Subscribe to my Facebook Page RiskBoard Community

Dear Readers,

I had launched the RiskBoard Facebook Page sometime back and it has slowly picked up. Besides posting this blog’s information, I link various interesting articles of other bloggers. I have today put a number of articles of the bloggers whom I normally read and find useful content from a few perspectives.

I request you to have a look and if you like the page please subscribe. Here is the link :

RiskBoard Community

Riskboard Community Fanpage

Feel free to send me a friendship invite. You can also follow me on twitter @soniajaspal68.

All the links for my social network are available on the blog. Look forward to interacting with you more frequently.

Best wishes,

Sonia

Gender Stereotypes & Myths About Women

I listened to the speech on “Gender and the Law Stories: Learning from Longstanding Debates” made by Martha L. Minow, Dean of Harvard Law School. The speech was in honor of Justice Ruth Bader Ginsburg as she made significant contributions to bringing gender equality in America. The topic covered the increasing trend of single sex schools in US in the current decade. Ms. Minow articulately talked about the history of women education, the educational and professional challenges faced by women due to gender stereotyping and biases. I was impressed with the rationale she presented. I am covering some aspects of the speech below along with some of my thoughts on the subject.

Ms Minow mentioned how at one time it was thought improbable for women to enter into fields of law and medicine. In most cases women in 1950’s & 60’s were the first ones to enter the male colleges or professions. The gender bias was strong. Women were denied entrance to esteemed colleges and received rejections from good jobs. Now law and medicine schools have 50% women. The changing times can be depicted by Margaret Thatcher’s statement in 1969 on becoming Tory education spokesperson –  

No woman in my time will be prime minister or chancellor or foreign secretary – not the top jobs. Anyway, I wouldn’t want to be prime minister; you have to give yourself 100 percent.

A few years later, Margaret Thatcher became the Prime Minster. It didn’t change the world much though she proved to be a capable political leader.  Women across the globe continue to battle for equality. They still have to prove it that they can do it. Hilary Clinton became the first women in US to fight for presidential candidate nomination. On losing, in her closing speech she said-

 “Although we weren’t able to shatter that highest, hardest glass ceiling this time, thanks to you, it’s got about 18 million cracks in it. And the light is shining through like never before, filling us all with the hope and the sure knowledge that the path will be a little easier next time.”

Women will conquer all bastions I don’t doubt that. The main barrier continues to be gender stereotyping and various mythical differences perceived by society. Although some men are still depraved enough to consider abusing, degrading and humiliating women as a sign of masculinity, the thought is receding in some parts of the world. Conventional societies, including India, still consider women inferior.

The gender stereotyping starts when a girl is born. A few of them are as follows:

• A girl is soft, a boy is tough, and hence a girl won’t be able to survive in the world without a man.
• A girl is good in arts and literature, and boys are good at math and physics. In India in Class XII boards most of the toppers for science subjects are girls. However, the bias continues in engineering colleges, where numbers of women are less.
• Women are not competitive, lack killer instinct and are emotional in nature. Hence, cannot be successful in the business world. Globally the number of women at board level in corporate world is less than 10%.

Ms Minow mentions that gender biases are so strong that initially in US co-ed schools were not encouraged. It was said boys would be coarse and corrupt girls. The logic given in favor of co-ed schools was that girls would civilize the boys. This argument doesn’t speak well for either of the genders.  

Men have not faced the negative impact of such twisted logic. However, women still face the challenges of typecasting. A woman breaks the conventional myths, she is said to be masculine. Take the example of Indira Gandhi, Ex-Prime Minister of India.  She served as a Prime Minister for 4 sessions totaling to 15 years and is globally the longest serving female Prime Minster. She was called as the only man wearing trousers in her cabinet. Margaret Thatcher was dubbed as the “Iron Lady” by Russia. She gave an excellent rebuttal to it in her speech in Finchley in 1976.

I stand before you tonight in my green chiffon evening gown, my face softly made-up, my fair hair gently waved. The Iron Lady of the Western World? Me? A Cold War warrior?”

 No woman escapes this gender stereotyping, whatever success she achieves. Her femininity is at stake if she rules the typical male bastions. Have you heard of a male politician being compared with stereotypical female traits?

In the current decade with the obsession of biology and psychology, the logic given is that men and women brains are wired differently.  Cordelia Fine in her book “Delusions of Gender” has debunked these pop psychology theories of intellectual and social differences between men and women. She states that there is hardly any scientific evidence available to state men and women behave differently because of the differences in brain.  Most of the areas of performance are touched by cultural stereotypes.  For example, men are not considered good cooks; however, most of the chief chefs in luxury hotels are men. Women in military and police have equal fighting capabilities but there is no evidence that this makes them bad mothers.  Society and not the human brain exemplify these differences.

Ms Minow has explained this aspect far better than I have. I would recommend readers of both genders, especially if they are parents watch the four parts. I am inserting my favorite Part 2 here and am giving the YouTube links for all. Hope you enjoy them.

1. The Justice Ruth Bader Ginsburg Distinguished Lecture on Women and the Law – 2011 – Part 1-4
2. The Justice Ruth Bader Ginsburg Distinguished Lecture on Women and the Law – 2011 – Part 2-4
3. The Justice Ruth Bader Ginsburg Distinguished Lecture on Women and the Law – 2011 – Part 3-4
4. The Justice Ruth Bader Ginsburg Distinguished Lecture on Women and the Law – 2011 – Part 4-4

Bloggers views – Governments are Helpless

This week I noticed one thing, all governments whether of developed, developing or third world countries are claiming their helplessness in bringing about a change. Now isn’t it amazing the citizens of the world assume that the government has the power to manage the nation and heads of nations are giving justifications for not being able to do the right thing for the people. You might question since when has doing the right thing become such a difficult task?  Right thing to do is easy when self-interest is not at stake. This week I am covering three posts, which highlight governments’ inability to do the right thing.

The first post is from Rolling Stone -“Why Isn’t Wall Street in Jail?” The post discusses the financial crises in US. It talks about how no senior official of financial institution was prosecuted for the damage. It emphasizes that in US normal people who steal less than a $100 end up in prison, and who have defrauded/ mismanaged billions of dollars go scot free. In most cases the Wall Street big guys have not been investigated, leave alone being prosecuted. The American public is unable to do anything about it and just watch the whole society paying the cost of greed of a few.

You will find an Indian citizen loudly complaining about corrupt politicians, corrupt judiciary and corrupt law enforcement agencies. Remarkably, I have not seen in an American blogger making a statement that his/her government is corrupt. If the creators of financial crises are unpunished, there is clearly some high level corruption. I am not sure why Americans hesitate to use the word. Maybe they are fearful or politically correct.

