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Ethical Business and Corporate Social Responsibility: The Long-term Perspective

J. J. Irani

THE IMPORTANCE OF ETHICS IN BUSINESS

For many years now, I have been going to the various business schools, to all the IIMs that we know of, and particularly to Ahmedabad, and have exhorted them to include ethics in business as one of the subjects in their curriculum. I have always felt that though these business schools churn out excellent financial managers, marketing managers, human resource development (HRD) personnel, they somehow miss out on ethics, corporate governance, and good social responsibility. I am, therefore, delighted that the Loyola Institute of Business Administration (LIBA) has taken up this challenge and has organized this conference, but more important than this conference is the fact that they now have instituted courses on these very important subjects. I hope that I will be able to emphasize as to why these subjects are important and why the younger generation, with whom the future of India now lies, must partake in these discussions and believe in these principles. But coming to this conference, as the previous speaker¹ mentioned, we have been together in more than one of such occasions and it is always a very difficult act for me to follow in the footsteps or in the way of Mr Damodaran. The short lecture from me would be that I agree with everything that he says. The long lecture would be that I try to exemplify from stories from the house of Tatas, which is the only house I have worked for, with one exception, and I will refer to it in a minute, that whatever he has said is, in fact, true and over our more than 100-year old long history we have managed to adhere to these principles through the rough and the smooth.

BUSINESS ETHICS IN THE HOUSE OF TATAS

I belong to, as you might have heard, Tata Sons not Tata ‘and’ Sons. Jamsetji Tata did start Tata and Sons, but 30 years later that was rechristened Tata Sons and for the last 100 years, we have been Tata Sons. But to come back to this story, it is indeed a very pleasant experience for us in the Tata house to see that this idea of ethics and corporate social responsibility (CSR) is gaining ground. The good part of the story is that India is beginning to believe in it. It is not just the Tata house now, there are many other houses and quite a few of them in this part of the country who do believe in ethics and who do practice good social responsibility. Of course, there is the other type also but we hope that we will soon be winning them over with the help of people such as yourselves. But I want to make one point very clear right in the beginning, that ethics is not old fashioned, nor is it a disadvantage. In the short run, sometimes it might appear to be so. I will be talking about my experience from the house of Tata. The one exception that I made or tried to make was that for five years of my career—of now almost 50 years, or 45 certainly—I was outside the Tata house, and that was when I was working for the British Steel Corporation in the UK. But now that also has joined the Tata house and, therefore, I can now honestly say that I have worked for my entire career in the house of Tatas.

CREATION OF WEALTH IS A PREREQUISITE FOR ETHICAL BUSINESS

Whenever I have been asked to speak at meetings such as this, sometimes in the introduction, thankfully not today, it is mentioned that the Tatas are a great house for charity, for philanthropy, and so on. And, I have to stand up and say that yes that is fine, but first we have to create wealth. Jawaharlal Nehru famously told J. R. D. Tata, who was a good friend of his, ‘J., don’t mention the word profit to me, it is a dirty word. So we say creation of wealth. But wealth can be created in many ways. In fact, one of the introductory books on Tatas is titled The Creation of Wealth,² and for anyone who is interested in the house, in the Tata house, I would recommend that book because within its 150 pages, it very clearly encapsulates what the house stands for. So, the main thing is to start with the idea that we have to create wealth, because all the good things that follow would require resources. I always tell my workers and our associates when I speak in-house that it is all right to say—‘Look, we will provide this, we will provide that and we will be good corporate citizens’. But all this requires resources, so the first thing is that we have to create wealth in an honest manner and then our principle is what comes from the people goes back to the people, hopefully magnified several times over. So, the principle of trusteeship, that you heard mentioned about in Mahatma Gandhi's philosophy, is established— what comes from the people goes back to the people, may be magnified several times over and so the cycle is complete. If you do not create wealth, your pockets are empty but what differentiates a good corporate firm from one that is not so good is how the wealth is utilized after it has been created. I always say to my workers that we will only distribute hot air if we do not create wealth and to distribute hot air there are plenty of people. For example, in certain professions, which I won't name, they go to the people every five years, creating a lot of hot air and hope to come back for the next five years. So, we leave it to them to spend or distribute hot air; we have to create wealth and with that wealth we will do the things which we would like to do. So, I can do no better than to exemplify that attitude by reading out something that J. R. D. Tata had said many years ago:

