Wall Street seems to have pronounced the
death knell of capitalism. Never before has the downward-slide
been so persistent, so long and so sharp. Despite a short
reprieve the Dow Jones index is now standing well below 8000.
Every measure that the US government is taking to prop up
the market or the dollar seems to be working otherwise. The
slide continued unabated even when President Bush was exhorting
US business in Alabama to boost the confidence in the US economy
and the dollar. The disease has caught up with Europe as well
and no doubt is going to afflict, the rest of the world. Dollar’s
weakness is not a good sign for the exporting countries of
Asia and the region’s fragile economic recovery.
The strange thing about the latest stock
market collapse is that it has not nose dived because of Japanese
dropping the atom bomb on Pearl Harbour or Saddam Hussain’s
attack on Kuwait or the Twin Tower attacks of 9/11. Americans
have simply lost faith in the ability of their iconic enterprises
to return their savings. The accounting frauds committed by
the likes of Enron, World.com, Global Crossing, Tyco, Adelphia,
Qwest, Dynergy, Xerox and the list goes on, have brought home
to average investor that the earnings these companies disclose
cannot be trusted. Nearly 1000 US companies have had to restate
their earnings since 1997 and many more are under investigation.
It is not that the fancy accounting tricks were only confined
to Andersen who has been convicted in a Texas court of obstructing
justice. Some of the big names of Wall Street such as Merryll
Lynch have been found guilty and fined for publishing deliberately
misleading research and ignoring egregious conflicts of interest.
It is not the first time that the stock market
has crashed or we have seen the emergence of ugly head of
corporate greed. The history of capitalism is replete with
examples of similar excesses starting with the affair of the
tulips in Holland and the South Sea Bubble. The general assumption
is that like the previous market collapses, the current crisis
will spur reforms, make corporates more ethical and help market
emerge stronger than before. It is assumed that rationalization
of the markets; stricter punishments for defaulters, curbing
the stock options, banning of consultancy by auditors, bringing
more independent directors, increasing transparency of accounts
and making auditors independent will bring back sanity to
the markets.
The tragedy is that all this has been said
before and time and time again. It is the implementation of
all this which is fraught with egregious problems. Lord Young,
the president of UK’s Institute of Directors has already lambasted
the institution of independent directors and called for the
abolition of the non executive posts. He argued that relying
on part time outsiders who barely spend 15 hours a year to
police boardrooms was naïve and dangerous non-sense.
Paul Sarbanes, the US Senator has introduced a bill to set
up an independent body to supervise the accounting profession,
which is likely to become law despite opposition by professionals.
Again will this help? Remember, Andersen, auditor to both
Enron and World.com had already separated from its consultancy,
now called Accenture. The remaining Big-four still have to
do it.
The malaise in the governance of corporations
is far deeper than what appears on the surface. Capitalism,
it has now emerged, is far more deeply flawed than our analyses
suggest. By feeding on ruthless competition and promoting
a culture of winner takes all, capitalism has spawned virulent
individualism which has grossly discounted the value system
based on ethics. Corporates still use moral language but they
do not believe it has any objective foundation. Like George
Bush they tell other corporates Do as I tell you, not as I
do. Naturally nobody listens.
With growing dominance of the markets and
emphasis on immediate gain people’s behavior is guided almost
exclusively by prudential and not moral consideration. They
obey the rules, remain within the law, follow the norms, respect
values only if they calculate that these will benefit them
personally. They do not accept the validity of moral discipline
if it runs counter to their personal objectives. In a policy
driven by competitiveness and aimed to enhance the authority
of markets, individual action has little to do with ethical
behavior.
The centrality of corporate governance lies
in its emphasis on transparency. It is far easy to say but
most difficult to implement. You cannot obtain transparency
if investors expect double digit profits in each quarter.
In our rapidly changing economy variations are an integral
part of business. So why are we defensive about shortfalls?.
We practice the three types of truths we all know - first
truth is what we tell others; the second truth is what we
tell ourselves but do not tell others. The third truth is
what we do not even tell ourselves. The malaise in corporate
governance is so deep rooted that we do not even tell ourselves
that it exists. This is why it has to make its presence felt
every so often by market collapses causing pain and suffering
to poor shareholders for no fault of theirs.
The problem of the American system is that
it is skewed heavily in favour of shareholders. The practice
of corporate governance was aimed to give the CEO unfettered
authority to hire, fire and reward in the name of creating
wealth for shareholders and to mitigate “principal – agent
problem”. In practice most CEOs use this authority to reward
themselves with huge pay hikes and vast bonuses by inflating
earnings. This was largely an American disease. But of late
European CEOs are also copying their US counter parts in this
respect and awarding themselves hefty rises. Prudential shareholders
had a hard job in preventing their boss to award himself bonuses
worth £900,000. While CEO’s salary in US quadrupled
in 1990s, the employees salaries only increased by 3%. Such
actions take away employees confidence in management. Governance
that says shareholders should get most benefits and does not
care about employees who dedicate their lives for corporation
is not governance but corporate greed.