This brings me to the Indian scenario. I rarely feel grateful to Indian politicians and media because of the level of corruption. However, I must give them credit that despite these factors they managed to hold government accountable for the recent scams. They have forced the Indian government to commence investigations against the culprits. Most of the main accused of scams are presently vacationing in Tihar jail.

Now our Indian politicians have screaming matches in Parliament and stomp out when their viewpoint is not heard. Infrequently they stand of chairs to shout at other members of parliament. This may not be politically correct, and may require rethinking the meaning of leadership but seems to be more effective than the civilized decorum of US Senate. Here is an extract of Prime Minister’s Manmohan Singh opening remarks at a media meeting on 16 February 2011 giving a clarification on corruption charges.  

The discussion wouldn’t be complete without Egypt and Tunisia. Kudos to the citizens of both the nations, they brought down corrupt governments. They didn’t consider themselves helpless but the international community does consider itself helpless. Ex-president’s of Tunisia and Egypt are stated of having billions of dollars and assets stashed away in developed countries. However, governments of UK, US, Switzerland and other countries are yet to freeze their accounts. These countries are unable to explain why they accepted illicit money in the first place. My view is it will take time for new governments of Tunisia and Egypt to embark on judicial proceedings against the ex-presidents. The international community is going to state later that in their respective countries the two have no assets. Read the interesting post from Taskforce- No Impunity for Corrupt Dictators.

Click on the headings to read the full post.

1.   Why Isn’t Wall Street in Jail? (via Rolling Stone)

Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What’s more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even “one dollar” just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick “The Gorilla” Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

—-

In the end, of course, it wasn’t just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice “Fabulous Fab” Tourre, Goldman’s outrageous Euro-douche who gleefully e-mailed a pal about the “surreal” transactions in the middle of a meeting with the firm’s victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.

—-

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It’s not a crime. Prison is too harsh. Get them to say they’re sorry, and move on. Oh, wait — let’s not even make them say they’re sorry. That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

2.   Prime Minister Manmohan Singh’s Opening Remarks at the meeting with Editors of Electronic Media – 16 February 2011

During the last couple of months, the media have drawn the country’s attention to some aberrations whether in the form of allocation of 2G spectrum, the Commonwealth Games and more recently some developments in the Space organization, Adarsh society affairs. I think media have played a very important role in drawing the country’s attention to these issues which require corrective action. I wish to assure you and I wish to assure the country as a whole that our Government is dead serious in bringing to book all the wrong doers, regardless of the position they may occupy. However I would like to say that in projecting these events an impression has gone round that we are a scam-driven country and that nothing good is happening in our country. In the process, believingly, I think we are weakening the self-confidence of the people of India. I don’t that it is in the interest of anybody in our country. We have a functioning government, and whatever some people may say that we are a lame duck government that I am a lame duck prime minister, we take our job very seriously, we are here to govern and to govern effectively, tackle the problems as they arise and get this country moving forward on a pace of development which would do justice to the demands being made on the process of governance.

I wish to tell you that our economy is in good shape. We will have a growth rate of 8.5 percent this fiscal year and that the way India has come out and tackled the aftermath of international financial crisis, I think does our country a great credit. It is certainly true that in recent months inflation and food inflation in particular has been a problem. We want to deal it in a manner that the growth rhythm is not disturbed. If we were concerned with only curbing inflation I think we could have done it by pursuing tighter monetary policies, we could have brought about a situation where price rise could be moderated. But if in the process, growth process gets hurt I think that would not do our country any good and we are trying to deal with inflation at a time when we don’t have all instruments at our command in the sense that we do not have control over international events. We are now increasingly an open economy and the oil prices are rising, the food prices are rising, commodity prices are rising, we have to deal with inflation despite an adverse international environment and you have my assurance that we will succeed. And at the end of the fiscal year, the inflation rate should come down to no more than 7 percent.

3.   No Impunity for Corrupt Dictators (via Taskforce)

The recent events in Tunisia and Egypt have demonstrated the power of citizens who won’t endure corrupt governments any longer. Their call for accountable and transparent leadership to ensure an equal distribution of public goods was heard around the world.

In France, the UK and Switzerland governments heeded calls to freeze and investigate the assets of ex-president of Tunisia Ben Ali and ex-president of Egypt Hosni Mubarak and their families. There should be no impunity for those who wield power for their own benefit and not for their people.

The international community has a duty to act. Effective international action against misappropriation of funds and money-laundering sends the message to corrupt politicians and business people all over the world that they will not be able to hide their assets easily anymore. In November last year the G20 signed on to a comprehensive Anti-Corruption Action Plan.

But as we know well, commitments made on the international stage don’t always translate into immediate actions; especially where long established power networks prevail. So that’s why we have to keep the pressure on. Just this week we got together with Global Witness to send a letter signed by 78 civil society organisations to the G20 Finance Ministers meeting in Paris on 18-19 February calling on the G20 to act now.

The Anti-Corruption Action Plan when fully implemented would make a big difference. It mandates international cooperation in preventing illicit flows into G20 financial markets and in tracing and recovering stolen assets. It also calls for criminalisation and prosecution of foreign bribery, measures to prevent corruption in the public sector and enhanced protection of whistleblowers, which have long been requests from civil society and anti-corruption fighters.

The Action Plan is largely based on the UN Convention Against Corruption which has been ratified by all but four G20 countries. The laggards are Germany, India, Japan and Saudi-Arabia.

As the governments are helpless, maybe the public should stop feeling helpless and hopeless. The world citizens need to actively ensure that their is justice and equity in the society. We can get  excellent guidance from Gene Sharp the author of the book “From Dictatorship to Democracy” (link here). On his site Albert Einstein Institution he has put a lot of material to conduct a non-violent revolution. Mr. Sharp is definitely thought-provoking and inspiring.

ISRO / Antrix– Devas S-Band Spectrum Deal Cancelled

Congratulations to the Comptroller & Auditor General of India (CAG) office for bringing out the dubious nature of ISRO- Devas S-Band deal. A couple of weeks back news broke that according to CAG office the ISRO-Devas deal will result in Rs 2 lakh crore (USD 44 billion) loss to the exchequer. The public outrage, media coverage and opposition party politicians pressure forced the government to re-look the deal and now it is cancelled.

Let me cover the facts of the case first and then I shall present my viewpoints on the same.

Basic Facts

Indian Space Research Organization’s (ISRO) commercial arm Antrix Corporation Limited entered into a deal with Devas Multimedia Pvt .Ltd. for selling S- Band spectrum in 2005. The agreement was that Antrix would build two satellites for Devas with dedicated portion of leased transponder capacity for S-band Spectrum. This would cost Devas Rs 1000 crore over a period of 12 years. CAG raised objection to the sale price of the spectrum, stating it is majorly underpriced.

