Sucheta Dalal :Corporate governance: Private sector’s bribe-giving
Sucheta Dalal

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Corporate governance: Private sector’s bribe-giving  

March 28, 2011

The private sector wants corrupt netas and babus to be pulled up. Corruption in the private sector is as rampant, but never discussed

Sucheta Dalal

Last week, KPMG, the consulting major that specialises in forensic accounting, released yet another survey on bribery and corruption which claims to reveal “how the Indian corporate sector is battling corruption and at the same time looking for ways to play a greater role in improving the system to ensure a thriving business environment in India.” Given the public mood and the many corruption scandals that have rocked the nation, the headline findings are predictable. More interesting are the nuggets of truth tucked away in the report. For instance, 99% of the respondents believe that corruption skews the playing field and allows less capable firms to bag contracts. But only 68% admitted that “many cases of corruption were induced by the private sector” and 31% of respondents to the India Fraud Survey admitted that “organisations pay bribes to win and retain business.”

KPMG correctly points out that Indians focus on the bribe-taker and not the bribe-giver; hence, “corporates do not shy away from adopting corrupt practices” and “tend to overlook the implications of encouraging bribe-giving and often look only at the short-term benefits achieved.”

The real story about India’s rampant corruption lies here. KPMG warns that as Indian companies access the global capital market (in fact, many top Indian companies already have a large global footprint through overseas acquisitions), this attitude could land them in trouble. Foreign statutes, such as the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act, not only focus on the bribe-giver but, in the aftermath of the global financial crisis of 2008, their regulators are keen on redeeming themselves through strict enforcement and making examples of some of the most respected names in business and finance.

But is India Inc willing to introspect? Or is it happy to take advantage of public anger to blame the government? A couple of months ago, a group of eminent citizens complained about the ‘governance deficit’ and large-scale corruption that’s preventing the benefits of economic development from percolating to the poor. Yet, when the US charged Rajat Gupta (ex-CEO of McKinsey & Co worldwide) with insider trading, simple governance processes went out of the window. The Indian School of Business (ISB), Hyderabad, whose directors seem to have a propensity to fall foul of governance rules, decided that Mr Gupta will not resign from its board. Corporate India joined the chorus, even though Mr Gupta himself stepped away from all the big global boards until the case against him was decided.

Mr Gupta may well be innocent; it is corporate India’s attitude to the action against him that is hypocritical. Their message is: the rules of good governance should apply to others, not to the power-elite. Why should it? After all, only 45% of those surveyed by KPMG believe that corruption has impacted their business or growth adversely; those affected are probably the relatively honest businessmen. Also, when nearly 90% of the respondents do not think that corruption has reduced their ability to access funds in the domestic financial market and 84% say it has no impact on accessing funds globally, where is the pressure on corporate India to clean up its act or focus on its own contribution to India’s corruption?

In fact, private sector corruption is not limited to bribing the government to get contracts; it is rampant even in its dealings with contractors, consultants and its hiring practices. It is fairly widespread in India’s best companies but never admitted or discussed publicly. The reason is obvious. While the Central Vigilance Commission or the Comptroller and Auditor General of India provide scope for investigation, action and whistle-blowing in government/public sector organisations, there is no oversight mechanism in private companies.

Worse, the fat payment to directors on corporate boards only encourages silence rather than good governance. In my experience, when told of dubious management practices, most directors promise to investigate and come back with excuses for the management rather than push for good governance. They know which side the bread is buttered.

Private sector companies actively encourage corruption in two ways—by paying bribes to bag contracts, or pretending not to pay bribes, knowing full well that they have simply outsourced the bribe-giving to lobbyists, public relations (PR) firms, event managers, consultants, lawyers or accountants they employ. One could argue that private-sector corruption is born out of the need to feed rent-seeking of politicians and bureaucrats. After all, employees who are asked to ferry bags of cash or provide other forms of ‘entertainment’ to venal netas and babus are hardly likely to be paragons of honesty while dealing with their own companies.

Even our blue-chip companies are not immune from dubious practices when it comes to HR (human resources), advertising, PR, training and consultancy of various types. And corruption is especially rampant in the financial sector, despite high salaries and bonuses earned by fund managers, bankers and brokerage firms. Here are a few examples.

• A consultant blew the whistle on a kickback demanded by the HR manager of a revered corporate house. The chairman sacked the HR chief, but the consultant also lost the assignment. In another case, the managing director of a large corporate house subtly nudged an independent marketing consultant to prepare an adverse inquiry report against a certain executive, although the inquiry showed otherwise. When he refused to play ball, he was slowly eased out. Lesson: Silence is golden and consultants who blow the whistle against corrupt and devious practices suffer financial damage and lose business.

• The corrupt nexus with HR firms is evident in hiring mediocre MBAs from management schools. Since admissions and the collection of fat fees depends on successful placements, some business schools pay HR managers to hire their students on the understanding that they may be sacked in six months, says a disgusted professor at a leading management institute in Pune. The companies pay the price. Similarly, many companies are ever eager to push up entry level salaries, since it ensures an automatic upward pay revision across the company.

• The head of an independent HR consultancy unhappily admits that kickbacks are the norm in his industry. Another banker told me about a nice racket between a ‘star’ finance professional and head-hunter who hopped jobs every year, with higher sign-on bonuses each time. The bonus was split with the head-hunter, who ensured that the executive switched jobs before any organisation ever had a chance to assess his performance.

• The nexus between a little-known broker and LIC Housing Finance led to a series of arrests mainly because of their brazenness. But bankers have innumerable anecdotes about chartered accountants on the boards of public sector banks who swing loans for specific companies for a price. Many of them are now powerful enough to influence the appointment of bank chairmen.

The public manifestation of such corruption leads to situations where private airlines hire pilots with fake flying credentials, a private hospital fails to notice that an unqualified person is masquerading as a doctor, and body-shopping IT (information technology) companies merrily accepted fake engineering degrees until the US embassy began to embarrass them by verifying and rejecting visas for such candidates.  

Isn’t it ironical that corporate India wants better regulation, transparency and whistle-blowing for the public sector, when there has never been a survey or honest assessment of the primary bribe-givers—private sector companies?

[Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at
[email protected]]

(This article was first published in Moneylife magazine, in the edition dated 7 April 2011, that was available on the newsstands on 24 March 2011)

 


-- Sucheta Dalal



 



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