REDEFINING BUSINESS ETHICS AND CORPORATE GOVERNANCE : NEED OF THE HOUR

WHY BOTHER WITH INTEGRITY AND ETHICS IN THE MANAGEMENT OF YOUR CORPORATION AND YOUR COUNTRY?

Ethics as a whole a part of the

global agenda. The world is going through not just economic crisis but also ethical crisis.

ETHICS AND FINANCE

Finance would be impossible without
ethics.

The very act of placing our assets in

the hands of other people require immense trust.

Financial scandals shock us precisely

because they involve people and institutions that we should be able to trust.

WHY DO WE NEED ETHICS

DEPENDENCE ON OTHERS FOR
MANAGEMENT OF FINANCIAL NEEDS

CONTRACTUALIZATION NOT POSSIBLE

PARADOXICAL SITUATION:The ever increasing need for getting things done by others on the one hand, and the description of human nature that emphasizes selfish behaviour on the other.

HUMAN DILEMMA
A Human is a MORAL and ETHICAL
being by nature.

At the same time Humans are also

ECONOMIC BEINGS:-Steep economic demands and the lure of a materialistic, consumptive society might cause people to become more insatiable and less rational.

INTERNAL COMPETITION BETWEEN MORAL AND ECONOMIC SELVES

Thus they tend to make expedient choices which might be convenient and practical though not necessarily moral, at the same time rationalising that everyone else is doing it, so whats wrong with it or take the risk and just dont get caught. AND THATS HOW THE ROT STARTS.

Sir Walter Scott said Oh what a tangled web we weave when first we practice to deceive. For every crook there are at least ten corporate deceivers.

HOW DOES THE WEB OPERATE?

Deceit demands more deceit until eventually the pile collapses under the weight of its own incredibility.

As WARREN BUFFET puts it, Once a company moves earnings from one period to another operating shortfalls that occur thereafter require it to engage in further accounting manoeuvres that must be even more heroic. THESE CAN TURN FUDGING INTO FRAUD.

ENRON-THE MOST OUTSTANDING EXAMPLE

Investors loved it enough to value the company at $28
billion in October 2001, less than two months before it skidded into bankruptcy. It was not that Enron lacked substance, but in the end the hype got the better of it. To disguise its liabilities, it wrapped them up in private partnerships and took them off its balance sheets. To satisfy the wishful thinkers insatiable demands, it brought earnings forward by selling shares in other off balance sheet partnerships, and counting the proceeds as revenues.

COLLAPSE OF ENRON
MICHAEL JENSEN says, My hypothesis is that they overreached to try to become all things to everybody, to become the worlds greatest company. No one can grow that fast.

ENRON OF INDIA-SATYAM
Classic example of how a
company can dig its own grave.

How auditors who see

no evil, regulators who hear no evil and credit rating agencies who speak no evil are corroding India.

Contd.
Until now a much-touted corporate
success story, suggests that capitalism in India even if led by Entrepreneurial firms like SATYAM, is no less vulnerable to corporate fraud, deception and deceit. The SATYAM SAGA raises serious questions about the key parts of Indias financial ecosystem

Satyam fraud: Misplaced faith in self-regulation

RAMALINGA RAJU,THE DISGRACED
CHAIRMAN OF SATYAM COMPUTER SERVICES ,HAS BEEN CONSIDERED AS ONE OF THE PIONEERS OF INDIAN INFORMATION TECHNOLOGY BOOM.

SATYAM AS THE 4th LARGEST

SOFTWARE SERVICES COMPANY OF INDIA

IN YEAR 2007 ,RAJU BECAME ERNST

&YOUNG ENTREPNEUR OF THE YEAR

IN 2008 ,HIS COMPANY WON THE

GOLDEN PEACOCK AWARD FOR EXCELLENCE IN CORPORATE GOVERNANCE.

CONT..
TRUE TO THE PARADOX OF LIFE ,IT IS THE SAME
RAJU WHO WROTE LETTER ON 7th JAN TO THE BOARD OF SATYAM ,ADMITTING THE FUDGING OF THE COMPANY BALANCE SHEET . KNOWING HOW TO GET OFF IT WITHOUT BEING EATEN

HIS APPREHENSION ABOUT RIDING A TIGER ,NOT

ACTUALLY THE WHOLE EPISODE STARTED FROM

HIS DECISION TO DIVERSIFY INTO REALTY AND INFRASTRUCTURE TO DE-RISK ITSELF.

