By Arun Kumar Jain, The edifice of good board level corporate governance rests on risk assessment, reporting and reflections. Global companies survive and thrive on the strength and adherence to these 3Rs. Of late, two of the most iconic and largest companies in the world, viz, Deutsch Bank (DB) and Volkswagen (VW) have been in the news for all the wrong reasons. DB has been reputed for its conservatism in lending and strong customer orientation, while VW, especially post WWII, has been a role model and pioneer in automobile innovation (ironically fuel efficiency), robust construction, panoply of aspirational brands, high quality and technologically superior cars. Both the companies have been known for their strong internal auditing, system-failure checks and risk reporting systems. Each company also has a well-established code of conduct policy applicable for all employees that lays down acceptable behaviour. Now, when we learn that both the companies had been scheming and cheating their investors, customers and public alike, while maintaining a facade of excellence in corporate governance practices, it only gives a feeling of déjà vu (a la Enron), helplessness and resignation. Just see the effect of deviant behaviour: DB has announced a pre-tax loss of €$6 billion in the third quarter and has been forced to undergo a huge downsizing (according to one estimate, almost 23,000 employees will be asked to leave). Most of DB’s top management has already left within the past few months, including two co-CEOs. DB has also been accused of having colluded with other banks in rigging benchmark interest rates. The bank has already paid $2.5 billion in penalties in the USA and Britain to settle some of the allegations. VW, which in 2014 became the world’s No 1 automobile company dethroning Toyota, has admitted that 11 million of its vehicles had a software installed that helped cheat on emissions tests. The company is facing huge financial and impairment losses, which according to one estimate, could be as much as $17 billion from potential litigation and penalties across the world. The software sensed when the car was being tested and then activated equipment that reduced emissions. It turned off the equipment during regular driving, increasing emissions of nitrogen oxide far above legal limits. Just to know, NO2 is a pollutant that can cause respiratory diseases such as emphysema and bronchitis. The chairman of VW’s supervisory board has now admitted that the decision to install cheating software “was made more than a decade ago,” after the leadership realised they could not meet the clean air standards in the United States through legal means. He also admitted that the cheating took place because of a climate of “tolerance for breaking the rules.” DB was textbook stuff for regularly doing risk and cross-risk analysis, and reviewing sensitivities of key portfolio risks using a bottom-up risk assessment and through a topdown macroeconomic and political scenario analysis. This two-pronged approach allowed it to capture not only risks that have an impact across risk inventories and business divisions, but also those relevant to specific portfolios. VW had various tools to spot changes in risk portfolios, and introduce appropriate measures to adjust to the situation. For instance, in the area of logistics, the company has developed extensive flexibility in their supply-chains to prevent disruptions. Beyond ethical conduct and code of conduct rulebooks, one wonders how something grossly wrong can go on in a global company across decades without guilt or reporting. After all, systems exist to check and forewarn the stakeholders and decision-makers about potential existential crises. And, if decision-makers themselves are involved or responsible for any organisation-wide wrongdoing, then a whistle-blower mechanism exists as a mandatory requirement. Yet, the DB and VW cases suggest that if the leadership decides to ride an organisation-eating tiger, then dismounting it could be extremely difficult until too late (the infamous Satyam case is a reminder). Such experiences also suggest that important changes are needed in the oversight and risk assessment practices in order to prevent not only investor and shareholder losses but also employment-reputation and public health-threatening conduct. There is no denying that businesses have to pursue good and long-term opportunities for value-creation and this necessarily entails associated risks. There can be some mitigating circumstances for, say companies like Alstom and Siemens, found to have bribed bureaucrats and politicians in emerging markets and less developed nations for gaining access to infrastructure projects. But when globally-reputed and well-established companies’ leadership indulge in deliberate public cheating and malfeasance without any external provocations and, which threatens millions and billions, then one has to think deep as to whether such behaviour is a result of pure greed or stupidity, or is it a well-cultivated arrogance and hubris that nobody can touch one even if caught. (At a different level and context, we are witnessing similar conduct in our country). In such cases, the strictest retributive justice is the only way to check deviant behaviour. (The writer is a professor of strategy and corporate governance, IIM-Lucknow. Source: mydigitalfc.com, Image:https://www.flickr.com/
