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Cover Story
 
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INDIA’S 100 MOST PROFITABLE COMPANIES WHO IS THE NEW NO.1?
India Inc. Needs a Lokpal too!
As India Intensifies its Struggle against Corruption in The Political Sphere, Virat Bahri wonders why The Debate on Transparency can’t be Extended to India inc. as well, and how B&E Power 100 Companies can play a key role
Issue Date - 21/07/2011
 
“In God we trust; all others bring data!” Dr. W. Edwards Deming, American statistician”

“Earnings can be as pliable as putty when a charlatan heads the company reporting them.” Warren Buffett, Chairman, Berkshire Hathaway”


Ruling parties of the day in India are not generally concerned about any issue of voter confidence they face; unless of course it happens in election year. They are quite self assured about the incredibly short public memory, just as they are of their ability to sway popular opinion back in their favour through some deft political maneuvering as the time comes.

This time, though, matters have been very different, at least so far. Even as the first half of year 2011 comes to a close, the issue of corruption and how it stands in India’s way to becoming a First World country, has become too well etched in public memory for UPA to brush under the carpet. And this is a great victory for the ‘Anna Hazare’ brand of activism – however you may perceive it. For a nation with a score of 3.3 (equal to Albania, Jamaica & Liberia) and a rank of 87 in the Transparency International’s Corruption Perceptions Index 2010, such a movement deserves Godspeed.

In these turbulent times, one does wonder, though, on the reasons why the debate on transparency still centres so much on politics and not on corporate India. That is surprising, since the 2G scam is where the most serious questions on the government started getting raised. Five executives were also arrested - Unitech Wireless (Tamil Nadu) Ltd. MD Sanjay Chandra, Swan Telecom Director Vinod Goenka and three high profile executives from Reliance ADAG.

Consider an interesting contrast in the following two situations, where protests on transparency came from unexpected quarters. While we recently witnessed how yoga guru Baba Ramdev took up the cudgels against the centre to declare black money at Swiss Bank accounts as national property, the US saw four orders (all shareholders of Goldman Sachs) of Catholic nuns protesting in the month of April against the excessive compensations amounting to around $70 million paid by Goldman Sachs to CEO Lloyd Blankfein and four other top executives for year 2010. Activism in the US face a significantly enhanced level of scrutiny from all stakeholders. In India, however, it’s still largely about government and bureaucracy, apart from serious land acquisition related protests from communities like Posco, Vedanta, Arcelor Mittal and Tata Motors. Of course, America learnt it the hard way when it was rocked by a series of accounting scandals like Enron, Worldcom, Tyco, AOL, Bristol Myers-Squibb, Merill Lynch, Lehman Brothers, et al. The Sarbanes-Oxley (SOX) legislation of 2002 took some pathbreaking initiatives by making the CEO and the CFO accountable for the certification of quarterly reports and disclosure of all known control deficiencies and acts of fraud. Besides, it also made the management and the independent auditor responsible for reviewing the company’s performance. A 2009 survey of financial executives by SEC reveals that while there is significant cost involved in compliance, the benefits are many – 73% respondents said that their company’s internal control structure has improved, 71% admit that the audit committee’s confidence in their companies got better, 49% appreciate the better quality of the financial reporting, 48% say that the ability to prevent and detect fraud has increased and 40% agree that their confidence in other companies with SOX compliance has grown. A Lord & Benoit report showed that two years post-SOX, share prices of companies that enhanced internal controls for both years increased by 27.67%. For companies that only got SOX smart in year 2, share prices increased by 25.74% and share prices for those who failed to implement SOX at all declined by 5.75%.

 
Of course, all regulation in America itself looks on weak legs since it could not prevent the Lehman debacle and its aftermath, and America still laments the fact that no prosecutions have happened. The Financial Crisis Enquiry Commission was set up to analyse the root causes and deliberate on accountability for the crisis, which destroyed around $11 trillion in household wealth and led to 26 million Americans going jobless. The commission concluded that regulators and companies both failed in their duties miserably – they had enough warning signs and could have helped matters. That is perhaps why the Say on Pay bill, which was an important section of Barack Obama’s political agenda, gets American shareholders incensed like nobody’s business.

If the stringent laws in the US can fail to control human vice, then India needs to wake up immediately. Cases like Satyam have been few and far between so far, but we could be indeed committing the same mistake as the Americans did – they ignored the fine print when the times were good and the real estate bubble was in the pink of its health. India is a booming economy and corporates are showing stupendous results on the back of a strong domestic market. However, closer analyses reveal that a bit of paranoia wouldn’t harm at all. KPMG’s Fraud Survey Report 2010, which interviewed senior management of 1000 top Indian companies, found that 75% of respondents believed that fraud in India was on the rise and 81% said that the biggest issue was financial statement fraud. Major factors that are believed to be increasing such incidents include “ineffective whistle-blowing systems, lack of objective and independent internal audit functions with forensic skills, inadequate oversight of senior management activities by the audit committee and weak regulatory environment.” Also the maximum percentage of respondents from financial services industry perceive that the fraud in their industry is significantly high, followed by consumer markets. This is indeed a serious issue, since the financial services industry is a cornerstone of any economy. In B&E’s Power 100, 30 companies belong to this industry. In India, the public sector also controls around 250 large (40 companies in Power 100 2011) and small organizations, and a number of them are falling behind in terms of adhering to corporate governance norms. It is equally important to have independent committees to assess whether the government itself is doing justice to minority shareholders. As the government plans greater divestment from PSUs, such transparency could in fact be a blessing in disguise.

          

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