Making a case for 'Stakeholder Democracy'

M Damodaran, Former Chairman, SEBI & Chairman, Excellence Enablers

Today we have in most countries what we call stakeholder democracy, where the last man who has one share or perhaps no share but relationship with a company as a vender, employee or as a member of the society, that last man's interest has to be subsumed in the larger interest of the company.

Corporates in India and across the world have long subscribed to the view that their world begins and ends with their shareholders. It’s much later that the word stakeholders entered the vocabulary. Initially it was all about delivering values to shareholders. And if you were the principle shareholder in the company it was about delivering values to yourself. 

That was the principle on the basis for which the capitalism was structured and companies existed. Much later because of pressure from various sources, the universe of interest got expanded from shareholder to stakeholders.

Today we have in most countries what we call stakeholder democracy, where the last man who has one share or perhaps no share but relationship with a company as a vender, employee or as a member of the society, that last man’s interest has to be subsumed in the larger interest of the company.

Is that something, that the corporates are practicing, I wish I could say ‘yes’. Some of them are, but a lot of them have just got started with the journey on what they should do as a corporate citizen. As corporates are also entities recognised by law, they should also behave like citizens of a great country.

CSR

I am not a believer of two per cent regulation. I always believe that CSR is an affair of the heart. It is not about an entry in the account books. When you say two per cent or whatever, you are talking in terms of the accounting entry and not an article of faith.

Society as a stakeholder in the corporate India is entitled to have its share. This is because the society provides a number of inputs that any corporate needs to survive and prosper. Therefore corporate social responsibility is absolutely essential.

If well implemented, CSR can be an act of corporate patriotism. But if the approach is that somewhere under the umbrella what is permitted in the CSR I will also smuggle my projects and schemes which suit my company, which serves my company’s interest but can be packaged as serving the community interest, then we have a problem that needs to be addressed.

The money that is spent in the name of society should not be something that is enriching somebody else. Like individuals, corporates are also in the business of nation building. Corporates need to be involved in the act of nation building. It involves creating the right working environment, not treating the less privileged in your workforce as numbers or objects but persons whose active involvement, physical as well as emotional need to be brought to the table. It is those corporates that will outperform everyone else in the long-run.

Governance

If a company is to survive and prosper on a long-term basis, you need to have your governance system right. Not in terms of processes, ticking boxes or responding to what regulators or lawmakers prescribe, but in terms of recognising what is good for the society, company, yourself and various stakeholders.

There is no diversity of objectives. It is the common objective that will take everyone on the right path. Do corporates subscribe to that? I wish they did!

The absence of governance leads to sub-optimal results. It is an act that goes against the grain of patriotism. Its not just about paying taxes in time. There are accountants whose cooking ability is so good that they would outshine chefs of most restaurants. They have developed a natural skill to put ingredients together to get right results. Do we want that kind of corporate accounting?

Almost everyone today, seems to be suspicious of everybody else. The auditors are suspicious of the accountants, for the right reasons. The management is suspicious of the auditors. The management and the auditors are both suspect in the eyes of the board and the board is suspect in the eyes of shareholders. This is the story that is actually playing out today.

Today we have in most countries what we call stakeholder democracy, where the last man who has one share or perhaps no share but relationship with a company as a vender, employee or as a member of the society, that last man’s interest has to be subsumed in the larger interest of the company.

How do we correct this? The solution lies in the appeal to the sense of patriotism, service to the nation and to the sense of doing the right things for the right people. 
History has demonstrated that if the business is conducted properly respecting values, ethics, in a non-discriminatory manner, the companies will survive and will deliver value to all stakeholders.

Earlier there used to be a saying, show me the man and I will show you the rule. Now it’s being slightly changed to say, show me the man and I will show you whether I will apply the rule. Rule is the same. But whether I apply it or not is dependent on my sweet will.

Take the example of the National Company Law Tribunal (NCLT). There are cases which should have gone to the NCLT, but they are still outside the NCLT because somebody somewhere decided that the rules are for some people and they need not apply for some other people.

Law Enforcement

Our laws are written in such complicated languages that lawyers will be in business for several life times, trying to interpret what somebody wrote. All laws are drafted incompetently and mysteriously.

Look at the definition of fraud in the Companies Act, not in the main section but in the explanation. It is one sentence that goes on and on and on. At the end of it you don’t understand what it is. It is a fraudulent draft of the definition of fraud!

Every time there is a problem, the first reaction from the government is to write a new regulation or amend the law. There is no shortage of laws in this country; enforcement is lacking wherein lies the answer.

Tripod Theory

After having the basics in place there are three elements that are critical for the success of a corporation. They are – empowerment, incentive and accountability. 
Empowerment is not delegation. It’s delegation with much more. It is about transferring ownership of the decision making process and not looking at someone over his/her shoulder.

Having empowered, incentivise the person, a culture that does not exist. Celebration of success also is elusive and failures are not discussed.

The third element of what I call in tripod theory is accountability. You empower someone, incentivise someone and hold someone accountable.

Take the example of public sector bank boards. The managing directors get transferred and the board members get to know about this through newspapers. It happened not in the distant past, but very recently.

Let’s not be a victim of stereotypes. There is need to incentivise good performers as much as take effective action against those who step out of the queue. Suspending cynicism should be made a national movement and will go a long way in ensuring corporate patriotism—something that will run more top-down rather than bottoms-up.

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of INCLUSION. Comments are welcome at info@skoch.in)

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