Be open and ethical to earn respect

A few months after the Rs 7,400 crore Satyam Computers scam became public, Nasscom, the industry body for the Information Technology (IT) and Business Process Outsourcing (BPO) had set up an Ethics and Corporate Governance Committee (ECGC) in early 2009.

About a fortnight ago, the 11 member Committee headed by Infosys Technologies Non-Executive Chairman and Chief Mentor N R Narayana Murthy submitted its report that enumerated a set of detailed voluntary recommendations with an objective to establish the highest standards of integrity and corporate governance within the IT-BPO industry.  Although the recommendations are meant for the IT-BPO industry, its relevance and applicability cuts across all industries. Yes, the Satyam scam, perpetuated by the company’s founder and the then Chairman Ramalinga Raju, is the biggest blot in the country’s corporate history, but in India most listed companies suffer from lack of ethical business practices and transparency.

The big picture

There are over 6,000 listed companies in the country whose shares are widely held. But, according to industry experts, more than 90 per cent are not run professionally. As most companies are family-owned and run by the members from the promoters’ family, private interest always takes precedence over that of the shareholders’.

The board of directors too is a mere rubber stamp and the non-promoter shareholders are not active enough to raise questions. No wonder then, that barring a few, listed companies in India are low on corporate governance and business ethics.

The Committee’s recommendations, therefore, should be evaluated in this broader perspective. It is also important that in their own interest all stakeholders of a corporate entity –– the promoters, lenders, shareholders, customers and employees, urge their respective companies to adopt the best practices mentioned in the report. As Indian firms are spreading out to the global arena for their market and also to raise funds, high standards of ethics and corporate governance will help.

Moreover, transparency will also encourage more Indians to buy company shares, thereby making larger propotions of household savings available for capital formation. Only three per cent of the Indian population invests in stocks now.

Part of DNA

While recommending the best practices the Committee also made it clear that no amount of regulations will make a corporate ethical or transparent unless these qualities become a part of a company’s DNA. Governance also does not signify excessive focus on compliance but on effective stewardship of company resources and fair and transparent practices, which is the spirit of the report.

“Embracing good governance cannot be mandated and over regulated; it has to be deeply embedded within the basic fabric of every organisation. Best in class governance is voluntary and stems from the values and standards which are integral to the company and which it must uphold at all times,” Murthy averred.

On an overall plateau the Nasscom Committee said that the fundamental objective of “Good Corporate Governance and Ethics” is to ensure commitment of the organisation in managing the company in a transparent manner for maximising long-term value of the company not only for its shareholders but also its customers, competitors, employees and all other partners.

Eventhough the role of a company’s board is extremely important for effective and efficient governance, success hinges on how various interconnected building blocks of the ecosystem work together. Keeping the above objective in mind, the report is structured according to the different elements working together to build a framework with respect to the role of board of directors, customers, competitors, employees, company as an ‘employer’ and vendor partners.

Board at the top

Since the board of directors of a company has a critical role to play in governance and ethics the Committee want the board to be completely transparent and diligent about its functioning across the stakeholders to build and restore stakeholder confidence. The board should possess the necessary knowledge, expertise and skill-sets which are linked to the company’s strategic vision. Every director should receive appropriate training, to make them familiar with the company’s businesses.

The board should develop and disclose the frequency, mechanism and processes to evaluate, the performance of the board as a whole and the performance of each individual director. As per the rule 50 per cent of the board members must be independent, but in reality even the so called ‘independent’ members are picked up by the management. To ensure true independence, the Committee suggested companies should have an entirely independent nominating committee to select independent directors.

Audit committee

It also recommended segregation between the office of the CEO & the Chairman of the board and appointment of a Lead Independent Director who can act as the Chairman of the board. He should play a key role in ensuring that the functions and responsibilities of the board as outlined in their charters are reflected on the board agenda. Independent directors should meet as a group without the presence of management to facilitate an informal and transparent discussion on company matters and determine any important matters that deserve immediate and complete attention of the full board, the Committee recommended. There should also be an audit committee that plays a critical and a key coordinating role in ensuring accountability on the part of management, the internal and external auditors, external advisors, while safeguarding the overall objectivity of the financial reporting and internal controls processes.

The boards also need to take stock of the company’s disclosure practices and the audit committee needs to ensure the quality, timeliness, and accuracy of all disclosures and ensure they are complete and comply with all relevant rules and regulations.

Care for customer

Customer influences every aspect of business and is the foundation of any organisation’s success. So organisations need to adopt a code of conduct that will be followed by all its stakeholders –– management and employees that defines ethical practices with customers. The Committee is of the view that IT-BPO companies have regular interaction with customers to establish fair and transparent relationship with the clients including billing, accounting of professionals’ time, and sharing of relevant information such as proper financial, quality and productivity records.

Organisations must do periodic customer satisfaction surveys by independent agencies for constant monitoring and improvement of customer satisfaction.

Respect competition

Every business has to face competitors in their respective fields but organisations should have ethical practices with them. Your competitors today could be your partners tomorrow, so, no derogatory reference should be made against a competitor in dealing with a customer. One should also refrain from taking advantage of a competitor’s adverse situation.  

The Committee also suggested that companies should desist from using any direct or indirect proactive methods of poaching employees from a competitor. They should neither form cartels that can lead to unfair advantage in business bids which may result in another company being unfairly eliminated from competition.

Employees’ responsibility

Every employee should employ the best of his skill and ability to promote the interests and welfare of the company. They must ensure that all internal accounting and audit procedures help in reflecting the true and fair picture of the company’s business. No employee shall make, authorise, abet or collude in an improper payments & commissions or bribing and shall desist from using the organisations assets, confidential or proprietary information or position for their personal gain. It suggested that any suspected incident of fraud, mismanagement of company assets or theft should be immediately reported.

A company as an employer must provide a congenial and safe work environment to employees, provide equal opportunity to all, create appropriate grievance handing and enable processes for promoting learning and fair practices.

Whistleblower policy

One interesting recommendation of the Nasscom Committee is to create an open and transparent culture wherein the concerns of various stakeholders at all levels can be raised and expressed without fear of retribution. To achieve this objective, the Committee said that it is necessary to define and create a ‘whistleblower policy’ which will enable various stakeholders to report their concerns. Such alerts should be looked into, fully investigated and acted upon and the whistleblower’s identity must be kept confidential so that others are encouraged to offer such information.