Wednesday, September 2, 2020

Corporate Governance: Lessons from Chanakya

“It is clear that good corporate governance makes good sense. The name of the game for a company in the 21st Century will be conform while it performs.” - Mervyn King

Governance is an all-inclusive concept entailing effective management of human resources, public institutions and natural endowments in the interest of good life. Governance of a state implies the process by which the praja or the ruled are guaranteed the right to good life which interalia include good housing, sufficient food, quality education, justice and fair play, security of life, liberty and property. Corporate Governance is the system, set of processes, customs, policies and laws by which business corporations are directed and controlled.

The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the Corporation, such as, the board of directors, management, shareholders and other stakeholders (include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large) and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.

But then a question may arise as to Why Governance or for that matter Corporate Governance became an issue? Before answering this let’s look at the concept of Corporate Governance.

What is Corporate Governance?
As we all are aware, following the number of governance failures, Sir Adrian Cadbury (A pioneer in raising the awareness and stimulating the debate on corporate governance and produced the Cadbury Report) chaired a committee whose aims were to investigate the British corporate governance system and to suggest improvements to restore investor confidence in the system. The committee was set up in May 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession. The report embodied recommendations based on practical experience and with an eye on the US experience, further elaborated after a process of consultation and widely accepted. The final report was released in December, 1992 and then applied to listed companies reporting their accounts after 30th June 1993.

As per the report, Corporate Governance (CG) is the set of processes, customs, policies, laws and institutions affecting the way a corporation (or company) is directed, administered or controlled. CG also includes the relationships among the many stakeholders involved and the goals for which the corporations are governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.

CG is a multi-faceted subject & an important theme to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world. 

Why It’s an Issue?
Globalization today has brought about spectacular improvements in human living conditions by introducing profound breakthroughs in fields of telecommunication, transport, agriculture, genetic engineering, medicine, multimedia & internet resources and so on and so forth. Simultaneously, it has also hastened the disintegration of families, and indigenous resource-base of traditional societies. It has wrought havoc with animal and plant life and caused massive pollution of rivers, oceans and the atmosphere. It has led to increase in crime rate & violence and has intensified the sense of alienation among individuals and collectives.

According to a recent survey, carried out by Opinion Research Consultancy Globescan for BBC world service, unemployment has joined corruption and poverty among the world’s most talked-about global issues. Now coming to India topping the charts is the gigantic 2G spectrum followed by Common Wealth Game Scam, UP food scam and a host of others. Further, among the worst scams that was to hit the corporate world was Satyam, where the Chief Promoter forsaking / bartering the interests of all other stake holders tried to create/ set up two companies for his children with stolen money (obviously from Satyam). All these and other scams have once again brought to the centre stage the concept of Governance & Leadership role in it.

What More?
International(March, 2017),which covered more than 20,000 people in 16 countries, regions and territories in Asia Pacific, found that more than one in four people have paid a bribe when using a public service. While this statistic looks at the entire region, the numbers for some individual countries suggest about corruption being deeply-rooted in everyday life. Here are the five most corrupt countries by bribery rates, according to Transparency International. 

5. Myanmar: 40% bribery rate
4. Pakistan: 40% bribery rate
3. Thailand: 41% bribery rate
2. Vietnam: 65% bribery rate
1. India: 69% bribery rate

In the latest PNB fraud, it’s disgusting to hear that, Bank of Baroda though classified the Rs 435 crore loan given to Rotomac Global a “non-performing asset” in October 2015 and a “fraud” in December 2017, remained silent for two years despite facing a Rs 6,172 crore forex scam in 2015. The BOB’s delayed action in the Rotomac case came after it was unable to recover dues from Kothari. Further, it is interesting to note that, the Allahabad Debt Recovery Tribunal (DRT) had last year accused bankers to the Rotomac Global group of gross misconduct and negligence in granting credit and failing to detect irregularities in multiple accounts.

