Dealing with corporate governance

 

Corporate Governance issues have marred Indian corporate sector and stock market in recent times. There have been cases where promoters did not reveal the pledging of shares, involved in insider trading, and sometimes, siphoned off money. Pledging of shares and insider trading are relatively common events. Siphoning off money is very rare event.The only good part of such misdeeds is that SEBI comes up with stronger regulations but the bad part is that there will always be cases of bad governance which will hurt the stakeholders of the company; employees, shareholders, and customers.

We, as retail investors or shareholders, are the biggest losers if this happens. How should we respond? Should we shun the company completely or keep invested? There are no easy answers because the cases of corporate governance are not so easy to prove. However, we should be wary of such cases and keep few points in mind.

 

 

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Important points to keep in mind

First and foremost, corporate governance issue is a serious issue. Stock market works on the belief that companies, regulatory agencies, and market work together in a transparent manner. Anyone defaulting on this trust will hurt investors. Investors should shun the companies with proved cases of corporate governance.

 

Second, there could be rumors about a company. It happens very often that any case of corporate governance also hits other companies in the similar business or similar cap. Hence it is important for investors to differentiate between the real case of corporate governance issues and rumors. It happened many times in the past and will happen in future too.

 

Finally, do not suffer from behavioral bias. Typically if a company has given good returns in the past, we tend to have a favorable view of the stock. Hence even after cases of corporate governance come out, we tend to be resistant and believe that the company will come out of the crisis and give the same returns. Most of us hope against hope that things will improve but they worsen. If cases of corporate governance have come out of a company, rest assured market will punish the company and there is no point holding the stock hoping for miracle.

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