Cancellation of Contract

Yesterday, it was announced that the government is cancelling the contract. Prime Minister Manmohan Singh clarified the government’s stance of the same, stating as follows:

  “There have been no backroom talks… There has been no effort in the PMO to dilute in any way the decision taken by the Space Commission in July 2010. On that, I would like to assure you and the country.” 

“Though there has been some delay in processing (referring to cancellation of contract), this was only procedural. The fact is that the contract was not operational in any practical sense.” 

ISRO comes under Department of Space, which is directly reporting to the Prime Minister. According to Prime Minister’s statement, Department of Space had requested for cancellation of deal in July 2010. However, this was not done until CAG raised the issue. This deal has raised further questions on  Prime Minister’s integrity and his office.

CAG is still investigating the case and I am waiting for the report. Meanwhile, I thought let me present my concerns on the deal. I have some serious doubts on  the deal and related transactions sanctity

Formation of Devas Multimedia Pvt. Ltd.

In the list of chronological events available at Devas website, I observed a couple of things. In 2003, Devas management had a number of meetings with senior ISRO/ Antrix officials. In these meetings, the group then known as Digital Multimedia Services discussed the concept of satellite terrestrial networks.

In 2004, the discussions continued and Digital managers made detailed presentations to the Chairman of ISRO Mr. G.Madhavan Nair (then Chairman) and other senior management of Department of Space, ISRO and Antrix. In December 2004, Antrix board approved the proposal and subsequently in January 2005 Devas Multimedia Pvt. Ltd. was formed under the Companies Act. Indian Cabinet approved the contract in December 2005.

Events sequence leads me to question three aspects –

1. Was Devas formed to cater to the Antrix contract alone?
2. If Devas was a new company, on what parameters was it evaluated for Antrix/ ISRO and Department of Space to approve the contract.
3. Now the government is stating that the deal is cancelled as the increased demands of India’s strategic requirement of defense and other departments’ needs to be met first. Why was this aspect not considered while approving the contract by the cabinet in 2005?

 Arms-length Transaction

 Now let me cover the next aspect of the issue. This contract was entered into during the Chairmanship of Mr. G. Madhavan Nair (2003- 2009). Now the chairperson is Dr. K. Radhakrishnan. Both the chairpersons had multiple roles. They were chairperson of Space Commission, Secretary to the Department of Space, Chairman of ISRO and Antrix. Hence, it is quite clear that the chairperson has significant control and influence on the activities of Department of Space.

The chairperson of Devas Mr. M.G.Chandrasekhar, is an ex-ISRO employee. A few senior managers of Devas had previously worked in ISRO. Now it can be said, that in this line of work there would not be very many expert professionals, hence the coincidence. However, it does indicate that Devas management had previous business and personal relationships with ISRO/ Antrix management.

The information available at Devas site raises quite a few doubts. In 2004, the committee debated the financial structure of the deal, in which the initial proposals of joint venture and equity stake of Antrix were rejected. The committee finalized deal  for capacity lease with significant amount of upfront reservation payments. The second aspect was that a clause was amended in July 2006 for extending the period for additional 12 years. In an equity stake the government would have profited from retail sale of spectrum, though one cannot estimate the quantum.

Devas funded the project in rounds in different stages and obtained FIPB approval for the same. The initial launch date of the satellite was in June 2009 and then efforts were on to meet the re-scheduled deadline of July 2010. Devas conducted the third round of funding by Devas after the expiry of the original launch date.  The rescheduled launch date of July 2010 was also not met. Since the new Chairperson of ISRO/ Antrix requested the government in July 2010 to cancel the contract, what were the reasons attributed? This raises suspicions that with the change in chairperson, the deal became questionable.

As I have not reviewed the contracts, hence I cannot form a definitive opinion on these transactions. However, they do not appear to be at arm’s-length . The government organizations and Devas management seem to be working quite closely. The other aspect is that government must have spent some money on building  satellites over these years, how is it going to recover that cost? Also, Devas would  have made some initial payments, there is high probability that the management will like to recover the same. There are a number of issues here, which need to be reviewed by CAG.

I am awaiting the CAG report on this; it would definitely throw some light. I checked the site, and found a report on Department of Space purchase and inventory control. It mentioned a number of serious lapses in procedures. Though this is a sales contract, I think similar process control lapses maybe highlighted. I must say, CAG is doing a great job of reporting all critical government lapses with independence and integrity.

References:

1. Govt cancels Devas S-Band deal – Business Standard
2. Chronology of Events and Progress Overview – Devas Multimedia Pvt. Ltd.
3. Antrix Corporation
4. ISRO

Reflections on Definition of Corporate Governance in India

Recently a spate of headlines got me thinking – What does corporate governance mean in India? Yes, we are familiar with the term, and most will define in simple terms as using ethical business practices to protect the interests of investors. However, in my view corporate governance is something more complex, a broader term that encompasses protection of interests of investors, creditors, employees, bankers, suppliers, government and society. In this post, I am putting my views on why India should think differently about corporate governance. I invite you to present your opinion and counter-arguments to my thoughts.

Narrow Definition

Let me start with the definition of corporate governance as given by Securities and Exchange Board of India (SEBI).

“Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company.” Report of the Committee on Corporate Governance of the Securities and Exchange Board of India, 2003

SEBI’s listing agreement requires the management of a listed company to submit a corporate governance compliance report on a quarterly basis. The report includes information on board of directors, audit committee, remuneration committee, shareholders committee, general meeting, accounting disclosures and general shareholder information. The focus of the report and SEBI’s actions are directed towards investor protection.

A case that focuses on investor protection is the insider trading charges levied against Anil Dhirubhai Ambani Group (ADAG). ADAG recently settled a case with SEBI regarding two group companies Reliance Infra and RNRL, for Rs 50 crore (USD 11 million). The settlement charge is higher than the total settlement charges SEBI collects in a year.

This is definitely a step in the right direction. However, I think corporate governance should cover unlisted and private companies too.

Broad Definition

As I had written earlier on the recent changes in existing laws by SEBI and Ministry of Corporate Affairs, the overall picture of corporate governance is hazy. In India, less than 10% of the companies are listed. That means, if we strictly follow SEBI guidelines, 90% of corporate India doesn’t need to adhere to corporate governance requirements. Since the structure of companies and groups are layered with listed, unlisted and private limited companies, it becomes difficult to assess the actual level of corporate governance in any of the groups. Mr. Narayana Murthy’s definition is broader, and covers employees, suppliers, customers and the public at large.  

