Putting housewives on the boards could have saved the global meltdown
Hyderabad, 26 August 2009. At a two day conference that concluded in Hyderabad this weekend it was claimed that the excesses of subprime that led to market meltdown could have been curbed had companies appointed more women on their boards. Almost 200 experts who assembled for the National Conference on Corporate Governance held in Hyderabad on 21 and 22 August and inaugurated by Mr Salman Khursheed, Minister for corporate affairs, questioned the role of independent directors.
In his keynote address to the Conference, Madhav Mehra , president of the World Council for Corporate Governance asserted that no lessons had been drawn from the collapses of ENRON and Worldcom 7 years ago. In Dec 2001 when Enron was on the verge of collapse the audit committee comprising only of independent directors and chaired by Robert Jaedicke, Dean Stanford Business School, did not challenge a single transaction because of the cozy ties with management. On 16 December, 2008, the resolution of buying promoter’s sinking property companies by Satyam was passed by a board that had majority of independent directors including Krishna Palepu, Ross Graham Walker Professor at Harvard Business School and an authority on making boards effective. For this we don’t need iconic independent directors who strike deep holes in company pockets as it is difficult to make them understand something when their remunerations depend on not understanding it. Independent directors are required to hold powerful management and the board to account. This required independence of mind and ability to offer contrarian views - a job that women could perform meritoriously in the boardroom and in a way that could disrupt the existing cosiness and groupthink.”
Corporate governance – the truth people prefer not to hear
Never before in human history a subject has been paid so much lip service, by so many , or so long as corporate governance. In every committee, conclave or conference when discussion wears round to corporate governance, you hear top executives swear, almost in unison – “ I love corporate governance. This is a subject so close to my heart”. Indeed one would have imagined that after the economic meltdown that shook the earth’s tectonic plates, corporate governance ought to have become the bible for businesses. It may be the sexiest word in business diction but has failed to arouse action because so much of it seems unreal, artificial, fake, fanciful, repetitive and rhetoric.
Even in India where Satyam episode generated so much heat, emotion and commotion and made corporate governance a household word little has changed in real terms. There was a huge initial scare which led to some 524 independent directors quitting boards out of 2355 companies that have submitted data to the Director’s Database on BSE website. It made Audit committees defensive after the arrests of Satyam auditors and put pressure on external auditors to ensure they perform their roles effectively. Other than that business continues as usual.
Fewer companies are using their boards effectively even after this deep crises which put India’s national image on the mat. Board meetings continue to remain rituals with no effort to involve outside directors.
Getting REAL with Corporate Governance
One would have imagined that after the economic meltdown that shook the earth’s tectonic plates, corporate governance ought to have become the bible for businesses. It may be the sexiest word in business diction but has failed to arouse action because so much of it seems unreal, artificial, fake, fanciful, repetitive and rhetoric.
Even in India where Satyam episode generated so much heat, emotion and commotion and made corporate governance a household word little has changed in real terms. There was a huge initial scare which led to some 524 independent directors quitting boards out of 2355 companies that have submitted data to the Director’s Database on BSE website. It made Audit committees defensive after the arrests of Satyam auditors and put pressure on external auditors to ensure they perform their roles effectively. Other than that business continues as usual.
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Corporate governance does not need more laws and it needs better enforcement of existing laws, says Dr Madhav Mehra
Corporate governance does not need more laws and it needs better enforcement of existing laws, says Dr Madhav Mehra, president of the WCFCG and founder of the Institute of Directors in India. Dr Mehra warned that overregulation is an excuse for ducking responsibility. Citing the example of Satyam, Dr Mehra added Satyam was listed on New York Stock Exchange and subect to one of themost strngent laws on coproate governance – the Sarbanes Oxley. Yet the draconian laws were not good enough to curb fraud.
Dr Mehra said for coprorate goverance to work we have to appeal to the hearts rather than the minds of Boards and managment. Corporae goverance is about priciples and not rules. Rules trigger defiance , principles on th eother hand encourae compliance.
Regenerate the Planet to Boost the Capital Market
The problem of juggling with accounts, cooking of books, inflating earnings, misappropriation of public money, and manipulation of customers has been with us all though history. The frauds sit in corporate books ticking like time bombs on river beds waiting to go off as the tide goes out. In his book The Great Crash of 1929, John Kenneth Galbraith, the noted economist says: “In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”
There are three types of truths. One truth is that we tell others. There is a second truth that we tell ourselves. And there is a third truth that we do not even tell ourselves. It is the recognition of the third truth, the truth we do not tell ourselves that has a potential for transformation of our lives.
The third truth is one of those terrifying realities, the very mention of which destabilises us. But human ingenuity and capacity to learn and adapt is so profound that the very realisation that there is a problem provides 90% of the solution
The public was unaware of the precision and sophistication with which these are practiced in Wall Street – the world’s greatest financial hub – through a culture of cosiness, conceit, concealment and corruption as has been revealed in the article “From Wall Street to Crawl Street”. According to Steve Eisman, a hedge fund manager, it was a castle built to rip people off.
John Gutfreund, CEO of Salomon Brothers and dubbed as King of Wall Street, breaks down while describing the greedy culture of Wall Street. According to him greed on Wall Street was a given, almost an obligation. While addressing students at Columbia Business School, he advised them to find something more meaningful to do with their lives.
This greed has continued because the governments play hostage to the moneyed class as they are scared of regulating them lest they move their assets to lightly regulated shores. Satyam’s main contribution was the exposure of a sordid state of the insider trading – a hush-hush word, the third truth – in bourses all over the world. The investigations revealed large scale selling of the company’s share by financial institutions days before Raju’s confession of cooking books. These institutions included some of the most respectable names in corporate and financial world. Time after time, clamour from investors against insider trading has been silenced by incumbents and regulators through self-denials and proclamations – it does not happen here – leaving the common man to suffer and give a bad name to markets. The greatest resistance to clean up the financial market is from the regulators themselves. Even Martha Stewart who was allegedly involved in insider trading served in a penitentiary not for insider trading but for lying.
It was Christopher Cox himself who rolled down the Sarbanes Oxley Act. Just six months before the announcement of bailouts SEC unveiled a widely discussed blueprint for U.S. financial regulatory reform calling for less supervision of Wall Street by the Securities and Exchange Commission. The article describes Senator Phil Gramm’s role in constructing the Gramm-Leach-Bliley Act in 1999 which completely deregulated the banking industry.
Good news is that today’s marketers turned bloggers have done much more than any regulator could have ever done. They have punished all manipulators and fraudsters as never before. Subjected to strobe like glare of public scrutiny, these fraudsters have been named and shamed as architects of destruction. The marketers have struck at the last refuge of scoundrels – the real estate. Within a span of 12 months of the queues outside Northern Rock, the heads of the world’s 5 biggest investment banks – James Cayne of Bear Stearn, Richard Fuld of Lehman Brothers, Blankfein of Goldman Sachs, John Thain of Merrill Lynch and John Mack of Morgan Stanley lost combined personal wealth to the tune of $2.2bn. Other fraudsters have been given the boot. Markets are in turbulence only because there are several at large. It will not calm down until all the fraudsters have been held to account.
Despite the proliferation of means to access information or , may be because of it, truth has become the biggest casualty. We were all told that short sellers are bad guys of the markets. In fact when stocks started pulverising , many regulators banned the short selling. It is only now that we can appreciate the interventions of the likes of Steve Eisman and Meredith Whitney in shorting the market that jolted the investors to face reality.
Use of tax payer’s money in bailing out banks offers a great dilmma. Why should we use bailouts to a pay Merediths and Steves and cause a double whammy to innocent investors or tax payers who have already suffered. Banks have got into this hole only because they have been insuring credit default swaps, estimated $62 trillion last year, four times the GDP of United States.
CDS works like this. Trader X identifies pools of subprime that have no documentation and no money down and shorts by covering it with a side bet with a bank, say Goldman Sachs. In exchange he pays a fixed premium – say $5 million a year to the bank for subprime mortgage of $500 million. If the subprime pool busts Goldman Sachs has to pay him $500m. Goldman Sachs covers itself by buying insurance from AIG. AIG have got themselves into a big hole because they were covering all subprime mortgages. When the government pays AIG from TARP , AIG is paying back to Goldman Sachs , so Goldman Sachs in turn can pay Eisman. Would anyone pay taxes to government to enrich a stock broker?
It will be naïve to think that all these financial ills are confined to Wall Street or the US. Our entire financial system is characterized by this and this is what has led to total distrust in the market.
Jesse Livermore , the legendary Wall Street trader of early twentieth century who made millions by short selling committed suicide on 28 Nov 1940 at the age of 63. His suicide note said “I am tired of fighting Wall Street.” He said “Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes because human nature never changes.”
68 years after the suicide of Jesse Livermore, we can change Wall Street if not the human nature. As President Obama said in his inaugural address: “what men and women can achieve when imagination is joined to a common purpose and necessity to courage.”
We should use the current recession as a God-sent opportunity to regenerate planet and rebuild people. In our eagerness of spending public money to contain recession and create jobs it is important to think carefully on the direction of expenditure on bailouts. Generating employment is the key to contain recession.
But it will be foolhardy to do that in a way which will make us uncompetitive in the long run. Can a portion of the hundreds of billion dollars of government bailout of banks be used to plough into clean and renewable energy? The future of humanity lies in solar energy. Recognition by markets and policymakers that the only way to achieve sustainability is to speed up innovations and investments in R&D for cleaner fuels and especially solar technology. This will fuel the capital markets and pay itself many times over by creating a world which is not only prosperous but much more equitable, greener, cleaner and sustainable.
Rather than giving huge bailouts to banks and platinum parachutes to those who wrecked the economy, let us spend tax payer’s hard earned money on regenerating the planet and creating jobs and building our people. Studies have shown that investments in renewable results in four time more employment than traditional sectors. So why not green the bailouts and let business be a driver in regenerating employment and boosting the capital market through clean and green agenda. The alternative is decades of strifes, strikes and suffering at a global scale.
Transparency is not just the essence of corporate governance – It is the only way to restore credibility of markets
Just days ago Bank of America, Citigroup and J P Morgan propped up the markets by announcing numbers that signalled green shoots of recovery only to have their faces blotched up with big eggs. Last week saw Bank of America stock sink by 14%. U.S. stocks fell, ending a six-week winning streak for the Standard & Poor’s 500 Index, as concern grew that credit losses at banks are worsening and drugmakers slid following disappointing earnings. Who will ever trust the credit figures of US banks or for that matter any bank? It is the crisis of transparency that is turning into a vicious crisis of confidence.
In her interview with Margaret Popper of Bloomberg, the noted short seller of banking stocks, Meredith Whitney (See “From Wall Street to Crawl Street” in the issue of Corporate Governance) said “Underlying credit is deteriorating at a faster rate. As banks are shrinking they have been cutting their credit lines.”
Whitney,39, has become a legend in her own lifetime, since she started working with Steve Eisman and shorted the subprime pools. She was an obscure analyst until on October 31, 2007, when she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince was chucked. In January, Citigroup slashed its dividend.
The market meltdown has no economic basis other than the loss of investor confidence which is feeding itself with daily exposures of the kind of John Thain, Bernie Madoff and Ramalingam Raju. Investors have been alarmed by seeing all their gods and demigods falling off their majestic heights. Almost everyone has been found swimming naked. Hence no one trusts any one. The strategy to restore trust in such a crisis is not doling out bailouts but changing the culture that has led us into it.
The Power of the Blogosphere
With 40,000 blogs and similar number of home videos uploaded everyday on YouTube and other internet sites, we have no alternative but to vigorously promote candour in conduct. Marketers have turned bloggers started taking revenge. Marketers could not let the likes of Jimmy Cayne, John Thain, John Mack, Richard Fuld, Angelo Mozilo, Phil Gramm and Hank Paulson – all named as “The Architects of Destruction”, in a special report by Wealth Daily Investment Research of Baltimore, get away with their booty coolly. So each has been skinned. The strobe like glare of public scrutiny has melted the veil of secrecy and unmasked their misdeeds and exposed the culture of cosiness, conceit, concealment and corruption that has characterized the financial markets. The cat was let out of the bag by the long queues outside a seemingly robust British Bank – Northern Rock over 18 months ago. Soon thereafter the French Bank, BNP Paribas froze withdrawals from three of its funds.
