‘Conflict Minerals’ and the Ongoing Crisis in DR Congo – Transparency & Accountability for Extraction & Hi -Tech Industries
Posted on: July 10, 2010
What are the ‘Conflict Minerals’?
What is the relation between the Metals & Hi-Technology Industries and the crisis in Congo?
How can we pursue this agenda to end the trade in conflict minerals and eventually the crisis in Congo?
Multinational Corporations from all over the world, engaged in mineral extraction, trading, smelting, refining, and end use electronics manufacturing industries: computers, laptops, MP3 – portable music players, mobiles, Smart phones, digital cameras, etc.; are illicitly buying “Conflict Minerals”, namely, Coltan (20% of the world’s consumption is being presently sourced from DR Congo), Tin, Tungsten, Gold, etc., oblivious of the facts that the proceeds from these activities are being utilized for funding the various militant groups, who are perpetuating conflicts, resulting particularly in gender based sexual violence and other human rights abuses in North and South Kivu in the eastern region of the Democratic Republic of Congo (DR Congo).
The DR Congo is rich in these minerals (64% of the world’s known Coltan reserves occur in the DR Congo) that make our daily use electronic gadgets work. The minerals mined in Eastern DR Congo pass through the hands of numerous middlemen – negociants, maisons d’achat and comptoirs as they are shipped out of DR Congo, through neighboring countries such as Rwanda, Burundi, etc., to the various processing plants all throughout the world. There are no international mechanisms yet in place to regulate these clandestine trades, therefore, allowing various armed factions, many with appalling human rights records, unfettered access to world markets, in order to generate funds.
These “conflict minerals” are one of the main drivers of a war has claimed around 5.4 million lives – more than fifty percentage of deaths that children, as of April 2007 with the toll mounting by 45,000 a month, according to a study by the International Rescue Committee and more than thousands of women are being raped every month in the DR Congo and is widely described as the rape capital of the world. Furthermore, the conflict areas also appear to have limited attention to poverty, food securities, health, safety and environmental protection, which may lead to additional negative legacies.
“Directly or indirectly,” says Carina Tertsakian, DR Congo team leader for Global Witness, “everyone involved in this conflict is benefitting from the trade in these resources except the Congolese people who are the victims of the war.”The mining conglomerates have to come under political pressure, she argues.”They aren’t likely to stop what they are doing overnight because of an attack of conscience.”But choking off this flow of funds is not just about putting pressure on multinational corporations but also about forcing governments in the area, through firm diplomacy and tight financial screws, to uphold protocols and peace processes in order to be in good odour to do legitimate business in the first place. Says Tertsakian, “The economic aspects have been a driving force in this war from the very beginning.”
The situation in DR Congo is a good example of the so-called “natural resource curse”, with an abundance of high-value natural resources, it has slower economic growth and an armed conflict for the past few decades. The resource curse represents the pre-eminent obstacle to democracy and development in this country. There is no magic wand to resolve the problem; however, there are a range of measures that all nations including India – besides deputing Indian soldiers for Peace Keeping, can take to increase accountability and transparency.
In the recent past, efforts had been made to counteract similar process applying pressures externally by instituting sanctions against commodities originating from conflict zones, namely, the Kimberly Process in 2003. It is a joint governments, industry and civil society initiative to regulate the diamond market and stem the flow of so-called “blood diamonds”, which was a success story in Angola.
One of the people pushing grassroots campaign on “conflict minerals” is Lisa Shannon (Women’s Rights Activist / Author) founded in 2006 the first grassroots effort in USA to raise awareness and funds for women in the DR Congo through her project Run for Congo Women. She had seen an Oprah show on DR Congo, and now she has devoted her whole life – making a difference for Congolese women.
The conflict minerals campaign is now a grass-roots movement and NGOs (like, Enough, etc.), are pressurizing companies, like, Apple, Intel and Research in Motion (RIM), etc., using social media network like, Facebook, Twitter, and YouTube to keep these “conflict minerals” out of high-tech supply chains. A year ago most members of US Congress hadn’t even heard of conflict minerals. These thousands of American citizens wrote on US senators’ Facebook pages and requesting them to support the Brownback amendment which is currently a part of the “Dodd-Frank Wall Street reform bill 2010” that addressed ‘conflict minerals’ from DR Congo, the new blood diamonds. Special interests lobbied against the provision, arguing that it was too expensive and would unfairly undercut American business.
