How Boards Ruin Institutions

28 AUGUST 2017

Readers of past editions of The Honest Truth know that I have often written that there are four things of great value in the Indian investment and corporate world, alphabetically:

  1. Gold,
  2. HDFC brand name,
  3. Infosys brand name, and
  4. Tata brand name

Readers of past editions will also note that in The Honest Truth of April 17, 2013 (The GHIT has hit the fan), I noted that - of the four things of great value in India - only Gold seemed to retain its value. The rest have been tainted and have slipped to join the ranks of many other faltu business groups in India that are obsessed with market cap and personal wealth.

Nothing wrong with that, I assure you, because even with wealth derived from "anyhow" means, these corporates and their founders were given the "Get Out Of Jail" pass with the questionable 2% donation under the CSR rule.

Donating a part of the profits - much of it made under suspicious means - has now brought their wives, children and mothers into a second, third, and fourth life in the haloed pages of the auspicious 'Page 3'.

On further reflection, I am convinced that the reason why HDFC, Tata, ad Infosys have been converted from infinite institutions with a halo around them into mortal companies with vulnerabilities has been the deliberate destruction by Members of their Boards.

The Boards have killed the dreams of the Founders by forgetting the foundations of the solid principles that they were formed on.

Let me explain.

HDFC dropped the ethical framework?

H. T. Parekh built an institution (with government help on taxation benefits, to be fair) that allowed individuals to purchase their first house way before they had the 100% cash-down to do so. Because of HDFC - and the many copy-cats - the home loans market is booming year after year and millions of individuals now live in homes they own much before they are ready to retire. In their old age, they may not have a mobile phone with zero "drop-calls" but they sure have a roof over their head.

Sadly, the ethical and transparent standards that are imbibed in HDFC have not filtered down to their other two well-known success stories: the most respected Indian private sector bank, HDFC Bank nor the giant of the Indian mutual fund industry, HDFC Mutual Fund.

I am sure there are many customers of both the companies-camouflaged-as-companies who will share their views on why these two entities do not deserve the HDFC brand name in their business names but I will list one example from each. It is a sector that I am familiar with: the mutual fund industry and the distribution channels.

As you have probably read multiple times by now - and may have unknowingly been a victim of it - HDFC Mutual Fund was party to the persistence survival of a scandalously profitable distribution mechanism for mutual funds. Commissions paid to distributors were never disclosed. Worse, rewards were given to distributors for selling the most products within a time frame. Greed was effectively encouraged. The fact that this was the standard in the industry is no excuse - for the subsidiary of an H. T. Parekh created firm, that is.

The founder of HDFC broke the then monopoly and stranglehold that a few state-owned banks had on home lending and pioneered a transparent mechanism to bring a great product to the needy masses. I don't think he would have sent an army of hired guns to sell home loans unless there was a solid education and disclosure about the product. And here, I am not talking about the Disclaimer that accompanies every leaflet but the decency of letting a customer know what his real costs were. The Boards of HDFC Mutual Fund and HDFC - with the 100% "silence is not dissent" attitude probably sent a strong signal to continue showing good growth in AuM. The Boards' silence may have helped game the system since the Board did not use its position of power and respect to clean up the messy practices in the distribution system.

It took a decade of bad experiences, the creation of ant-sized Quantum Mutual Fund (which lobbied for transparency from the time of our birth!), and a frustrated regulator to finally break the stranglehold that the distributors had on these willing elephants to dance to their tune. HDFC Mutual Fund is, indeed, a big elephant and adds to the market cap of parent HDFC. It's well paid fund managers talk about corporate governance (even when they write the pleading letter to get Nandan Nilekani to come back to Infosys - a disguise to rescue the dent in their NAVs?) but have they ever written a research note or made a comment on how the money that they get to manage was raised?

Have they ever connected the dots between their silence on the use of opaque distribution channels, the high Assets under Management, the high fee income - and their own outlandish salaries and bonuses?

Has the Board of HDFC ever reviewed the business practice of HDFC Mutual Fund and whether it would pass the test of the ethical framework of the late Mr. H. T. Parekh?