IT DECIDED TO ACQUIRE STAKES IN TWO

COMPANIES ie MAYTAS PROPERTIES AND MAYTAS INFRA.

FROM ICON TO I.CON

Flawless code for the perfect fraudB. Ramalinga Raju wrote a code that was simple, resolved the conflict for being seen as one of the biggest without being one and delivered riches. It was perfect because nobody got a whiff of the scandal till he confessed to it.

By his own admission, for seven long years- that is, 28 quartersRaju inflated income, profits and cash reserves.

The virus that he authored infected the mainframe of Indias

fourth largest software company and exposed India to speculation and suspicion of multiple fiddles.

Contd.
Every sentry leading to the ethical
mount called corporate governance was caught napping.

The algorithm of this massive

fraud has wrecked public faith in the institution of internal auditors, external auditors and independent directors.

Contd.
Regulators ranging from the Registrar
of companies (ROC) , the SEBI and the RBI were caught asleep at the wheel.

Very simply, there were no whistle

blowers and nobody called the bluff.

SHERLOCK HOLMES would have been

tempted to call it the curious case of the night the dog didnt bark.

Contd.
The little that is known on the scam is thanks to the
confession of Raju and later Vadalamani Srinivas, the CFO of the Satyam computers. Worse, Raju managed to orchestrate the fraud even as the diluted his holding from 26.5% in 2001 to a mere 3.6% in 2009. A minority shareholder can wreck such havoc is in itself a testimonial to the pathetic state of corporate governance. Even the most charitable explanation of the scam- that he cooked his books, ramped up share prices and used the profit from dilution to further inflate profits reveals the appalling systemic failure.

In short

that is fraud, forgery, cheating and insider trading all in one

long sequence.

Bigger Question
And one to be addressed more urgently is :
Do we have the kind of business environment and business culture that actually promotes good corporate governance and demonstrates it?

MORAL AND ECONOMIC CONFLICTS

The AMERICAN HERITAGE DICTIONARY defines the term ethics as the study of general nature of morals and of specific choices to be made by a person and Business ethics as that set of reasons which govern the conduct of a business. Being ethical requires acting with an awareness of how products or services of an organization can affect the society as a whole.

 Society bestows upon businesses the

right to own and use land, labour and natural resources.

In return, society has the right to

expect these organizations to honour existing rights, limit their activities within boundaries of justice and bring about overall development of the society.

NEED TO REDEFINE CORPORATE GOVERNANCE

Corporates at the centre stage of social development because of globalization of economies. No choice between profits and ethics but profits in an ethical manner this is Corporate Governance. Corporate Governance is about promoting corporate fairness, transparency and accountability.

A SEBI report defines Corporate Governance as The acceptance by Management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management.

HOW TO ENCOURAGE CORPORATE HONESTY

The dialogue between chief executives and wall
street must change. Bosses need to put an end to the expectations game by simply saying no to what has been termed earnings guidance.

The recession in America gives companies an

excellent opportunity to reset the conversation on a number of levels.

ENCOURAGING WHISTLE BLOWERS

People who draw attention to
suspected corporate malpractices. Regrettably, whistle blower today are treated as pariahs. Unless that message is conveyed continually companies risk finding that it is too late to turn honest.

ROLE OF INDEPENDENCE DIRECTORS

As well said by OMKAR GOSWAMI, the director

on the board of Infosys Technologies:Good independent directors are like watch dogs. Mostly, they will be collegial and work in tandem with management to grow long term shareholder value. But when management contemplates something, which may be inimical to the value or reputation of the company, or hurts the rights of minority shareholders, it is their responsibility to bark. No definition of independence matters if, at the end of the day, you cannot stand up to the management and be counted.

Contd.
The Satyam episode is a lesson in more ways
than one. It shows that management can put forward questionable transactions and expect Boards to give their assent- a fact that should make Independent Directors be even more vigilant in discharging their fiduciary responsibilities.

PROFESSIONAL COMMITMENT OF THE MODERN MANAGER

Being a decision maker is like, being a surgeon
or a soldier who is loyal to the ethics of his profession, and not just concerned about personal gain.

