Need for a voice for minority share holders

Mar 20 - 26, 2006

The scene could be right out of a Hollywood Mafia movie. The Sicilian Mafioso pushes a snub nose gun in the side of a terrified innocent looking hapless person and orders him in a gruff voice to come along for a ride. Soon you will sleep with the fish; the hapless, terrified innocent looking person is informed. The poor person is left with no choice but follow the order of the burly Sicilian. He quietly sits in the car, is taken to the unknown destination and is disposed off according to the desire of the Mafioso. Never to be heard of or seen again.

Now, the protagonists might be a little different but in practice the roles are not. Let us give the scene a touch of reality. The poor hapless gentleman in his role is similar to the minority shareholders of vast a majority of companies in our stock exchanges whose shares never manage to reach the par value, at which the poor hapless persons had originally subscribed the share at. And, the persons who own these public limited companies, in their roles are not less than the actual Mafiosos, rather than the fictional movie Mafiosos.

This, prima facie may seem a harsh comparison. If one undertakes a study of performance of a number of listed companies on our stock exchanges, one is bound to come back that reality is not very different. There are a number of companies which have shares that never manage to attain the magical number of par value. What are the reasons? One may ask. The prime reason is that the management of the companies are very complacent with the situation. They are not really pushed. And, again why should they be pushed?

This question in theory has the following answer. The owners and management always strives to work for the interest for the stake holders. This is what all the management schools from the lowliest of the local business schools which sell their diplomas or MBA degrees to the best of Academia including Harvards of the world teach. The management of any business enterprise has to work for the interest of the stakeholders. Is there anything different going on here?

The first knee jerk reaction is No. The management can not go against the interests of the owners. So they have to do whatever the owners want them to do. But the question was, are they doing anything different then the interests of the stakeholder's desire? Remember, the stakeholders includes minority shareholders, employees, management, customers, lenders, everyone. Hence, answer becomes a resounding yes.

In lot of the cases the management of the companies is the same as the ownership. There is no separation. They are employed by the company. They are getting a regular paycheck on monthly basis, their expenses are paid, and they really are not pushed to get dividends at the end of an accounting cycle. In most cases even their kitchen expenses are being picked up by the company in some fictitious account in one way or other. Same goes for the gardener and sweeper employed at their residential premises. Isn't life beautiful?

Ok, then what are they doing? That is quite simple. They basically manage to skim the profits. This is called creative accounting. There are a number of ways to do it. Any accountant worth his salt can easily tell you how to do it. There is a well known story of an accountant who at a job interview is asked how much is 2 plus 2. The budding accountant gets up, locks the door, closes the windows, draws the curtains, and turns to the interviewer, and asks in turn, as to how much the interviewer wants it to be. Needless to say the accountant got the job.

One of the easiest ways to manage the balance sheet is use of transfer pricing. The materials are purchased at inflated prices. Similarly other costs are inflated. This is a fact known to one and all. What happens in the end? The company never shows any profit. They never pay any taxes. They never pay any dividends. The management is not accountable to any one. The management is free to travel abroad, take any fancy trip they may so desire, purchase any vehicle they may like for their kids, do just about anything. They are simply above questions. And whose money is it anyway? One should not forget that part of the money also belongs to those innocent minority shareholders who invested their life savings in the hope of getting back some return in form of some dividend. They can not sell back their shares as these shares are selling at much less than the par value, a price at which they were purchased. In some cases the shares that they are holding can not even be sold as the companies have long been de-listed because of non payment of dividend.

Our stock exchange has a horde of these companies which neither live nor die. Look at their balance sheets. A cursory look of their annual accounts will reveal the picture. They would have negative equity. They have accumulated losses. Or, they will show marginal profits. This too in industry which to every ones knowledge is profitable. It takes talent to stay poor or not show profit. And we should admit our companies are talented. I have known Pakistani businesses who have never shown profit, or else, shown hardly any profit in their books, but in reality have generated enough profit to install brand new industries both in Pakistan and abroad in tax havens such as Dubai. These companies can set up new companies and new factories without any worry, yet never bother to pay taxes or pay dividend to the minority shareholders, or, say a word of thanks to the silent hapless shareholders whose wealth they are enjoying for nothing.

It is interesting how these companies change their tune when they go for borrowing money from their bankers. It is an entirely a different song. They often make a candid statement by saying that they are a profitable enterprise and they being Pakistanis are bound to show either loss or declare low profits on their balance sheets. However, they can pay back their debts they claim, if the loan is given to them. Prudent bankers have to think twice though, because they are not beyond sticking the same balance sheet back at the bankers at the time of repayment and claiming a sob story.

Another point of interest is the typical pattern of share holding of these companies. In some cases even more than 90% shares are held by a single individual. Less than 5% shares are in public domain, the rest being owned by some joint stock companies and others. There is a complete strangulation of control on the company's affairs by the management and nobody can utter a word.

It is not to say the plight of small investor and minority share holder has escaped the SECP. It has come to notice of the governing body. With this in mind SECP came up with better reporting instructions and also they came up with something which was at the moment considered revolutionary. It was the first Hostile Takeover Laws in Pakistan. In my view although it was a step in the right direction, but there is still a lot of work to be done. This is evident from the fact that since considerable time has passed after passing of Takeover laws, virtually and literally no takeover activity has surfaced in Pakistan. The takeover laws have no teeth. SECP has to still work on these laws to make them more effective.

The management and majority shareholders still have a very lackadaisical attitude towards the minority shareholders. Their voice should be heard. If at all, the shares of these companies should be purchased back from the minority shareholders at the par value by the majority shareholders. They should be asked to do so. This is called Public to Private. A lot of companies even abroad have been known to take this step. Companies which have been de-listed for non payment of dividend should be asked to undertake such a step.

Similarly these companies should be subjected to better audits and their businesses should be audited for their real worth. People should not be subjected to the creative accounting anymore. We should get a better insight to the real worth of the businesses. And again, the Hostile takeover laws were an excellent step. The SECP should continue in the same direction. New work should be done to facilitate the take over and merger activity. This will give a boost to the stock market. It will wake up the management to the needs of the stakeholders, thus helping the laggards to move and helping the overall stock market to perform. Which in turn will restore the confidence in the stock market.

Coming back to the scene of the mafia movie, we know that till now, the majority shareholders have taken the minority shareholders for a ride. This is high time for the ride to come to an end. The investments of the minority shareholders have to bear fruit. They have already waited too long and suffered too much. Their wait should now be over. The regulatory authorities should take some steps to ease out their situation. Their voice should now be heard.