Navigating Ethical Dilemmas and Redemption in Corporate Governance

A.F. Ferguson in an unprecedented move, agreed to withdraw and revise the report. Well-placed sources said that A.F. Ferguson's other partners told Kale that the firm would lose the Tata group account if he did not cooperate. A.F. Ferguson indeed worked for 36 Tata group companies at that time—a business worth about ₹ 9 crores, over a third of the firm's total revenue at that time. A.F. Ferguson, was known to never seek work or promote its services. Loosing Tata group could have been a dangerous and even fatal move. Kale, however, preferred to resign from the firm than to modify the report.

A.F. Ferguson issued a press release11 that referred to Kale's 'past conduct', how the client had 'lost confidence' in him and how it was 'the unanimous opinion of all the partners that they had lost faith in him'. The release categorically stated that there was no coercion from the client and his resignation was 'consequent to a detailed internal inquiry'. The release then explained that the company had withdrawn the report for examination and review 'in pursuance of good governance'. In effect, it conveyed that Kale was solely responsible for this embarrassment.12

SEBI, however found J.E. Talaulicar guilty of insider trading and took penal actions against him.

ETHICAL DILEMMA

The deeds of Mr. Pendse had left Tata in a vulnerable condition, not only were the investors looking for appropriate reimbursements, the brand name of Tata was compromised. Tata had spent a very long time and put in a tremendous amount of effort into creating a massive trust with the “TATA” brand, we can recognize that it takes many good decisions to make a positive image but one faulty step to tarnish that image. Tata faced an ethical dilemma of whether to reimburse the investors or not and a much larger dilemma of whether to pursue the legalities and eventually find one of its core members on the guilty end of the justice system.

Given the brand name and the ethical lineage, TATA did not have many options but to reimburse its consumers. Any discrepancies here would lead to a tremendous downfall of the TATA brand and ultimately hurt its consumer-facing business like Automobile, Chemical and apparel. This was also the time when Ratan Tata had announced the NANO, the worlds cheapest car, this had created a strong image of TATA’s commitment towards upliftment of the common people, having any negative publicity would seriously dampen the car's launch.

However, the pursuit of legalities was a whole new problem, if Tata were to be found guilty the ramifications could spread to the group and all associated companies, Not to mention the backlash of the people when they discover TATA had this problem brewing right under their nose and never got a whiff of the issues.

Sound Ethical Perspectives

The problem in hand could have tarnished the image of Tata Group and thus, demanded a more prominent stance from Tata for changing its perspective in the eyes of people. Three sound ethical aspects that could have saved the light of the day were Absolutism, Universalism, and Virtue Ethics. Absolutism explores the idea that there is essentially one way of going about things. Thus, there exists a consistency and coherence across all course of actions for diverse societies. Trust, integrity, and unity formed the core of Tata’s culture, and the organization very well stood by it in the crunch times. Sacrosanct about the values and the way forward (moral path), Tata group diligently followed it. There was no deviation whatsoever from the basic structure of “what is morality.”

Following up close as the next ethical perspective, Universalism very well expounds the moral duty of an individual that is to seek the good of his/her society as a whole (not society in a narrow sense). Tata considered its customers as a vital part of the community. Thus, the more significant part was to look for the next course of actions for the investors in the discussion. Comprehending the tough times, TATA followed a phase by phase approach. Immediate action was to return the money of the investors and ensure that the organization was very much with then under challenging times. It very well describes the heart of universalism, i.e., To include the agent’s right and the good of others.

Last but not least, Virtue ethics as a sound ethical perspective defines the foundation of Tata’s culture. It sheds light on a fundamental trait that the character is the focal point of moral assessment, not the action or consequence. In these difficult times, the management of the TATA group stood by its nature. It very well defines the impact a society can have provided the virtues are driven by the top management. The senior leaders did stand by its values and ensured a remedial action for the organization. Various traits, such as endurance, justice, and practical wisdom, were high on display. Indeed, the character of the concerned human being (decision-maker in tough times) is required to be possessing the virtues.

Action by Tata Group

At first Tata Finance management released a newspaper advertisement next day after the Shankar Sharma’s letters refuting the allegations. However, Tata executives soon realized that indeed such misconduct has taken place. By 25th May 2001, the company became insolvent. Subsequently an internal investigation was initiated into the financial activities of the company and it’s subsidiaries. Mr. Ratan Tata recommended to Tata Sons board to stand behind the company and to make funds available to protect the small investors for refund. Tata Finance deposits at that time were ₹ 2706 crores, where the small investors’ contribution was about ₹ 875 crores, representing more than four lac small investors. Cash and corporate guarantees were made available from Tata Sons and Tata Industries which amounted to ₹ 615 crores.

Damage control

On 25th July 2001, a public announcement was made, admitting the troubles faced by the company due to the fraud and investors were assured that their savings were safe. A special counter was opened for depositors to redeem their deposits even for pre-mature withdrawals. As per Mr. Bharat Vasani, general counsel, Tata Sons very few people withdrew money and almost stopped when people realized that company was ready to provide full deposits even without a legal obligation to do so. Even an helicopter was kept standby to quickly transfer funds in case there was a run on the company. The helicopter was not required to be used after all.

Mr. Ishaat Hussain, finance director, Tata Sons and Kishor Chaukar, a board member of Tata Finance, personally visited all the lending banks assuring them that the Tata Sons will meet all the obligations. Tata Finance top management personally met the RBI Governor and SEBI chairmen with self-disclosure and explained the situation to them.

Legal actions

Internal team and external investigators also collected available documents to build a paper trail as evidence for the fraud. In first week of August an FIR was filed against Mr. Pendse and some other Tata Finance employees with Economic Offences Wing Mumbai. When Mumbai Police filed a closure report, Tata management moved to Bombay High Court and got the case reopened and transferred to CBI.

Later steps

After this debacle, all CFOs of Tata Companies were mandated to report to finance director of Tata Sons apart from Managing Directors of their respective companies. Similarly Chief Internal Auditor reports to chairmen of Audit Committee of the board of directors, an independent director not aligned with the promoters and not a part of management of company. It’s a watchdog function with expertise in finance, controls and accounting. Tata group has also put in place a written code known as Tata Code of Conduct which lists down a code for employees to adhere to.

ETHICAL LEARNING AND SUMMARY

After this debacle, all CFOs of Tata Companies were mandated to report to finance director of Tata Sons apart from Managing Directors of their respective companies. Similarly Chief Internal Auditor reports to chairmen of Audit Committee of the board of directors, an independent director not aligned with the promoters and not a part

Based on our analysis and findings of the case, we recommend the following ethical course of actions:

1. The board of directors should be accountable, not merely for the performance but also for good governance.
2. There should be strict guidelines in place in terms of code of conduct to prevent any wrong doings in the firm.
3. Anyone responsible for ethical misconduct should be liable to punishment irrespective of his/her position in the firm.
4. Firms should have dual reporting system. It opens multiple channels of communication that are invaluable to the governance process.
5. Every institution has a set of values in place which should be percolated down the hierarchy to instil the same in every employee of the firm.