Sucheta Dalal :Corporate Governance: More form than substance
Sucheta Dalal

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Corporate Governance: More form than substance  

September 26, 2000

For the past four years, the Indian corporate sector, led by the Confederation of Indian Industry has furiously debated the concept of good corporate governance. Given its popularity as a hot subject on the corporate seminar circuit, the capital market regulator decided to set it in stone by codifying the tenets of good behaviour. Starting April this year, companies have to compulsorily disclose their compliance with the SEBI code in their annual reports.

Does this mean we are now into an era of ethically correct business and good governance? Not by a long stretch, say corporate executives. In India, ethical business practices are divorced from intellectual debate on the subject. So long as actions can be justified as being within the technical definition of what is legally correct, it is considered bad business to worry about ethics.

The best part is that management is never even asked to explain bad governance. Indian boardroom etiquette does not permit honourable board members to embarrass the chairman and/or managing director by asking difficult questions. In some companies, it is also bad manners to want the agenda or minutes (of previous meetings) to be circulated before the meeting. The board papers are placed in front of the board member, who is expected to leave them when he leaves the boardroom.

At a recent workshop on corporate governance in Mumbai, Professor K R S Murthy of the Indian Institute of Management, Bangalore, had this to say about board meetings: "We can do a lot of back-biting, but when we meet formally, we want a harmonious relationship and a clubby atmosphere." Those who break the rule find themselves isolated and soon enough, out of all boardrooms. In fact, the last recorded case of a board member openly questioning management is almost a decade old.

S S Tinaikar, a former bureaucrat, who made waves in the 1990s as the municipal commissioner of Mumbai for his tough dealing with the intimidating tactics of the Shiv Sena, was a director of Voltas -- a Tata company which was a fief of then chairman A H Tobaccowala. When Tinaikar questioned certain decisions, he found to his surprise that there was no support even within the Tata empire. The battle ended with his resignation.

A lot of water has flowed since those days and the Tata group under chairman Ratan Tata has aggressively worked at ousting all the powerful erstwhile satraps of the empire. In the process, the group has witnessed ugly corporate battles and much washing of dirty linen in public, but at a fundamental level, boardroom etiquette remains unchanged.

Ironically, it was Ishat Hussain, now chairman of Voltas, who admitted as much at the same seminar referred to earlier. Talking about the role of independent directors, he said, "We Indians are very deferential at board meetings. We are most unwilling to confront the management." Hussain said that he is a director of an Indian company listed on the New York Stock Exchange, which has some foreign directors on its board representing a collaborator/investor. Comparing this experience with that in other companies where he is a director, he says, "I can see the difference between the way the foreign directors ask questions and how much they are willing to push to get answers."

Since there are no questions asked, it is always easy to walk the borderline of what is ethical and to get away with an occasional stumble on the wrong side of the line.

Thus, the president of the Bombay Stock Exchange, Anand Rathi, has no problems with his company being the book running lead manager of a company (Tips Industries Ltd.) whose main promoter (Ramesh Taurani) is charged with abetting the gruesome murder of his business rival, Gulshan Kumar. Even while the public offering was open for subscription, Rathi and the Bombay Stock Exchange played host to Sir Adrian Cadbury to debate corporate governance. Neither the press nor the corporate luminaries who either spoke at the meeting or attended it, embarrassed the hosts by asking "uncomfortable" questions.

It is the same with ICICI, our most dynamic financial institution. Its top brass are staple speakers at corporate governance seminars, bit it finds nothing wrong in using a legal loophole to wriggle out of its fiduciary obligations as a debenture trustee when a company begins to turn sick. SEBI requires debenture trustees to 'fulfil' their obligations in an 'ethical manner as per the code of conduct,' but since these are not legally binding, ICICI has no problems.

In fact, it has been dragged to court at least three times by another financial institution (Infrastructure Leasing and Financial Services -- IL&FS) for failing to fulfil its fiduciary duties as debenture trustees. Each of those encounters ended with IL&FS securing its money. Small investors who had no funds to initiate expensive and time consuming litigation end up having to write off their investments.

There are innumerable such examples. After all, there is nothing to prove that good governance leads to good results or that bad corporate practices affect the bottomline. In fact, the opposite may even be true. Infosys Technologies, which has become an icon of good governance with its consistently good results, ethical management and popularity with investors, may just be the example to prove this. After all, Infosys is business which does not depend on licenses and permits; also most of its dealings are with foreign companies.

Contrast this with the Tatas whose main businesses are in the old economy sectors. They have often paid a price for being ethical. Had they been otherwise, they could have been a serious player in the domestic aviation business with Singapore Airlines as a partner. They could also have swung several corporate acquisitions their way by making political payoffs.

On the other hand, look at the top 10 business houses in India (in terms of assets) and you will find that many of them would not have been in the list if they bothered with good corporate practices. Former State Bank of India chairman D N Ghosh says it well: "In India, governance is essentially a power game. Over the years, only the form of management practices has changed and not the substance."

-- Sucheta Dalal