By UD Choubey
Regulations are designed keeping in mind the best possible practices of ethics. But ethics supersede regulations, since frauds do occur even if the best regulations are in place. Ethics are the sine qua non of the best practices in corporate governance.
More and more leaders in business are waking up to the need for organisational ethics that go beyond governance norms mandated by regulations.
Corporate governance came to limelight in 1991 when a committee, popularly known as the Cadbury committee, was set up by the London Stock Exchange to boost the confidence of investors both in financial reporting and in the ability of auditors’ to provide the safeguards. Over a period, its compliance was made mandatory for all listed companies.
Formalisation of a code of corporate governance in India commenced institutionally in 1999 when a committee under Kumar Mangalam Birla was appointed. Subsequently, the concept got further broad-based and evolved to attain its present character supported by the Companies Act 2013, and
the Sebi regulations on corporate governance.
Indian public sector enterprises (PSEs) are the classic examples of how business could be done by balancing regulations and ethics.
In addition to the governance guidelines that private sector companies are required to follow, there are systems and mechanisms of compliance applicable specifically to PSEs. These are the MoU system, review by the administrative ministry, CAG review of annual accounts and concurrent transaction audit, vigilance administration by the CVC and above all transparency required under the Right to Information Act. There is no denying that these mechanisms have contributed to the accountability, and credibility of the PSEs.
However, several features of existing controls and governance structures inhibit risk-taking and decision-making in PSEs. Over-regulations have sent a negative vibe to the investors, both national and foreign. There is a pronounced need to allow more flexibility in decision-making by the PSEs.
Participating in a Parliament debate on the Second Five-Year Plan in 1956, Prime Minister Jawahar Lal Nehru had said, “…The way a government functions is not exactly the way that business houses and enterprises normally function…When one deals with a plant and an enterprise where quick decisions are necessary, which may make a difference between success and failure…I have no doubt that the normal governmental procedure applied to public enterprises of this kind will lead to the failure of that public enterprise… Therefore, we have to evolve a system for working public enterprises where on the one hand, there are adequate checks and protections, and on the other, enough freedom for that enterprise to work quickly and without delay”.
Corporate governance attempts to put in place a system of checks and balances for the benefit of all stakeholders. It rests on the four cornerstones of fairness, transparency, accountability and responsibility. It extends beyond corporate law and encompasses the entire spectrum of functioning of a company.
Good governance is best assured by ethics and self-discipline rather than legislation and regulations. This can be seen from the history of frauds committed in the corporate sector, in India and abroad. It calls for retrospection as to whether the best regulated practices have really met their primary objective. The UK Bank of Credit and Commercial International (BCCI) collapsed because of its own weight of malpractices even though a world-renowned firm had audited its accounts.
The other names like Enron, Arther Anderson, Worldcom, and Satyam have become history now. Renowned financial experts on the audit boards, selected from world-class institutions, could not check the malpractices in corporate houses. Best-known bureaucrats, academicians and professionals, as independent directors, failed to check the frauds in India, too. These show the supremacy of ethics over governance.
It is important that governments, corporates and the civil society at large work towards developing an ethical culture than to merely evolving regulations for compliance. The institution of independent directors is an important component in this. All boards should have a mandatory “ethics sub-committee of the board” comprising all independent directors that can review decisions and recommend changes.
The author is director-general, Scope.