Corruption in India and Corporate Governance

In the backdrop of Mr.Anna Hazare's heoric fast  for Jan Lokpal Bill which ignited the imagination of middle-class, I wanted to bring a related but less-talked about aspect of corruption in India. Corruption in Govt offices has got media glare and rightly is the subject of Jan Lokpal Bill. But the part that is left out is the truth that the money that corrupts the Govt. offices largely come from corporate sector. Many of the corporate heads would argue that a company has only one goal: increasing shareholder's value. To increase shareholder value, company must grow revenue and profit. Faster the growth [compared to its competition], more the value returned to its stakeholder. When there is cut-throat competition in the market, growing faster than others require the company to find means to influence the decision-makers overtly and covertly . When everything is transparent, companies have no option but to play by rule but when the enviroment is opaque with many hidden rules, a company will have to use those hidden rules to grow faster than the others. So it is really the stock market that drives the corporate use unconventional means and sometimes cross the line.
Is that a good defence? The answer will change depending on which side of the line you are. But reality tells us that across the world, corporates often failed to live up to high ethical standard when the going got difficult for them. The case of Enron, Financial Crisis in US and Europe, Global Trust bank, Satyam and many more in India tells us that there are far too many instances to gloss over.
It is common knowledge that in any electoral democracy, the cost of electoral campaign is borne out of corporate donation to a large extent. Now why would a company donate for a candidate? In the corporate world free lunch as a concept does not exist, let alone a freeloader. So when a company spends money on a candidate it is imperative that it expects something in return and there the story follows. Further corporate dole follows dole to the company through Govt. policies and omission of statutiory procedures. Gradually the symbiosis between corporates, bureaucracy and political powers grows and slowly takes over every function of Govt. aparatus. There you have a working model of modern-day electoral democracy.
It is obvious that without a cleaner corporate governance, the nation cannot aspire to bring down the menace of corruption. How does the Indian corporate sector look at this issue?  Here we have the 2010 survey report titled "Enhancing Transparency and Accountability in Indian Corporates" from KPMG and ASSOCHAM. One of the startling data that this report throws is

•  75% of the audience said that Fraud in Corporate India is rising
• 45% said that suspected/actual Fraud in their organizations are rising

"Weak internal control systems, eroding ethical values and a reluctance on the part of the line managers to take decisive action against the perpetrators are cited as the most vital underlying reasons for fraud being on the rise.", the report said.
It clearly identified that in India both regulation and ethical standard is less stringent and is a weakness in the system. This table provides an intersting comparison between India and US [borrowed]

Aspect of Governance	India	US
Board Performance evaluation	Recommended	Mandatory
Whistle blowing	Recommended	Mandatory
Executive sessions of Independent Directors		Mandatory
Disclosure of Board/committee charters		Mandatory
Majority Independent Directors	50% only if the CEO is board of Chair	Mandatory

As it is evident in India many of the crucial aspect of governance is not mandated by the Law. KPMG survey identified the weak regulatory mandates and low respect for the shareholding community as two major reason behind the poor accountability in Indian Governance structure. Many of the Governance failures are attributed to scenario in India where the promoter/owner override is an accepted norm.
The report ended with few recommendations. Many of those are about incorporating and strengthening Independent board members. The Ministry of Corporate Affairs (MCA) has proposed the New Companies Bill which aims to improve corporate governance by vesting greater powers in shareholders. Additionally the proposed Companies Bill heralds an era of shareholder democracy through an emphasis on self regulation, minimization of regulatory approvals and, increased and more transparent disclosures.
Shareholder activism is unheard of in Indian context but that is the way forward if we are to get rid of corruption/unethical practises in corporate sector. Here the middleclass really can make a lot of difference since most of the corporate workers belong to this section of the society.

Fight against Corruption or Fight for transparency?

