The government had already initiated legal proceedings against the company for the fraudulent acts of the promoters and amounts realized if any, at the end of the trial and verdict must go to the claimants, including Tech Mahindra/Mahindra Satyam. The only reason which I can think of is  the frustration that Mahindra might be feeling that it is taking longer than expected to turn the company around to robust profitability.

Post-Satyam, those passionate about corporate governance, though shocked, believed that good lessons will be learned on the governance front. But that was not to be. Recently, corporate governance once again took a hit in the form of Everonn, about which I had written briefly. And it was only ironic that the Everonn issue happened just two days after Anna Hazare and his supporters claimed victory in the movement against corruption in the government circles. As things stand at the time of writing, the whole issue seems to have been put on the backburner. Media was more concerned about the market effect of Everonn and the possible impact on the skill development front rather than governance related issues. Other than that the Chief Vigilance Commissioner(CVC) felt that corporates be brought under the purview of the Jan Lokpal, there was no reaction from the Government, regulatory bodies, industry associations like CII,FICCI etc. Of course, the chairman of the company, Dr.J.J.Irani, a highly respectable professional with impeccable reputation, who once chaired a committee constituted by Department of Company Affairs to evolve a new set of corporate governance guidelines, promptly resigned and the Everonn founder and CEO, Mr.P.Kishore, was removed. The board also appointed Mrs.Susha John, a whole-time director of the company as MD and CEO. On the surface, it looked as if the company acted swiftly to deal with the crisis. Reports from the press said that the board unanimously expressed its confidence in the management and the business and that the company will offer all co-operation to all concerned as necessary to clearly demonstrate its commitment and adherence to principled corporate governance.
While apparently the bribe/ corruption issues seems to have been addressed, there seems to be a number of questions yet to be answered on the corporate governance front. The most pertinent question of them is, what has Everonn board done to uphold the values of better corporate governance in the country? Nothing much at the moment. Of course, the arrival of a new investor, GEMS Education belonging to the Varkeys Group of Dubai , has been touted as an indicator of investor confidence in the company.
Has it all been as simple and business as usual as it tries to convey? A few more questions like the following still linger on needing answers:
a. Mr.Kishore was arrested for bribery. What about governance issue relating to non-disclosure of income to the tune of Rs.116 crores? While the board may say( not fully satisafactorily) that it has acted upon the issue, there have been no reports so far of the regulator(SEBI) making any reference to the issue .
b. Apparently the raid was conducted on Everonn and ( and not on P.Kishore personally).When a raid was conducted on the company by Income Tax(IT) officials, it is very unlikely that the whole-time director and the CFO were not knowing about it and also the reason for the same. And even if it were related to subsidiary companies( there are thirteen of them), the whole-time director must still be aware of the issue as she is on the board of twelve of them, according to the annual report of the company for the year 2010-11.It doesn’t seem to be the case of just one ” rotten apple’.
c. Yet another important question that seeks answer is were the chairman and other directors and the audit committee informed of the IT department raids and the unearthing of the undisclosed income?
d. Was the auditing firm, M/S.P. Chandrasekhar, aware of the undisclosed income? If yes, why did he not report the same to the audit committee and in the remarks on the account? What did the audit committee, board and the regulatory body ICAI do in the case of the auditor, supposedly a gatekeeper?
One would have considered that the values of corporate governance were upheld had Mrs.Susha John & the CFO voluntarily resigned(despite the fact that under Indian Company Law, MD is the designated manager)to facilitate objective enquiry by the board or the board decided to keep Mrs.Susha John & CFO suspended from official duties temporarily till a board enquiry was completed and if found clean, reinstalled later. Dr.Irani also should have stayed back till the board enquiry into the event is over to provide leadership for the company & confidence to the investors and the market. The company is in a crisis and can you run away from it? It will be like the captain deserting the ship caught in a storm. The right time for his resignation would have been when he was informed of the IT raids on the company(if he was). His resignation, while with good intention of guarding his reputation and clean image , will only help create a feeling that selfish motives were overriding the interests of the organization. A courageous and problem solving behavior of the leaders is crucial in such difficult situations and would have become a torch bearer for the future.

In addition, the board should also have  changed the auditor, M/S.P Chandrasekhar with immediate effect, who should have detected this kind of  a failure of disclosure by the management.

