Lessons of the TCS scandal for corporate governance

The ‘bribes-for-jobs’ scandal at TCS is only one of India Inc’s several scandals in recent times, albeit it involves a venerated institution, the Tata Group. A senior executive (not a key managerial person) and other employees tasked with hiring contract workers were found to have accepted bribes from six business associates or staffing firms, compromising the tech major’s recruitment process. Let us consider some numbers to understand the misconduct and its impact. The 3,000-strong Resource Management Group (RMG), at the heart of the scandal, places about 1,400 engineers (including new recruits) on projects daily, which averages a placement per minute. Tata Sons Chairman N. Chandrasekharan stated that TCS hires at most 2-3% of its human resources through such contractors. More than 1,000 vendor firms service TCS operations across 55 countries; 19 TCS employees were found guilty in the scandal, while six vendor firms were involved. TCS’s 2022-23 revenue was $27.93 billion and it had 614,795 employees. Internal sources have placed the amount involved in the scandal at ₹100 crore over the last three years. So, all it took was the involvement of 0.002%-0.003% of its employees and just about 0.01% of its annual revenue to put the reputation of TCS built over 55 years at stake.

TCS has sacked 16 of the 19 employees and barred the six vendors, their owners and affiliates from doing any business with it. It has also announced other measures to “enhance governance.”

At one level, the TCS case raises questions about the failure of governance mechanisms. It also raises questions about the errant behaviour of a senior executive who was found to be awarding staffing contracts to firms run by his relatives. How did the famous Tata Code of Conduct collapse when faced with human greed or over-confidence? These vendors were TCS’s largest contract staffing firms in south India; did no one notice the obvious conflict of interest, or did they choose to remain silent? Are there corporate governance lessons to be learnt from this scandal?

Standard economic literature on corporate governance revolves around theories such as the Agency Theory based on the principal-agent relationship. The owners of a firm (its principals) and its top managers (agents) are said to behave rationally and opportunistically, but in a manner where their goals are conflicting and plagued with information asymmetries. Asymmetric information prevents principals from effectively monitoring the actions of agents. Corporate governance then involves formal incentives and control mechanisms to mitigate the inefficiencies of the principal-agent relationship, with the board playing monitor. Under the agency theory, governance mechanisms would include measures such as board structures that keep the CEO’s role apart from that of the board’s chair, the presence of independent directors and punitive measures for misconduct. By this theory, any wrongdoing by TCS agents, such as the senior executive, should have been prevented through a system of (dis)incentives and control mechanisms.

However, a recent book by this author, co-authored with R. Gopalakrishnan, challenges extant economic theories of corporate governance by studying behavioural dynamics within the boardroom. Delving into the complex theme of behavioural corporate governance, we advance the view that effective board governance (or a lack thereof) has as much or even more to do with CEO characteristics, specifically the tenure, experience and candidature of the CEO (whether or not based on family ownership). It also depends on the demographic similarity and social ties of board members, besides the timing of directors’ recruitment. Issues such as director interlocks and multiple board memberships would have implications for the power dynamics within a board, along with groupthink and group confirmatory biases resulting from explicit socialization processes.

Governance transgressions can be traced to the bounded rationality and satisficing nature of decision-making within corporates. These result in directors (and other economic agents) using simple decision-making heuristics while dealing with environmental uncertainty, solving monitoring problems or making strategic decisions. Such mental short-cuts, based as they are on deeply embedded and powerful memory structures of the previous experiences of directors, their reference groups and the routine procedures they use to learn and process information, would lead to flawed and myopic decision-making.

Cyert and March, in their 1963 book, The Behavioural Theory of the Firm, sought to open up the ‘black box’ of organizations’ internal workings. Even now, though, we remain as far from accomplishing this as we were back then. The black box of corporate governance and decision-making will need to be unravelled by studying the contexts and actual interactions and behavioural processes among decision-makers, both in and around the boardroom. Training corporate leaders and board members should include preparing them for the behavioural aspects of corporate governance, encouraging them to seek new knowledge, assisting in problem-solving, and honing their capacity to detect early warning signals. A deeper comprehension of human behaviour as the focal point of decision-making could serve as a shield against corporate reputation damage.

These are the author’s personal views.