Challenges faced by Indian corporate as regards adhering to ethical standards and future agenda - Paper presented by Dr. Mankad

A number of important issues are often talked about, written on, discussed thread bare with little, if any concrete action and measurable outcome. We have talked about child right, urbanization, energy security, corruption, and consumerism. The list is very long and keeps on growing. Corporate governance and business ethics are recent additions to this list. On business ethics, focus is generally on impractical bureaucratic intervention, corruption, environmental degradation, corporate social responsibility and profit centered strategies. Here also the list goes on and on. In this paper a slightly different approach is attempted. The focus is on a limited number of DNAs of ethical standards.

Starting on a Personal Note:

Let me begin on a personal note. I was the CEO of a medium-sized printing accessories manufacturing firm in Taloja, a few kilometers away from the venue of this conference. It was February 1988. At 2 O'clock in the morning, an employee of our administration department woke me up informing me that octroi authorities of Bombay Municipal Corporation had stopped one of the tempos, (goods career) carrying our goods from factory to the customer's printing press in Mumbai. The reason was that the driver did not have the necessary papers. The driver's explanation was that two tempos had left the factory. The leading driver had papers and money for octroi payment for both tempos. They moved together but were separated in the traffic. The lead tempo would have submitted papers and made payments for the both tempos. The officer on duty refused to check up the papers of payments made to verify the claim and was threatening to confiscate the goods.

In routine course, for ‘handling' the issue like this, administrative officer or manager would have gone to the octroi check naka. The concerned officer and the manager were out of Bombay and my telephone number was given to all as that of person of the last resort. The issue was serious enough and I got out of the bed, dressed up and drove to the octroi check naka, some fifteen kilometers from my place. Met the officer on night duty. Tried to reason out with him requesting him to check up his own record. He was adamant and refused to do so. The driver told me that we had to ‘buy' peace. I negotiated the price; paid the ‘ransom' money I had carried and got the release of the tempo and the goods, only after due verification.

It was 4 O'clock in the morning when I drove back towards home. In the cool pleasant morning, I reflected on the event and asked myself a simple question. Is this what I want to do in life? It was not for the first time that I had bought peace with corrupt bureaucracy. In fact my colleagues considered me rather ‘good' at buying peace. But my conscience was saying that enough was enough.

Somewhere on the way back from check naka, I decided to call it a day with the corporate world and to return home to academics. It took me a while to withdraw but by December 1988, I was back in academics as a Professor in a management school. The battle between my corporate conscience and my personal conscience was short and decisive. The latter won.

My conscience was still uncomfortable with the suspicion that ethics – or absence of it – was as serious an issue in academics as it was in the corporate world. In last five years I have held highest-level responsibilities in education management and have known about the practices followed. My suspicion has turned into a confirmed knowledge that ethical standards in academics are, indeed, very low.

Everywhere in India, personal and organizational integrity seems to be in short supply, albeit in varying degrees.

According to Transparency International, a Berlin based NGO, India ranks 72 nd in the group of 91 countries ranked. That we are not as corrupt as 19 other out of 91 countries ranked is no consolation.

An intriguing aspect of conscience is that often people with high standards of personal integrity accept low standards of organizational integrity. ‘I am personally honest. On the job, I do what environment demands.' This is the dictum most follow. (Personally I am no exception to the rule.) There exists a huge chasm between personal integrity and organizational integrity.

Challenge I: Gap between personal and organizational integrity:

One of the major challenges faced by Indian corporate is to acknowledge the chasm between personal and organizational integrity and attempt to fill the gap, as best as can be done.

What is ethics?

Oxford dictionary defines ethics as ‘branch of philosophy concerned with moral principles'. It is then the study of morality. But this raises another question. What is morality? Is it concerned with right or wrong, good or evil, black or white?

There are people who would say that the very term ‘business ethics' is contradictory. Business and ethic do not go hand in hand. In a survey by Prof. Baumhart, 50% defined ethics as ‘what my feelings tell me is right.' Ethics then becomes personalized for individuals and for organizations. Ethics then becomes relative!!