Citigroup which in 2003 was a behemoth with $250 billion of assets is only a fraction of that at $38 billion. Despite all the help from Phil Gramm, a US Presidential hopeful, or perhaps because of it , UBS, his benefactor Swiss bank, had to write down $19 bn debts resulting in the sacking of UBS’s boss. UBS is currently being investigated for a massive tax evasion. The manipulators and fraudsters have nowhere to hide in this economy of strobe like glare. Markets were waiting with bated breath for holding the guilty accountable. With insider knowledge markets are using the same instruments to bust the last refuge of scoundrels – shorting the sub-prime and the property market to pulverise their asset values.
Market’s retribution to the architects of meltdown
Within a span of next 12 months the heads of the world’s 5 biggest investment banks – James Cayne of Bear Stearn, Richard Fuld of Lehman Brothers, Blankfien of Goldman Sachs, John Thain of Merrill Lynch and John Mack of Morgan Stanley lost combined personal wealth to the tune of $2.2bn. Other fraudsters have been given the boot. Markets are in turbulence only because there are several still at large. They will not calm down until all have been held to account.
Perfecting the art HNTGC – (How Not To Get Caught)
Mr Henry Paulson, the outgoing Treasury Secretary, worked in the office of President Nixon in the early seventies. Mr Nixon who was successfully impeached for Watergate Scandal used to say “You can disobey all Ten Commandments as long as you follow the eleventh one: “thou shalt not be found out”. This maxim created a breed of business school executives whose success depended not on doing the right thing but manipulating success at all cost by perfecting the art of HNTGC (How Not To Get Caught). As the rules got more and more complex you needed young executives who were brighter and communicative enough to master the art of HNTGC. So these financiers queued up outside best business schools to recruit such executives at remunerations that were a King’s ransom. Hence today’s financial world is replete with Harvard and other Ivy School MBAs. It is these bright MBAs who used their creativity and innovation in designing mathematical models to unleash an insatiable appetite and turned into weapons of massive destruction.
All governments play hostage to the monied class
The problem was that western governments themselves play hostage to the big financiers and are scared of regulating them lest they move their assets to lightly regulated territories. This is precisely what happened to Wall Street and New York Stock Exchange . Scared of the draconian effect of Sarbanes Oxley Act many companies who delisted from the New York Stock Exchange were coaxed by the London Stock Exchange saying they did not believe in such draconian regulation and UK corporate governance laws did not make the regulation binding and gave the opportunity to the firm to explain why they could not comply with a particular regulation. There was as such a race to the bottom by regulating authorities to invite investment.
Clamor for Transparency
Satyam’s main contribution should be the unfolding of a sordid state of insider trading – a hush hush word – in all the bourses. The investigations reveal the large scale selling of the company’s shares by institutional investors days before Raju’s confession of cooking books. US must be given credit for putting an icon like Martha Stewart behind bars for a year for lying in a case of insider trading. Yet insider trading on Wall Street is starting to look as troubling as it was in the time of Ivan Boesky in the 1980s, the head of enforcement at the US Securities and Exchange Commission warned recently. Linda Chapman Thomsen, the SEC’s director of enforcement, said she had been “quite dismayed” at the nature of the commission’s recent insider dealing actions.
Self-regulation of human greed has rarely worked
Ms Thomsen shocked at the magnitude of insider trading when she saw the “multiple incidences” of insider trading and cases involving “tippers and tippees” who were both professionals. Recently a former Ernst & Young partner was charged with allegedly passing insider trading information to an investment banker friend ahead of seven deals involving the accounting firm’s clients. In one of the most high-profile cases recently, 13 people, including a Morgan Stanley compliance officer and a UBS executive director, were charged in relation to an insider trading scheme.
The market crash therefore was long in coming. In an interview to Wall Street Journal, Eliot Spitzer, the much defamed former Attorney General of New York, said: “The honour code among CEOs didn’t work. Board oversight didn’t work. Self-regulation was a failure”. Even a staunch defender of free capital markets as Joseph Ackerman, Chief Executive of Deutsche Bank says ” I no longer believe in the market’s self-healing powers.”
Why do you really need transparency?
Knowledge economy has changed the way people buy and behave. Knowledge is the only resource which increases when shared. Transparency helps companies share the knowledge and achieve multi fold results. The challenge of change is today so ferocious that whatever made you successful in the past wont in future. This means you have to constantly innovate. Innovation is a risky business. You have no perfect model. You are always improvising – seizing the unknown imperfectly knowing you don’t have all the answers. And you cannot succeed all the time. But if you fail and that fear puts you into hiding think where the world would have been had Thomas Edison gone into hiding after initially failing to produce incandescent lamp. The other person would have had to start from the scratch. Today the public scrutiny is so intense that unless you can celebrate your failures the media will give you depression. In any event there is no place to hide. Further the punishment for being found out by media is much more than being candid in the first place. You have to learn to love failure under and the communication skills to talk about them unabashedly as both Mahatma Gandhi and Barack Obama have done.
Back to Basics
To restore trust in the market we have to start with basics. What are we being taught in schools? Good old days schools used to compete with each other on the quality of their mission statements –truth alone brings victory” or “if wealth is lost, nothing is lost, if health is lost something is lost but if character is lost everything is lost”. Today’s schools and more importantly our Business Schools compete only on the packages drawn by their alumini. A journalist who studied in Harvard Business School described it as “a factory of unethical practices”. Students use educational loan to buy flashy cars and fall into debt trap well before they graduate. Our challenge is to make them aware of the ethical context and sharpen their moral compass. We have to change our metaphors of success “winner takes all” and “success at all costs” and develop a value system that prides in ethics, morality, equity, legitimacy, transparency, value dissent and diversity. Transparency requires courage to say: “We are sorry we made a mistake”. That is the only statement that tells your client you are earnest.
The Role of Training
There are no classes, no courses, no seminars on how to build moral courage, ethics and self-pride. Pride in becoming truthful of who you are – the kind young Barack faced when the teacher asked whether they could all call him “Barry”. We need classes and credits for how often we acknowledge, own and atone our failures. We should have credits and rewards based on the quality of our apologies. We have a policy that aims to reward those who own mistakes and punish those who hide them. Markets must know that there is a greater punishment for concealment than failure itself. As Einstein said it is not the mistake that causes the serious damage. It is the mistake that you make of defending the first mistake that causes the greatest damage.
These mindsets can only be changed through training. Because denial, double-speak, self-deception and hypocrisy are an inherent part of our organizational life, we cannot get rid of them without proper training. People all over the world are asking what were the boards doing when their companies were being sucked? Warren Bennis the legendry guru of leadership and James O’Toole created a diagnostic tool to identify the unique behavior characteristic of the company, profiling the type of individuals who get ahead in the organizations. One of the questions was “What is the company’s joke that no one would tell the boss?” It is eventually the values of leaders that drive the organizational culture, any process that aims to surface those will help in establishing the climate of candor. Only when the boards honestly and objectively ask themselves “What do we really cherish and hold dear – power, money, quality, excellence, morality, ethics” can organizations take a useful step to bring transparency and candor.
We need training at all levels – boards and investors both. The training should widen the outlook and make business feel global in outlook. A business is different from a political person because the former’s constituency is global. Businesses need to steer clear from blame games between communities, regions and nations. Also unless the governance moves to a global platform it will remain ineffective. The training should be to challenge people to reach beyond their grass – to value failures as building blocks of success and learn to talk about them proudly. The purpose for the training should be to excite the spirit of enquiry, spark innovation and develop holistic, integrated and independent thinking. As Scot Fitzgerald said “The test of first rate intelligence is your ability to hold two opposing views in your mind and still retain the capacity to function”.
Wear your embarrassments as badges of honour
Today’s corporations are facing many challenges. The biggest is the challenge of change. There are two certainties. First is whatever made you successful in the past wont in future. This means you have to constantly innovate. Innovation is a risky business. You have to recognize you cannot succeed all the time. But it is no good hiding when you fail. There is no where you can hide. You are under the constant glare of public scrutiny. The second certainty is that if you try to hide failure, you are bound to be found out. The punishment for being found out is more than being candid in the first place. In order to succeed you have to learn to love failure under and learn to talk about them unabashedly as both Mahatma Gandhi and Barack Obama have shown. But admitting failure requires courage. It took a long while for Gordon Browne to apologies for the affront Damian McBride had caused to Tory leaders by undermining their reputation through a website which propagated nasty stories about these leaders. The worst none from his party or opposition had expected the apology. They buried the story in shock. So the lesson is wear your badges of embarrassment as badges of honour.
“The Whole World is Watching”
As Thomas Friedman writes in his New York Times column of June 27,2007 , “The Whole World is Watching”: “We are all public figures now.” Anyone has the ability to tilt is cell camera in our direction and catch us in our most embarrassing moments – squabbling with a sales clerk or shouting at your spouse. Negative information can be spread much more rapidly and once committed to the internet will stay there forever. We have to reconcile to all that until the internet protocols become more forceful in vetting, verifying and authenticating information. This is the price we pay for the huge promise of transparency. No other issue has so much potential to transform the future of our children not just for bringing back to order. We do need to reskill our boards to face the challenges of the new transparency and its role in inspiring commitment, confidence, collaboration, creativity and build company wide competence and competitiveness. This alone will enable your companies to access flood springs of domestic and global capital hidden underneath the arid drought and bring back the market alive.
*Dr Madhav Mehra is founder President of World Council for Corporate Governance, UK
Britain’s Crisis of Governance
Lesson for India
The expenses scandal of the members of UK’s parliament has struck a raw nerve across the public in a way that British politics rarely manages to do.
In the words of Tory MP for Totnes, Anthony Steen, when questioned about £80,000 worth of work to his country estate. “The public are just jealous because I have a very, very large house,” says Anthony Steen. “What right does the public have to interfere with my private life?” What right? What right do voters have to ask how one of their MPs could justify claiming that £80,000 of garden improvements was necessary for the conduct of his parliamentary duties? This arrogant sense of entitlement is what has most outraged voters – ordinary mortals who have to pay for their own houses, their own food and their own taxes; who do not regard £63,000 as poverty pay and cannot understand how MPs could have become so morally deficient, so divorced from reality and so poisoned by greed that they would casually defraud the taxpayer of tens and even hundreds of thousands of pounds, and then claim that the public has no right to question it.
Of course, it is not as original as was advanced by Barbara Amiel, wife of Lord Conrad Black who owns the Daily Telegraph who fiddled not just thousands but millions and billions of pounds of shareholder’s with independent directors of the stature of Henry Kissinger in stall Lord Black has been incarcerated in a US prison to serve 78 months sentence for racketeering, obstruction of justice, money laundering and wire fraud . In August 2008, Black’s wife,defended her husband in a lengthy article first published by Maclean’s then in The Sunday Times. In a blog published on the Financial Times website, John Gapper writes that this defence had “an entertainingly deranged quality since Lady Amiel (sic) admits no wrong, on behalf of either of the pair, and is contemptuous about almost everyone else’s behaviour”.
As parliament’s dignity and authority finally collapsed under the relentless bombardment of sleaze stories from The Daily Telegraph, MPs are in disgrace, afraid to face up to their constituents and some even contemplating suicide. The Speaker, Michael Martin, was forced to resign – the first to do so for three centuries. Not to be outdone, the House of Lords suspended two Labour peers, Lord Taylor of Blackburn and Lord Truscott for offering parliamentary services for money – the first to be so punished in 350 years.
The collapse of parliament’s moral authority has not taken place in a vacuum; it is part of a general decline in standards of public life over the last three decades. We have seen the leaders of great institutions, like Sir Fred Goodwin of Royal Bank of Scotland, shamelessly enrich themselves while they helped to destroy their own companies and undermine the British economy.
