Turn your business into a cause and maximise your profits ?

Public expectations of corporations have undergone a profound change during the last decade. Kenichi Ohmae in his book “The Borderless World: Power and Strategy in the Interlinked Economy” has defined the role of corporations as follows:

“A corporation is a social institution whose responsibilities extend far beyond the wellbeing 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 wellbeing of the corporation.”

Charles Handy says “a business is no longer just an economic instrument, the principal purpose of a business is not to make profit, full stop. It is to make a profit in order to continue to do things and to do so even better and more abundantly.”

This is a far cry from which Milton Friedman said in 1970 – “the social responsibility of a business is to increase profits”. The expectations of people from business have changed vastly over the last few decades. In a millennium survey about 60% of those polled stated that they will punish companies who were found to damage environment. Today a company’s market capitalisation depends on how they take care of the social and environmental issues.

In this scenario a company that focuses on profit alone is certain to make no profit. Companies that wish to create sustainable wealth have to look after 3 things - people, profit and planet. This is what is called a triple bottom line approach. In traditional business one only watched a single bottom line i.e. reduction of costs to maximise profits. This equation is now considered inadequate. Companies have to look at society and environment issues. The goal of business should not be confined simply to the creation of financial wealth. Far more important is the human wealth, intellectual wealth, reputational wealth and environmental wealth. Corporations must aim to create significant impact on the society by reshaping community values, attitudes and culture. Corporates can create value for the society through several means; most of all is the way they recruit and the way they treat their employees. Discharging their corporate social responsibility through community health, education and welfare scheme is value adding as it enhances the human capital. Adding persity to the work force and creating gender balance not only enhances the quality of human capital but also adds to the financial gains. In an economy driven by innovation the only way to breed new ideas is by encouraging perse groups. It is only though the clashing of cultures and Ideas that best solutions are found. It was in 1859 that Charles Darwin told us that adding variety to crops improves yield. We are yet to adopt it for human.

At a recent lecture Joseph E. Stiglitz the noted Professor of Economics at Columbia University & former Chief Economist of the World Bank asserted that inequalities in developing countries have increased by 2% since the Uruguay Round which founded WTO 10 years ago. A recent FAO study on hunger reports that hunger is actually on the rise and 18 million more people have slipped into hunger in the second half of the decade.

India, currently celebrating the ‘feel-good’ factor owing to its remarkable economic performance, has added 33 millions to the ranks of hungry in 2001-2002 alone. With 276 million people living below the poverty line, India, recognised as a software giant, has the dubious distinction of being a country with the largest number of hungry people in the world. There has been a paradox in the economic growth worldwide. The national economic growth world over has not brought any increase in employment. The jobless growth is adding millions unemployed to its already expanding queues. Despite annualized growth of 8.4%, even the US economy generated just 1000 jobs against the expectation of 150,000 this December. India’s jobless has already exceeded 35 million.

All this shows that the maxim of capitalism on which the globalisation was based such as that the free markets would lead to universal opulence through free competition spurring greater productivity has not worked and we need to recast our strategies. 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’. While poverty is increasingly depriving large populations the very basic needs, the greed is pushing the envelope of corporate agenda. There has been no remission from corporate scandals despite Sarbanes- Oxley and Sir Derek. According to Sherrin Watkins, the Enron whistleblower, the directors have still got their hands in the till. Last year has witnessed value destruction in a whole lot of iconic enterprises such as Skandia, Boeing, Hollinger and Parmalat. World’s oldest stock exchange NYSE has also not been spared. After defending for months the obscene remunerations of £140 million that it paid to its former chairman Richard Grasso, NYSE has decided to join SEC in ordering investigation into Grasso’s earnings. The pay package will be investigated by famed New York Attorney General Eliot Spitzer. Skandia provides a classic example of what can happen when strong management is left unsupervised by a weak board and flawed auditing process. As usual the management represented by former chief executive Lars Eric Peterson and his deputy helped themselves to huge bonuses and company perks while Skanllia share price plunged by 90%. Latest to face SEC charges is another American icon IBM. Widening of Parmalat probe has shown the involvement of even Bank of America and Deutsche Bank, Germany’s biggest bank. Here is a lesson that investigations, unless carried out with full commitment and persistence, do not unravel the magnitude of skullduggery.