HDFC Bank, now 28% owned by HDFC, used to derive nearly 30% of their profits from fees from selling mutual funds in the good old days of 2005-2007. Yes, HDFC Bank was a distributor: part of the system that flourished at the cost of innocent investors who were totally in the dark on how much money was paid out of their subscription money in a mutual fund. And these investors may have been victims of a churning pattern that was adopted by many distributors to generate commissions every time a fund was redeemed and/or purchased on behalf of a client. Would H. T. Parekh have approved of this in growing the book of HDFC's home loan business? Of course, the response from HDFC Bank will be "bania ka hisab kitaab hai" since their focus is market cap, not necessarily values and value.

Financial firms, globally and in India, have a notorious reputation of destroying lives, society - and anything else in between - to achieve their targets and their selfish financial goals to preserve the unnecessarily extravagant salaries and bonuses handed out to their CEOs and senior employees. Exhibit "A" for this is the Great Financial Crisis which rocked the world starting with the collapse of a Bear Stearns hedge fund in July 2007.

For the opaque practices adopted by its two affiliated businesses, HDFC - in the books of many - is now just another financial firm, not an institution.

Tata says goodbye to "doing the right thing"?

The Tata group made a blunder in selecting Cyrus Mistry as the successor to Ratan Tata. This is not a judgement on the business acumen of the Mistry family members but, rather, a recognition by many that they are not quite "Tata-like" in their approach to business. The Tata group has pretty much fixed that error of judgement. Many of the independent members of the Boards of various Tata companies challenged the dismissal of Cyrus Mistry and the return of Ratan Tata. Luckily, for Tata, those Independent members of the Board lost the battle and the Tata group is now back to where it was: a caring, social enterprise that is focused on making money but, generally, not at the cost of its reputation and without compromising its self-imposed principles and obligations to society.

The Independent members of the Board were asleep at the wheel and forgot the basic belief of Sir Jamsetji Tata, the founder of the Tata group: "In a free enterprise, the community is not just another stakeholder in business but is in fact the very purpose of its existence". This is a far cry from the 2% CSR escape clause in the Companies Act that gives every conniving businessman a Get Out Of Jail Pass.

By the way, anyone seen any letter to the Tata Boards from fund managers asking for Ratan Tata to come back? I may have missed it. But I doubt they wrote that letter. Under a Mistry-led Tata, it seems that profit as a sole motive may have been a good focus. This meant that share prices were rising as "efficiencies" were brought in, so why bother on fighting for a return of a vague archaic Tata culture which does not show up immediately in a share price and therefore does not spike up the NAV of a mutual fund! Oh, I forgot: mutual fund investors wish to maximise their returns; they don't care about the benefits to society. But, yes, Mr CEO and Mr CIO of Elephants Dance To Distributor Tune Mutual Fund you could skim money from the investors at the top and not disclose it - because you want to maximise your personal return even at the cost of the return of your investors!

Anyone has an air-sick bag that I can use?

Infosys: Driven by Values, Ruined by its Board?

And now we come to the saga of Infosys.

I was unhappy when I learnt that there was this unwritten and unspoken rule that every founder of Infosys was to be given a shot at the being CEO. It was apparent that Shibulal was not the man to head Infosys as a CEO but, because he was a founder, he was in.

And I was doubly unhappy when, in May 2013, Narayan Murthy came prancing in with his son.

Again, nothing against the son who by all accounts is a brilliant and wonderful young man.

But it seemed like a breach of an internal corporate governance unwritten rule and a loudly spoken rule: no children of any founder of Infosys will work in Infosys.

The Board failed to maintain the vision of the original founders (including Mr Murthy) when it allowed the son to come in - the salary that he earned (or did not earn) was not the point.

Then they hired Vishal Sikka in 2014 - handpicked by Murthy.

And then we started reading about the compensation packages.

And you knew the Board was asleep at the wheel, yet again.

This has nothing to do with the challenges that Infosys faces as a business in a rapidly changing, increasingly automated, global world.

This has nothing to do with the technical ability of Sikka to turn the company around and face the new challenges.

This has everything to do with what Narayan Murthy calls "compassionate capital".

