Only shareholder value?
Once upon a time (even today it has not really changed much) companies were run for the benefit of the dominant shareholders who were also in management. Even today that happens in companies like Reliance, Birla, Bajaj, Murugappa, – and these are not insignificant in size or contribution to the national kitty.
However in the 1980s one concept got popular in US – the concept of shareholder value. Private equity funds came, took over a company and if the parts of the business was worth more than the market capitalisation, they ripped the company and sold off the parts. One of the biggest companies they tried doing this was Coca Cola – but what happened to the valuation, Warren Buffet’s role, etc. all of you should be knowing.
Normally in my portfolio building also I just bought companies which made money for the shareholder. The other stakeholders did not matter. ESOP was supposed to put the owners and the current managers in synch. Alas Enron, Worldcom, etc. proved that all this is bull.
So what should a company do? I think there should be a balance between creating value for the shareholder, treating employees well, giving good value to the customer, treating vendors with dignity, paying taxes honestly, giving back to the society and being socially responsible as a citizen.
Look at the life insurance industry in India. They were so busy creating ‘shareholder value’ – that they thought they could price poorly, and not worry about the end customer. Suddenly the regulator woke up and has put all kinds of clamps on the industry. The shareholder will not see money for another 4 years even in case of companies like Hdfc Standard Life insurance (the first life insurance company in the private sector) – and a company with a good handle on its policy stickiness.
I liked this statement ‘the top line is VANITY, so the bottom line is INSANITY’ so true of so many fiefdom building CEOs. To build the top line (give away everything and you will get rich was tested in the dot com boom which led to the dot gone doom) you recruit, pay unnecessarily high salaries, ‘grow’ all over and then find you have no money….
Of course now it has gone the full circle and the life insurance industry in the current form cannot survive – the shareholder has to make money or he will just walk away from the business. Currently the employees, the landlords (many branches are shutting down), the vendors, are all paying a part of the price.
Watch this space – the epitaph for a few companies will be written in Jan 2011.
Amen.
Gul
Subra,
I quite agree (rather loves) your points regarding balance….
“there should be a balance between creating value for the shareholder, treating employees well, giving good value to the customer, treating vendors with dignity, paying taxes honestly, giving back to the society and being socially responsible as a citizen”
Great blog, keep it up.
NPR
Monika Halan of Livemint keeps writing about how insurance (esp ULIPs) are mis-priced, mis-sold to customers. She says the disease has now spread to small towns, where awareness is lesser and they become gullible victims.
An industry which does NOT work to the benefit of customers (and others as shown here) and surviving on con talk, cannot survive long term. And the CEOs keep earning multi-crore salaries.
Every tom, dick and harry is now insurance adviser. Most of them dont know the difference between Mutual Funds and Insurance.
Srinivas Muthadi
I totally agree with NPR. This trend is recent one with LIC launching ULIP products, and the hold that it has got in the small towns and rural areas with a wide network of agents. Sad. :(.
subra
Sorry NPR but who will write about the media? L O L. The ills that you talk about are there in all industries. Sadly most of us believe the printed word or the blogged word. Not true at all.
ULIP bashing is fine, have you seen the media EVER CARRY stories about how a family was helped because the family had life insurance? Is having the MORE EXPENSIVE insurance a bigger problem THAN not having ANY LIFE insurance?
Frankly as a customer YOU have to decide. All industries make mistakes – I know of people who have paid Rs. 25 lakhs to have a website designed. Today it costs Rs. 350. Home loan, car loan, credit cards – all go through these phases. Customer learning is far more important. Do what is good for you. Not what I tell you – how do you know MY VESTED interest (I may perhaps be standing for an election!!). So an industry has to work towards the well being of the customer – conceptually fine – but shareholders of ITC, Pepsi, McDonalds, Pharma giants are not complaining, correct?
Ravinder Makhaik
Vanity and insanity – all bundled in the same set of numbers.
krishnan
What I understand from ULIP is that it pays in the long run say 10 yrs
subra
most people in the media who bash ulip cannot take part in a proper debate about ULIP.
I am anti ulip because it gets you stuck to insurance and money management. Later on if you are happy with the insur but unhappy with the money management, you are stuck. I personally HAVE ulips where by topping up I have made it MUCH cheaper than a mutual fund (amc charges are 0.8% vs. 2.5% of a mutual fund). I have sent excel sheets to some ‘journalists’ but most of them are too pre-occupied to verify facts. Or they do not understand – which is worse. A friend says when I entered (he is now making films, earlier he was an editor of a personal finance mag / website) -“I thought financial journalists do not understand journalism..later I realised they do not understand finance too’…THAT IS THE PROBLEM.
Aniruddha
What are cornerstones of a long term investment – good product, right pricing, win-win proposition for all stakeholders and last but not the least innovation through continuos R&D. Alas the insurance industry – both life & non-life, do not have any of these afore-mentioned positive attributes, their success is one which is born out of a unholy mix of high voltage marketing blitzkreig, shameless incentivisation to sales force (in-house & agency, both)and the gullible target audience (who get easily conned by corporate brand names and their slick advertisements). This industry will surely go through a lot of pain in future because as the adage goes “….you cannot fool all the people all the time”
Manish
@krishnan
“ULIPs will make more money in 10 yrs” , thats a dangerous way of thinking 🙂 , ULIPs will make money more or MF will more money depends on how you make them function for you. There is a equity MF which has given negative return in last 5 yrs , Can you beleive that ? they are JM Emerging Leaders and L&T global advantage, the funds managers of these funds have in true sense shown the meaning of “Underperformance” and “beating the index” (in down side) . So just saying that equity will give better returns in 5 yrs is not justified .
Manish
subra
Aniruddha,
Just because we are close we tend to be extra critical and harsh. See the food industry (even today the multinationals use colors which they cannot use in their country), see the pharma, hospitals, real estate, MBA education, – it is all a case of caveat emptor.
How many mutual fund schemes does one need? PSU banks are far, far more ethical (lazy also) than the foreign banks that we know. In fact there is a foreign bank which proudly says we do not let out clients sleep :).
As a shareholder-promoter of a life insurance business the person must be crying. The beneficiaries have been the early employees, some agents…and that is all.