So Corporate Governance issues are receiving greater attention in both developed and developing countries as a result of the increasing recognition that a firm’s corporate governance not only affects both its economic performance and its ability to access long-term, low-cost investment capital but the society at large as well.

Corporate Governance & Chanakya
In the third century B.C. in the city of Pataliputra (Patna) Kautilya (Chanakya) wrote his celebrated treatise on Statecraft – Arthashastra or Law of Economics. In this, Kautilla elaborates on the fourfold duty of a King as: -

• Raksha – Protection
• Vriddhi – Enhancement
• Palana – Maintenance
• Yogakshema – Safeguard.

Substituting State with the Company, King with the CEO or the Board of a Company and the Subjects with the Shareholders, the Four Principles of Corporate Governance can be elaborated as under: -

• Protecting shareholders wealth
• Enhancing the wealth through proper utilization of assets
• Maintenance of that wealth and not frittering away in unconnected and non-profitable 
  ventures or through expropriation, and above all
• Safeguarding the interests of the shareholders.

King (Leader in the current context) is the central point in Kautilya’s Arthashastra. It is mentioned in the Arthashastra that “In the happiness of the subject lies the benefit of the King and in what is beneficial to the subjects is his own benefit”. This is more or less same as what we practice in Corporate Governance today, wherein we say that the Directors should act in such a way so as to benefit the stakeholders, investors, institutions and others who work in the organization.

According to Chanakya, good governance should avoid extreme decisions and actions. King should act according to Dharma and should stick to the ethics & principles of what is told to him. Chanakya was very much against corruption, as it will destabilize the King and country. Accordingly he suggested that the person involved in any act of corruption should be penalized severely. Further, he insisted on accountability, sharing of work and delegation as the key mantra for good governance. Unless and until a right person is given a right, job the objective of clear and good governance cannot be achieved.

A King should work towards the welfare of society and his subjects. He should also be part of the working class and the successor of King should also possess such qualities and should not be selected based on the dynasty rule. Megasthanese, who visited during rule of Chandragupta Maurya, in his Indika had praised the administration set up during Mauryan Empire.

Ancient Governance - How relevant today?
In today’s competitive world of business, survival of a company depends on effective corporate governance. The concept is slowly shifting towards welfare objectives, i.e.,profit to triple bottom line (people, profit & planet) be it the welfare of stakeholders, investors, environment or the society at large. This is exactly what it was told in ancient period.

What we can deduce from Chanakya’s thoughts?
According to Chanakya “The Kingdom should be enjoyed by all” & the King should discharge his duties in the best manner keeping in mind his responsibilities and ethics and should not do anything for his own welfare. This shows that he is bound by his duties and ethics which are driving force today to run the business effectively and efficiently.

A person who assists King should be a right person and he should be selected based on series of tests. One of the important areas in corporate governance is decision making & all the major decisions relating to welfare of the kingdom should be taken on collective basis. In Mauryan Empire there were spies to monitor and control illegal activities and corruption in the administration. This can be related to appointment of internal auditors today in business. In this regard it’s intriguing to know that just one year before PNB fraud was detected/reported, PNB received an award for its vigilance!

The key areas where we can use Chanakya’s Principles are:
• Learning on Leadership qualities and skills
• Selection of right person for right job
• Accountability and Delegation of Authorities
• System of Spy and Intelligence agency to control corruption and monitoring of work.
• Social welfare ideas of King and his team (CSR)

Kautilya’s Arthashastra analyses the entire range of management and corporate governance issues in the following ways.
• Why do you have to do business? To generate wealth (artha) and to earn profits.
• What is the purpose of wealth and profits? To share among the shareholders.
• Why? Wealth and profits make the shareholders, employees, customers, suppliers, 
  distributors and also the government happy.

Kautilya stated that happiness is not obtained by wealth and profit only, but by doing right things & properly (sukhasya moolam dharma). Dharma without wealth, according to Kautilya, is toothless (dharmasya moolam artha), and wealth without dharma is useless because a poor person cannot support the entire society. 