The Range of ethics:

Consider the following

Will I kill? Definitely no Very white

Will I steal? No White

Will I run a red traffic light? Generally not Mostly white

Will I use pirated music? Possibly not Somewhat white

Will I bribe the policeman who catches

me running a red traffic light? Possibly yes Gray

Will I use unlicensed software? Yes Black

Like an individual, the corporate will also have a similar scale of issues ranging from very white to black.

Challenge 2: Wide spectrum of ethical and non-ethical practices:

The challenge is to identify the broad spectrum of issues related to ethics, acknowledge the shade of white, black or gray and as a clear policy initiative start eliminating blacks and gray.

Accounting muddle leading to high profile scandals

Since 1990, America has witnessed high profile scandals. From Milikan's junk bonds, through the .Com bubble culminating in WorldCom disaster, and the fitting collapse of Enron, there is a thread of accounting muddle running through.

The recently delivered guilty verdict against Kenneth Lay and Jeffrey Skillings on the charges of accounting fraud is a resounding repudiation of the corporate accounting gimmickry. Enron also pulled down once reputed Accounting and Auditing firm of Arthur Anderson. It was a case of a policeman caught thieving!

The ‘Harshad Mehta' scandal in 1993 was billed as a stock scam. It was also a bank scam. Harshad Mehta used to his advantage, and with possible connivance of some bank officers, the deficiency in accounting system of General Ledger at Reserve Bank of India, and used GR receipts for his enhanced access to funds.

Recent IPO scandal is also outcome of accounting muddle. Unscrupulous operators opened hundred of fake Demat accounts in fictitious names. Bank employees let them play their game, carelessly or willingly. Accounting slip caused one more high profile scandal.

In India, integrity of accounting has largely been suspect. Academicians and politicians recognize and accept existence of a large and ever growing parallel economy. The size of the economy – call it the commonly known black money or more elegant unsanctioned economy – is estimated to be at least Rs. 300 thousand crores and may be as large as Rs. 700 thousand crores. For Enron, the initiation of the scandal was through creation of ‘off balance sheet' entities. The company sold assets at highly exaggerated value to its own ‘off balance sheet' entities and booked profits. In India, a large segment of our economy itself is ‘off balance sheet'.

And here, then is one more challenge.

Challenge 3: Sanctity of accounting system.

The challenge is to have an accounting system where unethical deviations are immediately identified and actions taken to rectify these.

Pretence – a habit:

Social Psychology and Industrial Psychology have been known disciplines for quite some time. Behaviour scientists now need to focus on ethics part of Corporate Psychology. What are the driving forces that make most honourable persons take accounting short cuts? Personal greed, as was obvious in all cases referred to above, is a clearly identified force. But is not there something much more?

It is convenient to blame the free market economy for the ‘anything goes' attitude of the companies. Economists tell us otherwise. Efficient free markets prevent and not cause the anything goes attitude.

Competitive environment in today's business world puts pressure on management to succeed at all cost and at any cost. For Mr. Fastow, the CFO of Enron, giving better and better financial numbers, quarter after quarter, became a necessity. Not because Lay or Skillings asked for these. It was because market expected it. If market expectations are not met, share prices slide. Market capitalization of stock falls. This influences not only the investing public and market players. It erodes the personal wealth of a large number of employees who have acquired their company's shares at preferential prices or as stock options.

With increased need for resources and consequent dependence to mobilize the resources from the market and financial institutions, many companies twist numbers to keep them happy. Statements bordering on down right lies are given out as press notes. Falsehood becomes necessity. Pretending becomes a compulsion.

I have known an entrepreneur who fudged figures to keep markets and bankers in good humour and over the years, started believing that fudged figures were realities. The company he thought he presided over was miles apart from the company he did preside over. The illusion of well being that he entertained led to the collapse of his company and contributed to hastening his premature death.

Challenge 4: Temptation to window dress financial results

The challenge before the business is to resist the temptation to window-dress the financial results and have courage to represent the company as it truly is.

Organization culture:

Running an ethical business is essentially a matter of organization culture. Anything goes attitude is built in the culture over time. It may start with a small lie. A finance manager instructing the telephone operator that if so-and-so creditor or bank officer calls, tell the caller that he was out of town. Habitual fudging of sales to justify pressure of sales target, overstating stock to justify cash credit limits, letting sales persons inflate travel bills to take out cash for pacifying petty officials, not booking a variety of sales transactions to create cash buffer, booking personal expenses as official expense, having ‘ghost' employees on payroll, intentionally falsifying records to get concessions in direct and indirect taxes and many such methods are known to personnel in all organizations.

