The Hindu Business Line : Two factors that impact corporate governance

Till the collapse of the South-East Asian economies in 1997, corporate governance was not a buzzword, recounts N. Vittal in Roots of Effective Governance (www.icfaipress.org). These economies were booming and some of them were called `tiger', but suddenly there was a meltdown of the currencies - in Thailand, followed by Indonesia, Malaysia, and South Korea - as you may remember. The main cause for the disaster was crony capitalism and lack of corporate governance, observes Vittal.

He identifies two factors that impact corporate governance. One, the attitude and values cherished by the enterprise management, and, two, the external environment in which the business operates. "If the quality of public governance suffers, corporate governance then becomes more difficult," he adds. "If the environment in which it operates is not clean, then corporate governance may not be successful, or even if successful, it will find it very difficult to operate."

Yet, there should be a continuous effort at sensitising the people about the need for good corporate governance, insists Vittal. "Because, however good may be the operational systems and procedures, if the people who are operating the systems do not have the right values, we will not succeed."

Both public and corporate governance are exercises in continuous learning, according to the author. "We learn from experience and try to avoid the mistakes. But when it comes to new types of crimes or new types of frauds, it is better to remember what Oscar Wilde said: `The thief is an artist and the policeman is only a critic.'" Moral, therefore: Keep devising newer systems.

Thought-provoking essays.

* * *

Logic to nab crooks

Tommy looked at a sheet of paper on the table. "The typewritten words danced before his eyes. The description of a green toque, a coat with a handkerchief in the pocket marked P.L.C. He looked an agonised question(?) at Mr Carter. The latter replied to it: `Washed up on the Yorkshire coast - near Ebury. I'm afraid - it looks very much like foul play.'."

A snatch, that is, from The Secret Adversary by Agatha Christie. A few pages later, on www.pagebypagebooks.com, you'd find a deserted room, in which Tommy walks across to the writing-table, and opens the middle drawer. "A photograph, carelessly thrust in face upwards, caught his eye. For a moment he stood rooted to the ground. Then he took it out, shut the drawer, walked slowly over to an armchair, and sat down still staring at the photograph in his hand. What on earth was a photograph of the French girl Annette doing in Julius Hersheimmer's writing-table?"

You'd agree that one of the best sources of inspiration for auditors are thrillers such as those by Christie, the prolific English `Queen of Crime' author (1890-1976) who created famous detectives like Hercule Poirot, the eccentric Belgian who relied on his keen grasp of logic to nab crooks, as www.online-literature.com informs.

Catch up with Poirot, who comes graphically alive in the `three-in-one series' from Euro Books (www.eurobooksindia.com). A collection that begins with Murder on the Orient Express.

* * *

Cartels by the cartloads

Cartel is a small group of producers of a good or service who agree to regulate supply in an effort to control or manipulate prices, defines www.investopedia.com. "The best known example of a cartel is probably the Organization of Petroleum Exporting Countries (OPEC)."

Adam Smith wrote in The Wealth of Nations (1776) that when people of the same trade meet, `the conversation ends in conspiracy against the public, or in some contrivance to raise prices.'

India recognised cartelising as a crime against the public in 400 BC, says Pradeep S. Mehta, editor of Competition and Regulation in India 2007 (www.cuts-international.org). He cites Kautilya's Arthashastra, `a monumental treatise which is also a roadmap for economic governance and statecraft', for the role of the Chief Controller of Private Trading prescribed therein. This official had to ensure the following: fair trading in new and old articles; that profit margins of 5 per cent on domestically-produced goods and 10 per cent on imported goods were adhered to; that goods were sold at the prices fixed for them; and that merchants did not indulge in collective purchase of commodities as long as goods of earlier joint purchase remained unsold.

"It was cartel-type purchasing behaviour of merchants in the farm good sector in Canada and the US that led to the formulation of their first ever anti-trust/competition laws towards the end of the 19th century," the book notes.

"Big merchants formed `trusts', which decided the purchase price, who will buy what, and so on. This angered the smaller traders and farmers, who lobbied for competition laws, and succeeded."

Mehta writes that in India cartels have been alleged in various sectors, including cement, steel, tyre, trucking, and family planning devices. "India is also believed to be a victim of overseas cartels in soda ash, bulk vitamins and petrol. All these tend to raise the price or reduce the choice for consumers."

A box story in the book is about the bulk vitamins cartel that was rampant during the final decade of the last century. "US anti-trust authorities exposed a global conspiracy by leading chemical manufacturers in the bulk vitamins market to fix prices, allocate markets, supply contracts and sales volume and engage in bid-rigging. The cartel controlled the most popular vitamins, including vitamins A, C and beta-carotene (a form of Vitamin A)."

The conspiracy led to artificial increases in prices for hundreds of food, beverage and medicine makers, the bulk users of vitamins as additives. Sordidly, investigations revealed that `the colluding companies acted as if they were working for a single corporation, dubbed Vitamin Inc and reaped huge profits from the high prices.'

Despite the international exposure of the cartel, no action has been taken in India, rues CUTS (Consumer Unity & Trust Society, based in Jaipur).

