ETHICAL GOVERNANCE

[Dr. Sanjiv Agarwal]

Ethics and Integrity

Ethics and integrity are very important for developing democratic governance capabilities. Corruption in public life has a strong adverse bearing on the climate for governance. Factors that encourage corruption in the Indian context, are: scarcity of goods, lack of transparency in decision-making and delays in bringing the guilty to books. Corruption also flourishes because it is a low risk, high profit business. An active public is the ultimate beneficiary and the only guarantor of transparency and accountability.

As governance improves, and managers and professionals begin to work in their investor's and client's interests, everyone benefits. Resources are not wasted. Investors become more confident that they will get a return and become more willing to entrust managers even those they know less well, with funds. Access to finance expands.

Ethical Business Practices

Successful Corporate Governance underscores the importance of adopting systems that ensure adherence to ethical business practices, spotting deviations and stamping them out since unethical practices reduce productivity, drain resources, and cause significant behavioral issues.

Unethical business practices lead to financial losses and could be construed to cover:

o                    Commissions/benefits

o                    Procurement frauds

o                    Misappropriation of Funds/Assets

o                    Manipulation of Company Data/Records.

o                    Stealing Cash/Company assets.

o                    Unofficial use of Company's material/human assets.

o                    Activities violating Company policies.

There is a growing realisation that good Corporate Governance is a must not only in order to gain credibility and trust but also as a part of strategic management for survival, consolidation and growth. There is, therefore, a demand for simplification, greater accountability and transparency, necessitated by increasing investor awareness of competitive market forces.

In recent times, unethical business practices have unfortunately assumed gigantic proportions in Indian businesses causing great loss to shareholder value. Often the malady, if checked in time, can be curtailed and the losses minimised. This has prompted several Indian companies to adopt prevention as well as detection systems to arrest this agonising trend.

It has been now globally recognised that corporate growth is value driven and value enhancement in the product of good corporate governance practices and respecting shareholder's and stakeholder's concerns. It also results in growth of market capitalisation and facilitates access to capital and growth of capital market which drives the economy.

International experiences demonstrate that the synergetic combination of anti-corruption and ethics, and integrity improvement, oversight and citizen participation actions can facilitate transparency, accountability and responsiveness as part of democratic governance capacity building.

After the unpleasant episodes in corporate America, India  and elswhere in the world, many researches and debates went on to conclude that it was the result of CEO's or CFO's personal greed and lack of integrity. No organisation that is founded on a strong base of values can expect to sustain, let alone grow, over a long period. The concept of corporate responsibility has gained importance in last five years and it appears that many companies are now 'back to basics' in management focusing on value based management.

There is a growing realisation that business will succeed only when founded and run on sound principles and beliefs. 'Values' are those that are nurtured, developed and cherished based on one's principles, faith and belief. In turn, values give ethical standard, attitude and behaviour. Unfortunately, impact of globalisation, changing aspirations, fast paced life style and expectations of younger generations, all have provided temptations for change in values.

The credibility offered by good corporate governance procedures also helps maintain the confidence of investors - both foreign and domestic - to attract more "patient", long-term capital and will reduce the cost of capital. This will ultimately induce more stable sources of financing.

The failure to implement good governance procedures has a cost beyond mere regulatory problems. Companies that do not employ meaningful governance procedures will have to pay a significant risk premium when competing for scare capital in today's public markets. The failure to implement good governance can have a heavy cost beyond regulatory problems. Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets. In fact, recently stock market analysts have acquired an increased appreciation for the correlation between governance and returns. In this regard, an increasing number of reports not only discuss governance in general terms, but also have explicitly altered investment recommendations based on the strength or weakness of a company's corporate governance infrastructure.

Good Corporate Governance - an Ethical Attitude

Corporate governance is an ethical attitude. A detailed analysis of corporate philosophy and practices adopted by companies reveal that good corporate governance encompasses within it-

- transparent business operation and accountability with focus on core values - customer focus, team work, leadership, innovation, integrity, respect for people, performance and community welfare.

