Monday, April 20, 2009

Mockery of Governance

If forcing unviable pricing was not enough, the government now wants public sector oil companies to spend 2% of their profits on social programmes.
The directive makes a complete mockery of the high standards of corporate governance the government wants India Inc to follow.

The dominant shareholder, the government, has unilaterally taken a decision that has a bearing on the investment and returns of other stakeholders. The government would do well to set a better example. The big four oilcos — ONGC, Bharat Petroleum, Hindustan Petroleum and Indian Oil — are all listed on stock exchanges with public shareholding ranging from near 20% in Indian Oil to 48.9% in Hindustan Petroleum.

The 2% levy on profits for corporate social responsibility (CSR) spending would depress the valuation of these companies and create a handicap vis-a-vis private sector competitors, apart from upsetting their capital investments and dividend plans. Besides, given the political culture we possess, the sort of social spending the government is suggesting for oilcos would degenerate into funding schemes in, say, the petroleum minister’s constituency and/or those of top leaders of the ruling party. In fact, such misuse of PSU funds is already widespread, the current proposal only seeks to set aside more funds for the same.

True, there is a case for companies to conduct their affairs in a way that enhances social and environmental sustainability. The objection in this case is in the limited context of corporate governance or the apparent disregard of it.

There is a need for a wider stakeholder consensus in deciding what CSR projects a company may want to take up and the extent of spending. One important objective of listing state-owned companies on stock exchanges is to subject them to stock market discipline and bring in more transparency by making the m accountable to non-government stakeholders. If the government still insists on running them as private fiefs then it is better that it buys out the public and delists them. A listed state-owned company must respect shareholder democracy.

Source: Mockery of governance
20 Apr 2009, 0246 hrs IST, ET Bureau

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