Article: Expert Views on Corporate Governance

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Expert Views on Corporate Governance

Industry experts talk to People Matters about the business impact of strong corporate governance
 

“Strong regulation and laws with implementation are necessary”-Sushil Tripathi Former Secretary, Ministry of Petroleum and Gas

 

“The notion of trust is very central to the market and capitalism”-Gurcharan Das Author, Management Consultant and Public Intellectual

 

“The notion of trust is very central to the market and capitalism”

Gurcharan Das, Author, Management Consultant and Public Intellectual

When you look at the problem of corruption, I think the primary initiative is with the government. In the case of a bribe, yes, there is always a bribe giver and bribe taker. The bribe taker is in the position of power and has the ability to destroy the bribe giver’s enterprise. It is therefore an unequal relationship. Hence, the primary guilt attaches to the bribe taker. The bribe taker can make a choice to make the regulatory process transparent and make the rules that are non-discretionary.
The choice for the company is not to do business that is vulnerable to corruption—for example, refuse to enter a business in which the government is the main customer, such as arms supply or civilian aircrafts. Or to draw a line and not take an order or license which entails paying a bribe. At the end of the day companies are also measured by reputation. One has a greater inclination to do business with a reputed company as opposed to one that uses unethical or illegal business means. So reputation is a valuable asset.
Many people believe that capitalism is efficient but it is not moral. I disagree. I believe that the market sends strong signals that make companies behave in a moral way. For example, if a company misclaims about the virtues of its products, customers will punish it by re-buying the product and buying its competitor’s; if it does not treat its employees well, talented people will not join the company. There is thus a moral foundation to the marketplace. Transactions in the market place are also based on trust. Another meaning of Dharma is trust. The notion of trust is very central to the market and capitalism. We behave by trusting each other.
Good companies understand the importance of reputation and they invest in building that reputation—in the way that they transact with customers, employees, and suppliers. I think we need to build on this. Becoming more transparent, publicizing your process, sharing success stories that entailed doing the right thing; and penalizing employees who do not follow that culture the company is trying to create. It is a daily process of repetition. A company is like a child. It has a basic inclination to both good and bad. Like a child, once a company starts to do the right thing it too will become a habit, and that habit will become the company’s character, and character in turn becomes its destiny.
It all begins when you hire a person. Good companies make a great effort to recruit people with character. Whom you bring in is one of the most important decisions of the organization for they will collectively determine the character of the organization. Young recruits when they join an organization are like infants. This is the time they learn what is right, what is not and they build the right habits.

I thus see an opportunity for companies to take a stand on corruption as they have done about the environment. The concern for the environment has changed the mindset of many companies.

“Strong regulation and laws with implementation are necessary”

Sushil Tripathi, Former Secretary, Ministry of Petroleum and Gas

How do you see this alignment of shareholder-manager-official interests undermine the national interest? Do you think a longer play of such ‘scams’ could undermine the India growth story?
The alignment of shareholder-manager-official interest is the most dangerous situation. It is clarified here that official interest is not the public interest but the interest of political and or bureaucratic/technocratic “cabal” that may be in the position of making or influencing decisions ostensibly in public interest but actually does so in his/her own and in the interest of promoter/managers .In some cases all shareholders may gain but in some other case, only promoters and managers may gain. The first and the foremost thing here is to have strong regulation and laws with implementation left to independent regulators who should be persons of unimpeachable integrity. A proper selection procedure for regulators, transparency in procedures adopted by regulators and system of appeal, is necessary in all such cases. The lessons learnt from 2G scam in telecom and gas pricing in KG basin of petroleum ministry should be internalized.

How can managers act under the umbrella of ethical behaviour when shareholders implicitly demand a certain level of unethical behaviour for business continuance?
Involvement of Government with promoters and management is happily not seen so far. Although the involvement of lower functionaries in a large number of cases cannot be ruled out. There are adequate regulations to bring erring officials of Government or regulators in line. But the best deterrent is total transparency in procedures and quick prosecution as well as punishment. A specialized agency like Serious Fraud Cell needs to pursue such cases in specially designated courts.
At the corporate level, the role of Statutory Auditor and Independent Directors has to be emphasized. The Statutory Auditor and Independent Directors should be chosen by management/ shareholders only from the panel of names given by the sectoral and market regulators. These should all be professionals and public servants of high professional competence and unimpeachable integrity. Every quarter statutory as well as Internal Auditor should make presentation to Independent Director about detailed compliance of laws and Code of Ethics. In case the public shareholding in a company is 50% or more, the market regulator should appoint one of the independent directors as chairman of the board.

