Monday, March 21, 2005

Do corporates give back to the society?

March 21, 2005,, Co-author-Vivek Kaul

Every now and then, some event occurs that makes people sit up and take notice. Regulators start working overtime. Public talks and panics. Media makes money.
Ponzi schemes of the early 20th century, the Barings's debacle, Shell's tryst with North Sea, Union Carbide, Nike, Enron, WorldCom. . . the list can go on; every time there is a fiasco, more rules, more regulations and greater accountability are stressed upon.
But this does not stop corporations from committing frauds, exploiting the environment and eroding billions of dollars of stakeholders' wealth.
As the list of frauds grows, the number of books focussing on values, spirituality and personal development, on the bestsellers lists too rises. This trend makes us ponder over a very fundamental question: 'Do new age managers have their basic values in place?'
This question is justified because of the increasing number of reports in the media about corporate frauds, excessive executive remuneration, greed leading to loss of shareholders wealth and corporate crime.
Profits, money, share prices are the key words in any company. Keep your eyes on these key words, take decisions to increase them; this is what is told to the future managers and expected from present management.
As long as they achieve this, nobody questions the means. Shareholders are happy and managers are well fed.
But, for how long can this worship of profits and thirst for power go on? Even though the financial statements may remain unblemished, the company will begin to reflect the lack of morals and values.
The rise of a new phenomenon
An organisation receives inputs from the society and environment in the form of workforce and raw materials, and sends output to the society in the form of goods and services. Thus, an organisation exists because of the society.
In order to survive, the business in turn must take care of the society and the environment. This realisation has led to an increasing focus by firms on examining their social responsibilities and the development of a new term in management: Corporate Social Responsibility (CSR).
The World Business Council for Sustainable Development has defined CSR, as 'the ethical behaviour of a company towards society. CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.'
From top to bottom
CSR can be undertaken with a good blend of ethics, accountability and good governance. Ensuring the verbatim fulfillment of all the codes of corporate governance is not enough. The Enron fraud occurred despite meticulously following all the corporate governance norms advocated by the Securities and Exchange Commission of US. Moral and ethical behavior is important.
This behaviour needs to percolate to the entire organisation, from the top down. The task rests on the shoulders of the chief executive officer of the company. Responsibility is a state of mind. It cannot be enforced upon somebody. It has to be felt. It has to be experienced in the culture of an organisation.
Ethical behavior of the top management, acting in the goodwill of the public at large, keeping greed at bay and results in building a sustainable business, whereas if the management starts worshipping money, the end can be delayed but not avoided.
The benefits
Gone are the days when industry was driven by supply. Raw material was available in plenty. We are witnessing a period where inputs to an organisation are getting more and more scarce. Natural resources have been depleted and labour has become costly. Thus it is in the self-interest of the company to undertake CSR.
If the environment is not taken care of, where will the raw materials come from? If the employees are not taken care of, they will work for someone who does take care of them.
The financial health of a company in the long term depends to a large extent on factors such as environment protection and responsiveness to the society. The other various benefits that may accrue to the company can be in the form of enhanced visibility, reputation and loyalty of employees, customers, suppliers, lenders and investors.
One such example is the initiative by the State Bank of India to allow and encourage commercial sex workers in Sonagachi, Kolkata (one of the largest red light areas in Asia) to open savings account with the bank.
Ashok Dutta, one of the forces behind this initiative, also the general secretary of the bank's staff association, says, "On the one hand, you can call it social service. You can also say that this is an initiative by SBI employees to mobilise deposits."
The beginning
"The wealth gathered by Jamsetji Tata and his sons in half a century of industrial pioneering formed but a minute fraction of the amount by which they enriched the nation. The whole of that wealth is held in trust for the people and used exclusively for their benefit. The cycle is thus complete; what came from the people has gone back to the people many times over." -- JRD Tata
One of the first industrial houses of India, the Tata Group has been involved in philanthropic initiatives in the form of educational institutions, healthcare services, infrastructure and community development, and various other welfare activities through the various trusts endowed by the founders of the group.
