Dr. Sanjiv Agarwal
One may govern life in accordance with the revealed truth as one sees it or natural law or a simple precept of not treating others as ends, or in pursuit of the good life of contemplation prized by Aristole . One may believe that morality lies in doing the best one can for oneself and one’s children and giving something back to the society, when one can buy money or time. One may also think that morality is simple being responsible for one’s actions, avoiding harm to others, when one can compensate them for their pain when one cannot. One may think that morality is simply doing whatever produces the greatest good for the greatest number ; one may believe that morality is nothing more than maximising one’s wealth. One may believe any of these things but one has a moral compass that directs one in one’s daily life . One should have the sense that sometimes, at least, the ends do not justify the means and that sometimes, at least, the ends themselves are not worth pursuing. But the corporation has one end to maximise its stock value. The directors and employees of corporation that animate it does so with this end in mind. Corporations have no mechanism called systems or beliefs. The result is that corporations are able to act without morality or accountability for they are formed for that one purpose to maximise pecuniary shareholders’ value. Therefore, to maintain the sanctity of a corporate self, the corporations are required to follow a moral and ethical suit that has become more pronounced in the present scenario and has indeed exceeded the axiom of wealth maximisation.
In banking which is based on trust, integrity and ethics are the back bone of faith between customers and banks as entire banking relationship depends upon the people who do the banking and ensure fool proof transactions and custody of money. When integrity and ethics are in place, frauds are minimal and productivity is optimal.
The concept of governance cannot be completed without acknowledging the contribution of the most celebrated scholar of ancient India, Kautilya. One of the world’s most complete manuscripts on the science of governance was penned by Kautilya in third century B.C. Kautilya’s discussions on administration and management are strikingly modern and scientific covering almost all facets of governance. According to him, an ideal king is one for whom-
Praja sukhe, sukhamragyam,
Prajanan ca hite hitam,
Naatman priyam hitam ragyan,
Parajanan tu priyam hitam.
i.e, in the happiness and well-being of the subjects, lies the well being of the king, in the welfare of the subjects, is the welfare of the king, what is desirable and beneficial to the subjects and not his personal desires and ambitions, is desirable and beneficial for the king. He further elaborates that a king has a four fold duty as Raksha or protection, vridhi or enhancement, palana or maintenance, yogakshema or safeguard. It is the duty of the king to protect the wealth of the state and its subjects, to enhance the wealth, to maintain it and safeguard it and the interests of the subjects. If we for a moment assume the today’s business CEO or corporate board as King and subjects as its shareholders, it brings out the quintessence of corporate governance as public good should be ahead of private good and company’s resources should not be used for personal gains. The four duties in corporate parlance would imply protection of shareholders wealth, enhancement of wealth by proper utilization of assets, maintaining the wealth (without appropriating it otherwise) and safeguarding the interests of all stakeholders. Chankya endorsed this and said that “Arthavaan sarva lokasya bahumatah” – wealth, (inclusive of well being and welfare) generating capacity earns all round reverence. Kautilya’s Arthashatstra further says that “Sukhasaya moolam dharma”- root of all happiness is doing right; “Dharmasuya moolam artha” – root of doing right is the root of wealth, “Arthyasya moolam ragyam” – root of all wealth is enterprise. Therefore, the ultimate end of earning all round reverence, from a corporate’s perspective, should be the improvement of stakeholders’ value.
Corporate Governance Defined
Corporate governance is traditionally defined as the system of laws, regulations and practices, which will promote enterprise, accelerate performance and ensure accountability. It stimulates for effectiveness in the performance and operations of a corporate entity. The effectiveness, in today’s parlance, means that business is run in a manner to enhance stakeholders’ value, skewing radically from established enhancement of only shareholders’ value and moving towards stakeholders’ value maximization.
According to the Institute of Company Secretaries of India, “Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”
The crux of all these definitions depicts that good corporate governance seeks to promote:
• Efficiency, effectiveness and sustainable in performance at large.
• Integrity, probity and transparency
• Recognition and protection of stakeholder rights
• An inclusive approach based on democratic ideals, legitimate representation and participation
• A normal and ethical corporate social behaviour
What is Good Governance?
