Corporate Sep 29, 2012
The Supreme Court has made it clear: the purpose of alienating natural resources is not always "revenue maximisation." But what about the purpose of capitalist enterprises? Can it only be only about pleasing the markets and shareholders?
Once upon a time, it was easy to answer this question: what should your first priority be as a CEO or business manager? Most people would have answered "maximising shareholder value," especially if the company was a listed one, and millions of investors are watching your corporate profit performance like hawks.
But after Enron, Lehman, and many such egregious examples of corporate skullduggery, not to speak of our own Satyams and Global Trust Banks, few CEOs are willing to give the standard answer today.
Many are, in fact, going the other way. Two years ago, Anglo-Dutch Unilever plc's CEO Paul Polman made a startling confession by saying he could not put shareholder value as this top concern. He told Financial Times: "I do not work for the shareholder, to be honest; I work for the consumer. I am not driven and I don't drive this business model by driving shareholder value."
Before Polman, Jack Welch, the iconic former chairman of GE, made an equally strong statement. "On the face of it, shareholder value is the dumbest idea in the world."
Are these American CEOs speaking? Having retired from GE, Welch can pretty well say what he wants and still be considered a prophet of profit. But Polman, too, didn't lose his job. This shows how far western capitalism has come from the old raw focus on profitability that was the hallmark of laissez faire.
What's going on?
Welcome to Capitalism 3.0. If the rise of welfare capitalism (Capitalism 2.0) was the market economy's answer to the challenges posed by Marx and Lenin, the fall of the Berlin Wall should have ended further experimentation with capitalism. But, with capitalists stumbling all over in the wake of huge scandals, Gordon Gekko (Greed is good) is no longer a hero on Wall Street, and capitalists have realised that society is scrutinising them like never before. Capitalism has to be reinvented all over again.
In the US, President Obama has taken business to task for loss of jobs and excessive greed, and in India, too, we have seen the public fallout from rapacious crony capitalism in the spectrum scandal and the coal blocks allocation controversy - to speak only about the latest pressure-points.
What has changed is the universal realisation that no economic enterprise can have only one goal: shareholder maximisation is important, but cannot be the prime or only goal of an enterprise with so many stakeholders. The means are becoming as important as the end - something that Gandhi stressed. Even in the case of government, common good is the goal, and not just revenue maximisation, as the Supreme Court recently observed in the Presidential Reference on auctions of natural resources.
In fact, some time back companies went about saying that customers were their main focus on the assumption that if customers are happy and find value in products, profits and shareholder value will follow. This, too, is a false grail. Can you delight customers with the help of grumpy employees?
Two years ago, Vineet Nayyar of HCL Technologies thought he had got a fix on the employees issue by penning a book titled Employees First, Customers Second. He surely has a point in saying that an enterprise with unhappy employees can't succeed in making customers happy. Picture a call centre with disgruntled employees - and how they will respond to customers - and you can get this point.
However, here's the counter-point: there is no better place for employees than government and the public sector, where fairness to employees is placed above all else. Jobs are guaranteed till retirement. Air India employees did not think twice about ditching customers when they pursued their own interests earlier this year - and guess where the airline is today? No airline (with the possible exception, possibly, of Kingfisher today) is probably destroying value faster than Air India, thanks to its mollycoddling of employees. But even listed Kingfisher pilots have been no laggards in dunking customers in cold water, when their own salaries are at stake.
If employees don't come first, if customers don't come first, and if shareholders don't come first, who does?
The answer is all stakeholders - including vendors, distributors, and society at large, apart from shareholders, customers and employees - in varying measures.
No company can hope to succeed in the long-term if it is ultimately focused on a very narrow definition of stakeholders. Companies are a part of society, and their ability to make a profit depends on whether society sees its goals as respectable. You can make employees, shareholders, customers, and even business partners happy, but what if you are destroying the environment and contributing to global warming?
The capitalism of Ayn Rand was just a fantasy.
The illegal ore miners of Karnataka and Goa may have made many stakeholders happy (except possibly the taxman) by their nefarious activities, but they were looting the country and ruining the areas mined by careless exploitation. Little wonder, some of them are facing legal charge-sheets and an extended sojourn in jail.
Today's business enterprise must not only look serving the entire range of stakeholders, but also ensure fairness within each category.
Take shareholders. Today, shares like ONGC and Coal India are probably relatively undervalued not because they are unprofitable (quite the opposite, in fact), but because the main shareholder - the government - is taking minority shareholders for granted. Coal India has faced a legal challenge from the UK-based Children's Investment Fund for taking pricing diktats from government; ONGC is being asked to hand out a big chunk of its profits to the oil marketing companies, when the subsidy bill is that of the central government. This is corporate misgovernance of a high order.
If the message in all this is that companies cannot adopt an either/or approach to serving stakeholders, far-sighted businessmen are taking a more enlightened view of giving back to society what society gave them earlier.
A few years ago, the world's best known investor, Warren Buffett, started the trend of asking his fellow billionaires to publicly pledge to give a significant chunk of their wealth to charity or any good cause of their choice. At last count, there were more than 80 billionaires - ranging from Bill and Melinda Gates to Mark Zuckerberg (of Facebook fame) to Vinod Khosla to Michael Bloomberg to Ted Turner and many others - who had signed the pledge. (See http://givingpledge.org/)
In India, Buffett had urged a similar giving pledge, but the results are still to be seen. One presumes the crisis in Indian industry has focused efforts more in the direction of rescuing their business from the current scams than in redistributing wealth after the promoters are gone.
More than just serving stakeholders, businessmen need to acknowledge the role luck may have played in their fortune. This suggests that ownership of wealth beyond a reasonable limit should be seen as held in trust for the larger good.
While pledging 99 percent of his wealth to charity, Buffett made a reference to the luck factor: "My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the US were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.) My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mis-pricing of securities with sums reaching into the billions. In short, fate's distribution of long straws is wildly capricious."
Mahatma Gandhi, who disliked soulless Communism, was all for Capitalism with a human face. He wanted capitalists to hold wealth in trust for the poor. He called for Trusteeship Capitalism.
It's time India's capitalism starts looking beyond raking it in to giving it away. If not Buffett, they can read Gandhi all over again.
Capitalism 3.0 will have less of Ayn Rand, more of Gandhi.
(This article was first written for Entrepreneur magazine)
More From R Jagannathan.