ETHICAL RESPONSIBILITIES IN COOPERATIVE CAPITALISM As recently as 25 years ago, companies were viewed as islands of managerial initiatives and responses

in a sea of market relationships. This world view of a firm was founded on the notion of clear boundaries within which it operated. There were four boundaries which demarcated the limit of managerial activity and responsibility: Financial boundaries. Firms sought to own all of their assets including plant, equipment and intellectual property rights. They also endeavoured to fund their operations mainly through internal accruals. This naturally increased their autonomy and ability to take independent decisions. Administrative boundaries: Administration derived its validity and stability through the organization chart which clearly laid down the hierarchy and the authority/responsibility relationships within the firm. Managers excercised internal control through the hierarchy while on the outside response to market forces determined the allocation of resources. Social boundaries: Firms constituted social communities where employees were bound together by shared values, norms and a sense of shared purpose. The sense of community varied from company to company depending sometime on size( the smaller and younger a company the more the likelihood of strong community feeling), and sometime on strong inspirational leadership cementing the bond between employees. (G.E. under Jack Welch is a good example) Contractual boundaries: Most large firms and several small ones particularly in the U.S. entered into precise, formal, and legal contracts with their stake holders including employees, suppliers, dealers, franchisees and other associates. These demarcated the rights and obligations of each of the transacting parties. While these contracts were susceptible to violation on either side, managers preferred the arms length relationships that they created and commensurately increased the scope for independent decision making and control over the firms destiny. The blurring of boundaries: During the last two decades several forces have been reshaping company boundaries creating expansion on the one hand and overlap on the other. America has been in the vanguard of this transformation. Firstly the civil rights movement originating in the 1960s has heralded change in the recruiting and retention practices reducing the earlier arbitaryness and prejudices. The environmental movement has also brought about change for the better as far as the larger societal interest goes. Several new regulatory agencies came into being and they used persuasion as well as coercion to address concerns on fair employee practices and environmental issues. There are numerous agencies but the major impacters in ethical terms are the Environmental protection agency(E.P.A.), The Occupational Safety and Health Adminstration(O.S.H.A.), The Equal Employment Opportunity Commission(E.E.O.C.), and the The Consumer Safety Product Commission(C.S.P.C.). Firms who initially adopted an adversarial position vis a vis these agencies gradually moved to a more cooperative response on contentious and disputed issues. New Stake holders: After the first oil shock in the early 1970s, American companies faced stiff competition from Asian countries with the Janpanese in the forefront followed by the Asian tigers( Singapore, Taiwan, South Korea, and Hong Kong). As a result U.S. companies started paying more attention to important stakeholder groups primarily workers, trade unions, and local

1|Page

governments. GMs Saturn small car project is a fine model of cooperation between management, local government and trade unions who were all involved from inception in important decisions including plant location, recruitment, training and welfare activities. In our country with liberalization and the gradual emergence of competitive markets, there is increasing evidence of cooperation between industry, trade unions and local governments who are wooing investments into their states like never before. Of course there are still many problems and trust essentially has to be built between the various constituents(witness the imbroglio on the BALCO disinvestment). The heartening feature is that there is a clear realization on the part of all parties that it is better to adopt a collaborative posture than an adversarial one. The Japanese industrial paradigm. Perhaps the most striking example of cooperative capitalism can be found in the Japanese economy in the post war period. In a massive effort to first resurrect and then strengthen their economy, the Ministry of International Trade and Industry(MITI) was formed. Banks were orientated towards giving virtually unlimited credit on easy terms to companies irrespective of their size. Tariff barriers were installed to protect domestic industry and a sustained export drive was launched and sustained. There are many other initiatives that one can think of including the huge national effort in improving quality, but overall it was the concerted cooperative drive between industry and its major stake holders, not least company employees, that ensured Japans attaining a position of industrial primacy ahead of European nations and second only to the mighty Unites States. Sadly, too much of a good thing can be bad in the long run and the Japanese economy is languishing today almost buried under a mountain of bad debts that its banks failed to foresee during the good times. But the tremendous gains of the collaborative approach adopted in that country serves as a wonderful example that countries like India and China would do well to emulate. In our country we are seeing over the past few years an increasing willingness on the part of industry and its major stake holders to reason and work together. The inputs taken from industry bodies and concessions to their reasonable demands in the development of the annual finance budget is one example. The divestment process moving forward albeit with significant stutters and hiccups is another example. The willingness of trade unions to accept reductions in employment levels (unthinkable a few years earlier) points to a progressive improvement in cooperation . Another factor that is responsible for blurring of organizational boundaries is the knowledge explosion and the easy access by almost anybody to the latest developments in science and technology. The Internet is largely responsible for this and progress in Telecom/I.T convergence technologies will accelerate this trend. New responsibilities for managers. The new forms of cooperation extend the scope of managerial responsibilities. The accountability framework in the old, boundary paradigm was simple and straight forward. The increase of cooperation between companies, their stakeholders and between industry groups raises fears of large scale concentration of both economic and political power. This includes the possibility of industry groups acting in concert to subvert action of market forces that would be effective in regulating a normal competitive scenario where firms compete freely and fiercely against each other. Managers now increasingly will have to face up to the dilemma of loyalty to the home country interests on the one hand and maximizing global performance at the expense of domestic market performance on the other. Growing pressure to respect the cultures and preferences of overseas customers as well as to conform to local regulations and ethical norms are increasing the complexity of the decision making environments