Every company has a special continuing responsibility towards the people of the area in which it is located and in which its employees and their families live. In every city, town or village, large or small, there is always need for improvement, for help, for relief, for leadership and for guidance. I suggest that the most significant contribution the organized industry can make is by identifying itself with the life and the problems of the people of the community to which it belongs and by applying its resources, skills and talents to the extent that it can reasonably spare them to serve and to help them.

VALUES SERVE AS A STRONG ANCHOR IN BUSINESS

So, that clearly implies that you must have the resources before you can start doing good. This business about how to devolve your wealth and actualize it depends on your values, the values of the system. Now, values can be defined in many ways and I have given some thought and I would like to say that values support business in a number of ways. Values can be likened to a strong anchor for a ship that goes through rough weather and raging storms of business. People have testified that in dark and gloomy times, values provide faith. In difficult times, they encourage us to do the right thing, not to surrender but continue to try. They provide us with courage and confidence to stand up to any distractions along the way. The strong desire to move ahead can at times tempt businesses to cut corners, to bend rules. Values can create a culture that can withstand all turbulence and temptations. Nowadays, young people —and I do not mean you, but young people in general—consider this a handicap. But I can assure you that the end never justifies the means. It is our values that ensure checks and balances for the leadership and keep them on the right track. Values help us inculcate a sense of discipline and finally values often provide the bedrock to trust and I have already mentioned how the trust of the people can be won by returning to them whatever has come from the community. It is now widely recognized that trust is not only at the heart of leadership, but it is also the essence of all leadership and that is why we as a house have always cherished our values and stand by them despite changing businesses, technologies and business policies. Even when we approached foreign acquisitions, we kept these values intact. When I am talking about foreign acquisitions, I must emphasize that there was no change in our business policy which we followed in India. As you know Tata's was a domesticated company till as recently as ten years ago mainly because of compulsions of government policy, which did not easily permit such acquisitions due to constraints of foreign exchange. Now, we are free to move out and, therefore, we have moved out but the values whether we are in India or abroad will never change. In fact, one of the first things that we look at when we are considering an acquisition or a merger is what is the culture of the other organization, we study that very carefully and only if the cultures match and the value systems match, then we go ahead and look at the economics and other financial parameters. So, it has always been our credo that values come before everything else.

DIVERGENT VALUES CAN COEXIST IN BUSINESS

I will give you one more example of how values are important. We can share our own values and if we come across such a situation where different values are found, it is possible to let them coexist without sacrificing your values. I will give you the example of our election system. I am not referring to any state-level or local-level election but I think it is a well-known fact that all elections require a lot of money and, thus, a lot of money has to be generated, and not most of it is done in the way that we would like to do it. But the Tatas recognize that elections do cost money, the system does involve expenditure, not for the local parties or for the individuals, but the system itself must have certain resources, so what must be done? After much thinking, we have created an electoral fund. All our companies can contribute to that fund at the time of the elections or every year, according to their decision made by their boards, and most of the major companies contribute in crores. Tata Steel, for example, contributed Rs 2–3 crores for each of the previous elections. All this money goes to a trust and the trust is administered by three persons right now, all non-Tata people, and in a manner where the rules are clearly specified. What are the rules? The rules are that whatever money has been accumulated in the trust at the time of the election is divided into two crores. Suppose Rs 10 crores has accumulated, they are divided into two halves of five crores each and the first five is distributed to the political parties who have more than 5 per cent seats in the existing House, because we are not supporting factionalism or fragmentation. I think in Parliament, now there are parties where there is only one representative and although we do not feel that this is helping democracy in any way, we have said that we will support only those parties which have more than 5 per cent share in the Parliament. And, in a Parliament of 540 members, 5 per cent comes to 27. So, any party which has more than 27 members in the Parliament will get a share and the share will be according to the number of seats that the parties have in the then existing Parliament. I think you all know which are the parties which are there, obviously the Congress is there, the Left Parties are there, the BJP is there, maybe one or two others. But in that proportion, the first 5 crores are distributed according to strength in the existing Parliament. The second 5 crores are distributed in similar manner after the elections, on the basis of the results of the new parliament. So, we think that this way we can support the election system in a manner that is not discriminatory and it does not leave any discretion in the hands of the trustees. The trustees cannot have their own rules, these are the rules and this is how they can take the money from the trust and distribute it to those whom it is meant for. So, this is an example of how even in a situation where corruption can take place, we have managed to stay away from it and at the same time have maintained our values and have helped a democratic system to exist.

