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Challenges and Opportunities for Corporate Governance in India

Madhav Mehra

WHAT IS CORPORATE GOVERNANCE?

I am honestly delighted, privileged and honoured to be with you today to discuss this subject, which has become so vital not only for our corporate success, but also for our national success. What really is corporate governance? Of course, I do not have to tell you, you have had brilliant lectures from some outstanding people on the challenges and opportunities of corporate governance. But I will try to bring in a slightly different point of view. I might like to provoke you because most of you belong to the most representative class in this country, aged around 25 or less, that represents 54 per cent of the population and which is why I say ‘provoke you’. I think that this is the time. We are living in a defining moment of history in India. We will only succeed if we are able to bring a wholesale, 180-degrees shift in the concept of living, so we are not talking about one single thing. We are talking about complete change. I would like to bring in a new context.

THESE DAYS NEMESIS CATCHES UP FAST WITH UNETHICAL PEOPLE

You are aware that the Enron Chief Executive was given a prison sentence of a quarter of a century, which was never given even to a murderer. That is where we need to think why it has happened. There was another event where the question was ‘How is it that this kind of sentence was given, he is 63, by the time he comes out of prison, he would be 98?’ There is a change in the value system in the society; judges five years ago would not have given such prison sentences. In fact, there is a classic case in the UK, where, in a very similar situation, the people were completely let off. It was in Guinness where there was complete insider trading. No such case in the UK has ever come to the level of prosecution where it was successfully prosecuted. But if it happens today, the situation could be different. You remember a person who was the backbone of the Korean transformation, Kim Woo-Choong who wrote a book Every Street Is Paved with Gold. He was the Daewoo chairman. As Daewoo chairman, he was sentenced to 10 years in prison. Note that he has done tremendous good to the country.

LACK OF CORPORATE GOVERNANCE COULD BE DISASTROUS

Today, the market perception is that companies are looking for businesses that do good to the community, not necessarily make profit. So, today we begin with an assumption that corporate governance is a totally different concept. It is not just to make money for the shareholders. The whole reason why we brought into being the World Council of Corporate Governance is that we are here not just to look after our shareholders’ values immediately, because in order to do that we must look at the stakeholder. What are we doing? If customers do not buy our products, can we really do good to our shareholders? Who are the customers? The customers now have a very different paradigm. The world consists of two billion teenagers who are fuelling the market today. Their value system is very different. They want companies to be transparent, to be accountable. They want honesty and integrity. They want equity, and social and environmental responsibility. If companies do not provide this, companies are not sustainable. Lack of proper corporate governance practices is blocking the prosperity of a billion people in India. Today, our financial system looks after 81,000 individuals. We say growth—the rich have a growth rate of 20 per cent. These rich are just 81,000 among a population of one billion. You see the paper today, 54 people have been killed in Chhattisgarh. There were 11 policemen. Not one of the native people came to the rescue of these people whole night. How is there so much disparity, so much incongruence between our policies and systems? Now, who is responsible? You may ask why business should do anything about it.

GLOBALIZATION SHOULD NOT ONLY BENEFIT BIG CORPORATIONS BUT EVERYBODY

I ask you a question: we are talking about globalization, tell me which part of the society has become the biggest winner through globalization, and name the companies whether it is Bharti, Reliance or it is Tata. Their wealth has grown at least 10 times in the last few years now. So, the big businesses are the biggest beneficiaries of globalization. But for globalization to succeed, there should be good corporate governance. What is good corporate governance? Look at our growth, it stands at 9.2 per cent. This is India which has the largest number, 74 per cent, of malnourished children. We are big today. Mr Ramakrishnan is a friend of mine; I am very delighted that he is here today. We know why the world is looking at our country. We have not analysed that we have the youngest population in the world today. And that is what would fuel the growth. But in order to fuel the growth, we have to look after that population, the population that is our children and seventy-five per cent of these children under the age of six years are anaemic. How do we expect to grow? How and where will the corporations derive their workforce from? In order to fuel the economy, we have to look at the fundamentals. Why do we talk of the importance of corporate governance? I will just smoothen over the legal aspects.

