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Economic impact of corporate scandals worse than 9/11: Premji

Our Correspondent in New Delhi

The economic impact of the recent corporate scandals was worse than 9/11, said Wipro chairman Azim Premji while addressing a session on " Learning from Crisis: Business Ethics for a New Era" at the India Economic Summit, organised by the Confederation of Indian Industry and the World Economic Forum.

In India, the issue of corporate governance, according to Premji, needed to be addressed from three perspectives:

• Regulatory: by establishing common accounting standards;

• Structurally: by establishing genuinely independent boards; and

• Culturally: by having a set of well-articulated set of values in the company.

In the final count, accordingly to Premji, a culture, which respects integrity and right forms of accounting, is the key to success.

Studies of firms in India and abroad have shown that markets and investors take notice of well-managed companies, respond positively to them, and reward such companies, with higher valuations. A common feature of such companies is that they have systems in place, which allow sufficient freedom to the board but at the same time keep them tightly within a framework of effective accountability.

Vibrant capital market is an important instrument of investor protection. Without financial reporting premised on sound, honest numbers, capital markets will collapse upon themselves.

And it is here that the greatest damage has taken place. More than the dollar amounts involved in the financial scams, it is the loss of confidence, which has dealt a body blow, said Premji. "Trust is fragile in nature. It takes years of efforts to build trust but only few acts to destroy it. Once it is broken, it is even harder to rebuild."

"The first thing any business organisation needs to have is a set of values to be uniformly adhered to under all circumstances. There should not be any exception. These should be consistently communicated to the employees since the day they join the organization, said Premji, adding, "all the management institutes in the country should provide adequate thrust on the business ethics in their curricula. Great nations, like great organisations, can only be built on a bedrock of unflinching integrity. There is no other way."

Kenneth Courtis, vice chairman, Asia, Goldman Sachs, shared said investment bankers have to deal with many clients in the same sector, which may lead to several internal conflicts. These internal conflicts, Courtis suggested, would have to be managed well in order to regain the confidence of the investor.

"One way to manage these conflicts was for the investment bankers to be more specialised and focused."

Rahul Bajaj, co-chair of the India Economic Summit 2002, chairman and managing director, Bajaj Auto, India, compared the scenarios in India and in the USA and opined that the salaries of CEO had not become an issue in India for two reasons: first, in India management and ownership were still closely linked, and secondly, laws requiring disclosure of CEOs salaries have been in place in India for a long time.

Bajaj suggested that transparency and full disclosures were not just ethical issues, but essential requirements for the survival of large corporates.

Bajaj warned that with a few exceptions, adherence to the prescribed codes was in form and not in spirit. He emphasised that while guidelines are necessary, they were no substitute for good character.

Harry Hui, president, South-East Asia, Universal Music, Hong Kong said as an Asian educated overseas, he had dreamt of establishing a "MNC culture" in Asian companies. However, that dream rings hollow under the present circumstances. He mentioned that the media companies were going through their worst crisis, and most of the visionary CEOs of this sector have been replaced. He concluded by suggesting that the solution to the crisis was to go back to the basics, which is focus in simple value creation.

Earlier, introducing the speakers, the moderator of the session, Georges Ugeux, group executive vice president, New York Stock Exchange suggested that while there was a general agreement on the need to have ethical standards in business, a consensus on specific standards was difficult to achieve. He said even though it was possible to set up rules to override and check personal interests, it was impossible to legislate against human greed.

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