BackIf they’re multinationals, why bother about corporate governance?
By and large, investors have been tolerant of some of the poor corporate governance norms followed by multinationals
Premium
What was all that brouhaha about corporate governance related risks at Maruti Suzuki India Ltd? The company’s shares have recouped all the losses related to parent company Suzuki Motor Corp.’s plan to build a new car factory in Gujarat.
Since Maruti Suzuki isn’t exactly strapped for cash to build its own plant, the plan to source cars from a new plant owned by its parent company seemed like an unnecessary complication, especially with the related concerns about unfair transfer pricing. Why then are investors now taking the development in their stride? Apparently, they are enthused about the success of the company’s new launch, Celerio, and the prospects of a pick-up in volumes in the near- to medium-term.
This isn’t the first time investors in subsidiaries of multinational companies have ignored corporate governance concerns, and have chosen to focus on other factors. Take the case of Procter and Gamble Hygiene and Healthcare Ltd. Parent Procter and Gamble Co. has had another unlisted firm operating large segments such as hair care, detergents and skin care. According to a study by brokerage Ambit Capital, the unlisted subsidiary’s revenues amounted to 93% of that of its listed sister company in financial year 2000-01. But by 2012-13, its size had increased to 286% on a relative basis, indicating a preference for the company in which it gets to keep a larger share of profits.
Despite all this, P&G Hygiene and Healthcare’s shares have been among the best performing multinational firm stocks with annual average returns of 22.7% in the past 10 years. During the same time, the CNX 500 index has risen annually by 12.6% and the CNX MNC index has risen by 14.3%. Although growth in the unlisted company has been higher, investors have been pleased with the growth in the listed subsidiary as well.
Ambit’s report on listed MNCs states that there are a number of red flags on corporate governance issues for listed subsidiaries of P&G, ABB, Siemens and Suzuki. The most common concern is the high rate at which they pay royalty to the parent company (barring Siemens). Besides, investors in some of these firms have to settle for a relatively low dividend payout (Siemens and Maruti), get accustomed to the transfer of a profitable division to the parent company at cheap valuations (Siemens being a case in point), and also witness a trend of depressed share prices just ahead of open offer announcements by their parent companies (Siemens and ABB).
Yet, each of these stocks have outperformed the CNX 500 index in the past 10 years. Perhaps it is a telling commentary of the low level of corporate governance among listed companies in India in general. As a result, tolerance levels among Indian investors on this front appear to be fairly high. Also, it is clear that other factors such as profit growth are given much more preference compared with corporate governance. Most of the above-mentioned stocks also outperformed shares of GlaxoSmithKline Plc’s pharmaceuticals subsidiary in India, which stands out in the Ambit report with good corporate governance standards.
The unfortunate fallout is that MNC companies may well conclude that Indian shareholders are unlikely to vote with their feet, and they may not think too much about implementing a strategy that is unfriendly to minority shareholders. Of course, there are some counter-examples, such as when Siemens Ltd was forced to disclose the consideration for which it was planning to sell one of its subsidiaries to parent company, Siemens AG, after its shares fell by 30% in just three days. But, by and large, investors have been tolerant of some of the poor corporate governance norms followed by MNCs.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
