Only systems can fix corporate governance woes

The Board of ICRA has terminated the employment of their MD and Group CEO, say reports. The termination followed a complaint by a whistleblower to SEBI about irregularities in assigning top ratings to IL&FS – an allegation also upheld by a probe initiated by the new Board of IL&FS. Presumably, the CEO played a role in bending the ratings of IL&FS.

We know that we are among the most corrupt countries in the world. So, what’s the big fuss if rating agencies have been added to the list of other institutions, one may ask. But accepting the reality with equanimity is dangerous. Anyone who cares for the nation in the true sense needs to keep pushing back against corruption. But obviously, this will not happen unless one fine morning all 1.3 billion of us wake up as aliens.

So, we simply have to look for sub-optimal, but effective, alternatives. While the mother of all sources of corruption may be the lack of electoral reforms, that does not mean well-functioning and upright boards that genuinely care for good governance cannot fight corruption with good systems at subordinate levels.

For instance, we need to wonder why and how institutions like IIMs, IITs and some other institutions of excellence have remained corruption-free with respect to admissions, despite being government institutions. In these institutions, the probability that a student gains admission by means other than the admission criteria laid down, is zero. Even if there were an extremely greedy and corrupt director in one of these institutions, he or she would not be able to bend the rules or favour a candidate, even if they were so inclined.

It is important to understand how these islands of integrity survive in our ocean of corruption, so that others can borrow from the model. The systems and processes of admissions in these institutions are so designed that individuals, including the head of the institution, are ipso facto powerless when it comes to influencing admissions or even admission policies.

For instance, it would be futile for a director to try and bend a young assistant professor on the Admissions Committee, because the Admissions Committee comprises a large group and their placement on interview panels is random. So, when these heads of institutions tell the powers that be, “Sorry, I cannot do anything to ensure the admission of a cabinet minister or the cabinet secretary’s ward,” they are not just taking a moral posture. They are telling the truth. The composition of committees cuts across ranks, with all members weighing in as equals. Nor is the director ever a member of any of these committees. On all academic matters, these institutions of excellence are faculty-governed, leaving little scope for the head of the institution to interfere.

The systems in these institutions ensure rigid compliance. What is interesting is that these systems are not rigid in the sense that they stymie individual initiatives or not allow for situational exigencies. They do. And yet, the systems are such that the basic integrity is in no way compromised.

Now, imagine a rating agency that follows a similar system for ratings. If the assessment of the corporates coming up for rating and their rating processes were driven by similar committees cutting across ranks, with no participation by the CEO, it would be that much more difficult for a corrupt CEO to bend ratings. The same could be said of the credit committees of financial institutions like the IL&FS or banks to a large extent. The powers of the CEOs need not be absolute for them to be accountable, effective or even successful.

In fact, such systems and processes would make CEOs’ jobs easier, allowing them fewer opportunities to give in to greed, and help retain the core integrity of the organizational objective. And there is no reason why the boards should not push their managements in this direction.

Of course, the other piece of pushing back against corruption is the use of technology. After all, we all know how the introduction of e-reservations eliminated much of the corruption at the railway booking counters. We are beginning to see some traction in that direction through the use of technology in the payment of taxes, in the passport offices and even the RTOs. A localized Blockchain-like technology in ratings or credit approvals can easily bring down corruption by enhancing transparency in decisions.

Take the long-awaited reforms of our Motor Vehicles Act. While the intent is laudable, it needs to be backed by vigorous technology. We need cameras that would not only stamp the date and time, indicating at what time a red light changed and at what time someone jumped the red light, but also send automated tickets to the violators based on the vehicle’s registration number. Perhaps, the ‘Make in India’ movement ought to push for manufacturing such cameras in tens of millions to be installed at every single road junction, as these are bulk products, low-tech and simple to make, with product differentiation not being crucial, bring the costs down, like China does.

While technology and robust systems are important to improve our institutional integrity, we cannot forever overlook our national integrity. This requires electoral reforms in the form of transparent and tax-deductible contributions to political parties. Though the BJP first came to power in 2014 on the platform of fighting corruption, little has been done since in this direction. The ad hoc system of underhand collections in the name of the party continues to help politicians line their own nests liberally before their parties, which in turn virtually sets targets of collections in return for party tickets and positions, perpetuating the cycle. This, in turn, cascades corruption, all the way down to a point where even the traffic constable may have targets based on where he is posted.

As the world’s largest democracy, we owe it to ourselves to recognize corruption for the rot that it is, eating away our innards. We need systemic solutions.

(The writer is Director, Schulich School of Business, India Programme)