RACY CASES-46 Corporate Governance kya hai.

A V Vedpuriswar and V Pattabhi Ram

Wafers sat under the moonlight looking at the stars.  It was the weekend and she had had a tough week at office.  She let her mind run, very unlike Wafers! She was thinking of how fashions have changed.  Hey, no; she wasn’t thinking about dresses.  She was thinking about jobs.  Once jobs in the information technology sector were hot. Then came the craze over business process outsourcing.  And now Sox.   She smiled.  She was reminded of Chuin’s (her kid brother) socks.  He rarely washed it.  Her mom was a doctor and he prided himself saying his socks would provide anesthesia to any patient.

China, her bosom pal, dropped in. She decided that she would check out with him about working on Sox, in particular in areas relating to corporate governance. She would be a CA come May 2006 and was already weighing her career options.  She felt that the noise over corporate governance was misplaced.  For, in her mind, corporate governance was like “quality”.  You cannot show case it as a unique selling proposition (USP) since it was a bare necessity for any good corporate citizen.  She wasn’t surprised that both Infosys and the Tatas were at the top of the pecking order in a recent national survey on corporate governance.

“Hey, tell me why this fuss over governance?” she asked China.  “Simple”, remarked the IITian.  “Corporate governance is concerned with the interface between directors, senior managers and shareholders of companies.”  Wafers yawned.  A legalese?  Where had she read this?  China ignored the jibe.  “Most shareholders do not have the time or the inclination to monitor the functioning of a company. So they leave it to the board of directors. In recent times, in view of the spectacular collapse of companies like Enron, the subject of corporate governance has been receiving great attention”.

Oh how could Wafers forget Enron! Her dad had told her about how reams of newspaper columns were spent by the BJP pulling up the Congress for doing business with Enron and then when it came to power the BJP itself had inked the deal!  Very funny, she thought. China, sipping his third mug of coffee (if he sips at this rate he will grey before he turns 30 thought Wafers) was saying, “Among the issues being discussed are who should be on the board, what should be the checks and balances on senior managers, what kind of incentives must be given to align the aspirations of senior managers with the objectives of the company, and the kind of disclosures which the management must make to investors from time to time. Several committees had submitted reports on measures for improvements and many of these reports have been widely publicized and intensely debated. In the US, the Sarbanes Oxley Act (Sox) has been introduced to impose greater accountability on CEOs.”

Wafers wasn’t willing to buy it. “I think in all these reports on corporate governance we are mistaking the woods for the trees” she said.  And added, “Many of the US companies which ran into trouble had all the corporate governance mechanisms in place, at least on paper”.  “Explain” said China.  “For example, the Enron board was a model board.  When Enron went kaput, it was in full compliance with the governance provisions of the much publicized Sarbanes-Oxley Act, with the exception of loans to some corporate officers.  Enron also had a truly independent board. Only Ken Lay and Jeff Skilling were insiders in a board of 14 directors”.  China nodded.  “Many of the directors were highly qualified. Some were heads of major corporate or non-profit organizations. Others had significant governmental and regulatory experience. All the audit committee members were independent.  In 2002, the Enron board was judged as one of the five best boards in the country by the Chief Executive magazine”.  Wafers was flowing like a torrent and China liked that.

“Hey, I couldn’t agree with you more” he said.  “Actually, according to William Niskanen, Chairman of the prestigious Cato Institute there is no evidence that a company’s performance is related to the proportion of independent directors.  Over the past 20 years, many studies have tested this relationship and have reached that conclusion.  Audit committees, compensation committees and codes of ethics, have been of little use in preventing corporate governance failures.”

Wafers remembered what her professor who taught CLSP had told the class. “In India several committees have been set up to improve corporate governance.  But talk to people who sit on boards and they will admit that nothing much has changed.  More high profile people may have been added to the board. Sitting fees might have gone up.  But the real challenges remain.  Most Board meetings are superficial and held to satisfy compliance requirements. In many cases, agenda papers are not circulated in advance. Far too much time is spent discussing trivia, important points are taken up for discussion towards the end of the meeting when the concentration of the board members has started to sag”.

Wafers wondered whether the rules could cover certain matters of the heart when it came to governance.  China recalled what Jeffrey A Sonnenfield had written in the Harvard Business Review.  “We’ll be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing need -– to be strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues.”  China remarked, “The most important step is to create a climate of trust and candor. Directors must develop alternative scenarios to evaluate strategic decisions. They must be involved in the management of the company’s affairs”.

“So does this mean that Sox is hogwash” asked Wafers.  “Not really” said China.   “In the 20th century shareholder activists, accountants, lawyers, and analysts had highlighted the importance of independent directors, audit committees, ethical guidelines, and other structural elements that can help ensure that a board does its job.  They’re necessary but not sufficient conditions for good corporate governance”. Wafers nodded.  And then added, “If a board is to truly fulfill its mission to monitor performance, advise the CEO, and facilitate effective stakeholder management, it must become a robust team whose members have complete trust in each other”.

Wafers’ mobile rang.  Her mom was on line.  She had to return home.


About Pattabhi Ram

A chartered accountant by profession, a writer by passion and a teacher by accidental choice.
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