A question arises that what is actually good Corporate Governance-is it more governance or less governance? The situation we face about bad governance is not actually bad governance but is that of “crisis of governability.” The crisis we face now as a result of over regulation and under performance of both the public and private sectors of the economy over so long period is a crisis of Governance Short-term gains had taken over the long term vision and goal. Corporates have tried to capitalize on such grounds, which are proper from one angle but unethical from another, and finally land in a situation called Dharma Sankata. The concept of dharma sankata is well known in the Hindu religion. Narova Kunjarova (human or elephant) was the situation where Yudhistra in Mahabharata lied. For the sake of getting a short-term benefit, resorting to lies or straying from the straight and narrow path ultimately leads to a long-term failure. I would, therefore, suggest that even at the cost of sacrificing short term benefits, it is better for an enterprise to adopt healthy practices. Governance is about not merely ownership; even an owner has to learn to govern. Corporate Governance is a way of life and not a set of rules. A way of life that necessitates taking into account the shareholders interest in every business decision. A key element of good governance is transparency projected through a code of good governance, which incorporates a system of checks and balances between key players – Board, Management, Auditors and Stakeholders. Transparency in turn requires enforcement of right to information and the nature, timeliness and integrity of the information produced at each level of interface- all of which can only succeed when the responsibilities of each entity and their interface is defined by great clarity an understood by all. Good governance at any level will crucially depend on greater simplicity in the process of governance combine with much stronger checks and balances, clarity of roles, the assignment of responsibilities and obligations, which will enhance accountability where it is due.
Governance and Ethics
Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enable a person to choose between right and wrong, and therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders.
In Sanskrit, an ethical value can be defined as Dharma. Dharma is a standard or norm of conduct derived from the way in which we wish ourselves to be treated. The ‘Dharma’ mandates for behavior and attitude, though commonly found n religious scriptures, in fact, trace their source to pragmatic commonsense ethics, which religious ethics confirm. Hence, the values such as amanituam, arjavam, antra sauncam etc. have the potential of leading us to the discovery of fulfillment in our life. These natural and universal standards are the basic blocks for governance, not only at individual or societal level but can well be extrapolated in application to business governance. Governance, per se, is a deliberate manitestation of a set of values or beliefs and should be based upon these dharmic values.
In the row, the last verse of Gita refers to a value as dhruva nitih, constant justice and ethical sense. It emphasizes that no system, no society, can be healthy without unwavering justice and ethical sense. This is the value, which holds the scale between individuals and individuals, between groups and groups; by favouring one individual or group and discriminating against another individual or group, we increase injustice in society, increase social discontent, and pave the way to eventual social chaos. Hence, the citizens, as much as the administration, must be imbued with justice and ethical sense. This value referred to above as dharma, is presented by Indian philosophy as the principle that integrates man with man in society. It is basically a by-product of the spiritual growth of the individual citizen, which is expressed as moral law, and which is reinforced by the state laws and regulations. A respect for law and the constant effort to uphold it, on the part of the citizen and of the holders of power in the state, are what make for human integration and the strength and stability of a state, more especially of a democratic state like ours. It is the awakened moral sense in the citizen that expresses itself as human values and that makes the laws and regulations of the state effective. If the moral sense is absent, the laws become ineffective, as the citizens twist the laws to suit one’s own advantage. This increases injustice in society and weakens the political and social fabric. If the moral sense is not present, social contracts become ineffective; for it is the moral sense that motivates one to stick to a contract; without it, the contractor or contractee can, and will, flout it. In this manner, ethics and moral values play a vital part in social existence. Corporates as an integral part of society should also be corporate governance governed by commissioning this ethical and moral factor in their culture.
A corporate does not have any ethics or ethical behavior of its own but is reflected in that of its management and people running the corporate. Ethics is and has to be personal. It is as personal as colour of one’s skin. No two persons will have same ethics as a benchmark. It is something which comes from personal integrity, values, culture, education and family background. However, ethical behavior begins and top, ie, at board level. The principles of business or professional ethics could include avoiding conflict of interest, keeping all sensitive business information as confidential, providing full disclosure openly and honestly without loss of data integrity and maintain loyalty and respect for the organization.
“The recognition of issues related to Corporate Governance is at times appalling when we come across so many instances of well regarded Corporates looting their Share holders for the personal gains of the Managers or the Owners. That brings us to the basic issue of what will be the ethical issues in Corporate Governance. Honesty is the best policy. This means that there has to be absolute integrity in all operations. Integrity is of three types:
• Financial integrity
• Moral integrity
• Intellectual integrity
Corporate Governance and ethical behaviour have a number of advantages. Firstly, they help to build good brand image for the Company. Once there is a brand image there is greater loyalty, once there is greater loyalty, there is greater commitment to the employees, and when there is a commitment to employees, the employees will become more creative. In the current competitive environment, creativity is vital to get a competitive edge.
