Mass movement needed for better governance

The report of the Cadbury Committee in the UK, almost two decades ago, was considered a watershed moment in the history of corporate governance. Since it was released, we have had several committees of our own headed by eminent industrialists like Naryana Murthy and Kumaramangalam Birla. Clauses 49 of the listing agreement and amendments to the Companies Act have sought to usher in an era of improved governance in our country. But, after all this, has there been real improvement in the quality of corporate governance in our country?

Public, private view My interest in this question was re-ignited on reading Jitender Bhargava’s recent book The Descent of Air India . Bhargava contends that Air India’s largest aircraft order with a total value of Rs 40,000 crore was placed in 2004 without a full discussion in the Air India Board. In fact, according to him, this item was not even listed in the agenda for the meeting of the day and, hence, the Board did not receive any advance briefing papers on the proposed order. None of the Air India officials on the Board appear to have demurred, a bureaucrat who raised some questions was summarily transferred, and the protests of one independent director went largely ignored. Air India is today reeling under the debt burden of this huge and unprecedented order for aircraft.

While such brazen violations of governance norms seem to be consistent with other instances of egregious decision-making in the public domain, governance in large private companies seems to be characterised by following the letter but not the spirit of corporate governance. One manifestation of this is annual reports that have become thicker but hardly more insightful. One of the sections adding to this bulk is titled “Management Discussion and Analysis” but is filled with industry statistics sourced from external research reports with no meaningful attempt to identify the real challenges before the company and how it plans to address these.

The company secretary has an important role to play in board-level governance, but in India I find the company secretary is in a time warp. He is obsessed with observing the letter of the law but has very little understanding or appreciation of the spirit of the law. For the most part, the Indian company secretary sees his role as making sure the company does not get into trouble vis-a-vis regulatory filings, and protecting the interests of the promoters. He assumes that the Board will approve all decisions already taken by the promoters or management after some perfunctory discussion. Thus, in scheduling Board meetings he is driven primarily by the convenience of the promoters rather than whether it suits the independent directors. I rarely see a company secretary whose primary allegiance is to doing what is best for the company and who understands the role and importance of independent directors. While auditors can lose their right to practice if they don’t follow the code of conduct of the Institute of Chartered Accountants of India (ICAI), I am not aware of any company secretary who has been debarred in India.

Nitty-Gritties Governance is an even more ambiguous concept at the ground level. With all the stories of wrong-doing that swirl around us every day, I fear that the employees of most companies are confused about what is right and what is wrong.

Multinational companies have tried to remove this ambiguity by sensitising their employees to the practical and specific issues of corporate governance. Most of them require their employees to take quarterly online tests where they have to answer questions on ethical dilemmas, and repeat them till they get the answers right. Some Indian groups, like the Tatas, have a strong code of conduct and take steps to enforce it across the group. But I fear that the Tatas are more the exception than the rule.

Unfortunately, academia has done a poor job of inculcating a sense of what good governance means, or what is the responsibility of the manager in a corporation. Instead of getting into practical issues, courses in academic institutions tend to either get into excessive conceptualisation (principal-agent versus principal-principal-agent, deontological versus utilitarian approaches, and such) or high-level nitpicking (“should independent directors be one-third or one-half of the board?”). I won’t even try to describe the research done on corporate governance, most of it is so esoteric and far removed from day-to-day managerial concerns.

Reflecting the convulsions of a society in transition, professors themselves seem to be confused about what is right or wrong, and what advice they should be giving their students. So, they tend to hide behind arguments such as, “MBA students are adults and their values are already formed, what can we, as professors, do to change them?”

The Way Forward Having chosen capitalism as our economic philosophy, we need to bring corporate governance down from its high pedestal and make it a part of routine managerial practice. Otherwise, society may lose confidence in the firm, an important institution in a capitalist society.

We need to create a groundswell for better governance practices. Education and training programmes are a good starting point for such a movement. Both MBAs and company secretaries need to become agents of change. Consumers and investors should boycott companies that have consistently short-changed customers and employees, spoilt the environment or followed opaque disclosure practices. External corporate governance ratings of companies need to go well beyond board management to reflect the organisational climate and how different stakeholders are treated. Whistle-blower protection laws need to be strengthened so that we can create an environment conducive enough for more Dinesh Thakurs to come forward. Progressive industry associations need to move from voluntary to mandatory adoption of codes of conduct and be willing to de-register companies that have violated their own codes. Isn’t it time for us to start an ‘Anna Hazare movement’ in corporate governance?

(Beyond Jugaad is a monthly column. The author is the Professor of Corporate Strategy and Policy at IIM-B and author of From Jugaad to Systematic Innovation: The Challenge for India.)

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