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Corporate Ethics, Governance, and Corporate Social Responsibility: An Indivisible Package¹

M. Damodaran

As a product of the Jesuit educational system, as a citizen of India and as the chairman of the Securities and Exchange Board of India (SEBI), I'm delighted to be at the International Conference on Business Ethics, Corporate Governance, and Social Responsibility organized by the Loyola Institute of Business Administration (LIBA). I believe that this is not only the first conference that a business school has organized on these subjects, it is also the first time, in little over two years that I have been associated with SEBI, that I have been to a seminar where three different subjects, namely, corporate ethics, corporate governance and corporate social responsibility (CSR), are being discussed in the same forum, by the same people, at the same time. I have been to several conferences where corporate governance was looked at in isolation. I have been to a few where CSR has merited some attention. This is unarguably the first where I have seen business ethics specifically mentioned and, more importantly, placed in the batting order above corporate governance and CSR.

THOSE WHO SUBSCRIBE TO VALUES WILL SET THE BENCHMARKS

Fr Christie² had made a remark earlier that one-third of corporate India believed it was not possible to conduct business in an ethical fashion given that you are operating in a competitive environment. There are those who will tell you that business and ethics cannot stand together, that the combination of these two words somehow doesn't seem to be true. We forget, while we say all this, that we are in a land that gave birth to Mahatma Gandhi, who said that businessmen are trustees; they hold wealth; they create wealth; and they deal with wealth on behalf of all of us. For us to believe that we ought to specially make out a case for ethics in business in this land of Gandhi is a view that I cannot very easily subscribe to. I believe that young India will not buy that argument any longer even if they have believed in it until now. It is important to remember that not just business, not just the lives of companies, but the lives of all of us are marathon races. Our lives and our businesses are not sprints. These are not short-distance events. These are not things that start in the morning and end in the evening like one-day matches or the even more simplified and unattractive version known as Twenty20. Life is much longer than that. In the short run, it might appear that companies pay a price for adhering to values while their competitors get ahead in the shorter time frame, but over a long term people learn to distinguish, stakeholders learn to ask the right questions, even the competitive environment learns to distinguish between the grain and chaff. Those who do not subscribe to values will fall by the wayside; those who do subscribe to values will last the course and will set the benchmarks.

VALUES AND PROFITS CAN AND DO GO TOGETHER

I do not have to do too much to sell this case to you. We have one example sitting here³ and I am privileged to sit alongside him, not just here but at a few other conferences, who typifies, if such typification was needed, who exemplifies, if such exemplification was needed, the basic premise that values and profits can go together, that values and leadership can go together, that values and performance can go together, that values and everything else that is measurable can go together if we do our work the right way. It is not just the question of seeking to achieve the right results; it is the question of the methods that we use to get there.

ENDS DO NOT JUSTIFY THE MEANS

In all discussions on corporate governance, it is fashionable to start with Sir Adrian Cadbury because he authored the report that gave rise to an international debate on how companies ought to run themselves, on how companies ought to put in place practices that are in the interest of all stakeholders, not just those that own the majority shares. But in doing this, we forget that long years ago in this country Mahatma Gandhi said, and he put it very simply, not just in the context of business, not in the context of corporate India, but in the context of the way we live life, that the ends do not justify the means. Your ends might be noble; you might want to reach the right place and no one can fault you for that but if you abandon the highway of values and take the short cut of expediency and compromise, you might not get there in the shape in which you intended to reach there. You might not get there to the applause of those waiting to receive you at the finish line. True that the ends are important, but the means are equally important. Legitimate means will take you almost certainly towards desired goals. Means that are not so legitimate might end up tripping you by the wayside. I feel that it's important to remember this.