2|Page

for executives. Serious attention has to be given to these issues and induction of managers into these new responsibility roles has to be smoothly and speedily effected. PERSONAL ETHICS Ethical behavior in business situations has to flow from Managers personal ethics. In turn personal ethics are founded on personal morality which is based on aspirations, values and commitments and is considered by many to constitute the essence of ethics. A persons moral values are shaped by the rich and complex background of social influences that she comes under, starting from childhood. To better understand the sphere of Personal ethics, it helps if we adopt a suitable framework. Framework for Individual Ethics. The following framework is significant firstly because it defines the sphere of personal ethics and it provides basic analytical perspectives that help in the assessment of ethical dilemmas that constitute the working arena of ethical decision making. The framework also provides alternatives for resolving ethical dilemmas. Finally the framework is important because it crystallizes the long tradition through human history of serious thought about right and wrong and moral behavior that characterizes ethics. The basic elements in the framework can be identified through four questions; 1)What course of action will do the most good and the least harm? 2) Which alternative best serves others rights including shareholders rights? 3) What plans can a person live with? Which is consistent with the basic values and commitments of his company? 4) Which course of action is feasible in the world as it is? The ethics of consequences. What course of action will do the most good and the least harm to everyone affected by it? The British philosopher John Stuart Mills invented the term Utilitarianism to describe this approach. As the name suggests it is aimed at maximizing the utility for all those involved in a situation be they participants, contributors or merely those affected by the actions of the participants. This approach appeals to most people because of the prevailing view that actions must be judged as good if they benefit others and proceeding along this path of reasoning, the more people that are benefited by an action or actions, the more moral it has to be. In business too, utilitarianism squares with the role perceptions of those in authority who interact with large numbers of people and several agencies and therefore see merit in the concept of the greatest good of the greatest number. As a managerial guideline it is necessary to break up the four basic questions asked above into the following sub questions 1) Which groups and individuals will benefit from different ways of resolving a dilemma? 2) How greatly? 3) How severe will the suffering if any be? 4) In what ways can the risk and harm be minimized? Philosophers distinguish between two types of utilitarianism. Act utilitarianism is based on the idea that every act must be analyzed on the basis of its consequences by using the guidelines activated by the four questions and the four sub questions described above. Rule utilitarianism

3|Page

on the other hand stipulates that a general set of guidelines such as speak the truth repay your debts, dont harm the reputation of your fellows through loose talk and speculation etc. if followed consistently, will ensure the greatest good of the greatest number. The Ethics of Rights and Duties: Actions are wrong if they violate a moral duty and conversely they are right if they conform to a moral duty. We are familiar with duties such as avoiding harm to innocent people, keeping promises, behaving justly and respecting the rights of others. This view of ethics rejects the idea of ethics as an ultimate means and ends calculation. For instance executing a psychopathic killer to prevent him from taking more lives could be justified by the utilitarian approach. In a business context retrenching employees to show better bottom line performance acceptable to share holders and some other stake holders would be seen as admissible using the utilitarian approach, But most of us would agree that taking away employment from people through no fault of theirs and particularly where they have performed well , constitutes an unethical act. Immanuel Kant the great German philosopher laid down that adherence to principles and duties was the core of ethics. The Ethics of Virtue and character: This high minded and therefore important approach to right conduct is encapsulated in the following questions: 1)What decisions and course of action are consonant with my personal values 2) Which decisions and actions best serve my commitments and life aspirations 3)For business managers, which decisions and actions are most consistent with the kind of organization that we are trying to create or preserve? This approach differs from the morality of consequences and duties in two principal ways. The character of the person who acts is as important here as the rightness or the wrongness of the action. Karna the great epic hero of the Mahabharat is a prime example of a person who followed the ethics of virtue and character. Apart from being a brave and courageous warrior, he also had the courage of his convictions and displayed exemplary consistency in his conduct at all times. Lal Bahadur Shastri as Railway minister also showed laudable character in resigning in the wake of the Ariyalur train disaster accepting moral responsibility for the catastrophe- something which has been considered unthinkable by the present breed of political leaders. In Indian business J.R.D. Tata, G.D. Birla and Kamalnayan Bajaj were all men of great character developed over a lifetime of acting and living virtuously. Some believe (with considerable justification in my opinion), that this approach to moral conduct is the most commendable one and organizations, as well as, individuals within organizations, should view it as the finest achievement to practise this approach. However it must be accepted that this approach has to give due regard to and amalgamate with the earlier described approaches of consequences and rights and duties. The Ethics of Pragmatism: This approach to the understanding and practice of ethics owes much of its appeal to the 15th century Florentine statesman Niccolo Machiavelli. A single question summarises this world view of appropriate conduct-What will work in the world as it is? In any situation, there may be several options that could meet some or all of the competing demands of consequences, rights and duties, and personal integrity. Following Machiavellis recommendations, the decisive question to be asked and answered is which of the options are actually feasible . In an organizational situation, the companys competitive, financial and