There are also other systems from where I would like to give one more example and that is the work which the Tatas have done, if I may say so, for some Eastern party. I will name the party, I do not think I have any hesitation, and that is the party which was in power in Patna, the Rashtriya Janata Dal (RJD) of Mr Laloo Prasad Yadav, because I have dealt with it personally and I can tell you from first-hand experience. When he came to power, which was in the early 1990s, almost at the same time I became the chief executive of Tata Steel, and I went to Patna to see him. At that time, he was not too fluent in English and I did not know much Hindi but we managed to communicate anyway because the basis of the conversation was very crucial. I told him that we could not give him any money as a person, we could not give his party any money, but if he had any social causes like building a school, digging wells in the summer in his constituency, giving people protection in the cold Bihar nights with blankets, flood relief, fire relief, cleaning up Patna, anything which is of the nature where the community would benefit, we have got plenty of funds for that. And in return, I said that you have to help us maintain our value systems. Our value systems are that we cannot give you this. But we will ensure that we will not put you in an embarrassing situation, we will not ask you for any favours, we will not cut corners and whenever we come to you with a request, it will be based on your rules and regulations and you can dispose it off according to your legal system. It was 15 years back when he said, Thik hai. And I really admire him because for all these 15 years, he has never bothered us with an improper request, something I cannot say for other political systems that are there in this country. But I can assure you that he has maintained all his commitments, he has helped us throughout and made no requests for any particular favours which would allow us to bend the way from our principles. But he, on the other hand, obviously had his own value systems, to look after certain aspects of his population of voters, which we have been able to do. We have built schools, colleges, hospitals in Patna; we have helped him to clean up Patna. Every summer, there are requests for digging up wells for water, which we have been happy to provide because it gives relief to the community and so that means he is happy and we are also happy because our value systems have also been maintained.

So, the point that I wish to make is that it is not necessary that one value system has to be sacrificed when it comes up against another value system. Both can hold their own grounds, both can succeed. It is a win-win situation.

WE HAVE BETTER GRASP OF CSR IN INDIA

Coming now to CSR, this has become a buzzword now in the corporate world. When I was younger, I used to go abroad and talk about and listen to topics of technical development or marketing or finance and I would always come away thinking that I have learnt something. The developed world did have better technologies, did have better financial systems and when I participated in those discussions, I always felt that I had benefited and that I could come and do a little bit better. Nowadays, when I go and they talk about CSR, I come back and wonder what they are talking about. We at Tata Sons have been doing this for a 100 years or more and doing more than what they are talking about. So, we are now the benchmark as far as the Western world is concerned about CSR. There is nothing that we have not done which they are doing at present. So, this is a situation where I think we are in a favourable position; that means our CSR, particularly in the house of Tatas, and to some extent, India as a whole, is more advanced than what they practice over there. And there is a reason for that. I think CSR in the developed world may not be such a great necessity as it is over here. Please remember that in the developed countries, businesses are mandated obviously to make a profit, that is their shareholders demand, they pay their taxes honestly, hopefully, and then the rest of the welfare work, like looking after education, medical system where people are looked after when they have lost their jobs are all taken care of by the welfare systems in the State.

In India, it is not yet so. Our government might want to do it, but it is not in a position to do it because it has not developed to that extent. If a person loses his job, he is out on his own; there is no government protection as such, especially for medical care, education, etc. We claim that we have got it in all the villages, but is not of the quality that we want it to be and, therefore, corporations have to step in to fill that breach or that gap to some extent. For us, in India, it is very important that we, the corporations, do accept CSR in a big manner and should be prepared to spend on it.

