Corporates Need To Give Primacy To National Interest

Team INCLUSION

Series of irregularities and frauds have hit the corporate corridors in India in the last few years. There is a general environment of suspicion. It is ironic that we still need to either spell out duties or exert moral pressure to persuade the shareholders to do the right thing, for instance, paying one’s taxes honestly, says Team Inclusion

It’s important to transform patriotism to a mass movement and the role of corporate patriotism can’t be over exaggerated in this regard.

What has led to this situation? According to M Damodaran, former Chairman, Securities and Exchange Board of India (SEBI), it clearly demonstrates a failure on the part of the governance structures. “Clearly something has gone wrong somewhere and that something is the absence of governance,” he said. 

The first question, then is, what should be the patriotic corporate conduct?

Damodaran, in this regard, highlighted the need for strictly enforcing the concept of ‘stakeholder democracy’. It is a concept where the primacy is given to stakeholders and all stakeholders are treated equally – big or small. A company’s stakeholders include employees, customers and the society at large, besides the shareholders. Like in political democracy, in corporate space also all stakeholders have rights and responsibilities.

“You need to be conscious of both your rights and your responsibilities. There is no doubt, that you will deliver values to stakeholders. The moment you forget that, you are buying problems,” added Damodaran.

However, incidence of corporate corruption has increased sharply in recent years. The Serious Fraud Investigation Office (SFIO) has investigated 620 corporates in the last three years for the breach of the Companies Act. The number of cases investigated by the SFIO has quadrupled in the last five years.

The public sector banks alone reported 8,670 cases of ‘loan fraud’ between 2012 and 2017, according to the Reserve Bank of India data. Then there are cases handled by agencies such as the Central Bureau of Investigation, Enforcement Directorate, Directorate of Revenue Intelligence and the Economic Offences Wing.

Several big corporates are in trouble and its top executives are being investigated for serious frauds and irregularity. All this has posed serious problems on banks’ balance sheets and the national economy.

Sameer Kochhar, Chairman, SKOCH Group, said that the current problems in the corporate India highlight not only the failure of governance but also the lack of ethics. When the corporates try to maximise shareholders’ profit at any cost they end up doing undesirable things.

“The basic objective of the corporate is to contribute to the GDP of the nation, besides enhancing the standards of the average citizen… If corporations are not behaving ethically, the common man and banks will feel the pinch,” said Kishore Sansi, Distinguished Fellow, SKOCH Development Foundation and former MD & CEO, Vijaya Bank.

Referring to the rising cases of defaults by corporates in paying back the money borrowed from the banks, Sansi said, “Corporates have been coming out with innovative techniques of defrauding the banks.”

Rajeev Kumar Agarwal, former Whole Time Member, SEBI, emphasised on the need for the corporates functioning on the concept of safeguarding the stakeholders’ interests instead of just being focused on shareholders’ interest.

The second question to be answered in this regard is what should be the top most priority when deciding a charter that lists the best corporate practices?

Agarwal listed three broad principles in regulation for corporations. It includes fair conduct, transparency in conduct and accountability. “Regulator has to have an equal treatment to everybody and corporates need to see the larger interest of the country.”

Agarwal said the idea of corporate patriotism was not against the principle of safeguarding the shareholders’ interest. He said all stakeholders need to do their bit to eliminate corporate frauds as it can’t be done just by the board.

“It is the duty of the board to see that the conflict of interest is not there. However, the board will not be able to decide unless there is true disclosure. So it is the responsibility of the management and all the person concerned to make true and full disclosure,” he said.

Deepali Pant Joshi, Former Executive Director, Reserve Bank of India (RBI), emphasised on the need for a level playing field. “Regulators have to be even-handed,” she said.
According to Joshi, Insolvency and Bankruptcy Code (IBC) enacted in 2016 was much needed by the corporate India. The National Company Law Tribunal has been set up to take in the issues related to insolvency and bankruptcy.