4|Page

political positions, the likely costs and risks of various plans of action, as well as the time available for action must be considered. The ethics of pragmatism postulates that people are human, not angels and to suggest ideal standards of conduct is not only unrealistic but irresponsible. It is a fact that most business decisions are taken in the context of the here and now and are imbued largely with the considerations that derive from a practical approach. However it is suggested here that pragmatism is essentially a short term approach with unpleasant long term consequences. If for instance a firm maintains good relations with government officials by placating them with gifts and largesse, in the long term it will be found wanting in compliance with regulatory requirements, will be vulnerable to audit, and likely to fail in its fiduciary responsibilities. It may be better to bite the bullet in the short term but ensure long term compliance with legal and regulatory requirements. It is the considered view of the writer that the higher approaches of rights and duties and virtue and character will in the long run fulfill the objectives aimed at in following the approaches of consequences and pragmatism. However it is to be noted that the converse of this is not true. If consequences and pragmatism are followed exclusively, they will not yield long term stability and success for an organization. This can only be brought about by practicing the higher approaches. BALANCING RESPONSIBILITIES Ethical issues are coming more and more to the fore of managerial attention with the developments that have been described earlier and specially in the context of the expanding boundaries of business organizations. There are few if any accepted guidelines for such dilemmas. A sound way for managers to cope with these situations is to rely on the fundamental principles of personal ethics and to act out the roles prescribed for responsible economic agents and as managers in the increasingly boundaryless organization. 1) The ethics of consequences asks managers to carefully assess the benefits, harm and risks for all parties who will be affected by a decision. The utilitarian perspective encourages them to find ways to maximise benefits and minimize harm. 2) The ethics of rights and duties reminds managers that they have a duty to respect the rights of various stakeholder groups. No stakeholders rights can be overlooked merely by evoking the greatest good of the greatest number axiom. 3) The ethics of character and virtue requires managers to assess their obligations to various stakeholders in terms of their personal values and those of their organization. In particular it asks them to evaluate each alternative in terms of the consequences for different stakeholders.They should choose that alternative that harmonises best with the values and commitments that distinguishes their company. 4) The pragmatic Machiavellian approach dictates courses of action that will work in the world as it is. Taken in concert with the other three perspectives, this view can help managers in selecting an alternative that is most likely to succeed. The final suggestions are to examine the understandings that a company has with its various stakeholders (both explicit and implicit) and to respect them while applying the general guidelines that have been recommended above.

5|Page

CORPORATE GOVERNANCE: Definition: Corporate Governance deals with laws, procedures, practices and implicit rules that determine a companys ability to take managerial decisions viz. a viz. its claimants- in particular its shareholders, its creditors, its customers, the State and employees. There is a global consensus about the objective of good Corporate Governance: maximizing long term shareholder value(return on shareholder investment). Since shareholders are residual claimants(they get their return after every shareholder group gets their respective claims), this objective follows from a premise, that in well performing capital and financial markets, whatever maximizes shareholder value must necessarily maximize corporate prosperity and best satisfy the claims of creditors, employees, customers, vendors, associates, regulatory agencies including the government, and the larger societal environment in which the firm operates. However the major priority is still given to shareholders and creditors by most institutions in most countries that are responsible for developing guidelines on this relatively recent area of business focus. In India the prevailing guidelines have emerged from the recommendations of Confederation of Indian Industries(C.I.I. code 1998), and the Securities and Exchange Bureau of India(SEBI code 1999) which have been formally incorporated in clause 49 of the official SEBI rules which deals with compliance requirements of both listed companies and companies applying for listing. Coverage of Corporate Governance Board of Directors: Single tier board(unlike two tier board in which the second tier has worker and union representation which is mandatory in Germany). A minimum of 6 board meetings to be held in a year for a at least day per meeting. Outside professionals as independent directors. A minimum number of outside directors is specified for companies with a turnover equal to or exceeding Rs.100 Crores. There are restrictions as to the maximum no of directorships an individual can hold ( this figure is currently 16). Non executive directors are expected to become active participants on matters such as board formation, audit committees, required to be financially literate in the case of non executive directors. Issues that have to be addressed and settled include remuneration of directors including Independent non executive directors specifically sitting fees, commission fees and stock options for executive directors. Minimum attendance requirements at board meetings are also specified. Key information to be public ally disclosed include annual operating plans and budgets, manpower and Overhead budgets. A further set of requirements concern disclosures both financial and non financial. Interests of Directors register has to be maintained which records details of individual directors interest in any contracts or arrangements of the company. Other requirements include details of share price movements or the company, consolidation of group accounts and standards of disclosures(e.g. disclosure regarding planned capital instruments such as equity issue of G.D.R. issue) The larger view of corporate governance: It is now commonly accepted that every firm has and is answerable to its various stakeholder groups. We start with a definition of who a stakeholder is. Any person or group who has both a long term interest in and a long term commitment to a company can be termed a stakeholder. While a shareholder who owns at any point of time some shares in a company can be considered a stakeholder, it is only that or those shareholders who invest in a company for the longer term who are prepared to share the risk and the returns with other similar minded and similar acting shareholders who can be considered true shareholder stakeholders of the company. Similarly employees who while entertaining reasonable

