Flashback – 2010 … the year that flew by

2010 was an eventful year in more ways than one. Corporate performance is now seen in all hues. From a spectacular growth in the stock market and amazingly good / bad primary market listings to corporate frauds and press manipulation we have seen it all in the past twelve months.

Amidst all this chaos corporates are out there either raising money or attempting to raise valuations. How do they (corporates) gauge (a) investor interest and (b) investor confidence in their company? How many corporates have an effective investor relations strategy? Does anyone have and follow a code of conduct for corporate governance? and numerous other such questions.

To me this clutter and chaos should force corporates to pursue an active investor relations strategy and corporate governance code of conduct. However what should any management which does not intend to raise money or is not enthused by higher valuations do? Should they have an active investor relations strategy or a passive one will suffice? I believe that management’s of listed entities have the fiduciary responsibility towards its shareholders, especially minority shareholders. It is these shareholders’ who had faith and have invested in the company. This makes it their right to know and stay informed about the company on an ongoing basis. The other side of the coin is that it is the managements’ duty to continually let its investors know about the events at the company.

SKS Micro Finance – Spat continues

The SKS MicroFinance spat involving the founder-promoter Vikram Akula and the board on one side and the erstwhile CEO Mr Suresh Gurumani continues. In the past two weeks while none of the sides have openly traded allegations, media reports indicate that the spat is still very much alive.

Analysts across the board have agreed that such a sudden change in management is not good for the company and its perception with investors.  Mr NR Narayan Murthy’s (of Infosys fame) PE fund Catamaran has a stake in SKS Micro had reportedly advised the company to make a statement clarifying the details of sacking Mr Suresh Gurumani. The news article also states that a draft statement, circulated amongst board members, mentions investors requesting Mr Vikram Akula to return to a full time operational management position. This is purportedly the reason for the sacking of Mr Suresh Gurumani. However we do not believe this is the full story as in such as case Mr Suresh Gurumani would have been given another profile within the company or given adequate time to decide and move on. A sudden departure is always seen with suspicion.

SEBI, the regulator, has also asked the company to explain the reasons for sacking the CEO. SKS Micro has apparently responded to the query.

It has since transpired that Mr Suresh Gurumani, though sacked as the CEO, continues to be a director on the board of SKS Micro on the back of a Andhra Pradesh High Court Order. The order requires the company to continue Mr Suresh Gurumani as a director of the company. A bigger boost for Mr Suresh Gurumani is that same order also prohibits the new management and / or the CEO from taking any major policy decisions.

We believe that this is in essence bad corporate governance. We expect companies to be more transparent in their major policies, including those related to human resources. The top management drives policies which in turn is likely to drive growth. Any sudden changes therein unsettles investors and undermines the seriousness of founders to professionalize the management. Today’s board and management should remember that investors are well aware of inter-personal friction amongst management, and an open address of the issue is more appreciated.

The board of SKS Micro is slated to meet again on 22 October 2010, and Mr Vikram Akula and Mr Suresh Gurumani are both expected to be present. For investors, we can hope that the board first debates and approves the second quarter (Sept-2010 end) results and then debates the on-going issues within the management.

SKS Micro Finance – First Results post-Listing

Since this was the first result declared after the company’s IPO during July-August 2010, I think it was nice of the management to present financial results for the previous year comparable quarter (June 2009) and preceding quarter (March 2010) as well. The management also mentioned that the business is cyclical with larger business being derived in the 2nd half (Oct to Mar). It is interesting to note that while the management has indeed provided quarterly disbursements for the past three years, none of the other data, including the Income Statement (Profit & Loss Account) have not been provided for the other quarters (i.e. not provided for quarters ending Sep-09 and Dec-09). In light of the management’s own admission that their business is cyclical and the fact that these were the first results declared after the listing the financial details for the intervening quarters would have helped analysts better.

It should be remembered that beginning October 1st we have entered the earnings season for the second quarter results, i.e. for the quarter ending September 2010; while SKSMicro has declared these results for the first quarter, i.e. quarter ending June 2010. Hence, I believe that these results for the first quarter, i.e. June 2010 could have been announced earlier.

One surprise, and investors do not like surprises – especially without explanations – was the firing of the CEO. Though the whole new management team was announced, the reasons for firing the erstwhile CEO was only hinted at during the conference call as performance related. Having ensured a spectacular listing, investors were left guessing the nature of performance issues within the management. This, in short, isn’t being investor friendly or transparent within a few months of listing. A recent example is that of Mark Hurd, the ex CEO of HP. While he was fired, the Board of HP in clear words spelt out the reasons for the same. Whether investors agree with it or not; or view it as too harsh is a separate matter – the fact is that HP clearly laid out to the investors the reasons for firing its CEO. That is indeed being transparent.

The result presentation is available here.