However, the majority of the companies that use these minerals are listed on U.S. stock exchanges, including foreign companies, so it would actually set a level playing field for industry. Moreover, U.S. regulations will help set global standards, and the audit provision would set a common standard for minerals supply and smelting companies around the world. As a result of intensive public pressure, a group of companies led by Intel and Motorola have initiated actions and now developing a process to audit origins of tantalum in supply chains, followed by other minerals. Moreover, the audit process is inexpensive: the audits will only cost one penny per product, according to the Enough Project, which says the figure originated with the industry.
Speaking to BusinessGreen.com, Zoe McMahon, supply chain social and environmental responsibility manager at IT giant HP, revealed that a group of companies working under the banner of the Electronics Industry Citizenship Coalition (EICC) is working on the finishing touches to a certification scheme that should help firms identify from which mines minerals and metals such as Coltan, Tin and Tantalum have been sourced.
“We are going to introduce a scheme that will audit the metal process firms and identify those that have due diligence in place that can assure customers that they have not been mined from sources involved in the conflict in the DRC, ” she said. “We have tested the processes with a number of tantalum smelters and are ready to move within the next six months.”
The Congressman Jim McDermott has championed the conflict minerals issue in USA, authoring the Congo Minerals Trade Act (H.R. 4128). In June, 2009, Senator Sam Brownback introduced to require electronics companies to verify and disclose their sources of Cassiterite (Tin), Wolframite (Tungten), and Coltan (Tantalum) or derivatives of these minerals; commonly used in cell phones, laptop computers and other popular electronic devices. Under the bill, U.S. Commerce Department – sanctioned auditors would audit mineral mines declaring them “conflict free or not”. These mines would be mapped to show which ones fund conflict. Furthermore, importers would have to certify whether they were importing conflict minerals – companies that do import conflict minerals will be reported to Congress by the United States Trade Representative. This bill would commit the US government to address the mineral exploitation that underpins the violence in eastern Congo. Bill requires U.S. companies to annually disclose as part of their filings to the Securities and Exchange Commission (SEC) information about the source of minerals used for their products.
The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 was passed recently by a bipartisan vote of 237 to 192. The legislation is now under the considerations of the Senate and hopefully the stage is all set for the Senate to clear it before end of July 2010 and the signing by US President Barack Obama, is a formality. The Act includes the following major provisions for ‘conflict minerals’ under Sections 1502 & 1504:
“TRANSPARENCY FOR EXTRACTION INDUSTRY
Public Disclosure: Requires public disclosure to the SEC of payments made to the U.S. and foreign governments relating to the commercial development of oil, natural gas, and minerals.
SEC Filing Disclosure: The SEC must require those engaged in the commercial development of oil, natural gas, or minerals to include information about payments they or their subsidiaries, partners or affiliates have made to the US or a foreign government for such development in an annual report and post this information online.
Congo Conflict Minerals: Manufacturers Disclosure: Requires those who file with the SEC and use minerals originating in the Democratic Republic of Congo in manufacturing to disclose measures taken to exercise due diligence on the source and chain of custody of the materials and the products manufactured.
Illicit Minerals Trade Strategy: Requires the State Department to submit a strategy to address the illicit minerals trade in the region and a map to address links between conflict minerals and armed groups and establish a baseline against which to judge effectiveness.
Deposit Insurance Reforms: Permanent increase in deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.
Restricts US Funds for Foreign Governments: Requires the Administration to evaluate proposed loans by the IMF to a middle-income country if that country’s public debt exceeds its annual Gross Domestic Product, and oppose loans unlikely to be repaid.”
Legislation alone will not end the conflict in eastern DR Congo, but this bill would provide a crucial step toward the creation of a practical and enforceable means to ensure that the trade in Congolese minerals contributes to peace rather than war. This bill would also serves as a useful precedent for other countries like India to take initiatives to deliberate, discuss and legislate a similar act for Indian based companies, who may be fuelling these conflicts in eastern DR Congo. The goal should be to stem the flow of illicit minerals, promote legitimate trade, protect those living in artisanal mining communities, good governance, political stability, human rights, access to opportunity and unlocking of the economic potential of this resource-rich lands of the DR Congo and of the Great Lakes region.
The most effective way to achieve this goal would be to ensure transparency in the consumer electronics supply chain to certify products as “Conflict-Free” based on ‘Due Diligence’ study reports, which have been duly verified by an independent auditor. Furthermore, awareness programmes are conducted regularly jointly with civil societies, NGOs, etc., for the public to purchase only the “Conflict–Free” products.