The system lacks transparency, accountability and responsibility. The sacking of the speaker of UK’s House of Commons is not going to restore the dignity of the mother of all parliaments damaged outrageously by the graphic accounts of fiddling of expenses by UK’s elected representatives. The question is can we turn this dismal affair to our advantage and use the opportunity to change Britain’s archaic system of governance, accountability and enforcement.
Michael Martin’s shame does not stem from the way he handled the House of Commons office for fee expenses. Indeed as Jim Sheridan, the labour MP, says, “Speaker is being treated as a paedophile. There is no way the speaker knows what is going on in the Fees Office. Lets us get real.” That sums up the British attitude to enforcement of any regulation. They have been best at managing only the gentlemen’s clubs of the past with little ability to uphold accountability in governance.
The charm of good life from tax payers money is too irresistible to be refused. Greed does not distinguish between professions – has no colour, no cast and no creed. Extra cash keeps everyone enthralled.
Nothing of this would have come to light but for the Freedom of Information Act that made it possible for anyone to access information. Indeed, this is where Michael Martin faulted. It is the fire storm at the Freedom of Information request on MP’s expenses that engulfed the speaker.
It was odious to see the House of Commons seeking to exempt MPs from the provisions of the Freedom of Information Act that MP’s themselves have passed. People found it outrageous for a speaker to block investigations and resist transparency to clean up the system of expenses.
The public anger at the conduct of MPs underscores huge asymmetry and incongruence between the electorate and the elected representative first noticed when the Parliament approved the attack on Iraq against the will of the people. Parliamentary shenanigans IN last few weeks shows a big hole In he governance of this country and the legitimacy of the war which has caused large scale damage and destruction destroying millions of lives.
Systematic abuse of tax payers money is not something of recent origin. It has been the norm. Everyone is milking it. I discovered it when I joined the London Borough of Enfield in 1976 as part of my research for a PhD in Management by Objectives. Travel expenses were perks that you claimed regardless of whether you incurred. Each year Legal Services Commission of UK reimburses legal expenses amounting to ludicrous sums regardless of whether a case is lost or won and without any reference to the client let alone seeking a certificate of satisfaction from him.
It is interesting to see how “culture of greed” started in a party which was known for its social conscience. Of course all MPs do not come to politics for self-enrichment. The Labour MP, Laura Moffatt, could have cashed in like Hoon, but chooses instead to sleep on a camp bed in her office when the house is sitting late. Not all MPs are waiting nervously for the four o’clock phone call from the Daily Mail. MPs like Stroud MP David Drew travels standard class to London and stays in a Premier Inn. Chris Mullin, the former Labour minister, shot to fame last week for claiming a black-and-white television licence. There are hundreds of MPs who have not been flipping, bending, fiddling and dipping – but if the guilty ones are exonerated, what incentive do they have to stay clean? Where is natural justice?
To trace the love of lucre in Labor party one has to go back to the “prawn cocktail” era in 1992, when the late Labour leader, John Smith, with colleague Mo Mowlem, launched a lunching campaign to persuade the City of London that they were safe with Labour. Thereafter, Labour MPs became much closer to the financial world, and many rising Labour politicians, like Patricia Hewitt, spent time working for City institutions. Mo Mowlem married a banker. Financiers from Goldman Sachs and Merrill Lynch spent time in the Cabinet office, and took roles in government; they included Baroness Shriti Vadera, Brown’s key City adviser.
Some time after the turn of the century, as the property boom began in the south-east of England and bankers started paying themselves colossal bonuses, MPs stopped measuring themselves against the standards of their constituents and took to comparing themselves to the financial types they had taken to rubbing shoulders with in the City. From Tony Blair down, they resented seeing people with no better qualifications than they had earning mega-salaries. Unable to afford decent London houses, they used their flexible friend, the expense account, to even the score, surfing the housing boom to make themselves feel just that little bit richer. What never seems to have occurred to them was that the property bubble they were benefiting from was crucifying young families with debt.
Now the property bubble has burst and so has their credibility. Labour was captured by the financial interests in the City in much the same way as were the regulators in the Financial Services Authority. They felt both financially and intellectually inferior to the money managers, which is why they allowed the credit and property bubble to inflate to disastrous proportions. Tony Blair, true to form, got out when the going was good, and now has a comfortable sinecure in JP Morgan bank. But the rest of them, now dreading the prospect of having to face the voters in an election, have been left high and dry.
They are loathed by constituents, abused by the media, and laughed at by politicians in countries with lesser claims to parliamentary probity. Members of the duck house parliament will go down as among the most disreputable in the history of British democracy. The only positive is that they have ensured, by their behaviour, that parliament and the British constitution must now be subject to radical and irreversible reform.
The thirst for accountability is not going to end with MPs. British system is archaic in many respect. The worst is judicial system in administration of justice. There is no accountability of judges. Indeed, Britain may be the only country where the laws make it impossible to criticise judges’ findings. The result is that three are numerous cases of judges being wrong on the findings of fact but they cannot be proceeded unless you can shell out £100,000 to firm of solicitors to fight the case in court. You will not get permission unless under CPR 53.3(6) you can show real prospect of success. How can you show a prospect for success if you are not even given a permission hearing. The general belief is that British Justice system serves only the lawyers, solicitors, counsels and the court and not for the litigants. No wonder 48% of the litigants dissatisfied with the solicitors. Yet, their complaints to the Legal Complaints Service invariably get rejected. The Legal Services Commission works more like an insurance claims office whose only job is to somehow reject any complaint. Same holds good with the Bar Council. They take ages to register complaints, issue disciplinary proceedings and in most cases the delinquents get let off because no one bothers.
The strongest currency going around in Britain is ‘pass on the buck’. The Law Society passes on to Solicitor Conduct Board. They don’t do anything themselves. They pass it on to Legal Complaints Service. The Legal Complaints Service has a pathetic record in investigating complaints. All it does is to repeat the case of the solicitor to the complainant. . It is a catch 22 situation. Because Law Society takes no steps to discipline the profession the complaints are flooding. LCS has little staff. So they have hired outsiders with incentives for closures. So the methodology is that if you reject their decision and persist they will bar your email like a bunch of ostriches hiding their heads in sands to avoid facing reality.
The biggest advantage of the expose will stem from the governance reforms it will generate not only among law makers but other professions as well – most of all legal. No society can survive unless it has a well coordinated governance system. Yet nobody wants to hear the truth.
Back to Basics
To restore trust in the market we have to start with basics. What are we being taught in schools? Good old day’s schools used to compete with each other on the quality of their mission statements –truth alone brings victory” or “if wealth is lost, nothing is lost, if health is lost something is lost but if character is lost everything is lost”. Today’s schools and more importantly our Business Schools compete only on the packages drawn by their alumni. A journalist who studied in Harvard Business School described it as “a factory of unethical practices”.
Students use educational loan to buy flashy cars and fall into debt trap well before they graduate. Our challenge is to make them aware of the ethical context and sharpen their moral compass. We have to change our metaphors of success “winner takes all” and “success at all costs” and develop a value system that prides in ethics, morality, equity, legitimacy, transparency, value dissent and diversity. Transparency requires courage to say: “We are sorry we made a mistake”. That is the only statement that tells others you are earnest but unless you follow it up with a changed behavior it would not restore the breach in confidence.
Alex Salmond, first minister of Scotland told the general assembly of the Church of Scotland recently that it was a matter of “profound regret” that some core political institutions, such as Westminster, were losing their moral authority.
The Scottish National party leader also admitted that a few short years ago it was Hollywood that had lost respect among the people of Scotland.
“But we recovered, we opened ourselves up to full transparency, we admitted to mistakes and today Scotland’s parliament is stronger – much, much stronger – for that,” he said. “And it is an example for others to follow.” MSPs publish all their expenses – and receipts – on the Scottish parliament website.
All this talk about reform is a distraction from real issues. Shows our politicians are unable to grapple with realities. Overturn the constitution in haste and repent at leisure.
David Cameron’s promise to cut Downing Street’s power if, and when, he became prime minister is really suspect . We heard Gordon Brown say that in 2007 and I swear Tony Blair said the same thing but it never really happens, does it?
Lindsay Paterson, a professor at Edinburgh university, said: “It was uncanny listening to David Cameron . . . his entire agenda of reform could have come from what the Scottish parliament is already doing.”
But the devolved Scottish parliament, which has just celebrated its 10th anniversary, has itself gone through the flames. Its first few years were dogged by public criticism over the soaring cost of its new building and various controversies over expenses, involving sums that now seem trivial compared with the amounts revealed at Westminster.
What is the substance in David Cameron’s call for reform. Is it not naïve to think that each time we have a problem we look for a reform without thinking whether we have addressed what was required to be implemented by the previous reform? This brings us into the whole question of what is the purpose of governance.
So, the problem that has emerged time and again is our lack of will towards enforcement. Enforcement, therefore, is a far greater issue of concern than the legislation. We already have far too many laws than we need. What we need is proper regulation, supervision, direction, monitoring and training of our enforcement systems. That is where it is important to look on our instruments of enforcements such as the court and the police and that is where the reform is necessary because the fact is the UK’s own system of justice continues to be archaic and not responsive to the needs of 21st Century. With the rising fees of the legal profession and increasing limits on the grant of public funding it is virtually impossible for a poor man to get justice in the court system.
With a culture that lacks the will to enforce existing legislation calls for reform can often become an escape route for maintaining the status quo and its cosiness. Greed has no party, no cast , no color, no religion and no creed. It is part of human nature. J K Galbraith described the creation and discovery of bezzle in his famous book “The Great Crash of 1929″. The noted economist says: “In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”
That is why we need gover-nance systems to check greed and prevent the concentration of power through the mechanisms of transparency, accountability, integrity, responsibility and enforceability. The key word in all this is enforcement. Whilst we have been proactive in legislation and the latest example of all this is Freedom of Information Act which indeed provided the fire power to the Daily Telegraph, we have been very poor in designing , developing , monitoring and reviewing systems to meet the ends of legislation. The result is the system has been hijacked by those who were put in control and indeed who were supposed to protect and safeguard it’s integrity. What the daily exposure of expenses reveals is a complete lack of control mechanism in defining and approving expenses leading even MPs to become pawns in the hands of the Speakers fee office whose parameters of approval had no relationship with ground reality, its ethics or morality. The result of all this is catastrophic. It is particularly heart rending for those who cherish democratic values because the exposures have made UK, mother of democracies a laughing stock of world’s worst totalitarian regimes. Reported a China news agency:”UK opposition leader dumps lawmaker over duck pond.”
Modernization’s biggest problem is that it has divided the society into professions – parliamentarians, judiciary, police, armed forces, bureaucrats, solicitors, counsels, accountants, doctors, , bankers each inclined to protect their own parochial interests and at times at the expense of others. In a system where there are no clear control measures it is easy for some to confine power within a coterie through what Lord Penrose described while referring to Equitable, a culture of cosiness,greed, concealment and conceit. .
What we need is a decisive leadership with determination to act ruthlessly against those who are milking the system. The key for that is enforcement and not more legislation. Unfortunately, it the truth that makes men free is for the most part the truth which men prefer not to hear. As Martin Luther King Junior said, “Our lives begin to end the day we become silent about things that matter”.
*Dr Madhav Mehra is founder President of World Council for Corporate Governance, UK
Why Credit Crunch is the Best Time to Act on Clean and Green Agenda?
There are three types of truths. One truth is that we tell others. There is a second truth that we tell ourselves. And there is a third truth that we do not even tell ourselves. It is the recognition of the third truth, the truth we do not tell ourselves that has a potential for transformation of our lives.
The third truth is one of those terrifying realities, the very mention of which destabilises us. But human ingenuity and capacity to learn and adapt is so profound that the very realisation that there is a problem provides 90% of the solution.
The third truth that some people hate to admit even now is that the problem of juggling with accounts, cooking of books, inflating earnings, misappropriation of public money, and manipulation of customers has been with us all through history. The frauds sit in corporate books ticking like time bombs on river beds waiting to go off as the tide goes out. The public was unaware of the precision and sophistication with which markets are manipulated in Wall Street – the world’s greatest financial hub – through a culture of cosiness, conceit, concealment and corruption unmasked in the paper on “From Wall Street to Crawl Street” in this compendium. According to Steve Eisman, a hedge fund manager, it was a castle built to rip people off.
