It gives me great pleasure to be in your midst
today. The Institute of Company Secretaries of India (ICSI) has been a critical
player in the Indian endeavour to develop professionals to protect the interests
of the stake holders, to ensure corporate governance and contribute to public
good – a topic which is intrinsically linked to the theme of today, viz. value
based professionals and the broader theme of corporate governance. These are
difficult issues and given today’s audience, we here deal with broad generic
issues rather than particulars.
2. In the more innocent days of my youth,
perhaps, the term value based professional would have been a tautology. It was
then taken for granted that professionals possessed values. The word profession
evoked fields that require extensive study and mastery of specialized knowledge,
such as law, medicine, engineering, accounting, etc. This contrasted sharply
with the more humble term occupation, which referred merely to the nature
of a person’s employment. To conduct oneself as a professional – exhibiting
'professional behavior' – indicated that the person's actions remained in accordance
with specific rules, written or unwritten, pertaining to the standards of a
profession. Indeed, early sociological definitions of professionalism, in particular,
involved checklists of perceived or claimed characteristics, which apart from
esoteric knowledge or special skills, invariably included ethical behaviour.
It also entailed the recognition of a social obligation to apply one’s skill
and wisdom for the general benefit or what is termed ‘public good’.
3. One practiced a profession. It was in
this context that the word mal-practice evolved. It was taken as the failure
to provide professional services with the skill or ethics usually exhibited
by responsible and careful members of the profession, resulting in injury, loss,
or damage to the party contracting those services. It was with professions such
as medics, accountants, lawyers, that mal-practice was associated and one could
be charged for the same. While George Bernard Shaw characterized all professions
as 'conspiracies against the laity', professionals, nonetheless, were generally
deemed to be a group of people who shared not only common knowledge and skills
built upon a formalized framework of learning, but also a common and articulate
set of values and ethics. It is thus that competence and ethics formed the bedrock
of the professional. One did not exhort values in professionals – a professional
without values was no professional at all.
4. Today, the world has changed. We no longer
live in simple times. The cries for values and ethics in business today – the
value based professional – stem essentially from a crisis of confidence. Whether
in medicine or in finance, confidence is the linchpin of the professional –
confidence in his competence to perform and confidence in his integrity.
Till recently, competence was sought to be enforced through jealously guarded
barriers to entry. Self regulation by the fraternity laid out codes of ethics
and codes of conduct. These codes and standards have evolved over the years
influenced, to no small degree, by crises that affect the profession from time
to time.
5. The latest round of the crisis of confidence
in the corporate sphere has been catalysed by the unexpected corporate
failures of the 1980s, the 1990s and indeed the high profile collapses of new
millennium. This perhaps added a new dimension in the discourse related to confidence,
and this relates to confidence in the integrity of the system as a whole
to subserve the needs of the market system, the stake holders and indeed society
to provide reliable financial data and information on the ‘full and fair’ picture
of a company’s accounts and the changes therein.
6. Post mortem reports of accounts and of administrative
lapses of failed companies given by liquidators / regulators / inspectors give
us an insight into accounting as well as regulatory lapses and provide a stark
contrast between the ‘true and fair’ picture of the organisation at various
points of time in its life and what it was reported to be. Often times it has
been perceived that practices such as balance date adjustments, deferring expenses,
advancing revenue recognition and judicious or indeed creative use of complex
business group structures, while conforming to the letter were sometimes intended
to obfuscate and subvert the spirit of compliance.
7. The general perception is that accounting
statements have failed to inform of the drift of financial affairs of the company
towards impending failure. This has catalysed debate on issues like accounting
standards as well as issues of auditor independence on the one hand
and the issues of integrity and personal deviance, on the other. The
causal roots of the recent corporate 'misdemeanors' are debatable.
At one level, they were attributed to a swashbuckling ethos and corporate culture
initially spawned and made fashionable by the investment bankers of the 1980s
– an era that has oft been alluded to as the ‘decade of greed’. This set in
motion a period when dramatic financial success received acclaim, flamboyant
star operators were viewed as folk heroes and cautionary words from regulators
were viewed with distaste.
8. At another level, they are attributable
to the changed business environment of relentless competition in which firms
operate. This competition has brought with it pressures on corporate managements
to consistently sustain and enhance their financial performance and demonstrably
enhance shareholder value. The pressures on management, have in the recent past,
also spilled over to auditors and how they conduct their business. These pressures
have also brought into focus concepts of earnings management - the quality of
earnings and how methods of earnings management may lead to or even constitute
fraud. The accounting, regulatory and ethical failures subsuming the system,
the cultural ethos and individual deviance have squarely resituated professional
values and ethics and the broader governance issues onto the centre stage of
boardroom concerns.
