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Rein in the BCCI

What is an undemocratic institution doing representing the Republic of India?

The Shashi Tharoor vs. Lalit Modi fracas raises several questions on the turpitude, excesses and indiscretions rampant in the governance of an organization claiming to represent India to the outside world. Mr. Tharoor ultimately paid the price, and rightly so, for errors in judgment; however, the disproportionate pressure exerted by some sections of India’s news media on the government was both distasteful and inappropriate.

Insofar as Mr. Modi and the BCCI are concerned, the Tehelka exposé presents a grim picture of the muddled madness that is the business of cricket in India.  Commercial successes and unquestioned adoration of the game and its stars have essentially given the BCCI a carte blanche in how the organization conducts its affairs, even as it “represents” India on the world stage of cricket, which it largely dominates.  Greater transparency and accountability are, of course, important and must be demanded, but cannot be realistically expected in the absence of structural reform.

It is here that the fundamental questions of the role and composition of the BCCI need to be answered.  Structurally, the BCCI is incorporated as a private charitable society under the Tamil Nadu Registered Societies Act, 1975, but for almost all other intents and purposes, makes representation on behalf of the Government of India.  It uses government-owned stadiums (for which it pays a very nominal amount) and receives tax concessions as a charitable society promoting cricket in the country.  Powerful politicians such as Madhavrao Scindia and Sharad Pawar have held the position of President, BCCI, during their tenure as union cabinet ministers.  Operating as a charitable society, the BCCI is not required to disclose its balance sheet to the public.

The ambiguity, convenient as it may be for some,  must end — either the BCCI is government-owned and operated, or it is a private organization sanctioned to oversee cricket affairs in the country.  If it is a government-owned entity, it must fall under the ambit of the Right to Information Act (RTI) and the Comptroller Auditor General (CAG).

If it is a private organization like Cricket Australia (CA), or the English Cricket Board (ECB), and charged with overseeing cricket affairs in the country, then structural reform is necessary to remove any ambiguity — politicians holding public office have no business heading the organization.  Both CA and ECB are incorporated as companies limited by guarantee. If this ambiguity is to be removed, the BCCI must be restructured along similar lines, as provided for by the Companies Act, 1956 (Table C, Schedule 1).  Regardless of whether it is a government-owned entity or a private corporation, its books must be open for public scrutiny.

Additionally, what is a “charitable organization” doing running a $2.4 billion (2009) private cricket league? There is a conflict of interest between being a organization charged with governing India’s cricket affairs and running a multi-billion dollar competition of private clubs. Simply put, this cannot go on.  The IPL, if it is to continue, must be spun-off and incorporated like other sports leagues around the world.  Its private clubs can then enjoy the benefits of private enterprise as well as assume all its risks, including the prospect of bankruptcy. The IPL then would function as an association — much like the NFL or NHL in the U.S. — where each franchisee operates as an independent business unit, but functions under shared revenue generated from broadcasting, merchandising, ad sales, etc.

In 2006, the BCCI announced that it would constitute a Constitutional Reforms Committee to examine the structure and functioning of the BCCI. Was this ever operationalized? Where is the committee’s manifest? Were any reports published? What were its recommendations?  These questions can only be answered if Indian cricket fans and news media put them across to the BCCI and more importantly, to the government.  In the absence of this, the BCCI will continue to operate a plutocratic shadow-organization in the good name of the Republic of India and the IPL will continue to remain the Commonwealth’s largest annual sleaze-fest, again as a representative of India’s citizenry.

Now, will those media persons who feigned mock outrage at Shashi Tharoor, demand accountability from the BCCI and the Government of India?

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Satyam IT Scandal

If the global economic downturn wasn’t bad enough, incidents such as the Bernard Madoff issue, and now the Satyam scandal can’t have helped matters much in providing confidence to the already skeptical investor. India’s fourth-largest IT company admitted to “irregularities” in its books, thanks to the imaginative accounting practices of its Chairman Ramalinga Raju.

The company, which ironically received the Global Peacock Award for Excellence in Corporate Governance, first raised investors’ concerns with the apparent bid to acquire Maytas Infra, a construction company owned by Raju’s son. Once word of the proposed acquisition got out, shareholders rebelled, forcing the deal to fall through. The attempted unilateral acquisition, though, opened up a whole host of issues at Satyam with regard to systemic corporate mismanagement, which culminated in Ramalinga’s shameful admission on Wednesday.