“Corporate Governance needs to start in the promoters’ head first”

Sanjeev Bikhchandani, Founder, Info Edge

I think the benchmarks of good governance have not changed. What has changed is the realization that today we need to include a larger group of stakeholders other than just shareholders when we talk about good governance. The implications of actions that are against the law have a larger impact than just on shareholders; for example, taking the telecom 2G spectrum allocation process, the loss in potential revenue for the government is a loss for the public at large and for the country, as those revenues were to be used for government spending on development.
It is a huge challenge for entrepreneurs to operate in highly regulated areas where governments have wide ranging discretionary powers because that is a breeding ground for corruption. The problem is that the power of the government is much higher than that of each private player individually. It is, therefore, the responsibility of the government to set fair rules and then play by them and ensure that each of the companies in the space also adheres to them. If people in the government decide to play by rules that result in their personal enrichment, then companies who are already massively invested in the space will face a very difficult choice – be totally clean and go out of business or else play the game by the rules the government has set. And that’s a hard choice.
It is an easier choice to not enter a particular sector because there is too much government regulation. Once you have invested tens of thousands of crores, you are stuck. As far as we are concerned, we consciously decided long ago not to operate in highly regulated spaces precisely because we want to stay clean and also run a viable business operation. We prefer free competitive markets where the customer is king and there are minimal licensing requirements from the government. Follow the law, pay your taxes, don’t take stupid risks, be good to your employees and customers, keep your commitments and sleep peacefully at night.
Corporate Governance needs to start in the promoters’ head first. Everything else is an add-on to strengthen that position – audits, audit committees, independent directors etc. If there isn’t the intent on adhering to good governance practices between the entrepreneurs, then none of the add-ons will help.

“We need to strengthen the education system which must include morals & ethics”
Maj. Gen. D.N. Khurana

Corruption emanating from a nexus between the politicians, bureaucrats and the corporates is undermining credibility in governance and institutions. It erodes the moral foundation of State and society. These malpractices threaten our parliamentary democracy. Such warped policies lead to wrongful and inadequate use of public funds and resources, are not aligned to national interests and are likely to impact national growth.
Unfortunately, we do not have strong regulators who should be the watch dogs. Most of the regulators are ex-babus who have been used to quiet acquiescence during their entire service. Our judicial and criminal justice system is weak and slow. The penalties are either not imposed or are not stringent enough. Media has the power to keep the corrupt under the scanner but unfortunately there is a growing perception that media needs to put its own house in order and needs some regulation lest they become privy to corrupt practices to gain undue advantage from the immense power that they yield. Another important component of civil society in this battle against the corrupt practices - the NGOs, also need to look within so that they can remain effective watch-dogs on behalf of the society.
It is my view that we should formulate strict codes of ethical conduct in the government agencies as also in the corporates which should be widely disseminated and enforced. The penalties for violation should be stringent. The judicial system needs to be made faster and strengthened. We need to separately identify the responsibilities and accountabilities `of the political authorities and the bureaucracy. The powers for transfers, promotions and extensions of the bureaucrats should be vested in independent bodies and not with the political authorities as at present. Minimum tenures of bureaucrats must be laid down and any deviation would need to be justified. As I said earlier, the system for selection of regulators and independent directors needs to be refined and strengthened. The media must self regulate and remove malpractices such as the practice of ‘paid news’.
Lastly and importantly, we need to strengthen the education system which must include morals and ethics in all curriculum in the schools. We should look at the next generation to ensure a cleaner society and governance.

 

“We need the right kind of role models”
Sunita Thawani
, Chief Legal, Jusco

Where do you see the deterrents of unethical behavior for the corporates world?
Firstly, I believe that the Right to Information Act should be used more extensively to make government more accountable. On the corporate side there is need to have a more effective system of selecting, training and assessing the “Independent Directors” to make them more accountable. The legal system also needs to be more robust.

Do you see any system changes that can contain this kind of pilferage of public assets? What kind of checks and balances can curtail such behavior?
In the emerging business landscape as an evolution from IQ and EQ (Intellectual and Emotional Intelligence) to now SQ (spiritual intelligence), leaders with high SQ will have a stronger inclination towards ethical and moral behavior in their modus operandi. I think the forces that can curb corruption in India today are media, education and technology. Media needs to understand the importance of their role and their strong power to influence the society. This is a big responsibility. Media should identify and project right role models and behaviors and give a balanced view in talking about incidents instead of sensationalizing them. Public at large certainly needs to be conscious and aware of the problem but should not be encouraged to make biased decisions.
The importance of education can never be undermined and imparting such education is responsibility of both parents and the institution. Children get confused when they are taught something but see a totally different behavior around them. The right kind of role models should be presented to them, so that they are able to absorb the right values for their adult lives. If this can be done, then future generations should be able to reduce the problems that we face today. Technology is also playing an important role in creating this transparency both in terms of providing access to information across the country and also automating processes and reducing the level of potential intervention of unethical behavior.
Unethical behavior has always existed in society world over at different points of history in different levels of intensity; I wonder if it can be eradicated completely. India is going through a churning process and in the course of its growing up, I feel quite positive that good governance practices and need for ethical conduct in individuals will come out for the larger good.