In their book, The Stakeholder Corporation
published in 1997, Wheeler and Silanpaa have asserted that
during most of the 20th century in the UK and USA, stakeholder
inclusive enterprises fared better than shareholders - first
companies. Stakeholder inclusive corporations invariably lead
to better long term business performance.
More and more people today, individuals and
groups expect a business organization to adopt a triple bottomline
approach, be economically viable while becoming, environmentally
and socially responsible. They also expect the business to
be inclusive and ethical. Kenichi Ohmae argued in The Borderless
World: Power and Strategy in the interlinked Economy that:
A corporation is a social institution whose responsibilities
extend far beyond the well being 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
well being of the corporations.
Peter Drucker, in his now classic The Concept
of the Corporation, said over 50 years ago that what is needed
in a redefining of the corporation as a social institution
is an integration of the worker as a partner in the industrial
system and as a citizen in society. Yet most corporate governance
definitions even today do not include employees as the beneficiary
of the corporate rewards in the same way as shareholders.
If the capitalism is to survive, if it is
to create wealth, it is absolutely essential that it adopts
an inclusive approach to make it sustainable in the long haul.
It must incorporate the social and environmental agenda, not
as add-ons to a company’s economic activities but as an essential
and integral, part of business strategy and its processes,
to reflect the rapidly changing post-industrial economy.
The ultimate aim of good corporate governance
must be to make corporations good corporate citizens. Corporate
citizenship calls for creating value for the society as a
whole and goes well beyond corporate social responsibility
or corporate philanthropy.
Open dialogue is at the heart of corporate
citizenship. With wrenching change taking place all around
us the corporation has to develop systems of regular communication
within the board & between the board, shareholders, management,
government, employees, custom, suppliers and the civil society.
It is through this dialogue that the corporation will communicate
its values, vision, mission and goals and share their financial,
environmental and social numbers at regular intervals. It
must demonstrate corporation’s commitment to all it’s constituents
viz. the board of directors, management, employees, shareholders,
the government and the other stakeholders and the civil society.
Corporations must clarify that they are not only creating
value for the corporations but making significant impact on
the society by reshaping community values, attitudes and cultures.
Corporate scandals and the consequent collapses
have a lethal effect on the poor and the old. Not only these
destroy their life saving and reduces them to penury and desperation
they take away their confidence in the markets self. They
have no hope to make good their loss. It is a great national
loss. We have to something, therefore, to prevent them happening
again. But revising codes of corporate governance is certainly
not the answer. We have a great capacity to beat the codes.
Andersen have asserted all along that whatever they did at
ENRON or WORLDCOM was within the law and thousands of firms
do the same. Again nothing that President Bush has said in
the aftermath of so many accounting scandals is new. Plastering
over the capitalism’s cracks simply won’t work. It needs a
systemic change which will come only by looking inside and
not from outside. It is we who have to change our paradigm
from individualism to integration, from tangibles to intangibles,
from capital to knowledge, from objects to relationship, from
parts to the whole, from domination to partnership, from structures
to process, from short termism to long termism, from growth
to sustainability, from confrontation to collaboration and
from covering up failures to owning them up.
It is unfortunate that our economic structures
are built on an inaccurate view of the human psyche. Scientists
have recently discovered that the small, brave act of cooperating
with one another, of choosing trust over cynicism, generosity
over meanness, altruism over selfishness makes the brain light
up with quite joy. Experiments conducted on young women engaged
in cooperative effort showed the longer they engaged in cooperative
strategies, stronger were the blood flows to the pathways
of pleasure. Obviously our effort should be to increase opportunities
of cooperation and down play unbridled competition.
As we move into 21st century there is a growing
recognition that the ultimate goal of economic effort ought
to be to improve the quality of life. Money is not a measure
of all things that make us happy and markets are not the best
mechanism to enhance human happiness. Indeed, if completely
unfettered, they can do the opposite by encouraging selfish
behaviour. Our focus should not be only on financial capital
but also the human capital, intellectual capital and environmental
capital. Good Corporate Governance must aim on maximising
the value of all capital.
We need to think of business designs that
go beyond the externalities of quarterly profits and provide
intrinsic sustainable value to all shareholders. With its
belief in equity, fairness, transparency, legitimacy, integrity
and responsibility corporate governance is the best vehicle
to improve quality of life for all and enhance the value of
financial, human, social and environmental capital of this
planet. Alas, it may take many more scandals to move to such
a radical solution but since the alternative is so grave it
might be worthwhile to steer the debate in this direction.