6|Page

expectations of competitive remuneration, congenial working conditions, prospects for development and growth in the organization, with a commitment to consider the longer term good and success of the company and put in their best efforts to ensure both can be considered true employee stakeholders. On the other hand individuals who buy and hold a companys shares for short term speculative gains and employees who only stay till the next attractive offer of employment can not be viewed as true employee stakeholders. This combination of long term interest and long term commitment applies to every stakeholder category including vendors, associates, creditors, regulatory agencies and the larger societal group. There is only one exception to this requirement which is the customer. This constituent starts off with no interest or commitment to the business prospects of the company even in the short term. It is a measure of the competitive capability of the company, as to how well it can capture the short term interest of the prospective customer and persuade her to buy into the marketing promises made by the company. It is even more a measure of the sustained competitive ability of the company as to how long and how well the customer persists in buying the companys products/services. It is only the truly satisfied customer who can be retained and expected to be loyal to the company and its offerings. It is interesting how simple and yet how true the above is. It applies not only to the successful planning and implementation of Strategy but also the application of Ethical principles of which Corporate Governance is a significant element. If a company sets out to determine the rightful expectations of each of its stakeholder groups and makes it its obligation to meet these expectations it is bound to succeed in its business purpose which is the maximization of profits in the long term. To illustrate let us take the instance of the employee stakeholder group. Employees have the rightful expectation to be rewarded financially and non financially in a competitive manner. They expect congenial working conditions both of a physical and socio psychological nature. A true employee stakeholder would also look forward to development and growth prospects in the company which would take her to higher levels of achievement and self actualization. If the company accepted the fulfillment of these expectations as its duty, it would not only benefit the employees but would ensure highly motivated, high performing and extremely loyal partners who would do their best to meet all the organizational goals in the short, medium and long term. Similarly if vendor stakeholders are paid in a timely and accurate manner, given reasonable supply lead times and are made aware of the companys plans for new products, capacity expansions and acquisition of new technologies they will identify strongly with the company and ensure timely and adequate supplies as also adhere to the companys quality specifications. Why is it that so few companies in our country accept the simple larger message of Corporate Governance while trumpeting their claims of good Corporate Governance which is nothing but sound strategy. The Answer lies in the unreal expectations that are prevalent which emphasize short term performance. The tyranny of the quarterly results report which expects and rewards improved performance on a quarterly basis puts pressure on firms to not only misreport results, but encourages extremely short term initiatives and responses. Examples can be found in every functional area of management. Take the case of the marketing and sales function. Managers are constantly expected to improve sales and market share over the previous year and the previous quarter. Firms do not bother to determine actual sales as represented by consumer offtake but

7|Page

restrict their efforts to pushing ever increasing quantities of their products/ services on to their distributors and dealers. This gives short term results in terms of increased sales and booked profits but puts increasing inventory pressure on the trade associates and results in knee jerk sales promotion schemes which dilute the firms carefully built brand images and values. The much acclaimed Voluntary Retirement Schemes launched and executed by domestic and foreign firms on our country and abroad is another short sighted measure to reduce employee numbers and thereby reduce costs. The intention is to get rid of non performing employees in a painless way. What actually happens is that performing employees leave, take the VRS benefits and join other companies. On the other hand the non performers stay on in the company and vitiate the mix between performers and non performers. The only conceivable benefit is that the company can claim a short term reduction in its employee costs. Examples can be taken from every functional area of management including the finance and accounting function where delayed payments to vendors are viewed as a smart way of activating zero cost working capital. We all know that delayed payments will result in vendors increasing their prices and diluting quality as well as developing unsatisfactory loyalty all of which hurt the company in the long run. In conclusion we can state that Corporate Governance concerns meeting the rightful expectations of the true stakeholders belonging to the various stakeholder groups and considering this as a duty and not as a favour or option. If this is done keeping the long term as the right time frame it will not only ensure the continuing commitment of stakeholders but will result in maximizing the long term profits which are the ultimate purpose of business and business firms. It is important that firms realize the spirit of Corporate Governance as more important than the letter which is reflected in the various codes and subsequent regulations covering business policy and practice.