An ethical manager works for the organization

that employs him and is remunerated not just by his own gain, but by the fact that the organization grows and all the stakeholders are benefited.

Need for rotation of Audit firms as well as members on Board of Directors.

Former SEBI Chairman, M.DAMODARAN Stresses on the fact
that:-

The quarterly system of reporting puts undue pressure on the management to deliver members. This could lead to a tendency to try and do financial engineering. The UK has a six-month reporting system, the US threemonth reporting system. Its been a little premature for India to move to a quarterly system.
There is a need for ROTATION of audit firms as well as of
routinely changing members on the board of directors. If auditors and directors stay associated with one company for too long, the questioning mind dulls.

GOOD LEADERSHIP BY EXAMPLE

As well said by BILL LYTTON, who worked for
General Electric: Sometimes you want to be able to cite a good failure, somebody who didnt make the numbers, but for all the right reasons.

LYTTON said the key to avoiding ethical

disaster was good leadership by example.

Contd.
Management leaders must not only lead by
example but also institutionalize the high level of integrity and ethics which they champion, so that such positive values are not merely confined to a handful of people within the organization but will be pervasive throughout all levels and all units at the workplace.

JRD TATA said, You have to adopt

yourself to their (employees) ways and deal accordingly to draw out the best in each man. At times it involves suppressing yourself. It is painful but necessary. To be a leader, you have got to lead human beings with affections. To him, ethics included Gratitude, Loyalty and Affection.

RULES AND REGULATIONS-ONLY A PATCHWORK

In the near term as an outcome from investigations
/analysis government will come up with more rules, regulations and compliance procedures. These are more like patchwork and will address some of the outcomes of this fraud and add more overheads to the system (similar to Sarbanes Oxley regulations in US).

Putting more regulations will not address the root cause

of this issue. This whole episode will keep repeating itself time and again till we reach a stage where our rules and regulations become more of an impediment to our businesses instead of enabling them and defining boundaries/acceptable norms.

Tata Sons Ltd. Director Jamshed Irani says

that Corporate Governance is a culture that cannot be mandated, but has to be built of gradually with strong link between the board and the management of the company.

We should change the way we look at

Governance and also our mindset.

LESSONS TO BE LEARNED

NEW SCIENCE OF HUMAN RELATIONSHIP

JAMES H QUIGLEY, CEO of Deloitte and Touche, points out

that,
IQ-INTELLIGENCE QOTIENT which has been so highly lauded by many employers, should now be replaced with a new IQ-INTEGRITY QUOTIENT.

DANIEL GOLEMAN, author of New York Times bestseller

Emotional Intelligence and Social Intelligence points out that the importance of high EMOTIONAL QUOTIENT-EQ for corporate leaders is right, but what would now further differentiate one emotionally mature talent from the other would be the other EQ-ETHICAL QUOTIENT.

ITS NEVER TOO LATE TO LEARN FROM OUR PHILOSOPHICAL GUIDES

MAHATMA GANDHIS
QUESTION Economics that hurts the moral well-being of an individual or a nation is immoral and, therefore, sinfulTrue economics never militates against the highest ethical standard, just as all true ethics to be worth its name must at the same time be also good economics.

Contd.
SWAMI VIVEKANANDA ON
ETHICS The senses say, myself first. Ethics says, I must hold myself last. Ethics itself is not the end, but the means to the end . If the end is not there, why should we be ethical?

AN ACID TEST

If character is what you do when no

one is looking, then business ethics is how executives and other employees behave when customers, partners and regulators arent paying close attention - or when investors and bosses demand results at all cost.

IT IS HIGH TIME WE CHANGE OURSELVES

Just like there are rules and regulations for the

society, each of us need to operate under the boundaries of personal ethics and values. We as a society need to encourage moral values like honesty, integrity ethics etc. The value system needs to be imbibed into the future generations through our education systems and by parents setting an example to their children. While this may sound very philosophical it is essential that we fix this as failure of personal ethics and values is root cause of this issue.

We as individuals need to take ownership and drive this change both in us and in societies.

OUR MOTTO
SATYAMEVA JAYATE ANANRITHAMonly the truth prevails