P R CHANDNA
How can Independent Directors (IDs)/ Non- Executive Directors (NEDs) are held legally responsible for something which may go wrong or lapses in compliance on the part of the management, including the whole-time directors?
Do you agree that the law should be modified to exclude independent directors from any criminal liability for offences committed by the corporations?
After the recent past Satyam Episode, a debate has once again hit the roof concerning the role of Independent Directors (IDs)/ Non-executive Directors (NEDs) on the Board after the lower court’s recent judgment on “Bhopal gas tragedy” – that had claimed an estimated 15,000 – 20,000 lives and few hundred thousand suffered from various crippling ailments & blindness for the past two and half decades. The court has held Mr. Keshub Mahindra, ex-chairman, Union Carbide India, guilty and sentenced him to two years of imprisonment.
Some very strongly feel that an act of negligence by a corporation that has resulted in so many deaths and sufferings to the people for such a long period should not go unpunished and stopped being manipulated with no one held accountable.
Whereas, a cross-section of IDs/ NEDs are apprehensive about meeting a similar fate for misdemeanors on the part of others – executives who are solely responsible for the day-to-day running of the corporations. The likely fall out could be exodus by way of number of them resigning en masse and none would come forward henceforth to take up the assignments of IDs.
There are many such questions being asked and these needs to be addressed for the benefit of the India Inc.
Empowerment of Whistleblowers
Posted on: April 10, 2010
Paper Published by The Institute of Management Consultants of India, Delhi Chapter (IMCI) in their E-magazine “ABCeMag – delimiting excellence” – To access Click Here
In corporate parlance, whistle blowing is a mechanism for employees to raises a concern about wrongdoing occurring in an organization, such as suspected fraud or violation of the company’s code of conduct or ethics policy. In the context of risk management and internal controls, it is a useful management tool which can hunt out information which may or may not surface to the levels where such deviant practices could be flagged, and stopped, thus providing an opportunity for identification and rectification of the problem, without damaging the functioning and/or survival of the corporations.
While the Indian government still has to bring out a comprehensive whistle-blower policy, the Security and Exchange Board of India (SEBI) has set out a model procedure for facilitating whistle blowing in the listed corporations under the Clause 49.
These guidelines are non-mandatory following reservations on the part of several companies, who were apprehensive that the policy could be used to report a number of frivolous cases. However, there are a number of companies who have indeed evolved a whistle blower policy and in some cases; the reporter of misconduct even includes other stakeholders, such as vendors and customers.
Recently, in December 2009, the Ministry of Corporate Affairs (MCA) has issued a Voluntary Guidelines for Corporate Governance, incorporating clause VI for Institution of mechanism for whistle blowing by the companies:
1. The companies should ensure the institution of a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company’s code of conduct or ethics policy.
2. The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Chairperson of the Audit Committee in exceptional cases.
A company’s board and its directors have the responsibility of reducing the damage that any public exposure could bring upon them and as well their companies, their risk management systems should provide for suitable mechanism of facilitation to encourage whistle blowing procedures that would at once encourage adequate confidence in the employees about the confidentiality of the processes and also the fairness and promptitude of follow-up actions on their complaints.
In the US, well published high profile whistle blowing by Sherron Watkins of Enron and Cynthia Cooper of WorldCom, which led to revelation of frauds to the tune of $591 million in Enron and the $3.8 billion in WorldCom.
Aforesaid and other fraud cases, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the securities markets, spurred the US administration to pass the Sarbanes-Oxley Act, 2002 (SOX), which provided legal protection to whistleblowers in public companies. Section 806 of SOX, is intended to protect employees of public companies from retaliation for reporting financial misdeeds, and is administered by the Department of Labor’s (DOL) Occupational Safety and Health Administration.
Section 1107, of SOX Act has provision of strong penalties:
“Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both”
Despite a strict ban on various kinds of disciplinary or retaliatory actions against such whistle blowers, such as discharge, demotion, suspension, threats, harassment, blacklisting, etc., the ground realities are quite different and the confidence levels in the systemic protection mechanisms is low.