NOTE ON SOCIAL RESPONSIBILITY The meaning of Social Responsibility: The objective of business is to maximize long term profits in a competitive environment in the community of people which is Society. For the firm its stakeholders comprise the Society. Therefore the larger view of Social responsibility would constitute the view of Corporate Governance which has been dealt with in the preceding note. However conventionally, Social responsibility is held to pertain to the larger community not directly interfacing with the company in its business pursuits but impacted in less direct ways. The main features of Corporate Social Responsibility are: Behaviour by Businesses over and above the legal or statutory requirements voluntary adopted because businesses deem it their duty and also in their long term interests. As an example we may take the example of Timex Watches Ltd in their manufacturing plant. The heat treatment process featured the use of Potassium Cyanide a deadly poison. While the handling of this chemical within the plant was meticulously carried out with no danger to employees the handling of the effluent required specified chemical treatment and release of the residue to drains and sewer systems outside the plant. However a decision was taken by the management to bury the waste within deep concrete pits specially constructed within the factory premises to contain the treated waste within the four walls of the company. This is only one instance of many socially responsible initiatives taken by the company in the overall interests of the larger Societal group.

8|Page

Corporate Social Responsibility is intrinsically linked to the concept of Sustainable Development which emphasizes that acts by a responsible individual or group in the interest of social or economic development should consider the well being of both current and future generations. This is particularly true in the area of use of natural resources like forests, water sources and agricultural land. It considers all aspects of environmental conservation and specifically concerned about contamination of large water bodies and resource(dumping of effluents in rivers for instance), unacceptable levels of polluting liquids and gases and degradation of prime forest land and vegetation in the public domain. Erosion of mountain sides in the interest of cultivation or setting up industrial units would also be featuring as areas of concern. Here the important thing to note is that firms in particular and industry and business in general are expected to behave in a conscientious way rather than controlled through impositions through statutes or regulations. It is to be noted and accepted that Corporate Social Responsibility is not to seen as a fashionable new area of interest or concern to responded to by firms as an opportunity to gain publicity and goodwill by a few visible gestures as setting up a garden at a traffic roundabout or planting a few trees in the vicinity of their factories and offices. It should be seen as a mature and comprehensive approach to meeting the long term expectations of stakeholder groups who do not have direct involvement in the business activities and outcomes of the firm but whose welfare and well being will have long term impact on the firms business success. What is Ethics: By definition Ethics is a Normative science dealing with Morals(right and wrong). Simply put it deals with what one ought to do with respect to ones obligations to others. Thus parental and teachers injunctions to be punctual, tell the truth, treat others as one would like to be treated are familiar ethical sign posts that are used to first educate and then expect compliance to. It is to be understood that the practice of ethics and a high level of compliance have to be underpinned by a strong and consistent evaluative and incentivising /disincentivising system. Thus school children are punished or rewarded in various direct or indirect ways for their compliance/ non compliance to the codes they are taught. If a child comes late to school, she is sent home or asked to bring one of her parents to explain/apologise for the infringement. Similarly a student who is caught lying will be castigated in front of his fellow students and may even be asked to stand outside the class for its duration. Need for Incentives/Disincentives: In adult life, we are expected to follow these principles in our occupations and professions without the explicit evaluatory and incentivising control that was exercised in childhood. What is more we are subject to a far greater variety of situations in which the ethical standards apply. For instance breaking a commitment given for completion of a task or meeting a deadline. It may have to do with how we treat our subordinates at work or our vendors. This may happen in work situations or outside them but the basic principles still apply. Lets take an example: we pass on a secret that was passed on to us by a friend to another person who could use the information to the detriment of the friend. If the friend discovers this betrayal, it might result in some form or reproach, a retaliatory response by not sharing more secrets or even in the loss of the friendship. Note the progressive severity of the response. The first two would be short term responses without the prospect of a more severe outcome. The third is a long term response which not only applies for a long period(even indefinitely) but whose

