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Kanika Datta: Mess up and get rewarded

Legal culpability is one thing, moral culpability quite another

Kanika Datta  |  New Delhi 

Harshad Mehta, Rajan Pillai, Ketan Parekh, Kenneth Lay, Bernie Madoff all faced the law courts and, in some cases, served jail stints for breaking the law. Mehta and Pillai died halfway through investigations into their dealings — securities fraud that brought down the stock markets in Mehta’s case and cheating in Pillai’s case.

Lay and Madoff presided over corporate empires that duped a range of people, from shareholders to investors and employees. Lay was found guilty within four years of the collapse of Enron but died before he could be sentenced. Bernard Madoff is languishing in a fairly luxurious prison for white-collar criminals in North Carolina having been sentenced to 150 years after pleading guilty (and enjoying a certain notorious popularity, according to latest reports).

Meanwhile, in India, the jury of public is still out on the question of Keshub Mahindra’s responsibility as chairman of Union Carbide’s India subsidiary when the Bhopal disaster took place (had the tragedy occurred in the US, the issue would have been legally settled years ago), even though shareholders recently voted to retain him as chairman of Mahindra & Mahindra.

The point here is that all of these people have paid in some way for their errors of omission and commission. Cynical as this may sound, the Mehta, Bhopal, Enron and Madoff debacles were reprehensible and morally indefensible but their negative impact was, ultimately, limited. They do not begin to compare with the Deepwater Horizon disaster in the Gulf of Mexico, the largest accidental oil spill in the history of the petroleum industry, in April this year.

But Tony Hayward, the faux pas-prone CEO of the corporation responsible for this environmental disaster, has been allowed to exit with a £1 million payoff and a £10 million pension pot. Nor has he faded into jobless anonymity. Despite his spectacularly poor management of the crisis (at its height he famously said, “I want my life back”), he’s been appointed non-executive director of a Russian joint venture, TNK-BP.

Meanwhile, the company he has exited has had to set aside £20.7 billion to meet clean-up costs and has put up for sale $30 billion worth of assets to pay for it. It’s not just British Petroleum’s (BP’s) over 2,000 employees worldwide and shareholders who are paying the price for the disaster. All along the coast where the Deepwater Horizon rig spewed out 5 million barrels of crude oil, thousands of people are losing their livelihoods in an area that thrived on tourist dollars, not to speak of the long-term ecological damage.

Legal culpability is one thing, moral culpability quite another. No laws or corporate governance rules can address the latter adequately. Yet it is becoming an increasingly critical issue as global business integrates the world more closely than ever before. It is no longer far-fetched to say that every craftsman or textile worker laid off from the diamond-cutting shops of Gujarat and garment factories of Tiruppur can trace her job loss to the slowdown in global demand precipitated by the decisions of investment bankers in Bear Stearns, Merril Lynch, Lehman Brothers and Citigroup. Like BP’s Hayward, each of the CEOs who presided over these institutions was eased out with millions of dollars in pay, pension and benefits.

To take just one example. The board of Citigroup forced CEO Charles “Chuck” Prince out for plunging the world’s largest bank into the sub-prime crisis. But his job loss still earned him almost $30 million in benefits. Like him, the CEOs of Bear Stearns, Lehman Brothers and Merril Lynch all took home multi-million dollar “rewards” in pay and benefits.

None of these CEOs wilfully broke the law. Sub-prime mortgages and the dodgy financial instruments they spawned were all the outcome of regulatory weaknesses, just as much as BP’s oil spill was the result of cost-saving negligence. Yet, these corporate chiefs oversaw operations in their mammoth global corporations that virtually brought the global economy to a standstill in 2008 and the impact of the sub-prime debacle is still being felt worldwide.

Naturally, it would be difficult for governments to legislate against bad corporate decision-making, but there is surely something morally out of sync in rewarding top management when things go wrong, especially in trans-national corporations in which decisions can have global implications. It is possible that the time has come for corporate boards to insist on checks and balances so that tarnished CEOs do not become the beneficiaries of golden parachutes.

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First Published: Thu, August 05 2010. 00:24 IST