“The term ‘corporate governance’ is susceptible both to broad and narrow definitions. In fact, many of the codes do not even attempt to articulate what is encompassed by the term. . . . The important point is that corporate governance is a concept, rather than an individual instrument. It includes debate on the appropriate management and control structures of a company. Further it includes the rules relating to the power relations between owners, the Board of Directors, management and, last but not least, the stakeholders such as employees, suppliers, customers and the public at large.” —N.R. Narayana Murthy, Chairman, Committee on Corporate Governance, Securities and Exchange Board of India, 2003.

I definitely prefer the above definition to the SEBI definition. To stress the complexity of the issue, I am mentioning the other headline, which caught my attention- S-band spectrum scam: Angry ISRO fires away

The case is still under investigation and here are the facts. Media reported that Comptroller and Auditor General (CAG) office has stated that S-band spectrum has been sold at a loss of Rs 2 lakh crore (USD 44 billion).  Allegations made were Antrix Corporation Limited, the commercial arm of ISRO, a wholly owned company of government of India has sold high value S-band spectrum to Devas Multimedia Pvt Ltd on low rates and dubious terms. ISRO has stated the contract with Devas Multimedia Pvt. Ltd. was being canceled since it did not mention end-user terms.

Now although this case is still under investigation, the point I wanted to make is that Antrix Corporation Limited is an unlisted company wholly owned by the government. The government is the major investor in this case. If you visit the sites of ISRO and Antrix, neither of them have any mention of corporate governance.

My question here is why should these companies be outside the ambit of corporate governance requirements? Does it not make more sense to issue guidelines for corporate governance for unlisted and private limited companies?  Although, government guidelines and rules exist, what are these? Why are these not available on the websites as the corporate governance reports are of listed companies?

Broader Definition

The question which may come up when we say that corporate governance has to be viewed in broader terms is- how is the public at large impacted? If the stakeholders and third parties are covered, does an organization have a huge impact on society or nation?

Below is the definition of Sir Adrian Cadbury, which appeals to my sensibilities of corporate governance.

“In its broadest sense, corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, of corporations and of society. The incentives to corporations and those who own and manage them to adopt internationally accepted governance standards is that these standards will assist them to achieve their aims and to attract investment. The incentive for their adoption by states is that these standards will strengthen their economies and encourage business probity.” —Sir Adrian Cadbury, Foreword to Corporate Governance and Development, Global Corporate Governance Forum, Focus 1, 2003

Here Sir Cadbury is recommending that governments should adopt corporate governance standards to strengthen economies. I am highlighting the impact on government and business with the 2G telecom license scam that has been in news since 2010.

The CAG office had reported in 2010 that the 2G telecom licenses were sold by A.Raja ex-minister of telecom at favorable rates to companies by tampering with legal requirements. Though estimated loss figures to government are varying, though  Comptroller Auditor General of India stated it at Rs 1.76 lakh crore (USD 39.6 billion)

Presently, trails of bribe money received by A. Raja and other politicians are somewhat established. CBI is interrogating the high profile CEOs/ Managing Directors of telecom companies who received the licenses. Though it is premature to conclude on the results of the investigation, they are clearly showing a nexus between politicians and corporate. CBI is establishing linkages between demand and supply side of the big bribes. This clearly shows that if a company were involved in bribing the politicians, then it would be causing a huge loss to the government. In the end, it will be the taxpayers who will be bearing this loss.

The Congress party is on the defensive and trying to state that no wrongdoing was done. Public outcry is huge and opposition parties are attempting to leverage on it.

In defense of the actions, Prime Minister  Manmohan Singh in an interview yesterday said : “The then existing policy of the government was that auctions should not take place and if auctions have not taken place, then what is the basis to calculate the loss? There are various estimates but you have to assess what is the right magnitude after asking yourself what was the right price.”  

 

An article in Economic Times stated that India for the last two months in the least favorable investment destination. In an interview Michael Kurtz, head-Asian equity strategy, Macquarie Capital said, “At the macro level, India remains disproportionately at risk from oil price upside, and the blowback from recent corruption scandals may inhibit the speed of progress on key infrastructure projects.”

This clearly highlights the need to government to maintain some corporate governance standards. The whole economy and public confidence is being destroyed by the frequently disclosed frauds.

In your view, how should corporate governance be addressed by India as a nation? Do you think a broader definition and efforts are required to build a corporate governance culture? Should we again be questioning the fundamentals?

 References:

1.  ADAG-Sebi settlement charge at record Rs 50 crore- The Deccan Herald 
2. S-band spectrum scam: Angry ISRO fires away
3. ISRO Site
4. CBI Widens 2G Probe, official of 4 Cos Quizzed – The Economic Times
5. India seen as least preferred among Asia Pacific markets – The Economic Times
6. Global Corporate Governance Forum – Toolkit 2

The Negative Impact of CEO Pay & Power on Corporate Culture and Governance

A recent study conducted by Economic Times of India showed that in 2009-2010 fiscal year, CEOs of top companies earned 68 times the average pay of employees. This has increased around 9 times in just one year. In 2008-2009 fiscal year, CEOs earned 59 times the average pay of employees. Naveen Jindal, Managing Director and Executive Vice-Chairman of Jindal Steel & Power has the dubious honor of receiving the highest salary in India. He earned Rs. 48.98 crores (USD 10.75 million), an income 2000 times the average salary of employees of his company.

Similar studies of top executives’ income in UK and US have shown extreme disparity of income. In US and UK top executives pay is 263 and 115 times the average worker salary respectively. After the financial crises, US and UK governments are working on curtailing CEO salaries. Is the astronomical increase in CEO salary a good trend for India? If not, what are the negative impacts?

Psychology of CEO’s and Top Executives

In the present society, a CXO designation commands respect. A common person attributes a CXO’s success to attitude, skill, intelligence and brilliance. The automatic assumption is that CXOs are better human beings than an average person. Are these assumptions right, does power and money make a human being better? 

 A research paper titled “When Executives Rake in Millions: Meanness in Organizations” discusses the impact of high executive pay. The research shows that high executive pay brings out the mean nature of top executives. It states, “Higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers.” This sounds terrible. Is human nature such that more successful a person is, the less likely he/she is going to be compassionate and empathic to others?

The study indicates that some powerful people perceive those with lesser power as sub-human. Such a person feels reduced empathy, has lesser understanding of emotions and feelings of others, is inclined to objectify and dehumanize others, and sexually harass and degrade workers in lower positions. This person becomes morally disengaged; and tends towards unethical and corrupt behavior.