Indian culture has always emphasized that sukhasya moolam dharma and dharmasya moolam artha taken together – namely wealth - do not lead to directly happiness.

Happiness for self and others results through ethical behavior: wealth or resources, make ethical behavior possible.

Kautilya’s Arthashastra presented many operational details with regard to corporate governance such as the ideal size of board of directors, ways to check corruption, graded punishment for offenders, etc., Kautilya had a grand vision for building an empire that was prosperous, secure, stable, and based on fairness. He realized that the attainment of prosperity required not only human effort but also the accumulation of wealth (artha), which was not possible without good governance. 

1. Wealth is important for any State or government & suggested the following for increasing the wealth of the State:

• ensuring the prosperity of State activities;
• continuing well tried policies; eliminating theft;
• keeping strict control over government employees,
• increasing agricultural production;
• promoting trade; avoiding troubles and calamities;
• Reducing exemptions and remissions and increasing cash income.

Kautilya also provided the necessary conditions for reducing fraud.
• Selection & appointments of the right person for the right job is crucial- effective HRM.
• Avoiding appointment of persons who are fraudulent, dishonest, cruel, lack enthusiasm, incompetent and cowardly.

Kautilya suggested three measures to deal with the problem of fraud.
• First, people have to be informed of the existing laws, since it is not possible to obey them in the absence of proper information.
• He codified (along with modifications and extensions) all the rules and regulations.
• Laws must be unambiguous and as comprehensive as possible.
• Laws must have clarity, consistency,completeness and be in written form. Effective enforcement of rules and regulations requires clarity (no ‘confusion’), completeness (‘avoiding redundancy or deficiency of letters, words and subject matter; citing reasons,quotations and illustrative examples’), and consistency (‘non-contradiction’) and must be in written form.

2. He proposed an organizational structure, which reduced the scope for conflicts of interest.
Kautilya realized that no financial management is possible in the absence of accurate and complete records. He proposed the establishment of two very important offices to monitor and manage the financial health of the State: the positions of Treasurer and Chief Comptroller-Auditor. Both were to be very well paid, and in turn they were to be incorruptible and efficient.

3. He suggested long lists of punishments for cheating the government, and rewards for commendable service.
Kautilya recommended that errant individuals should be disciplined. He called for the creation of an intelligence service for apprehending violators, pursuing fair trials and punishing the guilty, depending on the nature and gravity of their offences. He recommended a judicious mix of incentive-based compensation, inspection, supervision and appropriate punishment to reduce cheating and shirking. 

4. Righteousness is the root of happiness. Greed clouds the intellect.

5. Creation of an ethical climate in the State and also suggested various measures to enhance it.

6. The leader of any organisation should be able to maintain high standards while running an organisation. 
If the King is energetic, his subjects will be equally energetic. If the leader is slack (and lazy in performing his duties) the subjects will also be lazy, and thereby eat into his wealth. Besides, a lazy King will easily fall into the hands of the enemies. Hence the King should himself always be energetic.

As we know, a major job of today’s managers & leaders is decision making and a major portion of their time is devoted to this. In that case, how to ensure that the decisions we take are correct morally? 

For this, I would suggest that we may adopt three way tests described by Norman Vincent Peale and Kenneth Blanchard in their book “The Power of Ethical Management”.

The first test is, is the decision that you are taking or action that you are going to take legal? If it is not legal, it is not ethical. 
The second test is the action that you are taking fair? This means that the course of action must be such that it does not give undue benefit to any one side - either your side or the other side or the opposite side. For example, if you are entering into a contract, it must be fair for both the parties which are entering in to the contract. 
The third test is what I will call the eleventh commandment test. Cynics say that there are Ten Commandments in the Bible. Nevertheless, there is an eleventh commandment which is unwritten, “thou can violate all the Ten Commandments but thou shall not be found out”. The third test of Norman Vincent Peale and Kenneth Blanchard says that if the decision that you take today or the action that you are indulging becomes public knowledge, will you feel ashamed? If you feel ashamed it means basically the action was not ethical? The exposes of 13th March 2001 and the embarrassment it caused was an illustration of the violation of the eleventh commandment. It is an example of the failure of the parties exposed in the third test for ethical action. 

