Wednesday, December 01, 2010

Watchdog v/s the BeingWatched

Watchdog (n): a person or group that monitors the practices of companies providing a particular service or utility [Oxford dictionary]

Quarterly/annual audits are done at every company by independent auditors. The auditors review the financials of these companies to ensure that the reported numbers are correct and there are no financial manipulations involved. Now, what is the business model for these audit firms? Their revenue comes from the very companies that they are auditing. If the company is not happy with the auditor, they can always choose the services of another auditor - there are many competitors available. If the auditors were to do their job right and identify inconsistencies or incongruities, it would be very easy for the company to just remove the auditor and find another one. Of course, not every auditor succumbs to this pressure, but you can never rule out that this can happen. So, would you really believe that all auditors are really independent in their function?

Take credit rating companies Fitch, CRISIL, ICRA, CARE and others. These firms look at a company's credit worthiness and rate them on different scales. These ratings are then used by investors and lenders to decide their transactions with these companies. Now, what is the business model for these ratings firms? The revenue flows to them from the very companies that they are auditing (clients). The clients have a choice of multiple rating agencies to choose from, who are sending their "Sales" teams to these clients to increase market share. So, can you be sure that all ratings by these rating agencies are truly independent?

We pay about Rs.3 for a business newspaper every morning. The cost of printing that newspaper is much more than Rs.3 for sure, so how does the newspaper survive? The primary revenue stream for these newspapers is obviously, advertising. While we expect the newspaper to cover companies and sectors and provide independent analysis of their performance, current plans and future prospects, the revenue comes from these very same companies. If they were to carry a negative article about one of their leading advertisers, would that advertiser not have a reason to question them about it and consider pulling the ads from that newspaper. Since there are many newspapers in the same field, the advertisers have a multitude of choices at hand and so need not take this lying down. Television news channels too have the exact same structure. The money that they make is from the advertisements put out by corporations. Now, is it possible that the pink newspaper or the news channel is going to cover the business news independently every single time?

The core problem in the three sectors described above is the same. When the revenue model of a "watchdog" is dependent on the "being-watched" and not the entity for whom they are watching, there can never be 100% independence. There will definitely be situations where the watchdog bends to the rules for the "being-watched", especially when the watchdog can be replaced.

The fundamental problem at the heart of this so-called "Radia-gate" is that the media, being the watchdog of the politicians, policy makers and corporations get their revenue from the same sources. So, the revenue givers will continue to influence how the watchdog operates and what they say or do not say. What was exposed during the "Radiagate" was one such revenue giver (Tata and Reliance's PR Niira Radia) speaking to various media-persons with specific requirements. What Barkha cannot say to her is that she will not do what is being asking for, because it will affect the revenue stream from Tata and Reliance. So she has to keep the relationship going - probably make false promises, get involved in minor affairs, not report that Tata/Reliance are lobbying for a particular minister and so on. If Barkha and NDTV were not dependent upon Radia and team for their revenue, that discussion would have been completely different.

This being-watched paying the watchdog problem which is present in many industries will not go away easily. There are two different solutions - one is where the watchdog is is the only player in the market, and thus reversing the power equation. If the only business newspaper were Economic Times and the only news channel were NDTV, they would be calling the shots with the advertisers rather than the other way around. But obviously, this is not a practical solution.

The other solution is to change the revenue model, and thus make the watchdog non-dependent on the being-watched. For this, alternate revenue streams are to required - preferably the same people on whose behalf the watchdogs are watching. The shareholders should be paying/choosing the auditors, the investors paying/choosing the rating firms and the common man paying the entire revenue for the news. This ensures an independent watchdog without any revenue-related pressure dictating how they do their job.

But the important question is - Would you pay Rs.50 for the morning newspaper? Would you shell out Rs.4000 a month for news coverage?

Till that day, the power equation will remain unchanged and we should take the watchdog's work with a pinch of salt.