An article published by The Economist titled “The psychology of power: Absolutely” states the well-known, power tends to corrupt people. Secondly, it states that powerful people are full of hypocrisy. They expect others to behave better, and do not hold their own behavior and actions to similar high standards. On the other hand, they conceive they are entitled to abuse others and break the law. Powerful people disregard law since they consider themselves privileged and believe different rules apply to them. These studies force me to think – does one have to pay the price of power by losing one’s humanity?

There is a reverse rationalization here. When CXOs consider their juniors as less human, the psychology of use and discard sets in. CXOs believe they can deny the employees basic human rights and dignity. Hence, the false sense of superiority of CXOs makes them insensitive to juniors’ pain resulting from their actions. Hence, CXOs terminate employees, deny decent working conditions and harass employees without any sense of remorse. This is illustrated by the fact that CEOs who fired the maximum number of employees during recession in US, received the biggest pay packets. A CXOs false sense of entitlement makes them happy about the disparities. A psychologically normal person would feel guilty at benefitting from another humans tragedy.

In my view, majority of the CXOs are of boomer generation and the probability of Gen X & Y being a CXO is low. Gen X & Y is more likely to be in the lower ranks. Hence, should we consider it destined that boomers will mistreat Gen X and Gen X will mistreat Gen Y. Each generation as they age will become more inhuman towards others. This raises a number of social issues. As we have seen in the last two decades in US, CXOs salaries have increased around 300%. As the social and psychological consequences of income disparity are borne by the society, this is a big concern for India.

Impact on Corporate Culture & Governance

Jeff Skilling, Kenneth Lay, Bernie Ebbers and Bernard Madoff are examples of the CEO psychology gone wrong. From heroes they became villains. Their moral disengagement caused them to break the law without considering the legal consequences of their actions. Their narcissistic sense of entitlement and superiority damaged the corporate culture significantly. This behavior was even transmitted in personal relationships. In an interview, Madoff’s sons had said, “he never thought us as good enough.” A man responsible for stealing billions held his own sons in contempt.

The question that comes up is why do the employees agree and cater to this false sense of entitlement?  Why do they not break the grandiose self-image of the CXO and make him/her see reality?

When employees see the power and sense of entitlement of the CXO, they start believing it to be the truth. Employees concede that the CXO is superior, group consensus and thinking develops on those lines, and the CXO behavior becomes socially acceptable. It is a vicious cycle, when CXOs see employees accepting their negative behavior and attitude, they start believing that they are all powerful and superior human beings. Hence, the whole organization is caught in a psychic trap.

Disconnect with reality results in a harmful organization culture and deteriorating corporate governance norms. CXOs select employees to bully, harass and humiliate to demonstrate their power. The employee’s incapability to fight back caters to the CXOs egos, and they further degrade employees. The other employees from fear of being chosen for same inhuman treatment keep quiet and cater to the CXOs ego. The seeds sown by this behavior grow into a destructive organization culture.

 The study titled “The CEO Pay Slice” shows that there is negative correlation between high CEO pays and profitability of the organization. In comparison to the competitors, companies having higher pay for CEOs showed lower profitability for investors. CEOs with higher pay do not automatically perform better. Results indicate that they make worse acquisition decisions and show weaker accountability for poor performance than other CEOs. Sometimes CEO compensation increases when industry and economic factors are favorable. Hence, the increase in pay maybe attributed to luck instead of better decisions and performance.

This does not augur well for the risk managers in the organization. CXOs with a false sense of privileged status are more likely to disregard business ethics and laws while making decisions. Hence, the organization is at a high risk for legal cases and reputation damage.  In the long run, the lack of focus on organization culture and governmance may cause major corporate disasters.

Recommendations

 The CEO and top executives set the tone at the top. If they are morally disengaged and disconnected from employees, the organization faces some severe challenges. Hence, some solutions are required to address this problem. Here are my recommendations:

i)     The Indian Company Law Schedule XIII defines the method of calculation and limits of managerial remuneration. In my view, the calculation should involve number of times the average salary of workers. This will ensure that some balance is maintained between board, CXO and workers pay.

ii)    Studies have shown that some powerful people tend to hold themselves at higher standards and are lenient to others misdemeanors. Studies on emotional intelligence indicate that emotionally intelligent people are aware of their own and others emotions and drivers. This might sound bizarre, but maybe we should explore methods to keep CXOs emotionally connected.

iii)     The research paper reflected that women are less likely to feel a sense of entitlement or power if they can be mean to a less powerful person. It is a good idea to keep more women as CXOs to maintain a balance and keep senior management grounded.

iv)   Corporate governance norms should include independent board members in compensation committee. This will ensure that a realistic view is taken of CEO and other top executives’ salary. Basing salary structures on performance rather than favorable circumstances is required.

v)    Employees may be empowered by forming trade unions and using whistle blowing lines inside and outside the organization.

vi)   Last but not the least, public should play an active role in curtailing income disparities. The issues should be brought to government and media attention.

References:

1. CEOs of Top Companies Earn 68 Times of Average Employee
2. When Executives Rake in Millions: Meanness in Organizations {Authored by Sheeshadri Desai (Harvard University), Arthur Brief (University of Utah), Jennifer George (Rice University)} 
3. The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer 
4. The Psychology of Power – The Economist

Share your opinion here.

Different Perspectives – Celebrating Egypt’s Victory

I salute to Egyptians for their glorious victory. They successfully overthrew President Hosni Mubarak’s autocratic government in a mostly non-violent struggle. Egyptians have surmounted the biggest obstacle in their road to get democratic freedom. Though the path is still laden with difficulties, and they have to continue the struggle, there is hope of seeing the sunlight after 30 years of darkness.

In this post, I am covering three articles that captured the problems of Egypt and the success of their revolution. The first post from Taskforce “From Egypt to Afghanistan: U.S. Self-Interest and the Unfortunate By-Product of Corruption” describes how US double speak and foreign policy has influenced the world negatively. US to maintain its super power status has for its own self-interest supported autocratic regimes in various countries, knowing that they were corrupt and subjugating human rights of their population. Instead of doing the right thing, US governments through years ignored the atrocities of their supported leaders. The cost of maintaining super power status of US was borne by populations of the autocratic regimes supported by US government.

The second post is from African Great Lakes News Repository “How Hosni Mubarak Got So Rich” discusses the corruption in Mubarak’s rule. President Mubarak has estimated net-worth is USD 5 billion and some reports state that the family assets are around USD 50-70 billion. He accumulated his wealth through collecting bribes and ensuring his family got a share of income through forced partnerships. A man who 30 years ago started his rule stating that he will fight corruption and ensure democratic governance became a figure known for worst autocratic rules in history. Egyptian suffered because of income disparity, poverty, lack of jobs and opportunities. Mubarak and his cronies enjoyed a privileged life at the expense of Egyptian people without remorse.  The negative outcomes of one man’s insatiable desire for power and money, and corrupt government were borne by a whole population for 30 years.