THE CONTENT IS MORE IMPORTANT THAN THE FORM

It is also important to remember that you cannot legislate for ethics. You cannot legislate, as Allan Greenspan famously said, for honesty. You cannot legislate for good conduct. When we talk in terms of corporate governance, when, as the securities market regulator of this country, SEBI, puts together a clause in the listing agreement saying, ‘this is the framework within which companies ought to govern themselves’, all that we are seeking to do is to provide a framework. What happens within that framework, the content that you put into that form—and content is more important than the form—is something that companies address themselves. We do not sit in the boardrooms of companies watching how they conduct business. We merely enable the good conduct of business by prescribing what in our view seems right, what in our view seems desirable, what in our view seems to inform the interest of all stakeholders.

CORPORATIONS HAVE A RESPONSIBILITY TO PAY BACK TO SOCIETY

In the context of CSR, which is one of the three issues that are there before you today, it is sometimes said that business houses should not concern themselves with CSR. In discussions on corporate governance, you quite often hear the word shareholder being used; it is less often that you hear the word stakeholder. And even when stakeholders are discussed, you hear reference to the workforce in the organization, you hear reference to customer, and you hear reference to those that you have a direct priority of business relationship with. You do not hear reference to society; you do not hear reference to the people living around the factories that produce the goods that are on offer and things of that kind. Those who talk about CSR somehow tend to equate it with handouts and charity. Business houses that are set up on resources that belong to the people of India, which have been given to them for utilizing and facilitating setting up of a productive enterprise, sometimes tend to believe that they got it by the grace of God, that they got it without any sacrifice on the part of society, that they set up business there all by themselves without anybody facilitating that process, and that they owe little or nothing to people that live in the immediate vicinity. Corporate social responsibility is a responsibility. It is an acknowledgement of society facilitating the setting up and running of that productive endeavour. It is a repayment to society for accepting you in their midst, for allowing you to produce in their midst, and for allowing you to profit in their midst. It is a legitimate sharing of profits with society that is called, in my view, CSR. It is not handouts, it is not charity, and it is not something that you do in order to square your account books before you render accounts to God on the day of final rendering of accounts; that is not CSR. It must come from the heart, not from the accountants. It should not be a tax benefit that you seek while providing a few fringe benefits in the area that you stay in and produce.

ARTICULATE FOR A CLEANER MORAL ENVIRONMENT

I want to revert to ethics for a moment. This is the land that gave humanity most of its thought leaders. This is also the land that today appears in all those dubious roll calls of honour, or dishonour, occupying a fairly high rank there. Somehow, it does not seem to gel with our ancient system of values, with what we believe we inherited from those that preceded us in this world. And I think young India ought to ask itself this question. Is this something that we can deal with effectively? The answer must, necessarily be a resounding yes. You can deal with it quickly and effectively. In your capacity as young Indians, you must articulate the need for a cleaner moral environment. The focus that we have on the physical environment is good. What we need to do is focus a little more on a cleaner moral environment that will ensure that those who conduct the business based on a sense of values are the ones that you will encourage, as customers, as people that deal with them in the conduct of business, and as members of society and of this great country. If that voice of young India does not reach across, you will repeat the mistakes of my generation, which is to somehow turn a blind eye to all malpractices holding centre stage.

BRING POSITIVE STORIES CENTRE STAGE

Take a look at any newspaper today, from the first page to the last. I hope that the last page will get a little better as the days go by and as the World Cup progresses.⁴ But from the first page to the last page, there is so much negativism. There are either incidents that do mankind no credit or accidents that do not reflect us in too great a light. You have to search for the positive stories in the newspapers these days. The electronic media covers itself in the glory or infamy, take your call based on the kind of sensational stories that they put. Sensational stories have some kind of negativism underlined in them. Where are the positive stories in this country? I think you need to ask yourselves these questions. You need to see that you bring positive stories centre stage; boring as they might be, uneventful as they might seem, because positive stories are not terribly exciting. Negativity often is. Sensationalism sells. But you ought to bring that centre stage in your lives and in the lives of people around you. And the way that you can do that is to get this message across. That ethics is something that your generation will swear by when you conduct business, when you deal with business, and when you are consumers of products that business produces. If that does not happen, you will have a situation where we might go further down in those lists of honesty or further up in the list of dishonesty or corruption.

