Introduction 35100 companies earned less than the cost of capital, against 20 percent in the US. The study indicates that
highly capital-intensive industries—steel, cement, chemicals, oil, etc.—received 79 percent of the investment
and earned 11 percent on it. The medium capital intensive industries—consumer durables, auto ancillaries,
agro industries, etc.—received 16 percent of the investment and earned 20 percent on it. So much for the
productivity of Indian industry and orientation towards wealth creation.
Until recently, the primary focus of Japanese companies was on growth—growth in sales and assets,
growth in earnings and market share. In pursuing growth at any price, no consideration was given to the cost
of capital. Implicit in this strategy was the assumption that capital was an unlimited and free resource. But all
this is changing. Competitive challenges are forcing all companies, including Japanese companies, to establish
pay-for-performance incentive plans. The seniority system that has existed in Japan for many years is being
replaced by alternate promotion systems.^19
SHAREHOLDER ACTIVISM
Any large corporation is dependent on a large number of small investors for capital as it is not possible
for any single investor or a small group of investors to provide the necessary capital because, by definition,
large companies have large requirements. Further, the law in some countries prevents financial institutions
(e.g., banks) from holding equity or cross a certain threshold (e.g., mutual funds are prevented from holding
more than a certain percentage of shares in any one company). Due to the wide dispersion of shareholding no
single investor will have an incentive to monitor a company. Since diversification can be achieved by holding
a dozen stocks it is possible for institutional investors to hold a small number of stocks and actively monitor
the portfolio companies.
Shareholder activism comes from two sources: institutional shareholders and wealthy individuals. Activism
may take on two approaches:
- Presenting a proposal at a shareholders’ meeting
- Prod the company’s management to change strategy and/or CEO.
Institutional investors discipline erring managers in the US and now in some parts of Europe. This trend
is spreading to other parts of the world. For example, in India, the Unit Trust of India (UTI) is seeking initia-
tives on corporate governance from companies. UTI is communicating to all its nominees on company
boards about what they should seek from the companies in which they are directors. UTI’s list on corporate
governance initiatives being sought include setting up board level committees, having a majority of non-
executive directors on the board, appointment of quality outside directors, proper disclosure norms and suc-
cession planning at the top, including quality selection processes for CEOs. UTI is in the process of appointing
its nominees on boards of companies in which it is a majority shareholder. The UTI is in the process of
drawing up a list of eminent people who will serve as its representative on the boards of various companies.^20
William Browder, the CEO of Hermitage Capital (a foreign institutional investor in Russia), for example,
is battling against Gazprom’s (a Russian company) famously opaque bureaucracy for around three years
now. The latest incident in the saga is his attempt to win a place on the company’s board. Gazprom has
(^19) Roundtable on Shareholder Value in Japan, Journal of Applied Corporate Finance, Winter 1997.
(^20) Business Standard, March 20, 1999.