The Year that was...

As the year draws to a close, let us take stock of what happened in the sphere of Corporate Governance and Business Ethics in 2009. Did we make enough progress on these fronts, were there any new developments that have taken us forward, did we do enough to bring new energy and thought to these disciplines? Relevant questions indeed.

As I scan the last 12 months, what stand out are the large governance failures. We felt the full blast of the sub-prime. Many argue that the sub-prime is not a governance or ethical issue, but one of business failure. I beg to disagree. A system that is driven by greed and enriches a small group of senior employees in financial firms at the expense of millions of people worldwide can be anything but a governance failure. We also had large corporate debacles like Satyam in India. Indifference to the principle of conflict of interest lies at the core of both these examples. Familiar words that ring a bell that sounds Enron...Enron...Worldcom....Worldcom... That was almost a decade back!

Despite the large scale impact of the sub-prime, we have not seen enough thought given to governance reform to prevent a relapse. While discrete cases like Enron and Worldcom invited a high level of introspection on governance, one feels sad that the governance aspects of the sub-prime have been forgotten in the rush to bail out economies. Is there enough study to understand how the risks underlying the mortgage-based securities were not analysed by Boards, Audit Committees and Auditors? Is there enough investigation of who failed and why? How much of a role did the greed for higher compensation play in the whole drama?

A governance institution that has taken a severe dent to its reputation during this year is that of the Audit Committee. Top minds and talent sitting on the Audit Committee of Satyam Computers had no clue of what was brewing. Sitting on an Audit Committee has become similar to a marine fighting in the outback of Kandahar, one does not know what will hit you and when.

The concept of the Audit Committee is laudable and we do not have any potential replacement for the concept in sight. However, the way Audit Committees work needs major overhaul if they are not to be seen by investors as watchdogs that can neither bark nor bite. A serious examination is needed of why Audit Committees with top-class intellectuals tend to fail time and again. Very little happened on this front this year.

On balance, a year of missed opportunities.