POVERTY AND CORRUPTION ARE STUMBLING BLOCKS TO SUSTAINABLE GROWTH

The growth rates of our economy will not be sustainable because there is a relationship that some of us do not often see between a lot of poverty that co-exists with a lot of growth, and a lot of corruption that seems to create the divide between the haves and the have-nots. There is a connection there that is not talked about because it is not fashionable to talk about it. Corruption impedes growth. I think the finance minister⁵ said once that we can move to double digit growth if we have physical infrastructure in place and if we have honesty in place. He also attached some numbers to each of these attributes to explain how you can go from eight plus rate of growth to 10 plus and stay at 10 plus if you have only these two in place. I believe we are working on the physical infrastructure bit. I believe that we need to do a little more work on the business of bringing honesty into the productive purposes and into our lives. Over time, corporate governance—something that I am paid to talk about, because it is part of my work—has become fashionable topic to be discussed. There are endless seminars that focus exclusively on corporate governance, where what is discussed is form, what is discussed is the prescriptive arrangement that is put in place, what is discussed is the arithmetic of board composition, what is discussed is how many committees you have, though no one asks about how those committees function. They count the number of meetings that take place. You have different forms, different prescriptive arrangements in different countries.

DIFFERENT MODELS OF CORPORATE GOVERNANCE

The United States, following all those major corporate scandals, put in place legislation, which the world today knows by the name of the Sarbanes-Oxley (SOX) Act. No sooner was that legislation placed on the statute books than the opposition started. ‘This has been an overreaction, ‘this has been an overkill’, ‘this has been unduly prescriptive’, ‘it will kill development’, ‘it will drive away financial markets from the US to London’. All these arguments are still going on. ‘You must dilute’, ‘you must liberalize’, ‘you must exempt’, ‘you must facilitate conduct as in the olden days when you had a strong CEO model that delivered results with not too many questions asked of the CEOs’. You have other models in other countries. Britain practiced and still continues to practice a model which is simply explained as ‘comply or explain’.

Either you comply with what you are required to comply with or explain why you are in non-compliance so that those whom you interact with read the statements that you put out, are enabled to see the way you do business and can derive an appropriate conclusion about it. This is what we have chosen to do in India because we follow the rules-based approach to regulation and not a principles-based approach to regulation. I am not for a moment saying that these cannot co-exist, because we follow a rules-based approach regulation, we have taken the essence of SOX Act that we have put in our listing act and you will hear, you will read reports, on occasions saying that we have been lax with those that are non-compliant.

SEBI IS NOT A TRIGGER-HAPPY REGULATOR

Some leaders of corporate India believe that SEBI, the organization that I head, has exhibited an attitude of ‘bark, but not bite’. It is easy for us to go out and start biting people. But if that bite takes the form of delisting companies, of temporarily ensuring that the shares are not transacted, I urge you to think about whom we will end up punishing. It is the shareholder, who is locked into those companies, who will find no exit if he wants to exit; he is the one who will get punished if you suspend a company that is listed on the exchange for the reasons of non-compliance. Other countries that have put prescriptive systems in place are not reporting 100 per cent compliance as yet. This is a matter that you ought to persuade people to move towards. It is not that one fine day, you will identify those that are non-compliant and deal with them in order to prove a point. Regulation is not conducted in that manner and I want to use this forum, as I will use every other forum that is available to me, to say that we are not in the business of regulation, to wake up, get out of our office in the morning, arm with Clause 49 and shoot everyone who is non-compliant; that is not the approach to regulation. We are not trigger-happy regulators. We would much rather persuade people to believe that good conduct, good governance, good value systems are the ones that will deliver results over time. There are also reputations that are attached to this and as cricket is the flavour of the season, I will take you back and give you an example. Many years ago—I think 90 per cent of the people in the audience might not have been born then, but I am sure some of the older people who followed cricket then and continue to follow cricket now will remember these names—England, which was then a strong cricket team, had two fast bowlers, Truman and Statham. Truman appealed three times in an over. Statham appealed less than three times in a day with a result that whenever Statham appealed, the umpire gave the batsman out. So it was a difficult situation in which England was placed. All that Statham had to do was to hit the batsmen on the pad and his LBW appeals were upheld, because he was not in the business of appealing. Truman had to actually hit the middle stump and turn around and ask the umpire and it is a story what you make of that. The umpire said: He is bowled, isn't he? Truman said: I can see that but is he out? That's what reputation does.

