Sreeleathers : Perils of Nepotism

Incessant travelling over the last six months meant not doing a lot of things that I enjoy(including writing). On the flip side I interacted with people outside my usual circle. One such conversation was with an investor who was a great believer in organizations attracting talent -  one key requirement to attract talent was the right organization structure wherein lies the secret to a great institution. His observation was companies in Eastern India have yet not embraced these values & are the flagbearers of nepotism.

Nepotism being such a raging discussion in Bollywood obviously merits attention in Indian business communities where 'family business' is still in fashion. Nepotism implies giving preference to friends & relatives in one's organization over someone better qualified. A classic case is that of the Indian National Congress where many credible candidates have been sidelined to make way for the family scion. On the corporate side, I felt this trait holding back Kolkata's shoemaker Sreeleathers. Here are some novel experiences in the company's AGM this year.

The meeting was chaired by the Managing Director Mr. Satyabrata Dey, for the first time he was joined by his daughter & newly appointed director Ms. Rochita Dey. Rochita is a freshly minted MBA(May 2018) from a reputed US management school. An interview below gives a peep into her thoughts.

https://voices.whitman.syr.edu/programs/finance/ms-reflections-rochita-dey.  

Like many AGM's in India it had loyalists(probably planted by the company) who eulogized the company & its management. One such loyalist made his motivations obvious when he said & I quote '.. brave & heroic decision to not pay dividends & invest in growing the business..'. The only irony is for the last 10 years the company has seen its fixed asset stagnate / decline, its working capital decline while its investments, primarily in debt mutual funds has steadily increased.  Why would any minority investor give money to the Dey family for investing in mutual funds ?

Before a single genuine question every effort was made by the 'loyalists' above that none other than their group are able to raise a question. Some of them walked upto the stage shouting like hooligans to end the meeting for seemingly another meeting planned by the management. This happened less than 15 minutes into the AGM.

One serious investor who came down from Lucknow asked a simple question - How many stores are their in the listed company ? 

• Now this question to me is like asking an individual how many children does he have, if someone cannot answer this then he has too many illegitimate children. Mr. Satayabrata Dey & team were scared to answer this one & asked the query to be mailed or will be answered on the sidelines. 
• Sreeleathers is notorious in operating stores through partnerships, Mr. Dey & his wife generate personal incomes out of partnership in excess of ~ 50 crores per annum(Individual IT returns tell the story). Infact the flagship store on Lyndsey street is in a partnership. There is no clarity how the advertisement cost etc is apportioned between the partnerships & listed entity. No clarity on fresh franchisee stores, which most likely are now being doled out of partnerships/ unlisted entities. The promoter lacks basic ethics & governance practices which are mandatory in a listed entity or still sees this as a family business where he is the only stakeholder. Besides Mr. Satyabrata, his brothers run stores outside the company independently thus ownership of the brand is not in custody of the listed entity. 

Oddly at most AGM's the concern is around the high salaries paid, here the concern raised by serious investors was the petty amounts being paid to the CFO, company secretary & all other professionals. The family scion inducted as a director a year ago is paid more than the rest of the senior management put together. Infact her monthly salary is more than their annual salary. It is not clear whether they also serve the partnerships & are paid from other entities.  

The market was jubilant when Miss Rochita Dey equipped with a formal degree stepped onto the board. But alas as she states in her interview (link above) '...having been bought up in a houseful of entrepreneurs..', she has embarked on her entrepreneurial journey through 'House of SL' which is in the same line of business & is the new product line she mentions in the latter half of her interview. The store which she operates was transferred to her from the listed entity & the market value is much higher than where the transaction took place. So much for management education, seems the shallow family tricks will continue. She continues to draw a hefty salary from Sreeleathers & the only reaction during the AGM was a nervous 'nod of no' when asked whether 'House of SL' is in the listed entity. It seems what she has learned seeing her 'family of entrepreneurs' supersedes basic governance taught at business schools. The biggest risk with such promoters is 'hoping for change'.

The mediocrity of these organizations/ management is depicted in the annual report where none had the time or effort to read/ verify the contents. The management is so callous that they cut, copied & pasted from the Bata Annual report of 2018 & did not even remove Bata's name. I am quite sure the Whitman School of Management at Syracuse University would have expelled Miss Dey for this petty act of plagarism yet our generous regulator SEBI will do nothing to maintain the sanctity of this pious document.

Ideally the management should delist this company if they wish to continue based on their whims & fancies. This way the minority holder will not be penalized as presently the promoter is slowly & systematically weakening the listed entity at the expense of his/ her personal competing businesses. SEBI being the mediocre regulator has turned a blind eye to this & is more intent on petty reforms. It is about time they standardize AGM, audits, disclosure practices for listed companies where data shared is relevant & not procedural. An AGM is particular should equip stakeholders to with an opportunity to grill the management & either the recording or the detailed transcript must be available. Every AGM must be attended physically/ online by a SEBI authorized representative.

The learning for any investor that despite a great business model serious returns depend on the approach & intent of the management. Here is a management which is not concerned about the listed business is probably looking for 'innovative' ways which are famous in Calcutta to squeeze the minority holder. They take to opaqueness & inaccessibility to avoid scrutiny & the regulator is not potent enough to act.

A handful of managements have embraced a concept I call 'thoughtful succession. Thoughtful succession is where the successors are nurtured & groomed. They demonstrate acceptability & capability but more importantly they leave space for other capable leaders to grow & take up decision making roles.