American mutual funds, a $ 7 trillion industry, known to be the saviours of small investors were also caught by SEC while trying to make a fast buck at the expense of small investors. Even UK’s Invesco was involved, raising the question once again as to why corporate misdoings by the same institutions escape scrutiny in the UK. SEC said it found 14 brokerage firms taking cash from mutual fund advisers and 10 funds accepting payments in the form of brokerage commission. Corporate mis-doing can do the greatest damage to this bullish market. Markets have only begun to bring in the small investor after a long absence. Not long ago 45% of those polled in a survey of potential investors had said that stock markets are a sure way to ruin. Our most important challenge, therefore, is to restore the credibility of the stock market. Experience has ndicated that mere box-ticking of corporate governance codes does not help. Indeed it can be counter productive because it gives you the illusion of things being in control. Besides, this is an area which is already over legislated. Further tightening of the rules as has been done by OECD improves the form and not the substance. More focus needs to be given on monitoring implementation.

As Warren Buffett recently wrote to shareholders: “The answer is not in inadequate laws ….but in what I would call ‘boardroom atmosphere’. When the compensation committee, helped by a high-paid consultant, reports on a mega grant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider.” What we really need is training of directors in boardroom skills of how to intervene without raising a storm.

Now that the Indian companies have become global, one of the biggest challenges is to ensure they have independent directors on the board. Board independence is the cornerstone of good corporate governance. Unfortunately government of India is still sitting on the Naresh Chandra Committee report on the reforms in the composition of boards to include independent directors. It is time that action was taken on this report regardless of industry resistance. A similar and stronger report submitted in the UK by Derek Higgs also faced a lot of opposition from chairmen of FTSE100 companies. It did not dissuade the UK government from implementing the report.

The purpose of appointing independent non-executive directors is to make them the watchdog of shareholders. There is the job to bring objectivity and impartiality to the board’s decision making. They also widen the horizon of the board in formulating strategy, applying both a wider general experience and any relevant special skill and knowledge that the board may otherwise lack. Cronyism in the appointment of non-executives and the cosines in the supervision of board room pay can spell disaster to independence and make a joke of non-executives.

Non-executive directors are crucial to maximisng effectiveness of the board and its time that the process of recruiting independent directors is given as much importance as appointment of a CEO. Ideally, appointment of both auditors and non-executive directors needs to be made by a group or a vehicle, which is independent of the board. The process needs to be made a transparent as possible which is possible only if each appointment is made through an appointment committee. This committee should develop criteria for the appointment and engage an independent search firm for recruitment.

Maximising the shareholder’s returns in a world of such disparities can be most challenging. It is dangerous to focus on profits alone in a world characterised by grueling poverty and squalor and build islands of opulence and extravagance. Such disparities in an interconnected economy pose the greatest threat to corporations and are time bombs waiting to explode. Corporations can ignore them only at their own peril. Their most important agenda, therefore, is to bridge these disparities through a triple bottom line approach focusing on people, profit and planet. The need for transparency, equity, integrity, accountability and social responsibility in such a situation is far more pronounced. It is certain that people are not going to accept a second class status in the internet world. People can stand poverty but not injustice. It is the corporates who will suffer a backlash if disparities persist and are not made good through market interventions. In this context the widening differentials between the wages of an average worker and the CEO are cause of deep concern warranting immediate corrective actions. People issues have come to the forefront. We are living a knowledge economy. The value has shifted from capital to knowledge.

