Shyamal Majumdar: India Inc's CFO-bashing

THE HUMAN FACTOR

The derivatives crisis has exposed the poor corporate governance & risk management standards in many companies.

Derivatives, a fast-growing category of contracts whose value is derived from some underlying assets such as bonds or stocks, has suddenly become a dirty word and a source of public anxiety.

Many Indian companies, which bought derivative contracts and lost money, are either suing their bankers for mis-selling the products or are busy disowning their chief financial officers (CFOs).

Software company, Hexaware, for example, fired one of its senior employees for intentionally withholding information regarding risky transactions from the senior management and board of directors.

Another small company based in Chennai, which has taken its banker to court, says its CFO had honest intentions but got fooled by the hard sell of the bank concerned. Convinced that exotic derivatives transactions can make good money for the company, the CFO persuaded the top management to sign the contract. The bank fooled us and the CFO just couldn't deliver, the company later said.

The bank, on its part, says it was dealing with a company's CFO and not an accounts clerk, and has submitted to the court voice recording of detailed discussions between the CFO as well as the top management with bank officials on the potential risk of the transaction.

Yet another south-based company said that it had authorised its CFO to deal with all matters concerning derivatives transactions and that the bank lured him to enter into an exotic contract with misrepresentations and false promises.

While the legality of these claims is to be decided by the courts, independent management consulting firms say the common factor in these cases is an abject failure to recognise collective responsibility and poor corporate governance standards in most companies.

"When the going was good and the deals made pots of money, the boards took the credit for smart treasury operations despite the fact that most derivatives transactions are, by their very nature, nothing but sophisticated betting. Now that the party has ended, they are blaming the banks and the CFOs and distancing themselves from the decisions," says a consultant.

Another consultant rubbishes the claims made by some companies that these deals were not approved by the board of directors. Most of these companies have mandated full board approvals for taking even a small loan. It's thus inconceivable that the CFOs alone were authorised to approve such exotic forex derivatives deals.

In any case, under Clause 49 of the listing agreement, companies are required to lay down procedures to inform the board about the risk assessment and minimisation procedures, and to ensure that executive management controls risk through a properly defined framework. But very few seem to be taking this seriously.

For example, many companies got into such exotic deals without having a proper currency risk-management in place. A Mecklai Financial survey, published also in Business Standard, showed that two out of five treasuries don't even bother to measure their currency risk, let alone manage it; and more than half didn't have a risk-management policy.

To be sure, Indian companies aren't alone in this. There are examples galore all over the world of company boards quickly blaming either their banks or the CFOs for derivative deals that have gone sour.

A few months back, Gibson Greeting Company, which lost $25 million on derivatives trades, promptly sued Bankers Trust for luring its CFO into excessively speculative deals by deception, cheating and fraud.

Some of the cases have been really murky indeed. A few months ago, Divania, Italy's Italy's 10th largest exporter, sued Unicredit, Europe's second largest bank, for fraud and usury, for having been sold derivatives contracts that lost money, forcing the $100-million company to shut down. The origin of the catastrophe was a credit swap contract Unicredit forced Divania to sign, under the threat of cutting credit channels to the company. Divania, however, secretly filmed some of meetings with the bank advisors, showing how the bank manipulated documents and made speculative deals without its consent.

However, the only silver lining is a few Indian companies and banks have preferred to go off the beaten track. Mumbai-based Alok Industries, for example, has an elaborate system in place to make it a collective decision. Every transaction other than a plain-vanilla forward cover is signed by the treasury head, the CFO and then the MD.

Similarly, while quite a few banks have thrown their codes of conduct to the winds to sell impossible dreams to unsuspecting clients, others have chosen to play strictly by the book. Standard Chartered, for example, does not allow any of its officials to sell forex derivative products to a company if it doesn't have commensurate risk-taking ability.