Manage-Wise

Challenges and opportunities for corporate governance in India

I am honestly delighted, privilege and honored to be with you today to discuss corporate governance, which has become so vital not only for our corporate success, but also for our national success. What really is corporate governance? Of course, I do not have to tell you, you have had brilliant lectures from some outstanding people on the challenges and opportunities of corporate governance. But I will try to bring in a slightly different point of view. I might like to provoke you because most of you belong to the most representative class in this country, aged around 25 or less, that represents 54% of the population and which is why I say ‘provoke you’. I think that this is the time. We are living in a defining moment of history in India. We will only succeed if we are able to bring a wholesale, 180-degrees shift in the concept of living, so we are not talking about one single thing. We are talking about complete change. I would like to bring in a new context.

Changes in value system

You are aware that the Enron Chief Executive was given a prison sentence of a quarter of a century, which was never given to a murderer. That is where we need to think why it has happened. There was another event where the question was ‘How is it that this kind of sentence was given, he is 63, by the time he comes out of prison, he would be 98?’ There is a change in the value system in the society; judges five years ago would not have given such prison sentences. In fact, there is a classic case in the UK, where, in a very similar situation, the people were completely let off. It was in Guinness where there was complete insider trading. No such case in the UK has ever come to the level of prosecution where it was successfully prosecuted. But if it happens today, the situation could be different. You remember a person who was the backbone of the Korean transformation, Kim Woo-Choong who wrote a book Every Street Is Paved with Gold. He was the Daewoo chairman. As Daewoo chairman, he was sentenced to 10 years in prison. Note that he has done tremendous good to the country.

Lack of corporate governance

Today, the market perception is that companies are looking for businesses that do good to the community, not necessarily make profit. So, today we begin with an assumption that corporate governance is a different concept. It is not just to make money for the shareholders. The whole reason why we brought into being the World Council of Corporate Governance is that we are here not just to look after our shareholders’ values immediately, because in order to do that we must look at the stakeholder. What are we doing? If customers do not buy our products, can we really do good to our shareholders? Who are the customers? The customers now have a very different paradigm.

The world consists of two billion teenagers who are fuelling the market today. Their value system is very different. They want companies to be transparent, to be accountable. They want honesty and integrity. They want equity, and social and environmental responsibility. If companies do not provide this, companies are not sustainable. Lack of proper corporate governance practices is blocking the prosperity of a billion people in India. Today, our financial system looks after 81,000 individuals. We say growth—the rich have a growth rate of 20%.

These rich are just 81,000 among a population of one billion. You see the paper today, 54 people have been killed in Chhattisgarh. There were 11 policemen. Not one of the native people came to the rescue of these people whole night. How is there so much disparity, so much incongruence between our policies and systems? Now, who is responsible? You may ask why business should do anything about it.

Globalization for all

I ask you a question: we are talking about globalization, tell me which part of the society has become the biggest winner through globalization, and name the companies whether it is Bharti, Reliance or it is Tata. Their wealth has grown at least 10 times in the last few years now. So, the big businesses are the biggest beneficiaries of globalization. What is good corporate governance? Look at our growth, it stands at 9.2%. This is India which has the largest number, 74%, of malnourished children.

We are big today. Mr Ramakrishnan is a friend of mine; I am very delighted that he is here today. We know why the world is looking at our country. We have not analyzed that we have the youngest population in the world today. And that is what would fuel the growth. But in order to fuel the growth, we have to look after that population, the population that is our children and seventy-five per cent of these children under the age of six years are anaemic. How do we expect to grow? How and where will the corporations derive their workforce from? In order to fuel the economy, we have to look at the fundamentals. Why do we talk of the importance of corporate governance? I will just smoothen over the legal aspects.

Promoting equity and ethics

We want corporate governance because we say it is accountable. It promotes equity and ethics. If it does not promote equity and ethics, then it is not corporate governance. This is what we have been doing— manipulation of business of majority of people.

Business has been doing this throughout history. Now things have to change. They have to change because that is what will create value. Promoting gender balance, accepting diversity are issues which will make markets worth for the poor.

Markets should bring prosperity and work for the poor. If markets do not work for the poor, corporate governance is not successful. Mr Damodaran, he is great friend of mine, this is one of his agendas: how can markets work for the benefit of the poor? Not just for 2%, we are now shining in the glory of India, and we say that our stock markets have gone up to 14,000—it may have come down temporarily—we are talking of 9.2% growth, we are talking of US$190 billion worth foreign exchange reserves and a whole lot of things.

But stock market participation is just 2%. While it is 25% in the US, here it is just 2%. What about the rest of 98%? How can we bring the rest and why do we think stock markets are important? This is one instrument where it does not matter whether you are from Chennai or from Bangalore or you are from Mumbai. Stock markets do not distinguish between your castes.

Excerpt from ‘Corporate Ethics, Governance, and Social Responsibility' by A C Fernando. Reproduced with permission © 2009, Dorling Kindersley (India) Private Limited. Price: Rs 550.