How to Remain Humble.
But how to remain humble when all around us would make us King or Queen? The key is to reorganize the dark gravitational pull of power and act against it. Writing on HBR. org John Baldoni offers three tips in this regard:

• Use your clout for good: Ask yourself; what good can I do with my authority? Focus on the positive change you can bring about, e.g. does your power allow you to push for innovation or envision new possibilities.

• Acknowledge the pull towards corruption: Don’t pretend that power doesn’t have a dark side; think about how power can corrupt you; keeping it in mind can help you keep it in check 

• Ask others to challenge you. Surround yourself with people who are willing to call you out if you start to abuse your power.

Governance and Leadership are the yin and yang of successful organizations and more so for nations. Leadership and Governance must always be objective and realistic and in addition to being strategic and focused. Further, the path chosen must strive to motivate collective civil society support and team work, integrating and aligning all citizens as equal performers.

Charles F Kettering has rightly said “we should all be concerned about the future because we will have to spend the rest of our lives there”

The leadership must encourage and facilitate the promotion of acceptable societal values that will stand the test of time and be acceptable to all segments and distinctive groups comprising the civil society. In this regard the principles enunciated by Chanakya in his Artha Shasthra come in very handy for effective governance.

It is said: Yat yat acharati shreshtah tat tat eva itarah janah Sah yat pramanam kurute lokah tat anuvartate -BG 3.21
Whatever a great man does is followed by others; people go by the example he sets up.

Lastly, let me close by saying:
 May the effective and committed actions of the new leadership in governance in the period ahead be blessed by the prayer?
• May the rains fall in due season,
• May there be high harvest,
• May the world prosper?
• May the ruler be righteous...
You must be the change you wish to see in the world………’- Mahatma Gandhi
Sarve Jana Sukhino Bhavantu
Dharmo Rakshati Rakshitaha

1. Garde, A.R. (2003) Chanakya’s Aphorisms on Management, Ahmedabad, Management Association, Ahmedabad.
3. John Baldani,Three Ways to Keep Your Ego in Check,Dec 0,2009,HBR
4. Kautilya, V.C. (1992) The Arthashastra, (4th Century BCE), Edited, Rearranged,
Translated and Introduced by Rangarajan, L.N., Penguin Books, New Delhi, New York.
5. Klapper, Leora F; Love, Inessa; Klapper, LeoraLove, Inessa. 2002. Corporate 
governance, investor protection, and performance in emerging markets (English). Policy, 
Research working paper; no. WPS 2818. Washington, DC: 
World Bank. http://documents.worldbank. org/curated/en/375451468765875377/Corporate-
6. Norman V Peale, Ken Blanchard (1988),The Power of Ethical Management, New York: 
William Morrow and Company, Inc. Sharma,Vishwamitra (2014),Complete Chanakya Neeti, 
Manoj Publication New Delhi
7. Tanvi Gupta,Asia’s Five most Corrupt Nations,Forbes,Mar13,2017, 
Corporate Governance: Lessons from Chanakya

Dr A Jagan Mohan Reddy - Dr Jagan Mohan Reddy is a Gold Medalist in Economics with an M.Phil Degree from JNU, New Delhi. He was a faculty at IMTGhaziabad before moving to Hyderabad and has more than 2 decades of Industry experience. For the last 15 years he is in the teachingcum-research line. Presently he is working as Professor(HR) at Symbiosis Institute of Business Management, Symbiosis International University, Hyderabad Campus. 

Source - AVB

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