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| Pratip Kar: Enron? Parmalat? Lehman? No, no, it's Satyam | |
| Pratip Kar / Pune January 9, 2009, 0:52 IST | |
Corporate Governance is a subject, on which everybody — from the head of an intermediary firm, to an academician, a CEO, or an advertising head of a shopping mall chain, or a consultant — can claim to be in possession of an extraordinary measure of competency and feel the urgency to display such possession in public, eloquently and often in clipped Oxbridge accent. But it is equally a subject whose implications if not understood and practised seriously as an integral part of business strategy, could lead to disastrous consequences to business itself and on those who depend on it. Instances ranging from the South Sea Company in 1720 to Daily Mirror’s Robert Maxwell in the mid-1980’s, to Enron in 2001, to Lehman Brothers or Bear Stearns in 2008 and our home-grown Satyam in 2009, and many others alike prove the point. The stories behind these companies are like that of Anna Karenina, each representing in its own way an archetypal denouement ending in tragedy.
Enron is an eponym for corporate governance disasters. Its business model was not flawed; it had a 15-member board which was the envy of corporate America; it figured in the list of Fortune’s most-admired companies for six consecutive years; it had a beautiful code of ethics; its employees and directors were enriched by stock options; its revenue, profit, net worth and stock prices soared year on year; its auditors were one of the most respected in the world with a 77-year-old history and its audit committee was chaired by Dr Robert Jaedicke, the Dean Emeritus of Stanford Business School. Compared with Satyam, the similarity is uncanny.
But Enron also had a soaring ambition to be and remain at the top slot always, a cut-throat and aggressive Mametesque culture, a cozy relationship with auditors and Capitol Hill and the first family of US. Besides it used unlimited leverage, created a web of SPVs to hide debt on its books; it inflated revenues on the basis of hypothetical future cash flows which never existed. The audit committee approved, the auditors signed off. Nobody asked why. Enron collapsed in a few months. Do Satyam or Lehman et al, differ in any way from Enron?
But why do corporate disasters tread a common path? Answers to this question go beyond mere compliance with Clause 49, SOX and Section 404, the Combined Code of UK and the OECD Code. Corporate India needs to introspect and search for answers.
One cannot ensure better governance standards merely by tightening the Codes or by increasing the granularity and frequency of disclosures. In the US, even with the stringent and detailed risk management requirement in Section 404 of Sarbanes Oxley Act, a Lehman Brothers or a Bear Stearns went undetected. Laws and codes are created in the expectation of full compliance in letter and spirit. But so long as companies do not embed good governance as a part of their business strategy for growing their businesses, salvation may not come. There is therefore a need to revisit the entire approach to governance itself. For this, the responsibility lies with the industry rather than the regulator.
The balance sheets and P&L accounts are the windows into the working of the company. The rest of the world assumes believes what they see through these windows. These windows must be very clean to allow for a clear view. The responsibility for this lies primarily with the auditors. If they have failed in their job, the public loses confidence. Supervision of the auditors lies with the ICAI. As a first step, the ICAI must bring a change in its own governance structure, and demonstrate that it has the will to use a scalpel at times rather than a feather if so required. The stock exchanges have something to do too. They have rich coffers and should enhance their staff strength and deploy them to do periodic test checks on the filings of say the index companies and some mid-cap companies. The market regulator must be careful, while revisiting the entire approach to governance itself along with the industry, to resist pressures for draconian changes in Clause 49, which would make compliance expensive, difficult and dampen entrepreneurial spirit. In a competitive world, auditors want business and would like get close to the clients. This needs to be studiously avoided. The relationship between auditors and client is fundamental to shareholder protection.
The present concept of independence and the belief that if the board is packed with intellectual celebrities and professional evangelists of governance is enough to guarantee high standards is flawed. Independent directors are like any other human being; they too feel hot in summer and cold in winter. So long as their incentive structure is not determined in a way which brings an alignment with the interest of the company and the minority shareholders, the concept of independence would not work. Besides the board design, and the ecology within the boardroom are equally important, but usually very little attention is paid to it.
Satyam’s business, if there is a real value still remaining, needs to be given a helping hand for the sake of those who depend on it. In the case of WorldCom, the US SEC had begun by revamping the Board by appointing Dick Breen, former SEC Chairman as the CEO.
Whether punitive action will finally be taken against the directors, including the independent directors and the auditors, is a matter of speculation, but in taking such actions, scapegoats should not be first searched for, nor should these actions be so severe that it deters persons with integrity and competence from taking up Board positions.
In business, as in life, there is a vicious cycle of ambition, leverage, greed, complacency and organisational arrogance and disaster. There must be several brakes which need to be in place which will self-activate before a cycle tends to be completed. Ethics and governance are the two brakes. There are examples of companies in India which understood this long before the two words got into the business lexicon. They have been able to build sustainable and successful business models which continue to provide leadership with trust. This is something which Indian business must understand and implement.
The author is Dean, Finance and Corporate Governance at the Tata Management Training Centre, Pune, and is a former ED of Sebi
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