What starts as a lie for the good of the company, soon becomes a lie for the good of the individual. With delegated power to temper with records, employees – right up to senior levels – drain cash from the business for personal gains. Insiders trading as a known unethical practice is as old as the stock market. Employees are emboldened in organizations with lax ethics. Fear of adverse repercussions of one's act reduces with every successful transgression. And the greed increases to do more. The more honest employees are looked down upon with disdain. ‘That is the way we are here' becomes the organization's motto, its defense, its driver, and its culture.

Challenge 5: Culture of ethical practices, honesty and integrity.

The challenge is to create a culture of ethical practices, honesty and integrity. All stakeholders of the organization know it and respect it as an organization that does not accept laxity in standard of ethics in individual and for the organization.

Leadership:

Perhaps the most critical challenge faced by a corporation today – in all its facets, including for ethics – is that of leadership. Literature on leadership is vast and growing. Authors, researchers, academicians, management practitioners have studied varying aspects of leadership. They all agree that level of integrity is one of the most critical elements of meaningful and successful leadership.

C. N. Vittal, the Vigilance Commissioner considers High Level of Integrity as one of the most important characteristic defining leadership. This he ranks as equal to vision, entrepreneurship and self-confidence –the other defining characteristics he identifies.

For creating an ethical organization, the leader has to communicate the intent and the purpose of ethical practices to all participants in the business. S enior leaders must create communication platforms that encourage employees (and other associates of the company) to raise concerns related to possible or actual deviations from integrity standards — especially those that could damage the reputation of the organization. All such platforms and processes must get institutionalized in due course.

Kenneth E. Goodpaster, professor of business ethics at the University of St. Thomas, Minneapolis, USA, emphasizes: "business leaders are the principal architects of corporate conscience. They are the ones who must manage the challenges associated with pursuing profit while maintaining integrity. They are the ones most responsible for delivering on the moral agenda of the corporation. That agenda includes three broad imperatives: orienting, institutionalizing and sustaining ethical values within the corporate culture."

Given the high competitive pressures, it is easy for business leaders to say that enforcing ethical conduct is difficult, but this is not an excuse they can use. As Jeffrey E. Garten, dean of the Yale School of Management, wrote in his book, The Politics of Fortune: A New Agenda for Business Leaders, "The essential point should not be lost: the more complex the markets become, the more the integrity of its leaders matters, and the less likely that higher prescriptive laws and regulations will really matter."

The leader through his words, gestures and actions sets the standards for an ethical organization. In his book ‘The Real Work of Leaders' Don Laurie advises the leaders, and I quote, “if you want commitment and trust within the fabric of the organization, you had better live the ideal you represent”. One of the most critical tasks for corporate leaders in India is to make their organizations sensitive to issues of ethics and get commitment to ethical practices. Laurie quotes Dee Ward Hock, founder and CEO emeritus of Visa International: “An organization's success has enormously more to do with clarity of a shared purpose, common principles and strength of belief than to assets, expertise, operating ability and management competence.”

Challenge 6: Leadership

One of the biggest challenges for an Indian corporate to adhere to ethical standards is creating and nurturing leadership with high level of integrity and committed to tenets of ethics. The person at the helm literally steers the course of ship corporate through icebergs of corrupt bureaucracy and stormy waters of ruthless and often ethics less competition.

There are other many and varied challenges for Indian corporate to adhere to ethical practices. IPR is emerging as a major challenge. Globalization brings in its wake the conflict of values and outsourcing to India has raised issues of culture. Environment and related issues are taken relatively lightly by Indian corporate but are high on agenda of western world. Labour practices in general and employment of child labour and sex discrimination practices in particular have raised concerns among India's trading partners. These and number of similar issues pose challenge to Indian corporate for adhering to ethical standards.

Let us now look at the agenda for the future.

