promoters ‘fail’ some of their business, even successful ones, at times. While some of them thereafter quit, others still cling onto their roles, assuming a TINA situation. It defies logic. Why do such promoters kill the goose that lays the golden egg?
It is happening with both unlisted and listed public companies; the latter, despite ever-tightening regulatory dictates on disclosures and governance. In many cases, promoters in-charge have siphoned off funds from the company. Sometimes, it can be personal image issues impacting the business. Satyam, the first major episode, is not an exception of promoter-director malfeasance, as hoped by many. It keeps happening, creating major headlines and headaches for the investors and market.
Ranbaxy, Bhushan Steel, Kingfisher Airlines, USL, Gitanjali Gems, Jet Airways, Videocon, CG Power, Dewan Housing Finance Corporation, IL&FS, YES Bank, Zee Entertainment Enterprises Ltd, Brightcom are reportedly some of the companies who got into such promoter trappings. There are also examples of personal matters affecting the businesses such promoter-directors manage.
It is not that all these cases have reached conclusions. Some of them are still sub judice, at different levels of the judiciary. Therefore, conclusions on the allegations/charges of wrongdoings/violations in those matters is neither possible nor desirable. It is not even relevant to the issue of this commentary. It is about the impact of public perception on those companies. A perception of hitherto successful companies being crash-landed by some of the promoter-managers, through adventurism (business or personal) or malfeasance or both, based on regulatory orders and media reports, need to be addressed to save those enterprises.
A company or similar juristic person is the outcome of substantive planning and hard work of one or a few natural persons. Just like a human baby, a juristic child also needs nurturing and care for long years before it is ready to stand on its feet. Bringing up a company is a delicate and a dedicated task that its ‘parents’ (promoters/founders) do with great care. As such it is no less than a natural baby to them, with even emotional attachment. No wonder entrepreneurs are considered central to the development, progress and sustainability of the economy.
Ayn Rand in her Atlas Shrugged goes a step further and claims that entrepreneurs carry the weight of the earth on their shoulders like the Greek demi-god Atlas, shouldering the weight of the Heavens.
If this is the spirit behind creation of such legal entities, fortified over centuries with several statutes (legislation relating to companies, their regulation, accounting standards, etc) to safeguard their legal rights and duties, why do some promoters/promoter- directors preside over the fall of those very companies?
Personal malfeasance
Some of the orders of the regulators, particularly market regulator SEBI, have clearly brought out personal malfeasance while imposing penalties or other actions against promoter-directors. In such cases, to rescue the legal entities from the wrongdoing of its managers, SEBI also restrained such people from holding on to their positions. However, some of them continue to remain in position using the shelter of law. Though their right to take legal recourse is inalienable, an ethical question, propriety, has to be factored in. In the case of a reasonably ongoing business concern, its image gets affected if people with dented (rightly or wrongly) image continue to manage them even though those business entities have done nothing illegal. Because all actions of the legal entity are taken by the people who run them and if the people who run are of doubtful integrity or found to be defrauding the company, the investors in those companies would lose faith. Therefore, the best course of interim action available to such accused promoter- directors is to step aside from management while they continue to try getting their name cleared using their legal rights.
Stepping temporarily aside may not even mean losing control. If cleared of the allegations, they could come back. However, most of them remain steadfastly in their position, while stepping aside temporarily would have saved their child/children from the ‘dishonour’ the promoters are accused of. To put it otherwise, such promoter-directors, in order to continue to control their companies, may be actually presiding over the decline of their juristic children, who had been brought up by them with much dedication.
The writers are Director and Professor, respectively, National Institute of Securities Markets. Views are personal