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BW Businessworld

Analysis: Guilt By Association

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Ranbeer Singh's dilemma is not uncommon. Do professional managers or directors in a company owe a single-minded allegiance to senior management and in turn to the owners and shareholders or should they hold themselves accountable to the law or higher moral principles? As Ranbeer's predicament shows, neither of these options may be cost-less in the practical context. Such situations call for institutional and legal reform, but, above all, the exceptional individual ability to make the right moral choices even if the consequences may be non-trivial.

Historically, professionals are those who belong to a well-educated and highly-trained guild, who work for fees and undertake a higher ethical and legal responsibility than laypersons. Where companies employ professionals in high-paying jobs, these professionals invariably subordinate their professional judgement to their bosses but are nevertheless responsible in the eyes of the law for the decisions taken under their watch. The law affixes responsibility to Ranbeer's or Muni's professional roles to ensure that legal responsibility is not avoided.

Ranbeer's inability to extricate himself from this situation may be for two distinct reasons. If Ranbeer is the CFO of the company but not a member of the board, his exit is covered by his contract of employment. So long as he is able to comply with the terms of the contract he may leave the company in a legally valid manner. Unfortunately, Ranbeer is seeking a cost-less exit where he is protected from the machinations from within the company's management — the law does not offer this. If he was a director of the company, a board resolution accepting his resignation and a filing of the appropriate forms with the Registrar of Companies would be necessary. Where the board is unwilling to carry out this process, Ranbeer is stuck without a remedy — the law, as it stands, locks the professional director to the company's wrongdoing and forces him to bear responsibility. Several professional directors are stuck in this unfortunate situation and the law in this area deserves serious attention and reform.
 
Ranbeer's Pune soliloquies present a picture of personal torment and the quest to sustain personal integrity and dignity. However, not so long ago, the bankers on Wall Street, who designed myriad convoluted and explosive credit default swaps, also claimed to have come under institutional pressures to show extraordinary profits. If we denude our institutions of human motivations and interests and render ourselves as automatons driven to misdeeds by oppressive and uncaring institutions, then on no account is anyone responsible for wrongdoing in this world. So, surely we must hold individuals to account for the actions of institutions they inhabit and direct. But we must simultaneously build institutional frameworks that incentivise such personal accountability.

The principle of the fiduciary responsibility of management to its shareholders (owners) is the core principle of company law. So, in closely-held and family-run companies the owners' interests are often misaligned with those of the company. Keeping such a company within the law and away from creative compliance or illegal conduct may well need fiduciary responsibility of managers to be tempered with other models of responsibility. While companies listed on a stock exchange may have independent directors and stronger regulatory oversight to provide professional managers with outlets for their grievances, there is no substitute for an independent ombudsman or an office that operates at an arm's length from the board of directors of a company. The International Monetary Fund has an Independent Evaluation Office for such a role. The Hindu has a Reader's Editor whose independent role is to protect and promote the interests of its readers and consumers.

The ‘White Paper on Black Money' published by the government earlier this May emphasises the need to address the supply side of corruption. While corporate India has been keen to participate in the anti-corruption campaigns directed at the public sector, it has pooh-poohed calls for a similar structure of accountability for the corporate sector. Any suggestion that the Lokayukta's jurisdiction must cover the private sector has been met with sarcasm or derision or both. However, the recent banking scandals in the Anglo-American world and the perpetual overhang of scandal in the Indian private sector suggests that a whistleblower's protection and action against corruption cannot be left to the invisible hand of the market. These reforms have been carried out in the US and the UK and are long overdue in India. Vishwas may insist that Ranbeer should quit and not try to save the company or the country. But unless we collectively act to create institutions that encourage and reward ethical conduct, we may inadvertently find ourselves in Ranbeer's shoes.

The author is Professor of Law at the Azim Premji University Bangalore

(This story was published in Businessworld Issue Dated 04-06-2012)