Every year the Tatas spend a substantial sum of money maintaining the city of Jamshedpur. The fact that they have survived when the business houses, which started more or less at the same time, are long dead and gone, speaks volumes of the importance given to CSR by the Tatas.
This is the story of just one such industrial house. Many other industrial houses that set shop early on, like the Birlas, the Godrej Group, etc. have contributed richly to the society.
Going through the bad phase
Then came the sudden wave of industrialisation, which swept the entire nation with the urge to make more, sell more, and earn more. In the post-Independence licensing era, the businesses were more concerned about obtaining licenses and quotas.
This was also an era of very high taxes. As the story goes JRD Tata had to sell some amount of his assets every year to pay taxes. The businessmen could either pay taxes and go bust or operate in the black economy.
The period also saw the politician-businessman nexus develop. Each of them needed the other to survive. The businessman needed licenses to do business and the politician needed money to fight elections. In such a situation the concern for the society at large was lost.
It would not be fair to blame the corporations entirely. We as consumers, the society, the investors, and the government. . . we all failed to question the means by which corporations were achieving their ends.
The decade of nineties saw radical changes in the way the businesses operate in India. With the economy opening up, competition came in.
Established businesses, which had till then operated as monopolies, saw their profits dwindle. The media boom gave information to the consumers. The consumers had choices now and they began making decisions based on the information they had.
And this is when the corporations began to realise the need to take care of all the stakeholders rather than just the shareholders.
The revival: A ray of hope
'We must do something for the community from whose land we generate our wealth.' -- Brijmohan Lall Munjal, CMD, Hero Honda.
Social consciousness is the new leitmotif of the Indian corporations. Greed is no longer good as has been demonstrated by the fall of a few great American corporations.
Some of the family-owned business enterprises (FOBEs) in India have regularly maintained a certain level of expenditure for social and charitable causes. The Tatas lead this list. The Aditya Birla Group comes next.
But what comes as a surprise is the fact over the years Reliance group has upped its spending on corporate philanthropy.
Reliance founder chairman late Dhirubhai Ambani always said that Reliance's primary objective was creating shareholder value, although very late in life he did remark in an interview that he should have done more social work during his lifetime.
The increased spending of Reliance is because of that. A few FOBEs undertake a lot of charitable work but do not divulge the details.
ITC has also been involved with social initiatives. It is been involved with integrated watershed development and farm and social forestry. ITC, working with NGOs, has also tried to organise village women into micro credit groups.
Group members have been encouraged to create savings corpus by making monthly savings and this corpus is then used to give out loans to group members.
What is heart-warming is to see that the new generation of companies is increasingly realising the importance of giving back to the society.
Leading the pack are Infosys, Wipro, Hero Honda and Bharti Enterprises. These companies have taken various initiatives to promote and support the environment, education, health, cultural harmony and welfare in the society.
The Infosys Foundation in the past has provided Rs 38 lakh of financial assistance to war widows in various parts of India. It has also been involved with the construction of a super speciality hospital and reconstruction of schools in Andhra Pradesh and Karnataka.
The Azim Premji Foundation run by the Wipro chairman in his personal capacity is working on the universalisation of elementary education. As the Web site of the Foundation says: 'The Foundation believes that the only way to sustained Universalisation of Elementary Education is to improve the quality of learning in schools. All efforts will therefore be directed at interventions, partnerships and communications towards guaranteeing learning in the school.''
The road ahead
It is still to be seen whether the concept of CSR develops into a giant or will it fade away as quickly as its rise. One thing is sure that many large corporations have started taking CSR seriously, working with NGOs, government and voluntary workers to look at the problems plaguing the society and environment.
Whether they do so in the days to come remains to be seen. But a good start has been made and one does feel optimistic on this front.
For CSR to be more than a buzzword in the days to come top management support will be essential. Also as of now the best companies of India are serious about CSR, but in the days to come this seriousness needs to spread to other companies as well.

