Indian companies must avoid the 'classic trap' of market expectations and the consequences of earnings guidance are often 'not very healthy,' S Ramadorai, chief executive of the country's largest software exporter Tata Consultancy Services, said on Monday.
"Companies often give guidance and the market accepts the guidance, because it makes for more transparency in earnings and allegedly helps investors decide to whether or not or how long to invest for," he said at a Confederation of Indian Industry seminar on 'Governance and Accountability.'
"The thought is fair as are the intentions of transparency in business operations, but the consequences are not often very healthy," he said.
He said when markets are booming along with revenue growth, setting and meeting expectations was not so tough. But, he said, conditions could change and companies could often find themselves trying to meet expectations and manage earnings, rather than being focused on the long-term health of their business.
Companies could be very often tempted to discard good governance to avoid a large-scale erosion in their market value, a la Enron Corp of the United States, he said.
After much deliberations TCS had decided not to give earning guidance to analysts, he said.
Ramadorai said though there was a huge demand to follow what was considered 'best practice', as "a leader leading the change, we decided not to follow the herd."
"We would run the business based on the long-term interests of stakeholders and not be held hostage by market expectations. After all, how many times have we seen companies give, revise, upgrade and downgrade the guidance previously given -- sometimes all in the space of a quarter," he said.
Ramadorai said for corporate sector, good governance leads to better, long-term investors "who do not mind paying a premium to buy your stock."
In turn, long-term, ethical investors keep companies on their toes and ensure there is no slacking in good governance.
Good governance had meant that Indian IT industry had been able to earn the kudos of customers globally, despite increased fears of data theft and privacy concerns, he said.
There was no doubt that good economic governance meant that the country's banking sector was healthier than most globally and forex reserves were almost $170 billion.
In other sectors, he said, "our governance has not been up to the mark." He cited the electricity sector, where despite soaring demand the country still could not manage to stand on its own feet, or the Urban Land Ceiling Act in Mumbai that had created very poor governance practices in real estate sector.
Citing the "Enron fable and its lessons," Ramadorai said the case of the US energy giant's bankruptcy illustrated problems that lack of good governance could create.
"In terms of governance, Enron highlights how difficult it is to wind things back in once they spin out of control," he said.