However, in the recent case, John Kopchinski’s six-year legal battle against Pfizer Inc just made him a rich man. Kopchinski and five other whistleblowers have earned more than $102 million in payments from the U.S. government under the False Claims Act through which individuals can reap rewards for exposing corporate wrongdoing. Kopchinski – the Gulf War veteran and former Pfizer sales representative, alone has earned more than $51.5 million as a result of his whistleblower lawsuit against the world’s biggest drug maker and the record penalty the company must pay the U.S. government for its massive marketing transgressions. The size of the whistleblower rewards announced is already having an impact worldwide.
According to a recent Fraud Survey 2009 conducted by KPMG, nearly two–third (65%) of the senior executives viewed fraud and misconduct to be significant risks within their industry. These senior executive were most concerned of potential loss of public trust, potential legal fines/ sanctions, and loss of new or existing customers due to frauds.
In an another survey data based on actual fraud cases from the Association of Certified Fraud Examiners, responders opined that frauds were more likely to come to light through whistleblower tips than through audits, controls, or any other means. In addition, employees, who responded to KPMG Forensic’s 2008–2009 Integrity Survey cited Internal Audit as among the least likely channels to which they would feel comfortable reporting misconduct.
The whistle blowing, as an internal control mechanism is yet to come of age in our country. Whistle blowing, in India, still continues to be perceived by many as acts; which are not constructive, a matter of personal vendetta or revenge, intention to embarrass the organization, and so on so forth. On the other hand, the whistleblowers have often faced reprisal, greatly suffered and endured, often for many years, after the complaints have gone unheeded. One of the reasons attributable to this is poor levels of confidence in the ability of the legal and regulatory environment to ensure promised protection against retaliation.
For developing a better corporate governance practices in the country, it is imperative to empower the whistle blowers, the policy concerning them need to be made mandatory, with clear guidelines for prosecuting intimidation of or retaliation against the complainants, including imposition of fines/ penalties for frivolous or mischievous complaints and fast-track disposal of cases along the lines of the Sarbanes-Oxley Act (SOX).
References:
1. Corporate Governance in listed Companies – Clause 49 of the Listing Agreement: http://www.sebi.gov.in/commreport/clause49.html
2. Corporate Governance Voluntary Guidelines 2009: http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf
3. Sarbanes-Oxley Act 2002, Section 1107: http://www.sarbanes-oxley.com/displaysection.php?level=2&pub_id=Sarbanes-Oxley&chap_id=PCAOB11&message_id=66
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“The directors (managers) of such companies, however, being managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own… Negligence and profusion, therefore, must always prevail more or less in the management of the affairs of such a company.”
• Adam Smith – An Inquiry into “The Nature and Causes of The Wealth of Nations”
The Corporate Governance, has never ever, since the Satyam Episode, become such a household word. A confessional letter from Mr. Ramalinga Raju, founder Chairman of Satyam, divulged the accounting scam of the order of US $ 1.6 billion, and shook the whole country with tremors felt throughout the globe. Mr. Ramalinga Raju can be credited as the only corporate fraudster to have admitted his misdemeanors – fudging of accounts, inflated revenues, non-existing profits, and the fraudulent bank deposits and audaciously sustaining it for seven long years. The Mr. Ramalinga Raju’s misdeeds, unfortunately had given negative publicity of India Inc so far a positive story. The fraud has undermined the trust in the government, companies, and markets alike. In India, nobody had ever imagined anything to go wrong at Satyam, one of India’s best known IT companies, which ironically had received the Golden Peacock Award for Corporate Governance in 2008.
This episode has led to debates in India, about inadequacies in the corporate governance norms. Questions have been raised about the performance/ effectiveness of board of directors, roles of auditors, the impact of regulations, disclosures, etc. However, the silver lining to this whole episode was the proactive role played first time ever in India by the shareholder activists in opposing the unanimously approved board’s resolution in acquiring a property of companies owned by the sons of Mr. Ramalinga Raju, which led to revelation of frauds being committed by promoter behind the scene. If a large company like Satyam could do it for years, what’s the guarantee more are not doing it? It is therefore, important that the Satyam fraud needs to fast track investigation and sentence the fraudsters swiftly and harshly to increase ‘deterrence value’.
The frauds of such magnitudes provide a good opportunity for introspection. These times also expose the shortcomings and vulnerabilities of the system. Conflicts always have hidden solutions. There are lessons to be learnt from Satyam’s nemesis too. It is one such great opportunity to reassess some of the existing framework on corporate governance, systems for better enforcements of regulations; effective roles and duties of directors, executives, regulators; ethics in businesses and empowerment of minority shareholders and whistle blowers.