CORPORATE GOVERNANCE PROMOTES EQUITY AND ETHICS

We want corporate governance because we say it is accountable. It promotes equity and ethics. If it does not promote equity and ethics, then it is not corporate governance. This is what we have been doing—manipulation of business of majority of people. Business has been doing this throughout history. Now things have to change. They have to change because that is what will create value. Promoting gender balance, accepting diversity are issues which will make markets worth for the poor. Markets should bring prosperity and work for the poor. If markets do not work for the poor, corporate governance is not successful. Mr Damodaran, he is a great friend of mine, this is one of his agendas: how can markets work for the benefit of the poor? Not just for 2 per cent, we are now shining in the glory of India, and we say that our stock markets have gone up to 14,000—it may have come down temporarily—we are talking of 9.2 per cent growth, we are talking of US$ 190 billion worth foreign exchange reserves and a whole lot of things. But stock market participation is just 2 per cent. While it is 25 per cent in the US, here it is just 2 per cent. What about the rest of 98 per cent? How can we bring the rest and why do we think stock markets are important? This is one instrument where it does not matter whether you are from Chennai or from Bangalore or you are from Mumbai. Stock markets do not distinguish between your castes. Once you buy a share, the growth is there, everybody benefits. Everybody benefits equitably. There cannot be a better system. Why should people hold money somewhere else? Why should only 2 per cent come to the stock markets? Everybody should come, why are they not coming? There is still insider trading. I was recently in a place called Trier, the birthplace of Karl Marx where they have got the European Academy of Law and I was talking to them about the relevance of Sarbenes-Oxley. I asked the audience, which included lawyers, auditors and accountants, how many of them own stock? There were nearly 10 per cent. Why do people not own stock? Because, even today, you cannot trust the market. If you start trusting the market, you will realize it is the best instrument to create equitable wealth in the country; because it has to operate under the law, it has ownership of solutions, enabling and facilitating rather than controlling and not rowing.

Yesterday Mr. Damodaran told you that SEBI is not trigger-happy. At times, I think we ought to be trigger-happy. I think the time has come when we need to take action, because if we do not take action, then we will not be able to make the market work for the poor. There is a lot going on. People have been talking about independent directorship for the past several years. Talk about independent directors, and Australia has had independent directors and companies have failed there. I have a question: do people in such societies, where they have the independent officials, think of friends when they want to appoint somebody somewhere? We make such enquiries: ‘What sort of a person is he?’, ‘Oh, he is a nice fellow, he will not say anything.’ We do not want people who are independent. The point is we are living in a society where people do not wish other people to be independent because independence means a position, independence means dissent, independence means difference and we do not like those words. We want to remain in conformity, we want to remain in uniformity, we want harmony but we do not realize the values created only by creating divisions, that is, by confrontation, though we may say no to confrontation and yes to collaboration. We must learn from the Vedas; unless there is a clash of ideas, there will not be progress.

MONEY IS NOT THE ONLY YARDSTICK, MAKING A DIFFERENCE IS

Let us come together. Let us think together. Let us combine our intellectual strength. Let our collective brilliance shine. That is the true way to progress. Not that we hide our things and say ‘Whatever you say!’ People say how do you appoint an accountant. Ask him what 2 + 2 is; if he says whatever you have in mind, he is the best accountant because this is our value system. It is a fallacy to assume that independent directors who receive huge compensations will serve the shareholder's interests better. Do you really think that if the fee is hiked to Rs 20,000 from Rs 5,000 or to Rs 1,00,000 from Rs 20,000 you will have better directors? I bet you will not. I started an institute of directors 20 years ago; Mr G. V. Ramakrishna has chaired one of our conferences. I can tell you people that what you get through voluntary effort, you will never get through a paid effort. We have to change the society in terms of thinking when it comes to making profits, making a difference. I have with me a very strong urge to make a difference to society. This urge should be far more than the one to make money. There is no yardstick. How much money can you make? People who came to my office 7–8 years ago, they could not even count a million, today they have 10 billion. You can live peacefully and sleep peacefully if at the end of the day you think you have made a difference to society. You can walk out with the feeling that you have left a footprint. Even 0.001 per cent makes a difference. You youngsters, the future of this nation, should look into this matter.

CORPORATE GOVERNANCE UNLOCKS AND CAPITALIZES THE STRENGTH OF ALL ITS STAKEHOLDERS

Now what is corporate governance? This is the classic definition. Corporate Governance refers to that blend of law, regulations, appropriate, voluntary, private sector practices, which enable corporations to attain financial and human capital performance efficiently by perpetuating itself, by generating long-term value for shareholders, by respecting interests of the stakeholders. We define corporate governance as a system that unlocks and capitalizes the strength of all its stakeholders, customers and employees. Employees were never a part of corporate governance; they contribute nearly 70 per cent to the value of the enterprise. They are not there in the balance sheet. Where is the natural capital? Where is the social capital? Where is the human capital that we push into it? These do not come into the balance sheets, so importance should be given to them not for the shareholders but for the corporation itself.