Knowledge comes from people. Valuing knowledge needs a change in the paradigm. Though sharing has been emphasised all through in the management literature, its impact has changed vastly at the onset of knowledge economy. In the industrial economy if people shared things, in the event of one party getting more then other party had to get less. This is not so with the knowledge. Sharing of knowledge brings gain to both sides. The quantity of gain depends on the persities of parties concerned. Greater the persity, more is the knowledge. The world today is beset with many serious problems. Some of them are catastrophic. One such problem is the environmental damage and global warming due to emissions of green house gases. It is a pity that the President of world’s biggest economy, US, is spending enormous sums to prove otherwise. This is how Robert F. Kennedy Jr. of Natural Resource Defence Council describes the US President’s response to environmental challenge:

“There is no scientific debate in which the White House has cooked the books more that of global warming. The Bush administration has altered, suppressed or attempted to discredit close to a dozen major reports on the subject. These include a 10 year study by the International Panel on Climate Change (IPCC), commissioned by the President’s father in 1993 in his own efforts to dodge what was already a virtual scientific consensus blaming industrial emissions for global warming. After disavowing the Kyoto Protocol, the Bush administration commissioned the federal government’s National Academy of Sciences to find holes in the IPCC’s analysis. This ploy backfired. The NAS not only confirmed the existence of global warming and its connection to industrial greenhouse gases; it also predicted that the effects of climate change would be worse than previously believed, estimating the global temperature will rise by between 2.5F and 10.4F by 2100. Bush reacted by launching a $100m-10 years effort to prove that global temperature changes have, infact, occurred naturally – another delay tactic for the fossil fuel barons.”

It is now well known that the Iraq war was initiated primarily to secure future supplies of oil. It was a highly short-sighted approach aimed to defeat its very objective. Oil is not going to last for more than 50 years. Huge oil imports of 11 million barrels a day with forecast of 20 million barrels a day by 2005 are ripping US economy and adding to its enormous deficit $1.5 billion a day. It would have been so much better to spend these £57 billion allocated for Iraq war in subsidizing the non-conventional energy sources. This way US would have helped the world in finding a lasting solution to the global warming problem and also balanced its budget.

A sweeping new computer-modeled study conducted by scientists from 14 laboratories covering six regions rich in bio-persity such a Mexico, Australia, Brazil, South America and Europe came to the startling conclusion that more than one-third of 1103 nature species like mammals, birds, reptiles, insects & plants could become extinct in 50 years time. The reason is because greenhouse gas emission from cars and factories could make earth hotter than it has been 10 million years. Applying the same yardstick in other regions means loss of one million species by 2050. Now if such research is made fully public, i.e. if media publicises the fact that cars are causing emissions that are destroying the Australian lizard called Boyd’s Forest Dragon, Europe’s azurewinged magpie and Mexico’s Jico deer, most of the young purchasers would replace their cars with bikes.

2003 was the third warmest year during the last 150 years. The other two warmest years also were during the last 5 years. Antarctic Ozone hole has expanded to an all time high. Arctic Sea ice has touched a record low. This bad news on environment has its good side. People will finally rally to the defence of environment. Coming years are going to witness much greater respect for environment. Lot of value will be created through corporate strategies based on the theme of “return to nature”. People will be willing to pay taxes to protect bio-persity. Company’s market capitalisation would depend on how they protect environment. An important trend would be migration of economy from acquisition to an experience based mode. Greater value will be created by intangibles that would appeal to emotions than products.

One recent poll found 95 percent of the American people agreeing with a sentiment long shared in Europe and Asia: Corporations owe a larger debt to society than simply making profit. One reason why this is true is the growing recognition of an interdependent, networked society in which business plays a key role. James Moore’s “business ecosystem” model, for example, along with such concepts as industrial ecology, stress that corporations are not narrow institutions distinct from the social contexts in which they are embedded. The recognition among business leaders that they cannot thrive if their surrounding ecology is perishing is already leading many companies to broaden the scope of their activities. “Ten years from now, I am firmly convinced,” Moore has concluded, “business leaders will be actively and daily addressing social and environmental issues.”

The role of business today is far more pervasive than ever before. Its constituency is global. Power of the MNCs has arisen enormously in the new era. There are over half a million foreign affiliate corporations in the world. The largest 100 multinationals $2000 billion in foreign assets outstrip the combined GDP of China, India, South Korea, Malaysia, Singapore and Philippines. Today it is the economy that drives politics. It is the business that drives governments. Business is shaping the social values and also becoming a powerful cultural force. The political system has failed to address the human problems of inequity, poverty and terror. The governments of today and politicians particularly, have lost the moral authority. For the first time in human history, the business has the power to make a difference to human lives and can fill the vacuum eminently.

