Why is SKS Microfinance Ltd in the news for all the wrong reasons? Why did an organization that had a chance to redefine financial inclusion fritter it away? Every time we think about it, we come to the painful conclusion that it is about the arrogance of governance. Failure driven by arrogance.
A look at the chronology of events makes it evident. First, the company’s initial public offering (IPO) last year sent all the wrong signals. Founder Vikram Akula and senior management, including M.R. Rao, Suresh Gurumani and Dilli Raj, sold all their holdings in the company acquired through stock options. The principal promoter and top management did not retain any financial stakes in the organization. They weren’t bothered about what signals they would send to potential investors. They only committed to lock in their future stock options (if exercised). There was no skin in the game. But the investors bought on blind faith, like the private equity firms before them did.
The company made an allotment of shares to Catamaran Management Services Pvt. Ltd, a venture capital firm set up by Infosys co-founder N.R. Narayana Murthy, at a price which was less than 50% of the price discovered by the market a few weeks earlier when Akula signed agreements to liquidate all his holdings to Singapore-based Treeline Asia Master Fund Pte Ltd. The top management and other employees signed agreements to liquidate their holdings at a similar price a couple of weeks later. This was to the detriment of the interests of the pre-IPO shareholders, which included the Mutual Benefit Trusts (MBT) representing poor women borrowers. The resolution was passed in a hurriedly called—at five days’ notice—extraordinary general meeting, which can be termed nothing but arrogance of governance.
The IPO document promised that, among other things, there would be an advisory council (chaired by Narayana Murthy, and, with Akula as a member as per the shareholders’ agreement—not disclosed in the prospectus), for a period of 24 months, to advise on a) managing the next phase of growth; b) best industry practices to benchmark; c) corporate governance policies and practices; d) improving disclosure standards; e) risk management and internal control; and f) best international accounting practices (page 124 of the prospectus). It appears that this council never met. Even if it met, it is clear that it has been fully ineffectual.
Soon after the IPO, chief executive officer Gurumani was eased out. There was much written in the press about the differences between Akula and Gurumani, the principal one cited being of Gurumani wanting to diversify and grow into areas which Akula thought was a drift in the company’s mission. Gurumani’s departure meant one of the faces of the IPO was no longer there. It did not matter to the company what the market would make of this move.
And now the easing out of Akula from the board on the grounds that Gurumani should have stayed on! The board wants to diversify into activities other than microfinance and become a universal financial services provider for the rural poor. Apparently, Akula stood his ground and was grounded.
A company that is listed and has investments from diverse sources continues to give out signals that it can do what it wants. As the stock price keeps tumbling and investors bleed, there is no transparency on the severance deal with Akula—the chief financial officer tells a newspaper that it is not material compared with the overall expenses of the company!
What are the lessons for governance here? If we look at the board of SKS, on paper, it is a dream board. A good number of independent directors, representatives of institutional investors and a Harvard University professor whose specialization is corporate governance. Expectedly, there are representatives of the largest investors and promoters. But no representation for owners-cum-beneficiaries, the MBTs that represent the poor customers who are also shareholders of the company. Venture capitalist Vinod Khosla, with a greater share than Sidbi, is also not represented.
What is common to all the members of the board—including those who were but currently are not on the board? None of them have any personal stakes of significance. Therefore, if the market price crashes, they do not lose any of their personal money (except Tarun Khanna, who did put in his personal money as an indication of his commitment). All of them are eligible for options, so they benefit from any upside. Under normal circumstances, this is supposed to be a good enough incentive—because the growth parameters and rewards are aligned. However, when it comes to a crisis, the downside of the individuals is zero. This is not the case with just SKS, but several other microfinance institutions in the country who were funded by grant money that was converted into equity.
Now, we can see what a governance deficit means. We also see that we could draw up a list of qualifications for a good-looking board. SKS had it. So did Satyam Computer Services Ltd. So did Global Trust Bank Ltd (GTB). But that was not sufficient for them to get good governance. While in the case of Satyam and GTB, the issue was of management taking the board and the shareholders for a ride, in the case of SKS, that is not the issue. The board has been active from the beginning, but it does not seem to have a clue about the implications of its activism. No clue about the political sensitivity, client sensitivity and implications for the company’s image. It seems to have taken the investors for granted.
Is that similar to the behaviour of the United Progressive Alliance in its second term in power, when it has been acting as if there were no opposition party, no electorate and no accountability. Well, these are questions to ponder.
M.S. Sriram is an independent researcher and consultant and a former professor at Indian Institute of Management, Ahmedabad.