How to End the Culture of Business As Usual After Instances of Corporate Scandals

The Worrying Decline of Corporate Governance Standards Worldwide

Of late, there has been a worrying decline in corporate governance standards leading to the exits of many high profile CEOs (Chief Executive Officers) as well as Directors of Boards from such firms, as well as a breakdown in the compact between the corporates and their stakeholders.

Whether it is Infosys, TATA Group, IL&FS (Infrastructure Leasing and Financial Services Ltd in India, the Silicon Valley Firm, Theranos and Uber as well as Facebook and Alphabet (the Parent Holding firm for Google) in the United States, or the spate of bankruptcies and collapses of the SMEs (Small and Medium Enterprises) in China, the trust and the reputation of many Blue Chip firms has taken a beating in recent years.

While the occasional corporate failures and governance scandals are “par for the course” in any capitalist and free market economy in the world, the worrying aspect in recent times has been the sheer failure of regulators, stockholders (both institutional and individual) and the broader Media outlets to hold the perpetrators of corporate malfeasance to account.

An End to the Business as Usual Approaches

Indeed, the present trend seems to be that whenever a business scandal breaks out, some high profile executives and board members are “allowed to resign” in a “face saving gesture” and then, It is BAU or Business As Usual which means that the incoming execs and the board members “cover up” and nothing is said anymore.

As some experts have noted, this is the main reason for concern and indeed, alarm, as once there is no attempt to hold the guilty to account, there is absolutely no guarantee that the same behavior would not persist and manifest as a corporate governance scandal a few years down the line.

Indeed, this is what happened to Infosys as the upheaval in 2017 was allowed to die down and the incumbent CEO, Vishal Sikka, resigned along with some board members and were soon

“rehabilitated elsewhere” whereas the core issues that were responsible for them were never investigated or were simply buried in a “miasma of legalese” in the form of NDAs or Non Disclosure Agreements and other such corporate legal niceties that preclude the key actors to go public.

Cosmetic Changes and Window Dressing

Again, this is what happened in the United States as well where Gig Economy firms such as Uber were found to encourage a culture of “predatory behavior” and where “needles aggression” was the norm rather than the exception.

Despite multiple accounts and revelations from the employees who were victimized, the end result was a “cosmetic” change of guard in the execs and the boards and then, it was as if nothing had happened.

Similarly, this is a pattern of behavior that Tesla, which is the firm responsible for the Electric Car Revolution, is also exhibiting under its flamboyant CEO, Elon Musk, who has now been asked to step aside in a very ceremonial manner by the SEC or the Securities Exchange Corporation, which is the market regulator in the United States for his explosive and some would say, controversial Tweets.

Further, even in Europe, the troubles being faced by Volkswagen and Valeant were similarly defused by what can be called “window dressing” or merely changing the curtains rather than allowing transparency and the “sunlight of scrutiny” to probe the allegations.

What Individual and Institutional Investors and Regulators Can Do

While some would say that it is good for corporates to own up and then fix the problems without demoralizing the employees through “Witch Hunts” and other forms of investigation, there is a cause for concern as nothing is fixed and there is no guarantee that they would find themselves in the same situation again.

Indeed, there is no worse way to demoralize the workforce other than make them cynical about nothing been done and cynicism breeds a sense of resignation leading to atrophy of the firm.

This is where the broader shareholder community has a role wherein by virtue of them holding stakes in the firm, they can indeed hold the firms to account.

Some sort of this is happening in the United States where a new class of “activist investors” has been at work each time there is a whiff of impropriety among the firms and hence, other countries including India, should learn from them.

Of course, this is not to say that individual investors should usher in a revolution all by themselves and the most important role here is that of the regulators and the government in initiating and taking action against the erring firms.

Further, the other important stakeholders who can affect changes are the Institutional Investors who are more powerful than the other stakeholder since collectively, their holdings are more than those held by the assorted categories of investors.

The Hidden Hand of Capitalism and Systemic Changes

Indeed, this line of argument also feeds into the free market narratives where the markets are supposed to “correct” firms and punish them whenever there is evidence of corporate malfeasance.

However, this hypothesis does nothing to address the systemic issues as well as the question that why no action was taken when the pressure was building up.

Indeed, the same markets that treat top performers as darlings one day would dump them the next day when bad news trickles.

While not disputing the power of the “hidden hand” of capitalism in rectifying mistakes, we would instead, like to point to how the periodic euphoric booms of best market movers should not turn in manic busts leaving the poor investors poorer.

To conclude, while it is in the nature of economies to be beset by corporate governance scandals, there must be more efforts to fix the underlying causes rather than “managing the situation” approaches.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.