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The Satyam accounting fraud revealed how compliance and corporate governance norms were being grossly violated in one of India’s leading IT firms. While the scandal came as a shock, it also triggered fears that the rot could be widely spread across India Inc. Investors rightly expected corporate India to pull up its socks and be more rigid in enforcing its compliance norms. But a recent survey indicates mixed results. While corporate India believes in the importance of compliance, it may not be implementing it with the rigour expected in the aftermath of the Satyam scandal.
The survey, done by 9.9 Media and Newgen Software Technologies, has raised some key questions. For instance, |
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86% of the finance leaders surveyed stated that their firms had formally identified compliance objectives. While this is a significant majority, it does raise the question: why isn’t this figure closer to 100%. One would expect that at times like these Indian enterprises will follow a “zero-tolerance” approach to compliance; in which case it is worrying that 14% of respondents are still unclear about their compliance objectives.
The survey results on the roles of independent directors were also interesting. Nearly 82% of the respondents claimed that they had the requisite number of directors on their board. However, a few independent directors had a different perspective on “compliance” with Clause 49 (this clause regulates the number of independent directors on the board).
“Merely appointing independent directors doesn’t solve your problem. You have to make sure that they are also effective,” said an independent director. In fact, more than 90% pointed out that relevant material for a board meeting was sent to them less than a week before the meeting. This is not sufficient time for independent directors, especially those who may not be experienced in financial and legal matters or familiar enough with the business, to participate effectively and do justice to their roles in board meetings.
While all the respondents admitted to having instituted enterprise risk frameworks, detailed questioning revealed some gaps in enforcement. For instance, although more than 80% monitored their compliance procedures via audits, a little more than half actually shared risk reports and self-certified procedural documents underlying those audits with the audit committees. Also, only 35% of the respondents admitted they had significant access to actual proofs of compliances and controls. This raises questions on propriety and process, again in light of the recent scam.
Further, most respondents believed that “enhancing shareholder value” and “creating a distinctive competitive position” were the key reasons for being compliant. Very few believed that better governance would “enable greater access to funding”. This appears to be a blind spot for respondents who don’t seem to realise that strict compliance and the associated transparency are one of the critical drivers of funding decisions taken by investors and lenders. Thus, compliance can play an important role in enabling access to much-needed funds, especially when times are tough.
Finally, although 86% had formally defined their compliance objectives, 31% of them had no defined budgets for their compliance activities. The question that arises then is whether some companies are only paying “lip service” to compliance requirements. To be completely fair, it could also mean that the current downturn is influencing India Inc. to divert their tight resources to address other problems. Whatever be the reason, it is wise to remember the old adage that the best time to plant a tree was 100 years ago. The second best time is now. The same logic applies to compliance.
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