THIS issue of gfiles exposes the nexus of politicians, bankers and civil servants, all of whom are embedded in the scam reportedly implemented by Ravi Parthasarathy of IL&FS. His story is one that is crafted by some of Mumbai’s financial wizards who have expertise in such scams. The other important story in this issue is on the deteriorating defence infrastructure as indicated by none other than BJP stalwart Dr Murli Manohar Joshi, Chairman of the Estimates Committee.
The concept of modern companies, or joint stock firms, whose shares are trade-able, is five centuries old. Corporate scams have since rocked managements, policy makers, regulators, investors and even nations. Sometimes, fortunately rarely, the contagion spreads globally—Great Depression (1930s) and the bailouts of American auto manufacturers in 2009. Yet, shockingly, the nature of the scandals remains the same. Change the individuals’ names, and those of the firms and countries, yet each case seems to possess similar ingredients. Corporate history repeats itself, albeit in a grander, bigger and more wealth-eroding manner. Every corporate downfall, especially of a larger scale, has three crucial components—emotional (human), management (professional), and institutional (corporate governance and regulation).
The first relates to the deification of a specific company, or a set of companies, and its owners, promoters and managers. The owners are worshipped as Modern Midas’, Gods of Mammon, for their capacity to earn riches.
Owners, promoters and managers are consumed, even subsumed, by the accompanying hubris. They believe that they can never do anything wrong, and everything that they touch, even look at, will turn to gold. Hence, they over-reach themselves, over-leverage their company or companies, and begin to take more and higher risks. Policy makers, directors, funders and shareholders encourage them, in their craving for higher returns. The owners think that they have a magic wand: they expand furiously and enter businesses that they have no clue about. Caught up in this ever-growing frenzy, the checks and balances break down. Those who are appointed to fulfil and discharge these responsibilities either act like fools, sleep on their jobs, or get caught up in the excessive self-confident environment. Corporate governance fails, as the board of directors becomes a rubber stamp, looks the other way, or fails to read and raise the red flags at the appropriate time. Regulators find some excuse or the other to justify their passivity. The policy makers, if they are in a position to do so, hand out ever-larger largesse to the company or companies, and their owners. The stage is set for the grand downfall.
At the root of the entire process is plain and naked greed, the age-old original sin. Personal, corporate, and institutional greed interacts and enmeshes with each other, as everyone involved feels that he or she can benefit, either in cash or kind, power or influence. The corporate system is actually rotted and rusted, and fresh optimistic, hyperbolic, high-quality and jargonised plaster is added to hide the gigantic cracks in the corporate edifice. The pack of cards rises so high that even a whiff, a whisper, and a singular, insulated and irrelevant action can bring it down in an instant.
What is clearly required to control corporate scams—one can never stop them—is more than a set of laws, checks and balances, and incorporation of institutions and regulators. What is needed are people who exercise their responsibilities, and can somehow protect themselves against the tyranny and forces of greed. The effective way to check corporate scandals is to enforce the punishment of those guilty in the strictest possible manner. Send people, even at the highest levels, to prison. Set an example. Spread the message that no matter how powerful you are, if charges are proven against you, you will spend a long time behind bars. At the end of the day, only fear can counter greed, and the dread of jail can offset the lure of easy money.