Constructive challenge of good governance

Simply watching TV or reading the news in the papers or over the Internet has become a daily reminder of questions related to governance. People are not reassured and distrust (especially of business) runs high. Corruption and scandals seem to constantly flood the senses and the mental conditioning — whether driven by mainstream or social media, activist or political remarks or even simply being an outlet for frustration — leads one to imagine the worst instantly.

It has been a sub-optimal year when one speaks of corporate governance in India. At times like this it becomes difficult to differentiate between what has been a genuine failure of governance or business, and what in hindsight could be (or can alleged to be) a mala fide .

Winston Churchill once said: “Some people see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon” . It stands to reason that the business constituency must work hard to be seen as that sturdy horse.

Yet, whether it be an NPA (non-performing asset) story, an IL&FS story, management or systemic lapses at banks, or a key shareholder wielding power beyond the enterprise’s own constitution, the appearance is that of a widespread governance vacuum. Allegations begin to fly thick and fast and knees begin to jerk at unnatural paces.

In such circumstances, the easy reaction is to either demand or advance a solution that is wrong. It becomes convenient to neglect appropriate choices since it seems easier to prescribe medicine for the symptom than truly cure underlying factors. Writing a reactive prescription creates unreal expectations; when these are not met, one proceeds to write or demand yet more prescriptions and the circle goes on.

By way of context I loosely rephrase a comment by Bhishma in Mahabharata : “ Koi vishay gambhir nahi hota hai, paristhiti gambhir hoti hai ” (a topic itself cannot be grave; only circumstances are grave). Rationality demands that we acknowledge real aberrations in governance. Just labelling failure or absence of governance as isolated instances cannot be par for the course. Enhanced governance standards are the need of the day.

Heavy-handed regulations

At the same time, sincere contemplation of the realities of enterprises, individual participants and the authorities is deserved. Regulation without such appreciation is destined to be suboptimal. It is not unusual to see heavy-handed regulations being prescribed (if only to show that the state is frowning and acting) even if they do not achieve an optimal outcome.

Each organisation is different and has its own governance policies, requirements and capabilities. Each organisation has its own industry/regulatory requirements and distinctive tolerance for risk.

It is usually the combination of business circumstances and an organisation’s risk profile that sinks it or makes it soar. It is usually its risk tolerance that dictates the kind of decisions and choices the organisation makes. A bad outcome does not signify deviant intent or behaviour.

All directors of an enterprise are bound by their fiduciary duty and the duty of care and skill. It is obvious that not all directors may have the same skill and experience, or a similar understanding of the functioning of the business. This raises a question as to what is expected of different types of directors when it comes to their duties.

Globally, the business judgment rule prevails. Under this, a director is not considered liable if he/she took reasonable and diligent steps to become informed about the subject matter, did not have a personal financial interest (or declared such a conflicting interest) and had a rational basis to believe that the decision was in the best interest of the company at the time. Contraventions or failures must invite proportionate punishment.

But like in any equitable economic environment, presumption of good faith and innocence on the part of a director must prevail until there is compelling evidence to prove otherwise.

An equitable system has the maturity to suffer failure in punishing one delinquent as long as the presumption of innocence is not denied to many. This balance is crucial in preserving the desire of appropriate, upright persons to undertake the duties and obligations of a director.

Blaming the directors

In recent days the role of independent directors has invited both debate and criticism. Promoter directors have been in this unhappy situation for much longer. It is rare for the media or public or the authorities to show a spontaneous interest in the good work of these classes. This perhaps is a global phenomenon, not just here. Negativity has more takers than positivity.

In this environment, for the powers that be it becomes natural to turn prescriptive and create wholesale regulations, which end up essentially making life more difficult for the diligent. The delinquent usually don’t seem to care or simply find shortcuts.

These paragraphs cannot accommodate substantive suggestions, and barely scratch the surface on what merits an intense dialogue. None of the above belittles a reality that those responsible for corporate governance need to study where others have failed, and use the learnings to introspect and strengthen attitudes and processes at their own ends.

The authorities may like to introspect if in the long run a muscular state or too much regulation can be harmful to the success of businesses as well as the economy as a whole. It will be a fine balancing act amongst all stakeholders to evolve a scenario where sound ethics and efficient management can be ensured, and unintended or unpleasant consequences avoided.

The writer is an entrepreneur and former President of FICCI.

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