John Gutfreund, CEO of Salomon Brothers and dubbed as King of Wall Street, breaks down while describing the greedy culture of Wall Street. According to him greed on Wall Street was a given, almost an obligation. While addressing students at Columbia Business School, he advised them to find something more meaningful to do with their lives.
This greed has continued because the governments play hostage to the moneyed class as they are scared of regulating them lest they move their assets to lightly regulated shores. The most significant aspect of Satyam that has been missed in the cacophony that followed the confessions of bezzle by the promoter is how the market reacted. Most financial institutions sold the stock days before the confessions. The exposure of a sordid state of the insider trading – a hush-hush word – is the third truth in bourses all over the world. The institutions who sold Satyam stock days before the confessions included some of the most respectable names in corporate and financial world. Time after time, clamour from investors against insider trading has been silenced by incumbents and regulators through self-denials and proclamations – it does not happen here – leaving the common man to suffer the consequences. The greatest resistance to clean up of the financial market is from the regulators themselves. Even Martha Stewart who was allegedly involved in insider trading served in a penitentiary not for insider trading but for lying.
It was Christopher Cox himself who rolled down the Sarbanes Oxley Act. Just six months before the announcement of bailouts SEC unveiled a widely discussed blueprint for U.S. financial regulatory reform calling for less supervision of Wall Street by the Securities and Exchange Commission. The article describes Senator Phil Gramm’s role in constructing the Gramm-Leach-Bliley Act in 1999 which completely deregulated the banking industry.
It is no wonder that investors of all types have lost faith in the markets. They would rather put their cash inside quilts than hand over to banks who have defrauded them. They have turned activists in scrutinizing the companies. It was one of those investor groups who raised an alarm after the Satyam board unanimously passed the resolution spending shareholders money to bail out troubled property companies of the promoter’s son.
It is these investors turned bloggers and activists who are punishing manipulators and fraudsters using their own tactics like short-selling and making artificially propped stocks hit the floor. Subjected to strobe like glare of public scrutiny, these fraudsters have been named, shamed and ridiculed as architects of destruction. The marketers have struck at the last refuge of scoundrels – the real estate. Within a span of 12 months of the queues outside Northern Rock, the heads of the world’s 5 biggest investment banks – James Cayne of Bear Stearn, Richard Fuld of Lehman Brothers, Blankfein of Goldman Sachs, John Thain of Merrill Lynch and John Mack of Morgan Stanley lost combined personal wealth to the tune of $2.2bn. Other fraudsters have been given the boot. Markets are in turbulence only because some fraudsters are still at large. It will not calm down until all the fraudsters have been held to account.
Use of tax payer’s money in bailing out banks offers a great dilemma. Why should we use bailouts to a pay Merediths and Steves and cause a double whammy to innocent investors or tax payers who have already suffered? Banks have got into this hole only because they have been insuring credit default swaps, estimated $62 trillion last year, four times the GDP of United States.
Changing Growth model for Combating Climate Change and Social Inclusion
While we are reveling in the jubilations sparked by the joint award of Nobel Peace Prize to IPCC startling evidence is emerging that IPCC downplayed the impact of climate change. Christopher Rapley , director of Antarctic Survey claims that Arctic could become ice free by the middle of this century. He says IPCC’s report suggesting ice cover until the end of the century is misleading. The denial machine that started functioning ever since a Swedish chemist Svante Arrhenius asserted back in 1896 “we are evaporating our coal mines into the air”, is revving up full throttle. An oil company is reported to be paying $10,000 for each article that runs down the recommendations of the IPCC. It is time to act.
Climate change and environmental degradation are far too complex issues to be solved simply through proclamations. Sir Nicholas Stern has a stern warning. Climate change could reduce global consumption by 20%. Is it not a good thing? The rub is in the next statement. He says, this could mean GDP reduction of 5%. The question is why should reduction in consumption of materials reduce GDP? After all it is our obsessive materialistic consumerist culture that has brought us to such a pass. Is the fault not with our belief that success means a big house, a big car, a big TV, a big refrigerator , a big washing machine and proliferation of unneeded products that are dangerous for health and disastrous for ecology. It has sinister repercussions. This means if we help the poor to become rich they will only add to our environmental nightmare.
The tragedy is that this acquisitive culture is resulting in Afluenza, an emotional disorder caused by envious greed described by Oliver James in his book by the same name. The question is what can business do that cause happiness without environmental or social damage. How can companies create wealth by simply letting people have fun? Daniel Kahneman, a psychologist at Princeton University who won the Nobel Prize for economics in 2002 reckons people cherish experiences over commodities. The most durable amusements are the ones which have application and attention. People love doing than having. So, can we move our economy from this acquisional mode to an experiencial mode?
We have to question how did we come to create an economic system which is so contrary to nature’s biological processes and is based primarily on extraction, depletion, waste and disposal. As Paul Hawkin, the author of Natural Capitalism questions: how is it we create an economic system that confuses the capital liquidation with income? How is it that our pricing system tells us it is cheaper to destroy the earth than to conserve it? Is it normal to have an economic system that discounts the future and sells of the past? Wasting scarce natural resources to achieve immediate profits does not lead to value creation and wasting environment to achieve economic growth is neither economic nor growth.
In October 1994 a group of 16 scientists, economists, policy makers and business leaders met at Carnoules in France and published a declaration, which is known as the “Carnoules Declaration”. The declaration called for radical increase in resource productivity and expressed the hope that within our generation, nations can achieve a ten fold increase in the efficiency with which they use energy, natural resources and other materials.” While the group which called itself the “Factor Ten Club” had made only basic commonsensical recommendations for satisfying human needs without unduly damaging environment, the implementation has faced monumental resistance.
MARKET MELTDOWN IS THE OUTCOME OF UNREGULATED AND UNBRIDLED CORPORATE GREED
Facts about market meltdown others wont tell you
The Satyam fraud that shattered the dreams of hundreds of thousands of investors and employees is a microcosm of the unregulated and unbridled greed that has infected the capital markets worldwide. The only thing surprising is the gall and scale. In the case of India it has at least put the culprit behind bars within days of his confession. His US counterpart, Bernie Madoff, whose scale of fraud is infinitely bigger is still living in his luxury penthouse in Manhattan.
The tragedy is that these frauds occur with unremitting regularity . Long Term Capital Fund, Harshad Mehta and Ketan Parekh, , Enron and Worldcom, Parmalat and Hollinger. The boss chooses cosy auditors and independent directors, cooks books to show great growth, offers fabulous returns to investors and shareholders by fudging accounts. Extra cash keeps everyone in thrall including the government and regulators who play bet on his stellar performance. As the going gets tough and the boss runs out of options he makes a clean confession. There is a din of shock and horror. New laws are passed. Everyone is satisfied and things go back to normal.
The frauds occur with boring similarities. The unbridled greed of the market manipulators that took the form of financial innovations such as derivatives, MBS, CDOs ostensibly intended to spread the risk is unmatched in its reach and magnitude. That is why it has destroyed all credibility and trust and has resulted in this credit crunch. The banks have stopped lending to each other. With central banks bailing out the banks, ordinary tax payers are underwriting the excesses of monied class whose take home packages are reported to be in millions of dollars
PROACTIVATE – A GROWTH MODEL FOR THE 21ST CENTURY
A Model for Environmental Upgradation, Employment Generation,
Rural Transformation, Business Innovation And National Security
Natural Capital is gaining considerable interest as a means for devising policies that reconcile economic and environmental imperatives. Integrating the value of natural capital within economic and environmental management systems is best achieved by treating the natural environment similarly to other forms of valued capital, and adopting an ecosystem approach, which is compatible with a wide range of contexts. This integrated approach facilitates policy making for sustainable development.
Natural capital is the spectrum of physical assets within the natural environment that deliver economic value through ecosystem services. Like a savings account, natural capital can pay interest or be liquidated. If a tree is chopped down for firewood, the capital has been spent. However, if the tree is retained and preserved, it can deliver (perhaps much higher) value through the ecosystem services of shade, air filtration, carbon sequestration and erosion control. Many forms of natural capital provide multiple benefits. Wetlands, for example, provide water treatment and purification services; prevent floods by retaining surface runoff; and provide wildlife habitat.
The concept of natural capital has the potential to reconcile economic and environmental interests by integrating the value of natural capital in decision-making. It makes it possible, for example, to develop a cost-benefit analysis of a new water treatment plant, versus the restoration or preservation of a wetland for the clean water filtration service it provides… full article
From Wall Street to Crawll Street – Markets punish greedy manipulators
Wall Street – A castle to rip people off
“That Wall Street has gone down because this is justice,” says Steve Eisman, manager FrontPoint Partners, a Wall Street hedge fund: “They fxxxxd people. They built a castle to rip people off”.
In 1902, Franklin Keyes, a prominent Wall Street lawyer once said: “Wall Street speculation fosters a ring of idle gamblers, parasites upon society, who prey upon the fortunes of the honest and industrious; such people are a menace to the legitimate business interests of the country and an element of danger to the republic.”
The Satyam fraud characterizes that corporate greed that has infected the world financial system. The frauds sit in corporate books ticking like time bombs on river beds waiting to go off as the tide goes out. They persist because the perpetrators think that they are too smart or too well connected to get caught. Both Raju and Madoff belonged to the same ilk. They forgot how internet has empowered investors and spurred activism. Satyam fraud would never have seen the light of the day but for the diligence and courage of a determined group of investors. The board had already passed the resolution on 16 December 2008 unanimously to acquire promoter’s son’s property companies to provide a cover for the cash hole and give a fresh lease to his guile in siphoning off investor’s funds.
The essential story of all fraudsters – Long Term Capital Fund, Ivan Boesky, Enron, Worldcom, Parmalat, Hollinger et al is the same. They choose cosy and pliable people brimming with greed as auditors and independent directors, cooks books to show great growth, offers fabulous returns to investors and shareholders by fudging accounts. Extra cash keeps everyone in thrall including governments and regulators who play bets on his stellar performance. As the going gets tough and the boss runs out of options and makes a clean confession. There is a din of shock and horror. New laws are passed. Tougher than before. Everyone is satisfied and things go back to normal.
Satyam investors and employees thought their company was gilt-edged
Satyam has shocked the world and interrupted India’s narrative. It has shattered the dreams of hundreds of thousands of investors and employees who thought their company was gilt edged. They wonder how a billion dollars could disappear from the company accounts certified by one of the world’s best auditing company supervised by a board that listed names from Harvard who’s who as independent directors. Only last year they were told that the company’s earnings performance was the best among its competitors.
With So Much Mayhem Caused by MBAs do we need business schools
Both Satyam fraud and financial meltdown are the outcome of a common problem – a culture of excessive greed bred by business schools that focus primarily on “success at all cost” and “winner takes all”. What shocked the public and the investor consciousness most in the Satyam scam was not that the promoter embezzled a billion dollars, it was a deal involving of $ 1.6 billion of Satyam shareholder’s funds to buy real-estate companies owned by the promoter’s son. This deal was passed unanimously by a board of directors that consisted largely of independent directors most of whom professed to be experts on Corporate Governance and some even taught this subject in the best business schools such as Harvard Business School in US.
In fact the financial wizards who invented the CDOs and CDO2 and CDO3 that created weapons of mass destruction and choaked up the financial system were largely the brightest of the best business schools alumni. Talk to any business school graduate and see for yourself that the only goal for which a student joins MBA is to get the fattest pay cheque. Even the rating of business schools is measured not by the quality of their academic excellence but the salary and remuneration of its alumni on placement.
For the past 20 years business schools have become factories that churn out graduates who have spawned unethical practices for quick results and landed the global economy in the current mess. They legitimized a pseudo-scientific approach to finance that turned out to be bogus: they promoted a management style that was too mechanistic and deceptive. They perfected the art of HNTGC (How Not To Get Caught) to beat the system to drive short term results. They created a managerial elite more interested in quick rewards than producing lasting wealth for the economies they operated in.
