Corporate governance cries out for reforms

Financial Express, January 15, 2009

By Pradeep S Mehta

As the country recovers from the jolt received from the confessions of Satyam’s chairman B Ramalinga Raju and the consequent precipitous slide of the Sensex, it is important to glean the broader lessons for corporate governance and become wiser about the need for swift systemic changes.

Corporate India’s reputation and, therefore, its position as a key competitive player in the global financial and corporate environment is at stake. A fall in ratings might also permanently queer the pitch for high economic growth.

Satyam, today, stands at the mercy of national/global regulatory actions/investigations. At the national level the market regulator SEBI has already sprung into action ordering a post-mortem of the books of accounts of the tech firm; the Ministry of Corporate Affairs has asked the Andhra Pradesh Registrar of Companies to provide an immediate report; and the Andra Pradesh chief minister has demanded a CBI enquiry.

These actions have sent the right signals to the rest of the world —the Indian government and people take the demeanour of their corporations seriously. But mere initiation of investigations is not enough. The national weakness of allowing initiated projects to gather moss might severely and permanently damage our corporate reputation in the international economy. The investigations have to be seen to their correct and logical conclusion.

Overseas, the company faces investigations by the US financial regulator and is likely to be subject to class action damages. Following the thread of our argument, it is important for punishment at the national level to match those by international regulators in both severity and swiftness.

In as much the management of Satyam is to be blamed and prosecuted for dishonesty and the complete flouting of corporate ethics, there are other wrongdoers who should not go scot-free. First, the company’s independent directors should also be questioned for their complacency and inactive behaviour. Second, the auditors who allowed a financial scam of such gargantuan proportions to take place for years under their very noses—Price Waterhouse Coopers— should face stern action.

Ominously, the SEBI chairman has cautioned about the probable opening of a Pandora’s box – more Indian corporate frauds might be detected. This is possible. The buoyant conditions that prevailed in the Indian economy and stock market before the financial meltdown had probably encouraged a ‘cooking of books’ by companies. Investments by gullible cash rich individuals presented themselves as instruments for covering up gaping holes in accounts. The financial meltdown, by reversing these conditions and drying up spending by investors, might expose such firms.

Pro-active swift interventions by the government to nab likely financial offenders are needed as they would send a message to the rest of the world that as a nation we take ‘corporate ethics’ seriously.

Moreover, as always, prevention is better than cure. It is essential that the government takes immediate steps to minimise the possibility of scams occurring in the future, by introducing stricter corporate norms and facilitating more pro-active financial regulation. The crucial Companies Bill 2008 (to replace the Companies Act of 1956) provides the government a precious opportunity to tighten the loose ends in corporate governance to this effect. Such an opportunity could cost the government and the economy dearly, if it is allowed to pass.

Similarly the recommendations of the Naresh Chandra Committee on Corporate Audit and Governance’—pertaining to appointment of independent directors who do not have a stake in reported profits, provisions for disciplinary action against dishonest/irresponsible auditing; investor protection investor activism etc— cry out for long overdue implementation.

The blunder of linking directorial remuneration to company profits might detract from neutral supervision of finances. Gleeful acceptance of overstated profits by directors is understandable under such a scenario, though not morally justifiable. Such perverse incentives need to be replaced by fixed sitting fee for directors.

While the various stakeholders in the country should react swiftly to this scam and stem the spreading rot, if any, there is a need to maintain the right balance and not indulge in knee-jerk reactions. In the event of such a crisis of confidence, the fulfilment of moral responsibilities might be as important as that of legal responsibilities.

In addition to think tanks and business associations, it would be necessary for the media to play its part in a responsible and constructive manner. Initial reactions have not been encouraging. a section of the media has indulged in sensationalism by predicting the downfall of the Indian IT sector and even corporate India because of a loss of reputation.

In a world that is often ruled by expectations such dire predictions can be self-fulfilling. Negative publicity will obviously send shareholders scurrying to the stock market to sell their shares, transforming loose speculation to reality. India’s free media should not abuse its freedom by indulging in such loose talk, which might result in panic and disaster in the market.

As N R Narayana Murthy has rightly observed, Satyam is an isolated case and does not represent India. This is the message that should be conveyed loud and clear. The pride of corporate India has taken a serious blow, and the onus is on all of us to help salvage it.

The author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached Siddhartha Mitra and Rijit Sengupta of CUTS International also contributed to this column.

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