SOCIETY FOR CAPITAL MARKET RESEARCH & DEVELOPMENT
An Unusual Whistle Blower
L. C. Gupta*
1. The six-month old feud between the Ambani brothers, Anil and Mukesh of the Reliance group, has suddenly taken an unexpected new turn in the last few days. Anil refused to sign the 2004-05 Accounts of the Reliance Industries Limited (RIL). He has publicly made several serious allegations concerning corporate governance in the company, even though he is second in rank in the company’s hierarchy, with the designation of Vice-Chairman and Managing Director. It is a rare case of Whistle Blower emerging from a company’s top management cadre.
2. Two important questions arise: first, how should investors view this development and, second, how should the market regulator handle this problem. My discussion will be focused on these aspects.
3. From the perspective of investors and in view of the need for strengthening the corporate governance system, an exposure of realities should be welcomed. Family-controlled companies dominate the Indian scene. Unless the weaknesses are exposed, there would be no pressure for change. That the exposure has resulted from family feud is incidental. Such weaknesses are known to be quite widespread but hidden from view. In human affairs, there is generally a tendency to ignore a problem unless it has become a festering wound.
4. From the regulatory viewpoint, a case of this kind is very useful because it provides hard evidence from the horse’s mouth. This is an excellent opportunity to the regulatory authorities, specially SEBI, to speed up the corporate governance reform. The manner in which the so-called “independent directors” are functioning requires a hard look. Are they carrying out their task diligently? Is not SEBI living in a world of make-believe so far as this system is concerned?
Break the board’s coziness
5. The Reliance case confirms why most of the ordinary investors remain skeptical about the quality of corporate governance in the majority of our companies. Most of our private-sector corporate boards still continue to be chummy type of cozy clubs, lacking a questioning attitude. This kind of culture must go in order to improve the quality of deliberations and decision-making in the boards.
6. The Reliance case exposes the bogusness of the high profile and over-paid independent directors. These directors should be asked to explain how could they allow serious breaches of corporate governance. Did they ever record their dissent?
7. I have been on many boards and seen them from inside. I have also conducted extensive empirical research on directors’ attitudes and behaviour. In an earlier book, Corporate Boards and Nominee Directors, (Oxford, 1997), I had strongly advocated the need for overcoming the ‘groupthink’ tendency in boards, i.e. an overbearing concurrence-seeking tendency, which regards dissent as bad etiquette and unanimity as more important than the board’s quality of decision-making. This often leads to suppression of frank discussion of the various aspects of a problem. The role being played by independent directors should be evaluated, keeping this context in view.
Ethics and societal issues
8. It is well recognised that corporate governance goes far beyond legal technicalities and niceties. It involves ethical and societal issues, not always easily defined because of constant change. Of course, legal compliance is a must but that is not enough from governance angle.
9. My personal experience as Company Law Board nominee on the Board of Shaw Wallace Company had brought home to me the immense potential for misuse in the case of transactions, specially inter-company investments, within group companies. Many of the alleged irregularities in the RIL group also relate to inter-company dealings within group entities. The RIL has many subsidiaries and subsidiaries of subsidiaries. The group has a complicated pyramidal structure. There is a web of transactions among these interrelated entities.
10. I am not sure whether the audit committees of RIL and other listed companies of the group carried out their tasks diligently. There are allegations of impropriety in regard to related-party transactions. The audit committee members may be questioned on such transactions.
11. The present system of quarterly compliance reports submitted by companies to stock exchanges under Clause 49 of listing agreement would never be able to uncover many serious types of irregularities. It is a merely box-ticking exercise. These quarterly reports mean a huge amount of paperwork but very little effect. More meaningful checks on corporate governance can be evolved through an arrangement which involves institutional investors.
12. While refusing to sign the RIL’s accounts, Anil has made specific allegations about irregularities and improprieties being committed by the company. According to him, the company’s accounts did not provide the necessary explanations, details and disclosures and there was silence on related-party transactions, specially those involving Infocomm group.
13. The issues raised by Anil Ambani are too important to be ignored. The RIL has often been involved in controversies and is, therefore, like a hot potato which may be passed on by one authority to another and left with such junior levels as stock exchange administrations!
High-level committee should investigate
14. I believe that the government needs to adopt a bold approach and take the bull by the horns. However, there is a delicate problem here. The SEBI, as a statutory body, can deal with violations of law and of its own regulations. I am not sure how far it can go regarding violation of Clause 49. Some parts of this clause are non-mandatory and many parts are only loosely defined.
15. Nevertheless, the situation which has emerged provides an opportunity to SEBI to drive home the point that corporate governance irregularities would not be tolerated in such a large company. A practical approach which SEBI may adopt would be to appoint a high-level committee of independent experts to investigate each allegation from the corporate governance angle and to judge whether “best practices” have been followed. The findings should be made public.
16. Ordering a transparent investigation would convey an important message to Corporate India. If nothing wrong is found, it would help to remove doubts in the public mind; if the company has made mistakes, it would have the opportunity of correcting them and would become stronger. Hence, an independent investigation by experts would be the best course to adopt from every viewpoint in this case. It is not enough to say that SEBI is keeping a watch over the situation.
* Dr. L. C. Gupta is Director, Society for Capital Market Research & Development, and former Member of SEBI.
See the published version in The Economic Times dated May 10, 2005 (Editorial Page).