GN Bajpai is a genial, avuncular official. He exudes informality and wears his considerable power lightly.
Considerable power ? As the man who heads the Securities and Exchanges Board (SEBI) Bajpai's name evokes an instant response from those who keep India's financial and commercial wheels turning. It is Bajpai's responsibility to keep track of the markets and act as the social conscience of those who run the money economy. Business Standard caught up with Bajpai while he was in Delhi earlier this week. He spoke at length about his philosophy and his dreams of making corporates more accountable. Here are excerpts
On corporate governance and what it means
Let me relate an anecdote. A researcher in the US was rushing to the university. On the way he stopped to see his uncle who owned a proprietary shop. His uncle asked him where he was going in such a hurry. "I'm going to learn about corporate governance" replied the researcher. "Is that all ? his uncle said. "Let me tell you what corporate governance means". He took his nephew to his small shop and showed him an empty cigar box. "When this box is full, it means good governance. When it is empty, it is bad corporate governance" he said.
The incident indicates the need for corporate governance. In this case, all the resources of the businessman were his own and he reckoned, the profits should also be his own. But when individuals bank upon the resources belonging to various entities and take the personal responsibility for husbanding them, their job is to share their spoils with all the stakeholders.
Who are the stakeholders ? One set of peole are those who represent the financial resources of the company. And then there are the people who work to make the money grow, the employees, the HR backbone of the compnay.
If the company manages the resources well and distributes the gains appropriately, that is corporate governance.
Certain practices are appreciated at certain times not at others. At other times, these practices become misdeamnours. UK was the first to raise the flags. Now they are being raised in the US.
The Cadbury Committee in the UK was the first one on corporate governance. The the OECD Secretariat set out a code for good corporate governance. In India SEBI appointed the Kumaramangalam Birla Committee to try and synthesise processes which should be followed while governing a public company.
There are two aspects of this. One is the facade. For instance, there must be a certain proportion of management and independent directors - the latter should be 50 per cent of the board. The question is: how independent are these directors ? Then, the concept of audit committees which must have two thirds independent directors. They are supposed to review the revenues and assets of the company. But all these things were in place both in Enron and in Worldcomm.
What we're talking about is the facade. The spirit of corporate governance is different.
On world standards of corporate governance
The US used to be the Mecca of regulation. But I think we can now safely say that no more is the US regulatory structure an inspiration for the world. Tyco, Adelphi, Enron, Worldcomm.... I was reading the other day that in the past the trend was that older CEOs were being shunted out for younger ones in their 30s and 40s.
Now, the trend is the opposite - older CEOs are being preferred because the perception is that they will not be under so much pressure to perform and prove they can make money. Their tendency will be to provide safety, experience and less corner-cutting.
The fact is, a lot if introspection is required. If you read the full account of the collapse of Worldcomm or Enron, you will find these compnaies did not flout any corporate governance norm that Cadbury or OECD or Kumar Birla have set out. But it is not enough to be financially honest.
Companies and individuals have to be intellectually honest as well. Financial dishonesty can cause damage that can be repaired. But the harm done by intellectual dishonesty is irreparable. Take the case of Arthur Andersen. It was destroyed not so much because of financial dishonesty with Enron but by its intellectual dishonesty.
On the remedies
My belief is : good corporate governance will come if there is optimum wealth creation; if this wealth is managed optimally; and it is shared in the proportion that contributors have given of themselves in creating it.
In the West, there is a great concept of Sweat Equity. The theory is that ideas mean money. So there is no capital, only ideas and Employee Stock Option Plans (ESOP) are backed by ideas. Yes, it was all the rage in the US in the early 1990s. But this was seen as disproportionate sharing of wealth.
The solution is a principle-based approach not a form-based approach. An audit committee meets for 15 minutes to examine a balance sheet of a compnay that is worth Rs 15,000 crore. Is that the way to observe corporate governance ?
The fundamental purpose of the existence of a corporate body is to create wealth, to manage it and to distribute it. These are abstract ideas. I have asked Crisil and Icra, India's two top credit rating agencies, to provide the market with an instrument, a measure to assess the creation, management and distribution of wealth. The central theme of the instrument will be ethics and a trustee relationship between the corporate and the market. The underlying idea is that lack of corporate governance will - should - lead to loss of wealth creation.
We are going to discuss this more fully with corporates. But eventually, companies with a proven ethical base will find it easier raising capital than those that don't have ethical foundations. That is where we are headed and companies should prepare themselves for it. These instruments should be ready before the year is out and will be introduced soon after.
