CORPORATE GOVERNANCE: culture and institutions matter

3rd May 2010, ECONOMIC TIMES

Urban middle class Indians think in English but act in Indian for example: Flexibility and compromise is very Indian.

3rd May 2010, ECONOMIC TIMES

Urban middle class Indians think in English but act in Indian for example: Flexibility and compromise is very Indian. Nee katru, naan maram, yenna sonaalum, thalai aattuven (you are the breeze, I am the tree, my head will sway whichever way you blow) sang Hariharan in the 1998 Tamil film Nilaave Vaa.

Praising to persuade is quite Indian. Hanuman allowed himself to be captured so that he could deliver Rama’s message personally to Ravana. Everyone in the Lanka court wanted Hanuman executed. Only Vibhishana interceded by first praising Ravana and only thereafter suggesting a lesser punishment.

Judging through background and appearance is Indian. Urban middle class Indians think that educated Indians (like them) who speak English are likely to be more reliable than their vernacular counterparts. The truth is that unless the Raja and leaders are honest, the praja will not be honest.

In the Mahabharata Duryodhana said, “Contentment and patience, though the virtues of ordinary men, are not virtues in kings.” With that pompous statement, he invited Sakuni to deploy his wiles at his court leading to the battle of Kurukshetra.

Why culture matters
Culture matters in many things including in corporate governance. The Indian practice need not be completely different from the west, but it must embed cultural influence. The western mind is shaped by the Greek philosophical tradition of analysis, linearity and abhorrence of ambiguity. It believes in a unitary sense of right and wrong and lays great emphasis on meritocracy.

On the other hand, the Indian mindset represents integrative and perambulatory thinking with a great tolerance for ambiguity. Nothing is black or white, everything is shades of grey. Merit is important but so are age, connections and lineage.

These show up in many ways:

  • Alan Greenspan was Fed Governor in America till 2006, just before the meltdown. In his book, Greenspan viewed instability analytically and wrote, “Regulation, by its nature, inhibits freedom of market action, and that freedom is what rebalances markets…..I fail to see how adding more government action can help.” Dr YV Reddy was India’s central bank governor. He viewed the undefined issues of instability intuitively and wrote, “The challenge shifted from managing the successful integration of the Indian economy with the global economy to managing the impact of the global crisis on India.” Very different ways of seeing the same thing.
  • Indian events are a Grand Spectacle where a few are doers; a few more are lurkers while many are watchers. For example, think of the doers, lurkers and watchers at our airport security, at a district government office or at an Indian wedding. Even cricket fits the doer-lurker-watcher cultural pattern: 4 doers, 18 lurkers and thousands of watchers!
  • Although the Mughal Empire had long spent its course by 1857, when the soldiers of the Gangetic plains wanted a leader for their movement, they agreed on an illogical choice: the defunct Bahadur Shah Zafar. Dynastic choice was thought to be less unacceptable than a merit-based choice.

 
Why institutions matter
Politics and government are poor examples of governance. Government is a poor custodian of public assets. In a recent case at the Panaji bench of the Bombay High Court, the local government lawyer unabashedly stated that “the ants had eaten up 24 kg of charas from the official godown where the government had stored the charas seized from drug traffickers.” The drug racket by local public functionaries is not Goa’s best kept secret!

Political leaders preach corporate governance, but are silent about political governance. Party accounts are never published, let alone quarterly or being audited by rotating auditors. Parties expect Anglo-American corporate governance but practice Indian political governance.

A few years ago government sold a majority shareholding in a PSU through an open process; the concerned minister was unhappy about the buyer and he expressed his unhappiness in several ways. Memorably he wagged his finger that he would not allow the buyer to implement changes as it was “his money”. The 26 percent owner was warning the 45 percent owner that he would thwart attempts to change! And he got away with it.

The high-handed behavior of some government directors on PSU boards and indeed the very functioning of many PSU boards set a poor example to the private sector. The message is right, but the messengers are not credible.

How do we live with such contradictions?

