2018 was some sort of a watershed year for governance in the world of business. Some of the best known corporate executives and well-known companies lost their long earned respect. Many rich and famous seem to be getting stuck in the muck of bad governance.
One of the best known corporate managers in the recent times – Carlos Ghosn, the ex-Nissan Chairman have been put behind bars in Japan for several misdemeanors’ including understating his executive pay. The much vaunted Tesla Chairman, Elon Musk, lost his job after he fraudulently tweeted that he was arranging funding to take Tesla private in early August 2018.
Some famed corporations were not far behind. One of the world’s best known company, General Electric, got embroiled in several unseemly acts. The US market watchdog SEC, is investigating this much praised company’s accounting practices. Revenue recognition related to service agreements looks to have been booked early by robbing from the future to make the present financial position better.
Look at Facebook: it has put growth ahead of governance for too long. The company allowed a number of big companies like, Apple and Amazon, to tap sensitive user data even as it was promising to protect privacy.
Companies after companies, have been treating good governance as something which is to be written on paper, and not to be practiced.
Is India better of?
Closer home, things are not better.
One of the best known Indian manager, Chanda Kocher had to reluctantly relinquish the top job in ICICI Bank when fingers were pointed at her on governance matters. Loans were apparently given without disclosing conflict of interest arising due to her husband having business relationship with some borrowers.
Several Indian corporates were also in the news for the wrong reasons. We saw the largest ever reported corporate fraud: diamantaire Nirav Modi and Mehul Choksi (of Gitanjali Gems) swindle from Punjab National Bank almost Rs 14,000 Crores.
Is anything altering?
The most oft repeated question nowadays in business circles is: will 2019 be any different in terms of financial misdemeanors of the corporate world? Frauds are primarily driven by ‘greed’. This basic human instinct is unlikely to change. The good news is, the legal eco-system in India and many parts of the world, have changed a lot, to discourage corporate fraudsters misbehaving time and again.
The most important legislation which could make Indian entrepreneurs think differently is: The Insolvency and Bankruptcy Code, 2016 (IBC). This enactment is trying to make sure that borrowers, pay back their debt liabilities. If they do not, their assets may be auctioned off to others.
The Prevention of Corruption (Amendment) Act, approved in mid-2018, could also change things around quite a bit. Bribe givers can now be punished with imprisonment. This could change our ill-behavior of trying to buy-out public servants like bureaucrats and bankers.
Are Auditors auditing additionally?
Auditors are supposed to be the conscience keepers of the society. But what happens when a lot many of them resigns, a phenomenal not so prevalent earlier? It affects client-goodwill adversely.
Look at the fruit juice maker Manpasand Beverages – the auditors resigned citing non-receipt of “significant information” requested for auditing the company’s books. The company’s stocks are down 80 per cent since the auditors resigned in mid-2018.
The reason for some auditors not hanging on, could be the then proposed introduction of National Financial Reporting Authority (NFRA), which was finally notified by end 2018. It is an oversee-body of the Chartered Accountants, with powers to decide on disciplinary cases against auditors of listed and large unlisted entities.
Some of the biggest frauds the world over in the last five years, have been detected by whistleblower complaints and tip-offs.
India’s largest drug maker Sun Pharmaceuticals was accused by a whistleblower email that the much acclaimed company promoter Dilip Shanghvi and his brother-in-law were engaged in financial irregularities with a stock-market scamster. The result – company’s share price hitting a five-year low.
About a third of the Nifty companies said in their last annual reports that they together received about 3,500 whistle-blower complaints, pointing to an increasing awareness of this vigil mechanism. Whistle blowers may just become bolder in times to come.
Increased shareholder activism is also helping to change corporate behaviour. No longer can listed company resolutions proposed, can always be assumed to get passed without any raucous. In a recent study, it was observed that 75 resolutions were defeated in the last four years – a situation unheard of before.
At Fortis Healthcare, which were under cloud with the co-founder brothers Malvinder and Shivinder Singh stepping down in early 2018, the shareholders voted to remove ex-Ranbaxy CEO Brian Tempest—an ally of the Singh brothers—from the board with an 88% majority. We may perhaps see more of these henceforth.
Challenging challenges for cherished character
Things are changing. Tougher laws are getting enacted. Social media is helping to spread bad business stench.
But yet there are still quite a few black holes. Unless these are plugged, the obstinate may still run away with their ill-gotten booty.
Whistleblowing, which is often considered to be the best bet to catch fraudsters, are yet not encouraged in the Indian society. Unless whistleblowers are protected from being victimized, it is unlikely to become a major tool.
The IBC has changed the credit behavior of the borrowers. But there are still some promoters that are trying to game the system. Hence, continuous modifications of the law based on experience gained, is a must. Without it, this superb legislation may become a lame duck.
Further, with NFRA overseeing the auditors, it needs to be seen whether the body provides more comfort or adds to the confusion to the users of financial statements.
The last words
The Companies Act 2013 is widely believed to be the harbinger of the good governance in India. But unfortunately, ticking some requirement boxes would not improve corporate behavior.
Good governance is a philosophy which corporates need to believe in. Time and again it has been proven that businesses which have followed it steadfastly, have maximized stakeholder value. However, many entrepreneurs do not believe in such niceties.
Short termism and immediate gratification keeps many an entrepreneurial adrenaline flowing, and so it will always be – be it illegal or otherwise! 2019 may not be too different in corporate governance, though some recalcitrant will keep getting caught, exposed and shamed.
First Published in: ET CFO