9|Page

consequences are more serious. While there is no formal punishment, the outcomes have to be considered as such. On the other hand, if the friends secret is preserved, it would lead to both short term and long term positive consequences. In the short term, there will be a continuing affability, punctuated by affection and reciprocity and in the long term confidence and trust will be built to the mutual benefit of both parties. A Viable Consistent Framework: Once we accept that Long term profit maximization is the purpose and therefore the ultimate objective of a business -in fact every single business, whatever plans, policies and actions that can contribute to this objective must be seen as elements of sound strategy and good business. If we now make the submission that these elements will also be part of good ethical planning and implementation, this will resolve the existing but clearly unnecessary conceptual stance that ethics and profit making are mutually exclusive and in fact hostile to each other. We will set out to establish the unassailable veracity of this proposition. For this we need to establish a framework and that is the Stakeholder Framework. Defining the Stakeholder: We first should define who a stakeholder is. Quite simply a stakeholder in any organized body or institution is one who has both a long term interest and commitment to that body. This flows from the primary meaning of the word stake which combines both of these attributes. We also set down the various stakeholders in the organizational framework. These are Customers, employees, Vendors, Creditors, Regulators including government, Business associates including distributors and dealers/retailers, the larger societal environment in which the organization functions and finally last but not least the shareholders. These constitute the complete set of stakeholders. There is a need to distinguish a nominal stakeholder from a true stakeholder. A person might buy and hold thousands of shares of a company. But if he is interested in holding these shares for only as long as they take to appreciate by say 5 0r 10 or maybe even 50% and then would exit his holdings he cannot be considered a true shareholder stakeholder. Again if an employee who is extremely capable and productive and contributes significantly to the companys good, is interested in staying with the company only until he gets a better offer from another company, such a person cannot be considered a true employee stakeholder. This of course assumes that the organization on its part is fulfilling its legitimate responsibility for respecting and meeting its employee stakeholders rightful expectations. We next should establish the long term rightful expectations of each of the stakeholder groups. Lets do this first with the Customer. This is the simplest to identify and the hardest to fulfill. Every customer expects Satisfaction. To understand this we must understand that Customer buys a companys offering be it product of service on the basis of claims made by the company and at the price offered and accepted. But on purchase while he has paid for and received the product, the claims and promises made which persuaded him to part with his money are yet to be fulfilled. If after receipt of the offering the customer finds that the claim/promise made has been fulfilled he would become a satisfied customer. If he is dissatisfied he will complain. If the complaint is attended to in a timely and adequate manner, then too will the customer be satisfied. When this happens we have a satisfied customer who is likely to repeat his purchases of the companys offering and who too could pass on his satisfactory experience which could result in new customers. It is unfortunate that so many companies keep mouthing slogans of customer delight

10 | P a g e

and Customer relations management without fulfilling their basic duty to satisfy customers in this primary and fundamental way. This in no way suggests that firms should not be working on new offerings ahead of their competitors or working in ways to develop strong enduring bonds with their customers. But in the absence of this total and unyielding focus on satisfying customers by fulfilling the initial claims and promises made, no amount of additionals can do the job of meeting the customer stakeholder expectations. Employee Stakeholders: We now come to the next in order of precedence stakeholder, the Employee. It is this stakeholder who contributes most to the companys pursuit of its ultimate objective of maximizing long term profits. What are this stakeholder groups rightful expectations? We identify them as: 1. Competitive remuneration developed on an Industry standard. A company should try to be among the best in its industry and it should be on the basis of what the employees get in hand and not on a Cost to the Company basis 2. Congenial working environment both physically in terms of basic work place facilities and utilities including adequately spacious well ventilated and temperature/humidity controlled environment. It should also be an emotionally congenial environment with reasonable working hours, transparent policies on recruitment, training and development and retention(the three basic processes/functions in the larger H.R. Process) 3. Opportunities for growth and development within the organization. In this context it would not be out of place to lament the tendency to fill vacancies arising out of attritional losses through direct outside recruitment. In Timex Watches where I worked for 10 years, it was our policy to fill all vacancies through internal transfers and promotions. It worked massively to the organizations advantage. Not only were we able to fill our vacancies quickly but the overall motivation and performance were of a uniformly high order. Though much thought and planning as well as meticulous implementation were required, it was a huge success. There is no reason why most if not all organizations should follow similar policies. There are arguments against this approach notably that outside recruitment would constitute a source of fresh blood and therefore fresh thinking. On the other hand there are more disadvantages than advantages including outsiders bringing bad practices that they had acquired, to a good organization and thereby polluting instead of invigorating their new environment. 4. It should be the endless endeavour of an organization to provide opportunities for Self Actualization to each and every one of its employees. Apart from providing opportunities to learn and to contribute in various functions, the employees should be given scope to further their individual interests in knowledge and activity related pursuits including sporting and cultural activities. It goes without saying that these should be promoted after ensuring that employees do full justice to their jobs and responsibilities towards the basic business interests of the organization. It would be entirely feasible to list the rightful expectations of each stakeholder group in the above manner. After listing the first seven stakeholder group expectations, we come to the shareholder. It is very simple as in the case of the customer to establish the rightful expectation here and that is Maximization of long term return on Investment. Here too, there is a plethora of indicators including Maximizing share holder wealth and optimizing share holder value. The first is an inadmissible objective. A share holder might have a massive investment in a

