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Governance failures

THROUGHOUT THE BUSINESS world, there is a renewed interest in redefining the subject of corporate governance with the sole objective of making it work. Fashionable as it was until very recently in seminar circuits and management schools, the core principles of governance seem to have been observed more in the breach. In country after country, there have been spectacular failures. The American model of governance has had a pivotal role in defining standards everywhere. For that very reason, the debasing of its values as seen in the subsequently discovered seamy scams have been widely commented upon. Throughout the boom decade of the 1990s the exceptionally strong U.S. economy lent extra credibility to the governance norm. Routine checks and balances that are embodied in any prudent system were either ignored or rendered ineffective in the face of a belief that the prosperous days will not end any time soon. Auditors, analysts, investment bankers, senior managers of well known companies and their directors are now in the dock for not carrying out their most elementary duties.

Cynics might scoff at the very idea of fixing a system that in hindsight has been a big letdown. However, there is no alternative except to buttress the ongoing efforts of the Governments, regulators and voluntary effort everywhere. Far too much is at stake to let the market forces alone take corrective action. Investors' faith, the bedrock of the capitalist system, has been so badly eroded that it will take the collective will of all concerned to restore credibility. In America, where the Enron collapse has presaged a wide range of equally sensational failures, a new legislation which has come into effect recently is noteworthy for its sweep as well as its enabling provisions to book corporate offenders speedily. Even as the regulators crack the whip, new shenanigans are being exposed by the day. WorldCom, which already held some kind of record for the magnitude of its accounting fraud, has been forced to admit to another $ 3 billion plus of deliberately misstated numbers.

Inevitably, in this season of justified scepticism over corporate behaviour, even the best-known names are not above scrutiny. The ongoing fracas concerning one of India's best-known groups, the Tatas, is an outstanding example. A group company, Tata Finance, had gained notoriety by reckless share market dealing. The Tatas' official view has been that a coterie of senior executives then in charge of its finance arm alone were responsible and that none from the promoters' side were aware of what was happening at the time. The problem at Tata Finance has been allowed to fester for more than a year since it first surfaced. The unending controversy has taken a toll not only of the image of the Tatas but also of their once acclaimed management practices. There are allegations that they have breached certain well-established governance procedures, by being derelict in controlling a group company. Very recently, a special audit report commissioned by the Tatas to fix accountability has intensified the controversy. A. F. Ferguson, one of the country's renowned audit firms, withdrew a report which allegedly looked at some of the other senior Tata executives' roles in the fiasco. The circumstances of the withdrawal are murky and the subsequent full-page advertisements released by the Tatas in the financial press do not clear the air. Without going into the merits of each controversy, it is clear that even with all its strengths, standing and goodwill, a very traditional industrial group has not been immune from the controversy sweeping the corporate world. In India as in the West, there are alarming signals of breach of trust in the system. All the more reason to refix it quickly.

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