FIVE PRINCIPLES OF CORPORATE GOVERNANCE

We have the five principles that I have mentioned earlier: equitability, accountability, transparency, disclosure and integrity. These are the five principles. Corporate governance is a decision-making process that is equitable, honest, has integrity, is accountable, and is environmentally and socially responsible. Now, what are the drivers of globalization? With huge amounts of money available today, there is a huge fund called socially responsible investment (SRI) fund available today; it is meant for companies that are honest and thus sustainable. I discussed that the biggest value of the board lies in the independence of the directors. Independence does not refer to the appointment as such. It refers to the quality of mind. It is not whether you appoint independent directors, but a director who has an independent mind; and this depends on society's independence. Then you could say your five Ds are diversity, difference, dissent, dialogue, and disclosure. These bring value because you do not have trust. The biggest thing that happens would happen through trust in the company. Trust relies on disclosures. Disclosures take place through dialogue. That of course will happen only if you allow dissent. Then if you agree with me, there is no value to add to either of them. Vedas talked of collective brilliance because everybody brought in their ideas. Today, we are living in a knowledge society. How is knowledge society different from industrial society?

A KNOWLEDGE SOCIETY CAN BE CREATED ONLY THROUGH SHARING

Knowledge society talks about sharing. Suppose we have 10 glasses here. You and I share in such a way that both are bigger. I take five, you also take five. If I take six, you get only four. There is no way that both of us will get more. But there is a way in the knowledge society. In a knowledge society, if a party shares knowledge, it increases. The degree of transaction depends on the transacting parties. Let me say, you come from LIBA, there is another person who comes from London Business School. Let us talk together. You will see the addition of knowledge taking place rather than what takes place between two people of the same institute. On the other hand, talk to someone from the villages, talk to youngsters over there, and communicate with them, much knowledge will come to you. Today's knowledge is not limited to the book. Societies are changing so rapidly that the knowledge in books becomes obsolete by the time they are published. So much is the rate today at which knowledge is becoming obsolete; you have to look at the people to believe. Networking today is what productivity used to be 20 years ago, that is what value creators are, networking with people of different types. Value creation is possible with diversity. You put a man who is a director. You should never have directors who are from the same school. Now look at the directors of Indian companies, forgive me to say that, there are hundred personal contacts among them. Where is the diversity? Now if you say that you pay more money and appoint retired people, then you say you need independent directors, retired people and where is the value being added? You are having same of the old.

INDUCTION OF YOUTH

You need new ideas, new people. You need youngsters today. Now who are the drivers of change today? Who are fuelling the economy? Two billion teenagers, how many teenagers are on the boards of the companies? I don't know. You think teenagers do not know. They are running huge companies today. People in their 20s are running companies today. Now if you say that 54 per cent of Indians are the young lot, are they members of the board? You think they are not mature enough. Today's maturity lies in diverse innovation. It does not mean not doing the same thing, difference and not perfection alone. I used to teach and I used to talk of perfection. Value will not come with perfection of the same. Value will come by imperfectly seizing the innovative, so try to seize the imperfect. Because the first thing that comes to your mind, is very different. If you try for perfection, you will never achieve value today.

WE SHOULD DEVELOP A HOLISTIC VIEW

Why do we need independent directors? Because we are not managing continuities, movement is not linear anymore. We are managing discontinuities. Look at the changes in the marketplace. The whole of India and China is moving up today. The fulcrum of the world has changed today. Look at people in Britain now. You see Barclays Bank, only the other day, they removed 3,000 people to put people in Bengaluru and Chennai, their back-end offices. Now look at those 3,000 people who have lost their jobs. They are also human beings, they also have families. So this is the kind of upheaval that is taking place worldwide now. We have to look in a holistic situation. That while they are powering the economies here, there is a lot of despondency taking place and which is affecting the policy-making of the countries you know. But there are lots of good things that are happening as consequences. But these changes are changes that could not have been thought of earlier. Where the world has changed, none of us could perceive 10 years ago; Who thought Arcelor chairman would be Lakshmi Mittal? We could not imagine even one year ago when the battle was going on. One would think that the whole management of Arcelor would accept L. Mittal. He is virtually an autocratic person. Who would accept him as a chairman? But such is the way things are. The Tatas have got themselves into the biggest, in fact, the treasure of the British Steel as such. Corus is nothing but the merger of British Steel and a Dutch company. They are now being taken over. There are huge changes. How our companies will take advantage will depend on the diversity of its management that will be provided to the directors.

