The noughties has been a uniquely scandal-prone decade for global corporations. As the proliferation of NGOs and special interest groups suggests, the biggest fall-out of all of this has been the growing trust deficit in public perception. It’s a notion that Global Inc has quickly understood. The real crisis is that it is being imperfectly tackled.
Part of Global Inc’s problem is the alarming regularity with which scandals have occurred this decade. It started with Enron’s flameout in 2001, was followed by serial accounting scandals (WorldCom, Xerox, Tyco), continued through the mid-decade (AIG, Xerox) dragged on till the global meltdown caused by the sub-prime crisis in 2008-09 and was topped out by British Petroleum’s oil spill in the Gulf of Mexico in early 2010. India has not lagged — Ketan Parekh, Global Trust Bank and, of course, Satyam in the penultimate year of the decade.
Today, thanks to accounting laws, disclosure norms and regulations that grow tighter with each passing scandal, corporations are being forced to focus on fulfilling the legalistic aspects of their businesses. Indeed, the need to meet stringent compliance requirements has given rise to a whole new profession of compliance officers. Today, few CEOs worth their company’s share price will certify annual reports without fully verifying the information on which they're signing off.
The other virtuous fall-out of the scamstering decade has been the wider focus of corporate managements on stakeholders rather than just shareholders. Although market capitalisation and share price swings remain variables that consume management concerns in listed companies — the quarterly disclosures being a particular bane — the wider universe of suppliers, customers and employees is coming in for greater attention.
Not for nothing do mega-CEOs like Carlos Ghosn and BP’s Tony Hayward (before his ignominious exit) embark on meet-the-customer tours in key markets. Such terms as Town Halls, once a rarity, have become the staple means for CEOs of large corporations to regularly engage with employees.
But there are weaknesses to practising corporate governance by the book. The first and most obvious, all of this doesn't really stop a determined scamster. Nothing illustrates this better than Satyam, a seemingly successful and profitable company headed up by a promoter with an awesome reputation for respectability and for his social projects. Being listed on the US exchanges, his company was subject to Sarbanes-Oxley accounting standards. Despite this, Ramalinga Raju was — according to his own confession — able to overstate profits for seven years.
The second is that the governance-by-due-diligence technique is not altering public opinion in a significant way. That is why, for instance, Dow Chemicals cannot, try as it may, shake off the stigma of the Bhopal gas leak tragedy even though it had nothing to do with it. The incident that killed 4,000 and maimed nearly 200,000 people occurred 17 years before the conglomerate acquired the US parent Union Carbide Corporation (UCC). Nor does Dow own UCC’s Indian subsidiary Union Carbide India Ltd (UCIL) that operated the plant that caused the disaster. That was acquired by Kolkata-based Khaitan group's McLeod Russel in 1994 and the name changed to Eveready Industries Ltd.
In strict legal terms, therefore, the calls for Dow to make good shortfalls in compensation to the gas leak victims are untenable. But there is the human dimension to consider. There is any number of people suffering long-term health effects of the gas leak. As the parent of the US shareholder of the Indian company (UCC owned 50 per cent of UCIL) that was responsible for one of the world’s worst industrial disasters, Dow will find it difficult to escape being guilty by association. That will remain as true for it as it will for any future potential for BP, despite the latter’s $20 billion spend on compensation and clean-up costs.
For that, it can blame the sharp deterioration in corporate governance standards in the noughties. As a result of it, staying on the right side of the law is no longer an automatic guarantor of esteem in the court of public opinion.