Article: Malpractice & Malfunction- Corporate Governance Woes

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Malpractice & Malfunction- Corporate Governance Woes

A surge in the recent instances of the failure of corporate governance mechanisms have not only raised questions about the role of the Boards but compliance irregularities that organizations are mired in
Malpractice & Malfunction- Corporate Governance Woes

Does being in power eventually corrupt you? Are you bound to falter and bend the rules in your favor if you think you can get away with it? If you are having a tough time answering these questions as an individual, imagine the ordeal of an entire organization that goes through it! Let us look at how a few organizations and their leaders have floundered recently, and the phenomena of corporate governance in India.

Corporate Governance 101 

Investopedia describes ‘Corporate Governance’ as the ‘the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community.’ Hence, corporate governance lays down the framework for every sphere of management, big or small, in an organization.

The board of directors is the biggest player in ensuring effective corporate governance. Elected by shareholders or other board members, directors represent the interests of the shareholders of the company and make decisions related to appointments, executive compensation, and dividends. A board of directors consists of ‘inside’ and ‘independent’ members to ensure a balance of power. Bad and ineffective corporate governance naturally casts a shadow on a company’s ethics, integrity and commitment to shareholders, which can negatively impact the financial health of the organization. 

Corporate Governance Gone Bad

In the recent times, several instances of downright failure of corporate governance have grabbed the headlines. Let us take a look at some of the more prominent cases that have been in the spotlight:

  1. ICICI Bank: CEO Chanda Kochhar came under the scanner for a potential conflict of interest when ICICI bank gave credit worth thousands of crores of rupees to Videocon, which has business relations with her husband. Initially, the board threw their weight behind her but eventually ordered an independent probe into allegations. Kochhar was asked to go on leave until the probe was underway. She has already received a show-cause notice from Securities and Exchanges Bureau of India, and at the time of going to press, the US Securities and Exchange Commission was also ‘actively looking’ into the allegations.

  2. AirAsia: Air Asia Group CEO and others are being investigated by the Central Bureau of Investigation over alleged violation of norms for obtaining international flying licenses. They allegedly lobbied for faster clearances, and the removal and relaxation of rules with government servants. The case served as a reminder to the allegations made by Cyrus Mistry when he was dismissed as the chairman of Tata Sons. According to Mistry, he was sacked just before he could expose the fraudulent transactions to the tune of Rs. 220 million in the matter, which was exposed by Deloitte during an investigation. 

  3. Fortis Healthcare: In a rather dramatic unfolding of events, four Directors on the Board of Fortis healthcare – all known to be directly or indirectly related to the founder, who is being investigated for irregularities – appealed to shareholders to not vote them out. However, three of them resigned before the meeting where the matter was to be voted upon, and the fourth was voted off the Board. At the core of the controversy is the preference of bids made by the Directors regarding the sale of the medical chain.

  4. Nirav Modi-PNB scandal: The 11,000 crore scandal which went unchecked for years questioned just how seriously Punjab National Bank undertook its role as a public bank. The fact that a few employees colluded against the interests of the bank and managed to stay under the radar points to a lack of checks and balances in the organization. Furthermore, the fact that Nirav Modi was able to divert funds without being red-flagged by investigative agencies or the tax department also points to systematic failure of vigilance. 

  5. Volkswagen: Volkswagen took two years to fully recover from the 2015 emissions scandal, wherein the company admitted to rigging its automobiles to pass quality tests. In addition to causing damage to human health and the environment, the entire scandal cost the company roughly $25 billion. Sales and stock plummeted to unprecedented lows after the scandal broke, and have only recently started showing signs of recovery.
  6. Wells Fargo: In September 2016, a scandal that involved fraudulent transaction by Wells Fargo employees on behalf of Wells Fargo clients without their consent, and several other missteps, became public. Some 5,300 employees were fired and the bank was penalized $185 million. Even before the impact of this had been fully realized, new allegations regarding frauds in auto insurance surfaced in June 2017. Alongside a penalty, the Federal Reserve disallowed Wells Fargo to grow its assets until the bank made some changes in its way of functioning. 

Corporate Governance in India

The board of directors is one of the most crucial aspects of any organizations’ corporate governance framework. It is, thus, important to understand that the concept of directorship to the board of directors is viewed a little differently in India when compared to the rest of the world. For many, raising a valid concern equals being chucked off the board, and hence, they choose not to say anything. For instance, directors are expected to be onboard to grant repeat extensions to top leadership, no questions asked. The problem, as explained by the Economic Times, might be that as opposed to global companies that approach head-hunters and search firms to hire independent directors, in India, the process is largely ad hoc. Therefore, independent directors are usually chosen based on familiarity, and not necessarily merit. For example, when the regulation to have one woman on the board was officiated, many company heads tried to get their wives or daughters placed as directors on the board. 

If the appointment process wasn’t murky enough, the absence of clarity on the role further puts the role of directors in jeopardy. They need to be given the autonomy and space to ask the tough questions and discharge the responsibility they have been appointed for. However, there exist no incentives for directors to apply their autonomy or exercise their independence. Those who do, do so while keeping the top leadership happy. This not only makes the company less welcoming to independents and outsiders but also makes it less competitive. 

A Promise of a Better Tomorrow: Recent Notable Progress

In June 2017, SEBI formed a committee under the leadership of Uday Kotak (of the Kotak Mahindra Bank) on corporate governance and elicited recommendations to improve the standards of corporate governance of listed companies in the country. The Kotak Committee submitted its report in October 2017, post which public comments were invited. Last month SEBI announced that its board of directors had accepted several recommendations in their entirety, and some with modifications. Key recommendations regarding directorship like decreasing the number of listed companies in which a person may be a director, increasing the minimum board size, having one independent woman director, and separation of roles between the CEO/MD and the chairperson, have been accepted. 

Furthermore, recommendations on enhancing the eligibility criteria and roles for independent directors, increasing the role for committees, setting meetings and procedure guidelines and increasing disclosure and transparency have also been accepted. The way in which these accepted recommendations will be implemented remains to be seen, but they set a fine precedent for the future of corporate governance in India. More recently, lawyers and auditors are also growing cautious of the companies trying to manipulate books and records. With stricter rules and regulatory practices in place since the Companies Act of 2013, instances of auditors and lawyers quitting, rather than helping companies get away with such acts have gone up. 

Hence, despite the many instances of bad corporate governance that have come to the fore, progress, no matter how glacial, is underway. For every instance of a CEO misusing his/her position and getting away with it, there must exist an example of one who was penalized and stripped of his/her position. Instances of a board exercising its power to remove the top leadership are not very hard to find. Come to think of it, maybe it is natural for humans to err when they are in a position of power. If that is the case, we are a long way from ensuring that the error doesn’t cause any damage, let alone, prevent it from occurring in the first place. 

Topics: Corporate, C-Suite, Employee Relations

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