OVERVIEW OF INDIAN CORPORATE GOVERNANCE
India’s corporate governance codes are on par with the best in the world, the importance of continuing to assess it against international best practice, to suit to the Indian ethos & culture with utmost sincerity and keenness in enforcement has been highlighted by the recent fraud at Satyam.
The Indian corporate would appreciate the fact that the corporate governance in India has not been forced upon them by the government, but it was a voluntary and path-breaking initiative from the Indian industries association – Confederation of Indian Industry (CII). It was necessitated, for the fact that India Inc. was to move forward and globalize itself towards international standards in terms of disclosure of information by the corporate sector and, through all of this, to develop a high level of public confidence in business and industry in the process of building large global conglomerates. CII had vigorously lobbied and pressurized the government of India for its implementation.
Corporate governance initiatives began in 1998 with the “Desirable Code of Corporate Governance” – a voluntary code published by the CII, and the first formal regulatory framework for listed companies specifically for corporate governance, established by the SEBI, widely known as Clause 49 of the Listing Agreement – Aimed at improving corporate governance in the country. It was implemented in February 2000, following the recommendations of the Kumarmangalam Birla Committee Report.
Legal reforms has been ongoing, with SEBI in 2003 revised the Clause 49, as per the recommendations put forward by the committee and public comments received. Subsequently, the SEBI received a number of feedbacks/ representations, which were deliberated once again by the Narayana Murthy Committee and post discussion, SEBI directed further amendment to the Clause 49 in October, 2004. The amendment to Clause 49 of the Listing Agreement has been the topic of elaborate deliberations and discussions in the Indian corporate scene. The ease with which SEBI introduced mandatory corporate governance standards in India is unparallel.
The Companies Act, 1956 was undoubtedly a significant landmark in the development of Company Law in India. It consisted of 658 sections and fourteen schedules. The Act was enacted with the object of amending and consolidating the law relating to Companies and certain other associations. The main object of the Act was to provide protection to investors, creditors and public at large and at the same time leaving management free to utilize its resources and energies for the optimum output. However, the working of the Companies Act brought to light several lacunae and defects in its provisions. Therefore, the Act was amended from time to time. But despite extensive changes the principal Act still suffers from certain defects. Moreover, after liberalization, the increasing number of options and avenues for international business, trade and capital flows had necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner.
In 2004, the Indian Government took up a comprehensive review of the Companies Act, 1956. The aim was to strengthen compliance norms and to provide a governance structure for unlisted firms. The new Companies Bill has been based on best international practices and fosters entrepreneurship. As a result the Union Cabinet in August 2008 gave its approval for introduction of the Companies Bill, 2008 in the Parliament to replace the Companies Act, 1956. The bill had lapsed with the dissolution of the house in December 2008 and it has now been re-introduced in August, 2009. The Companies Bill seeks to enable the corporate sector in India to operate in a regulatory environment of best international practices. The provisions of Companies Bill are broadly considered to be suitable for addressing various contemporary issues relating to corporate governance, including those recently noticed during the investigation into the affairs of erstwhile Satyam.
The bill has now been re-christened as Companies Bill 2009, and will be forwarded to a Parliamentary Standing Committee for recommendations. With the standing committee set with no time frame for giving its recommendations, the passage of the new law is likely to take over a year. It is quite sad that the amendment of the Company Act 1956 has been languishing for so many years now. It is earnestly hoped that speedy passage of the Companies Bill will now be ensured.
LESSONS FROM SATYAM EPISODE
The Satyam board in December 2008, had unanimously approved a proposal to acquire 100 percent of closely held Maytas Properties for Rs 6,240 crore ($ 1.3 billion) and 51 percent of Maytas Infra for Rs 1440 crore ($300 million), with a total expenditures of Rs 7680 crore ($1.6 million). The immediate reaction of institutional shareholders and investment analyst, as soon as the information become public the next day, was that it was daylight robbery and the promoters were siphoning money out of Satyam. They further vehemently reacted and said that they would go to any length to prevent this from happening. Mr. Ramalinga Raju was left with no option to abandon the plan at the first place, but also had to put in his papers, confessing cooking of the books for several years, on 7th January 2009, sending shockwave all throughout the corporate board. However, the silver lining to this whole episode was the ascendancy of the Shareholders Activism, one of the first times ever in India. But for the proactive role played by the shareholders and the institutional investors, the nefarious activities committed clandestinely by promoters would not have seen the light of the day.