Some people have put the whole episode down to poor corporate governance. Unfortunately, the issue is much deeper. Like everything else in India, the larger issue is archaic laws; the dilapidated securities and internal control legislation of the country is not congruent with the current business environment of India. The issue is compounded further when you consider countries like the United States, where despite the attempts to heavily regulate internal control, dramatic failures such as the Madoff scandal, or even the sub-prime mortgage scandal come to light.

In the United States, the Sarbanes-Oxley Act (“SOX”) was passed in response to the Enron and Worldcom drama of 2001. The Act’s Section-404 requires both management and an independent external auditor to assess the adequacy of the company’s internal controls over financial reporting (ICFR). In addition, a public accounting oversight body, the Public Company Accounting Oversight Board (PCAOB) was constituted. However, as of 2009, SOX has effectively run its course in terms of its usefulness.

Companies have had a few good years to understand the scope and approach of SOX audits and have taken comfort in the fact that the demands of the Act, despite the design, merely result in scratching the surface of ICFR. Despite the design, there is a fundamentally flawed bottom-up approach to ICFR that all SOX audits assume. For example, more hours are spent reviewing mundane transactional detail than investing in a robust review of the “bigger picture” and asking why company executives are doing the things that they are doing.

Most “white collar” crime is committed by corporate executives, and not, for example, by staff accountants or system administrators. Corporate fraud uncovered by the United States Department of Justice (DoJ) indicted 214 CEOs and Presidents, 53 CFOs, 23 Corporate Councils and Attorneys and 129 VPs, in 1,236 cases registered since 2002. Fraud can occur with the marriage of — (a) Opportunity, (b) Motive, and (c) Means. Usually, these three elements fall either directly or indirectly within the purview of corporate executives. Corporate executives didn’t get where they got by boiling potatoes; they’re sharp, know their businesses inside out, and are driven to excel. The intrinsic flaw in public auditing is the relationship between the auditor’s independence in assuring the accuracy of their client’s books, and the dependence on the client for revenue. An imbalance in this relationship creates scenarios such as Arthur Andersen’s willful connivance in cooking up Enron’s books in 2001.

So where does India proceed from here? Clearly, investor confidence will be down, both at home and abroad (Satyam trades on the New York Stock Exchange). Lack of investor confidence may very well translate into reluctance to invest in India’s growth — negatively impacting Foreign Direct Investment (FDI) and an already slowing economy. Despite the drawbacks of legislation like SOX (as described above), regulation of internal control must be standardized in India. If the 2008 financial crisis has proved one thing conclusively, it is that companies and people operating in a capitalist and/or entrepreneurship friendly environment will look out for their own interests; the capitalist system, by design, is anti-self regulation. India needs to look into the following areas:

  • Developing robust legislation to regulate publicly traded companies in India, including the regulation of internal control, corporate governance, independence and financial disclosure requirements;
  • The creation of a federal body, separate from, but reporting to the Securities and Exchange Board of India (SEBI), that will enforce the legislation described above;
  • Auditor independence (I find it hard to believe that PricewaterhouseCoopers genuinely had no idea that Satyam was cooking its books); public auditors should not be allowed to provide consulting or advisory services to companies on whose books they issue opinions;
  • The constitution of an independent Audit Committee to review the company’s state of affairs; the requirement of having an independent Internal Audit department that reports only and directly to the Audit Committee;
  • A national whistle-blower program to report instances of possible corporate fraud to the newly constituted federal body;
  • A requirement of full disclosure of any business interests held by executives’, their spouses, and immediate family;
  • A comprehensive review of the company’s corporate governance as part of audits and investigations, assessing the reasonableness of significant corporate decisions (asking the question “why” instead of regular checklist auditing);
  • Stringent penalties for committing corporate fraud (e.g., holding executives personally liable), and a body to investigate and adjudicate over fraud cases.

At the end of the day, the Satyam saga is a tragic multi-point failure of a government that doesn’t sufficiently regulate publicly traded companies, of an Executive Board that didn’t probe suspicious transactions (why does an IT firm need to acquire a construction company?), of lower level management and staff who wouldn’t notify authorities of irregular accounting practices, and of auditors who chose to turn a blind eye to obvious accounting irregularities.

Adopting the recommendations above will not completely solve India’s problems (indeed the pressure to report significant revenue increases in a rapidly developing economy such as India’s will remain and will bare fruit to more ingenious accounting practices), but should be looked at as a good starting point. The central government, in trying to ensure investor confidence and tackle other cases of corporate fraud, must show that it is serious about providing a clean and transparent business environment and that it still upholds that timeless credo of the Nation — Satyam eva jayate — Truth alone Triumphs.

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