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Why India's aviation sector is in crisis

August 13, 2009 11:04 IST
The aviation industry in India, through Air India, is a gleaming example of what the lack of corporate governance can do to a business, says Pratip Kar.

It is unfortunate that PSUs need to be privatised for them to be able to run as commercial enterprises and make the best possible use of their assets.

In the foreword to F W Harris book Jamsetji Nusserwanji Tata: A Chronicle of His Life, J R D Tata wrote, The wealth gathered by Jamsetji Tata and his sons in half a century of industrial pioneering formed but a minute fraction of the amount by which they enriched the nation.

The whole of that wealth is held in trust for the people and used exclusively for their benefit. The cycle is thus complete; what came from the people has gone back to the people many times over.

In the Wealth of Nations, Adam Smith said being the managers of other peoples money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which partners in a private copartnery frequently watch over their own.

While, the simple words of J R D Tata, are central to the principles and practices of corporate governance, its very quintessence, Adam Smith, however, tells us why practising corporate governance may not be easy. We have been seeing a lot of examples of this in recent times. 

A state-owned enterprise, by its very nature, should have no difficulty in practising corporate governance   that is creating wealth, holding it in trust for the people, and using it exclusively for their benefit, because such an enterprise is not a private copartnery and thus does not suffer from the kind of conflict which Adam Smith talks about.

But the public perception and the reality of the level of corporate governance in the Public Sector Enterprises in India is not particularly encouraging, except in some of the Central Public Sector Enterprises (CPSEs) included in the Navratna category.

Now that the CPSE disinvestment is back on the burner and the first disinvestment after nearly five years is round the corner, it is important that a serious thought is given to the improvement of governance standards of the CPSEs. 

Disinvesting a miniscule portion of shares in a CPSE, held in the name of the President of India, is only a part of the story. It will serve the governments immediate objective of getting the much needed funds to its coffers.

It will provide new investment opportunities to the investors and help increase the depth and liquidity of the stock market. But there is a greater opportunity of wealth creation for the people of India, which will be lost, if scant attention is paid to the practice of corporate governance standards at the CPSEs.

The aviation industry in India, through Air India (as well as the private airlines), is a gleaming example of what the lack of corporate governance can do to a business it can result in a faulty business strategy.

Corporate governance is not about doing well in good times, but about long-term sustainability of business through good times and bad. This truth does not dawn upon us most of the time and we blame the stars and God (in that order) for our business failures. 

Corporate governance usually becomes a challenge for the CPSEs because the separation of the multiple roles of the state becomes quite difficult and the boundaries tend to blur posing greater challenges to the efficient management and accountability of such enterprises.

Pricing of products of CPSEs is one such example. Besides, as it is, the balance between economic and social goals is not always easy to achieve; continuous ministerial interference makes it much more difficult.

Consequently, the distinction between what constitutes a policy issue making ministerial engagement legitimate and those which are predominantly of commercial nature, remains opaque in many CPSEs. Decision-making thereby becomes all the more complicated. The Board of the CPSE loses the independence in decision-making. 

Some of the CPSEs, of course, have a commendable track record in corporate governance, such as NTPC, ONGC and BHEL to name a few.

These companies have been wealth-creators, though mainly on account of the near-dominance in their operating sectors, and partly aided by a strong governance framework. But this number is only a handful. 

There are certain governance issues which continue to plague the CPSEs even the more enlightened ones  though to a lesser extent. In practice, the CPSEs continue to be ministry-managed, instead of being board-managed.

The boards have little or no role in strategy formulation and setting the direction of the company. The MoU between the CPSE and the ministry by itself a brilliant mechanism for target-setting, monitoring and 360 appraisal often becomes a routine annual exercise and the board has little role to play.

The board has no role in the selection of the independent directors. Even though there is a fair process of selection of board members set out by the Department of Public Enterprises, the administrative ministry has the last say in recommending the final list to the government.

There is no separation of the posts of chairman and managing director and the listed CPSEs have dragged their feet in complying with requirement of Clause 49. Often the posts of independent directors are ornamental and meant to provide employment to the superannuated; the attendance record of the independent directors is poor and the board composition is often unwieldy with as many as 18 directors in many CPSEs. 

Contrary to public perception of lack of accountability for the CPSEs, the CPSEs are weighed down by multiple levels of accountability in which as many as fifteen institutions have an important role.

There has been no attempt to rationalise this structure, without sacrificing the effectiveness of supervision. This leads to far more intrusive supervision than is desirable.

In turn, it makes the management over cautious and leaves the board to take decisions which, in the normal course, should be taken by the management. The number of board meetings is far in excess of what the most admired global companies require and the agenda items far more than a board director can be reasonably expected to read through. 

This has two implications. One, it saps the freedom and entrepreneurial spirit of the managers and results in hamstrung leadership in the CPSEs. Two, it leaves little time for the board to devote to strategy and provide direction to the company, which is its primary role in a board-managed company. That may be the covert objective a cynic may however be tempted to say. 

All this can change and needs to change, if we want to make our public sector companies to be the best in class. After all, was it not the governments Circular [No DPE/11(2)/97 Fin, issued on July 22, 1997] granting autonomy to selected Central Public Sector Undertakings (CPSEs) and classifying them as Navratnas, which had turning our public sector enterprises into global giants as its express objective? 

Since good governance results in long-term efficient use of assets, improved factor productivity, better performance of enterprises and greater wealth creation, improving the governance standards of the CPSEs should logically be an end to be pursued in national interest with or without privatisation. What is required is only a change in the dominant logic, a mindset change.

The author is currently associated with the World Bank and the Global Corporate Governance Forum of the IFC.

Pratip Kar
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