While the decision on restatement and making CEO/CFO responsible is welcome, what about the responsibility of the audit committee? Audit committees are mandatory according to SEBI Clause 49 guidelines for corporate governance. And the Audit Committee has “responsibilities of  overseeing the external audit, interact with the management to review the auditor’s findings and to decide on the steps that the management must take to address the auditor’s concerns, reviewing the financial  information to be provided to shareholders and others” according to SEBI guidelines. Thus, before the information goes to the investors or public, the audit committee has to make sure that the information is right and correct. Then, why are audit committee members excluded from the  responsibility of bearing the costs of re-audit and distribution of restated accounts and the responsibility solely assigned to the CEO/CFO? On the one hand Company Laws  and /or SEBI are trying to strengthen the institution of independent directors(audit committees are expected to be constituted of majority independent directors) but on the other hand they are reluctant to assign responsibilities to them that must be considered as legitimate .

I did not find anything new in this suggestion since the same suggestion was made as early as February 2006 by me at a national conference held on February 24 & 25 at IBS, Ahmedabad(“Empowered Boards: Are We Moving In The Right Direction” ) . Of course, my suggestion was based on compensation received by the CEO on a  manhour basis rather than on a manday basis as CEOs on a typical working day will put in anything between 10 to 14 hours.The rationale behind the suggestion was also given. The IDs are expected to advice CEOs on business related matters and hence he should be compensated at the same rate as CEO for the effort they take.

Now that a Corporate Governance Officer from a heavy weight international financial making the suggestion, I hope the business and industry will take it very seriously. But, I also have a suggestion that the compensation should not be beyond the efforts put in and also not below the effort put in by the independent directors. It should be just right.

Actually it is a victory for the corporate governance process and regulations which is in it’s infancy in India and is a pointer to the alignment that is required  among policy makers,law makers and regulators. It clearly gives direction that publicly listed corporate can’t be run as private fiefdoms of promoters. I had already raised this issue as early as 2005 while the war was on and later in 2009 when the Bombay High Court  passed an order in favour of RNRL. In the article”Anil Ambani Ko Gussa Kyom Aaya?,Effective Executive, November 2005 I had written ”While the settlement has been a big relief to the corporate sector  in general and financial markets in particular, it has given rise to many questions and has also helped to bring out a number of corporate governance issues to the forefront. What role the board  of a company should play in such situations? Who will handle such issues whenever a crisis arises? Shall it be left to the promoters’ families to settle issues when majority of ownership lies outside the family? Or , is the board which represents the interests of the entire shareholders responsible for settling such issues?”

In 2009, I wrote in a paper presented at The National Conference On Corporate Governance organized by IOD at Hyderabad: How could a decision as important as the restructuring or demerger of companies, all publicly held , be taken by an individual ? While we all might have been relieved that the spat between the brothers has been amicably settled , what business led Mrs. Kokilaben as head of the family, which was reported to be holding only 46% of the shareholding in RIL, to assume that the demerger was in the interest of the remaining shareholders who account for 54% of the holding? Not even once when the entire episode was enacted ,did the  board of RIL show any signs of exercising their power and authority as representing the interests of the larger group of shareholders. And , it seems unfortunate that no shareholder (including institutional holders) raised the question” where was the board?”

In the same paper I wrote about the Bombay HC judgments as follows: “While delivering the judgment, the division bench of the honorable Court  said that ‘parties should enter into suitable arrangement on the basis of quantity, tenure and price as specified under the MOU either by renegotiating the terms……..or reverting to Smt.Kokilaben Dhirubhai Ambani who has reserved  her ability to intervene again if the parties fail to  act upon the MOU”(“RNRL wins rights for RIL gas,44% cheaper’, Economic Times, June 16,2009)”.

 And further that  “ What do all these point to? The rubber stamp nature of  the role of boards of directors  in family managed companies to begin with? Or failure of boards on the corporate governance front? Should court have suggested reverting to Smt.Kokilaben again  “who has reserved her ability to intervene again”? The honourable High Court suggested that “the parties should enter into a suitable arrangement” and wasn’t that enough, since the boards of the companies had accepted the terms  of the demerger scheme? Both RIL and RNRL are publicly listed companies  with the public holding   48.63% and 44.79% respectively according to  the annual reports  of 2007-08.Can an individual be entrusted  with the responsibility of resolving a corporate  issue of this magnitude(reports estimate the RIL liability  to be Rs.17,000 crores, spread over the life time of the KG basin)?  What roles do the boards of the companies , the body accountable  to the shareholders for the acts  of the company as a  separate economic entity, play? Or is it that boards are only a necessary evil to conform to the regulations?”