In the de-regulated digital economy where it is the business which is running the government, the responsibility for removing these disparities rests with the business. It is for business to realise that in this era of knowledge economy if growth is not equitable and shared, it cannot be sustained. It is the disparity that drives people to desperation. People can live with poverty but not injustice. India’s advantage lies in its youngest population in the world. 54% of our population is below than age of 25 and largely unemployed. These young people are not going to sit idly if India’s growth does not improve their prosperity. Extending your horizon to care for the long-term societal needs has to be the key element of human effort and indeed the main challenge to leadership at all levels in the 21st Century. This is what is called stewardship. The fundamental role of leadership has to shift from production at any cost to protecting the environment, preserving natural resources and taking care biopersity and the ecosystems with a view to safeguarding the interests of future generations. Sustaining efforts to improve quality of environment calls for personal commitment. The question before us is how can business be made to realise that a duty of care for our environment and making a difference to the lives of disadvantaged and impoverished can provide a deeper purpose to business?

Global Corporations today have to face new geopolitical realities. Their’s has to be a global vision transcending parochial boundaries. As their businesses expand and operations extend beyond their borders, they have to expand their mindsets as well. Having cried hoarse all along for minimising the government role in corporate agenda they cannot bank on governments alone to solve the problem of disparities. Businesses are the engines of today’s progress and have to become the drivers of change. They have to become aware of the new challenges of managing perse operations across continents spanning different cultures and geographical locations amidst resurgent geopolitics and heightened business volatility requiring greater transparency and accountability.

They have to realise that their biggest challenge today lies in managing persity and bridging disparities. National governments driven by local and parochial agendas have made a mess of it. It is now for the business to drive the government agenda and engage with all stakeholders and local communities to make them realise the benefits, proper implementation of globalisation can bestow. They have to invest in local communities and seek their trust. Capitalism has to channel self-interest to achieve collective good for its own survival. A focus on triple bottom line is the key to all this. In the triple bottom line approach the social and environmental has to be incorporated not as an add-on to a company’s economic activities but as essential and integral part of the strategic intent of the company linking the business success with society. Alternative is chaos and anarchy.

Never before in human history has the corporate directors’ role been so vital in creating prosperity for the nation, as today. Never before did they have so much power and capacity to improve the lot of common man and enhance human happiness.

In the corporate form of business organisation the board of directors occupies unique position. The Cadbury report placed the corporate board at the central stage of governance system. Elected by the equity shareholders of the company, the board of directors overseas the performance of the company through the executive management. The Cadbury report described the board responsibility to include setting of company’s strategic aims providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.

Such a high profile occupation has a cost attached to it especially in today’s internet economy. Public expectations of director’s roles and responsibility have increased sharply. Directors who have been found wanting in the performance of their duties have had to pay a heavy price. Recently, Keneth Lay the former Chairman of Enron was marched off in handcuffs. America’s household goddess Martha Stewart was sentenced to 5 months in jail and 5 months of house arrest following her conviction for lying about a stock sale during government investigations. Bernie Ebbers, ex-boss of WorldCom has been awarded 25 years of prison sentence, something that will be more appropriate for a Mafia don.

In a landmark judgement the Delaware court has upheld the right of shareholders to sue management of Disney over the pay of its President Michael Ovitz for outrageous compensation. In another case, 10 former directors of the Worldcom (now MCI ) have agreed to pay $18 million out of their own pockets as part of a shareholder lawsuit. A few days later, 18 former director of collapsed energy conglomerate Enron agreed to pay $13 million as part of a settlement in a shareholder lawsuit. Rebecca Mark, who played such a prominent role in the controversial power purchase agreement for the now defunct Enron’s Dabhol Power Company plant in India, is among those who will be paying out.