HOW MUCH SHOULD CORPORATIONS SPEND ON CSR?

As far as the spending is concerned, I have got another true story to put before you. This was in mid 1990s when the then Prime Minister Narsimha Rao called all the top corporations in India. There were about 40–50 people and he had one request to make to them—in addition to whatever they spent on their own workforce and their families, good corporations should spend 1 per cent of their profit on tax, that is, their net profit on a scheme which was totally independent of their own workers or their own townships for the welfare of the community as a whole. Thus, good, solid CSR means spending 1 per cent of your profits to raise the living standard of the communities in which the corporations are and, of course, everybody said that it was a good idea and they would so implement it and many schemes were suggested on the spur of the moment. Various corporations were there, Mr Tata was there and I was also there and we really did not understand the question and so we kept quiet and after we finished the meeting we made a calculation on the expenses that Tata Steel had incurred over the previous five years on these programmes on which the prime minister wanted us to further spend 1 per cent of our net profit. Remember he had said 1 per cent, so it is a ratio. It depends on the profit you make, also on the amount you spend, and it turned out that in the previous five years, that is, in those years where we made a lower profit, the ratio was 20 per cent, and in those years where we made good profit the ratio was 5 per cent. Of course, in the present context where we are making very good profits, the ratio has come down to about 2 per cent. But even at this stage, it is double of what the late prime minister had suggested. So, the important thing is we have kept on increasing our spending, maybe keeping pace with the inflation—and it did not really matter whether we have made good profit or bad profit. In those years when we made lower profits, we did not say we would cut down on expenditure or went on a splurge when we thought we made more. So, it was a constant endeavour at Tata Steel and the figure varied between 5 per cent and 20 per cent, when the prime minister wanted us to spend just 1 per cent. So, this is what good CSR is. I hope the corporations of tomorrow will have certain obligations towards their stakeholders.

EXPECTING A GOOD RETURN ON SOCIAL INVESTING IN GOOD TIME

As far as their shareholders—their owners—are concerned, I think they will naturally want good returns, but shareholders will prefer to invest in those companies that show good CSR, and by doing so, enhance the value of the shareholders’ wealth and this, I think, is already happening. You can see it happening in the US with great fervour. There are corporate managements being thrown out where good corporate governance is suspect. So, shareholders are now playing an active role. Consumers also will start buying their goods from corporations which have shown good CSR. There are activists already. People for Ethical Treatment of Animals (PETA) is one activist group which says that we should not buy goods from those corporations which are not carrying out their responsibility properly. So, consumer activism will come in support of good CSR. And I have got many examples such as the Tatas, where we had the active support of the community because of our record of good CSR, and of course, employees will prefer to work in an organization that exhibits the same. As far as the community is concerned, I would like to make one point which I heard earlier from Fr Christie that you know when you go in and make investment in CSR, it should not be with the intention that it would give you a return. I think that is a fatal mistake, it should be with the belief that one day it will give me a return, because the return will come but it will come much later and in some of our cases it may have taken 30–40 years before that return has come, but we did not make that investment 30–40 years back looking at a community and thinking that this would be the situation 30–40 years hence. So, the intention for good CSR must come from the heart because it is something good. You must have that belief because one day it will pay.

TAKEAWAYS FROM THE CONFERENCE

I would like to conclude by telling you what are some of the takeaways, which I hope I have been able to express during the course of my talk. The first, of course, is that ethics in business is essential and it pays and you need not sacrifice your principles in any particular environment. The second is that good CSR must be embedded in a corporation; it is the only sure way to success and it pays in the long run. Third, a business cannot hope to survive if it remains the spike of prosperity in a sea of poverty by which I mean that it has to be accepted by the community in which it operates, it cannot hope to successfully operate if the community is against it. Fourth, the long-term prosperity of the community is more important than the short-term profits of a corporation; and the fifth and the last, trust is the essence for future growth and prosperity, only leaders with trust and credibility will survive.