Bring Back Managing Agencies
Actually, the not-so-hidden agenda behind the abolition was to make British-owned companies sell out to Indians. Nehru was a moderate socialist; he did not want to stir up a hornets nest by nationalising British businesses. But the British then had a strong presence in Indian industry, notably in eastern India jute, tea and coal were their strongholds. These industries were full of small companies managed by huge managing agencies such as Andrew Yule and Martin Burn. The shares of the companies were owned by many small investors in Britain; they had invested in the companies in the belief that honest, competent, hands-on management by British managing agents located in Calcutta would ensure decent, steady dividends. That is how the investment of British widows and orphans was attracted to Indian industry five thousand miles away with which they had no familiarity or contact.
When managing agencies were abolished, Indian managing agents devised an intermediate form called secretaries and treasurers to gain breathing time; but in a few years this became unnecessary, for they manipulated shareholdings in such a way that they could manage their companies without being managing agents. They stacked away what shares they could afford to buy and control in captive trusts and subsidiaries, and issued large chunks to the government financial institutions on the informal understanding that the institutions would support the incumbent management. This pact is fundamental and almost universal: the financial institutions have virtually never unseated promoters, as managing agents are nowadays called. This unwritten pact is reinforced by many favours from the promoters to the FIIs and their employees preferential share allotments, jobs for relatives, and other less subtle inducements.
Almost every company that has been mismanaged has been managed by promoters; the only major professionally managed company that has been poorly managed is ITC. Whenever a company is brought into trouble by the promoters, the government gets into the act in some way or the other. In the 1960s it used to take over the company without compensation: when managing agencies were abolished, all the big British managing agents in Calcutta went bankrupt and were taken over by the government. So were lots of textile mills in the 1970s. Then came the era of the BIFR. The BIFR would make creditors of bankrupt companies give them writeoffs and subsidies. It would replace the promoters, but that was very rare. In any case, the BIFR took so long over most cases that the promoters had little to fear.
The theory is that a company is a democracy of shareholders: that the shareholders appoint the board of salaried directors who in turn manage the company. In actual fact, the shareholders are a fictitious constituency: the promoters and the FIIs together make up the organised shareholders and appoint the promoters on the board, who then milk the company in many ways besides the salaries they get. In other words, the companies are still being managed by managing agents, who take their remuneration in many forms, many of them illegal. For instance, the management of a company I know takes a commission on two-wheelers sold, which it then lends out to the dealers of the company. The family has got immensely rich at the cost of the company.
The illegality of promoters compensation has become the biggest obstacle to the induction of technology from abroad. For the technology suppliers nowadays want a share in the equity and in management to ensure that the technology earns the highest return; they simply cannot tolerate the double books of account that underhand commissions for promoters require.
There are other problems with the non-recognition of managing agents. For instance, the Tatas, who generally are more law-abiding than other business houses, have no way of recovering the costs of the services they provide to their daughter enterprises, and are contemplating the charging of a licence fee for the use of their name.
When a company gets into trouble, the governments instinctive reaction is to take over management. Right now Shaw Wallace is in trouble, and the government is getting ready to appoint directors on its board. This appointment of directors is a highly nepotic affair. Most of the directors are government servants or their friends and relatives, they know little about management, and as a board, they put too little energy in turning around the company, which needs day-by-day crisis management. They only earn board fees and make the company sicker.
Hence another way must be found, and it lies in the explicit reintroduction of managing agents. Wherever a management does not own or control an absolute majority of shares, the majority shareholders may appoint a managing agent. A managing agent may be a partnership, a family enterprise, a company, or anything else. It would enter into a contract with the company, under which it would undertake to raise dividends and net worth by a promised amount during the management contract, which may be three to five years; they would also promise to avoid liquidity crises and defaults. In return they would get a commission which would be a certain proportion of value added of the sum of wages, salaries and profits. If the managing agents do not honour the contract and fail to ensure the promised growth, dividend distribution or solvency, either the shareholders or the government would have the right to terminate their contract and appoint another managing agent. The appointment may be based on competition: applicants would state the companies they have managed and with what success, and the most successful applicants would be appointed.
The managing agency system has never been abolished: it has always been with us, and has worked badly because of the indissoluble marriage between managing agents and companies. The managing agents have come to regard the companies as their family property; and because they are treated by all as de facto owners, they cannot be dismissed however incompetent they might be.
If, instead, managing agency is made detachable from ownership and subjected to competition, professionally managed managing agents will emerge to serve the market. They will manage companies purely for the remuneration; and if they want to stay in business in the long run, they will manage the companies well. The way to create professional managements is to legalise them first, and to distinguish them from owners.