This has everything to do with the estimated 100,000 people who joined Infosys (maybe 70,000 are still there) and "grew up" under the leadership of a series of founders each of whom followed a certain pattern of compensation, a certain norm of travelling in economy or business class, and staying in certain types of hotels - and have now seen all that change under the new regime.

A Board, anchorless in history, and populated by many who are proponents of maximising market cap, grinned happily when share prices surged. Like an HDFC which seems to have jettisoned transparency for growth, like the Independent members of the Tata boards who supported Mistry to serve profits rather than community, the Infosys Board seems to have discarded a 'value system' from compensation to travel budgets to merit versus familiarity.

Narayan Murthy has rightfully protested.

The return of Nandan Nilekani is a great positive to ensure that the next CEO - from within or without - has a value-based culture, a competence, and a compensation package that reflects what the founders of Infosys had laid out.

The entire Board of Infosys must be removed, for collectively, they have failed.

The Noise and the Muzak.

The rating agencies have been seeking to grab the headlines as they shout out on "Corporate Governance".

However, they have their own mathematical methodology for rating companies and their corporate governance.

To me, much of it is garbage in - garbage out: incorrect inputs give you suspect outputs.

To agree or disagree with me, try this out:

Think of 5 business groups that you will never want your children to work with.

And 5 business groups you do not trust.

Now ask the rating agencies to send you the ratings of those companies in your list.

Let me know how well it matched with what you know, or perceive, about the 10 companies.

The fund managers will continue to be largely devoid of conscience and inflated with money concerns. They will write letters selectively. They need their NAVs to be rescued.

At the end of the day, there are founders of companies and founders of institutions.

Boards have a responsibility to preserve the culture of institutions.

The Corporate Governance folks can rate companies for the rest of the public; they don't understand what an institution is.

India is lucky that Ratan Tata was alive and fighting fit to rescue the Tata Group.

India is lucky that Narayan Murthy and Nandan Nilekani are around to lead the charge to reclaim Infosys.

HDFC sadly is rudderless and, after Keki Mistry, they will probably import a CEO from Blackrock, Blackstone, Goldman, Sachs or Morgan Stanley.

Then there will be no illusions of it ever pretending to be an institution.

HDFC will be a "valuable company" when measured by market cap.

Meanwhile, I will say a prayer for the soul of the honourable Mr. H. T. Parekh.

NOTE: Ajit Dayal has resigned from the Board of Directors of Quantum AMC on August 22, 2017. Quantum AMC is the investment manager of the Quantum Mutual Funds. As communicated to unit holders on June 2, 2016 there is a strong team in place and a very clear succession plan that has been implemented in phases since 2013. A Charter of Principles is being laid out for the Board of Directors to ensure that the core values and investor-focus of Quantum AMC and Quantum Mutual Funds will never be at risk.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund and Quantum Equity Fund of Funds Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 20% in QLTEF and 60% in QEFOF 20% Keep aside money to meet your expenses for 6 months to 2 years
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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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11 Responses to "How Boards Ruin Institutions"


Sep 5, 2017

Just one question:

Why HDFC, Infy and Tata group companies still showing up in your top 5 holding?


Sambaran Mitra

Aug 30, 2017

I started investing in Quantum after reading (and getting wildly impressed) a few editions of Honest Truth by Ajit Dayal.

I understand very little about stocks. As a mutual-fund investor, I do not need to. I just need to trust my fund-house. I did and do trust Ajit Dayal. A respect earned through visible Quantum operational decisions and personal interractions in path-to-profit. Not to mention a good rate of return.

Hence it is necessary for me to understand why Ajit is quitting Quantum.

The mail (sent later to investor's inbox) talks about how the team, he is leaving behind, is competent and value oriented. It does not unambiguosly clarify why Ajit is quitting. Does he want to reduce his workload? As per his linked-in profile, I guess he is aged between 56 to 60. Does he want to observe (when he is still capable) how the organization performs in his absence? Where is Subbu in the new scheme of things? Is he also relinquishing to enable the 'younger' generation to take over?

The answers should not be left to my conjectures.