Shareholder activism on directorial responsibilities has also opened up new opportunities for aspirants of director’s positions. It has brought a new breed called ‘independent directors’.

Clause 49 of the listing agreement with India’s Stock Exchange regulations – Securities and Exchange Board of India (SEBI) defines the independent director to mean non executive director of the company who

Directors Have a Cause to Live For 107

Securities & Exchange Board of India requires that at least 50% the directors in the listed companies should be non-executive independent directors. This means that a country like India with an average of 8 directors on the board of a listed company would need 22,500 independent directors to comply with the requirement.

Independent directors are entitled to sitting fees which have been enhanced from Rs 5,000 to Rs 20,000. In addition they are entitled to 1 % of the company profits. A number of directors have multiple independent directorships. India’s Companies Act permits upto 15 directorships at a time. There are complaints that pendulum has started moving in the other direction. Some independent directors are receiving 12-15 lacs per year as sitting fees and commission.

An analysis of 2004 compensation data for US companies showed independent directors of top 200 companies are being paid £97000 for barely 7 days work in a year. Would you expect such directors to give “independent” and “unbiased advice”?

Notwithstanding all this or despite all this record changes are taking place at the top of US corporations. 103 CEOs were shown the door in February alone. This was 11 more in January which was a record in itself. Sacked CEOs include high profile people such as AIG’s Maurice “Hank” Greenberg, HP’s Carly Fiorina and Boeing’s Stonecipher. A great mutiny is raging at Morgan Stanley.

Directors are becoming increasingly afraid of being hauled up in legal actions for letting fraudulent conduct go unchecked. The record increase in the sacking of CEOs despite the fact CEOs are reported to be spending nearly 40% time more in the office than a year ago is the result of the increasing public pressure on the credibility of CEOs. A recent survey stated as many as 73% of CEOs have thought of quitting. The bad news is that at least in some cases sackings were not because of fraud but an irrational exercise by the board of their new found authority. Carly Fiorina whose stellar performance brought Hewlett Packard to such heights was one of those to face the brunt simply because her merger of HP with the Compaq failed to deliver results. Similarly Stonecipher’s exit from Boeing had nothing to do with his performance or even his integrity.

The fact is that a fear psychosis has set in motion by a variety of new laws. There are several regulators working overtime in competing with each other on who goes the farthest. This excessive focus on regulation is hurting the investors. In this the work done by Eliot Spitzer, the New York Attorney General, is worthy of commendation. He has shown how the system can be reformed applying the existing laws instead of bringing new ones. The issue, therefore, is not of having more laws but enforcing the ones we have more effectively.

The proposition that the corporate world and specially the capital markets need to be regulated to improve transparency, accountability and integrity is uncontestable. Self governance has really not helped. The opacity with which the market is run has excluded most of the world population from the stock market. Corporate governance is not only an issue of compliance and disclosures but a powerful instrument for national economic and social transformation. Only by encouraging the participation of disfranchised masses in the stock markets can any nation hope to achieve a measure of sustainable prosperity and remove inequalities.

In his article in this issue Rene Banez talks about restoring trust at the workplace. A recent study of the World Economic Forum shows a dramatic lack of trust in key institutions. In fact the public trust in institutions is increasingly going downhill. The worst in this are corporates. 67% of those surveyed distrusted executives of multinational companies.

The real issue in corporate governance is the handling of inpidual greed as opposed to self-interest. Self interest can be enlightened and long term. Greed is self centered and short term. The current business culture is not driven by “do what is right” but “do whatever you want to do but don’t get caught”. The issue is not that there are a few rotten apples, as some tend to think. Both pre-Enron and post-Enron eras have shown us that greed is widely spread. Post Enron years have seen mighty falls of corporate icons from their pedestals. Almost all the business icons have fallen from grace. It was not only Tyco’s chairman who gave huge gifts to his wife and had lavish parties on her birthdays. Maurice “Hank” Greenberg, a celebrated star in the American corporate firmament until last month gave his wife more than 2 billion dollars of AIG shares 3 days before he stepped down. He was forced to resign after New York Attorney General Elliot Spitzer started investigating AIG’s business practices. Even Warren Buffet the great sage of Omaha is being grilled by Spitzer’s office about his role in a questionable deal between Berkshire Hathaway and AIG.