The Satyam fraud has also posed serious questions concerning auditing and audit firm oversight. The very fact that a member of the elite Big Four auditors, Price Waterhouse Coopers was caught completely unaware of the reality as it existed from that presented in Satyam’s books of accounts indicates the need for more stringent checks on the role of auditors and to make them more accountable.
In the Indian context, it is well known fact that many of the companies are controlled by the families and would like these to be handed over to their sons and daughters. The promoters may pursue interests that are not necessarily desirable from the point of view of the commercial success of the company. The promoters are all powerful making even the academically well qualified Independent Directors, as in the case of Satyam having people like; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…, appear dwarfs and not of independence. This has brought to attention once again the role of the independent directors and audit committee.
Timely regulatory action always helps, even if this action may seem to antagonize some of the players. More often, the pursuit of unprecedented growth leads some of the corporates to adopt sharp practices and the risks they carry. The genesis of these scams and scandals usually lies where there is either unregulated or lightly regulated. It is essential to watch out for such warning symptoms. These organizations need to be identified – in the present scenario state of art computer technology, it would not be difficult to keep a track off, cautioned and kept under careful scrutiny. Not only should their CEOs be interviewed periodically by the regulators, but their annual reports and periodic financial statements, where one can easily detect frauds should also be analyzed. It is important that the authorities ask the right questions at the right time.
The present crisis has taught lot of people a lot of lessons – we need stronger regulation, especially in the area of systemic risk, with such companies. The regulators instead of regretting their present failures review the practices and procedures being followed, address shortcomings, and implement the lessons learned to regulate markets and protect investors to bring back the lost trust and confidence.
It is one thing to have elaborate codes, but quite another for companies to follow them in letter and spirit. Yet another is the question of enforcement if companies do not adhere to the standards. Weakness of enforcement in India is a real issue. The unraveling of these events at Satyam has once again put spotlight on some of the corporate governance practices and has exposed the following weaknesses:
1. Lax Regulatory systems
2. The imperious and Machiavellians promoters/ CEOs and their unbridled greed
3. Connivance and collusion of Auditors and poor auditing practices
4. Timid and acquiescent independent directors
5. Shareholders activism and Empowerment of minority shareholders
6. Empowerment of Whistle blowers
We ought to refrain from taking short term regulatory measures. It would be worthwhile to search for holistic solutions to these issues; which are relevant in the Indian context. The choice of changes in the regulatory frame work should be compatible with the country’s own values and legal system, rather than plagiarizing from other countries. The system adopted should be agile enough to fore warn the early signals of a brewing crisis and take corrective measures. The system should encourage “proactiveness” rather than be a “reactionary”, otherwise reforms are not expected. With the present day state of art computer technologies, early warning system is not impossible.
One must, however, understand that no matter how strong a regulatory system is, it cannot always prevent frauds. Despite the enormous increase of disclosures and stringent risk management systems in US post the Sarbanes Oxley Act (SOX), inability of the system to read the early sign of impending recent Subprime crisis, Madoff’s Ponzi scheme and willingness to take corrective action is one such example. Moreover, strong measures often lead to expensive regulations and defiance. There are limits to legislations as a lot depends on the integrity and ethical values of various corporate players such as directors, promoters, executives and shareholders. The key lies in management decisions and its commitment to establish and follow rigorous governance systems. The implementation must be in the letter and spirit, and one should recognize the responsibility of the company towards its stakeholders.
- In: Bernard Madoff | Corporate Governance | Ethics | Fraud | Ponzi Scheme | SEC | Whistle Blowing
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Is it a case of hamstrung by bureaucracy, inexperienced investigators, misjudgment, improprieties or much more to it?
In a blistering executive summary report posted on SEC’s web site on 2nd September 2009 by US SEC’s inspector general, states that the regulators missed “numerous” red flags that had led to Madoff‘s $65 billion Ponzi scheme and never did a “thorough and competent” probe despite complaints dating to 1992.
In spite of five probes and having caught Madoff in “lies and misrepresentations” SEC failed to follow up on inconsistencies. But for Madoff’s self confession of the crime in December 2008, the regulators would have never ever found out. The financial crisis has exposed many breakdowns in regulation, but none has involved such a large fraud by a single person.
The laxity of regulator in discharging duties for around one and half decades had only encouraged the fraudster to continue the crime audaciously for such a long period. The fraud left thousands of clients, including charities, retirees and celebrities, devastated. Such failure are unpardonable and do not act as deterrent.