Another area where Corporate governance and ethical issues may arise is at the time of the Annual Report and particularly preparing the Annual Balance Sheet. There may always be a tendency to do what is called, window dressing and to show that the results were better than what were projected. I think a stage has come when it is better to be transparent and not do much of financial engineering but be straight because this may prove to be better in the long run. Especially now, in the context of the liberalization, and the opening up of the Indian companies for foreign competition, an issue will also be raising about the accounting practice”. (Dharma in Corporate Governance: GS Mehta, Pg 678-679, The Chartered Accountant, December,2003 issue.)
Enron’s debacle has shaken the roots of corporate governance through the practices revolving around auditors independence, audit committee functioning, corporate ethics and accounting obfuscation. “Enron has been like a lightning bolt, shooting through corporate America, It has changed the whole world of corporate governance. It has caused directors to examine their roles and responsibilities and dedicate more time and energy to their fiduciary responsibilities. At home, the unearthing of Stayam’s staya reveals it all.
After the unpleasant episodes in corporate America , India and elsewhere in the world, many researches and debates concluded that it was the result of CEO’s or CFO’s personal greed and lack of integrity. No organisation that is founded on a strong base of values can expect to sustain, let alone grow, over a long period. The concept of corporate responsibility has gained importance in last five years and it appears that many companies are now ‘back to basics’ in management focusing on value based management.
The failure to implement good governance procedures has a cost beyond mere regulatory problems. Companies that do not employ meaningful governance procedures will have to pay a significant risk premium when competing for scare capital in today’s public markets. The failure to implement good governance can have a heavy cost beyond regulatory problems. Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets. In fact, recently stock market analysts have acquired an increased appreciation for the correlation between governance and returns. In this regard, an increasing number of reports not only discuss governance in general terms, but also have explicitly altered investment recommendations based on the strength or weakness of a company’s corporate governance infrastructure.
The biggest victim of lack of ethics or ethical lapse are stakeholders. This may lead to decline in productivity, lower morale of people, low loyalty, theft and frauds.
Unethical business practices lead to financial losses and could be construed to cover:
o Procurement frauds
o Misappropriation of Funds/Assets
o Manipulation of Company Data/Records.
o Stealing Cash/Company assets.
o Unofficial use of Company’s material/human assets.
o Activities violating Company policies.
In recent times, unethical business practices have unfortunately assumed gigantic proportions in Indian businesses causing great loss to shareholder value. Often the malady, if checked in time, can be curtailed and the losses minimized. This has prompted several Indian companies to adopt prevention as well as detection systems to arrest this agonizing trend.
Integrity and Governance
Integrity is defined as waling the talk when it comes to living one’s true value and being authentic. In fact, integrity can be understood as like being pregnant- either you are pregnant, or you aren’t . There’s no middle path and it is the same with integrity. The dictionary defines integrity as a “firm adherence to a code of especially moral or artistic values and the quality or state of being complete or undivided. Integrity derives from the Latin root of integer which means entire. To act in integrity our entire self, our entire sense of honesty and rightness, is included. We bring our full self to bear. When we act out of integrity, only part of ourselves is present, giving way to lies, trickery and deceit.
People and employees who maintain their integrity and who give their employer an honest day’s work are more likely to gain their employer’s respect and be assigned more responsibility in the company. They are the ones who will be remembered when promotions come around and added bonuses will come with that. But most important of all, they will have a better conscience and feel more secure in their job if they are careful to maintain their integrity within the workplace. Integrity involves doing the right thing even when you know you wont be found out. It’s easier to play by high rules when you know you will be punished or criticized if you don’t. But what about when nobody will see you? It is at times like that your integrity reflects .
Ethics and Integrity
Ethics and integrity are very important for developing democratic governance capabilities. Corruption in public life has a strong adverse bearing on the climate for governance. Factors that encourage corruption in the Indian context, are: scarcity of goods, lack of transparency in decision-making and delays in bringing the guilty to books. Corruption also flourishes because it is a low risk, high profit business. An active public is the ultimate beneficiary and the only guarantor of transparency and accountability.
A good balance between ethics and integrity in business governance avoids bad governance at all levels- National, corporate and individual.
As governance improves, and managers and professionals begin to work in their investor’s and client’s interests, everyone benefits. Resources are not wasted. Investors become more confident that they will get a return and become more willing to entrust managers even those they know less well, with funds. Access to finance expands.