It may be because of an awe of rulers. For 25 of the last 30 centuries, citizens’ local issues were sorted out by local panchayats. The ruler or king was a remote person, even thought to be God. Be it the Mysore Dussera Festival or the Nizam of Hyderabad, royalty has always been awesome to common folks.

May be that is why industrial captains are in awe of leaders either or may be for reasons of enlightened self-interest. Exceptions apart, many corporate leaders subconsciously adopt a subservient role in their interaction with ministers.

Politics and business share some things—dynastic leadership, confounding arrangements, one-upmanship and disdain for rules at higher levels. There is a further implicit connection between politics and business. Politicians used to view business as an akshaya patra for funds. As deregulation denuded the akshaya patra, politicians themselves entered business with benami identities as suggested by the ownership of IPL cricket, the mushrooming higher education colleges, and private airlines. Though most politicians avoid garlands of currency notes publicly, they do possess enough currency to make many garlands!

While government pretends to govern, influential citizens pretend to obey them. Highly connected offenders roam freely with the attitude that they can expose others or that the law is corruptible and inefficient, so nothing can happen to me.

In the USA allegations of the misuse of corporate funds or insider trading, like with Vinod Gupta or Anil Kumar, are brought to speedy conclusions. India cannot emulate this despite adopting the American corporate governance principles.

Like other institutions of democracy, the corporate sector too is flawed. The relationship between shareholder democracy, authoritarian leadership and company growth is not a linear one and it defies any neat mapping.

Some thoughts
I am not sure how, but CG practices need to be tweaked from being precise and prescriptive to being directional and intuitive.

Investors and independent directors should watch behavior, not only compliance
A structural weakness in India is the poor performance of the institutional shareholders. They need training and encouragement.

They must focus on honesty of purpose and intent rather than just on the rules and regulations. The hard truth is that if the owner, CEO and CFO conspire, no corporate governance system can work. You can arrest the auditor and jail the director, but that will not prevent the next incident where evil intent is present. The Satyam case is the best evidence of this.

The giveaways of bad governance lie in behavior. Pratip Kar, while at Tata Management Training Centre, showed that one or more of five signals from the C-Suite provide early warning: constantly being applauded by the media as being visionary and daring; displaying excessively risky but exciting ambitions; showing high connections and life style; being hubristic and egoistic; being surrounded by ‘non-smelly’ individuals, yet appearing ‘smelly.’

As former SEBI chief Damodaran has said, Indian executives regard the boss or the promoter as the kartha of the Hindu Undivided Family. The promoter is the ultimate. The top leadership may have managers who ‘kiss up and kick down’; who are very eager to please the boss. These are tell tale signals which need to be considered by intelligent investors.

Review related party transactions with care like a Lakshman Rekha
All related party transactions are not bad or suspicious. But this is the line that is normally breached to achieve differential enrichment. Just as Lakshman drew the line for Sita for her protection, independent directors should regard related party transactions as the watch-line for shareholders and be very alert in an intuitive way.

Independent directors should feel emotionally accountable to minority shareholders
Independent directors represent the interests of minority shareholders. They are elected by the shareholders. The role of the lead director can be strengthened and the lead director should feel accountable for initiating steps to protect minority interests. He can be answerable in writing or in person where necessary.

Focus the rule book on what a board cannot do
There are too many regulators and rules, but too little regulation. Corporate governance rules describe in minute detail how a board is to be composed and all that a board has to do. In sports, the rule book tells you what you cannot do, and the rules are therefore simple. In football, you cannot touch the ball with the hand, you cannot physically push the opposing player and you cannot be ahead of the last opposing player (other than the goalkeeper) before receiving a pass to shoot for the goalpost.

Western intellectuals are reviewing their own model. Sir David Walker, the senior guru of UK’s CG, has wondered whether the western CG system should be copied by the developing world because the eastern model seems to have advantages. Magdalene College senior research fellow, Stefan Halper, has wondered in his new book The Beijing Consensus whether the market authoritarianism of the east has some virtue.

I wonder whether India needs a modified kind of CG rule book.

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