The Hindu Business Line : Lessons from Arthashastra

Rabindranath Tagore remarked “I have become my own version of an optimist. If I can’t make it through one door, I’ll go through another door — or I’ll make a door. Something terrific will come no matter how dark the present.”

The corporate sector in India had a forgettable 2008 and was seeing some silver lining in 2009 when Satyam happened. Subsequent to the bizarre admission, events have had all the elements of a pot-boiler with a multiple-agency investigation, on the one hand, and a high-profile board attempting damage control, on the other.

Collateral damages have been in the form of independent directors of many other companies putting in their papers rather needlessly, giving rise to speculation and a general sense of pessimism over the overall business climate.

The questions that need to be asked are: Can we prevent another one? And what are the lessons we would learn after the floor has been swept clean?

Corporate Governance

We have had no dearth of legislation on corporate governance. The Kumara Mangalam Birla Committee in 1999 and the Narayana Murthy Committee much later did suggest concrete measures to improve corporate governance regulations and disclosures in India.

One of the spin-offs of the Sarbanes Oxley Act in the US was an amended Clause 49 of the Listing Agreement for listed companies which prescribed, inter alia, stricter norms for qualification and appointment of independent directors, prescribing qualifications for them, increasing frequency of meetings of the board and the audit committee, disclosure of deviation from set accounting forms and disclosures about risk management.

On the specific issue of independence of directors, while the original clause gave the board the freedom to decide whether a materially significant relationship between director and the company affected his independence, the new clause takes this discretionary power away from the board.

One can go back to the India epic Arthashastra to learn a trick or two about corporate governance. In Chapter I of Book XI, Kautilya, the author provides guidance as to how a chief executive should conduct himself: “The chief of corporations should endear himself to all the people by leading a virtuous life, by controlling his passions, and by pursuing that course of action which is liked by all those who are his followers.”

In Chapter XV of Book 1, he gives advice to what can be considered board and audit committees: “All kinds of administrative measures are preceded by deliberations in a well-formed council. The subject matter of a council shall be entirely secret and deliberations in it shall be so carried that even birds cannot see them.”

For committee members who do not act as per these norms, punishment is severe: “Whoever discloses counsels shall be torn to pieces. The disclosure of counsels may be detected by observing changes in the attitude and countenance of envoys, ministers, and masters.”

Lessons prescribed in the 4th Century BC appear relevant even today.

Collective failure

Whatever the results of the Satyam investigation and its victims, it is apparent that there was a collective failure. All those being arrested/investigated appear to have been riding on the gravy-train driven by the promoter with/without any clue to where they were going and not bothering to ask also.

The Securities and Exchange Board of India (SEBI) has already fired its first salvo by asking promoters to disclose details of their shares being pledged.

The Institute of Chartered Accountants of India (ICAI) is being questioned frequently as to what action it plans to take against the errant auditor.

Irrespective of the action that it would take, it has to be understood that what has happened is a systematic diversion of funds over a period of time, pre-emption of which cannot be prescribed by any accounting standard. With a buyout imminent, the future of the company would take its own course.

With multiple agencies investigating, the writing on the wall is apparent for people guilty of connivance. It does not matter which agency gives it diktat first. It appears only a matter of time before India Inc. shuts the door on this episode and opens a new one which hopefully would not have any such stumbling blocks.

One could expect need-based regulations from institutions such as the RBI, SEBI and the ICAI, which can at least attempt to minimise the possibility of an encore.

(The author is a Hyderabad-based chartered accountant.)

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