Successful corporate governance underscores the importance of adopting systems that ensure adherence to ethical business practices, spotting deviations and stamping them out since unethical practices reduce productivity, drain resources, and cause significant behavioral issues.
There is a growing realisation that good Corporate Governance is a must not only in order to gain credibility and trust but also as a part of strategic management for survival, consolidation and growth. There is, therefore, a demand for simplification, greater accountability and transparency, necessitated by increasing investor awareness of competitive market forces.
International experiences demonstrate that the synergetic combination of anti-corruption and ethics, and integrity improvement, oversight and citizen participation actions can facilitate transparency, accountability and responsiveness as part of democratic governance capacity building.
There is a growing realisation that business will succeed only when founded and run on sound principles and beliefs. ‘Values’ are those that are nurtured, developed and cherished based on one’s principles, faith and belief. In turn, values give ethical standard, attitude and behavior. Unfortunately, impact of globalization, changing aspirations, fast paced life style and expectations of younger generations, all have provided temptations for change in values.
The credibility offered by good corporate governance procedures also helps maintain the confidence of investors – both foreign and domestic – to attract more “patient”, long-term capital and will reduce the cost of capital. This will ultimately induce more stable sources of financing.
Good Corporate Governance
Corporate governance is an ethical attitude. A detailed analysis of corporate philosophy and practices adopted by companies reveal that good corporate governance encompasses within it-
– transparent business operation and accountability with focus on core values – customer focus, team work, leadership, innovation, integrity, respect for people, performance and community welfare.
– uncompromising emphasis on integrity and regulatory compliance to achieve excellence.
– board independence and commitment to creation of wealth for shareholders.
– adherence to financial, legal and environmental obligations.
– practices that result in control of company in a regulated manner which makes management transparent, fair and accountable.
– sustained corporate growth and long term benefit for stakeholders.
– maximum information to all stakeholders
– respect for law and fair business and corporate practices.
– all round excellence with ultimate objective of enhancing shareholder value
– Integrity, transparency and compliance with law while dealing with customers, suppliers, employees and other stakeholders.
– fair dealing with all, active contribution to society and best possible investors services.
– corporate discipline.
– way of life, not just a set of rules, keeping stakeholders in mind while taking every business decision.
– high standards of ethics, sound business decisions, prudent financial management practices, professionalism in decision making and conducting business in strict compliance of law.
– out performing organization leading to employee and customer satisfaction and maintaining global standards of corporate responsibility.
– attainment of total transparency, accountability and equity in all dealings.
– enhancement of overall business valuation for the owners.
– openness, credibility and accountability in corporate practices and conducting business to building confidence of various stakeholders.
– satisfying the spirit of law, not the letter of law.
– clear distinction between personal and corporate resources, truthfull communication, simple and transparent corporate structure and being trustee of capital, not owners.
All the above statements are one or the other form of expressing good corporate governance.
Ethical infrastructure and codes of conduct which lay stress on accountability, evaluation, transparency and social justice are essential for Corporate Governance. Institutional activism also needs to reinforce itself so that boards function more efficiently and objectively.
The Moral Law
Kural insists on the moral law being followed in acts of State Governance. Following verses from the kural, Tiru Valluvar English translation by Dr. C Rajagopalchari, are relevant in the context of governance.
Avoid at all times action that is not in accordance with the moral law:
– Those who seek to be great should refrain from everything that might tarnish their good name:
– Do not that which good men would condemn. Even if it means your helplessly looking on without finding food for your starving mother:
– Success achieved without minding the prohibitions of the moral law brings grief in the wake of achievement.
– To seek to further the welfare of the State by enriching it through fraud and falsehood is like storing water in an unburnt mud pot and hoping to preserve it:
– The extreme practicality that Tiru-Valluvar combines with his idealism, is illustrated by the following couplet.
– Do not do that which your better sense tells you that you will afterwards regret. But if you have done such a thing, it is well you at least decide to refrain from such folly again.
About the Author
Dr Sanjiv Agarwal is independent director of State Bank of Bikaner and Jaipur since 2004. A practicing chartered accountant in the domain areas of service tax and corporate governance, Dr Agarwal is senior partner with M/s Agarwal Sanjiv & Company. He is a fellow chartered accountant (FCA), fellow company secretary (FCS) and associate of Institute of Chartered Secretaries & Administrators (ACIS), UK. He is a member of Secretarial Standards Board of ICSI.