CEOs NATURALLY LIKE SEAMLESS, UNBRIDLED EXERCISE of power but three vital limbs of a modern corporate (aside of shareholders) supposedly work towards ensuring that such power is exercised reasonably. The limbs in question are risk management, internal audit and in-house legal departments. A reality check of corporations across the world would however reveal that the professionals attached to these limbs are, more often than not, and entirely for wrong reasons, the most unpopular lot of any corporate. The tide is slowly turning in their favour although old attitudes are hard to dislodge.
THE COMPLEXITIES OF DOING BUSINESS TODAY and the regulatory compliances that have to be ensured on a day to day basis should, in the normal course, result in adequate respect being accorded to #risk management, #internal audit and #in-house legal professionals. However, are their voices heeded and their recommendations and findings implemented ? The answer is anybody’s guess.
IT IS ONE OF THE IRONIES OF MODERN CIVILISATION that there is a hell of a lot of money to be made by breaching the law or by diluting adherence to applicable compliances. For instance, no one has yet estimated the billions of dollars corporates have made, say, by the violations of #sanctions on Iran although there have been instances of some high profile fining. The banking industry is particularly vulnerable. #Matthew Vincent, a columnist with the #Financial Times recently asked : ” If 16 global banks can incur GBP 306 Billion of fines and provisions in 5 years…and still make profits, has “getting caught” simply become a cost of doing business ?”
FOR THE MEDICAL PROFESSION, IN ORDER TO SAVE human lives, #Dr Atul Gawande famously recommended that we must mandatorily run through an irreducible minimum of checklists. What is the equivalent for corporates ? #The Sarbanes-Oxley Act triggered a host of checklists for corporate compliance and it resulted in an increase in the intake of risk management and audit professionals in most MNCs. Nevertheless, the credo of “profits at any cost” or “profit in everything that we do” has still marginalized the above named professionals. Sadly, company managements particularly look for pedigreed but weak-kneed ones who can either merely “go through the motions” or “wink” at breaches. This tacit pact has spelt the ruin of several corporates from #Enron to #Lehman Brothers (nearer home, #Satyam Computers) and audit firms catalysed their doom by looking the other way when irregularities stared at their faces. When the columnist #John Plender spoke of “moral capital in secular decline” a reader from the #Financial Times aptly commented: “An action that brings a big reward will be adopted no matter how unethical it can be, if the risk to get caught is low enough.”
THE INTERNAL MARGINALISATION OF RISK MANAGEMENT, Internal Audit and In-House Legal functions has also given rise to whistleblowers. But life is not easy for whistleblowers either. In the context of several banking scandals, #Beatrice Edwards, Director of the Washington-based #Government Accountability Project, aptly said:
“It is a win-win for everybody involved. The calculation for the Bank is going to be, “OK, how much money can we make by doing this (bad behaviour) before we get caught? Are we going to be able to cover the fine at the very least , and then make a fairly substantial profit and just pay the fine ?” And that would explain why there aren’t any prosecutions, because if the Department of Justice starts prosecuting, then the gravy train kind of shuts down. Calculate how much money you can make by doing X or by selling Y before getting caught at it and what you think essentially you could settle for, and if what you can make is substantially more than what you can settle for, then you go forward. If getting caught means (there is) a whistleblower, then you just grind up that employee in the cost of doing business. If the employee whistleblower is lucky, he or she comes out with a successful anti-retaliation claim three or four years after the blood was shed. Or the whistleblower if successful gets an amount of money that may make it possible to go on living – but it is certainly not an amount of money that caused a real pain to a major financial institution on Wall Street. It is a cost benefit analysis. It works because nobody is going to jail. Jail would put a stop to it...”
ULTIMATELY IT DOES APPEAR AS IF THERE IS an unwritten understanding between all participants in society. This has been analysed in the book #Fragile by Design, co-authored by #Charles Calomiris and #Stephen Haber, the essence of which was aptly summed up in #John Kay’s review : “The incidence of financial crises is the outcome of local political conditions. The authors describe bankers’ interactions with supervisory authorities as a game of “bank bargains” in which the structure and behaviour of a nation’s financial system is the outcome of tacit compromises between competing and cooperative interests mediated in a political arena.” What applies to banks applies to all other corporates too.
THE PROFESSIONALS DISCUSSED IN THIS POST have only two options : either wink and sail along or stay their ground, regardless of consequences.