9. The general dismay was, in fact, not
with insolvencies per se but with unexpected collapses where the financial
statements, regulatory warnings did not presage what was to come. The un-serviceability
of accounts to give a true and fair picture of what lay in store, the inaction
of regulators to gauge the pulse of the forthcoming events and the ethical failures
of the organisational culture or of individuals that perpetuated acts of commission
or omission painted a picture of a systems failure that often got blurred with
the media focus on personalities and on deviant behaviour. This in turn has
brought back into focus the quest for codes and standards as well as the issue
of values and ethics in business.
10. While the quest for codes and standards,
in generic terms is, in some ways, never ending, the endeavour in accounting
and finance, nonetheless, is geared to improve the reliability of financial
statements. This makes them more credible and increase shareholders' confidence.
Confidence in financial statements reduces the cost of capital and makes the
markets more efficient. Thus, in a market economy, quality accounts, audits
and the integrity of professionals create an enabling environment for economic
efficiency and corporate growth.
11. Historically, the importance of published
accounts was brought into focus by the UK’s Companies Act of 1844. This, over
time, gave rise to the quest for standards, codes and quality in accounting
in market based economies has been to shore up investor confidence by setting
strong and binding accounting and auditing standards. It was thus that financial
audits were preformed by auditors who were independent of the entities whose
financial statements they audited. The purpose was to reduce incentives for
conflict of interest which would compromise professional judgement. The early
attempts in modern times to build binding standards date back to the early 1930s
in the run up to the period when the Securities and Exchange Commission (SEC)
was established in the US in 1934. It is interesting to recall some of the issues
that arose in the 1930s which are redolent of the debates of today. One was
whether audits should be performed by private firms or government auditors and
another was whether the rules for the auditing profession would be set by auditors
themselves or by outsiders.
12. The first issue of government auditors
vs. private firms was resolved 1933 in favour of private firms. The second issue
of whether auditing standards and rules should be set by those who laboured
in the trenches, viz., the auditors themselves or by outsiders who were essentially
the users of the accounting services was more contentious and was settled in
the late 1930s - in 1939 to be specific. The issue was resolved narrowly, and
not without considerable lobbying, in a 3-2 vote in favour of the auditors themselves
setting their own accounting and auditing standards, i.e., regulating themselves,
thus formalising the regime of self regulation.
13. This debate has come a full circle today,
when the consensus has once again veered in favour of 'outsiders' having a prominent,
if not dominant, say in the setting of accounting standards in the quest for
accounting quality. The recent events - high profile misstated earnings and
frauds - have in no small measure helped catalyse this development. The underlying
purpose of the endeavour for quality has been to restore the confidence of the
stakeholders, the regulators and the society at large in the quality of the
attest functions performed by accountants and the integrity of the professional.
14. It is in the context of this background,
perhaps, that almost half the members of the Peer Review Board of the Institute
of Chartered Accountants of India set up in 2002, are drawn from industry, banking,
academics, etc. In the international arena, the dominance of outsiders is even
more pronounced - the Sarbanes-Oxley Act of 2002 in the US envisages that of
the 5 members of the Accounting Board only two members can be Certified Public
Accountants. In some ways this reflects a movement to resituate the needs of
the consumer of accounting services over the compulsions and convenience of
the provider of these services.
15. At a fundamental level, this marks a
substantial change that has been brought about in the recent times in the governance
of the auditing profession. In fact, the move in the 1980s towards ethical behaviour
got gradually subsumed under the expanded notion of corporate governance, renewed
discussions on which emanated from the Cadbury Report of 1992. Over time, the
voluntary nature of self regulation and corporate governance has metamorphosed
into an overlay of additional layer of rules and compliances such as the Sarbanes-Oxley
Act. Essentially, this is premised on two pillars : (a) the mechanism by which
Corporations are directed and controlled; and (b) the mechanism by which those
who direct and control a corporation are supervised.
16. In matters relating to Corporate Governance,
Secretarial Practices play a critical role. In India Secretarial practices have
evolved over a period of time in differing business environments and have had
different usages. The need to harmonise and consolidate the diverse Secretarial
Practices in use in India, has given rise to the quest for standards and codes
in this area too. Towards this end, the Institute of Company Secretaries of
India (ICSI) has constituted a Secretarial Standards Board (SSB) with the objective
to formulate secretarial standards based on applicable laws, business environment
and best secretarial practices. The Establishment of this Board represents a
significant step towards harmonization, integration and standardisation of diverse
Secretarial Practices prevalent in the corporate sector. These standards lay
down the principles’ which companies are expected to adopt and adhere to in
discharging their corporate responsibility.