“Today we need a new freedom struggle in our country”
Anil Sachdev
, Founder & CEO, SOIL

The earliest mention of ‘corruption’ in India is dated during the ruling of the Mughals and those cases intensified when India was ruled by the British. For the first time in the history of India, it became important to be close to those in power. So in order for you to do this, you had to do ‘favors’. When you asked yourself a deeper question on why people felt the need of doing this, we find that there was some kind of lack of connection with each other and within the country. When India got independence, people had some kind of idealism, but the economic model that was chosen was not appropriate. The involvement of the government in all major sectors of the economy involved centralizing all decision making power in the hand of the new rulers. It was as if the old set of rulers had gone but a new set of rulers had been introduced.
When the constitution of India was made, again, not enough thought was given to how we are going to be governed in a democratic system, how people would get equal opportunity, how people would have an opportunity to make money in an ethical way and so on. So all these controls, licenses, etc. created an opportunity for the few to make money in an unethical way. I think the nineteen seventies witnessed, soon after emergency, the first systematic attempt of taking away the rights of people and concentrating power on few leaders in the country. What followed was the first major institutionalization of corruption. If you wanted a license or you needed something to be done, and then a parallel process was created. Governance model inside companies also adapted to this new reality. Inside the organization, only few people called the shots - those that were close to the government. There was a need to develop new processes to generate ‘black money’ to get things done and thus the parallel economy began to thrive.
From the ‘need’ of people to make money, it is now their greed that is fuelling corruption. Today we need a new freedom struggle in our country. We need to create a powerful network of the good. Fortunately, we still have some honest leaders in business and public life who truly care for the country.

“Important to articulate components of ethical governance”
Dr. Pritam Singh
, Professor of Eminence, MDI

Corruption is a global phenomenon today. For the first time in human history the globe is struggling, and it is not about war, but about the crisis of ethics.
What has gone wrong? Ethics have been defined in terms of money transaction only, that has been the first problem. I think we should be defining ethics and governance in a more holistic manner, we should define it in terms of three main elements: purpose, process and people. If you want to build ethical governance and a strong foundation, we must first define and articulate the components of ethical governance.
The first element is Purpose. If you compare Gandhi with Hitler, the latter was not much inferior in terms of capability to mobilize people in the country, evoking people’s response, building a sense of pride; as a leader, Hitler had enormous capacity to mobilize and create constituency… he was not like Gandhi but he was not much inferior. What went wrong was the purpose that he was pursuing. First we need to ask the purpose on why are we here, why do we exist as a corporation? Why should we have an institution or corporation at all? What is the purpose of our existance? Today, we need to talk of stakeholders, employees, customers, shareholders and society at large.
The second thing that you need, to define ethics and morality, is that you must define the process. Is it the right kind of process? For example, look at the case of child labor, you might be having competitive edge, but is it the right process? Labor cost is a big thing for India and China. But being careful as it means that we are more busy in saving labor cost rather than looking at how to heighten the productivity of labor. Whole mechanization is being used for displacing human beings.
The third one will be the People part. That is where the role each of us plays is very important. When you think about the people part and think about India, it is a political statement. For example they say today that the Prime Minister is an extremely ethical man, his integrity is beyond doubt. I ask the question on how we define “integrity” that will need to be defined in terms of role that you are occupying. If I do not do justice to my role, am I man of integrity or honesty? This is one question we must ask. If you look at Mahabharata, when defining the role of the King, it says that his foremost duty and dharma is to punish scandals. Are we punishing scandals? Are people playing their role?

“Our education has become too left-brain oriented”
MJ Xavier
, Director, IIM - Ranchi

Where is the incentive for the individual to correct actions and follow a certain ‘dharma’? How do you see corporate India evolve in this respect?
People born and brought up in a shortage economy generally tend to seek more and more of material rewards. No amount of preaching `dharma’ to them is going to work. Those who take bribes in India are interestingly very religious too. They share their booty with their God and by making such offerings, they feel that their sins are washed clean. In the process `dharma’ becomes a casualty.

In your view, what is the role of education?
Educators have a key role to play in sensitizing people to the need for an inclusive and holistic growth. Our education has become too left-brain oriented. That way we are making robots. In order to make better human beings, we must resort to the Gurukula method of holistic education. Apart from maths and science, we need to teach our children subjects such as Indian culture, Indian ethos and Indian history and geography. Reintroduce subjects such as arts and craft. Make multimedia courses compulsory at school level so that they not only develop computer skills, but also develop an aesthetic sense. This must continue at the college level too. Business education should be reformulated with the triple bottom-line approach - profit, people and the planet. Currently, the management education is entirely focused on the first P, namely, profit. Business has to be relevant to the society in which it operates. Inclusive growth and regional development should also form a key component of business education.