The third post “Everywhere Tahrir” from zunguzungu captures the elation and joy across the Arab world on the victory of Egyptians. They are now the torchbearers for democratic freedom in the Arab world. The world dynamics is changing and we are seeing history unfold itself. Here is hope for betterment of human race. May more people across the world get equality, justice and freedom to live.

Egyptians Emotions on Victory from boingboing blog

Click on the headings to read the full articles. Check out the boingboing blog article “Egypt- Dance, Dance Revolution” to see more photos.

1.     From Egypt to Afghanistan: U.S. Self-Interest and the Unfortunate By-Product of Corruption (via Taskforce – Financial Integrity & Economic Development)

I’m thinking specifically of several recent events, but let me start with a little history.  In 1947, Greece and Turkey faced military and political pressure from the Soviet Union, and in response President Truman vowed the United States would support these countries to resist “attempted subjugation” by outside pressures.  Called the Truman Doctrine, this strategy later came to wield enormous influence on U.S. foreign policy as the American government sought to contain the “domino effect” of communism.  Frightened that if one country succumbed to communism the surrounding countries would as well, the U.S. chose to intervene in a variety of internal conflicts worldwide to overthrow leaders perceived as pro-Soviet or to support leaders who might otherwise be vulnerable to communist uprisings.

As a result of this policy, a line of U.S. presidents, both Democrats and Republicans, empowered a variety of pro-America leaders and overthrew progressive, pro-Soviet governments across South America, Asia and the Middle East.  Under President Eisenhower, a CIA-organized coup overthrew Jacobo Arbenz, the democratically elected president of Guatemala, who was suggested to have some influence under the Soviet Union.  President Lyndon Johnson deployed 23,000 troops to the Dominican Republic to intervene in their civil war. President Ronald Reagan waged covert warfare in Nicaragua.  Many American-installed leaders later turned into corrupt despots who ruled their nations with brutality.

Today the relationship isn’t as distinct.  Without a clear existential threat, America has fewer obvious reasons to empower corruption.  But, while it is not as obvious, the dynamic still remains.

Take Egypt and Tunisia.  The U.S. has a very good relationship with Hosni Mubarak, the current president in Egypt, and has maintained a close relationship with Zine El Abidine Ben Ali, the now-former president of Tunisia, consistent with a long diplomatic history with both countries.  The United States has maintained official representation in Tunis almost continuously since 1795 and signed the American Friendship Treaty with Tunisia in 1799.  Mubarak is also a close ally of the United States, and has long offered the United States military access to the region in a crisis, including overflight rights and Egyptian troops, who sometimes participate in international coalitions.

2.   How Hosni Mubarak Got So Rich (via African Great Lakes News Repository)

There are no Mubaraks on the Forbes list of the world’s richest people, but there sure ought to be.

The mounting pressure from 18 days of historic protests finally drove Egyptian President Hosni Mubarak from office, after three decades as his nation’s iron-fisted ruler. But over that time, Mubarak amassed a fortune that should finance a pretty comfortable retirement. The British Guardian newspaper cites Middle Eastern sources placing the wealth of Mubarak and his family at somewhere between $40 billion and $70 billion. That’s a pretty good pension for government work. The world’s richest man–Mexican business magnate Carlos Slim–is worth about $54 billion, by comparison. Bill Gates is close behind, with a net worth of about $53 billion.

Mubarak, of course, was a military man, not a businessman. But running a country with a suspended constitution for 30 years generates certain perks, and Mubarak was in a position to take a slice of virtually every significant business deal in the country, from development projects throughout the Nile basin to transit projects on the Suez Canal, which is a conduit for about 4 percent of the world’s oil shipments. “There was no accountability, no need for transparency,” says Prof. Amaney Jamal of Princeton University. “He was able to reach into the economic sphere and benefit from monopolies, bribery fees, red-tape fees, and nepotism. It was guaranteed profit.”

Had the typical Egyptian enjoyed a morsel of that, Mubarak might still be in power. But Egypt, despite a cadre of well-educated young people, has struggled as an economic backwater. The nation’s GDP per capita is just $6,200, according to the CIA–one-seventh what it is in the United States. That output ranks 136th in the world, even though Egypt ranks 16th in population. Mubarak had been working on a set of economic reforms, but they stalled during the global recession. The chronic lack of jobs and upward mobility was perhaps the biggest factor driving millions of enraged Egyptian youths into the streets, demanding change.

3.  Everywhere Tahrir (via zunguzungu)

“The Winter Uprisings in Tunisia, Algeria, Egypt and Yemen have shaken western and Arab confidence in the sustainability of the current models of “competitive” authoritarianism. These were not bread riots; they were illustrations of political gangrene…in the end the Winter Uprisings are political, not merely economic. They cannot be reduced to economic “reforms,” pice checks and micro-finance. They are putting strains on the Arab political order in its full diversity. And the youth driving the Winter Uprisings appear not to be satisfied when thrown a bone — they deserve steak. In the span of two months they have seen two long-sitting autocrats make shaken and desperate public appeals in response to their actions and watched one of them make a run for the Gulf. Whether Tunisia or Egypt or some other Arab polity turns out a revolution or a serious political change, these uprisings will be serious political and historical importance going forward. These are exciting, perplexing times indeed.” (TMND)

There have been quite a few persuasive calls (particularly from historians) to resist the urge to see this as one thing, a single “Winter Uprising” as Kal put it above. Manan, for instance, and Gretchen Head. And I agree. But no one would deny that people in Egypt were watching what happened in Tunisia and interpreting it in their own ways, and the rest of the world is sure as hell watching what happened in Egypt. And while this is not exactly Nasser 2.0, the idea of an Egyptian led Pan-Arabism is certainly on the minds of at least some (and in the nightmares of others). As Lamis Andoni writes:

The Egyptian revolution, itself influenced by the Tunisian uprising, has resurrected a new sense of pan-Arabism based on the struggle for social justice and freedom. The overwhelming support for the Egyptian revolutionaries across the Arab world reflects a sense of unity in the rejection of tyrannical, or at least authoritarian, leaders, corruption and the rule of a small financial and political elite.

