Fortis stumbles, again
Corporate governance concerns in recent board decision
Indian health care major Fortis, which has lost 7 per cent in value on the markets this year so far, has continued to stumble with its rehabilitation plan. The company was thrown into turmoil by allegations against the promoters, who had to step down in February. The latest wound is also self-inflicted. Fortis’ board has chosen one of the four possible options. The deal will, of course, have to be accepted by shareholders. Yet the decision itself has raised knotty questions about the quality of corporate governance on offer at Fortis. It has been reported that three independent directors in the eight-member Fortis board would have chosen another offer. Attention has focused particularly on the rejection of the offer by Malaysian health care giant IHH, the largest private Asian health care provider. That bid, according to several reports, foundered on the demand for a seven-day due diligence period, which would appear to be a reasonable request in the circumstances.
There is no doubt that poor governance practice was followed by the Fortis board in its approach to this deal. For one, independent examination of the company should have been prioritised. If indeed the various outside evaluations of the deals on offer preferred alternatives to the one selected, then there is some explanation due to the shareholders of the company. The board’s claim that it chose this particular offer on the basis of the “deal certainty” criterion is not persuasive, since this can also be read as an unwillingness to undergo due diligence, which creates uncertainty in the other possible purchase plans. Although the stake sale is below the 26 per cent cap that triggers an automatic open offer, it is clear that shareholders would be well served by an open offer made to compete with the board’s chosen purchase plan. This is not a harbinger for Fortis’ return to stability. The concerns being aired by minority shareholders, including well-known global funds, about the independence of Fortis’ board and its responsibility to shareholders are reasonable in this context.
Once again, choices made by boards of major Indian companies are being seen as insufficiently concerned about the rights of minority shareholders. Recent attempts made by the security market regulator to strengthen the power and competence of independent directors will come to naught if they are merely turned into permanent minorities on boards. Certainly, boards should be induced to prioritise greater transparency and information-sharing, especially at moments of transition such as the one Fortis is currently undergoing. Independent evaluation and due diligence should not be seen as a negative, since they are in shareholders’ interest. In this specific case, Fortis needs to sort out the ownership question as soon as possible, and install a properly representative board. Some of the prominent investors have already questioned the legitimacy of the existing board because all its current members have had previously tenured relationships either with the promoters, or with companies of the group. In the December quarter of 2017-18, Fortis reported a net loss of ~191 million, compared with a profit of ~4.53 billion in the same period of the previous financial year. It is clear that the confusion at its corporate level has hit its operations and profitability even as the potential of the Indian health care market remains under-exploited.