Lessons of the TCS scandal for corporate governance

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₹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