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What good corporate governance is all about

December 15, 2009 08:45 IST
Corporate governance codes work only where firms believe working in a legal, ethical and transparent fashion also means good business, says Pratip Kar.

It is not in dispute that good corporate governance is all about commitment of a company to run its businesses in a legal, ethical and transparent manner, and that the tone must be set at the top.

But are companies in India convinced that good business is all about good corporate governance? Do companies really believe that good corporate governance has got more to do with leadership?

Do companies feel that the codes of corporate governance are not all about compliance, but they have an underlying purpose which lies beyond compliance?

These are important questions, and the leadership teams of companies must seriously come face to face with these, irrespective of whether any "big brother" is watching. Company managements and members of the Boards often do not have a basic understanding of what good corporate governance is.

At a recent colloquium on Board leadership, the participants who were directors or belonged to senior management of medium-sized companies were asked to write down anonymously on a piece of paper what each one understood by corporate governance.

Clearly, corporate governance meant different things to different people. Less than half the class believed that corporate governance meant leadership; several referred to Clause 49 as "imposed" by Sebi and several others were honest enough to proclaim their belief that business was all about money, control and power.

 The codes of ethics and business conduct of companies and their impact on the firms' businesses can be referred to for answers to some of the questions mentioned in the foregoing paragraphs. These codes of most companies are approved by their Boards, and should be clearly reflective of the "tone at the top".

Often the codes vaunt lofty idealism, are written with great éclat and announced with dazzling élan. Others are simple and written in a matter-of-fact language, shorn of any linguistic fervour. The codes that belong to the former ilk often ring hollow.

 The code of a company like GE is a case study in itself. Its Code of Business Conduct and Ethics, known very symbolically as "The Spirit and Letter", has a tag line, "unyielding integrity", which is a musing of what GE has been standing for 125 years.

The Code expresses GE's commitment to perform with integrity "Everywhere", "Everyday" and for "Everyone". The Code expects all employees "to obey applicable laws and regulations governing their worldwide business conduct; to be honest, fair and trustworthy in all their GE activities and relationships; to avoid all conflicts of interest between work and personal affairs; to foster fair employment practices, to strive to create a safe workplace and to protect the environment and through leadership at all levels, sustain a culture where ethical conduct is recognised, valued and exemplified by all employees".

The Tatas have an elaborate Code of Conduct predicated on the concept of "Humata, Hukta, Huvarashta" from which flows the five Tata core values of integrity, understanding, excellence, unity and responsibility.

This code provides the guidelines by which the group conducts its businesses. Infosys has a detailed code based on core values C-LIFE: Customer delight, leadership by example, integrity and transparency, fairness and pursuit of excellence. These are noble thoughts couched in beautiful words.

These companies believe in these principles, live by them, and conduct businesses. It is evident that not only the tone has been set on top, but it has permeated through the organisation, and has been imbibed in everyday business of these companies.

 On the other hand, take Enron with the crooked E. Its 1996 Statement of Human Rights emphasised respect, integrity, communication and excellence, and all employees, including Jeff Skilling and Andrew Fastow, signed it.

These core values were embossed on the company's T-shirts, its intranet, pamphlets and paperweights. It even emblazoned on a giant banner that hung from the ceiling inside the lobby at Enron headquarters in Houston.

 The Satyam Computers, which is now being remembered mostly for the lightning speed of systemic response to save the company rather than the enormity of the corporate misconduct, also had an elaborate Code of Conduct and Ethics on its website.

It was based on "four core values which Satyam stood for" - belief in people, entrepreneurship, customer orientation, pursuit of excellence.

The Code, among other things, required the Board of directors and associates to conduct their duties legally, honestly and ethically, when acting on behalf of the company or in connection with the company's business or operations.

It required them to fulfil their fiduciary duties towards the stakeholders of Satyam; to act honestly, fairly, ethically, with integrity and loyalty; to conduct themselves in a professional, courteous and respectful manner; to act in good faith, with responsibility, due care, competence, diligence and independence and to avoid any activity or association that creates or appears to create a conflict between the personal interests of the directors and associates and the company's business interests.

Examples of codes of business conduct and ethics are numerous. But the questions are: How do the codes of conduct appear in retrospect?

Were the core values of Enron or Satyam questionable? Were these less noble than what GE or the Tatas or Infosys proclaim? Were these not approved by the Boards of Enron or Satyam? If yes, then why were these profaned by the same people who approved them?

Why is it that some companies are able to put to practice what they state in eloquent terms, while others are content with having their codes remain gilded in beautiful English?

The answers to these questions lie in the fundamental belief of a company that if it "runs its business in a legal, ethical and transparent manner", that is following principles of good governance, it would also mean good business.

If it is accepted that companies are normally set up to make profits and not to incur losses, it stands to reason that it would be futile to expect that companies will seriously take up activities that will not contribute to this objective.

But companies are also set up in long-term interest and not for winding up after a fixed period of time, unless compelled to do so on account of business failure leading to bankruptcy.

Pursuing this twin line of argument can lead to the conclusion that companies should be looking at long-term sustainable profit-making, which will result in sustainable business growth.

Hence, only such activities will be beneficial to companies and pursued by them that are in their long-term interests. Some companies believe in this, while others do not. The agnostics look at Clause 49 or other similar codes or regulations of governance only through the lens of compliance, and as an undue imposition on business.

For the believers, governance is a necessary requisite for long-term sustainable growth, and they feel that there is a compelling need to run businesses in "fair, transparent, legal and ethical manner" with unyielding integrity.

They believe that one can progress by doing good. They look beyond compliance and are able to make good governance their competitive advantage.

Milton Friedman articulates this view in his popular 1970 essay, The social responsibility of business is to increase its profits. In this, he says that the social responsibility of business is to maximise profit for the company, but subject to "the limits of law" and the "rules of the game" that ensure "open and free competition without deception or fraud".

The author is a former Executive Director of the Securities and Exchange Board of India and is currently associated with the Global Corporate Governance Forum of the International Finance Corporation and the World Bank. Views expressed are personal.

Pratip Kar
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