Low corporate governance a concern for divestment-bound PSUs

Institutional investors rate level of governance in state-owned firms at 1.75 on a scale of four

The perception of poor corporate governance in the public sector enterprises can be a dampener for the government’s divestment programme. The government is hoping to raise Rs 30,000 crore by share sales in companies such as SAIL, BHEL, NMDC, Nalco, OIL, RINL  and MMTC.

In a new low, the recently released government data showed that many of the state-owned firms are not even to keen to self-evaluate their governance standards.  As per data released by the Department of Public Enterprises (DPE) Monday, out of the 249 central public sector undertakings in the country, 109 entities did not provide self-evaluation reports on their corporate governance practices for the 2010-11 financial year. The DPE sets the corporate governance guidelines for the central government owned firms.  DPE measures Corporate governance on different parameters such as number of independent directors, quarterly board meetings and review of audited accounts etc.

 

While the share prices have improved considerably riding on a series of government decisions and cheap and easy money around the globe, the government’s lack of concern for governance issues including protection of minority investor rights are seen as key risks by institutional investors.

“You can’t do a huge amount of disinvestment without looking at the governance issues,” said Amit Tandon, founder of Institutional Investors Advisory Services (IIAS), proxy advisory firm.

According to a recent survey by CII and IIAS, investors rated the governance in state-owned companies at 1.75 on a scale of 4, much below 3.67 for multinational corporations and 3.17 for professionally run companies.

This low perception of governance in turn resulted in poor return expectations. PSUs were came last among the four categories of companies in terms of perceived shareholder returns.  At the score of 1.36, PSUs were behind even promoter-run companies, who had a lower governance score.

The government is often accused of treating listed PSUs as its hand maidens using their balance sheets to fund populist schemes. In 2009, Goldman Sachs had slammed the government for using ONGC’s balance sheet to subisidise fuel prices.

At present, UK based hedge fund TCI is in the middle of a messy public spat with the government for allegedly following pricing policies that are detrimental to shareholder interests.

The IIAS survey showed that investors have very low tolerance levels for corporate governance issues in the investee companies.  "About 33% of the investors expect corporate governance issues to be resolved within 1 month, while 42% expect corporate governance issues to be resolved within three months. In other words, institutional investors have a very low tolerance for bad corporate governance, and may respond by exiting the company," it said.
 
Although PSUs received a very low rating in terms of perceived shareholder returns (rated 1.36), they have fared better when investors have been asked to rate their likelihood of investing in them (rated 2.33). “In the current environment it implies investors expect some favourable policy changes,” the IIAS report said.