D.Murali

Chennai: Living as we do in the post-Enron era, the crunch-in-progress in the realms of mega credits soberly makes it seem that it was not too long ago when the global energy giant with a tilted ‘E’ went belly up, causing tsunamis in the accounting profession and the regulatory mechanisms.

While Enron and WorldCom were watershed events caused by large scale failure of business ethics, the ongoing sub-prime crisis seems to be a master class in failure of risk management, feels Mr Ramesh Venkataraman, Managing Director – Asia Pacific, CurAlea (www.curalea.com), an international management consulting firm specialising in the areas of corporate governance, business ethics and risk management.

“How would you explain large global banks and investment firms not having anticipated the risks, when they should have been aware that mortgage lenders were chasing borrowers with lending practices that were too aggressive to be sustainable?” he asks during a recent lunch-hour interaction at Business Line.

“Although the situation does not suggest fraudulent intent, there certainly remains a question whether short-term results pressures drove risky behaviour,” rues Mr Venkataraman.

We continue our interaction over the e-mail. Excerpts from the interview.

What are the major challenges to Indian companies in the area of corporate governance and business ethics?

As Indian companies strive to take their businesses and brands global, the challenge would be to step up the governance and ethical processes to match global best practices. This shift is easier to achieve if the approach to these processes changes from one of compliance to that of value creation and sustainability.

Good governance can be as strong a differentiator as good strategy, and help attract the best customers, business partners and employees, apart from enhancing reputation and brand value. The economic benefits of this virtuous cycle, in a scenario where businesses vie with each other not only for market shares but also for scarce resources like talent, are self-evident. The narrow perception that business ethics is about avoidance of practices like corruption has to be replaced by a broader vision of the corporate’s ethical obligations towards all stakeholders.

Is the legal compliance to corporate governance an adequate baseline? Does this merit better monitoring by the regulator?

The corporate governance legislation in India has by and large kept pace with global developments. Hence the baseline is quite adequate. However, creating value would call for adopting the principles of good governance in spirit rather than the letter. This is something that cannot be achieved by regulation or monitoring but has to come from within. Moreover, corporate governance is largely limited to a company’s obligations towards shareholders. Good governance is about obligations towards all stakeholders, and applies equally to businesses that are not listed.

We see professional bodies training people to become independent directors. Can “independence” be taught? What can be the best practices that companies can adopt to fill up the independent director slots on the board?

Independence is more a state of mind than anything else. Eastern philosophy talks of liberation when one is able to be present in a situation and at the same time be detached and impartial, so anyone who can follow this can be a good independent director!

Companies can follow some norms that enable them to have good independent Boards. First would be to appoint as independent directors persons who have had good exposure to corporate management and the way corporates function e.g. senior managers, consultants, academicians, auditors, etc. Modern corporate working is extremely complex; notwithstanding their credentials, people from other walks of life might find it difficult to adequately appreciate its nuances to be able to pose a credible independent challenge.

Second would be to choose individuals who have a proven track record of work and achievement and have built a reputation for themselves, as they are unlikely to risk this reputation easily. A good yardstick of independence is to see whose reputation is enhanced more by the directorial appointment, that of the company or that of the individual?

Third, the process of identifying a good independent director should be as thorough as the search for a CEO, if not more.

Are there clear metrics to gauge the effectiveness of risk management?

Enterprise risk management has to have clear deliverables that are monitored, or else could end up as a mere compliance exercise. A good practice example is the Infosys annual report of 2005-06 that presents a comprehensive discussion on major risks facing the company. These include risks like client and geographic concentration, employee retention, foreign exchange movements, etc. One can visualise each of these risks having clear action plans and metrics within the company that help in their management. More than metrics, what differentiates an effective risk management process from others is its seamless integration with the company’s internal planning and target setting processes. Or else companies run the peril of the risk management process being seen as a time-consuming and superfluous activity.

Since companies are part of an ecosystem, where does their responsibility stop, when it comes to ethics and governance? To what extent should a company ensure the alignment of the practices of associates and employees, to its own standards?

Post the Nike sweat shop issue, the global trend has been for companies to articulate separate Codes of Conduct for vendors. These cover aspects that are sensitive from the buyer’s point of view e.g. labour practices, safety, environment, etc. The question is where the line should be drawn. Would you frown upon a vendor group company making political donations or facing tax cases in court? The general baseline is that vendors should demonstrate expected levels of integrity in activities that are directly related to the business with the principal. The expectations from employees would of course be higher and mirror the values of the employer.

Your views on corporate disclosure practices w.r.t. to governance, ethics and risks.

While disclosure norms are in place, variability in the quality of reporting is common as companies try and take refuge under legal subtleties. A classic example is the management discussion on risks that is mandated under clause 49. A perusal of published Directors’ reports gives a varied picture. While commendable disclosures can be observed by companies like TCS, Infosys and Maruti Udyog, a number of companies carry minimal or superficial comments on their risks. A good way to improve standards would be to make Corporate Governance ratings mandatory for companies. Agencies like CRISIL and ICRA currently offer Governance ratings.

