The blog post on ICICI governance, despite appearing previously on the Bloomberg Quint website, was rather popular (30,000 views) when reposted on LinkedIn. Readers really engaged with it by offering several comments on how to improve corporate governance – Thank you. In this post, I would like to share some of the comments with my observations.
Does it happen everywhere?
Some readers observed that “this happens elsewhere in the western developed countries as well” and “lest this be construed as a dent on India, it well behooves to know that this is nothing endemic to my country alone.” Of course, this is a frequent response whenever one observes any shortcoming of India. The argument being that if it happens elsewhere, then we should not expect any better in India. But I find this a specious argument. Just because we all lie sometimes, does not mean all human beings lie equally.
One can be nuanced at developing a mental scale that ranks people or countries relative to each other. If you have lived in several countries as I have, you know that there are differences in the extent to which you can take people at their word and the level of corruption that touches an ordinary citizen. Furthermore, any Indian, off the record, will remark about the ubiquity of corruption and lack of consequences for powerful. I have never encountered this sentiment in any Northern European country, or for that matter, even in Singapore since moving here.
Yes, Enron and Rajat Gupta did happen in USA, but examine the consequences. Enron went bankrupt, its leaders were imprisoned, 60 billion dollars of investor wealth vanished, 4,500 employees lost jobs with the pensions obliterated, and the auditor Arthur Anderson is no more. This fallout, even on innocent bystanders, sets an example for the future. Do not consider engaging in wrongdoing, or even staying silent in the face of transgressions by others. Of course, it does not guarantee that it will never happen again, but it lowers the probability. The overall point being that while no system is perfect, this does not mean all systems are equal. Emerging markets, including India, have a long journey to travel on this front.
Are there any knights in shining armour?
One reader lamented the state of affairs by noting the following good questions: Every investor needs people with impeccable integrity for independent director positions in the board. How do we ensure that the right people are appointed? How do we minimise the influence of promoters in appointing independent directors? Does current compensation mechanism allow right people to come forward and take the job seriously?
My belief is that instead of attempting to find people of impeccable integrity, it is more realistic to work on developing a system that punishes aberrations so that people behave with impeccable integrity. There is nothing inherent about Indians that makes the country corrupt. It is learned behaviour. The system fails at enforcing laws with punishment for the powerful.
Furthermore, the social structures do not ostracise wrong doers. There is little shame or embarrassment associated with ethical lapses. Recently, at a dinner with a celebrity acquaintance, the person hoped that Vijay Mallya gets off as he is such a great guy and suffering! Yes, I tried keeping a straight face.
Chanda Kochhar was a female trailblazer, lauded on the national stage, for having become the CEO of a major bank. Some readers felt let down by her fall. But, perhaps the fault lies in us. We do not need to anoint successful people as saints. Otherwise powerful/successful people will believe that they can get away with anything. Let us praise the good a person has done and punish their mistakes. One’s good deeds do not give a license to be forgiven for the transgressions.
I was proud that Rajat Gupta became the first Indian to lead McKinsey worldwide or that Nitin Nohria became the first Indian dean of Harvard Business School. Yet, Rajat Gupta fully deserved his jail term in USA. As someone who has served on many boards, I saw his telephone calls to the stock broker friend immediately on departing board meetings as unforgivable. Just as I was disappointed by what I observed of Nitin Nohria’s judgment and behaviour on the Tata Sons board.
I disagree that higher compensation for board members would improve their ethical behaviour. In fact, perhaps the opposite is the case. The higher the compensation, the more people become prisoners. In the Tata fiasco, because TCS paid its directors very well, they were more likely to tow the promoters line not only on the TCS board but also on the other Tata boards they served on. Similarly, it is not like Chanda Kochhar, Rajat Gupta, or Vijay Mallya were wanting for material things that drove them. It was simply greed and/or the lack of a moral compass.
Is there systematic risk?
There is widespread awareness among corporate and political leaders about the malpractices that have prevailed in Indian banks. But, as a reader observed, if government took a stringent stand and ordered proper forensics into banks, the banks in India would collapse. This would have detrimental effects on the economy as it would curtail lending and also erode the customers faith in Indian banking system. These are real concerns. In fact, some would argue that the scandals that have recently come to light and the action against some corrupt bank executives have already reduced lending by banks.
But, what is the option? At some stage the problems must be confronted for a more robust and sustainable system to emerge. There will be a one-time hit with the exact pain distribution between government, shareholders, depositors and taxpayers to be determined. This was what was done by the western countries after the financial crisis of the last decade. There are enough case studies to examine in order to determine the way forward. At a time like this, it would have been reassuring to have a Raghuram Rajan at the helm of RBI (Reserve Bank of India).
Back to ICICI, one reader noted that all eyes are now on the RBI and the ministry of finance to intervene and straighten out this mess. As mentioned above, I do see a role for government and regulators at the system level. However, it should be the shareholders and board through the corporate governance process, backed by enforcement and redress from the legal system, which ultimately corrects the situation in any particular case. This makes for a healthy system. In contrast, looking to a particular regulator or minister for redress makes the system more capricious.
Finally, the idea that independent directors only depend on “non-promoter” votes is excellent in my opinion. It would clearly make these directors more “independent”. However, promoters in India will never “allow” this. Unfortunately, powerful promoters usually head the corporate governance panels that are instituted to “reform” the system. Most of these panels only reinforce the promoters hold on the board.
For example, the recent panel bifurcated the role of Chairman and CEO. This is a solution to the corporate governance problem in USA, where in the face of diversified shareholdings, powerful CEOs usurp the board by adopting the dual role. In India, where promoter led companies are ubiquitous, this separation protects the promoters from powerful professional CEOs!