The recent ONGC share sale imbroglio, when the Life Insurance Corporation (LIC) was roped in at the last minute to rescue the Rs 12,000 crore issue, has raised many questions on the governance of state-owned enterprises.On March 12, 2012, The Business Standard carried a story titled ‘LIC policy holders carry disinvestment can’. The authors reported that ‘while the companies it (LIC) had taken big bets on, have seen their share prices tumble, at least four public offers the insurer avoided have performed very well’. On March 5, 2012, another financial daily reported IRDA’s concern over corporate governance in LIC. The report mentioned two issues: appointment of CEO’s of state-owned financial institutions as independent directors in the board of LIC and inclusion of government officials in the investment committee, which decides investment of funds, including policy holder’s fund.
Researches on the corporate governance of family businesses report ‘tunneling’ of funds from one company to another within the business group and also for personal benefit of the family members. The recent reports on the governance of LIC referred to above suggest that state-owned enterprises are often managed like family businesses. ‘Tunneling’ is a dirty word in corporate governance literature. It is considered to be a kind of theft of shareholders' wealth and in case of insurance, it might be considered as a theft of policyholders' wealth. Therefore, there are many who do not approve of the government’s direction to LIC to invest in PSU shares when the market is not enthusiastic to pick up shares that government divests. It is time that we re-examine this view.
In contrast to conventional wisdom, a recent research finding shows that ‘tunneling’ is not always a theft. It enables companies within a business group to manage business shocks better than standalone companies. The finding will provide a new direction to view tunneling in business groups. Although, we have to wait for new research, which will test this new finding, we may not ignore the positives of tunneling activities. If we consider that all state-owned companies belong to a business group owned and controlled by the government, perhaps tunneling benefits each of them in some form or the other. In any case, government support is always available to state-owned enterprises in difficult business situations. A recent example is the government support extended to Air India in the aviation sector. This definitely reduces the risk of investment in public sector companies. The level of uncertainty about the future of Air India is much lower than the future of the Kingfisher Airlines.
The government can explain its act by invoking the principle of utilitarianism, which is one of the accepted principles of ethics. The principle of utility states that what is right is that which promotes the greatest happiness. Therefore, if reduction in fiscal deficit creates greater happiness in the society, use of policyholders' fund for reducing fiscal deficit is justified. There are many criticisms of this principle. Even then, we cannot say that the government has behaved unethically.
What is surprising is that the government has failed to present itself as a responsible controlling shareholder of state-owned listed companies. It has shown disregard to transparency, which is the cornerstone of good governance. It often fails to explain its decisions and actions to the market. For example, it is unable to explain the sequence of events in case of the divestment of shares of ONGC. No one in the market believes that LIC had picked up ONGC shares of its own, without any direction from the government. Similarly the government’s disregard to the corporate governance norms in appointing independent directors in LIC and in formation of the investment committee augured badly for investors. The government could have avoided the same.
Investors in state-owned enterprise understand that the government has the right to intervene in the management of those enterprises and will use those to achieve certain social objectives, which are in conflict with the objective of ‘creating shareholder value’. Therefore, the market discounts the share price of state-owned companies on account of those possibilities. However, the valuation of those companies will improve if the government avoids sporadic intervention. Sporadic interventions create uncertainty. When the market finds a pattern in government intervention, the uncertainty is reduced and investors’ confidence enhances as the market gets a clear signal about the government strategy for a particular company. This leads to higher valuation of the company and consequent reduction in the cost of capital. Let us hope that the government will learn from the ONGC-LIC episode.
E-mail: asish.bhattacharyya@gmail.com.
Affiliation: Director, International Management Institute – Kolkata