Corporate Governance

Corporate governance has been in the Indian news headlines quite recently in connection with the scam perpetrated by Raju on Satyam shareholders and employees. Interestingly,  Satyam was the recipient of numerous corporate governance awards. Just goes to prove that just because processes are in place, does not imply that the processes are being followed. The spirit of the law  is more important than the letter of the law. But then India is a nation that loves it’s forms, it’s idiosyncratic processes and customs,it’s  bureaucratic ways and any change is greeted with derision, disdain and shock. Processes are meant to be traditionalized, embedded into the culture of the company and not uprooted without a by your leave! Who minds it’s clutter?

For more laid-back news followers, Satyam was just another scandal in just another family-run business.Satyam despite all its protestations , was just that – a family-run business though it’s shares were listed on the Indian stock exchange and available via ADRs.The more engrossing and entertaining corporate scandal has been the IPL imbroglio and it’s many running installments in the Indian media rumor mill.

Now, the IPL has a governing council which is equivalent to a corporate board of directors. In theory, a board of directors is an independent body that oversees the management of the corporate body or entity. It is there to make sure that the right processes are adhered to, that due diligence is carried out while executing strategy and no hanky-panky or unethical acts are carried out by any of the top management honchos.

But in practice, this is easier said than done. Most corporate boards are appointed with inputs from the incumbent management and thus cronyism is the name of the game. The typical board is populated with members who thus tend to be hand-in-glove with top  management. This seems to have been the case with the IPL governing council. Despite the presence of luminaries such as Ravi Shastri, Sunil Gavaskar and M A K Pataudi on the governing council, the BCCI finds itself facing a scandal of gargantuan proportions with conflict of interest and high-handedness tarnishing the fabric of IPL governance.

I do not intend to dwell on what could be done to improve IPL’s governance. I am sure there are more than enough interested commentators who can make a better case for much needed improvements. So far, the two individuals who can claim to be above censure and have displayed an awareness of governance are Pataudi and Shashank Manohar. Pataudi stated that the governing council was equally to blame for IPLGate and that the governing council  should have resigned and/or should have been shown the door along with Lalit Modi. Shashank Manohar decided to recuse himself from the investigating committee into the allegations of misconduct, misappropriation of funds and non-disclosure of conflicts of interest by Lalit Modi, when accused of being an interested party himself and thus  biased.

In the light of the above two scandals, a book by Jonathan R. Macey titled Corporate Governance – Promises Kept, Promises Broken is an enlightening read. It sheds new light on this much-maligned, misunderstood topic. Macey takes an oft controversial look at Corporate Governance w.r.t to American firms and makes some startling observations that forces the reader to sit up and take notice.

First, Macey tackles the issue of boards and argues that the very concept is flawed. Boards are supposed to both manage and monitor i.e. they take part in formulating strategy as well as overseeing the management. Now, if the board is engaged with management and the strategy executed is based on their inputs , then it becomes difficult for the board members to disengage from management. This leads to a phenomenon that Jonathan terms ‘capture’ i.e. the board now becomes collegial or chummy with top management defeating the purpose of impartiality and independence in it’s evaluation of existing management.

Another topic explored is the role of insider-trading , short selling and whistle-blowers in corporate governance. Macey argues that though insider trading is rightly viewed with trepidation because of its shady connotations and illegality, he believes that insider trading (and short selling) is sometimes a better tool than whistle-blowing to safeguard the shareholder’s rights , if done the right way. He adds that the short-seller and inside trader has more skin in the game and thus has more to lose than the whistle blower. The chapter addressing this aspect of corporate governance is aptly titled ‘Quirky Governance’.

Macey further elaborates on how hedge funds and private equity participate in corporate governance; hedge funds and private equity take on the role of activist investors seeking to increase and better shareholder value by making their views and opinions public. It is another matter that hedge funds and private equity do profit from this  activism; Macey argues that this benefits all shareholders as the duty of corporate governance is to protect and increase total shareholder value.

The book is fascinating (i.e. I found it fascinating!). It also explores the roles of  various regulatory institutions in the art of corporate governance. Macey takes a dry, done-to-death topic and makes it eminently readable, much like a potboiler novel.

Have a great day!

Corporate Governance: Promises Kept, Promises Broken