Editorial: Done In By Hype

By M H Ahssan

Unqualified adulation of corporate leaders is dangerous. Flashback to the early 1980s and some people may recollect the name Agha Hassan Abedi. He was the founder of the Bank of Credit and Commerce International (BCCI) which in those days was the fastest growing financial institution in the world. It later emerged that BCCI’s success was built around a web of deceit and fraud. Abedi’s collapse into ignominy was as rapid as his rise to fortune. Fast forward to the 1990s and there is Ken Lay. He took Enron from revenues to the tune of $4.6 billion in 1990 to $101 billion in 2000, and then to bankruptcy by 2001.

While the company’s fortunes were on the rise Lay was the darling of the corporate community. He was showered with awards and those who asked troublesome questions about the company’s performance were dismissed as awkward Cassandras. And now there is Ramalinga Raju, the man who built Satyam into India’s fourth largest IT company, and who only last year was conferred the Golden Peacock Award for corporate governance. These are just three names out of the many that at one stage bestrode their professional domains like a colossus but then collapsed into a heap of public opprobrium, legal suits and personal shame.

Why did such people who had been hailed as iconic trailblazers and whose entrepreneurial and innovative initiatives were held up as models of inspired leadership for a competitive and connected world feel compelled to wilfully defraud?

There is no simple answer but of all the possible explanations there is one that calls for a psychologist’s comment — the subtly corrosive impact of public accolades and media hype. Abedi, Lay, Raju and their like were once the cynosure of shareholders, peers, financial journalists and industry federations. Their every initiative was given broad coverage. Their companies were the envy of the corporate community. But then hubris and overconfidence stepped in. They began to believe the hype. They began to behave as if they did have the Midas touch — that they could indeed convert dross into gold.

They got so taken in by the spin and hyperbole of third-party analysts and a superficially knowledgeable media that instead of focusing on business fundamentals like managing cash flows, they expended disproportionate effort on sustaining the stories of their success. Matters had to eventually come to a head. Whether it was because of a mistimed bet or a shift in market conditions their companies started to falter. The rot set in when against this backdrop of deluded grandeur and
fear of failure they crossed the line that divides the bending of rules from the breaking of them.

How did the board of directors — in particular the independent directors — allow such a situation to come to pass? What were the external auditors doing? The answer to the latter is clear. The auditors were asleep at the wheel. They were negligent and in breach of their responsibilities. The answer to the former is, however, more complex. The independent directors must of course share the blame. But to what extent? Are there extenuating circumstances?

Independent directors are expected to have the knowledge to help the company meet its corporate objectives of profitability, growth and social responsibility and also to ensure adherence to legal and financial propriety. They are better able to do the latter than the former. This is because most directors do not have the time to get a grip of the details of a company’s operations, its business strategy, its people and its organisational complexities. They are either preoccupied with a full-time responsibility elsewhere or, if retired, with multiple boards and consultancies. Management is also all too often economical with information. The board’s papers contain no more than the bare bones of important proposals and they arrive but a few days before the meeting. This may be a prudent precaution against leaks but it does not facilitate a meaningful dialogue.

The Satyam board, for instance, could not have had a more distinguished pedigree and yet it approved a proposal that was clearly in transgression of the spirit, if not the letter, of corporate governance norms related to conflict of interest. Why did the board approve the proposal? The charitable explanation would be that the information presented was sparse and possibly misleading, and that the board’s agenda did not allow for a rigorous and structured discussion. But the more likely explanation would be that the directors did not have the detailed knowledge needed to penetrate the veil that covers operational and financial numbers. The fact is that a management bent on fraud would under such circumstances have little difficulty in pulling wool over the eyes of its directors.

The Satyam saga must not lead to the assumption that every CEO is a potential Lay or Raju, or that in the absence of a further tightening of rules there will be a run of corporate scandals. But it does offer a useful lesson. Independent directors should have a more formal involvement in the setting of corporate strategy. The creation of a subcommittee on strategy would not only play better to the strength of the directors but it would also help check the ‘strategic’ forays of ambitious, and possibly greedy, owner-managers.