Two friends following the theatrics around Byju’s got into an interesting conversation.
Ram: Three directors resigning from the board of Byju’s? Why is that big news? It is the management that runs the company right, not board of directors (BOD)?
Veena: Good point, but it is the BOD that oversees the management. The management is appointed by the BOD. However, the BOD is appointed by the shareholders. So the BOD is trustee of the shareholders, including the minority shareholders.
Ram: Ok, so what does this mean?
Veena: It most probably means the BOD members who resigned are unhappy about the functioning of the company.
Ram: But why resign? Can’t they debate their ideas in the board meeting and address their concerns?
Veena: Ideally, yes, but then where the management/promoter also turns out to be a significant shareholder, they can have outsized clout in influencing the board. Thus those representing other shareholders may not be able to address their concerns, the way they would like to.
Plus, there is also the case that they may know something happening within the company that is yet to come to light. But let me clarify here that, I am not saying that is the case with Byju’s.
Ram: I didn’t understand your second point.
Veena: Didn’t you follow what happened in the case of Satyam Computers?
Ram: No
Veena: Satyam Computers was the fourth largest Indian IT services company in 2008-09, right after TCS, Infosys and Wipro. In December 2008, its shares crashed when the promoters influenced the board to approve a large related party transaction. The transaction involved using large cash reserves of the company to buy promoter-owned realty and infrastructure companies which were top investing themes of the 2003-2007 bull market. Facing investor wrath on the dubious decision of a software company getting into infrastructure, the board, within a few days, revoked the decision.
But strangely, while the shares recovered a bit after the decision was revoked, one by one the directors of the company started resigning, citing personal reasons. The BOD of Satyam included marquee names like Vinod Dham (father of Pentium chip), Krishna Palepu (Harvard Business School professor), Ram Mohan Rao (Dean of ISB). In a matter of days the BOD of Satyam had shrunk from 9 to 5!
Ram: Ok…
Veena: Within a few days of the spate of resignations, the founder, Chairman and CEO of Satyam Computers, Ramalinga Raju, confessed via a letter that the books of accounts of the company were cooked up and that out of ₹5,361 crore of cash/bank balance as stated in books, only around ₹300 crore actually existed!
Ram: Oh my!! So does it mean big director resignations are a cause for concern for investors?
Veena: I would say it’s a case to more deeply analyse what is happening if you are a shareholder in a company where this is happening. May not always be the case that something murky is going on, but you need to check. For example, when the Ambani brothers had a feud in 2004-05, directors with allegiance to one brother resigned from companies managed by the other. So, in that case, it was only a personal decision and did not involve company affairs.