Hence I request (and demand), as an investor, to reiterate the reason why Ajit is quitting.



Rajeev Kapur

Aug 29, 2017

Shocking to know that Ajit has resigned from Quantum MF. Is it time to add Q to GHIT?



Aug 29, 2017

Nice article Ajit. HDFC bank has been practising unethically since long - it was punished for fake Demat accounts around 2003-2005. It was found guilty of mis-selling the products of HDFCLIFE. It's distributor based MF misspelling is well known. Deepak Parikh and Aditya Puri do not inspire confidence as ethical leaders - they are more like corporate crooks who pretend to be ethical. HDFC bank has high extra charges for even common services like sending a statement by post. It's conduct during demonetisation is well known.

Infosys board should have been scrapped totally. NANDAN N was the only promoter who had voted for the appointment of Puneeta Kumar Sinha to the Infy board and also for the extravagant 55% increase in compensation to Sikka. So it is debatable how he will bring confidence back to Infy investors. Corporate governance does not mean ethical conduct any longer. It has a new definition - maximising profits for the CEO, the board by whatever means and keeping the founders at bay and the shareholders in dark. Sikka (Money) rules the business world even as the corporate honchos chant "Narayan, Narayan"


Adrian Pinto

Aug 28, 2017

Dear Mr Dayal

Thank you for your frank comments on corporate honesty/greed which were very enlightening.

Firstly, we must keep in mind that the increase in any employee benefits/bonuses should not exceed the increase in the corporate entity's net profit available for distribution.

I have no objection to CEOs and other C level officers getting bonuses that are twice or thrice what they got the previous year PROVIDED that the shareholders also get twice or thrice the dividend they got the previous year.

I have no objection to employees getting share options PROVIDED that the shareholders are also part of the same share options scheme.

After all, it is because of the shareholders investments that the C level officers or other employees are employed !

Adrian Pinto


Salunkhe S

Aug 28, 2017

Hello Mr Dayal, Good to see u writing when you have resigned, hopefully you'll write more often. Bill Bonner's pearls of wisdom are always pleasure to read and we are happy to see that the same traits being trickling down to next generation at Equitymaster.


Pradeep Bhat

Aug 28, 2017

Very well articulated !

Pradeep Bhat


Praveen Godbole

Aug 28, 2017

Dear Mr. Dayal

While you have given one example of how ethical and transparent standards that are imbibed in HDFC have not filtered down to the most respected Indian private sector bank, viz. HDFC Bank, another major example seems to have escaped your attention. HDFC Bank has a subsidiary viz. HDB Financial Services Ltd (HDBFSL). While 96% equity of HDBFSL is held by HDFC Bank, largest individual shareholder of the balance equity is one lady Ms. Amrita Puri, who holds 14.81 lakh shares, constituting 0.19% stake in the Company (Source: Economic Times 26 July 2017 and Annual Report of HDFC Bank). Does the name of lady sound a bell? It should. She is daughter of Mr. Aditya Puri, MD and CEO of HDFC Bank. Incidentally, Mr. Puri has also become Chairman of HDBFSL last year. How did she (presumably) become promotor of an NBFC promoted by HDFC Bank? Is it not a case of conflict of interest? HDBFSL is planning to come out with an IPO in near future. Post IPO, her Rs.1.41 Cr stake (at face value of Rs.10) will be worth over Rs. 75 crores, going by unofficial market price of equity share of HDBFSL (Source ET 26 July). Would that have been possible in H.T. Parekh's times? Unimaginable!

Like (2)


Aug 28, 2017

Dear Mr.Dayal,
It was pleasure to read your column after a very long time. Do so more often.
I like your columns & like one Mr.Mulraj use to write.
You have hit the nail on head. Corporates have become greedy. Surprised to read about HDFC Halo. Good I read today.
Banks have forgotten that without depositors they stand no where. Alas that is conveniently forgotten.
I urge you to spare more time in writing your reports.
S. Parikh

Like (1)

P Chandrasekar

Aug 28, 2017

Hi Ajit,

Very few in India will have the honesty and integrity to bluntly say what you have very well articulated! While any view can have a counter, the core cannot be countered! I salute you!


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