In the backdrop of a wave of loan defaults, bank frauds, accounting scandals and misgovernance in a welter of names such as DHFL, PMC Bank, IL&FS, Religare and Kingfisher, this week's news on software major Infosys facing an internal probe over auditing irregularities after an anonymous complaint seems like a flea bite. But its shares have plunged by as much as 14 percent overnight, and it is a good opportunity for us to use the Infosys episode as a case to understand the nature of corporate governance and whistleblowing in India.
The details of the whistleblower complaint, which mention everything from chief executive officer (CEO) Salil Parekh's travel habits to his casual remarks on employees, are such that either his future is in doubt or his style will be cramped. We need to ask if big companies have to be bureaucratic in the pursuit of processes. It is for the board to take a view on grey areas. But accounting is often an indicator of character and trust rather than profit, and here is where questions loom on what corporate governance is all about.
Infosys is considered as a bellwether not just for India's emergence as a strong economy in a globalised era in a pioneering export sector, but also for corporate governance and disclosures wore on the sleeves by its iconic founder, NR Narayana Murthy. As the country's first company to list on the tech-laden Nasdaq in 1999 (and unglamorously shifted to the New York Stock Exchange since) its status deserves a second look. But it still remains a trendsetter for what thousands of other listed companies can be or should be.
Bengaluru-based Infosys has a whistleblower policy in place, and we need to ask how far other companies have got in the sphere. One study showed that about 20 to 25 in the National Stock Exchange's benchmark Nifty index had at some point forged financial results.
The details of Satyam Computer Services Ltd staging India's biggest accounting fraud in 2009 is still fresh in our memories. It was Infosys co-founder Murthy who in 2003 headed a Securities and Exchange Board of India (SEBI) committee on corporate governance, and the stock market regulator has followed his and other panels' views in tightening the screws on Indian companies.
With literally hundreds of millions of Indians being led into the stock market through mutual fund investments through systematic investment plans and employee provident funds, it falls upon the SEBI and the company affairs ministry to ensure that the money risked by small investors is safe from all sorts of window-dressing in numbers.
The Reserve Bank of India (RBI) needs a similar approach in the interest of depositors. If only the Punjab and Maharastra Co-operative (PMC) Bank had a functioning whistleblower policy, its shenanigans could have come to light earlier. It took PMC Bank's former managing director, a long-time collaborator in irregularities, to confess the wrongdoings under duress. The woes faced by PMC Bank depositors is a case study in the miscarriage of justice, with five serious victims counted already.
Having said that, it does seem on the face of it that the new episode in Infosys' cup of woes may well be an overblown storm in a teacup when things quieten up. It is perhaps a tribute to the company's best practice list that the complaint has been smoothly referred to the audit committee.
The fact there appears to be voice recordings and e-mails as part of the evidence that Parekh asked for some rule-bending on visa costs and revenue recognition suggests we should wait for the outcome of the probe. Nevertheless, it could well be a borderline violation of best practices than serious violations of ethics. However, it is noteworthy that deputy chief finance officer Jayesh Sanghrajka resigned days after Infosys's quarterly results and the whistleblower complaint is dated barely two weeks before the results.
Infosys chairman Nandan Nilekani, in his second innings at the helm after he returned to the board to fix a mess can no longer repeat his famous words last year that the company had gone back to being boring and "that is a good thing." His assurance promising the "fullest investigation" into the latest complaint shows his troubles may have shifted from business strategy to corporate governance.
The fact that Infosys is US-listed and brokerages are cautious after the latest complaint shows that there is an onus on the bellwether to live up to its description.
Infosys is no ordinary company. The last time it was in the news two years ago over accounting/whistleblower issues related to its acquisition of Panaya under ousted CEO Vishal Sikka, some matters seemed to be brushed under the carpet in a sudden forgive-and-forget mood that smacked more of politics than good governance. What is it this time? We do not know yet. But what we do know is that there is such a thing as overdoing.
Corporate governance is, in reality, an art than a science. Companies face uncertainties in the best of circumstances, and forecasting earnings and managing expectations, if adhered to a fault, results in episodes where even a fine CEO may be forced to flirt with numbers in a less-than-excellent manner. It is for such reasons that companies such as Wipro and Google have chosen to part with less glamorous details in forecasts. It is better to be safe than sorry in the game of disclosures.
For all we know, some of the practices criticised in the whistleblower letter may be viewed by shareholders as the display of aggression in deal-making in the long-term interests of the company. There are no easy answers on how a company should manage short-term profitability and long-term sustainability. Fair disclosures are a good thumb-rule in corporate governance but auditing rules can sometimes be more in the nature of desirable guidelines than cast-iron law. In such a context, shareholders and boards may view an auditing issue in a different light.
Whistleblowers need encouragement and protection, but they also need threshold limits below which complaints can seem frivolous or motivated.
We would have to wait and see. The devil is in the details. But, for India as a whole, it is time to raise the standards of accounting, disclosures, whistleblowing and corporate governance in general. The Infosys episode shows that there is more to this than simple rules or corporate structures.
In the age of social media outrage and proliferation of stock market investing, regulators and policy-makers have to be proactive on such issues to pre-empt unwanted scandals and unwarranted stock market instability. India has a whistleblower protection law for public servants. It is time to look deeper into the alleyways of corporate India to encourage at least a uniform framework for the private sector. Nasty surprises are not a good thing.
(The writer is a senior journalist and commentator. He tweets as @madversity)
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Updated Date: Oct 22, 2019 16:30:15 IST