Three golden jubilees

Three well-known institutions, IIMA, IIMC and The Economic Times are currently celebrating their golden jubilees. I happen to have been a bit player in all three. I record my impressions of these institutions in my ET column, A tale of three jubilees.

Great Lakes stake sale

Bala Balachandran, founder of Great Lakes School of Management, is in talks to sell 51% of his stake to Tata Foundation and Pirosha Godrej Foundation, BS reports.

“I have 90 per cent stake in my institute. I have decided to give the ownership to somebody who can give me some money to expand. I may offload as much as 51 per cent. The valuation of the institute would be around Rs 220 crore,” Balachandran told Business Standard on the sidelines of an event in Mumbai.

Balachandran would make a cool over Rs 110 crore on his stake sale. Not bad for an investor in a school that has been around for less than 10 years. What was his original investment, I wonder. The money that Balachandran makes would go into his pocket because it arises from sale of his equity, not through additional issue of equity. Presumably, for the expansion, the new investors will provide the additional funding.

Is the original promoter in an educational institution allowed to exit this way, possibly at a profit? I would like to know. The BS report states:

Great Lakes was formed in 2002 as a Section-25 company. Section-25 companies are those formed for the purpose of promoting commerce, art, science, religion, charity or any other deemed “useful object” and whose profits are used solely to further its stated objectives.

Balachandran will be taking over the Mumbai Business School, which will be named Great Lakes, Mumbai. Great Lakes is also venturing into Gurgaon and Orissa. In Gurgaon, it has bought land. In Orissa, the government has given it 100 acres of land on a 99 year lease. I have said this before: we need to review the policy on making government land available to private parties at less than market prices.

Making a career out of board memberships

An article in the latest HBR proposes a solution today's corporate governance problems: have professional boards. That is, board memberships become something of a career. No professional director will serve on more than two boards. He will be required to spend time at the company other than for board meetings. He will have to be knowledgeable about the sector or products in which the company operates. And, of course, he will be paid more for his exertions.

I doubt that this will work. No matter how knowledgeable about a sector or how much time you spend on it, you can never become as knowledgeable as management. They can always withhold information or pass on information in ways that suit them.

Boards are ineffective not because of lack of knowledge or ability but because independent directors don't have it in them to question and challenge management. It is more rewarding to go along with management than to do otherwise. Remember, directors are beholden to management for giving them lucrative directorships. You can hope to get independence only when other interest groups find a place on the board- institutional investors, employees, minority shareholders.

More in ET column, Board membership as career?

Guru of microfinance under fire

Mohammed Yunus, the Nobel prize winning founder of Grameen Bank and originator of the idea of microfinance, is facing an investigation over alleged diversion of funds given by a European donor from the Bank to an affiliated organisation. He has now come under fire from his PM, Sheikh Hasina Wajed, FT reports.

Wajed is quoted as saying, "Micro-lenders make the people of this country their guinea pig ... They are sucking blood from the poor in the name of poverty alleviation.”

More ammunition for critics of microfinance in this country. Don't expect anything to move until the RBI's Malegam committee submits its report, expected in mid-January.

Does corporate governance matter?

It is assumed that corporate governance defines the health and performance of a company. How true is this? In the Economist, Schumpeter cites a recent study that casts doubt on this view;

The authors conducted a comprehensive study of the performance in 2007-08 of 296 financial institutions with assets of more than $10 billion. They found that none of the tenets of good corporate governance stood up to close examination. Directors who were well informed about finance performed no better than know-nothings. Companies that separated CEOs and chairmen did no better. Far from helping companies to weather the crisis, powerful institutional shareholders and independent directors did worse in terms of shareholder value. Indeed, the proportion of independent directors on the boards was inversely related to companies’ stock returns.

The authors of the study are quick to also point out that in East Asia, external monitoring has led
to better performance. So, maybe, one cannot generalise from banks?

Well, a good way to address the question of whether corporate governance matters is to ask whether management will do without boards at all? Is this desirable? Most people would think not. Some checks, however imperfect, are better than none.

Secondly, we have to look closely into the role and motivation of independent directors. In most cases,' independent' directors are selected by management. Management also pays them well in some cases. It's hard to see these directors taking their role seriously and challenging management. We need to find a different way to select independent directors. Even then, they may be co-opted by management. But it's worth trying something different.