The values business leaders choose to live by

Little girls playing soccer are wont to chase the ball in a herd. Their coach cannot persuade some of them to stay behind to protect their own goal should the tide of the game turn against them. For two decades, business executives have been chasing the ball to produce more shareholder value and create higher stock market valuations. Though there were a few voices reminding them of the other sorts of values they should protect, those voices were drowned in the hoof-beats of the herd.

Oxfam International’s global inequality report says that the richest 1% in India now owns 58% of the country’s wealth. And Korn Ferry reports that Indian wage growth has been the most unequal in the world in the last eight years.

In the last few months, India’s two icons of good corporate governance—Tatas and Infosys—have been shaken. Their retired founders (or their descendants in the case of Tatas) have accused the professional managers running the businesses of not living up to their values. The promoters have been criticised in the media for the way they acted to make their displeasure known. In a board meeting, the Tata Sons board summarily fired the chairman they had chosen after an extensive search just a few years ago. Mr. Murthy, the revered founder of Infosys, went public with his displeasure. The business media was alarmed by the sharp decline in both companies’ stock prices. Business analysts sought to defend the performance of the new managements citing improvement in the company’s stock market valuations under their watches.  

The promoters were worried, however, about a decline of other sorts of values that cannot be measured in monetary terms. It is not clear yet what these were in the case of Tatas. In Infosys, Mr. Murthy said he was unhappy with the excessive compensation given by the board to the CEO, and the large severance compensation given to the former CFO. A payment of Rs. 17 crores to the CFO for not doing any work for the next two years seemed very vulgar when there are millions of people in India willing to work for a few hundred rupees a day and yet cannot get work.

The Infosys board said the payments were not out of line with the benchmarks in the corporate world. Also, the board had applied its mind and was convinced that the CEO and the former CFO deserved the huge payments. The board claims it has taken good decisions by the norms currently applied in the corporate world. Therein lies the huge divide that is tearing apart societies around the world. An elite set has been jetting around the world, benchmarking against each other, and getting further and further away from people scrambling on the ground. Oxfam International’s global inequality report says that the richest 1% in India now owns 58% of the country’s wealth. And Korn Ferry reports that Indian wage growth has been the most unequal in the world in the last eight years.

A voice that had cautioned Indian business leaders to mind their values was none other than Dr. Manmohan Singh’s, who Indian industry had been hailing for two decades as the father of the reforms that released Indian industry from previous binders of pro-poor socialist policies. Singh was credited with the reforms that enabled corporations to grow, their promoters to become very wealthy, and their executives to receive huge compensations also. Dr. Singh was invited by a grateful corporate community to speak to them at CII’s annual conference in May 2007. Dr. Singh quoted Lord Keynes who had explained how capitalism enabled the growth of the European and American economies in the nineteenth century. “The new rich of the Nineteenth century were not brought up to huge expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a regime intolerable,” Keynes said.

Dr. Singh cautioned India’s business establishment. “Resist excessive remuneration to promoters and senior executives. In a country with extreme poverty, industry needs to be moderate in the emoluments it adopts. Rising income and wealth inequalities, if not matched by a corresponding rise of incomes across the nation can lead to social unrest.”

Seventy five years ago Mahatma Gandhi wrote in the Harijan that private wealth was not an evil, and that he supported people who created wealth. He then explained his vision of trusteeship. “Earn your wealth by all means”, he said, “But understand your wealth is not yours; it belongs to society.”

CEOs of Indian companies, including some in India’s iconic IT sector, now earn more than 400 times the median salaries of their own companies. When Mr. Murthy was recently asked to comment on this, he said a multiple of only 50 would be fairer. One can gauge how far corporate benchmarks have drifted by the reply Mr. Murthy gave to the same question fifteen years ago. He had just spoken at CII’s Leadership Summit in Delhi on corporate values. Afterwards, a journalist asked him what would be a fair differential between the salaries of CEOs and workers. Mr. Murthy said, 15 times. Now corporate boards are justifying CEO salaries that are 400 times more. They say they are not-out-of-line, and that the salaries are well-deserved because the CEOs create wealth for shareholders. Their metric of wealth-creation is too narrow, according to both Lord Keynes and Mahatma Gandhi. It should be not only shareholder value, but broader societal value.

It seems the herd of players chasing each other towards their goal of more personal wealth has run out of society’s bounds. Referees must blow their whistles harder and call them back to the realities of the rest of the world. It is time to consider societal values that are not measurable in monetary terms. These are easily lost sight of while chasing increases in stock prices of companies and growth of GDPs of countries.

(The writer is a former member of the Planning Commission, former Chairman of the Boston Consulting Group and author of Discordant Democrats: Five Steps to Consensus)