If the current developments  are indicative of  the end of animosity between the two sibling groups, that would be the best  thing to happen. Let’s wait and watch as further stories unfold. But one wonders how it did not occur to the eminent mediators that the family MOU will not stand the test of legislature and judiciary?

While a whistle-blowing mechanism is considered to be highly desirable in the pursuit of better corporate governance systems, at the core is  the philosophy “Prevention is better than cure” and not  to  confess about wrongdoings  when  no other  option is left. It is true  that many  corporate frauds and consequent failures causing miseries to all stakeholders could have been avoided, had the system of whistle-blowing was in place and institutionalized. Sherron Watkins in Enron, tried to act as a whistle-blower once she found that whatever the CFO Andy Fastow did  was benefiting him personally at the expense of  Enron by  sending an anonymous mail to Kenneth Lay, the Chairman and CEO of Enron. But nothing happened as Ken Lay ignored the warning and failed to make any investigation on the allegations mentioned in the mail. Rest is history now and is well known.

While whistle-blowing as a policy is laudable, the intricacies involved in institutionalizing it as a process poses great challenges to corporate and the very concept of corporate governance. While most of the corporations consider the regulations for the governance themselves as a necessary pain, it is very difficult for a system of whistle blowing mechanism to set in and get institutionalized. In  fully or partly government-owned companies, this could work as they can have a system of nominating somebody at a higher level of the organizational hierarchy who will have the responsibility of the oversight of vigil and report to an outside agency rather than the top executive cadre of the company. In India, public sector organizations have a policy of appointing a Chief Vigilance Officer in the category of General Manager and above who is responsible for the oversight of the vigilance function of the company and reports to a Chief Vigilance Commissioner, appointed by the Government. Such an arrangement will enable the process to get institutionalized. But how to implement such a process in the private enterprises is a major challenge before the policy makers. While the mechanism per se  can do wonders if implemented, the challenges revolve around the very implementation issue.

Clause 49has put the whistle-blower policy under the non-mandatory requirements . Companies have to present the whistle-blowing mechanism installed in their annual reports. Whistle blowers shall be provided access to the audit committee and if necessary to the Chairperson of the audit committee. Instances of whistle-blowing have been there in India but most of them have been instigated. Mr.L.C.Gupta, a former member of SEBI hailed Mr. Anil Ambani as “An unusual whistle-blower” while writing about the issues that were raised by Anil Ambani during the sibling-rivalry days in the pre-demerged Reliance Group. Gupta wrote that “It is a rare case of whistle-blower emerging from a company’s top management cadre”( Gupta  L.C., “An unusual whistle-blower”, Economic Times, May 5, 2005).While there is nothing wrong about somebody from top management level blowing whistle if some frauds or unethical practices happen in the company. But, Reliance had been involved in many issues of violation of rules and regulations during their growth phase during eighties and nineties, and Anil was very much a part of it, no such issues were raised  or discussed  by him in public. Hence, while he might have done the right thing by pointing to various issues and refusing to sign the accounts for 2004-05, there is all the reason to believe that this was the result of the eruption of rivalry between him and his brother Mukesh Ambani  with respect to the control of the Reliance group.

But, when a company seems to be doing extremely well, or during good times, everybody has a tendency to ignore most of the issues. Most of the control mechanisms don’t get enforced when the going is good. As Garrat says, “In good times, both the cream and scum rise to the top. Very few people are willing to blow a warning whistle when every one seems to be winning in a rising market. When that market turns and the cream curdles, however the scum become only too obvious. What looked to the public like marvelously engineered marble palaces turn out to be two –dimensional lath and canvas film sets, closely held together by “creative” EBITDA accounting.”(Bob Garrat, Thin On Top,2003).Such issues will get attention during tough times when everybody searches for the problems and tries to fix a culprit.