The people who steered the global economy onto the rocks in the past year are products of these business schools. Richard Fuld, chief executive officer of Lehman Brothers Holding Inc. Which it collapsed, has an MBA from New York University. John Thain, the shamed CEO of Merrill Lynch, is a graduate of Harvard Business School. Christopher Cox, the former chairman of the Securities and Exchange Commission, has an MBA from Harvard University. And so does former US president George W. Bush.
Global meltdown has been caused primarily due to distrust of the market. Governments around the world are looking for ways to restore investor confidence. How can trust be created without transparency and disclosure? Transparency needs courage to own failures. Even today banks are shy of opening their books and admit the extent of their toxic assets. Postponement of AS211 to 2011 by India Inc. even after Satyam collapse shows we still have not learnt the lessons and continue to botox our revenues. Corporate Governance was designed to encourage transparency. Sadly it has become a victim of a culture of cosiness, concealment, conceit and corruption embedded in the boardrooms through the “old boys club” of MBA grads. That is why self-regulation did not work leading to calls for more regulation each time a scam surfaced.
Corporate Governance is not an issue of compliance of rules. Rules always encourage defiance. Corporate governance is a principled approach of steering a business that creates wealth for the society as a whole. It cannot be straight-jacketed into any law. That paradigm indeed has been its bane. We need to unshackle it and define it as principles of producing wealth. Principles encourage compliance. Principal-agent problem, the hall mark of corporate governance is endemic to all governance issues whether public governance, societal governance or political governance. Corporate governance consists of a set of voluntary processes, policies, practices which takes within in its ambit a whole range of stakeholder’s issues, business imperatives, market forces, social expectations, governance issues and therefore not just limited shareholder returns. It goes beyond customers, creditors, employee’s regulators. It touches every aspect of community and environment in pursuit of creating wealth for the corporation and society as a whole. For corporate governance concepts to be embedded in the board rooms we need to train directors to become independent-minded and have courage and sense of ownership. They must learn and internalize a sense of corporate responsibility, accountability, transparency and integrity.
IOD has been engaged with boardroom issues through its Masterclass for Directors over the last 6 years. Thousands of directors have gone through its programmes. Through its interaction with boards all these years, it has come to the conclusion that boards have not had proper training in key issues like leadership skills, communication skills, ethical values, corporate accountability, self-awareness and independent mindedness. Boards do not really need independent directors. They need directors of independent mind. Our current management education has failed to create such directors because of its obsessiveness with short termism. We lack directors who have a long term vision, the courage to own the vision and problems associated with executing that vision and learning from failures. The very realization that a problem exists provides 90% of the solution. When the Carnegie and Ford Foundations unveiled their scathing critiques in 1959 of what was then the modern MBA degree, they made a serious impression on their intended audience. The top business schools scrambled to make the suggested changes in an effort to earn back a little respect from both businesses and critics at large.
In recent years, many critics have charged that business school education has fallen out of step with the needs of the 21st
century corporation, that it fails to understand the global threat and has become more about club membership for future consultants than serious training for corporate executives. CEOs complain that MBA training has become too theoretical to be practical and that graduates are ill-equipped for the kind of leadership companies sorely need. Recruiters have gone so far as to suggest that an MBA could be a liability. Proliferation of MBA degrees, niche, have eroded standards and confused the value proposition. “In the elite business schools there is a de-institutionalization going on about the coherent body of
knowledge required,” says Rakesh Khurana, a professor at Harvard Business School and vocal critic of B-school education. “Because it’s such an inchoate, ill defined degree, there is almost no standard by which one can accredit what a qualified MBA program is.”
The challenge of teaching soft skills
One of the most vexing challenges for business schools in recent years has been in the area of leadership. While traditional MBA programs were largely successful at minting managers for manufacturing operations, they’ve had a much harder time defining and teaching leadership skills in a post-industrial, knowledge-based society. In the modern corporation, leaders need both strong managerial skills and visionary leadership skills, says Allan Cohen, dean of Babson College F.W. Olin Graduate School of Business. “Leaders who don’t understand how the organization works can’t lead very well. Managers who don’t have any notion of where they might be headed don’t last very long anymore. And of course, it’s very hard to teach this stuff,” he says. The illusive softer skills in particular, such as listening, empathy, optimism, the ability to inspire, motivate and maintain personal relationships, are challenging to impart to students. “Self-awareness, for example, is a very important leadership skill. To what extent can you teach self-awareness in a classroom?” asks Jay O. Light, dean of Harvard Business School.
21st century demands teaching skills that embed students in an environment where they learn them from one another and from their collective experience. Soft skills can’t be taught through traditional methods but they can be internalized by sharing experiences models. You can put students in role playing processes. You can have them lead each other, reinterpret their experiences before they got there, develop a cognitive understanding for them. You can do a lot that can help a lot. You have to look at leadership in large organizations and see how leaders take decisions, how they handle dissent, how they value diversity, how they encourage dialogues, how they disrupt coziness and how they deliver value to all the constituents.
Some business schools have already begun to change their curriculum. The most sweeping change over the past year has been the introduction of a brand new curriculum at Stanford University’s Graduate School of Business. Developed after four months of intensive research and unveiled last fall, the new program departs from the traditional silo approach–core course requirements in first year and electives in second-and replaces it with a tailored approach based on prior education, work experience and individual goals.
It focuses more deeply on leadership and communication skills “and what does it mean to play a role and change an organization for the better,” says Dean Robert Joss. “We’re doing a lot around leadership and what that means, role-playing and experiential learning.” In new, day-long leadership labs, for example, alumni volunteers play the roles of board members or top executives in an “executive challenge.” Students then negotiate with them to tackle challenges and devise solutions. “It’s this sort of exercise we’re trying to do more of because it gives people a head start in realizing that their management of themselves and relationships to other people is just as important as tackling the task analytically.” Students will also delve into critical analytic thinking, which Joss believes students no longer get sufficiently as undergrads. In small seminars, students will examine issues that transcend individual functions and management disciplines, such as corporate social responsibility and ethics.
Columbia Business School also made additions to its two-year MBA program in response to feedback from recruiters, who said graduates lacked critical social leadership skills. The new Program on Social Intelligence combines assessment tools to help students see themselves more clearly, along with experiential learning and role-playing techniques to teach them how to harness their own and colleagues’ skills and assets. At University of Chicago, the Graduate School of Business’s LEAD program has emerged as the only required element of the MBA curriculum. Designed to provide both leadership experience and feedback on interpersonal skills, the LEAD program assigns second-year students to teach and coach first-year students in a series of modules and classroom sessions covering topics such as leadership research, interpersonal communication activities, team dynamics and conflict management. “The notion that you can teach leadership and good teamwork in a formulaic way is probably wrong,” notes the school’s dean, Edward Snyder. “But you can create an environment where people are challenged. And if you can dispel the idea that hierarchy should drive decision-making and put in its place the view that everybody’s responsibility is to make the best provisional idea better, that to me is very powerful.”
Along with expanding their leadership lessons, business schools are exploring ways to bring theory and practice closer together. At University of Michigan, for example, Robert J. Dolan, dean of the Stephen M. Ross School of Business, is working hard to establish Ross as the school for action-based learning. “The idea is to try to do the training in typical MBA analytical methods, but also bridge that from the world of academia into the world of practice as part of our academic program, rather than say, ‘You’ll have a chance to apply this once you go off and have your job,’” he says. Dolan, who spent 21 years at Harvard Business School and, prior to that, four years at the University of Chicago Graduate School of Business before taking the helm at Ross, agrees that leadership is hard taught in the classroom, “which is one of the reasons we get out of the classroom as much as we do.”
Corporate governance is not simply a stand alone subject. It is no longer just an issue of statutory compliance. It is an instrument for social and economic transformations. It is the only way a business can be managed to fulfill aspirations of society as a whole in a sustainable manner. It is for this reason that IOD has decided to establish a University to educate all directorial issues. This University would impart educational programs tailor made for directors, focusing on building ethical values, strengthening moral compass, art of governance as the approach to management, social accountability, environmental responsibility and inculcate skills to engage with business, community and environment at all levels for holistic development.
It will have separate faculties for leadership, communication skills, corporate finance, corporate law, corporate accountability, environmental governance, managing innovation, managing behavior change, entrepreneurship, natural capitalism, fiscal governance balanced scorecard and enterprise governance. The faculty will be drawn from the best business schools and industry to develop a holistic and integrated outlook to enable alumni to make a real difference by driving the social and environmental agenda to create sustainable wealth.
*Dr Madhav Mehra is founder President of World Council for Corporate Governance, UK
Madhav Mehra: Getting Real
Wall Street seems to have pronounced the death knell of capitalism. It has fallen victim to the worst form of crony capitalism of which it used to blame the Asian economies. Never before has the downward-slide been so persistent, so long and so sharp. Every measure that the US government is taking to prop up the market or the dollar seems to be working otherwise. The slide continued unabated even when President Bush was exhorting US business in Alabama to boost the confidence in the US economy and the dollar. The disease has caught up with Europe as well and no doubt is going to afflict, the rest of the world. Dollar’s weakness is not a good sign for the exporting countries of Asia and the region’s fragile economic recovery.
The strange thing about the latest stock market collapse is that it has not nose dived because of Japanese dropping the atom bomb on Pearl Harbour or Saddam Hussain’s attack on Kuwait or the Twin Tower attacks of 9/11. Americans have simply lost faith in the ability of their iconic enterprises to return their savings. The accounting frauds committed by the likes of Enron, World.com, Global Crossing, Tyco, Adelphia, Qwest, Dynergy, Xerox and the list goes on, have brought home to average investor that the earnings these companies disclose cannot be trusted. Nearly 1000 US companies have had to restate their earnings since 1997 and many more are under investigation. It is not that the fancy accounting tricks were only confined to Andersen who has been convicted in a Texas court of obstructing justice. Some of the big names of Wall Street such as Merryll Lynch have been found guilty and fined for publishing deliberately misleading research and ignoring egregious conflicts of interest.
While India and other developing countries are fortunate in not having been infected with this problem to such an extent, may be they did not pay heed to the World Bank advice of using American model and use American audit firms, their penchant for inflating profits and earnings is no less. A recent study by India’s credit rating agency CRISIL stated that 139 companies including infotech giant WIPRO, and star companies such as TISCO, NOCIL and SPIC had resorted to creative accounting and inflated their asset base in 2000-2001.
It is not the first time that the stock market has crashed or we have seen the emergence of ugly head of corporate greed. The history of capitalism is replete with examples of similar excesses starting with the affair of the tulips in Holland and the South Sea Bubble. The general assumption is that like the previous market collapses, the current crisis will spur reforms, make corporates more ethical and help market emerge stronger than before. President Bush has already called on stock exchanges to require companies to appoint majority of independent directors and audit and remuneration committees to be all independent. There is ,of course nothing new in his proposals. All this has been an integral part of corporate governance folklore which the Washington based secretariat of the World Bank and Paris based OECD Secretariat are assiduously lecturing the emerging markets about. It is assumed that rationalization of the markets; stricter punishments for defaulters, curbing the stock options, banning of consultancy by auditors, bringing more independent directors, increasing transparency of accounts and making auditors independent will bring back sanity to the markets.
The tragedy is that all this has been said before and time and time again. It is the implementation of all this which is fraught with egregious problems. Lord Young, the president of UK’s Institute of Directors has already lambasted the institution of independent directors and called for the abolition of the non executive posts. He argued that relying on part time outsiders who barely spend 15 hours a year to police boardrooms was naïve and “dangerous non-sense”. Paul Sarbanes, the US Senator has introduced a bill to set up an independent body to supervise the accounting profession, which is likely to become law despite opposition by professionals. Again will this help? Remember, Andersen, auditor to both Enron and World.com had already separated from its consultancy, now called Accenture. The remaining Big-four still have to do it.
The malaise in the governance of corporations is far deeper than what appears on the surface. Capitalism, it has now emerged, is far more deeply flawed than our analyses suggest. By feeding on ruthless competition and promoting a culture of winner takes all, capitalism has spawned virulent individualism which has grossly discounted the value system based on ethics. Corporates still use moral language but they do not believe it has any objective foundation. Like George Bush they tell other corporates “Do as I tell you, not as I do.” Naturally nobody listens.