Since 1995, Transparency International are publishing what they call Corruption Perception Index for many countries. Though their methodology and authenticity of the source of data [collected through third parties] are questioned off and on, people across nations by and large have accepted  TI's CPI model and relative ranking of countries. Something definitely is better than nothing. But even otherwise there is no universally acceptable method to this type of perception survey. India is quite used to find its place in the bottom quarter of this chart and tht did not change in 2010 too. India's ranking in 2010 was 87th from top in the list of 178 countries[Full report: http://www.transparency.org/content/download/55725/890310]. Top of the chart, incidentally is shared by the nordic countries alongwith Singapore and Newzealand. Interestingly all countries that are suffering from 2008 financial crisis have faced a downgrade.

The perception about India must have taken heavy hit with explosion of scams in 2010. We started with Commonwealth Games scam and then on the way picked up 2G scam and now we have the mining scam.  In fact another study published in this year by a Hongkong-based consultancy firm, PERC (Political & Economic Risk Consultancy Ltd) rated India as the 4th most corrupted country among 16 countries in south asia. Fact that agitation of Team Anna is getting so widespread support among the middle-class Indians is itself an indicator that these studies share some amount of truth about perception of India inside and outside this country. RTI act and CAG's last few audits ironically helped build this perception by exposing multiple irregularities and opaque handling of crucial policy issues at the high offices. The question that still refuses to go is this: Are we treating the symptom or are we fixing the problem.
Let me take the example of mining case. Multiple reports indicate that most of the irregularities happened in last 5-6 years. It started with China's massive infrastructure expansion fuelling the demand for iron in the international market and eventual skyrocketing of its price. Miners in Karnataka and Andhra border saw this as one time opportunity. To make most of it they expanded their mining operation. Bureaucracy and Opaqueness in regulatory process [approval needed from multiple govt departments] and lack of flow of information in different Govt structures, provided incentive to create a localized solution that led to collusion of mining mafias, politicians, and local Administrative bodies. Every stake holder got benefitted at the expense of the country and its people at large. Now ask the question: What will ensure that the problem does not repeat? A strong centralized Lokpal at best is an agency that can look at the issue after it has happened and only when someone reported. It can indict but it cannot prevent, let alone cure.
What we need is real-time, transparent and traceable information flow between multiple Govt/non-Govt agents and clear and established accountability of Govt structure. Accountability strcuture should be a simple directed tree and not a forest with multiple loops and deadends. Information flow would make people aware of what is happening and catch the inconsistencies in the decision flow. Automatic checks and balances can be built if we have right infrastructure for information flow. For example, by tracking the number of trucks crossing a checkpost every day, such a system could raise a red flag about excess mining when it exceeds a high-water mark. Software can make entire chain of process transparent and automated with few points of manual intervention. Regulatory bodies' work then gets reduced to monitor that system and track for any irregularities.
 The case of software eradicating the opportunities of corruption is not far fetched, in fact we already have many successful examples not only outside India but inside India. Local BBMP tax collection is one example that has thrown some of the touts out of job. IT depertment's computerization is another example. Now all your monetary transactions and tax collections can be seen online. Tracking the cases of income tax evasion has become lot easier for the IT depertment. But it needed investment from Govt and willingness of the depertment to undergo the painful transition process. Fact that India's banking system and IT depertment have already shown that they can do, is itself a great achievement and confidence booster. Now we need structural simplification, in Govt. functions, that establishes clear accountability till the lowest chain of command in Indian burueaucracy. We also need serious investment from the Govt in e-governance. Last but not the least we need overhauling in the legal system so that one does not need to wait his lifetime for resolution of his case. Incidentally none of the above will be addressed by Jan Lokpal Bill.
The fight against corruption started with RTI act but if we are to make this country corruption free, we must build a system of transparency in every walk of our life. That needs resolve, lots of it, steadfastness and character to persist. One cannot realistically expect to remove all the incentives of corruption from a system, one however definitely can expect the system to build enough barrier and easy detection mechanism so that cost of corruption become prohibitively large for the corruptibles. We also must remember that any socio-economical system is not a static system and must evolve with its constituents and for that the nation needs not activists but active, aware, involved and watchful citizens.