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Opinion | Mirrors, windows and doors as enablers of corporate success

Reflection, clarity of vision and a strong board of directors would serve a business better than issuing non-voting shares

The most painfully learnt lesson of growing older is that the most dangerous lies are the lies we tell ourselves. This delusion, not a medical condition but a universal human condition, suggests that successful companies, entrepreneurs and investors consciously surround themselves with people, culture, and processes that protect them from themselves. We’d like to make the case that governance-light rules like non-voting shares are not good for sustainable companies, vibrant entrepreneurship, and legitimate capital markets.

To paraphrase Nigerian writer Ben Okri, entrepreneurs are re-organizers of accepted reality, dreamers of alternate histories, and disturbers of deceitful sleep. This needs a strong vision, dollops of self-confidence and relentless optimism. All these complicate the entrepreneur-investor relationship; both want a sustainable, scalable, and valuable company, yet different time horizons can create differing views of goals and strategy. When is self-confidence stubbornness? Is the job of investors just to provide capital and stay out of the way? Are they friends or allies? What is the difference between investors and board members being back-seat drivers and coaches? The Uber board clearly failed at protecting Travis Kalanick from himself (wonderfully chronicled in the book Super Pumped by Mike Isaac). WeWork investors and board members’ negligence in reining in Adam Neumann early meant abandoning an IPO valuation of $47 billion for a private round valuation of $7 billion (that required a $1.2 billion pay-off to the entrepreneur). Closer home, many large Indian companies in bankruptcy had board members who did not stop entrepreneurs from borrowing their equity, mindlessly diversifying, and confusing liquidity with solvency. However, the Tesla board navigated multiple life-threatening situations—declarations of going private, US Securities and Exchange Commission (SEC) violations, executive churn, delivery delays, silly tweets—by separating the CEO and board chair role that helped Elon Musk’s company cross $100 billion in market capitalization.

Indian banking demonstrates that regulation is a poor substitute for governance. Public sector undertakings (PSU) banks’ powerful shareholders make boards and CEOs weak, while powerful CEOs at some private banks make boards and shareholders weak. However, regulation matters and the recent decision to allow Indian companies to issue non-voting shares is a backward move. The rationale of preventing short-term thinking and protection from foreign control doesn’t stand up to the evidence. The first three companies to reach a trillion-dollar market cap—Apple, Amazon and Microsoft—and 90% of the 1500 S&P broad index companies follow one share, one vote. Many of our successful companies in technology and financial services—insurgents not incumbents—may not have been built without foreign capital with fair equity dilution and voting. Our research suggests that market capitalization-weighted stock market returns for Indian investors over the last decade have largely come from companies with promoter shareholding much lower than the Indian stock market average of 50%.

The book Willful Blindness by Margaret Hefferman suggests entrepreneurs can’t notice and know everything; the cognitive limits of our brains simply won’t let us. So we filter, edit, and leave out obvious challenges that unsettle our egos, threaten our safety, create conflict, breed anxiety and diminish prestige. However, she suggests entrepreneurs can make better decisions by challenging biases, encouraging debates, asking new questions, discouraging conformity and not backing away from difficult problems. The disproportionate power granted to founders from non-voting shares will encourage wilful blindness by sabotaging the renewal, cognitive diversity, and questioning that comes from effective governance.

There are exceptions, but companies that sustainably create value for shareholders, employees, lenders and communities volunteer for effective governance. Companies are no different from countries; every large country with a per capita income of more than $30,000 is a democracy with a constitution that balances the rights and duties of the executive, legislature, judiciary and citizens. Prime ministers are constrained by constitutions; dictators are not. 19th-century scholar Walter Bagehot suggested that all constitutions have a dignified and efficient part; the dignified part is one that excites and preserves the reverence of people, while the efficient parts of it are the rules and institutions that make for governance. A clear separation between the two is meaningless and not possible. This is no different for corporate governance; regulations iteratively attempt to strike the right balance among stakeholders, but the art lies in the softer aspects of board effectiveness, corporate listening and cognitive diversity.

The most thoughtful entrepreneurs recognize the wisdom of educator Rudine Bishop’s metaphor of mirrors, windows and doors; an honest reflection that creates effective strategy and leads to decisive action. Mirrors are investors and board members who speak up and prevent wilful blindness; governance is an insurance policy. Windows are the clearest and most forward-looking view that often requires partitioning the roles of shareholders, board members and the CEO. Doors are actions that deliver the next quarter and quarter-century. New policies around corporate governance (independent director exams, chairman and CEO blood group tests, non-voting shares) prioritize the accounting of governance (did you follow rules and process?) over the account of governance (did you do the right thing?). Non-voting shares will not deepen corporate democracy, empower meritocracies or spread fairness. Policymaking can, and should, drive change. However, a $5 trillion economy with vibrant public and private capital markets needs corporate governance that is as much voluntary art as mandatory science.

Manish Sabharwal & Gopal Jain are, respectively, co-founders of Teamlease Services and Gaja Capital

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