Arab protests in solidarity with the Egyptian people also suggest that there is a strong yearning for the revival of Egypt as a pan-Arab unifier and leader. Photographs of Gamal Abdel Nasser, the former Egyptian president, have been raised in Cairo and across Arab capitals by people who were not even alive when Nasser died in 1970. The scenes are reminiscent of those that swept Arab streets in the 1950s and 1960s

  

Egypt Victory Through Unity by boingboing blog

 I hope Egyptian revolution shows a path to suffering people across the world that united they can achieve wonders. They need to take action, actively fight for their rights and not let their human spirit be diminished. They have faced atrocities at the hands of people in power, the powerful won’t change, hence the lessor privileged have to bring about the change.

 

 

The Upward Spiral

Guest Post by Elizabeth Doty – Author of the book “The Compromise Trap – How to Thrive at Work Without Selling Your Soul”

In November last year, I got the chance to speak on campus at Harvard Business School and returned to the classroom there for the first time in twenty years.

Being in the amphitheater-style room again brought back many memories and some new perspective. My cohort, the class of 1991, was the first to take a required ethics module when we started in 1989 – a response to the unethical behavior of the junk bond era. During those first few months, Mike Milken’s trial was in full swing, Ivan Boesky and Ira Sokolow were in prison for insider-trading, and Michael Lewis’ Liar’s Poker (an expose on Salomon Brothers) had just been published.

 ‘How Quaint’

Looking back, the cases we studied are disorienting in scale. Whereas Ira Sokolow received a whopping $120,000 for insider information on the RJR takeover, the mortgage-backed securities debacle has implicated thousands of professionals in multiple industries and cost at least $500 billion. As Michael Lewis said in an article revisiting Liar’s Poker in 2008, “What I didn’t expect was that any future reader would look on my experience and say, ‘How quaint.’”

Now, to help explain how such critical failures of responsibility could happen on a mass scale, I was there to talk with the Harvard Business School Association about my book, The Compromise Trap.

I was both overjoyed and saddened by the passion in the room. Every professional there had some experience with pressure to compromise, several with severe consequences.  There was a shared and genuine concern that a “downward spiral” was eroding something supremely valuable in our society – not just at work but in every sphere of life. Clearly, in a knowledge-economy more of us face conflicts of interest as we try to live up to our fiduciary duties and professional responsibilities. For example, in 2006, 90% of real estate appraisers reported feeling pressured to distort property valuations.

Unfortunately, such pressures create cynicism and compromise. According to the Josephson Institute “regardless of age, people who believe lying and cheating are a necessary part of success are more likely to lie and cheat. In fact, this belief is one of the most significant and reliable predictors of dishonest behavior in the adult world.” Perhaps this explains why Dan Ariely and his colleagues found that a majority of MBA students cheated on a self-scored math test with financial incentives.

Yet there is a paradox here: Professionals are now pursuing higher aspirations on a greater scale than ever. Social entrepreneurship is exploding. Business for Social Responsibility has more than 250 members whose combined revenues make up 42% of the U.S. economy. And over 5,000 MBA’s worldwide have signed the MBA Oath.

How do we amplify these efforts? “Is it possible,” said one businesswoman during our conversation in November, “to counter the downward spiral with an upward one?”

Shifting the Dynamics that Drive the Downward Spiral

Amplifying an upward spiral would require shifting three critical dynamics:

1. Situational Influences: Despite our confidence in our moral compasses, we are all remarkably susceptible to situational influences. For example, when the MBA students in Dan Ariely’s studies were given poker chips instead of cash the level of cheating doubled – even though participants exchanged the chips for cash just 60 seconds later. And when they were asked to write down as many of the Ten Commandments as they could remember just before they took the self-scored test, cheating dropped to zero. Similarly, Stanley Milgram ran 19 variations on his famous experiments in order to isolate exactly which conditions increased or decreased unethical compliance. Typically, 63% of subjects were willing to administer electric shocks all the way to the level of death when an authority figure told them to do so to help another person “learn”.  (The shocks were fake and the learner was a confederate.) When the subjects did not have to touch the knob to administer the shocks themselves, compliance skyrocketed to over 90%… but when they witnessed two others refusing to administer electric shocks, compliance dropped from 63% to 10%.
2. Self-justification: Once we have taken an action, even if it contradicts our values, we have a strong psychological need to justify it. According to the authors of Mistakes Were Made (but not by me) this drive is so strong that we will alter our beliefs, confabulate our memories, tune out disconfirming data, and filter our perceptions in a reinforcing cycle of self-justification. Conversely, having the humility and self-awareness to question ourselves and admit when we are wrong enables us to learn and reinforces our values.
3. Influencing Others: Finally, our actions become the situational influences that push others into conformity and compromise or prime them for courageous action. One businessman at my talk had left his home country due to rampant corruption. On the other hand, Jon Haidt’s studies of “elevation” show there is a measurable physiological change when we witness another person’s good deed, leaving us inspired to take altruistic actions ourselves.

As you can see in the simple diagrams below, these three forces can add up to negative or positive trends

How do we shift toward the positive?

Downward and Upward Spirals

 

A Model for the Upward Spiral

The best example I know of an upward spiral that shifts these dynamics comes from a piece by Vaclav Havel, the Czech dissident who helped mobilize democratic action across the former Eastern bloc and became the first president of the Czech Republic.

Havel’s once-outlawed essay, The Power of the Powerless, describes how the automatism of life under Soviet rule was the result of being unable to own one’s personal responsibility. Describing a downward spiral, he showed how the lowest shopkeeper and the highest ranking elite both helped keep the rituals of conformity in place. “In everyone there is some willingness to merge with the anonymous crowd and to flow comfortably along with it down the river of pseudolife,” he wrote.

According to Havel, we reclaim control of our sense of responsibility when we decide to live in the truth, to face the larger realities that are often eclipsed by pressure or temptation. Bringing in these bigger truths enables us to have a positive influence on others, as long as they feel some connection with us. This happens all the time, though it’s not something we normally notice or talk about. For example, a plant manager who was tempted to manipulate some safety testing procedures stopped because he knew his staff would not go along with a lie. In essence, his staff’s presence reminded him of the larger stakes involved. In another instance, a top executive of a Fortune 50 company resists pressure to make a loan to a croney because a front-line loan officer five levels below him says, “I won’t make a bad loan.” A customer service executive convinces her CEO to change unsafe production processes by bringing the corporate attorney into his office to lay out the risks. A stock trader invites his boss to reconsider whether working all weekend is good for either of their families. A civil rights activist asks the mayor of Nashville if he doesn’t actually believe in desegregation… and he says yes, and so the lunch-counters are desegregated. And so on, and so on.

