Decoding Sam Altman’s Impact on Personal Loan Guarantees in India

TK Arun

The shock and sense of injustice that most Indians feel at the ouster of a founder from the company he or she founded also gives, in the same breath, legitimacy to founders being held responsible, without limit, for the failure of the company and for its resultant liabilities.

Firing of Sam Altman

The precise reasons for OpenAI co-founder and artificial intelligence’s glamour boy, Sam Altman, to be ejected as CEO by the company’s board are not known, apart from the official statement that Altman had been less than candid in his communications to the Board. But what we do know are two things: one, he is not the first charismatic founding boss of a startup success to be ousted by the company, and two, this strikes most outside observers, particularly in India, as gross ingratitude and the first step in a spiralling descent into corporate disaster.

In two prominent examples of a founder CEO being sacked, those of Steve Jobs at Apple and Jack Dorsey at Twitter, the company brought back the founder leader to salvage the company and its business. In Apple’s case, the return of the Jedi master was, of course, a stellar success. Twitter continued to underperform deemed potential, despite Dorsey’s return as CEO.

Uber also pressured its co-founder CEO Travis Kalanick to quit, less directly for financial underperformance than for mismatch with the liberal values of the bulk of Uber employees. Under his successor, the ridesharing platform has performed better.

Yahoo co-founder and CEO Jerry Wang had to quit after the company failed to develop a search engine that could rival Google and he turned down an offer from Microsoft to buy the company for $35 billion.

The point to note is that a company has a persona different from that of its founder, however larger than life he might loom over its affairs or the industry in general. The interests of the company and its shareholders matter more than the charismatic founder. In India, the culture has been to treat a company as an appendage of the founder, and ever the twain shall meet is accepted as the natural order of things.

Now, Naresh Goyal is not exactly imbued with a great deal of charisma, but there is no gainsaying that he is a  dynamic businessman, who built Jet up as a pioneer of India’s airline business. Yet, if he had been ousted from  the company’s leadership, at least  when it became  obvious that the outgo under the head ‘Sum of General and Administrative expenses’ was, for  Jet, nearly ten times as large as for Indigo, Jet would probably have survived.

Despite all his troubles with markets regulator SEBI, Punit Goenka continues as CEO at Zee, even becoming a stumbling block to Zee’s merger with Sony. Formally, an order by Securities Appellate Tribunal, quashing Sebi’s order removing him as CEO, enabled his  return as CEO at Zee. But his refusal to step down as CEO, even after Sony’s reluctance to have him as leader of the merged Zee-Sony entertainment behemoth, stems from cultural legitimacy in India for the notion that a company is the private property of its founder and his family.

The corollary is that other shareholders and stakeholders such as lenders, customers, employees and suppliers have incidental rights. Devaluation of minority shareholder rights is the obverse of deification of the founder.

Liability For Business Failure in India

It might appear that the deck is stacked in favour of the founder CEO, in Indian circumstances. Yet, the very same identification of the company with its founder managers underlies the ready, unquestioning acceptance in India of personal guarantees by promoters and fellow board members for loans taken by their companies.

Co-signing of corporate loans by individuals is not unknown in advanced economies, but far less common than in India. Personal guarantee by a promoter for a loan taken by his or her company amounts to travesty of the principle of limited liability. That an investor’s liability would be limited to their risk capital contribution to the enterprise is a cornerstone of capitalist success.

It took decades after the formation of the first joint stock company for the concept of limited liability for individual shareholders to get statutory backing. This shield against an investee company’s failure leading to every investor’s ruin under conditions of unlimited liability became the bedrock of widely held investor bases, which alone would enable, except for rare cases, the formation and operation of very large enterprises.

The shock and sense of injustice that most Indians feel at the ouster of a founder from the company he or she founded also gives, in the same breath, legitimacy to founders being held responsible, without  limit, for the failure of the company and for its resultant liabilities. That a promoter’s personal assets should be taken over by the bank that lent to his failed enterprise flows logically from such conflation of promoter and company, regardless of whether there was fraud and diversion of the company’s funds to the promoter/founder.

This is inimical to the spread of entrepreneurship and broad-based economic growth. Policy and popular culture need to firmly separate a founder/promoter from the enterprise promoted by him or her, and privilege the health of the enterprise over the deemed natural right of the founder to stay at the helm of the company. This would also help end the practice of bank loans to companies being routinely supported by personal guarantees by the company’s directors.

TK Arun is a senior journalist based in New Delhi.

The article was first published in Money Control as Sam Altman’s relevance to personal loan guarantees in India on November 20, 2023.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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Acknowledgement: This article was posted by Aasthaba Jadeja , a researcher at IMPRI.