What is the Role of HR?
We should produce leaders who are like the philosopher Kings of yesteryears. Pick people with vision that is holistic for leadership positions. Our selection methods should not only look at IQ, but also EQ (emotional quotient) and SQ (spiritual quotient). It should be made mandatory for organizations to play a key role in the development of the region in which it operates. More legislation should ensure that the organizations go green and employ sustainable practices. HR should create organizations that bring out the individuality in every person to benefit the whole organization.

“Ethical behaviour is a way of life”
Professor Bala Balachandran
, Professor Emeritus of Accounting Information & Management, Kellogg School of Management, Northwestern University and Founder & Dean, Great Lakes Institute of Management

Shareholder interest is definitely a priority for all organizations in order to ensure availability of future resources from the same purse. However, in many cases, one sees that the office bearers do resort to unscrupulous behaviour in order to increase profits and thereby their incentives. So long the vision-mission-values-culture of the organization are all in tandem with each other and remain within the accepted ethical boundaries, I don’t see how the nation’s interest can be at jeopardy. Once the harmony between all these variables and goals are achieved, there is no cause for concern.
Ethical behaviour is a way of life. It is cultivated in the very early years with continuous inculcation received from parents as well as teachers. You can’t learn it by writing a paper (which you can score full marks on, by cheating). Courses on ethics in higher education are meant to mature the existing thinking and show the way to function as responsible corporations and socially conscious entities. Thus the line is very clear - there is no grey area. The manager is like the driver of a car. If the passenger insists that the driver violate a traffic signal, what do you think the driver should do? Likewise, the manager is the doer and he need not be driven by the shareholder or the top management in making decisions which are detrimental to the interests of company or shareholder and by extension the nation.
Corruption thrives only because people are willing to give. To quote the words of our former President, Dr. A P J Abdul Kalam, it is all about building a brand about oneself. He has stated that in his entire career, he was never approached even once to do something that was incorrect as he had created a strong brand that approaching him for a short cut or for an unjustified favour would bear no fruit. Likewise, individuals and organizations need to also create a brand of their own – in the matter of ethical practice and moral soundness, which will ensure that no one even approaches them for doing something incorrect. This takes time and is not always easy, however, in the long run, the fruit of this labour will be infinitely sweeter.

“Not merely a question of motivation... but one of purpose”
Peter Block
, Author and Consultant

HR is a player in the question of corporate and societal ethics. Most unethical or corrupt behavior starts from the HR/Management philosophy of compensation and rewards; they think that money motivates people and they also believe that variable pay is the way to motivate performance. The extreme version of this is including stock options as a serious component of executive pay. This philosophy creates a context of excessive short-term orientation where unethical behavior is more likely. If companies link payment to stock prices, they are creating a false god. Then CEO will not be incentivized to invest in the long-run, they will be incentivized to cut costs, maximize short-term profits, and postpone development.
What is interesting about this compensation philosophy, especially at the executive level, is that companies are not rewarding for commitment and long-term alignment of these managers but actually creating conditions to encash compensation and leave the organization.
It is not only a question of compensation and motivation philosophy, it is a question of purpose. Leadership needs to look at their business with a larger purpose than shareholder value. Leaders focusing on just making money will not build companies or the country. Asking oneself what is the larger purpose of the organization is the ethical question that managers should pose to themselves. Pay fair salaries to avoid bribing, make salaries transparent and even publish them to avoid excessive focus on compensation. The systems already exist to prevent unethical behavior, more checks and balances will not help. When controls do not work, adding more is madness. What is needed is more internal and external transparency. Whistleblowers also will not lead to systemic change, because the case just appears to be an exception. Board of Directors again cannot help as most of the times they do not know enough details to find questionable practices until something blows up. It is the coming together of corporate leadership, business schools, citizen groups and government to call for a shift in pay practices and purpose. The purpose of companies should be for the common good.
This is possible because it is in human nature to do the right thing. I believe that given a choice, most people will choose a larger purpose. Unfortunately, our western economic system is based on the assumption that men are driven by self-interest and the most valuable things are those that are scarce. This is not true, it is just popular. We need to break this assumption. We are cast under the spell of conservative, last century economic thinking. Luckily, that is not working well in the west.
It is not correct that the entire universe around the individual today is going wrong; what is going wrong is the narrative; we need to change the conversation to change the reality. As long as we continue the problem narrative that people are selfish, government and leaders are corrupt, more control is needed, and the west is the model for our future, nothing will change. The new narrative is about abundance, those who act on higher purpose, and the possibility of the common. It is close at hand, we just do not think it is news.
 

Topics: Leadership, C-Suite

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