The Fiasco of Professional CEOs and Independent Directors - what is a way out?

23^rd October 2019

The fiasco of Professional CEOs and Independent Directors

Dear Fellow Travellers,

Greetings from Hitesh! Our last post on HDFC BANK PASSBOOK First page entry has been a superhit. Readers appreciated our approach to proper investment. With the same concept in mind – I am dealing with INFOSYS fiasco. Infosys and many other companies boast about their professional CEO and Well-Respected Independent Directors. In practice, we often get shocked when the sudden negative news comes. Let me deal with both the issues.

Professional CEO: -

Normally, the guy who becomes a CEO has a very successful background in SALES / MARKETING / FINANCE / PRODUCTION / Innovations and things like that. Though he may be super successful in his area – running a total business is altogether a different ball game. To run a Business successfully requires proper capital allocation and a holistic approach to the business. Most CEO’s lack that.

To fulfill their shortcomings – they appoint a group of experts or committees to guide them in what to do? Now, the job of these guys depends on their suggestions to the CEOs. CEO is a professional person and he has expertise in one area. So, he will rely on these guys and take action based on these guys' suggestions. Everybody is working on SALARY and their first goal is to keep their SALARY coming each month. Normally, they take the company’s fortune for a ride for their personal gains.

Independent Directors: -

These are the guys appointed from various fields to guide and watch the CEOs. They get some sitting fees for the same. As an investor, we may assume that they would be doing their job properly. But in practice, they face the following issues.

1.  Going against CE0: - say they don’t like CEO’s step in a particular area. Now, if they go against the CEO in a board meeting – it will hurt the EGO of the CEO. He will keep this in mind and may not renew their directorship for the next term. What’s more, if he raises the voice – the market will come to know and other company CEOs will not appoint him as an independent director in their companies as he could be a source of problem for them. Also, the present CEO will not give a good reference. This will affect the income of Independent directors. They will think twice before they do that.  

2.  Social Effect: - Say a board meeting is going on and the Independent Director finds that something is fishy. He wants to raise his voice. But if he sees, nobody is raising voice against the CEO or the proposal in the meeting, he too will keep his mouth shut. This is the most harmful step an independent director will take under the social influence. Everybody wants to be in good books of the other guys socially, so they end up supporting each other at the cost of the company’s fortune.  

3.  Lack of Business Specific Knowledge: - Say an IT company has selected an INDEPENDENT DIRECTOR from PHARMA company. However, HONEST this guy could be, he lacks the expertise in IT. This limits the ability of Independent Director to find out the loopholes in the business proposals / or in the routine operation of the business.  

How does this affect investors?

I have a long track record of dealing with individual investors. They come to the market from various fields and thanks to their success in their own field – they assume that they can also do investments. The way CEOs are not aware of CAPITAL ALLOCATIONS, small investors are not aware of ASSET ALLOCATIONS. Since they don’t know and it hurts their EGO to agree that they don’t know, they end up making mistakes while investing.

How to invest in companies where PROFESSIONALS are managing the businesses?

The only must-have qualification one should look at is the CHARACTER of the CEOs and Independent Directors along with business-specific skill sets.

As a HUMAN all can make mistakes, but a person of CHARACTER will accept that and take steps not to repeat the same.

I have yet to find a better way than the mentioned above.

What NEXT?

Most small guys want FAST money. The same way your CEOs and Directors also want the fast money. The law of NATURE says – one pregnant woman can deliver a BABY in 9 months. But if a MAN makes 9 women pregnant and expects a baby in a MONTH, it will never happen.

As the SECRET book writer says - Your GREED attracts the CHEATERS in the STREET to promise you a MOON and take you for a RIDE. So, work on your GREED this DIWALI. 

I wish you all a VERY HAPPY DIWALI.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.