Click here to Read the Executive Summary Report
CLICK HERE To Read Full Report
The Hon’ble Union Minister for Corporate Affairs, who had delivered the inaugural address on 21st August 2009 at the “National Conference on ’Corporate Governance’” organized by the Institute of Directors, asserted the government’s commitment to demystify issues relating to corporate governance.
Referring to the new Bill on company affairs, the Minister said the government was working to simplify the law by bringing down the provisions from 600 to about 400. He further said that there was a need to restrict the number of directorship an individual could hold. “We don’t have superhuman being to be the director of 20-25 companies”.
“Those aspiring for the posts should be aware that it is a position of responsibility and not a joy ride,” he said. (Source: Business Standard (New Delhi Edition) dated 22nd August 2009)
The above issue of “Super (human) Independent Director” was commented upon by me on the blog “Indian Corporate Law” on 30th July 2009. To read the full article Click Here.
In view of the above, it is pertinent that, those IDs holding such ornamental posts, on the moral grounds should of their own resign from some of directorship before they are removed through the enactment of new company law and get humiliated later.
It would also be, not out of context to mention here that the Chairmen/ Chairperson / Nomination committees of those corporate should set an example of good corporate governance and ask these IDs, who are holding so many posts on the board to go immediately. Not only, the reputation of these companies is at stake, but it would lead to plummet of these companies’ shares in the stock market thereby affecting the minority shareholders values, like in the case of Satyam.
P R Chandna
Independent director, anyone?
Posted on: June 27, 2009
Regulators will have to think through questions prompted by the mass exodus of independent directors from company boards
The following comments on the above article by undersigned were published at the Live.mint.com at the Lounge to read the full article click here:
PUSHKARRAJ Said:
Scrap the System of Independent Directorship in the Board – Is this the solution? What are the role and responsibilities of an Independent Directors? How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……? Does the self regulatory mechanism has the solution? How far SEBI or any other regulators been successful in controlling? Is scraping of the system of IDs has the solution? The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders. The role of the independent non – executive is slightly more onerous than that of ordinary non – executives as they must also be completely free from any “conflict of interest”. That means they cannot have any vested interests, whether by personal shareholding, contracts with the company or relationships with the management. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest. The independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles. When looking at the failures it is tempting to claim that the independents have failed miserably in their duties. But, when we consider the vast majority of companies that survive, or even thrive, the failures are a miniscule percentage of the greater whole of the listed companies. In most companies the independents, supported by ethical non-executive and executive directors, manage to represent the shareholders’ interests faithfully and well. The key issue is that we are dealing with a social system in a confidential operating environment. Ethical and tough directors will stand up for what is right. Unethical or weak directors will cave in to pressure and may do the wrong thing or simply turn a blind eye whilst others do the wrong thing or resign and go. It is impossible for regulators to regulate so that only ethical and strong people get onto boards. Shareholders can help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviours in the boardroom: • What skills each director brings to the board? • How directors behave in the boardroom? • What training needs were identified in the board performance review? • What training has been delivered and what is planned? • What specific governance/ director training do board members have? Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director. It is therefore, pertinent that the ethical side of directorship needs to be recognised and managed far more than it currently is. It is observed that things are improving slowly, but there is still much to do to get all the deadwood cut out of the boardrooms. P R Chandna NOIDA
AN EXAMPLE OF GOOD GOVERNANCE
Posted on: June 18, 2009
AN EXAMPLE OF GOOD GOVERNANCE
“Environment ministry to eject double agents: http://www.hindustantimes.com/StoryPage/StoryPage.aspx?id=3991f809-1079-4462-8370-4df1fe532ad6 ” – HT Times 17th June 2009
It is good to see an intiative has been taken towards good governance in one of the ministry. Our congratulations to the Hon’ble Minister for taking such an initiative of transparent working in his area of influence.
The government as well PSU service rules are very clearly defined issues like “conflict of interests” and “cool off period” and suggest not to take any pecuniary avantages from clients or private sector employment immediately after their retirement but are being coveniently overlooked in many cases.
Many of the ExCMD/ Directors/Scientists/ Government officers at the highest levels have joined either their clients or private sectors immediately after retirement or holding parallel offices. The initiatives taken by one ministry should be emulated by other ministries, so that an example are set for good governance in the country and those holding similar posts should either resign immediately or sacked or removed.
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