Firms do not last without performing, especially during times of market volatility, uncertainty and in rapidly changing business environments. For investors this becomes a key thinking point, since to succeed in this business every penny needs careful and calculated investing.
But then the question becomes: How can investors know whether firms are performing or not? The answer is: Through board meetings. Periodically (for example, on a quarterly basis), the Board of Directors meet in order to discuss, debate and evaluate the performance of firms. Regular meetings enable better monitoring of managers and are an important factor leading to enhancement in firm performance.
India's Ministry of Corporate Affairs has taken steps to improve the Companies Act, 2013. New rules stating guidelines for conducting board meetings, and inserting necessary provisions including on frequency of meetings have been put forth. Also, as per Uday Kotak Committee's recommendations, all listed companies should mandatorily hold board meetings at least once every three months.
Board meetings become an essential channel through which the directors can obtain firm-specific information, monitor management, and determine strategic responses to various events that could impact firm performance and in turn the firm's value in the long run. The benefits that a firm could possibly derive, both in short and long runs, clearly outweighs the costs involved in conducting these board meetings.
If the matters discussed in the board meetings are price-sensitive, it has a substantial impact on the stock market. The firm's announcement of mergers, acquisitions, bonuses, shares, and dividends further impacts the stock price.
For example, India Today reported on April 3, 2019 that shares of Muthoot Finance hit a new 52-week high of Rs 631. This occurred immediately after the firm announced a board meeting to consider distribution of interim dividends on April 5, 2019`. Similarly, Mindtree's shares surged 2 per cent ahead of the board meeting that was considering buyback decisions.
Decisions taken during board meetings hold great value. This is because stock market information, which arguably is bread and butter for traders, impacts short-term investors relatively more than long-term investors.
Furthermore, such board meetings enable increased monitoring, better advising and reduction in asymmetry of information. As a result, the confidence of investors improves and the trust and goodwill of the firm builds up leading to more investment, increase in the volume of market transactions and better financial performance.
From the board's perspective, the directors make better strategic decisions as they become better informed of the firm's current standing in the market.
What this could mean is that the fluctuations in stock prices are closely monitored and remedial action is sought for. The accuracy and credibility of financial statements gets taken care of, ensuring reduction in fraudulent earnings. Such steps improve transparency and it has a large influence on making investment decisions.
Mandatory norms such as disclosing the number of meetings held in a year and providing the details of directors who attended the meetings within the annual report, bring more clarity to the investors. Thus, compliance with laws, regulations and governance mechanisms embedded in organising of board meetings ensure better shareholder protection and ultimately better investing decisions.
While taking a decision the next time about their hard earned money, the investors look out for such intricacies in the potential firm's board meetings.
Rahul Sukumaran is a Research Scholar at IIM Trichy and AghilaSasidharan is Research
Scholarat IIT Madras.