With growing dominance of the markets and emphasis on immediate gain people’s behavior is guided almost exclusively by prudential and not moral consideration. They obey the rules, remain within the law, follow the norms, respect values only if they calculate that these will benefit them personally. They do not accept the validity of moral discipline if it runs counter to their personal objectives. In a policy driven by competitiveness and aimed to enhance the authority of markets, individual action has little to do with ethical behavior.
The rational market participant is supposed to treat everyone and everything as a means to serve his/her ends. The imperative is simply to achieve the greatest possible satisfaction of our personal preferences. So what is wrong in the CEO paying himself astronomical salary and bonus, while he is sacking the workers in the name of cost cutting and downsizing?. Why should the independent director ask awkward questions on company accounts or CEOs pay hike? He gets only a fraction of his remuneration from the company in director fees – a lot more comes from the consultancy services provided by his / her private company. Similarly what is wrong in auditing companies flogging their other services to the clients?. The fact is that you get ahead as an independent director or an auditor by billing large fees and not by blowing the whistle. As Mike Rake, the international chairman of KPMG now admits, “having a $3 million audit fee and $ 100m non-audit services fee just does not meet the perception test”. It is not for nothing that auditing firms advertise themselves all-purpose solution providers. Here is an example from Ernst & Young’s website :
“Our 84,000 people in more then 130 countries worldwide can implement a broad array of solutions in audit, tax, corporate finance, transactions, online security, enterprise risk management, the valuation of intangibles, and other critical business-performance issues.”
Would you ever rely on a food inspector who also sells catering services to the kitchen he / she inspects?
Lester Thurow wrote, nearly 40 years ago, in The Future of Capitalism that, ‘Paradoxically, at precisely the time when capitalism finds itself with no social competitors – its former competitors, socialism or communism, having died – it will have to undergo a profound metamorphosis’. It is time we began the process to bring about this “profound metamorphosis”.
The centrality of corporate governance lies in its emphasis on transparency. It is far easy to say but most difficult to implement. You cannot obtain transparency if investors expect double digit profits in each quarter. In our rapidly changing economy variations are an integral part of business. So why are we defensive about shortfalls?. We practice the three types of truths we all know – first truth is what we tell others; the second truth is what we tell ourselves but do not tell others. The third truth is what we do not even tell ourselves. The malaise in corporate governance is so deep rooted that we do not even tell ourselves that it exists. This is why it has to make its presence felt every so often by market collapses causing pain and suffering to poor shareholders for no fault of theirs.
It is curious that each time we are confronted with market collapse our immediate response is to tighten the rules and revise the codes little realizing that corporate discipline is not something that can be achieved simply by revising codes or adding new ones. The very people who are crying for retribution were part of procession of cheerleaders of Kenneth Lays and Bernie Ebbers. They are the ones who stoked the fires of impossible expectations with, what ”The Economist” says, “an unfailing supply of hero worship, with their idiosyncratic maxim that you either get it or don’t get it.” Investors were so inebriated with “irrational exuberance” that they almost willed the companies to tell lies.
One of the problems of the modern economics is that we have no perfect business models. We often aim at fastly moving targets and are bound to have a few misses. We are oblivious to the fact that failure is also value adding, that failure is the precursor of success and that no success has ever been achieved without failure. In a relationship based on trust and transparency, failure is an investment and would need to be capitalized and not expensed. Hundreds of Silicon Valley companies have demonstrated that “failure is a badge of honour,” that people should be rewarded for “good tries”.
As humans, we recognize that we reach perfection by learning from mistakes. So why do we hesitate in owning our mistakes and sharing them with our colleagues in the board & the shareholders? We are on a journey of continuous improvement where “everyday I am doing better & better”.
Transparency calls for sharing of mistakes with your board and shareholders. Their real concern is not that you did not achieve the double digit earnings-growth, but what are you doing about it and where is your plan of action for the next quarter. Investors are looking for management with their eyes on the ball who may lose a game but can demonstrate a compelling strategy that will finally win the match.
In any event market capitalization today is not determined by quarterly profits or earnings. Study after study has indicated that buyers are thronging to companies which have societal, environmental and social messages. So why inflate earnings and risk the wrath when you are exposed?. Think how it would spoil your reputation – the very key to market capitalisation.
We must realize that knowledge economy behaves differently from capital economy. Success in the knowledge economy requires boards to change their industrial age paradigms. Far more value is added by promoting the concept of sharing than competing. Sharing adds value to both sides because knowledge unlike capital is not limited by tangible assets which can be used only for one purpose. Knowledge is a fluid tangible asset that can be transferred at little cost. But sharing cannot take place without trust and trust can come only through transparency.
The problem of the American system is that it is skewed heavily in favour of shareholders. The practice of corporate governance was aimed to give the CEO unfettered authority to hire, fire and reward in the name of creating wealth for shareholders and to mitigate “principal – agent problem”. In practice most CEOs use this authority to reward themselves with huge pay hikes and vast bonuses by inflating earnings. This was largely an American disease. But of late European CEOs are also copying their US counter parts in this respect and awarding themselves hefty rises. Prudential shareholders had a hard job in preventing their boss to award himself bonuses worth £900,000. While CEO’s salary in US quadrupled in 1990s, the employees salaries only increased by 3%. Such actions take away employees confidence in management. Governance that says shareholders should get most benefits and does not care about employees who dedicate their lives for corporation is not governance but corporate greed.
In their book, “The Stakeholder Corporation” published in 1997, Wheeler and Silanpaa have asserted that “during most of the 20th century in the UK and USA, stakeholder inclusive enterprises fared better than “shareholders – first” companies. Stakeholder inclusive corporations invariably lead to better long term business performance”.
More and more people today, individuals and groups expect a business organization to adopt a triple bottomline approach, be economically viable while becoming, environmentally and socially responsible. They also expect the business to be inclusive and ethical. Kenichi Ohmae argued in The Borderless World: Power and Strategy in the interlinked Economy that: A corporation is a social institution whose responsibilities extend far beyond the well being of its equity owners to giving security and a good life to its employees, dealers, customers, vendors and subcontractors. Their whole life hinges on the well being of the corporations.
Peter Drucker, in his now classic The Concept of the Corporation, said over 50 years ago that what is needed in a redefining of the corporation as a social “institution “is an integration of the worker as a partner in the industrial system and as a citizen in society”. Yet most corporate governance definitions even today do not include employees as the beneficiary of the corporate rewards in the same way as shareholders.
If the capitalism is to survive, if it is to create wealth, it is absolutely essential that it adopts an inclusive approach to make it sustainable in the long haul. It must incorporate the social and environmental agenda, not as add-ons to a company’s economic activities but as an essential and integral, part of business strategy and its processes, to reflect the rapidly changing post-industrial economy.
The ultimate aim of good corporate governance must be to make corporations good corporate citizens. Corporate citizenship calls for creating value for the society as a whole and goes well beyond corporate social responsibility or corporate philanthropy. The transformation is achieved by following the 11 point agenda.
Sustainability
Corporate governance must recognize that at the heart of successful business there needs to be a promise of long term prosperity for all its constituents. Corporates must move away short term approaches and link all their actions to long term horizons.
A triple bottom line
Good corporate governance recognizes that a business has social, cultural and environmental responsibilities to the community in which it seeks a license to operate, as well as economic and financial responsibilities to its shareholders. Corporate citizenship is about business redefining the way in which a company focuses on a triple bottom line approach that brings financial rewards while meeting social and environmental obligations.
Making a difference
Business’s foremost purpose is to make a difference in society. It is more than philanthropy and beyond corporate social responsibility. Corporations must refit themselves into businesses which provide services the society needs rather than create artificial demand for obsolete products or services.
Employee and stakeholder empowerment
Corporate citizenship seeks to ensure that every one associated with the corporation is empowered to be able to contribute creatively an proactively. It must recognize that people want to become involved and it is for the Corporation to innovate strategies to make it happen.
Transparency
No teamwork is possible without trust and transparency. Business must be truthful in disclosing not only its financial statements but also the way in which decisions are arrived at. It must also share its responses to environmental and social consensus with its shareholders.
Equity
Transparency means sharing not only successes but also failures. Such sharing is not possible unless financial rewards are distributed equitably. The benefits must be divided not among the few but many. Creation of wealth must aim at removing inequalities and inequities.
Accountability, probity and integrity
Corporate citizenship is about improved accountability, probity and integrity. The business must aim to bring benefit to all and demonstrate it through regular audits of the organisation’s financial, environmental, social and economic processes.
Inclusivity
Corporate citizenship is about employee and stakeholder-inclusivity. Stakeholder inclusion requires a long-term, and continuous relationship to be developed with all stakeholders both inside and outside the corporation.
Diversity
Diversity has been regarded as dysfunctional throughout our economic history. It is extremely valuable in the board. It is only through the clashing of opposite ideas that the true reality emerges and real progress takes place. A lot of our national ills can be solved only if we recognize that its is the difference and not conformity that makes harmonious society.
Engagement
Corporate citizenship is about engaging with changing and diverse cultures – corporate, government, community and individual – in order to achieve sustainable social, environmental and economic success.
Dialogue
Open dialogue is at the heart of corporate citizenship. With wrenching change taking place all around us the corporation has to develop systems of regular communication within the board & between the board, shareh
olders, management, government, employees, custom, suppliers and the civil society. It is through this dialogue that the corporation will communicate its values, vision, mission and goals and share their financial, environmental and social numbers at regular intervals. It must demonstrate corporation’s commitment to all it’s constituents viz. the board of directors, management, employees, shareholders, the government and the other stakeholders and the civil society. Corporations must clarify that they are not only creating value for the corporations but making significant impact on the society by reshaping community values, attitudes and cultures.
Corporate scandals and the consequent collapses have a lethal effect on the poor and the old. Not only these destroy their life’s savings and reduces them to penury they take away their confidence in the markets itself. They have no hope to make good their loss. It is a great national loss. We have to do something, therefore, to prevent them happening again. But revising codes of corporate governance is certainly not the answer. We have a great capacity to beat the codes. Andersen have asserted all along that whatever they did at ENRON or WORLD.COM was within the law and thousands of firms do the same. Again nothing that President Bush has said in the aftermath of so many accounting scandals is new. Plastering over the capitalism’s cracks simply won’t work. It needs a systemic change which will come only by looking inside and not from outside. It is we who have to change our paradigm from individualism to integration, from tangibles to intangibles, from capital to knowledge, from objects to relationship, from parts to the whole, from domination to partnership, from structures to process, from short termism to long termism, from growth to sustainability, from confrontation to collaboration and from covering up failures to owning them up.
As we move into the 21st century there is a growing recognition that the ultimate goal of economic effort ought to be to improve the quality of life. Money is not a measure of all things that make us happy and markets are not the best mechanism to enhance human happiness. Indeed, if completely unfettered, they can do the opposite by encouraging selfish behaviour. Our focus should not be only on financial capital but also the human capital, intellectual capital and environmental capital. Good Corporate Governance must aim on maximising the value of all capital.
It is unfortunate that our economic structures are built on an inaccurate view of the human pscyche. Scientists have recently discovered that the small, brave act of cooperating with one another, of choosing trust over cynicism, generosity over meanness, altruism over selfishness makes the brain light up with quiet joy. Experiments conducted on young women engaged in cooperative effort showed that longer they engaged in cooperative strategies, stronger were the blood flows to the pathways of pleasure. Obviously our effort should be to increase opportunities of cooperation and down play unbridled competition.
We need to think of business designs that go beyond the externalities of quarterly profits and provide intrinsic worth and meaning to shareholders while making corporations focus on the larger picture and helping to relish the joy of making a difference. Alas, it may take many more scandals to move to such a radical solution but since the alternative is so grave it might be worthwhile to steer the debate in this direction.
