Small share-holders of some of the top companies in the US, Britain and Europe have become restive and assertive. And they are changing the pattern of corporate working, and making their chief executives too uneasy.
They have been awakened by the glaring scandals in the corporate world, particularly the excessive payments received by the chief executives along with their very large share options, while the small share holders are getting too little on their shares after having lost a great deal on their technology shares.
The whistle-blowers in the Western companies are increasing and they are being hailed as heroes or heroines. After the rewards of the chief executives or directors became excessive these whistle blowers were forced to reveal to their shares holders and the public at large the large abuses in their company.
As long as the share-holders were getting good returns on their shares including capital gains because of the stock market boom and they were bothered about the abuses of their chief executives.
They were receiving heavy payments along with over-generous share options; but now that the bubble has burst and the share holders are getting too little for their share holdings. They are outraged to see the chief executives still getting very large emoluments and living it up at the expense of the companies.
And to add insult to injury, some of the chief executives like Michael Eisner of Walt Disney, who is one of the most autocratic chief executives would not stand for anyone questioning their authority. Now he has been stripped of his chairmanship of the troubled company and he is under attack as chief executive and may not be able to hold that office for long.
The most scandalous or most talked about chief executive in recent months in the US is Tokyo's Dennis Kozlowsky, who bought a luxury yacht for himself at company expensive, kept his mistresses on the pay rolls' of his company and bought a five million dollar diamond ring for his wife with company funds.
Prosecuting such chief executives in court and getting them punished is tough and a great deal of time is wasted on the litigation. Bernied Ebbers of the World-Com has been charged with fraud in the US only now, although the company he had bankrupted hit the rock in July, 2002 after $11 billion scandal.And the trial of Jeffrey of Enron in the largest corporate scandal may take another two years to start, although that is a major milestone in corporate abuse and fraud.
In Britain Sir Philips Watts has been forced to resign as chairman of Royal Dutch-Shell for coming up with report of large reserve of oil and gas earlier and recently showing that reserve of oil and gas earlier and recently showing that reserve greatly reduced to the horror of the share-holders.
In Britain again the nominee of the chairman of the large chain store, Sainds-bury, as his successor was rejected by the share holders as chairman as he did not have the requisite experience.
The British trade and industry secretary Patricia Hewit was asked about a new law to prevent excessive payments or rewards to the chief executives of companies. She ruled that out and argued in favour of share-holder activism.
Sleeping share holders happy with the profits they received let well known Italian firm of Palmalat become bankrupt as the family which managed the company indulged in the worst form of corporate abuses. Large assets and deposits mentioned to be there were just not there. The fraud was total.
And in Germany the large payments made to the directors of Dutch Bank have been a major scandal and a matter for litigation, while the chief executive defends his generosity.
Share-holder activism can pay in the West as the chief executive or the family which runs a company does not have the majority shares. But in Pakistan the owners of companies hold 60 to 80 per cent of the shares, if not more. Hence the share holders, besides the principal share-holders, are not effective at all. Ethical considerations or corporate enquiry is brushed aside by the majority share holders.
Finance minister Shaukat Aziz was recently asked about the very high salaries, perquisites and other rewards of the chief executives of some banks. He said they were private banks and the share-holder activism should prevail. He was told they when the majority share holder had too many shares the small share holder had little clout. In that case a regulatory body like the Security and Exchange Commission (SECP) should intervene.
Britain, for example, now rejects the argument that the chief executive has to be paid far too many millions of pounds to attract the best talent to a company. A system in which the share-holder gets a raw deal, while the chief executives get the best deal,cannot last for long.
The situation in Pakistan in respect of the ordinary share holders is anyhow far better than before. The stock exchanges are more vigilant, and particularly the managing director of the Karachi Stock Exchange Moin Fudda. The State Bank of Pakistan is pretty alert.
And the SECP is watchful.In a country in which until recently the companies were not sending their annual reports to the share holders, the SECP now makes them send quarterly reports in detail. But I do not know how much the SECP examines such reports as such un-audited reports can hide a great deal.
The intervention of the stock exchanges, the SECP and analysis by the mutual fund companies are making some of the public limited companies to resist them and turn their companies into private limited companies.
And in a world in which the Citibank, the largest bank in the world, as well as the second largest, the Hong Kong and Shanghai Bank are private companies, Pakistan cannot refuse to permit quoted companies from becoming private companies, of course, they should pay fair prices to buy off the shares of the small share-holders which the SECP insists they do now.
Of course, the auditors, internal and external, have a heavy responsibility to ensure corporate accounts are kept properly and do not go the way of Enron or BCCI. And erring auditors should be exposed and punished heavily if they abuse the trust in them.
There have been moves for the formation of a share-holders association to protect the interests of the small share holders and ensure corporate equity in Pakistan. The stock exchanges have opposed such moves saying they would become an unhealthy pressure group.
But judging by the performance of the some of the best companies in the West until they were exposed, the small share-holder here does need far more protection than he has. It is time for such an association to come up and be permitted to function.
Some writers have called the present boom in the capital market a bubble. Of course, having touched 4,900 points the KSE index can come down and should come down to an extent. The index has been overblown to an extent.
But unlike in the past when the KSE index hit its peak of 2661 in 1994 and then came tumbling down, there are a good many safety measures and quite a few watch dogs now beginning with the State Bank, the banks, stock exchanges which are more vigilant, greater watchfulness on the past of the banks which lend money to the companies, the SECP, and the managers of mutual funds in the market which keep a sharp eye on the market.
Andrew Spencer, chief investment officer of J.P. Morgan Chase Fleming in the US thinks the investors are stupid in unpredictable ways. "He calls the behaviour of the average investor as the madness of the crowds in an interview with the Forbes Magazine. That is true of investors in Pakistan as well.
The country needs better and more reliable investment guides than we have. We need proper news-letters from investment companies who do not have vested interest other than in helping the ordinary share-holders. Good dividends from some companies for a time should not make them abandon an analytical approach to the performance of such companies.
If all the agencies involved in the corporate exercise perform their duties well and are marked for their due diligence capital market boom need not become a bubble in which small share holders eventually feel cheated. If some of the best companies in the West can explode into a rash of scandals, far more of that could happen in Pakistan. We should be truly wary.
PS: The SECP has just announced re launching of the Company Easy Exit Scheme, originally launched in 2002, for a period of four months ending June 30.
And that has been done on the basis of the feedback received from companies on the success of the CEES Dormant private limited companies, non-listed public companies and companies limited by guarantees can again avail themselves of the Exit facility and get their names stuck off the register of companies.
