The recent fiasco in the Satyam case has brought out some serious issues that could have long term judicial implications.
To begin with, a case of the nature demands that there is coordinated action amongst the various agencies. I am not suggesting that it did not exist but what intrigues me is the fact that the capital markets regulator and the SFIO have been consistently denied access to question the accused for close to a month. This leads one to an inevitable question if there is more to it than the eye meets! One surely is not absurd to wonder if SEBI and SFIO should be entitled to it. In this case the market loss is in far in excess of Rs 7000 crores of the alleged fraud. Second if even in such cases the local CID with its archaic systems is going to get precedence for investigations then our law makers must have been naïve to have thought of the SFIO.
Compare this with what happened in China in the case of the melamine in the milk. The case that was first reported only a couple of months back but the trial has already been completed and the guilty convicted including a death sentence for a couple of them.
The other aspect was the arrest of the auditors of the company. I am not defending them at all but upset at the gross abuse of the judicial process. How else will one explain the arrest on a saturday evening knowing fully well that they will not be in a position to obtain a bail over the next two days being public holidays. The other aspect relates to the statement of the investigating officer. In the absence of access to the FIR one has to take it as the reason. The reason attributed was that they did not perform their responsibilities as external auditors! That would warrant action under the Companies Act and professional disciplinary action and not action straight away under the criminal procedure code! If lack of accountability can warrant action of the nature suggested we need to take some actions straight away. First let us all walk around with anticipatory bails and second the governments need to obtain budgetary support for expanding the capacity of all prisons! Well surely could classify as infrastructure projects during recessionary times!
Wednesday, January 28, 2009
Sunday, January 18, 2009
Corporate Governance & Crisis Management
A couple of week’s back I had an occasion to write on corporate governance and succession planning in a very different context. Little did I realise that the implications of planning for continuity in business management would become as evident and critical as seen in the context of the alleged fraud at Satyam. A sure case study on corporate governance for sometimes to come. Viewed in a larger context, business continuity management is an integral part of the succession planning process.
Developing an effective crisis management plan is not an option for an organisation but a hallmark of good corporate governance. The source for a crisis may be events like an industrial accident, product failure, financial improprieties, sexual harassment allegations, or a hostile takeover. To think of it, one does not have to go very long back in memory to recall that very famous Indian corporate brands like Cadbury’s, Satyam, Infosys, Zandu Pharma, have been in the news for each one of the examples cited. Any event that suddenly threatens a company's financial performance, reputation, employee retention, customer relations has the potential to become a full blown out crisis. An organisation response to a crisis will have a significant bearing on its short-term and long-term performance.
In a discussion on business continuity planning it is not uncommon for people to look around at the technology heads as if to indicate that it business continuity is inseparably linked only to technology! Threats to business continuity can arise from natural disasters, human being, technology and socio-political factors.
The ability of management or the leadership team to recognise the fact a crisis is brewing or emerging is by itself a science. This is as critical a phase as the golden hour in the case of an accident victim. The recognition of the early warning signals of an emerging crisis is critical to trigger actions that need to be initiated to contain the follow out of the same.
An international study conducted a couple of years back assessed the financial impact of 15 major corporate crises, ranging from product recalls to industrial accidents and terrorism found that the stock prices of companies that managed their crises well rose 7% on average in the year following the crisis. By contrast, the stock price of companies with less effective crisis management dropped 15%.
For initiating an effective crisis management strategy, it is critical to understand the impact that the event could have on the various assets of the organisation including and more importantly the reputation and brand. Having done that it is important for the team to draw up a vulnerability assessment to determine the implications of a potential threat on the various assets.
Having understood the vulnerabilities and sources for discontinuities in the business, the first responsibility of the management team should be to identify mitigating measures that are proactive and prevent as many of them. The singularly critical aspect of this would be to have a well-defined “Crisis Management Team” the constitution of which should be cross functional with clearly defined roles and responsibilities. More often than not, most potential sources are avoidable or atleast the impact of the event can be minimized. This category includes crisis caused by employee or mismanagement, poor oversight, or inadequate operating procedures. A cursory look at some of the management reports of listed companies would reveal that most of the identified risks are so predictive and responses linear. One does hope that these are only for public consumption and are not representative of all the risks identified by the management.