Poor are not an obligation but an opportunity
“Poor are not the begging bowl of our economic system. They are an opportunity. 800 million poor of India represent one of the largest untapped consumer markets on this planet. Their combined economic power is greater than the economy of some sovereign nations. They are an immense source of innovation offering the biggest business opportunity of our times”. This was stated by Dr Madhav Mehra in his keynote address at the First National Conference on Corporate Social Responsibility held in New Delhi on 9th November 2004. He added, “Widening socio economic disparities are indicator of the lethargy of business innovation. The business should have a vested interest in thinking of revolutionary ways to remove the widening gap. The greatest business challenge of our times is to include the poor in the market economy and reassure them that globalization will work for them. Corporate leaders should aggressively publicize the bottom line benefits of tapping the poor markets so that more and more corporates adopt CSR as a business goal and not shy away assuming CSR is about giving handouts.
Oddly enough both poverty and global warming, the two most critical challenges of our times, have a common cure. It is in innovating products and services for the four billion poor making sure they are also eco-friendly. The strategy is summed up in POISED (Poor Oriented Innovation for Sustainable and Eco-friendly Development) and can be achieved through eleven simple steps termed as PROACTIVATE.: pricing non financial capital, radically increasing resource productivity, public private partnerships for innovating products for the poor, abolishing all subsidies, conserving natural resources, turning all products to services, introducing designs robust enough to stand heat, dust, humidity and mishandling but simple in skill levels, diversity in work force, mobilizing and activating women groups, transparency in governance and education for entrepreneurial skills.
Global warming has become a reality and has started affecting all of us. We need to change our growth model. Conservationism, not consumerism should drive economic growth. A saving grace of India’s poverty is that India’s environmental footprint is one-twelfth of US. Against 80 tonnes of natural material used by an average American, India’s per capita material usage is under 7 tonnes (per person). The rabid rate at which consumerism is growing in India can eventually lead to ecological catastrophe. There is a complete lethargy in eco-innovation. We need to curb the proliferation of products and innovate products for multiple use. A cell phone is a classic example. It is not only a phone but also a camera, a watch, a radio & a TV. All this at a fraction of the cost and size.
Innovations are no longer following the traditional ‘S’ curve. The cycle time between the launch, its diffusion and maturity is shrinking turning ‘S’ curves into ‘I’ curves. Our planet is in danger of being cluttered up with half-baked products that leave customers half-longing and half-spoilt. There is an urgent need to move from products to services, from tangibles to intangibles and gear the economy upwards from acquisition mode to experiential mode, if we have to avoid the ecological disaster.
Poor may be capital poor but they are asset rich. It is the lack of transparency in contractual transactions that prevents them from unlocking their assets. Hermando de Soto, Hermando de Soto the noted author of “The Mystery of Capital” estimated that the trapped resources of Mexico are $300 billion. India is bound to be higher. Besides, India’s GDP based on purchasing power parity increases from half a trillion dollars to three trillion dollars, way ahead of UK. Poverty, therefore, is at least partially, a self-imposed problem in most of the world. FDI or philanthropy are but a mere fraction of the potential for capital-trapped in the country because of poor and opaque governance system. The primary face of private sector in most developing countries is the extra legal black market controlled by mafia, moneylenders, slum lords and strongmen.
The problem cannot be solved by government alone. Solutions to involve poor in the market economy have to be co-created through active partnership between government, NGOs and the business. Indeed business has to take a deep interest. It is the business which will be the biggest beneficiary of tapping the BOP- Bottom of the Pyramid, a term used by Prof. C K Prahlad for the poor. There are galore examples of how ITC, HLL, ICICI Bank and Aravind Eye Hospital have improved their profitability by innovating processes to access this market. Studies have shown that return on capital employed on products innovated for poor markets such as Nirma was 121%. In the case of Aravind Eye Hospital where only 40% are paying patients and the average charge for cataract surgery is $50 including stay, the return produced constantly has been of the order of 120-130%. In the case of e-Choupal, ITC has been able to get the payback on their PC Kiosks within one full season.
Poor do not need handouts. They need education and infrastructure. Developing rural markets by encouraging transparency in governance structures will unlock the hidden assets of the rural poor and accelerate their integration in the market economy. Business can fundamentally alter the rural landscape and stimulate commerce and development by bridging infrastructure gaps in rural areas, linking the informal economy to established markets and providing distribution channels and transaction platforms.
The government instead of spending Rs. 30,000 crore on poverty alleviation and proposing a further outlay of Rs. 30,000 crore on Employment Generation Scheme for 100 days per household will do better to divert this expenditure on health, education, roads, bridges & electricity and bridge the infrastructure gaps to link the informal poor economy with established markets. Guaranteeing jobs for 100 days is a mirage and a misutilisation of scarce resources but including the poor in market economy by upgrading infrastructure is a sustainable path to real prosperity. We are entering an era where there will be a lot of work but little employment. Our effort henceforth, should be to equip young people to become entrepreneurs. “Don’t give them fish. Teach them how to fish instead”.
Test of the progress is not whether we add more to the abundance of those who already have too much, it is whether we provide enough to those who have little. As Mahatma Gandhi said “the test of orderliness in a country is not the number of millionaires it owns, but the absence of starvation among its masses”. People can live with poverty but cannot stand injustice. Disparity drives people to desperation. These disparities are a time bomb waiting to explode and pose the greatest threat to the security of business. This is specially true in India where 54% of the population is under 25. Most of the unemployed are under 30. The business should have a vested interest in thinking of revolutionary ways to remove the widening gap. It was John F. Kennedy who said in his inaugural address back in 1961: “If we do not make a peaceful revolution possible we will only make a violent revolution inevitable”.
On 8th December 1927, Mahatma Gandhi wrote in Young India “A time is coming when those who are in the mad rush today of multiplying their wants vainly thinking that they add to the real substance, real knowledge of the world, will retrace their steps and say: ‘What have we done?’”.
Since the writing of Mahatma, the technology has opened unlimited opportunities for the business. The role of business today is far more pervasive than ever before. Business today is running governments. Out of 100 biggest economies in the world 51 are transnational corporations. The largest 100 multinationals with $2000 billion in foreign assets outstrip the combined GDP of China, India, South Korea, Malaysia, Singapore and Philippines. Never before in human history the business had so much power to make a difference to the lives of poor. All it needs is commitment.
The understanding of the way the new economy works itself is tantalizing and has an immense potential to transform society to make it more humane. In the new economy knowledge is the measure of wealth. Knowledge when shared benefits both sides. The degree of benefit is determined by the diversity between the parties. Greater the diversity more is the gain. This realisation can have a monumental impact on our geopolitical landscape. Societies divided today between classes, races, religions and regions can unite and reap the huge benefits from working together. This will signal the death of clannish and caste politics which has brought havoc specially in India. As people realise that the value comes not from homogeneity but dissimilarity, the hatred based on religion and race will disappear. Hence there is a strong case for the business to take affirmative action to increase diversity of workforce.
Our problem for far too long has been of posturing instead of practicing. We are being increasingly trained to become performers, adept in acting the part. Time has come to get real with the problems of poor and develop a strategy for integrating them. We should no longer use CSR simply as a PR tool. CSR will be meaningless unless it becomes part of the core business. The urgency is not because social good is a competitive differentiator and part of innate human creed but that the alternative is anarchy where nothing but violence and terror will succeed.”
Poor are our Planet’s Galactic Business Opportunity
FAO’s latest hunger report says starvation, humankind’s oldest enemy, still lurks in large parts of the world. According to UNDP’s latest Human Development Report 799 million Indians are still below the poverty line earning less than $2 a day. 10 million hungry live in industrialized countries including US & UK. Well after a decade of globalization, hunger is actually on the increase. India’s own figures of people below the poverty line as per the latest National Sample Survey has arisen to 27.6% in 2001-2002 compared to 24.4% in 2000-2001. With 276 million people living below the poverty line, even as per India’s official figures, India otherwise recognised as a software giant, has the dubious distinction of being a country with the largest number of hungry people in the world. India’s poor are the worst off among emerging markets. The great IT revolution has not touched the poor.
The Twin Scourge of Poverty and AIDS
FAO’s report links hunger with AIDS. It shows that countries with a high prevalence of chronically hungry people are also afflicted by high rates of HIV/AIDS. World’s AIDS graph shows a steady increase of the number of deaths on account of AIDS. The figure last year went up by 3 million. After infecting 28 million people in Sub Saharan Africa, AIDS is advancing steadily towards Asia and East Europe. 1.8 million people are living with AIDS in the countries of Eastern Europe and Central Europe. Total number of people living with AIDS has increased to 40 million.
The Flop of Trickledown Effect
All this shows that the maxim of capitalism, on which the globalisation was based, that the free markets would lead to universal growth through free competition has been proved wrong. The levelling that was expected due to the great trickle-down effect has not materialised. In fact the inequalities have sharpened both in the developed and developing countries. They have increased by 2% since the Uruguay Round in developing countries. The world is witnessing a new phenomenon called “jobless growth”. In 2001-2002 the monthly per capita consumption expenditure in rural areas of India rose a mere 0.7% over that in 2000-2001, while consumer price index for agricultural labourers, a measure of their cost of living, went up 2.23% pushing more people below the poverty line. Poverty means powerlessness, voicelessness, vulnerability, disease, fear.
Gap is Widening Everywhere
Even in the world’s most powerful economy, the bottom fifth of US householders receive only 4% of the national income while top fifth receive about half of it. 82% of the expanding export trade is enjoyed by the top fifth quintile of world wealth. Bottom fifth enjoys only 1% of its expanding export trade. One million poor have been added in US only last year.
Disparities are a Time Bomb
Large parts of the world are being increasingly disenfranchised. It is purposeless waste to have 40% of world population in abject poverty with unused capacity in 20% of it. Test of the progress is not whether we add more to the abundance of those who already have too much, it is whether we provide enough to those who have little. It is the disparity that drives people to desperation. People can live in poverty but cannot stand injustice. These disparities are a time bomb waiting to explode and pose the greatest threat to the security of business. This is specially true in India where 54% of the population is under 25. Most of the unemployed are under 30. The business should have vested interest in thinking of revolutionary ways to remove the widening gap. It was John F. Kennedy who said in his inaugural address back in 1961: “If we do not make a peaceful revolution possible we will only make a violent revolution inevitable”.
Outmoded Business Models
Globalisation is not necessarily the cause of these disparities. These are largely due to an outmoded business models, short term approach and ill-advised subsidies. The business is starved of innovation and enterprise and is based largely on a box ticking approach. There is an urgent need, therefore, for a fundamental rethinking of our business paradigms, and overhaul of its structure and reward system to align it with the requirements of knowledge economy.
Spiralling Aspirations – The Age of Individual
While the process of globalisation has been debilitating for the poor, their aspirations have risen exponentially with the onset of knowledge economy. We are today living in an age of the individual. Knowledge economy has empowered individuals and democratised institutions. The internet has made people highly conscious of their rights. If corporates do not improve things on their own, people will take the law into their own hands as they did recently in Nagpur, where groups of women killed two criminals in broad day light. Awesome events of 9/11 have demonstrated the vulnerability of business. Gruelling poverty may not be the breeding ground for fundamentalists and ideologues such as Osama Bin Laden, but it certainly provides them a lush recruiting ground for promoting terror and mayhem. Business, therefore, has a choice: either look after the local communities or be forced to do so and risk losing all you have.
Change in Business Values
Last few decades have seen a gradual migration of values. There are many factors responsible for it. Dawn of the millennium brought about a convergence between various forces of change that led to a realisation that we are living in a world which is becoming increasingly interdependent. We must therefore act more responsibly to one another and towards the planet. The events of 9/11 further reinforced the new thinking. The other factor influencing the new thinking has been the demographics. A third of world population today consists of teenagers. It is these 2 billion teenagers who are largely driving the world economy today. Their social and economic values are vastly different from the older generation. The new generation looks for greater ethical responsibility, transparency, environmental action and social responsibility from the business. It was this generation which was responsible for the exponential growth of companies like Body Shop when they pitched their marketing on “we do not test our products on animals” back in the early nineties. This generation does not share a fanatical obsession to economic success. They expect the corporation to take care of people and planet along side the pursuit of profit. A significant proportion of young management graduates have opted for NGOs as their first job. Others have accepted lower salaries with corporations known for protection of human rights, environment or social action.
