Saturday March 7, 2009

The issue of corruption – a factor in current financial crisis?

COMMENT
By TAN SRI GANALINGAM

EVERYBODY, everywhere likes to talk about corruption, be it in the civil service or in the private sector.

Corruption is everywhere, and it is growing because of little emphasis on deterrence. Corruption has become an issue of major political and economic significance in recent years and the necessity to take measures against it has become evident.

As widely acknowledged, corruption is the abuse of entrusted power for private gain. It is damaging to a country because decisions are taken not in the interest or benefit of the public at large but rather to serve private interests.

Corruption undermines good governance, fundamentally distorts public policy, leads to mismanagement of resources and particularly hurts the general public especially the poor. Of late, there are calls for the anti-corruption movement to focus seriously on tackling corruption in the corporate, banking and financial sectors.

Yes, I agree greater emphasis should be paid to fight corruption in the private sector especially in the banking and finance operations, auditing and rating agencies as well as corruption by government-linked companies (GLCs), doctors and lawyers. The incidences of corruption in these areas and professions have undoubtedly escalated.

The spread of corruption, incompetence, malpractices, abuse of power, fraud and other unethical behaviour have been attributed to the alarming decline in integrity in the private sector, especially among individuals and organisations at large. The case of Enron in the US and Satyam in India are good examples of widespread accounting fraud. The latter is tagged as India’s biggest corporate scandal in history.

Here’s an irony – the word Satyam means “truth” in Sanskrit. And when the truth came out, Satyam got into a rapidly cascading wave of troubles.

First, shareholders blocked Satyam’s chairman, Ramalinga Raju’s asset purchases, and then the World Bank banned Satyam from bidding for orders for eight years, alleging that improper benefits were given to World Bank employees.

Then four directors quit, and finally, Raju quit the company and announced his fraud.

Guess who the London-based World Council for Corporate Governance gave the Golden Peacock Global Award for Excellence in Corporate Governance last September?

It went to none other than Raju. So, even though he “only” attended Harvard Business School’s Advanced Management Programme, I would certainly add Raju to this list of five Harvard MBAs who wrecked the global economy – one of whom is Jeff Skilling, former Enron CEO.

The others include former US President George W. Bush, former US Treasury Secretary Hank Paulson and former Merrill Lynch CEO Stan O’Neal. Of course, being a Harvard product myself, not all Harvard MBAs produce such poor results.

All this takes our memory back to Enron days where we saw a spectacularly rising company falling equally spectacularly. Quite a bit if similarity with Satyam – cooked balance sheets, a superb board of directors and complete ignorance of basics. Another similarity is Enron was known for its strategy before it collapsed and it was part of every management strategy book.

There is a difference though as Enron was much bigger and in vogue than Satyam and the fraud in Enron was much larger. This crisis has led to a lot of questions on role of regulators, credit rating agencies, CEOs, etc.

In the case of Satyam, there were millions of cash and bank balance which were of non-existence. This gives rise to how their auditors, PriceWaterhouse, missed that vital information as cash is counted and bank balances are certified by banks.

It clearly shows that this audit firm and its partners must have been a part of the fraud, and therefore must be severely prosecuted. Regulators and investors are made to believe audited balance sheets.

Corporate mis-governance and the lack of oversight really don’t respect geographical boundaries. I am actually surprised that we have not seen more cases like Satyam come out of India, or elsewhere, in earlier years.

The economic boom over the last decade is the perfect breeding ground for such cases. As such, in my opinion, I am actually quite pleased if this remains an isolated case.

Realistically though, I will not be surprised if Raju’s actions cascade like a domino effect, and we have a slew of such hidden ghosts coming out of the closet in the near future.

No doubt, this Satyam episode is a real shame.

Going back to the Harvard education, people have started blaming the “Harvard MBA/PhD mentality” as one of the critical factors that have substantially contributed to the economic demise of America.

The “gaming of the system”, the objective to maximise quarterly profits without regard to the long term impact, have been a major factor in the fraud schemes. Their philosophy is to wring out the quarterly profits in any possible manner.

In retrospect, this “philosophy” is fraught with a lack of ethics and integrity – maximisation of quarterly profits to justify exorbitant CEO and upper management compensations.

This philosophy and mindset has been the ruination of the American economy and their markets. It has totally undermined the “faith and confidence” of the average American investor, who is not so easily going to be sucked into their market and corporate scams anytime soon.

Coming to the banking sector, banks perform essential functions in society and provide people with a ‘safe’ place to deposit their money as well as to give credit to borrowers. Against this perception, I understand and share people’s anger towards the behaviour of some banks.

Recently, I read with interest an article in The Observer by British Prime Minister, Gordon Brown titled “We will put people first, not bankers”. He explains how new institutions with new values will govern the banking system.

He notes: “Banks must act in the long term interests of their shareholders and therefore of the economy as a whole, not in the short term interests of bankers. We want to ensure that the new banking system that emerges over the coming years becomes the servant of our economy and society, never its master.”

A lot of banks spend people’s money to lend. Personal influence and corruption lead banks into high-risk lending – sometimes to borrowers, who have no intention of repaying the fund. In one of my earlier article, I did say that Financial Institutions use other people’s money to make investments and need prices to go up so that they can make a profit and pay themselves 20% bonus on top of the 2% management fees.

Banks have been doing all sorts of stupid and barely honest moves like lending to people who cannot pay the money back.

In 2004, a US Senate Committee revealed that the World Bank has lost about US$100bil slated for development in the world’s poorest nations to corruption since 1946, nearly 20% of its total lending portfolio.

Other experts estimate that between 5% and 25% of the US$525bil the Bank has lent since 1946 has been misused.

Corruption has become a global issue as developing countries, watchdog groups and some economists complain that poor nations lose huge funds from multilateral development banks (MDBs) like the World Bank because of misuse of money.

While the MDBs profess “zero tolerance” for corruption in their projects and programmes, this rhetorical commitment has not always been meaningfully implemented.

In Malaysia, the Government should obtain information immediately to detect corruption involving GLCs. Shareholders can also play a role by raising what may seem to be irregularities and use their authority to act against dishonest individuals in a company.

If we are serious about addressing the cancer of corruption, especially GLCs must be subjected to procurement guidelines that assure transparency in the award of contracts or tenders and thus minimise the risk of corrupt payments in connection with such contracts.

It must be remembered that GLCs, just like the banks, are also dealing with other people’s money. We do not want to see cases such as Enron and Satyam emerging in Malaysia.

We have examined society and people, but what about our own selves? For every finger that we have pointed at the business fraternity, politicians or bureaucrats or the government, four fingers have pointed right back at us. It is time to turn the light, and the microscope inwards.

We might begin by asking ourselves: Am I incorruptible? If an opportunity comes my way, would I desist? It is easy to be a person of steadfast integrity until a temptation presents itself.

Gnanalingam is executive chairman of Westports Malaysia