In Birla Imbroglio, Corporate Governance Will Be The Issue
Jul 19, 2004
The battle between the mighty Birlas and the wily Lodha will continue to hog media headlines in the months to come. But if one were to look beyond the extraordinary tale of Priyamvada Birla’s Rs 5,000 crore bequest to her accountant, the case may have far-reaching implications for the structure and working of family-owned corporate empires in India.
In fact, this could be the case that puts to rest several arguments that members of the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) have had over the proposals of the Narayana Murthy Committee on corporate governance reform. It would be recalled that India Inc had literally bristled at the suggestion that ‘independent’ directors should not serve more than three terms of three years each. And if a company were to insist on retaining the directors on their board beyond nine years, they would no longer be considered ‘independent’. Corporate India was furious. Its representatives lobbied against the proposals by using rhetorical tools such as naming prominent professionals who are independent directors of leading companies and asking if they are unlikely to be less independent after nine years.
Clearly, the Lodha episode, or rather the reaction of the seven factions of the Rs 40,000-crore Birla empire (Indian companies alone) to Priyvamvada’s will, shows that they need to take a long hard look at their own relationships.
Family-run businesses, which have expanded and sprawled through publicly listed companies, have always retained their power and control through ‘trusted’ retainers. Most family business houses used to have ‘trusted’ brokers in the stock market, whose sales and purchases were closely watched by investors in the run-up to the corporate results of group companies. All that came to an end when the Securities and Exchange Board of India (SEBI) enacted stringent Insider Trading rules.
This extraordinary situation would indicate that family-run business empires that develop incestuous relationships with independent service providers have more to lose today than their retainers
But there is still a lot of unease over the proximity of independent auditors to corporate groups and the relationship between Lodha & Com- pany with the Birla Group never fails to find mention in such debates. Lodha & Co currently audit Birla Mutual Fund, Indo-Gulf Corporation, Grasim, Birla Global Finance, Birla VXL, Mysore Cements and Mangalam Cement, among others.
Interestingly, while the loss of Birla business will hurt the auditor, Lodha & Company is fairly well insulated from the possible wrath of the Birlas. While in the past, incurring the displeasure of the Birla empire may have ruined the audit firm, today it has a diversified audit portfolio that includes several institutional accounts (PNB Gilts, ICICI group companies), public sector undertakings (ONGC) and companies belonging to the Jindals, Manu Chhabria group, Reliance and others.
It will be interesting to watch whether the inheritance tangle has any adverse impact on the audit firm. This can happen if industry friends of the Birlas show solidarity with the family by removing Lodha & Co as their auditor. If not, this extraordinary situation would indicate that family-run business empires that develop incestuous relationships with independent service providers have more to lose today than their retainers.
Sources close to the Birla group developments say that Kumaramangalam Birla has already made it clear that he wants a clean break from the past in consonance with the corporate governance requirements. While a three-member team is in charge of effecting changes, Mr Birla has apparently said that he wants an end to the possibility of developing incestuous relationships with auditors. We learn that S R Batliboi (affiliated to Ernst & Young) and Singhi & Co are two leading contenders. But these could well be mere rumours.
Also worth watching will be Kumar Birla’s choice of directors to fill the positions vacated by Rajendra Lodha and his sons on group companies as well as in other segments of the empire. There is already a lot of subtle lobbying and jousting for these prestigious posts; again, the actual choice will reflect whether the Birlas use this opportunity to ensure real change.
The seven factions of the Birla group account for the largest family-run business empire in the country, comprising scores of high profile, publicly listed companies. It is also a group that has proudly clung to its traditional management style, which has depended on close relationships with their professional managers. In many cases, the Birlas actively encouraged the sons of their senior managers to turn into entrepreneurs and become suppliers for agents for group companies. Until recently, their experience was that such close ties to the family ensure complete loyalty.
Corporate watchers are keen on finding out whether the Lodha imbroglio has jolted the Birla clan enough to consider a complete break from tradition, or whether the changes will ultimately be restricted to purging the Lodha influence from the group. A few other developments also bear closer scrutiny. For instance, why would the M P Birla flagship, Birla Corporation, shoot up nearly 10% in the midst of a controversy? Newspaper reports say that a Foreign Institutional Investor called Emerg- ing Markets Management picked up a 5.7% stake. Birla Ericsson, Birla Kennametal and Vindhya Telelinks from the same group also spurted.
Are these investment decisions by FIIs who see a big improvement in group performance under Mr Lodha? Are they speculative purchases by FIIs and other investors who see profit opportunity in a possible take-over tussle? Clearly, an alert regulator should be asking some questions here.