Agenda for the future:

Let us go back to the quote of Kenneth E. Goodpaster cited above. Any agenda for the future would include three imperatives. These are orienting, institutionalizing and sustaining. Each one of these requires a lot of thought, understanding and action.

Orienting:

In Indian context, this is perhaps the most critical element of the agenda. Indian businesses are aware of ethical issues. Their non-adherence to ethical practices arises partly out of greed but largely out of indifference. They see gains from unethical practices as large, immediate and tangible and cost of unethical practices as small, distant and intangible.

Over last few years, the regulations have been made stricter. Mandatory structures have been created under the aegis of SEBI regulations and under the guidelines for corporate governance. Role of outside director is expanded and laden with authority as well accountability. Functions and powers of Audit Committee are fine-tuned. All the efforts are aimed at orienting companies towards increasing sanctity of accounting standards and financial information.

And still, the success of the corporate governance is dependent on the willingness and readiness of the company. Legislations have never solved any problem of deviant behaviour. The business and its leader have to take the initiative to orient the business towards adherence of ethical standards.

A word here for education is in order. Indian education system, through school, college and post-graduate institutions has failed to imbibe a strong sense of values and ethical standards among the students. With increasing competition for entrance to more reputed institutions, pressure for getting the right results at whatever cost is mounting. Assignments for courses at management schools, including those for a course in Corporate Governance and Ethics are worked on through plagiarism, through net downloads and cut and paste process. Young persons think nothing of working on unlicensed software and dancing on pirated music. A concerted effort is required to make the children and young persons aware of what is wrong before making them commit to what is right.

Institutionalizing:

Many companies have institutionalized structures for adhering to ethical norms. It is a time consuming affair. The success of the process also involves sparing the resources and unconditional and intense commitment of top management and leadership.

Among the first issues that need discussing in organizations that want to be seen as ethical and want to institutionalize the processes are the following

• Creating the post of ethics practitioner or counselor, with a specific description of the job and its responsibilities.
• Route map for implementing a code of conduct and establishing a clearly stated set of integrity standards.
• Working out the relationship between ethics and other business functions, and aligning company policies with the code.
• Planning for ethics training and communication to employees.
• Creating a structure for ethics monitoring, compliance auditing and whistle blowing.

In the process of institutionalization, most critical element is communication. Employees, suppliers and customers have to get clear message that company means business. Openness and transparency are needed for effective implementation of the ethics related policies. No ifs and buts have a place in such policy. Deviations when required would need to be acknowledged and explained. Credibility of management and its efforts define the success or otherwise in such exercise.

Sustaining:

Contrary to processes in other initiatives, sustenance of initiatives in establishing ethical business is relatively easy. The wisdom of ‘taste of the pudding is in eating' is fitting to such initiatives. Ethical practices become an integral part of the organization's culture. Ethics monitoring and compliance auditing structures would ensure sustenance of the initiatives. High standards of personal and organizational ethics of leader would rub off on the organization.

Sustenance of ethical standard depends on policy and systems adopted by the company. Code of conduct adopted becomes the guide, a commitment and a habit. As with a grown up plant, a little care, required watering and keeping the pest that eat into its health away takes less efforts than growing and nurturing the plant in initial stage.

In conclusion:

India has changed rapidly over last fifteen years. Liberalization, privatization and globalization policies have borne fruits. Rate of growth has accelerated. Poverty indices have established a decisive downward trend. India is respected in the world for its technical manpower, its managerial skills and its financial acumen. More and more Indians have entered global who is who lists. Indian companies are registering presence in Fortune 500. More and more of the top Fortune 500 companies are looking at India for outsourcing and for her promising markets.

Growth in telecommunication, computer penetration, increasing bandwidth, rapidly growing media are creating environment for transparency. Sting operations from media have put law violators and law enforcers on alert. Business ethics is becoming a necessity.

Societies change over generations. Command and control economy created dreams it had no wherewithal to fulfill. The dreams collapsed creating a no holds barred environment where personal and organizational integrity became victims.

The globally linked, net savvy new generation of entrepreneurs is taking charge of corporate India. They are subtly shedding the traditions and burden there of. Perhaps, they will usher in an era of business ethics and corporate governance that was lost in a decade or two after India's independence. This is the hope.

After all, hope is what we all live with.