As someone who has worked in the FMCG industry for over 20 years, do you think that in the face of cost pressures and earning expectations, ethics and governance may take a backseat and risks assumed beyond the optimal?

Not really. The role of effective governance increases in such a situation. The real risk for an organisation that is facing cost and profit pressures is that of its managers taking decisions that harm its brands, customer franchise and sustainability. An example is cutting back on R&D or brand spends to meet short-term profit targets. The oversight and whistle blowing framework in a well-governed company would normally be able to identify and prevent such actions before they can destroy concern value in a big way. That is the benefit of having an ethical ethos that has been built over time and guides the collective organisational behaviour.

With Indian companies on an aggressive M&A spree globally, what are the governance and ethics issues that come to the fore when integrating the cultures?

In the case of any M&A, conducting an ethics due diligence and managing the integration are important. In fact this presents a good opportunity for leveraging the best practices in the two entities. Global M&As are more challenging since compliance parameters, generally accepted business ethics norms and cultural aspects could vary across geographies. More importantly, in matters of ethics what would need to be adopted is the highest common denominator. For example, the consumer complaint handling norms for a Nano owner would have to be the same as for a Jaguar owner! This might sometimes raise the bar for the home operations. Herein lies the challenge as Indian companies go global, and also the opportunity.

You have been teaching business ethics in B-schools in India and abroad. Do you think that our education prepares students to the demands of corporate governance and ethics?

Business ethics and corporate governance are yet to form an integral part of the curriculum of most B Schools in India, although compliance elements of corporate governance are sometimes dealt with as part of business laws. Providing future managers a strong foundation on business ethics would be invaluable to Indian industry. Students need to be made aware of critical governance aspects like the ethical responsibility of a business towards different stakeholders, the handling of ethical and moral dilemmas in real-life business situations, the relationship between ethics and sustainability, CSR, risk and crisis management, integrity of performance measurement, etc. In my experience I have found students to be very keen to engage with these topics. The width of issues deserves a full-fledged paper on governance and ethics with adequate credits. Some B Schools have taken the initiative of including this in the curriculum, rather than view the subject as ‘non-job oriented’.

Is there a case for SMEs to have different standards of governance and ethics?

The basic principles do not change for SMEs, it is the application that needs moderation. Good governance and ethics are in fact more critical for SMEs for two reasons. Most Indian SMEs have or wish to become B2B partners for large multinational companies in India and abroad. The prospects of a sustained relationship with these global customers would depend to a large extent on the governance and ethics practices of the SME. Multinationals would be wary of forging an alliance with a SME of doubtful integrity, as the fall out for them globally could be high.

The second reason is that SMEs have lower risk thresholds and are more vulnerable to surprises. Governance practices like effective risk and crisis management and good safety policies are crucial in this context. However it would be unwise to burden SMEs with governance requirements applied to large, listed corporates. A smartly crafted and voluntary governance framework that is light but focused could make a world of difference to an SME.

Do you see CSR emerging as an important element of governance?

CSR has evolved considerably over the years, from philanthropy to initiatives that are closely linked to the core business strategy of the firm. This is a welcome shift as CSR then forms an integral part of the business vision and thus is assured of continued focus of the company as well as the involvement of the line managers. Also, CSR in such cases is at a scale that can make a significant impact on society. ITC has been pursuing such an integrated approach quite effectively over the last few years. The front runner in this context of course is Amul, a classic case of integrated CSR at a time when corporate governance was not even a topic of discussion!

The future of business ethics, as you see it…

Business ethics is something that keeps evolving all the time, as the expectations of newer generations keep increasing. For example, the concept of an equal opportunity employer seems no longer a matter of choice of the owners, as the new generation would like to work for companies where everyone has a fair shot at the top slots. While the core principles do not change over time, the challenges that these principles are put to do change with time. Anticipating these challenges and responding appropriately helps shape a progressive organisation.

**BioMr Venkataraman’s most recent work experience was with Unilever plc as Director – Corporate Audit, Asia during 2000-06, a role in which he was responsible for providing independent reassurance on major risks to the business in over 15 countries in the Asia Pacific region, with a high focus on China, Australasia, India and South East Asia. A significant part of this responsibility involved the review of governance risks and compliance to the code of ethics. Prior to this, he worked with Hindustan Unilever Ltd for over 18 years in a number of finance and business roles. He was also Financial Controller at Pond’s India Ltd during 1996-1999. Mr Venkataraman has been active in the academic circuit, teaching aspects of corporate governance and business ethics, both in India and abroad. Currently, as part of CurAlea, he is pioneering the concept of e-learning in the area of business ethics.