The Telegraph
Since 1st March, 1999
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- The nature and function of corporate social responsibility

Do companies have a responsibility to society beyond that of being law-abiding citizens who run their companies in the most efficient manner'

The Nineties have been a period of upheaval for most Indian companies. And that is not only due to market factors like more competition. It is because of the entry of large foreign institutional investors. These investors were far more professional than our then mutual fund managers, investment advisors and other investors. They actually studied markets, competition, managements and company accounts. They understood them better and asked questions. If they were not satisfied, they exited the investment leading to sharp falls in values.

This lost wealth for other shareholders, especially the ones who controlled the companies. It did not suit the Central government, which was afraid that the foreign investment might exit the country if the system for regulating financial markets was considered as being too opaque and ineffective in protecting shareholder interests. Transparency of company accounts, managements and of market values became increasingly necessary.

The information technology companies were an important influence in the speed with which these ideas became popular. Promoted as they were by white-collar workers, mostly from the middle classes (and in some cases making a virtue of their middle-class values), many of these promoters were staggered by their sudden personal wealth. They brought their values to bear on their companies and behaved as if they were trustees for all shareholders. Most of them lived modest personal lives and tried to be good citizens paying their taxes and taking interest in the betterment of their local community and society generally.

N.R. Narayanamurthy upset many in the old economy by advocating that no company should get away without paying taxes, calling for self-regulation in salaries to top management, arguing for competence, and not chromosomes, to determine management succession and the like. His chief executive officer is actively involved in the resurgence of Bangalore along with a group of other socially conscious industrialists. They created the best model so far in India of corporate executives effectively improving a city’s infrastructure and services. As their companies began to be the movers and shakers of the stock market, their examples influenced the demands from investors, governments and even regulators on all companies for being good citizens.

The Nineties witnessed the rise of the IT companies. It saw an upsurge in foreign investment in Indian markets, accompanied by domestic small investors. While the large foreign investors could withstand the adverse effects of severe downturns in the market and many times to anticipate them, this was not the case with the domestic small investors. The seemingly wayward gyrations of the stock market hurt them badly. It became apparent that these were mostly because of the uninhibited rigging, insider-trading, and thieving of large sums from scheduled and cooperative banks in scams worth thousands of crore of rupees.

Small investors lost faith in the fairness of the stock markets and deserted them. Even more was the loss of faith in new primary issues. Managements, and not government, now determined the premiums at which they were issued. Many blatantly rigged their prices artificially, which fell soon after the successful oversubscribed issue. Foreign investors also lost confidence in the market and particularly in their regulation.

This led to a spate of studies and then measures to improve the quality of governance of companies, their transparency and full disclosure, and amendments to the laws and to listing requirements for companies on the stock market. These moves were further encouraged by the large number of American cases of collusion between companies and their auditors, the ineffectiveness of outside directors in controlling the misuse of powers by controlling managements, and the apparently weak regulatory oversight by the designated bodies. It was Infosys that led the way.

Good corporate governance is a buzzword today in India as in other countries. The difficulty is that all the legislation and regulation cannot prevent misuse of authority by managements. The regulators need to be constantly watchful, speedy in their investigation and empowered to impose heavy penalties for abuse. This is still not the case.

The trouble is that many companies in India do not yet understand their responsibility as good corporate citizens. There is a feeling among “promoters” that they own their companies and can decide which member of their family will succeed them, how much they would be paid and so on. There is little recognition that there are other shareholders, however small, who are also owners. They have not only to be consulted and approve major decisions but these must also be in their interest.

The recent example of the shareholders of Sky TV in the United Kingdom questioning his son’s succession when Rupert Murdoch steps down is a good signal. Instead, they appointed an independent search firm to find the best successor. This has yet to happen in India. Whether Bajaj or Ballarpur or Shaw Wallace or Thermax or Sanmar or Bombay Dyeing or many others, it is the family that puts its own member in control, not based on any assessment of the most competent but only on the fact of his DNA. Despite the talk by some of them that they are M.K. Gandhi’s followers and regard their control as a trust, when it comes to exercising control it is a family member who gets it.

The increased clout of independent directors because of the recent changes in the company law and listing agreements might serve to bring greater fairness in determining succession. Perhaps independent directors will begin to assert themselves and demand that the best and not the most closely related candidate should be the chief executive.

Corporate social responsibility is about many things. It is about good governance in the interest of all shareholders and not merely the ones in control of the company. It is about ensuring that the company adds to its wealth and that of the nation. It is about following the laws and customs of the society in which the company is placed. It is about the sensitivity to the environmental and ecological effects of its actions, to developing the capabilities of all in the enterprise and particularly of the disadvantaged. It is also about taking some responsibility for improving the life of the community in which the company is located.

This does not mean that the company neglects its reason for being — that is, its focus on its products and services. But the involvement of the company’s people in community issues is necessary. It helps to improve the acceptability and image of the company. It exposes the employees to the realities of the societies in which they live and makes them better managers and human beings.

The contrast between the companies from the old economy, as in Mumbai, and the new as in Bangalore is striking in this respect. Mumbai started a movement called “Bombay First” many years before Bangalore took the initiative of the “Bangalore Agenda Task Force”. Both had the support of the local state governments and local authorities and had blue-riband boards consisting of the best-known managers in the best companies in the two cities. The BATF has been effective. Bombay First has not, despite reams of publicity and big talk. The BATF has become a role model for other cities in India and the World Bank is promoting it in other countries.

Is it possible that the old companies in Mumbai and elsewhere regard themselves as rulers and not trustees, and therefore do not appreciate the need to be actively participating in the betterment of the community' Perhaps business schools in India might teach their students that it is not wrong to want to be rich, but that they must at the same time have a strong sense of social responsibility and community involvement.

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