Corporate governance must be fixed

“The time has come,” said the Walrus to the Carpenter in Lewis Carrol’s poem, “to talk of many things”. The year 2019 was an anus horribilis for corporate governance in India. Breakdowns of governance continued to be exposed across the board—in banks, financial services, healthcare, food and beverages, airlines, real estate, etc. The year ended with a shocking decision of the Corporate Law Appellate Tribunal (CLAT) regarding governance in India’s most hallowed business conglomerate. (That decision has been appealed in the Supreme Court. Even if it is reversed, the tarnish will take time to be polished off).

There is pressure on the schools now to teach ethics. Students must learn to question the purpose of what they do, the purpose of the technologies they develop, and the purpose of the enterprise they serve. They should ask themselves: who benefits from the enterprise’s success? And what harm could it be causing to whom while pursuing its own growth and profits?

Cracks in governance appeared not only in India. Nor were they restricted to business corporations. The world’s richest companies—all technology giants---are embroiled in controversies in many countries, for the taxes they have avoided and the harm they cause societies while their shareholders make even more money. Oxfam and Save the Children, who have served the causes of the neediest people around the world for decades, are just recovering from serious indictments of their governance. Even McKinsey, the hallowed management consulting company, who advises the largest companies around the world, and NGOs, and even governments, was dragged to court in the US for conflicts of interest.

There is something rotting within corporate governance. The British Academy is completing its report on the Future of the Corporation. There is a need for “purposeful businesses” it says. It defines the purpose of a business as fulfilment of the needs of all stakeholders. The Economist has already dismissed the report as “barmy”. It says firms belong to their shareholders whose interests they must serve. The ideology of ownership capitalism—that those who own the most must call all the shots—is proving hard to change. Indeed, the CLAT judgement mentioned before pivots on the rights of minority shareholders. Stakeholder capitalism goes even further. It says that even those who do not own any shares in the firm must have some say in its governance. 

Mercenaries are professionals who get things done efficiently, for a price. They will serve the highest bidder. Many don’t care about the purpose of the enterprise. Professional carpenters can build cathedrals as well as prisons. In wars, mercenaries can fight on either side. Schools of management, law, and technology produce valuable professionals. They are rated by the salaries their students earn. The schools whose graduates earn most attract the best students.

The trail of irresponsibility for the condition of the environment and the ills of society don’t stop with corporate boards. It goes back to schools of business and technology. There is pressure on the schools now to teach ethics. Students must learn to question the purpose of what they do, the purpose of the technologies they develop, and the purpose of the enterprise they serve. They should ask themselves: who benefits from the enterprise’s success? And what harm could it be causing to whom while pursuing its own growth and profits?

‘Innovation’ and ‘entrepreneurship’ have been buzzwords for business in the last two decades. Like salt and pepper, every business conference and journal had to sprinkle them on everything. ‘Impact’ is the new buzzword.

‘What is measured gets done’ is a management nostrum. Enterprises who claim they are socially responsible must measure the impact they have on all stakeholders. Surprisingly, even large NGOs do a bad job of this. Their boards’ agendas invariably begin with the progress made by the enterprise in terms of increase in its own budgets, the visibility of its own brand, and enlargement of its own size. In addition to these measures of performance, boards of business corporations focus on the ‘bottom line’—which is the surplus produced for shareholders. The bottom line for not-for-profit NGOs is the ‘value’ they produce for other stakeholders. This value is hard to measure in monetary terms, or even to quantify. Yet, they must focus on it. If they do not, they are not fulfilling their purpose. Not only ‘not-for-profits’, even socially responsible and for-profit business enterprises must measure the impact they have on all stakeholders. They too must learn how to measure ‘Impact’, though it is hard to.

Public trust in large capitalist enterprises has been reducing for many years. Large automobile companies were caught cheating emissions regulators. Pharmaceutical companies sold drugs though their internal tests had revealed hazards. Oil companies cut costs on safety and damaged the environment. Social media companies have been misusing citizens personal data to make more profits—even selling the data to persons who damage democratic processes. Professional mercenaries.

Capitalist corporations must learn to gain a larger ‘share of citizens’ hearts’ if they want to be trusted, not just a larger ‘share of consumers’ wallets’. They will never gain citizens’ trust if the ‘theory-in-use’ of their boards and managements is that their responsibility is to only care for their owners, not others.

We trust those who will not harm us. How can we trust those who do not know what matters to us? They may say they do, but we know they don’t. Because they hardly listen to us, yet keep cajoling us to buy from them what they say is good for us. This can improve their bottom-lines. But what about our well-being and the bottom-lines of our lives? The ‘corporation of the future’ must learn to listen to many social needs that ‘money cannot buy’—including fundamental human needs for respect and dignity.

The time has come to inject social purpose and ethics into business corporations. Promoters of companies must consider the purpose of their enterprises—whose bottom lines will be improved? The fiction of ‘independent directors’, who are expected to be the conscience within the board, while also discharging their fiduciary responsibility along with the rest of the board to shareholders alone, is too weak for good corporate governance. The entire board must be accountable for the corporation’s conduct. Professional CEOs, who move from company to company, with compensations linked to shareholder value, must consider the purpose of the enterprises they serve.

(The writer, a former member of the Planning Commission, is the author of the book, ‘Transforming Systems: Why the World Needs a New Ethical Toolkit’)