Tuesday, March 15, 2005

For God's sake, harness forex reserves now!

March 15, 2005,, Co-author-Vivek Kaul

Foreign Exchange reserves are basically held to achieve a balance between demand for and supply of foreign currencies.
The reserves also help in maintaining confidence in monetary and exchange rate policies and enhancing the capacity of the central bank to intervene in forex markets.
They help build a capacity to absorb shocks in times of crisis and provide the confidence that the economy is well placed to meet all external obligations. Also, reserves provide the security of backing domestic currency through external assets.
Further, it helps the country maintain the investor confidence required to attract the much-needed FDI in crucial sectors of the economy. The country also benefits by using the excess reserves to repay its liabilities.
India's foreign exchange reserves hit a record high in recent years and are currently placed at $137.55 billion as on the week ending March 4, 2005. Since the inception of economic reforms, forex reserves have risen continuously. However, the forex reserves in the past two years have been rising exponentially.
The swelling of forex reserves has become a macroeconomic issue. Policymakers, independent analysts and politicians have expressed some worry regarding the deluge of dollars into our economy over the past two years.
Nearly 50 per cent of our current forex reserves have been built up in the past 2 years. The question being asked is how have the reserves been built up, and whether they would start dwindling.
Some experts seem to suggest that the quantum of dollar flows is not explained by normal economic activity such as foreign direct investment, portfolio investment in stock markets, money sent by Indian workers abroad and bank deposits made by non-resident Indians.
So where is the forex coming from?
Analysis of components forming the inflows suggest that the upswing is mainly attributable to the resurgence in exports, increase in capital inflows (including foreign investment), stronger rupee and the reduction in the current account deficit.
It is possible that the substantial part of the forex inflows could be funds that have been held abroad over the years by the Indian business class.
Historically, Indian businesses, with some help from public lending institutions, have been known to over-invoice project imports and use it as an instrument to keep some money out of the country. Some of these funds may be coming back into the country, as confidence in the domestic economy, in the medium term has grown stronger.
The persisting weakness in the western economies, primarily the United States, has added to this reverse flow of funds.
Private transfers -- inward remittances by a large number of Indians who live abroad -- to families, into Foreign Currency Non-Resident (FCNR) accounts, and real estate, also represent a large portion of the inflows.
Furthermore, Indian companies today are able to raise debt and equity in foreign markets, and do so far more effectively than they could in the past. This again explains a part of the increasing forex reserves.
All this indicates that a good part of the increased dollar inflows are here to stay. The assessment by some analysts that these dollar inflows are merely in search of the interest rate differential that prevails between the US and India and can exit anytime is not entirely correct.
Although fund managers are parking their money in India due to the advantage they get from the positive interest rate differential, a lot of these funds, just as in other Asian economies, have come seeking a more permanent parking space.
The high reserves have certainly provided the much-required boost to investor confidence and given India a good image abroad.
India's forex reserves have been at a comfortable level for quite some time now, even after the traditional approach of assessing adequacy of foreign exchange reserves in terms of import cover has been broadened to include some important parameters, such as size, composition, risk of capital flows and international uncertainty.
With high reserves, high exports, and increasing foreign direct investment inflows, the economy is all set to ride the trajectory of higher growth. Thus, instead of worrying about the cost of holding such high reserves, the government would be better off capitalising on them to improve the country's image.
Intentions seem to be good. Prime Minister Manmohan Singh and Finance Minister P Chidambaram both send out the right signals about their commitment to development and providing the right environment for development. But, sadly, action seems to be missing.
So, what are the ways in which resources can be utilised in the most effective manner?
For one, there is definitely a case for revisiting and resetting the timetable for capital account convertibility. It is rather unfortunate that the debate has been put on the backburner.
It is time for the Reserve Bank of India to take a stand on whether it wants to follow the example of China and move towards a controlled exchange rate regime or is it ready to let the rupee float and dump its policy of buying the dollars to check the rupee from appreciating.
Being a developing economy with a large and growing manufacturing sector, our import demand is going to be continuously high in the coming years and we will need large forex reserves to meet this demand, especially when export growth may not be able to keep pace with import demand.
Further, if the economy grows at 8 per cent, and there is a revival in investment leading to an increase in import demand, all the excess reserves will stop accumulating.
The high foreign exchange reserves can be used to allow higher import of capital goods and technology to support the growing economy and for development purposes. Another alternative use of the reserves could be to use part of the inflows to replace external commercial borrowings.
Thus, the contradictory situation, where there is more commercial borrowing (large forex inflows) and lack of demand for domestic rupee resources, can be avoided.
A sizeable proportion of resources, taking the stock of forex reserves available, can be used for domestic investment in both the medium and long term.
A great debate on this issue seems to be going on these days and the present government seems to be more than inclined towards this proposal.
The government should also allow Indian residents to open foreign exchange -- say, dollar-denominated -- deposits in domestic banks. At present this is allowed with a lot of restrictions.
Another way to utilise these huge forex reserves would be to follow an aggressive policy in investing overseas, and outward FDI. Recent announcements are definitely steps in the right direction in this regard.
A lot of restrictions on investing in foreign markets have been relaxed. However, further steps need to be taken to further facilitate Indian companies to acquire foreign companies and brands by signing more bilateral investment and double taxation treaties.
While on the one hand so much can be done with the reserves, on the other hand the costs of reserve accumulation are rising, especially when accompanied by sterilisation.
Reserve accumulation means a poor country is lending money very cheaply to the United States and Europe. If the same resources were harnessed for investment, economic growth would accelerate, inflation would diminish, and the welfare gains would increase.
Unfortunately there is not enough happening to create sufficient demand for dollars. This has resulted in an appreciating rupee, which the country does not exactly want.
The reserves may not really be of that much concern if we are aiming for 8 per cent growth. In such a scenario, imports will also increase and we may not be looking at such a big import cover after all.
Therefore, the time has come to think up policy measures that would create greater import demand and widen the current account deficit. The policies must ensure that the piled up reserves are used to attain greater economic growth.
The debate on capital account convertibility should be restarted without any further delay. The government must also initiate aggressive FDI and trade policy reforms, promote exports aggressively and use the India Brand Equity Fund to create the India brand to boost export growth.
All this should be done with various components of the forex reserves in view. Devising an appropriate strategy to make productive use of reserves is as important as providing incentives for larger inflow of forex.