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Home > India > Business > Columnists > Jamal Mecklai

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An organisation people will trust

January 23, 2009

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The best thing about the global credit crisis -- and, incidentally, the local Satyam [Get Quote] fiasco, which was of a piece of the bigger problem -- is that it has refocused everybody on that old home truth, 'Only do business with people you trust.'

Which translates into what should be the goal of meaningful corporate governance: to create an organisation that all stakeholders trust.

And while this may seem a remarkably simple test, the truth is that there are very few companies in India today (or, indeed, in the world) who would pass this test rigorously. Infosys [Get Quote], TCS [Get Quote], Wipro [Get Quote] (ITW) immediately roll off the tongue as examples -- notice how the announcement that the World Bank had banned Wipro some years ago had only a one day impact on its share price. I hasten to add that there are, of course, dozens of other companies that would earn this intuitive badge, but to me at least, these are the clear top-of-mind winners.

On the other side, there are hundreds -- thousands, perhaps -- of companies who are well able to tick all the boxes of Clause 49 and SOX, and even win professional service firm sponsored corporate governance awards, but who are well known for, say, delaying payments simply because they can, or setting profit targets that sales people can only achieve by -- to put it baldly -- lying to customers. They pass the corporate governance by regulation test, but will increasingly fail the real, ie market, test.

The good news, as I said, is that the global credit crisis has already started separating the men from these spoilt brats. In fact, a month or so into the crisis, I had pondered an equity play where I would go long ITW and short a basket of other blue chips which didn't carry that same 'trust' quality. I wish I had. I'd have made quite a bit of money.

And, indeed, it's probably still a very good play, since few people learn from the experiences of others. They wait till the fire reaches the edge of their own domain before looking for the fire extinguisher, only to find that it isn't where it's supposed to be, or if it is, it's empty. Ask Mr Raju.

So, how do you define an organisation that people will trust? And, having done that, how do you build such an animal?

The answer to the first is, of course, very simple. You trust people -- or organisations -- that do what they say they are going to do EVERY SINGLE TIME. Sure, individuals and organisations can slip up occasionally. We've all done that. But how you act when you mess up either reinforces or withers away the trust you have built. Depending on the nature of the slip-up, any or all of acknowledgement, apology and compensation may be warranted.

Now, don't get me wrong, I understand that business is business and you can't leave yourself open to lawsuits every time someone in your organisation makes an error -- but my point is that if you never acknowledge mistakes, your trust quotient is likely to be clouded.

Now, while knowing what to do is usually quite straightforward, the problem is that it is often a costlier way of doing business. Make no mistake, effective corporate governance costs money -- and I'm not talking about consultants' fees. When I was a kid, my dad told me that in the stock market they used to say, "Buy Tata products, but never buy Tata shares." The reason was that, at least in those days, the market believed that the Tatas spent too much money on product quality and such like and, as a result, were never as profitable as they could be. Today, of course, may be another matter but, in any case, this is not about the Tatas.

Good corporate governance costs money because you have to factor in the reasonable interests of as wide a range of stakeholders as you can visualise. It often means passing up business opportunities and frequently giving up juicy-looking short-term gains. But, as is more than apparent today, it is the only way to create a certain winner in the long term.

The days of using the shimmering fig leaves of corporate governance ratings and awards to hoodwink investors are over. Each company needs to look deep into each of its business processes and apply the simple rule: Would I trust somebody who did this? If the answer is yes, keep the process, with whatever improvements the analysis may have thrown up. If the answer is no, or even maybe, redesign it completely. Do it again if need be, and again, till you get the magic answer. If it ends up increasing costs, that's the price you have to pay.

Now take it to your board and tell them that this is the new world and that you saved a lot of money on consultants' fees, since the only consultant you needed to use was your own conscience.

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