ISSUES OF CLIMATE CHANGE

Thomas Edison had decided to improve lighting by having a bigger candle. He had to have tens and thousands of failures in making an incandescent lamp. He had already failed 9,999 times. He said, ‘Failure? I have never known one. I just found 9,999 ways not to make a bulb.’ Such is the power of your ability to have a sense of ownership. One would be able to take pride in doing what he does. Understand markets better for companies’ short- and long-term goals, give more importance to the issue of long-term sustainability. In the last 4–5 days, The Financial Times, the financial paper of UK, is only taking of ‘Climate Change’. I have not come across that word in the last two days in India. It is of such significance to our children. It is unbelievable since all this is going to happen in our lifetime. According to an economist, Sir Nicolas Stern, we have to spend nearly 20 per cent of the GDP in stopping this climate change. It has already begun but further loss can be prevented if we take immediate steps. Twenty per cent amounts to a huge figure. It amounts to nearly US$10,000 trillion. He also says that people can spend much lesser now else will have to spend nearly 20 per cent 20 years from now.

Now that the climate is changing, there are going to be more floods and there will be droughts; all kinds of phenomena will take place, and these will affect production. This in turn will affect the ability to create wealth. This is a challenge but there also is an opportunity. The companies will think, like Stewart Rose. Who is Stewart Rose? He is the CEO of Marks & Spencer. It was not a big name. He made a 100 billion worth company just by paying attention to issues that had social and environmental relevance, thinking in terms of how they can add value? People today want to buy organic food. They have become very health conscious. They want to see if companies are giving fair price or not. There is something called fear trade. These are the issues, which have become vital; so corporate social responsibility (CSR)—is going to help you make more money. If you tell people that you are socially conscious, it will give you much more money.

COMPANIES THAT DO GOOD BECOME SUSTAINABLE

Now, power comes because there is a separation of Chairman and CEO. Companies that have not separated these have not had issues as such. Value proposition has changed a lot. A lot of emphasis is laid on tangibles, when intangibles should also be considered equally, if not more. Intangibles are much more than tangibles. I do not have any money now, but I can return to London. Imagine if you remove the air from this room, for how long would we last? Nowadays, clean air has a price. When we do not give it a price, are we doing any good to our children? Where is the wealth? This is the wealth. So we have to look in terms of what is called the triple bottom line. We need to look at the balance sheet of triple tide. We need to create wealth. We will have to price the natural capital as well as social capital and even human capital. It does not have a place in the balance sheet. Because it is not in the balance sheet, there is a lot of false information. I have started with quality management; people think of quality circles. In the year 2000 people have asked questions like ‘What do you look for in a company when you are going to invest?’ Only 34 per cent said management practices, 40 per cent said quality practices, 56 per cent said they want corporate citizenship. This is what they want. They want companies to do well; companies that do good become sustainable. Those companies are ones where one could invest with their blindfolded eyes. Because markets compose of financial capital, intellectual capital, vocational capital, customer capital, realization of the human capital, it has various things that we have not priced.

LAWS ALONE ARE NOT ENOUGH

If you decide to use your investors’ or stakeholders’ money as a piggy bank, you are bound to lose your personal freedom. Coming to Sarbenes-Oxley regulations, we have already discussed its relevance. Having done that, what is the effect? The very accounting firms that were submerged in scandals are profiting now, forgive me for saying that as a result, price quotations are fluctuating. We are now in a maze. The CEO of Citibank was forced to apologize after he sold stock to people worth US$ 100 billion when he knew very well that these were junk stocks. It is not the laws that would bring about change; it is you who is capable of doing it. We have enough laws but we need conviction to implement them. Even today, this is the financial times report of 2007, what does it say? Insider trading is widespread in London stock markets. And it is as common, as it was in 2000 in spite of the laws, and moves to stamp out the issue.

PERSEVERE LIKE GANDHI AND BECOME CHANGE AGENTS

So, CSR is the heart of corporate governance. Have you heard of the person Barack Obama? Obama has challenged Hillary. My forecast is he is going to win. There are two reasons as to why he would win. He wrote a book in 1996 and that is something for young people who wish to be in public life. Write a book about all your misdeeds, all that you have done in college also. There was a debate about Clinton and it was said that Bill Clinton was having an affair, and indeed he had one. The issue is not whether you have one or not, the thing is whether you would lie about it. That is where Gandhi comes in because the whole book My Experiments with Truth is very much true to the title. Why do not we go back? We have produced the wisdom. The entire book talks about the misdemeanours of Gandhi. It shows whether we have the courage and conviction to say the truth. People will say a lot about you, whether you will acknowledge that, do you have the ability to do that, which is where transparency comes in. Corporations have become naked. It is important to bring in the concept of Gandhi because it is not difficult. He was not able to speak one word even after three years of law in Britain. Even his first case was actually a help from his brother. But he persevered, persevered and persevered. That is what we must learn from him. You are the change agents, future of the world, future of the country. What you have to do is you have to become the change agents.