The next key issue for management to be prepared for is a containment action in the event of a crisis. The crisis management team should act fast to assert control over events. Decisions need to be quick without procrastination. The management would be better of in presuming that the crisis would get worse and become public. Management must be honest and open with their stakeholders. Board of directors, more importantly the independent directors, can play a significant role in this early phase of the crisis especially when the source of the crisis is the existing senior management including the CEO. Good corporate governance assumes even more significance as a badly handled crisis can cause major damage on the organisation’s reputation or financial results. The board, comprising of both promoter and independent, have an important responsibility in ensuring that the management have a comprehensive crisis management strategy in place and more importantly, the plan exercised regularly and reviewed no differently from any other audit, financial or performance. It would not be out of context for the audit committee to shoulder this responsibility.
The lessons learnt out the exercise or an event needs to be documented and looped back into the learning process to revisit the crisis management plan along the lines of the Deming Cycle - Plan Do Check Act (PDCA). Organisations could use the principles enunciated in the British Standard BS 25999 on Business Continuity Management.
Every organisation should learn from the events around them and initiate appropriate actions lest they are exposed to a similar situation. Professionals, independent directors and the like should take a proactive role and insist on these for events like the ones we are midst of a source of major credibility erosion.
Developing an effective crisis management plan is not an option for an organisation but a hallmark of good corporate governance. The source for a crisis may be events like an industrial accident, product failure, financial improprieties, sexual harassment allegations, or a hostile takeover. To think of it, one does not have to go very long back in memory to recall that very famous Indian corporate brands like Cadbury’s, Satyam, Infosys, Zandu Pharma, have been in the news for each one of the examples cited. Any event that suddenly threatens a company's financial performance, reputation, employee retention, customer relations has the potential to become a full blown out crisis. An organisation response to a crisis will have a significant bearing on its short-term and long-term performance.
In a discussion on business continuity planning it is not uncommon for people to look around at the technology heads as if to indicate that it business continuity is inseparably linked only to technology! Threats to business continuity can arise from natural disasters, human being, technology and socio-political factors.
The ability of management or the leadership team to recognise the fact a crisis is brewing or emerging is by itself a science. This is as critical a phase as the golden hour in the case of an accident victim. The recognition of the early warning signals of an emerging crisis is critical to trigger actions that need to be initiated to contain the follow out of the same.
An international study conducted a couple of years back assessed the financial impact of 15 major corporate crises, ranging from product recalls to industrial accidents and terrorism found that the stock prices of companies that managed their crises well rose 7% on average in the year following the crisis. By contrast, the stock price of companies with less effective crisis management dropped 15%.
For initiating an effective crisis management strategy, it is critical to understand the impact that the event could have on the various assets of the organisation including and more importantly the reputation and brand. Having done that it is important for the team to draw up a vulnerability assessment to determine the implications of a potential threat on the various assets.
Having understood the vulnerabilities and sources for discontinuities in the business, the first responsibility of the management team should be to identify mitigating measures that are proactive and prevent as many of them. The singularly critical aspect of this would be to have a well-defined “Crisis Management Team” the constitution of which should be cross functional with clearly defined roles and responsibilities. More often than not, most potential sources are avoidable or atleast the impact of the event can be minimized. This category includes crisis caused by employee or mismanagement, poor oversight, or inadequate operating procedures. A cursory look at some of the management reports of listed companies would reveal that most of the identified risks are so predictive and responses linear. One does hope that these are only for public consumption and are not representative of all the risks identified by the management.
The next key issue for management to be prepared for is a containment action in the event of a crisis. The crisis management team should act fast to assert control over events. Decisions need to be quick without procrastination. The management would be better of in presuming that the crisis would get worse and become public. Management must be honest and open with their stakeholders. Board of directors, more importantly the independent directors, can play a significant role in this early phase of the crisis especially when the source of the crisis is the existing senior management including the CEO. Good corporate governance assumes even more significance as a badly handled crisis can cause major damage on the organisation’s reputation or financial results. The board, comprising of both promoter and independent, have an important responsibility in ensuring that the management have a comprehensive crisis management strategy in place and more importantly, the plan exercised regularly and reviewed no differently from any other audit, financial or performance. It would not be out of context for the audit committee to shoulder this responsibility.
The lessons learnt out the exercise or an event needs to be documented and looped back into the learning process to revisit the crisis management plan along the lines of the Deming Cycle - Plan Do Check Act (PDCA). Organisations could use the principles enunciated in the British Standard BS 25999 on Business Continuity Management.
Every organisation should learn from the events around them and initiate appropriate actions lest they are exposed to a similar situation. Professionals, independent directors and the like should take a proactive role and insist on these for events like the ones we are midst of a source of major credibility erosion.
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