“The objectives of business expansion and what the society need have to match,” noted Aruna Sharma, Distinguished Fellow, SKOCH Development Foudnation and former Secretary, Government of India.

She said the corporate India must focus on quality of products and honesty. “If quality consciousness is not there you are finished. If honesty is not there you are finished.”

Even in the much touted software sector, Indian firms are hardly doing research oriented work she added. “Even in software industry we can’t frame questions, we can only give answers. You must learn to frame questions to the leaders of the world,” said Sharma highlighting the need for enhanced R&D in the country.

Saurabh Chandra, Chairman, Multi Commodity Exchange of India Ltd (MCX) and former Secretary, Government of India, said a system needs to be put in place that act as a deterrence for corporate frauds. He said a good board and the focus on “risk” and “purpose” would help promote good corporate behaviour.

Referring to the manner in which independent directors are appointed and removed from the board, Chandra said it is a serious problem for the functioning of the board. “On the board, the biggest issue is independent directors. Principal shareholder appoints independent director and also has the power to remove it. So the independent part is hazy.”

For burgeoning Non-Performing Assets (NPAs) of Indian banks, the boards of the concerned banks and companies must be held accountable for the mess. How could it be possible that crores of rupees disappear while the Chairman of the board does not know? There is need to ask the senior management of corporates as well as the banks that where has the money gone. There is no point in penalising the small managers.

Social responsibility

India is among the first countries in the world to make Corporate Social Responsibility (CSR) mandatory through an amendment to the Companies Act, 2013. The new regulation came into effect from April 1, 2014. Under the new regulation companies with a net worth of R500 crore, or turnover of R1,000 crore, or net profit of R5 crore or more in a fiscal, must contribute 2 per cent of their profits to programmes that benefit society. Over R50,000 crore have been spent on CSR during 2014-15 to 2017-18.

But where is this money being spent? Has it really benefited the society? “CSR, if well implemented is an act of corporate patriotism. The money that is spent in the name of society should not be something that is enriching somebody else,” said Damodaran.

Kochhar said in the name of CSR and charity several people in the corporate sector, mainly technology and software segment, have been getting favourable changes done to suit their business interests. “There is a trend of policy capture. You make sure that the policy is written in such a way through your foundation or through your charity that there is no competitor left. Right now it is happening at the top so not very visible,” said Kochhar.

He pointed out how software companies enjoyed almost tax-free environment for almost three decades and now trying to influence government and public perceptions through cosmetic donations and charities.


Making a case for ‘Stakeholder Democracy’

Corporates in India and across the world have long subscribed to the view that their world begins and ends with their shareholders. It’s much later that the word stakeholders entered the vocabulary. Initially it was all about delivering values to shareholders. And if you were the principle shareholder in the company it was about delivering values to yourself. 

That was the principle on the basis for which the capitalism was structured and companies existed. Much later because of pressure from various sources, the universe of interest got expanded from shareholder to stakeholders.

Today we have in most countries what we call stakeholder democracy, where the last man who has one share or perhaps no share but relationship with a company as a vender, employee or as a member of the society, that last man’s interest has to be subsumed in the larger interest of the company.

Is that something, that the corporates are practicing, I wish I could say ‘yes’. Some of them are, but a lot of them have just got started with the journey on what they should do as a corporate citizen. As corporates are also entities recognised by law, they should also behave like citizens of a great country.

CSR

I am not a believer of two per cent regulation. I always believe that CSR is an affair of the heart. It is not about an entry in the account books. When you say two per cent or whatever, you are talking in terms of the accounting entry and not an article of faith.

Society as a stakeholder in the corporate India is entitled to have its share. This is because the society provides a number of inputs that any corporate needs to survive and prosper. Therefore corporate social responsibility is absolutely essential.