`Vitamin cartel' continues to be alive in current news. `EU court cuts UCB, raises BASF, upholds Akzo Nobel vitamin cartel,' reads a Forbes headline dated December 12. "The EU's second-highest court has cut, increased and upheld fines imposed by the European Commission on UCB SA, BASF AG and Akzo Nobel NV respectively for participation in a choline (?)chloride cartel, otherwise known as vitamin B4 used in animal feed," opens the Brussels-datelined report.

"In 2004, the commission said its investigation found the companies had colluded in secret to set prices and share markets for the vitamin from 1994 to 1997. In 1997, the companies controlled around 80 per cent of the global market for choline chloride. The market was worth around 180 million euros."

Recommended addition to the professionals' shelf, for the ever-elusive cutting edge.

* * *

Keep in mind the Seventh Generation

A few weeks ago, Omar Bongo Ondimba began his 41st year in power, as the president of Gabon, a small West African country. "He was just 31 and the world's youngest president," Wikipedia informs, about his ascension in 1967. "His rule has been characterised by the co-opting of the opposition - using the country's considerable oil revenues to grease the path to power," writes Mark Doyle in a story dated November 28 (http://news.bbc.co.uk).

Bongo is reported to have said that he will be running again in the scheduled 2012 presidential election. "An amendment made to the constitution in 2003 allows him to run for the presidency indefinitely," says Jade Heilmann in a Dakar-datelined report on www.voanews.com. However, Bongo gets a lot of praise, in Daniel R. Castro's book Critical Choices that Change Lives (www.macmillanindia.com), for creating more than a dozen national parks, to protect `one of the world's last true jungle paradises (11,000 square miles) from loggers.'

On that, again, there can be different versions. For instance, Chris Haslam's October 2006 article in www.wildlifeextra.com talks about how teams from Chinese state-owned oil company SinoPec moved into Gabon's Petit Loango national park, `exploiting a loophole in the law to begin operations that threaten the habitats of dozens of rare and endangered species, including West Africa's highest concentration of lowland gorillas.'

Castro extols Langoue Bai, `a paradise within a paradise' located in Gabon's Ivindo National Park, "where elephants, gorillas, monkeys, crocodiles, large forest antelopes, parrots, and all manner of birds come to greet each other and play in a river fed by waterfalls. When these areas were first explored in 2000 by J. Michael Faye, most of these animals had never before seen human contact. It was and is a true Eden. Now it is protected, and the future of the country will be enhanced and preserved by eco-tourism."

But Haslam has this quote of Professor Christophe Boesch, a primatologist performing fieldwork in Loango, about SinoPec's operations: "They're using dynamite, which is killing and scaring the wildlife, sending the gorillas deeper into the forest and outside the protection of the park where they risk becoming bushmeat. They're bulldozing roads through the park, polluting the waters with chemicals and slurry and hunting the wildlife to eat.I don't want to forbid the Gabonese from profiting from petrol but modern techniques exist, like horizontal drilling that would allow the oil to be extracted without setting foot in the park."

The loophole in Gabonese law that Haslam mentions is that "if oil or mineral riches are discovered in the protected areas they can be exploited for the economic and social benefit of the country...nevertheless the operator concerned is obliged to rehabilitate the site."

He cites Boesch's expert view that `the antiquated and environmentally-destructive prospecting and extraction methods used by the Chinese preclude any return of the park to its pristine state when the relatively small deposit - estimated at around 20m barrels - has been exhausted.'

To Castro, though, Bongo is a hero who can see into the future, as perhaps accountants. Interestingly, the Americans Indians have `a beautiful philosophy about preserving the earth for future generations', as captured by Oren Lyons (`Onandaga Faithkeeper') in this statement: "We always keep in mind the Seventh Generation to come. It's our job to see that the people coming ahead, the generations still unborn, have a world no worse than ours - and hopefully better. When we walk upon Mother Earth we always plant our feet carefully because we know the faces of our future generations are looking up at us from beneath the ground. We never forget them."

Despite Lyons' solemn wishes, it may be an open question whether the now living seventh (or older?) generation of the native inhabitants of the US lead a qualitatively better life than the descendants of the settlers.

Be that as it may, here is more `evidence' that Castro musters, to confirm the point that greater rewards await those who, like the proverbial bookkeepers, have the discipline and patience to persevere: a 1970 study by Walter Mischel on four-year-olds in a room with a bell and a marshmallow. "If the kids rang the bell, Mischel would come into the room and give them one marshmallow. If they did not ring the bell and waited for Mischel to come into the room on his own, he would give them two marshmallows. Some kids broke down and rang the bell in just a few minutes. Others lasted fifteen minutes."

The study tracked the children later in their lives, and found something striking. "Those who waited the longest did better on SAT exams, got into better colleges, and generally had higher incomes. Those who rang the bell the quickest tended to become bullies, and received worse teacher evaluations and were more likely to have drug problems."

A book for your weekend read.

D. Murali

http://BookPeek.blogspot.com

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