The Satyam episode has led to debates about inadequacies in corporate governance norms in
In this backdrop, there is an interesting report in the Business Standard that refers to the efforts of certain institutional investors in
“The main idea is to reduce/stop investments in companies that do not provide correct information to investors. Also, we are looking at ways to make our decision public, so that other investors are also aware of the company’s standing with fund houses,” said a leading fund manager.
Fund houses could take stern steps in case of an errant company. For one, the name of the company could be put up on the website of the Association of Mutual Funds in
Fund managers said it has been decided that each fund house would identify three-to-five companies that did not give adequate financial information and had too many corporate governance issues.”
The basis of this idea is to strike at the reputational incentives of companies and their promoters and thereby motivate them to improve their corporate governance practices. In other words, the fear of being blacklisted would operate in the minds of companies to adhere to high quality practices. It may be an interesting, and perhaps effective, alternative to regulatory or penal sanctions, especially when the enforcement of regulatory sanctions is likely to be time-consuming and uncertain.
Such efforts also have a bearing on corporate law and norms. In his article Shaming in Corporate Law (
While all this is very well, it is not clear if there is sufficient will to put through such proposals. They will surely require acceptance not only by the investor community but also by the corporate sector in general. Further, unless such proposals are facilitated by the regulators (read SEBI in this case), the investor community may run the risk of creating frictions with companies they wish to blacklist. The following observation in the Business Standard report is evident of this:
“However, some analysts said that many fund houses could find it difficult to point fingers at specific companies as there would be fears of management access as well as business denials. “At present, this is just a proposal from some fund managers. To make it a success, we require cooperation from the entire industry and also the regulators. Otherwise, the entire idea could come under pressure from corporate houses,” said a chief investment officer.”