Ways and Means to Strengthen Corporate Governance

The impact and scale of corporate crimes has reached unascertainable heights in recent times. It seems corporate governance has gone for a toss. Most of the corporate crimes are backed by continuous and meticulous planning coupled with unethical activities conducted by individuals hiding behind the corporate veil. Corporate scandals like Enron, Satyam, Punjab National Bank, etc. have shown the level to which dishonest and fraudulent activities of corporations and/or their promoters/employees can be detrimental to the economy and society at large.

As observed in Standard Chartered Bank case in 2005, the position in India regarding criminal corporate liability is that corporations can be held criminally liable for offences that require compulsory imprisonment.[1] However, the Court ruled that since the corporations cannot be imprisoned, the imprisonment shall be substituted with compensation.

The deterrent effect of compensations and fines to the dishonest acts of corporations remains under question. The primary objective of criminal sanctions is deterring and ensuring that corporates do not indulge in criminal activities. A cost-benefit analysis is required to see whether monetary fines are deterrent enough. The large companies are financially sound and are capable of making calculations to afford the compensatory damages. As a result, more often than not, punitive fines imposed by the court do not act as an efficient deterrent for erring corporates.

In some cases, therefore, individual sanctions may be more effective tool for the courts. As corporate entities cannot be imprisoned, the courts have to pierce the corporate veil and imprison the real persons behind the fraudulent activities of the corporation. A company can act only through the agency of its officers (sometimes, at the behest of the promoters) — these individuals only are brain of these crimes. They possess the requisite “mens rea” as they hold the high managerial positions in the company. It was seen in the large-scale Enron scandal in America, that the judiciary had to punish all the individuals behind the scandal due to the size of the crime. Similar situation was experienced in India during the Satyam scandal wherein Ramalinga Raju and other Senior Managers of Satyam were imprisoned for cheating and breach of trust.

The legal proceedings in such cases remain quite complex, lengthy and tedious due to the involvement of a lot of documents and evidence. Due to the complex structure of these corporations, locating the real people behind the corporate veil becomes a tough nut to crack. Corporate democracy is also not a very well-functioning idea in corporations and influential and overpowering Board of Directors manage to find their way in everything. This further creates hurdles in collection of evidence against the high and the mighty.

Therefore, the courts may adopt a mixed model and need to impose sanctions based of the facts of every case. Both compensation and imprisonment are useful tools in the hands of the judiciary. They should work in tandem and must together act as a deterrent against complex corporate crimes. While imprisonment of individuals by piercing the corporate veil combats personal motives behind such activities, fines make the economic motive behind crimes redundant.

Newer and alternative forms of economic and social sanctions are needed to bar corporates from indulging in organised corporate crimes.[2] Putting restrictions on trade, forcing closure of company in case of continuing acts and earmarking corporations as fraud are some of the alternatives to the imposition of fines and imprisonment.

The economics behind criminal sanctions states that the probability of crimes is contingent upon the chances of being caught and the severity of the punishment.[3] With time, corporate crimes are becoming increasingly sophisticated and complex, thus difficult to point out. Moreover, as the activities take place with the shield of the veil, the directors are not scared to take dishonest decisions to serve their personal motives. In such cases, if the cost of being caught is limited to monetary penalties, it might not be enough deterrence for wealthy companies.

There is thus, a need to raise the fines to a level in which the corporations collapse or to impose strict individual sanctions. Ways and means should be found (if possible, even with the help of artificial intelligence) for better detection of such crimes as it would deter the individuals hiding behind the corporate mask from using the corporations for fulfilling malicious personal motives. This will further boost confidence in the system and better relations between shareholders and Board of Directors.

The legislature can ensure a better environment by promoting and strengthening corporate governance and creating more structured guidelines for corporations to follow. The importance of corporate governance is quite understated in India.

Corporate governance should seek to ensure the welfare of all quarters — be it the Board of Directors, shareholders and other stakeholders. Internal transparency is instrumental in ensuring a healthy relationship between the decision-makers and shareholders of a corporate entity. Therefore, good governance ensures that the rights of shareholders and the society dependent on the corporations are respected. Further, good governance ensures stability of stock prices of corporates and maintains goodwill for the company. Thus, an environment where good governance is the rule would see less dishonest corporate activities.

Given the social consequences of mismanagement in corporations, the idea of corporate democracy should be promoted and even small shareholders should take more interest in the meetings and be constantly involved in the operations of a company.

The legislature should streamline and consolidated a compact corporate governance code, rather than the regulations scattered in different and often disjointed legislations.

Mandatory compliance and adequate punishment for failure for adherence to corporate governance norms would give authenticity to such a code. As mentioned previously, the punishment must accompany a form of stigmatising or labelling of the company, as for the big corporations today, their image is hallmark of their existence.


[1]  Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530.

[2]  Angira Singhvi, Corporate Crime and Sentencing in India: Required Amendments in Law, 1 International Journal of Criminal Justice Sciences, 12 (2006), <http://www.sascv.org/ijcjs/angira.pdf>.

[3]  Roger Bowles, Michael Faure and Nuno Garoupa, The Scope of Criminal Law and Criminal Sanctions: An Economic View and Policy Implications, 35 Journal of Law and Society, 402 (2008), <https://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=1547&context=facscholar>.

 

Join the discussion

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.