Contrary to the dictates of common sense – and surprisingly – the positive potential of good governance is quite often not completely realised and the destructive nature of bad governance is underestimated. It is, therefore, necessary to put things in perspective for a serious appreciation. It is like light and darkness: the absence of one makes the significance of the other clear. When a company’s stocks are viewed by stock markets and analysts as the “it stocks”, much like the “it girl” in Hollywood parlance, investors, young and old alike, join the gold rush. It takes an apocalyptic collapse of the company to end the intense phase of mass euphoria and contemplate what is happening in the firm. Before the sub-prime crisis, barring the likes of Kenneth Rogoff, Robert Shiller, Nouriel Roubini, Raghuram Rajan, who were the Cassandras, no one dared to question if financial innovation had made the world riskier. People begin to talk about “governance deficit” only when multiple manifestations of that deficit show up, threaten to impact the economy and pull it down.
Lack of governance, whether in a company or in a state, has a distinctive characteristic: it is generally not manifested till the failure of governance becomes so acute that its impact can no longer be hidden, something like a tumour. If detected well in time, it can often be treated and cured with minimal invasive procedures. If detected at the fourth stage, even intense doses of chemotherapy offer little help. However, the early symptoms are often not noticed, even ignored.
Patterns of failure in corporate governance (“Lessons in corporate governance”, May 10, 2010) show instances in which deliberate intransigence in companies necessitated by the managements’ desire to avert an immediate crisis led to a series of consequential infringements, which cost the companies dearly. Boards were blissfully unaware of the infringements, or were kept in the dark by the managements. Even when the boards noticed this, their first reaction was to ignore the signals, treating them as weak. This was followed by attempts to cover up misdemeanours under the guise of business expediency, or to find convincing justifications. Behind facades of activity and teamwork were unethical behaviour, internal aggression, punitive environment, ingratiating behaviour, which resulted in the elimination of critical upward communication. Such companies and their boards suffered from the “Dhritarashtra and Gandhari” syndrome. Dhritarashtra was born blind; Gandhari had eyes but chose not to see. And what is true for companies is also true for the state.
There are two reasons for this pattern. The first is based on intellectual dishonesty and ethical deficit, and the second on a leadership crisis which can result either from an absence of leadership or an autocratic leadership that stifles dissent. In the first case the organisation becomes arrogant and suffers from a delusion of invincibility, and in the second it becomes insipid. In either case, a handful of people, or a coterie, derive significant benefits from the specious association of money and power, and prefer not to disturb the honeycomb. They suffer from an almost psychotic belief: since all beneficiaries are in the game together, the Omertà code will prevail. They are equally aware that the leadership is either ineffective or too weak to protest, or is a co-signatory to the Omertà code. The rents derived from cheating are short-lived, but it’s the rent-seeking activity that provides the initial impulse. The presence of a nexus boosts rent-seeking, which, in turn, leads to further rent-seeking, and this chain reaction goes on unabated at least for sometime, viciously ensnaring the company.
Governance failure can often trap a state in a similar deadlock. Such a failures, thus, gives rise to a vicious circle and negative reinforcement occurs at each turn of the circle, drawing companies, enterprises and governments in a debilitating downward spiral.
Mock Turtle describes the vicious circle when it tells Alice: “Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic — Ambition, Distraction, Uglification, and Derision.”
Does the entrapment in the vicious circle pronounce an end? Yes, under certain circumstances. And this results in bankruptcy, financial deprivation and economic disaster.
But is it possible to turn the vicious circle into a virtuous circle? The vicious circle and the virtuous circle reinforce themselves through a feedback loop. Some companies in India and abroad have never got themselves trapped in a vicious circle since they recognised the importance of negative feedback and took timely corrective actions.
Those who have successfully come out of a vicious circle and have moved into a virtuous circle or remained in a virtuous circle have followed a sequence. First, there is a desire to change — it must be strong and not polluted by personal ambitions and greed. From this desire arises the need to introspect continuously. This will work if the will to change is strong. Introspection leads to an analysis of what went wrong. Analysis is different from investigation. The former is positive while the second can be debilitating. Introspection and analysis lead to a rational assessment and understanding of the past. After this, goals are determined once again, or “recalibrated”, and strategies are formulated. Honest goal-setting, serious strategising and planning help sequence the changes.
At the same time, it is important to take into account the availability of resources, and assess bottlenecks and downside risks if things go wrong. For this to be effective, a conscious balance between the aspirational intent and the resource intent is necessary. An excess of the former leads to a stretch target that could easily translate into an improvement of organisational productivity. However, a deficit results in economic wastage. The next stage is implementation. It requires the right tools, adequate resources and, most importantly, cost-effective monitoring capabilities.
But at every stage, feedback is important and no negative feedback must be filtered. Feedback helps reinforce and invigorate positive action. Overarching this sequence is the willingness to recognise and reward excellence and merit. In companies, it is manifested in the judicious selection of board members and the C-suite. In the state, it is manifested in the appointment of the key functionaries of the government, state-owned enterprises and para-statal organisations.
Introspection, recalibration, planning and implementation, reinforced by continuous feedback, have kept successful organisations in a virtuous circle. India followed this approach in the Golden Age. The Greek and Roman civilisations also adopted it. The rest is history. So, what should be done now?
The views expressed are personal
The author is a former executive director of Sebi and is currently associated with International Finance Corporation’s Global Corporate Governance Forum and World Bank