Strangely enough, positive influence can work even when we have little power. As Havel puts it, “This power does not rely on soldiers of its own, but on the soldiers of the enemy as it were-that is to say, on everyone who is living within the lie and who may be struck at any moment (in theory, at least) by the force of truth.” For example, Reverend Timothy Ngoya of Kenya was attacked one night by seven armed assailants for preaching pro-democracy messages under a dictatorship. At one point, lying on the floor believing he was dying, he began giving away his treasures to his attackers – his Bible, his library, etc.   His assailants were so overcome by his generosity that they rushed him to the hospital, where doctors saved his life.

Wherever we are situated, all of us face daily choices about whether to add to the upward spiral or the downward one, contributing to the myriad feedback loops that together determine the trends in society. To quote two experts in the science of complexity,

Our attitude and being forms the climate others live in, the atmosphere they breathe. When we’re negative or dishonest, this exerts a subtle influence on others, quite aside from any direct impact our behavior might have. Subtle influence in its negative sense — collusion– holds restrictive limit cycles together, but in its positive sense is vital for keeping open systems renewed and vibrant. In this way, each of us is a hidden degree of freedom, an angle of a system’s unexpressed creativity.

From 1978 to 1989, Havel’s essay was part of this subtle influence, passed illegally throughout the Eastern bloc, helping groups such as Solidariti sustain their resolve and tipping the scales toward democracy.

Now, twenty years after the fall of the Berlin Wall, is it time to apply these methods more globally to renew the values and integrity that enable democracy?

Your reactions, thoughts, and stories are most welcome. Who knows, they could exert a positive influence on someone!

Please visit http://www.worklore.com/ to get more information on the topic.

Ministry Approval Waived for Managerial Remuneration for Unlisted Companies in Red

A couple of days back Ministry of Corporate Affairs issued a press note stating that it is waiving the approval requirements for managerial remuneration of unlisted companies where there are no profits or inadequate profits. In my opinion, Ministry of Corporate Affairs has not considered a few implications of the changes.

1.    Reason for change

 The first aspect that needs attention is the reason for change. As per the press note, the Ministry is receiving a number of applications for this, hence does not have the manpower to deal with it. Below is the statement:

 “A substantial number of the applications coming to the Ministry fall under this category and the Ministry’s limited manpower is disproportionately involved in this exercise.”

Is this sufficient reason to change a law? In a country with over a billion population and an unemployment rate in double digits, the Ministry is not finding resources for approving critical applications covering managerial remuneration. I suspect that some more critical clauses might be waived to reduce workload. This statement clearly tells me one thing that adequate attention was not paid to the impact of the changes.

2.    Section 198 of Indian Companies Act

According to Section 198 of Indian Companies Act, 1956, public limited companies, listed and unlisted, are required to obtain permission of Ministry of Corporate Affairs for paying remuneration to directors if the company has no profits or inadequate profits. This section effectively restricts directors and CEOs of an organization approving high salaries to them if the company is not performing adequately. It protects the rights of the minority shareholders.

Now the clause in respect to unlisted companies was changed stating that since they have limited number of shareholders the organization is similar to a private limited company. Hence, now unlisted companies, which are not subsidiaries of listed companies, will not require government approval before declaring managerial remuneration if they were making loss or have inadequate profits. Requirement of  paying creditors stands. Secondly, the maximum pay out for the loss making companies per person managerial remuneration of Rs 1,050,000 per annum or Rs 87,500 per month stays. Hence, magnitude of the change is  within limits. Provisions of Schedule XIII continue to apply and a special resolution of shareholders is required.

3.    Corporate Governance of Unlisted Companies

My concern is simple, if numerous unlisted companies are making losses and are seeking approvals to pay managerial remuneration; there is a possibility of some fraudulent activity. The question is why are these companies loss making, is it just a one year kind of situation or are they continuously making losses. If the company is continuously making losses, the concept of going concern is negatively impacted.

The second aspect that needs consideration, is that if the organization cash flows are sufficient to pay creditors, should one delve deeper into reasons for losses? Is it that the unlisted company is passing dubious expense bills to reduce income tax liability and then availing benefits of high remuneration? Unlisted companies are not required to follow corporate governance norms listed in Clause 49 of SEBI. Hence, overall governance is not high in these companies as shareholdings is of family and friends. Due to the concentrated shareholdings pattern, it is easier to obtain board approval. The propensity of wrongdoing increases with the removal for approval requirements of Ministry of Corporate Affairs.

 Overall, though one can be happy with the attempt of the Ministry to liberalize and provide freedom to corporate sector, I have my reservations. In my view these piecemeal changes of company law should not be done. Less than 10% of the companies in India are listed, the remaining does not have adequate corporate governance norms applicable to them. In my view, corporate governance applies to customers, employees, government and community besides the shareholders and creditors. I would be more comfortable if the Ministry of Corporate Affairs provides a wholesome solution for corporate governance in respect to private and unlisted companies.

What is your opinion regarding these changes? Do you think this is a step in the right direction?

References:

1.  Press Note:  4/2011 dated 8.2.2011 :  Managerial Remuneration in unlisted companies having no profits/ inadequate profits  Ministry of Corporate Affairs http://www.mca.gov.in/Ministry/press/press/Press_Note_No.4_08feb2011.pdf

SEBI’s proposal on accounts restatement

A proposal is pending approval with the board of Securities Exchange Board of India (SEBI) regarding restatement of accounts of listed companies. A panel appointed by SEBI has proposed that stock exchanges can call for restatement of financial statements if the audit report has serious qualifications. Interestingly, the CEO and/or CFO of the organization will bear the cost of fresh audit. The shareholders will not have to pay for the audit fees. SEBI is holding the CEO and/ or CFO responsible for the misstatement and is allowing the final say on the financial statements to the auditors. As per the proposal, SEBI will discuss the seriousness of the qualifications with the Institute of Chartered Accountants of India before suggesting restatement of accounts to the company. You can read the full article here on Economic times.

The stated objective for the new proposal is to give more power to SEBI and auditors to ensure financial statements integrity and built a robustness in the reporting system. My personal doubt is whether this proposal will really be effective. There are two scenarios were financial statements lack integrity:

1)  CEO/ CFO force auditors to write auditors report in their favor and/or 

2)   Auditors compromise ethics and give an unqualified auditor’s report an incorrect financial statement.

In both these scenarios the proposal is not saying much. Hence, I suspect that in this case auditors may become more pressurised into submitting unqualified reports. Rather than give independence to auditors, this guideline may become a deterrent to writing qualifications in the auditors report.

Additionally, there has to be some clarification on who will bear the cost of restatement if an honest mistake is made and a material fraud or error is discovered after submission of the audited financial statements?

What do you think of this proposal ? Do you think it is a move in the right direction or is it going to make it more difficult for auditors to give qualifications ?