Why Good Governance Matters
It would not be surprising if some big company would have chosen to downscale itself for avoiding reporting on governance issues affecting the company – By Anil Gujadhur
The notion of good governance came on stage only in the 1990s. It was against the background of some huge financial scandals that regulators and lawmakers came to the conclusion that the beast of misgovernance had to be reined in at the risk of making the whole system collapse.
Cases of exaggerated behaviour by private decision-makers came to light from different places across the world. One may recall the feeling of awe and disbelief which seized the world when the gigantic MMM pyramid scheme of Russia collapsed in the mid-1990s, clearly showing that all the money had been siphoned off, possibly with complicities in the government. (Mavrodi Mondial Moneybox – MMM – was a Russian company that perpetrated one of the world’s largest Ponzi schemes in the 1990s. By different estimates from 5 to 10 million people lost their savings.)
It is shocks such as this that led to the formulation of explicit rules by regulators and lawmakers by which market operators would be governed, collectively called rules of good governance. The objective was to bring under control undue departures of private and public decision-makers from good principles and to preserve public confidence in the regulated working of institutions in both the public and private sectors.
Many countries had taken the lead by the late 1990s to require companies and others to conduct their business activities accountably and in a transparent manner to reassure the public that sufficient levers of control against abuse were in place. We caught up with this international trend here in Mauritius in the 2000s. In early 2001, the Bank of Mauritius issued a first guideline on corporate governance to financial institutions falling under its supervisory authority, clearly setting out division of duties and responsibilities between board and executive management for ensuring their safe, sound and accountable operation by adopting clear mechanisms of internal control.
By 2003, then Minister of Financial Services and Economic Development, Sushil Khushiram, circulated a Bill intending to set up a Financial Reporting Council (FRC) of Mauritius. By 2004, it was made into law. The objective was to ensure that auditors and accountants operating in Mauritius were made answerable to the specialised institutions set up for the purpose by the FRC, even though they continued to be professionally overseen by their overseas Institutes they belonged to.
The Act also established a National Committee on Corporate Governance (NCCG) with Tim Taylor appointed as its first Chairperson. Within the year, the NCCG issued the first National Code on Corporate Governance (the Code). This set the pace for Mauritian companies of significant size to have to abide by the Code which contained a number of internationally recognised standards and principles of ethical, accountable and transparent conduct of company business. Companies were required to comply with the Code or explain any non-compliance therewith.
It is difficult to state the spirit in which all concerned Mauritian companies took the coming into place of the Code. Some may have considered the additional reporting on their governance standards annually as a burden. Others could have seen it as an opportunity to outshine their competitors by abiding by the highest standards of compliance. It would not be surprising if some big company, not wanting to disclose its affairs publicly regarding observance of the Code, would have chosen to downscale itself for avoiding reporting on governance issues affecting the company. Still others may have decided to fall within the parameters set out in the Code, merely, as it were, to pay lip service to its requirements.
The fact is that, whereas the original Act identified over 40 State-Owned Enterprises (CEB, CWA, Wastewater Management, MBC, Rose Belle Sugar Estate Board, Road Development Authority, the STC, Irrigation Authority, etc.) to fall within its precincts of compliance, our legislators subsequently had all of them deleted from the list. It is difficult to make out the reason why they were exempted whereas large private companies continued to have to comply.
For the first time, Mauritius had a Minister responsible for good governance in 2015. It is not all that clear that the disarray which followed showed good governance at its best or at its worst. Just as an example, in deference to established norms, Tim Taylor and his team offered their resignation from the NCCG early 2015 when the new government came to power. This was refused by the Minister, only to revoke them dramatically a couple of months later in April 2015 without explaining the reason therefor.
Bad governance comes with a risk
One may ask the question: why did the international financial and economic crisis occur, despite all the governance and regulatory safeguards put in place since the 1990s? Many agree today that big business in quest of higher profits in several important countries persuaded politicians to loosen the rules of compliance, which is what happened. Abuse of corporate power was profit-driven or rather bonus-driven for the bosses of big businesses earned more the higher they were able to soar corporate profits or stock prices. This kind of malpractice led to the crisis which, even today, threatens to dismember the globalised economy.
Recent examples show that abuse of good governance is widespread all over the world. The Volkswagen fuel-emission cheating software scandal, involving large fines and penalties US regulators have been imposing on it in tens of billions of dollars, has barely left the scene. We already have a spate of corporate scandals splashing up on the stage in Japan.
In this case, it has recently come to light that Tepco, the nuclear-plant supplying company has long been involved in lax regulatory reporting before the Fukushima nuclear disaster. Deceitful corporate practices have also surfaced up for Takata for having supplied faulty airbags to auto-manufacturers, for falsification of fuel-efficiency tests by Mitsubishi Motors, for extensive accounting malpractices by Toshiba, for fraud at medical-equipment maker Olympus and, no less, for supply of adulterated steel to train, aviation and auto manufacturers by Kobe Steel. The top bosses of these companies, unable to hide the identified flaws anymore, have lengthily apologised for their company failings of which they were aware since long, in some cases for over a decade, only to admit them now.
If it borne in mind that a country like Japan had to prove that it was as good a quality and high-tech supplier to global markets as competitors from the former market-dominant western manufacturers. Its international success was based on its being seen as a consistently good, high-standard and reliable supplier. Under pressure to produce ever higher profits year after year, its bigger companies have employed extensive contract labour, forced overtime on workers a few of whom were so stressed up as to commit suicide. In the process, loss of rigour and quality have finally eroded the hard-earned goodwill.
Mauritius however has to tread more carefully when it comes to abiding strictly by high and ethical standards. Given the economic and political clout a country like Japan wields on global markets, it can internalise and overcome its corporate governance failings with its market-dominant position at the global level. On our part, we don’t have such clout. On the contrary, even a small failing on our part can invite those who see us as being in competition with them to exploit it fully and paint us in the worst light.
Given this kind of vulnerability, we cannot afford to trifle with good governance for short term private benefits of corporate or political decision-makers. Some work has been done on this chapter already. We should build upon it to create confidence that no double standards will be allowed to erode the element of trust so important to investment and economic development.
* Published in print edition on 8 December 2017
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