If well implemented, CSR can be an act of corporate patriotism. But if the approach is that somewhere under the umbrella what is permitted in the CSR I will also smuggle my projects and schemes which suit my company, which serves my company’s interest but can be packaged as serving the community interest, then we have a problem that needs to be addressed.

The money that is spent in the name of society should not be something that is enriching somebody else. Like individuals, corporates are also in the business of nation building. Corporates need to be involved in the act of nation building. It involves creating the right working environment, not treating the less privileged in your workforce as numbers or objects but persons whose active involvement, physical as well as emotional need to be brought to the table. It is those corporates that will outperform everyone else in the long-run.

Governance

If a company is to survive and prosper on a long-term basis, you need to have your governance system right. Not in terms of processes, ticking boxes or responding to what regulators or lawmakers prescribe, but in terms of recognising what is good for the society, company, yourself and various stakeholders.

There is no diversity of objectives. It is the common objective that will take everyone on the right path. Do corporates subscribe to that? I wish they did!

The absence of governance leads to sub-optimal results. It is an act that goes against the grain of patriotism. Its not just about paying taxes in time. There are accountants whose cooking ability is so good that they would outshine chefs of most restaurants. They have developed a natural skill to put ingredients together to get right results. Do we want that kind of corporate accounting?

Almost everyone today, seems to be suspicious of everybody else. The auditors are suspicious of the accountants, for the right reasons. The management is suspicious of the auditors. The management and the auditors are both suspect in the eyes of the board and the board is suspect in the eyes of shareholders. This is the story that is actually playing out today.

Today we have in most countries what we call stakeholder democracy, where the last man who has one share or perhaps no share but relationship with a company as a vender, employee or as a member of the society, that last man’s interest has to be subsumed in the larger interest of the company.

How do we correct this? The solution lies in the appeal to the sense of patriotism, service to the nation and to the sense of doing the right things for the right people. 
History has demonstrated that if the business is conducted properly respecting values, ethics, in a non-discriminatory manner, the companies will survive and will deliver value to all stakeholders.

Earlier there used to be a saying, show me the man and I will show you the rule. Now it’s being slightly changed to say, show me the man and I will show you whether I will apply the rule. Rule is the same. But whether I apply it or not is dependent on my sweet will.

Take the example of the National Company Law Tribunal (NCLT). There are cases which should have gone to the NCLT, but they are still outside the NCLT because somebody somewhere decided that the rules are for some people and they need not apply for some other people.

Law Enforcement

Our laws are written in such complicated languages that lawyers will be in business for several life times, trying to interpret what somebody wrote. All laws are drafted incompetently and mysteriously.

Look at the definition of fraud in the Companies Act, not in the main section but in the explanation. It is one sentence that goes on and on and on. At the end of it you don’t understand what it is. It is a fraudulent draft of the definition of fraud!

Every time there is a problem, the first reaction from the government is to write a new regulation or amend the law. There is no shortage of laws in this country; enforcement is lacking wherein lies the answer.

Tripod Theory

After having the basics in place there are three elements that are critical for the success of a corporation. They are – empowerment, incentive and accountability. 
Empowerment is not delegation. It’s delegation with much more. It is about transferring ownership of the decision making process and not looking at someone over his/her shoulder.

Having empowered, incentivise the person, a culture that does not exist. Celebration of success also is elusive and failures are not discussed.

The third element of what I call in tripod theory is accountability. You empower someone, incentivise someone and hold someone accountable.

Take the example of public sector bank boards. The managing directors get transferred and the board members get to know about this through newspapers. It happened not in the distant past, but very recently.

Let’s not be a victim of stereotypes. There is need to incentivise good performers as much as take effective action against those who step out of the queue. Suspending cynicism should be made a national movement and will go a long way in ensuring corporate patriotism—something that will run more top-down rather than bottoms-up.

M Damodaran is Former Chairman, SEBI and is Chairman, Excellence Enablers

(Comments are welcome at info@skoch.in)

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