Corporate Governance

This is my first blog. I am very lazy in writing but now decided to share my thoughts and experiences which i accumulated as a student of finance over a period of last 13 years of my investment journey. 

I think investing is all about trusting the manager who is running the business for you. it is his hard-work who ultimately rewards us as an investor through share price appreciation. There is no magic stick to understand the intend of incumbent manager. But there are ways which provide us a sense whether the management who are running are reliable or not or working for the benefit of shareholders.

I am fond of identifying red flags in listed companies. If we rigorously follow all these red flags, it helps us to take informed decision about companies.  

No business man is monk so finding clean and transparent company is very difficult. But understanding of red flags help us to draw a conclusion hoe much risk we are taking by investing in a company. 

Corporate governance is most fashionable world in corporate world. People talk in common parlance but how to identity that company has reasonable corporate governance is daunting task.

The purpose of corporate governance is that the management who are involved in running the business are accountable for shareholders.  But most of the time we found that there is a conflict of interest between people who run the business and public listed shareholders. 

One of the US based pension fund came out with checklist to identify the corporate government practice. These includes:

1. Number of independent Board of Directors in the Board

2. Chairman of the Board should be different from CEO / MD and Chairman should be independent 

3. Remuneration and Audit committee members should be independent

The intention behind is that management who is running the business should be aware that they are accountable for the shareholders. Logically, board of directors should work in the interest of shareholders. 

But often we found that conflict of interest between management and shareholders.  Most of the time, we found the so called independent directors are not independent at all as it is selected by the CEO / MD of the company.  We are human being and does not want any kind of interference in our decision so while selecting the board members, may be CEO comply with the statutory guidelines but all independent directors are just a puppet and rubber stamp. 

One should try little hard work to identify the strength of the board members also think whether these board will be able to help the company to achieve the wealth maximization objective of the company. 

I will put some example in my next post about the board and its power.