COMPANIES' REPUTATION TAKES THEM FORWARD

Reputation of companies travels long distances. Consumers get to know that. A company like the Tata, and I have no hesitation in taking names, is a company that is identified by the value systems that it has subscribed to for over a century. Why was it that people in India sat up fingers crossed when the Corus deal was going on? Not because they were shareholders in Tata but they wanted to see that this effort made by an Indian company, which has been seen as a synonym for values, managed to triumph in the end. Every Indian kept his fingers crossed, those that had chosen to stay awake, not just those that were interested in the way it will play out in the market, because there was a feeling that good guys should not come second. I think that's the message that you ought to take and I am very happy that you have placed business ethics, corporate governance, and social responsibility alongside one another. This is an indivisible package. Any attempt to divide this, to look at these as different, to see these as separate from one another is not going to get you or me anywhere. Ultimately all of life, all of business, all of our conduct in the family situation must be informed by values. It is those values that we must take to boardrooms. That is why as regulators in the securities market, we stress on disclosure, we stress on transparency, we believe that everything that ought to be in the public domain, ought to be brought to the public domain. Non-disclosure and lack of transparency are consistent with practices that are not visible to people and, therefore, such practices can be not so legitimate and can undermine the company in the long run as well as not deliver values to all stakeholders.

COMPANIES WILL BE APPLAUDED FOR THEIR CORE VALUES

‘To illumine, to imbibe, to inspire business with integrity’, I believe, is the theme of this particular seminar. I was particularly happy that when we lit this lamp, and lamps are the traditional instruments through which darkness is dispelled, I was mentioning in an aside that this lamp got lit much faster than the others that I had seen lit in most places and it was done without wax being placed underneath. In other words, there were no externalities in the support system that I could easily discern there. I think in a sense, it exemplifies what this conference is about; it exemplified the message that Fr Christie and his team are trying to get across not just to you students, not just to participants in the seminar but to a wider audience outside consistent with the principles of Jesuit education⁶ that whatever you seek to do in life, do it for the right reasons. It's just not about doing right things in life; it's about doing right things in the right manner. That is what will give results over time and that is what I believe this seminar seeks to address. Going forward, if corporate India takes this lesson from this conference as well as from elsewhere, then the rest of us can create the environment, can create the enabling atmosphere, can provide the framework, can enact legislation. We will not get into the boardrooms, will not look over the shoulders of the members of the board, will not look at the decision makers but we will simply encourage them and applaud them as they do their business on the basis of the values that are imbibed. If that message can get across, and if we can see that over time, markets, consumers, people that do business with companies prefer those companies that do their business right and for the right reasons as against the companies that seek expediency and short cuts, we would, I believe have contributed to business practices, not just to higher rates of growth not just to a stronger India, but also for taking India away from those dubious lists that are out in the public domain so often, much to our shame.

WHAT SHOULD BE THE TAKE-AWAY FROM THE CONFERENCE?

And it is that resolve I believe that younger people in the audience must take away from here. You must together ensure that in this country, which is today talking about inclusive growth, the economic upswing must carry the have-nots along, a point that Fr Christie mentioned so eloquently. As India moves forward, it must take along almost all its citizens on this journey—if not all of them, as some of them will fall by the wayside; and that alone is going to ensure sustainable growth. Divided on the basis of economic considerations, we cannot see sustainable growth, and business cannot aid a progress of a unified India unless it seeks to do business on the basis of values, principles and ethics.