The Hindu Business Line : Seeds of failure usually sown in good times

In every country or company which is accused of abuse, the traits are all the same: abuses of power, breach of ethics, undermining of honest accounting, deception of both public and private watchdog groups….

Mohan Murti

On the eventful 7/1 evening I went to the only English bookshop in Cologne and browsed the books it had on corporate governance to see if they gave me any ideas for my column theme.

There was just one book specifically on corporate governance, in the accounting section, a dry and dull book with chapters on formal rules and procedures. I let that remain on the shelf.

A few feet away I saw a book titled The Rise and Fall of Enron and thought maybe that would more stimulating in generating ideas on corporate governance, both good and bad!

Then I saw a book by Donald Keough, former president of Coca-Cola, titled The Ten Commandments for Business FAILURE. I picked that book.

Much of what the author wrote, centred around what Lord Krishna recounts in the Bhagavad Gita — that the seeds of failure are usually sown in the good times because of the lure and enticement to adharma and asatya.

When conditions deteriorate and failure is imminent it is often too late to rectify the situation.

When Satyam fell

Financial wizards, accounting tigers and company law gurus are all having discussions on the fall of the Raju regime. What is surprising is that as recent as in September 2008, the so-called world’s leading rating agency Standard and Poor - Risk Control Indices reiterated a ‘buy’ option to investors on ADSs (American Depository Shares) of Satyam Computer Services calling it a “buffet fitting stock”. I wonder why this rating agency is still not yet blacklisted by India.

Systemic Rot

The Satyam episode and the Mumbai terror strike may appear to be a far cry from ground realities, but a closer and deeper look reveals interconnections that stem from systemic rot — crooked politicians, corrupt judiciary, dishonest administration and deceitful populace. A nation where police and intelligence reforms have been wilfully thwarted by the political class and vested interests within the system for decades and a realm of poor, ignorant, feeble, selfish civilians who just do not care.

In June last year, there was evidence that some MPs were paid Rs 25 crore per vote-switch. We even had the scandalous episode where an MP took out wads after wads of currency notes to substantiate their claim that horse-trading had taken place and heavy cash was used to ‘purchase’ MPs for the trial of strength.

There have been no serious investigations on these incidents. And, Indians with their ephemeral memories, have conveniently forgotten to ask, why? In the past week, there have been a lot of adjectives used to describe what happened. Let’s call this what it really is: It is greed, pure and straightforward.

Basics forgotten

In each case, checks and balances failed, and people tried to get away with gains made at somebody else’s expense. In the corporate sector, it is also true that abuses occur when — some media, some analysts, some management teams seemed to forget the basics.

Basics like: management should manage the company, not manage the share price; management means balancing short-term returns with long-term investment; and that a CEO must think of a decade, not simply a quarter. Basics like: real profit, real cash flow and real balance sheets matter. Basics like: trust, integrity and responsibility matter.

There is no question who paid the biggest price: it’s been the average investors and ordinary people who have or will either lose their jobs, lose their life savings, lose their pension funds — or, lose all three.

The EU formula

Company law and corporate governance are right at the heart of the political agenda, in continental Europe. That’s because economies only work if not just companies but even nations are run efficiently and transparently. In this context, European corporate and political governance can be a model for India.

The European Commission does not have any Europe-wide code. The legal codes of EU countries are so diverse, and the social meaning of a company differs between countries, that trying to impose one model is madness. The markets decide.

A well regulated market with protection for shareholders, but without excessive legislation. In understanding the European formula for good governance, I am reminded of the use of the negative in the expression of limitations used through the ages and always as a form of ‘liberation’ — the Ten Commandments given to Moses and the Israelites — and the rule of law in jurisprudence. This means that everything is permitted except that which is forbidden. As to the substance of the detailed ethical, financial, control, environmental, moral values or limitations, these are well understood — and again equally applicable in the political, civil and business context, as any other.

Winning Companies

In Europe, winning companies are seen as those who not only increase profits by maintaining the highest standards, but those who increase social value at the same time — and that more and more shareowners, customers, partners and employees begin rewarding companies that fuel social change through business initiatives. Corporate Europe believes that reputation is the one thing that can take a century or more to build — but that can be lost overnight. Europe values the fact that managing a company, not a share price, means balancing the requirements of shareowners, customers, employees and communities. And managing a company for the long-term, not just the short-term, requires building sustainable value for shareowners and customers and employees and communities.

Generally, good corporate and political governance in Europe boils down to principles of dharma or righteousness — trust, honesty, values, good citizenship.

(The author is former Europe Director, CII, and lives in Cologne, Germany. blfeedback@thehindu.co.in)