All innovations must be rooted in cultural soil. Indians respond to exemplary behaviour by elders and leaders, who set the tone at the top. Recall yatha raja thatha praja or how Shastriji first gave up wheat before asking the same of his countrymen.
Oversight of companies
All Indian companies have been overseen by the Companies Act and the listed ones, in addition, by the Securities and Exchange Board of India (Sebi). After 1956, a new Companies Act was enacted in 2013 with far-reaching changes, for example, the new Act explicitly acknowledges that the shareholder's interests are not supreme compared to other stakeholders. Over 40 years ago, well before this new Act, a clairvoyant J R D Tata in a groundbreaking move, amended the Articles of Association of Tata companies that "the company shall be mindful of social and moral responsibilities to consumers, employees, shareholders, society and local community." The Act also has innovations such as board appraisal, director evaluation and women directors.
India is strong on law-making but weak on law enforcement. The new rules apply to thousands of listed and unlisted companies but who has the resources to ensure implementation? Forget corporate governance, watch the glaring infarction of traffic signals every day in Mumbai by cabs and cars!
Evolution of the innovation
The new Act on companies was preceded by three innovations over a long time.
- Accounting: In 1458, double-entry accounting was innovated by Benedikt Kotruljevic in Dubrovnik, Croatia. His paper, displayed in the National Library of Malta, was the first recording of a great intellectual breakthrough. Several years later, Franciscan monk Luca Pacioli developed the idea further. These ideas allowed massive amounts of information to be organised into journals and then to produce summary financial statements.
- Limited-liability company: Stock was sold to high-net worth investors, who provided capital and had limited risk. The East India Company was established on December 31, 1600 to establish trading privileges in India. Some years later, the Virginia Company was created to establish settlements in the New World.
- Management: The corporation grew rapidly in the late 1800s and 1900s, leading to management as a profession. To provide formal pedagogy management colleges were established. By the 1960s, management had become among the most prized professional qualifications, attracting thousands of bright students. The world has produced 35 million 'management graduates' over the last century.
In 1972, management arguably peaked when Peter Drucker's book displaced The New York Times best-seller, The Illustrated Joys of Sex, authored by a person coincidentally called Alex Comfort. In the half century since then, greed has repeatedly reared its ugly head. By the early 2000s, business leaders' excesses caused unprecedented social grief and financial disasters. Nowadays, management is perceived as lacking ethics, morals and discipline. Management and governance are sorely in need of innovation.
Governance innovation
So, how do you embed innovations in company governance? For culturally sensitive innovations, India might respond better to principles rather than rules. Increasingly anyway, companies need to prepare their accounts on principles-based standards in which a simple set of key objectives is set out with common examples as a guidance.
Indian corporate policy-makers rightly looked outwards for innovations, particularly the Anglo-American practices; for example, women on boards. Here again, Tata Sons had a woman director from 1918 right up until 1966. Contrarily and interestingly, Professor Sucheta Nadkarni, Cambridge Judge Business School, has just published her research that factors other than quotas are more important for women to join and stay on boards (The New York Times, April 8, 2015). The most effective policies, she states, are the economic power of women and the governance policies of a given corporation and not legislation requiring quotas.
Conjure the dramatic effect if the Union/state Cabinets adopted an assessment process as prescribed for corporate boards. Imagine the huge impact if the Cabinet secretary were to evaluate secretaries as director evaluation has been mandated. How elevated the moral high ground would be if Sebi and public institutions recruited a woman director on their boards. Exemplary behaviour by corporate and publicly visible leaders, more than rules and laws, is a strong cultural impetus for embedding innovation.
During my college years, Bob Dylan's song "Blowin' in the Wind" posed questions about peace, war and freedom. The song's refrain was as intangible as the wind. In the same spirit, I wonder:
How many laws must we have before lawmakers can agree?
That business managers are valuable and do deliver great social good?
The answer, my friend, is blowin' in the wind, the answer is blowin' in the wind.
The writer is Director, Tata Sons.
gopal.gopalakrishnan@amp115.hbs.edu