Box ticking Corporate
Governance
is a recipe for disaster
“If there is one lesson to be learned
from the high profile corporate failures of Enron, WorldCom,
Marconi and the lot, it is that we must move away from the western
model of a box ticking approach to corporate governance. Enron
had ticked every box. The chairman of its audit committee was
a person of irreproachable reputation and no less than the Dean
of Standard Business School. Law, rules and regulations are
never an answer for the issues of head and heart”, this
was stated by Dr Mehra at a Press Conference concluding his
hugely attended seminars on “Unleash the Power of Corporate
Boards” in Mumbai, Calcutta and Delhi.
"To think that Enron, Marconi
and Vivendi are simply isolated cases where corporations have
cheated the innocent public is to show evidence of extreme naiveté.
Lynn Turner, Chief Accountant of the SEC from 1998-2001 who
was earlier a partner of Cooper & Lybrand admitted in a
TV interview “All the Big Five accounting firms helped
Wall Street investment banking firms to engineer hypothetical
transactions to make companies look better than they actually
were”, added Dr Mehra.
Dr Mehra said, “instead of bashing
Enron, we should be grateful to it for throwing open the murky
world of corporates and providing us an opportunity of getting
real with the huge problem of cleansing it. Arthur Levitt, the
former chairman of Securities and Exchange Commission tried
for 4 years to curtail the power of Accounting profession. He
could not succeed even in having a meeting of the Big Five in
his office. Finally, he had to hold it in the office of one
of them. Paul Sarbanes and Mike Oxley have gone a long way since
then in establishing an Accounting Oversight Board with majority
of non financial members and banning non audit work. Yet, Naresh
Chandra Committee has not drawn lesson from it to clip the power
of India’s accounting profession and has failed to recommend
establishment of the oversight board in India”.
“Enron has also debunked the myth of
role models. Enron itself was declared the “most innovative
company” by Fortune for five successive years. McKinsey,
the super consulting firm, was consultant to Enron and collected
fees of $10 million a year. A McKinsey director attended board
meetings and the CEO himself was a former McKinsey partner.
Super star CEO Jack Welsh is suspected of not generating but
managing earnings of General Electric. Corporate preacher George
Soros himself has been fined for insider trading. Corporate
hero Messier of Vivendi has the police raiding his premises.
Jean Claude Trichet who is to head the European Central Bank
has been put on trial for massaging Credit Lyonnaise accounts.
It is interesting to note that all these cases date back to
previous decades. Had these come up for decisions in the pre
Enron world then, as in the case of Lord Archer’s libel
case, the outcome would have been entirely different. The pendulum
has since moved completely to the other direction. Instead of
CEOs, judges are becoming super stars, ” asserted Dr Mehra.
“Corporations require to change their
paradigms. The public values have undergone sea change. In the
nineties the corporates could live through by following the
Nixon doctrine – “thou shalt not be found out”,
this option is no longer available in the new economy. Companies
which are not transparent will pay a heavy price. New York Attorney
General Eliot Spitzer’s success in bringing US’s
top financial institutions and corporate giants like Sandy Weil
to their knees was due to the power of internet. It was the
clinching evidence of their inhouse e-mails that helped him
build cast iron cases against Solomon Smith Barney and Merrill
Lynch. There is only one certainty in the uncertain world of
today, that if you try to hide behind stealth and translucence,
you are certain to be found out”, claimed Dr Mehra.
He lamented that, “India’s Joint
Parliamentary Committee had missed a terrific opportunity of
cleansing its political system in the way President Bush had
done oon after the Enron scandal in the US. It is a cardinal
mistake not to capitalise the post Enron righteous reaction
and indict those responsible for UTI scam which has inflicted
so much suffering to India’s common man and has been largest
single factor responsible for shattering public confidence in
the stock markets”.
Dr Mehra said that the basic reason for the
recent corporate collapses is the “mortal fear in which
the today’s CEO lives of the stock market which forces
him to inflate quarterly earnings. We have to educate investors
to ignore quarterly reports and take a long view of the company’s
performance”.
He asserted, “the heart of corporate
governance is the independence of directors. Directors will
never be independent unless they are recruited and paid by an
outside agency. World Council for Corporate Governance is helping
establish such an agency for recruitment and placement of Non
Executive Independent Directors. But non executive directors
will be ineffective unless we can restrict the number of directorships
an individual can hold and take up with non performing directors”.