11 | P a g e

company and for the same return would have more wealth from his investment in the company than another investor who puts in a smaller sum in a more profitable company and gets a higher return on his investment. Its obvious which shareholder is getting a better deal. The second indicator viz. shareholder value is too vague to merit serious consideration. We must accept that as far as possible performance of a firm and the meeting of stakeholder expectations should be measurable in simple and quantifiable metrics. Since business performance has to be ultimately assessed and rewarded in financial terms, we should avoid qualitative and subjective performance indicators. And to cap the argument, which shareholder would give up a tangible maximum return on her investment, for a nice sounding but vague Shareholder value bouquet? None in my view! Counter Expectations from Stakeholders: If then a firm is able to meet its stakeholders expectation as fully as it can and certainly to a greater extent than its competitors is it not to be expected that it would fulfill its ultimate purpose ?True there would be a lot of details to be developed, planned for, and followed up meticulously for the firm to be the perfect fulfiller of its stakeholder expectations. But it cant be disputed that this framework is a complete and exemplary one for any firm in any industry. Now we come to the clinching argument. If a firm is able to meet its stakeholder expectations fully and thereby maximize its long term profits, would it not meet its ethical objectives as well. In order to make this happen there should be a corresponding set of expectations from each stakeholder group. As an instance lets take the case of the vendor stakeholder. The rightful expectations of any company from its vendors would be: 1. Consistent adherence to supply schedules and as per quality specifications 2. Reasonable and competitive prices 3. Timely intimation to the company in case of expected supply problems 4. Continuous working on improving cost thereby providing progressively lower prices with scaling improvements 5. Sharing vital technical and commercial information which could impact the companys interest 6. Developing a partnering relationship as opposed to an arms length relationship. Through faithful and rigorous adherence to the above set of mutual expectations, not only can the ethical objectives be achieved, which meet conventional notions of transparency, fair play, reciprocity enshrined in the arena of Ethics, but best long term performance on profit maximizations will also be assured. Integrating B.E, C.G and C.S.R: It has become fashionable to talk about Corporate Governance and more recently about Corporate Social Responsibility. All of these concerns can be addressed conceptually and practically with the framework proposed above. But one caveat: Each of the primary stakeholder group expectations should be addressed simultaneously and to the extent at any point of time, omissions and commissions can be identified vis a vis any of the groups, pain should be taken to address these as soon as possible and in full measure. Firms should avoid masking or hiding non fulfillment of major obligations to their primary stakeholders and playing to the gallery by announcing activities and spending on minor obligations to the larger community. So if a firm is failing in controlling its factory emissions and thereby contributing to the ill health of its employees and people in the vicinity of its plants, it is of little use and vastly hypocritical to announce that a small percentage of its profits would be allotted to community service like digging wells and providing educational facilities for the

12 | P a g e

poor in distant villages. Unfortunately, there is a continuing tendency for corporates to pay lip service to Business Ethics and to overlook their primary ethical responsibilities while gaining publicity with stunts like those described above. It can be nobodys argument that everybody including business entities should enlarge their concern horizons to include as many groups and persons as possible, but there has to be a clear and sensible system of priorities. Conclusion: there is a need to sort out the present confusion on Business Ethics specially the implicit dilemma about the divergence between profit and ethical objectives. Understanding that the profit motive is the only acceptable motive for any business (with the qualifier that profits have to be maximized in the long term) is the starting point. We then use the comprehensive Stakeholder framework, identify and work to the rightful expectations of each stakeholder group. We need to augment these with a list of counter expectations that a business firm would have of each of its stakeholder groups. These then would constitute the framework in which Strategy, tactics and operational plans of the firm would be developed, executed, monitored, and controlled so that the goals, and targets are achieved in the right time frames. We would then truly be able to accomplish what is currently seen by most Business Managers as Utopian, in full measure. We would also achieve Long term profit maximization and more importantly be seen as completely Ethical Corporate Entities engaged in an ongoing partnership with each and every one of our Stakeholders

Virtuous circle: Meeting the Employee Stakeholder Expectation

An investment in your employees ability to provide superior service to customers can be seen as a virtuous circle. Effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will probably result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle.