Like in the sustainability debate where the defenders of the old regime have tried to pooh pooh the idea of the sustainable development and the reduction of the green house gases, there is a strong lobby spawned by Chief Executives, Board Directors and Chairmen, threatened by the new regulations requiring induction of independent directors. This lobby is working overtime and sponsoring reports showing companies would be better off without outside directors. Independence is an attitude of mind. You can be independent as an Executive Director and not independent even as a Non-Executive Independent Director. The fact is that there are a lot of us who like to be led rather than lead, who cannot handle conflict and avoid stress situations, who never take any risks and will never ask an awkward question. Leadership skills and communication skills have to be cultivated. So the endemic problem of the conflict of interest cannot be solved simply by having more independent directors. Furthermore, if these independent directors, most of whom are usually retired people, are paid remunerations in the region of £100,000 a year by the company, would you really expect them to be independent? The key issue in the debate about independent directors is the selection and training of directors. We have to train directors to develop leadership skills and an independent mind because independent minded directors are the only hope of good governance. Excessive regulation on the other hand simply means throwing good money of the investors down the drain. Excessive regulation has resulted in corporate opposition to compliance and demand from European companies to delist from US Stock Exchanges. A delegation of European business leaders, including top officials from leading companies such as BASF, SIEMENS & UK’s CBI has met William Donaldson, SEC Chairman, to relax rules that compel companies to comply with US reporting requirements if they have more than 300 US investors. A growing number of European companies are considering delisting.

According to a US quoted German company half the DAX 30 companies with US listings want to withdraw from US market. Sir Christopher Bland, Chairman of BT Group said it would delist if it had the option.

There is another view that this is an investment that offers significant opportunities of competitive advantage in an environment where each stakeholder is looking for greater transparency and disclosure. A survey by PwC involving 1300 chief executives indicated that those who think that compliance of SOX is an investment, outnumbers the “cost” group by almost 2:1.The prolific advances in technology and globalisation has transformed the capacity of businesses to effect human lives. Companies are increasingly realising that wealth creation requires a vision that goes way beyond their bottom line. Companies who simply focus on quarterly profits rarely succeed in the long run.

Most CEOs understand that improving corporate governance by strengthening board expertise, board oversight and exercise of better internal controls to manage risks, would improve managerial effectiveness and add significant benefits and savings. The compliance can result in enhanced reputation, increased operational effectiveness, higher employee moral, improved customer loyalty and more transparent engagement with civil society. Transparency is the heart of corporate governance. With the increasing demands on disclosures, companies cannot survive without putting in place internal control architecture that will enable timely disclosures without risking reputation.

The globalisation today offers huge opportunities for proactive businesses. Today’s business is dealing with only a fraction of the infinite field of available options. There are enormous opportunities for innovation and creativity. But innovation does require investment. Transparency can work wonders in improving company’s credibility and access to global capital.

The real management challenge for global companies lies in creating systems for global governance that comply with stakeholder expectations right across their global operations and help them to build new markets and increase profitability. One of the nagging worries of the businesses after Enron and WorldCom directors accepted to compensate company losses from personal funds is to attract quality independent directors. Companies that have developed robust compliance programme and transparent structures would make them ideal choices for qualified directors.

The greatest tragedy of corporate governance lies in the manner in which it is being abused by the vested interests to perpetuate their self interest whether it is auditors, CEOs or other powerful lobbies. Time has come for directors to use the five pillars of good governance namely transparency, accountability, equity, persity and social and environmental responsibility as competitive differentiator. The spectre of directors being marched off in handcuffs should provide a cathartic experience and make directors realise the value of making difference to the community where they live. Leading their businesses to not only create sustainable wealth but also improve the lives of local communities can be most electrifying. With four billion people under fed and under nourished, glaciers melting though global warming and the CO2 degrading the environment to such a level that our lungs are getting seriously damaged , corporations would never have better causes to work to maximise their profits.

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