- uncompromising emphasis on integrity and regulatory compliance to achieve excellence.

- board independence and commitment to creation of wealth for shareholders.

- adherence to financial, legal  and environmental obligations.

- practices that result in control  of company in a regulated manner which makes management transparent, fair and accountable.

- sustained corporate growth and long term benefit for stakeholders.

-                       maximum information to all stakeholders

-                       respect for law and fair business and corporate practices.

-                       all round excellence with ultimate objective of enhancing shareholder value

-                       Integrity, transparency and compliance with law while dealing with customers, suppliers, employees and other stakeholders.

-                       fair dealing with all, active contribution to society and best possible investors services.

-                       corporate discipline.

-                       way of life, not just a set of rules, keeping stakeholders in mind while taking every business decision.

-                       high standards of ethics, sound business decisions, prudent financial management practices, professionalism in decision making and conducting business in strict compliance of law.

-           out performing organization leading to employee and customer satisfaction and maintaining global standards of corporate responsibility.

-                       attainment of total transparency, accountability and equity in all dealings.

-                       enhancement of overall business valuation for the owners.

-                       openness, credibility and accountability in corporate practices and conducting business to building confidence of various stakeholders.

-                       satisfying the spirit of law, not the letter of law.

-                       clear distinction between personal  and corporate resources, truthful communication, simple and transparent corporate structure and being trustee of capital, not owners.

All the above statements are one or the other form of expressing good corporate governance.

Rewards of Good Governance

A business that makes nothing but money, is a poor kind of business - Henry Ford said.

It is almost a truism that the adequacy and the quality of corporate governance shape the growth and future of any economy.            Good corporate governance contributes to the efficiencies of a business enterprise, to the creation of wealth and to the country's economy.

Creation of wealth is the fundamental of any economic policy. India's civilisational economic policy rests on two fundamentals wealth creation and wealth sharing. We need the basic understanding to create wealth. Because it is only when we create wealth that we can distribute wealth.

Studies suggest that markets and investors take notice of well managed companies, respond positively to them and reward such companies, with higher valuations and easy access to low cost capital. A common feature of such companies is that they have proper systems in place which allows adequate freedom to the independent boards and management to take decisions towards the progress of their companies and to innovate, while remaining within a frame work of effective accountability. In a nutshell, such companies have a system of good corporate governance.

Companies with better corporate governance practices enjoy a premium in the financial markets and can significantly improve their market valuation. The listed companies with better governance practices command a superior premium as compared to average valuation for the relevant sectors. Also, the strength of stakeholder relationships play an important role in determining the quantum of governance premium enjoyed by the companies.

Governance and Excellence

Corporate Excellence and Corporate Governance are so intertwined that achieving one at the cost of the other is unimaginable. Corporate Governance is the most appropriate tool for achieving Corporate Excellence. Companies should identify, assess and establish core values, core capability and core purpose to achieve Corporate Excellence. For Corporate Governance to lead to Corporate Excellence, it must be structured according to the principles of the Vedas, aligned with natural law. High performance or excellence in an organization can be achieved by providing: greater customer satisfaction, high employee morale and commitment, enhanced shareholder value and sensitivity to societal concerns.

Good governance is a necessary condition for achieving excellence, not a sufficient one. Good governance is a source of competitive advantage and critical to economic progress. The quintessence of Corporate Governance is transparency, accountability, investor protection, better compliance with statutory laws and regulations, value creation for share )as also for other stake) holders and societal value.

Corporate governance is a way of life not just a fashionable word talked in air conditioned seminar halls or board rooms. When we have any interest in any corporate, our some part of life is at stake. "What is at stake is our very way of life". It we are to survive, we must find a way to return compassion, wisdom and the highest ethical standards to our corporations.  And to our lives." [Lynn Brewer in House of Cards: Confessions of an Enron Executive].