17. It is heartening to note that this has
been a collaborative endeavour with consultations across the sector. It is thus
that the SSB comprises eminent members of the profession and is represented
by the regulatory authorities such as the Department of Company Affairs, the
Securities and Exchange Board of India and your institute’s sister professional
bodies such as the Institute of Chartered Accountants of India and the Institute
of Cost and Works Accountants of India. We trust that the Guidance Notes developed
by SSB and the clarifications given by it on issues arising out of the standards
will contribute to better corporate governance.
18. We as regulators at the Reserve Bank,
too, have sought to catalyse conditions for good corporate governance. We have
been at pains to emphasise that compliance with regulatory requirements is the
minimum requirement of good corporate governance and what are required are internal,
peer and market pressures to reach higher than minimum standards prescribed
by regulatory agencies. A critical element of our endeavors has been the transparency
aspect that is emphasized by expanding the coverage of information and timeliness
of such information and analytical content. Importantly, especially in the post-reforms
phase, the central bank has reiterated several times over that deregulation
and operational freedom must go hand in hand with operational transparency.
19. This also brings us to the moot question:
What does it take to be a value based professional? This is a difficult question.
There are, perhaps, qualities that individuals need to possess to make ethical
decisions. First, recognising ethical issues and reasoning through ethical consequences
of decisions. Second, the ability to look at alternate points of view and deciding
what is right or appropriate in a particular set of circumstances. Third, the
ability to deal with ambiguity and uncertainty and making a choice on the best
information available.
20. The pace of technical change, scientific
innovation, and cultural interchange in the global world of today, increasingly
confronts us with situations of conflicts and unanticipated ethical challenges
where we are forced to make decisions we are not prepared to make but cannot
avoid. Often times, the existing moral knowledge and ethical guidelines prove
inadequate or simply do not provide answers to modern moral problems. Worse,
the pace of change is such that similar situations cannot be replicated in stable
and recurrent conditions and it is therefore very difficult to look to or construct
ethical guidelines for a fast changing present. What individual professionals,
groups and organizations need to do in such situations is to acquire skills
and methods that give them the ethical competence and confidence to handle ethical
issues that may arise in everyday professional life.
21. Essentially what we need to know is how
to apply our personal or organizational principles to concrete moral problems.
Moreover, there can be a disconnect between individual and organizational values
which leads to internal conflict and dilemmas. Worse, there can be a disconnect
between the stated and prevailing values in an organization. We all have, at
some point or the other, faced conflicts between loyalty and integrity. We are
confronted with issues of dissent and how to deal with dissent. Emerging commercial
structures such as outsourcing bring with it their issues of enjoining the agent
to profess the values of the principal they represent. Besides, a corporate
reality check indicates that we have to increasingly live with issues which
range from black and white areas such as false and misleading claims, fraud
and manipulation, etc. to more grey issues such as concealment of information,
conflicts of interest, coercion, vulnerabilities, principal-agent problems and
fiduciary duties.
22. Ethical dilemmas for individuals arise
not from issues of corporate misconduct such as whether a particular practice
is unfair, questionable, misleading or intended to deceive. It arises from one’s
own personal beliefs, moral values and commitment to right action. They are
in short challenges to one’s integrity. It arises from questionable behaviour
in others or being pressured to indulge in questionable behaviour ones’ self
by just getting a job done. It can be fostered by the demands of the times or
organisational pressures in the form of explicit instructions to do things that
may be considered sleazy. It need not necessarily arise because the organization
or superiors are corrupt but could grow out of the intense pressure to get a
job done or, for that matter, from an organizational culture or a leadership
that fosters an environment in which unethical behaviour takes place.
23. What is needed is a psychological approach
to ethical competence where one can anticipate moral problems, recognize them
and address them squarely with confidence. In resolving ethical dilemmas that
professionals may be confronted with, communication plays an important role
to explain first to one’s own self and then to others convincingly the basis
of the decision taken and why that was the best in the circumstances. At an
organizational level, it needs all the leadership qualities, communication skills
and sensitivity to inculcate a culture that raises the level of ethical awareness
and carries the organization and the group along with credibility and confidence.
And confidence is what the quest for the value based professional is all about.
24. It is thus not in codes and standards
alone that a culture of the value based professional may be moulded. Nor in
processes and compliance. While these are important, there are views that we
need to cautiously work out the fine balance between processes and outcomes.
In today’s politically correct world of form, there are therefore increasingly
cries for substance – indeed, one school of thought, in the accounting
profession itself, feels that obsession with compliance begets a creativity
that subverts. This brings the word dialectics, more associated with bohemia,
revolution and the intellectual, squarely into the lexicon of the staid accountant
and regulator. Value based professionals is not just about compliance alone,
but living up to the spirit of compliance. These are difficult issues indeed,
and we have more questions than answers. Today I sign off with a call for more
innocent times and leave you with a chiasmus (where meaning is reversed as in
a mirror image): I trust that value based professionals value the profession
they profess and value the values they profess to value. I leave it to you to
pause and ponder.