Wednesday, August 06, 2008

Unjust enrichment - ESOPs for nominee directors?

Has SEBI yielded to the pressures of IAS lobby? It seems likely.
Financial Institutions (FI) and Banks that take direct exposure in companies nominate their representatives in the Board of the assisted companies to safeguard their investments. They ensure that no decisions affecting the interest of their employers or that as might jeopardize the return on their investments should be taken by the company boards. So to the company concerned, these people offer no strategic value. In reality, they just pocket the sitting fees and incessantly nag the company managements with requests for availing company guest houses (or shamelessly ask for hotel accommodation where no guest houses are available) for their family vacation or call for their cars for their family trips. At the board meetings, they are busy devouring the fried cashew nuts and feeding on anything that looks like food while the managements play havoc with the enterprise (declaring dividends even as the company is reeling under high cost debt, siphoning off company funds by way of unsecured inter-corporate loans to below investment grade (promoter) group companies at low interests, passing liberal executive remuneration resolutions, writing off personal expenses of directors). Remember, the appointment as nominee flows directly from their employment with the investor institution.

Now these nominees are being allowed entitlement for ESOPs from the companies where they are nominated. Here is a funny story of two LIC directors on the Board of L&T fighting it out :-)

Last year, there was a two-month face-off between LIC and GIC and their nominee directors, B P Deshmukh and Kranti Sinha, on the board of Larsen and Toubro (L&T) after the nominee-directors refused to return shares allotted to them by the construction major in spite of directions by both the institutions that its nominees should not accept any Esops. Sinha and Deshmukh held 20,000 and 30,000 L&T shares, the market price of which was Rs 3.5 crore and Rs 5 crore, respectively, at the time.

The two financial institutions moved the Bombay High Court to bar their nominee directors from dealing in these shares. Both directors lost their jobs on the L&T board. The matter was later settled out of court after the former directors returned their employee stock option shares to the company. After this, all financial institutions that hold equity stakes in various companies had written to them asking them not to issue Esops to their representatives to avoid a similar situation.
I have a few questions –

a) Aren’t nominees just what they are - employees of investor institutions? How can they be entitled to a perk that is available to the permanent employees and non-wholetime directors of companies even as their attendance at the board meetings are only to protect the interest of their employer?

b) Where does the loyalty of the nominee (post ESOPs) lie? To the management of the company that enriched him or to the PSU employer that pays him a piffling salary in comparison?

c) How can the employer expect the ESOP awarded nominee to protect their interests? Why would they go against the company that enriched them?

d) What strategic value could the nominees offer to the assisted company that belongs to an entirely different vertical? Let’s say an IDBI nominee (a banking professional) in the Board of a power company - can he ensure leakproof transmission and distribution of power? (Now don't tell me he could suggest low cost financing measures - we know how financially savvy they are; just take one look at earnings growth of their parent institution itself. You get the picture?

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