According to me, for a whistle-blowing mechanism to work, some pre-requisites are necessary:

• The corporate governance must become a culture within the entire organization rather than an annual box-ticking exercise by the board. For this, every employee should have some learning about the importance of it.
• The whistle-blowing must start from top, the board of directors. Non-executive directors , and especially independent directors, should blow the whistle the moment they find that something is not in line.
• All employees must have access to not only the audit committee members but also to the non-executive and independent directors.
• A mechanism whereby any employee, if his concerns are not addressed by the audit committee or directors, has the freedom to convey the concern to SEBI.SEBI may open a mail-id under the control of a General Manger for the purpose.
• SEBI must invite researchers on corporate governance  or corporate watchers to get their inputs where there are no clear guidelines  and also to get sounded of some untoward happenings in the companies.
• SEBI should encourage investors to act as whistle blowers. A number of governance deficiencies, either due to lack of regulation or otherwise, can be brought to the notice of the audit committee, auditors and/or non-executive directors.

How many companies encourage  their employees to voice their concerns in the best interest of corporate governance? How many companies look for qualities(such as courage, value system etc) in the potential employees while recruiting and existing employees during their appraisal? According to me such courage is  not only missing at the lower employee levels but also at the higher levels like directors. When the RIL-RNRL gas  allocation and pricing suit was heard at the supreme court, the counsel  for RIL, Mr.Harish Salve  stated that the RIL board was not aware of the family MOU and hence it is binding only on Mukesh and not  on  the company. But, none of the directors showed courage to raise a question  regarding how could Mukesh as an individual could get into an agreement with his brother  to allocate gas from the oil wells owned by the company.

I fail to understand what is this “objectivity and performance orientation” which the committee is talking about. A corporate’s performance is by and large measured by the economic performance of it. And don’t independent directors have a  real role to play in the economic performance of the company? While most of the non-executive directors  don’t consider that there is no role for them in the performance of the company in its strategic or  competitive perspectives, it is not true. They can play a major roles in strategy making, creating a unique position for the company in the marketplace etc. If that is so, their compensation should be linked to company’s economic performance.

  While compensating them with stock options have to be handled with care(as this might tempt them to think like stockholders who usually have a short-term outlook), I strongly feel that non-executive directors’ pay shall be related to performance. Of course, this might give rise to problems like  lesser or no remuneration when the companies do not make a profit and in some cases the companies will have to run without profit as in the case of long-gestation projects. Why don’t the companies decide on some kind of “Minimum Remuneration payable in the absence or inadequacy of profits” beyond the sitting fee as is usually done in the case of MD and other Whole-time Directors. But independent directors as contributors  to the better performance must have a chance to participate in the better performance of the companies .

The suggestion for  a lead independent director shall be applicable only when  the positions of Chair and CEO are combined or when the Chair and the CEO are full time or when the Chair and CEO belong to the promoter group/family. If the chair is independent, then the lead independent director’s position will become redundant.

Other suggestions in the report like those on succession planning and whistleblowers are  not anything new but  only the implementation strategy has to be dealt with. Which family managed company in India  will explicitly disclose about their intention to choose a particular person or persons(family nominee/promoter nominee/professional)as the successor to the current incumbent? While  nobody makes it explicit,  one ahs to read in between the lines and  make inferences. They are also not necessarily sure about the succession plans. Could Mukesh  Ambani have stated about a succession plan  during the period 2002-05 while rivalry was brewing between him and his younger brother? And barring a few companies, very few companies  across the globe have clarity and purpose about succession planning.

Very interestingly Ashley Summers suggested a model in which he considers the board as a manufacturer of wisdom and the CEO as the customer. According to him, the question is :is the board making a product that the CEO wants to buy? I don’t know whether this is a right approach. Doesn’t it indirectly say that the board has to sell a product(suggest a decision ) suited to the CEO or the one which he likes. While the board has an advisory role with reference to the CEO, and the CEO might be enthusiastic to receive the advice, please note that the CEO is also a board member and he has a role to play with respect to the company which is created as an entity, although artificial. The board(including the CEO) has to work towards what is best for the company, which is into certain economic activities, which will impact a number of stakeholders and other beneficiaries. The board should actually work in the best interest of the company, which may not be always be to the personal liking of the CEO.

While a few suggestions like permitting the CEO to sit on at least one outside board (Rajeev Vasudeva), creating a pool of director candidates from which companies can draw and board meetings beyond four to discuss strategies and plans(R.C.Bhargava) make good sense, an inquisitive reader may not find anything useful that will enable companies to unleash the potential of boards and use them as a competitive weapon.