13 | P a g e

THE ETHICAL RESPONSIBILITIES OF MANAGERS AS ECONOMIC AGENTS: While many philosophers have argued- not without considerable justification- that ethical thinking and practice has to flow solely from the framework of personal ethics, there is another view which holds that by taking on responsibilities in group situations such as business organizations certain roles have to be played and with those roles also go responsibilities. There is often conflict between the role obligations of managers and their obligations as human beings. For instance a managers role responsibility might dictate that he reduces manpower to manage costs and fulfill his obligations to the shareholders of protecting their investment in the business. However in doing so he would be depriving some employees particularly good performers of their livelihood (at least temporarily) causing hardship to them and their families. This understanding of the dual nature of a managers obligations helps to bring perspective to the ethical dilemmas faced by managers and the possibility of equitable dealing between various stakeholder categories. A second assumption that has to be considered is that managers obligation to maximise shareholder value is not only a professional obligation but a moral one. Many in our country and some other countries as well could contest this assumption. On the other hand in countries like the U.S. it has not only been upheld, but is one of the cornerstones on which that countrys extremely successful business model and economic edifice has been built and sustained. In this framework, owners are considered principals while managers are viewed as agents who are obligated to serve the interests of their principals. In fairness it must also be said that principals are typically long term institutional investors like Mutual funds, trust departments of Banks, and Insurance companies. These could also include individuals who are long term investors but not those who are short term speculative holders of company shares. In meeting shareholder expectations for high financial returns on their investment within appropriate risk levels, managers faced with ethical situations, be they related to employees or other stakeholders, have to follow one or more of the ethical approaches described in the earlier chapter on personal ethics. The approach that most readily suggests itself is the ethics of rights and responsibilities. It is the shareholders right to expect high financial returns commensurate with acceptable risk. It is therefore the duty of managers to fulfill this expectation. It is also the shareholders right to expect managers to obey the laws of the land in the conduct of the business and so too would it be the duty of managers to do so. In the several takeover battles that have been witnessed both in our country and outside(primarily in the U.S.), a strong argument used to justify attempts to takeover has been that incompetent or self serving managers had failed to meet their obligations to their shareholders. Attempts to take over the D.C.M. and the Escorts groups of companies in the early 1980s by Swaraj Paul, and the takeover of the American tobacco giant R.J. Reynolds are examples of the use of this logic. An interesting development recently has been the preference of the shareholders of some companies for controlling pollution and improving product safety over the maximization of financial returns. The ethics of consequences is also an important driver of managerial motivation and action. It must be accepted that in the pursuit of business success measured by the bottom line, companies and the people who manage them are able to improve prosperity levels and alleviate human suffering to a significant degree. Joseph Schumpeter one of the leading economists of the 20th century argued that modern capitalism by its very mechanism improves the standard of life of the masses. The relatively more rapid growth rate of the Indian economy post the liberalization

14 | P a g e

started in 1991 by the Narsimha Rao government validates the contention of this great economist. A third cornerstone of the framework in which managers are to fulfill their obligations as economic agents is the relationship between markets and individual freedom. In an open market where firms compete vigourously, the customer is provided with an increasing number of options thus enhancing his freedom to choose that which best suits her personal needs. Vigourous competition expands the range of choices for labour goods and capital or in laymans terms for customers, employees and investors. The decision of the Indian Government to divest its holdings in public sector undertakings will definitely increase the choices for all these groups notwithstanding the current opposition of some stakeholders notably the state governments and the trade unions. Ethics makes sense in Business: We stop and ponder for a while here whether all this talk about ethics makes any sort of sense, as it relates to business, and business success. The answer to this has to be a big yes though very few people realize it let alone accept it. Let us illustrate with an example. In Timex Watches there was an early temptation to get the Excise inspectors off the companys back by paying them off. Had this happened it would have led to more demands for payments and several raids. The company decided on the other hand to maintain cordial relations with the officials,make available records, accept their feedback on non updation and any other lapses noted on scrutiny, and ensure strict compliance at all times with excise procedures. The result was that the company was never harassed and was in fact upheld as a model of compliance to other companies and most of all got better than average cooperation by this often feared arm of governmental control. Most managers who have to deal with union officials seek a compromising relationship where indiscipline and misdeeds are overlooked and tolerated, sometimes even condoned in return for an uneasy industrial relations peace which can be marred at anytime by a stoppage of work, or an act of misconduct. On the other hand the manager who spends time with the workers or staff, communicates effectively with the union officials, is willing to seek solutions to worker problems, and do this all without surrendering his right to demand and get performance, will succeed not only in winning cooperation from the work force and the union but will also get superior performance from his work team. While pragmatic behaviour might seem to get results and to some extent it does in the short term, an ethical approach while apparently frustrating in the short term will yield lasting results in the long term. Another example can be in the recognizing of the rights of vendors and looking on them as partners that the Japanese Keiretsu has shown. The companies who have followed this approach include Toyota and Honda and they have obtained wonderful results by way of timely and high quality performance from their vendors at extremely low cost. Had these companies pursued the more conventional approach of treating their vendors as subordinate entities to be dominated, condescended to and perhaps bullied into performance, they would have had to be content with patchy performance, higher purchasing costs, and a sullen set of unwilling and under motivated business partners.

15 | P a g e