CSR – A Competitive Differentiator
A survey conducted at the dawn of the millennium showed that 60% of those who responded would punish companies which are environmentally or socially irresponsible. On the other hand 54% felt they would prefer companies with a record of good corporate citizenship as opposed to 40% who preferred quality and 34% who opted for good management. This showed that we have marched into an era where consumers will increasingly make purchases on the basis of firms’ role in society, how it treats employees, local neighbourhoods and other stakeholders. Social good has become a competitive differentiator. CSR is essentially a company’s approach to managing stakeholder issues such as customer – supplier relationship, work force diversity, human rights, work life balance as well as its efficient management of environment issues.
Corporations are Moving from Strength to Strength
Globalisation has made corporations much stronger. Out of 100 biggest economies in the world 51 are transnational corporations. Businesses have become so powerful that they are circumventing democratically elected governments. Mobility of capital has further loosened the hold of national governments on business. With corporations becoming increasingly footloose the government’s tax base is shrinking, forcing them to collect disproportionately higher taxes from salaried classes. No wonder there is a huge public outcry about companies being made responsible for their social and environmental obligations. Such is the pressure of civil society that more often than not market capitalisation is determined not by the profits announced by the company but the public perception of how they discharge their social and environmental obligations.
Positive Correlation Between CSR Performance and Bottom Line Results
That there is a strong evidence of positive correlation between the CSR performance and financial performance has been proved by some 95 empirical studies during the last 32 years using 70 different measures. But results cannot be tantalising unless companies give up posturing and start implementing the nitty gritty of CSR. CSR effort can be a win-win situation for the company as well as for the poor and disadvantaged provided it is executed with all sincerity.
CSR being used as a PR Tool
Corporations are becoming increasingly aware of the PR value of CSR. Companies have realised that its reputation is the most valuable intangible asset. No wonder, therefore, most claim to be votaries of CSR. There is a current debate whether this is driven by altruism opportunism. Christian Aid, a UK based charity, in their latest report “CSR – Behind the Mask: The real face of Corporate Social Responsibility has castigated companies for using CSR as a shield behind which to campaign against environmental and human rights regulations. Citing Shell’s example, the report says that CSR in some cases has been counter productive and harmed relations between the business and local communities. Despite Shell’s claim about and not come clean for years. “honesty, integrity and respect for people” it cheated investors by overstating reserves. The report says that CSR is being used as a public relations tool and it is no coincidence that companies in oil, mining and tobacco are its biggest public champions. That most CSR initiatives of the companies are designed to improve their public profiles, is evidence by the example of Philip Morris, a US tobacco company, which spent $75 million dollars on charitable causes but $100 million dollars to launch a corporate image campaign to publicise the $75 million dollar spend.
Philanthropy is not CSR
No one expects companies to simply donate money for CSR action. In fact CSR is far removed from simply giving away as charity. Philanthropy is not CSR. CSR has to be an integral part of the business model. The real benefit of CSR emerges only if it flows from the strategic intent; when the board and management both realise that CSR is a way to make the business more sustainable, assuring continual long term growth. CSR is part of continual improvement which says – everyday in every way I am getting better and better. CSR is an inside out job and not for those who simply want to act the part.
Poor are the Planet’s Greatest Business Opportunity
The pursuit of business today is limited to a small proportion of the total field of options. There is a lethargy of innovation. There is a whole new market of untapped customers and unarticulated demand waiting to be commercialised. This market consists of 4 billion poor the world. In an article published in HBR titled “Serving the World’s Poor Profitably” C K Prahalad and Alan Hammond have given an example of the huge premium being paid by India’s poor for water, food and fuel in a shanty town called Dharavi inhabited by over one million people in Mumbai. Nobody has worked on the inclusion of these poor in the market place. This will have a transformational effect on the whole business landscape. It will not only radically improve the lot of the poor but also make a hell of a lot of money for the business. A conservative estimate of the value of the market offered by the poor in 18 countries including India, China, Brazil, South Africa comes to $1.7 trillion, roughly equivalent to the annual gross domestic product of Germany. Dr Hammond who is the Vice President of the Washington based World Resource Institute says “Business has all but turned a blind eye to the poor because of the assumption they have no money. Instead, global business continues to make the mistake of going after the “upscale” consumer even though there are fewer of them in developing countries.” This hypothesis has most radical implications. The governments can stop treating the poor as begging bowls. The civil society can stop viewing them as objects of charity. The poor at the bottom of the pyramid represent the largest untapped consumer market on this planet. They can transform the bottomlines of many a fading corporation and save them from bankruptcy while making this world a less dangerous place. No need for the government to dole out Rs.30,000 crores of public money every year in the name of poverty alleviation programmes. This money can be well spent on infrastructure – roads, electricity, water and sanitation.
The Multiplier Effect
The collateral social and economic benefits of extending the market economy to poor can be huge. The multiplier effect of including 4 billion poor in the world economy will be of galactic proportions. Here we are not simply talking of the $ 1.7 billion existing economy. This market will multiply manifold once the poor are provided with the infrastructure and communication to integrate them with the rest of the economy. This has the potential of not only lifting the world economy from its current depressed state but raising the world’s gross domestic product several times.
Creating Wealth from Wastelands
The concept has been given practical dimension by ITC in what they call their Social and Farm Forestry Project. ITC has effectively leveraged its wood fibre need to provide income generation for the economically backward wasteland owners of Andhra Pradesh. They brought equipment to turn the wastelands into productive farms and helped the local poor with planting trees intercropping with seasonal vegetables. In a single year in 2002, ITC’s afforestation programme has resulted in the planting of 20 million saplings. ITC claims, they have planted 66 million saplings generating employment opportunities for 2,00,000 people. The marriage of ITC’s technical know-how with the local poor has enabled yields of up to Rs. 75,000(US$ 1666) per acre per year from former wastelands, thus enabling both the company and the farmer make money in a virtuous cycle of sustainable development.
Routing Nations’ Prosperity through Poor
Business can fundamentally alter the rural landscape and stimulate commerce and development by bridging infrastructure gaps in rural areas, linking the informal economy to established markets and providing distribution channels and transaction platform. Use of voice mail and voice recognition software can help bridge the literacy gap. e Choupal experiment of ITC provides the farmer direct access to uptodate market-information and help him/her eliminate intermediaries and reduce transaction cost as well as corruption. It improves the decision making ability of the farmers and enables them to secure better quality, productivity and pricing.
Social and Environmental Accounting
The primary reason for both our corporate and social ills lies in our accounting system. Capitalism has admittedly won the battle against communism. But we need to understand the true nature of capitalism based as it is on the market’s ability to determine correct price levels. Knowledge economy has upset our equations and changed the definition and scope of capitalism. Firstly it has focused on the value of non-financial measures. Secondly this has established new rules of exchange. Exchange of knowledge has no losers. Both sides sharing knowledge win. We do not realize that corporates can create value by various non-financial measures. Enormous value can be created by enhancing human capital, environmental, capital and social capital. We are captives of a strange economy. I can walk out of this room, take a flight to any destination I want, hire a room in the best hotel, stay for weeks, may be even months – all this without a rupee in my pocket. But if all the air is sucked out of this room I cannot survive for more than a few minutes. Yet, while we have a price tag for all the goodies that I can live without, the things that are most crucial for my survival are free. Market economy is meaningless if it can not count the non-financial goodies that are far more important to our happiness such as our emotions, love, trust, inspiration, joyfulness.
Diversity – A Value Enhancer
Global corporations today are facing enormous geopolitical challenges. As the businesses expand and their operations extend beyond their borders they have to transcend their parochial mentalities. What sets them apart is that their constituency is global which enables them to capitalise on the inherent advantages of knowledge economy and constructively engaging with diverse stakeholders. Diversity is a value enhancer in the knowledge economy. Knowledge when shared benefits both sides. The degree of benefit is determined by the diversity between the parties. Greater the diversity, more is the gain. This realisation can have a monumental impact on our geopolitical landscape. Societies divided today between classes, races, religions and regions can unite and reap the huge benefits from working together. This will signal the death of clannish and caste politics which has brought havoc specially in India. As people realise that the value comes not from homogeneity but dissimilarity, the hatred based on religion and race will disappear.
Obsessive Consumerism
We are living in exciting times. Never before in human history the gap between what can be imagined and what can be achieved has been smaller. Technology has given us the power to do what we want. The question is Do we have the will to do it? Our will has been corroded by the omnipresent greed and our obsessive adulation and addiction to consumerism. This is the major cause of a lot of our ills the reason for widening disparities, distrust, waste, pollution, environmental damage, obesity and heart disease. We need to be ashamed of our obsession to consumerism. The true measure of a person’s riches lies not in the things he or she can buy but the things he or she can afford not to buy. Do we not feel guilty that 63% of India’s children go to bed hungry? They have no water supply, no concrete roof, no toilets-things that we take for granted. We must ponder why greed has become our sole driver. That goes even for our NGOs. There is a huge funding in the name of CSR and poverty alleviation programmes. Studies indicate that barely 18% of it reaches the targeted recipients. We need to think how we would like to be remembered by the history. Think of Alfred Nobel. Alfred Nobel, the founder of Nobel Prize had the very unique experience of reading his own obituary with his morning coffee. It was all about his involvement with dynamite. Noble was devastated that he would be remembered only for destruction. The experience changed his life. So he devised a Peace Prize.
Making a Difference
CSR essentially means redeeming the debt that the business owes to society. We must ask ourselves how best this debt can be repaid? Remember what Einstein said: “only a life lived in the service of others is worth living” We must ask ourselves – Why are we here? What is the purpose of our journey from womb to tomb? The moment you realise you have no other purpose than to realise your innate potential you will think of doing something that will make a difference. Indeed the whole purpose of business is to make a difference to the society. In the words of Charles Handy, “the principal purpose of a company is not to make profit. Full stop. It is to make profit to do things better and more abundantly.” Profit is like breathing. You can not live without breathing but it is not the purpose of living. As Andrew Carnegie, the great American industrialist philanthropist said, “it is great to make money but it is a disgrace to die rich”. Changing our motivation from greed to taking pride in making a difference will make businesses sustainable and help us to give up posturing and get real with CSR. Americans have long been proud of the decade when slavery was abolished. Let future generations be proud that it was our decade that abolished poverty and removed inequalities. The urgency is not because social good is the ultimate human creed but that the alternative is anarchy where terror and violence will succeed.
Wide gap between staff, CEO remuneration: study
Mumbai, Nov. 14: India is witness to an increasing differential between an ordinary worker’s wages and a chief executive. The differential has moved dramatically to touch 1:400 as against 1:20 two decades ago, a study conducted by the Centre for Corporate Governance indicated. According to the survey there is an urgent need to rein in excessive compensation.
Addressing a seminar on the “Challenges of Corporate Governance in turbulent times,” Mr M. Damodaran, chairman of the Unit Trust of India and IDBI, and also chairman for Western Chapter of Centre of Corporate governance said, “Corporate Governance should not only be on paper, but should also be put into practice.” “One of the ultimate negative points of corporate governance is the chief executive, often the promoter, of a company also heading the board of directors. A structural change should be there in the composition of the board of directors so that better corporate governance can be practised,” Mr Damodaran said.
The regulators should not be too obsessed with quarterly results of corporates. It requires lengthy reviews and huge efforts, especially if the company is large and diversified, to put together a quarterly review of performances. Such mandatory requirements put enormous pressure on companies and could force people to put out information that may not be entirely accurate, Mr Damodaran added.
Dr Madhav Mehra, president, World Council for Corporate Governance also expressed his views in saying that CEOs have not been focusing on creating wealth but manipulating figures to justify large bonuses to enhance their pay packages and pointed out that the other reason for corporate collapse is the “mortal fear in which today’s CEO lives off the stock market, which forces him to inflate quarterly earnings. We have to educate investors to ignore quarterly reports and take a long view of the company’s performance.”
