Ethical Business? – Oxymoron to Holistic Aspiration

Introduction

Post-graduate Management programs typically have a part-covering, or an integrated course often titled ‘Ethics, Sustainability, and Governance’. The coverage includes grounding on applied Ethics, Sustainability features in terms of external engagement, business practices, and resource consumption. The governance part sensitizes students on the need to have continual due diligence, checking accounts through various audits, having independent directors as conscience keepers, and to have various committees to enforce the ‘collective good’ including protecting minority shareholder’s interests.

While sustainability and governance topics get passed off with due respect these topics deserve, there is always a little cynical tone around ‘Business Ethics’. On a positive note, it is commented as an ‘aspiration’, and on a negative note, it is commented as ‘oxymoron’, any phrase that contains polar opposites. To promote applied ethics and bring-in the ethical approach to the business, potential ‘nava-randhras’ or ‘nine drains/holes’ must be addressed. Here is an effort made to identify and talk on these nine potential drains. We shall have a quick appreciative (not approving!) look at these ‘nava-randhras’, and the emanating issues from these.

Understanding ‘Ethical Downhills’ from ‘nava-randhras’

There are many potential holes and downhill paths that are faced or practiced by the organizations. We may remember that sin condoned is a sin committed. We shall examine the ‘nava-randhras’, nine leaky downhill points of serious interest that frequently happen in large industrial/commercial organizations. The attempt is purely for academic appreciation of the areas of interest, covered in a comprehensive ‘Ethics, Sustainability, and Governance’ course for third trimester PGDM students.

1.?????? Concept to Commercial facilitation - The very beginning of the business proposal and then taking-off have some ‘non-bright’ spots. Business proposal moving, entity registration, land allotment by the government, helping land acquisition (if no allotment is done), facilitating clearing of the squatters, conversion of the ‘land use’, all these have serious efforts needed that require ‘facilitation’. Lots of potential benefits that exist regarding land (for example 99 rupees yearly lease per acre for next 50 years!), water for industrial use (one rupee for hundred litres!), and pollutant release and dumping (not enforcing the sewage treatment). No wonder there are many facilitation agencies and services promising ‘consultants’ who offer their ‘paid services’ along each of these lines.

2. Consultants for Clearances - Once the land is in one’s ‘name’, getting due permissions along forest and environmental clearances will be needed to have the ‘ground-breaking’. So also carrying out the socio-economic surveys and other documentation building that is needed for submission purposes followed by financial closure, all will have ‘consultants’ involvement. Speed money gets legally channelized through these ‘consultant’ agencies, and this happens in an audit-proof manner.

3.?????? Accident/Incident Management - Execution stage arising issues of incidents/accidents are a serious concern. Once the construction begins at site, accidental occurrences may result in casualties. Under-reporting of the incident numbers and dumping the bodies in no-man’s land can happen in remote areas. When it is unavoidable, covering up through ‘Paid Post-mortems’ happens. Immediately right-brushed ‘Image Management’ is commissioned through friendly channels/ organizations/ agencies. Full-page advertisements on the ‘common good’ done or planned by the organization are issued. Here the newspapers face a conflict of interest. On one hand, these papers accept crores of rupees worth of full-page ads, and on the other hand they have the responsibility of reporting the ‘real’ happenings / occurrences. What prevails and which side gets moderated is easy to guess in these low conscience and high materialism times.

4.?????? Over-invoicing and cost-inflation – ‘Private benefit’ yielding procurements and cost inflation in procurements are commonly seen. Over-invoicing is a common practice that benefits the procuring party, as most of the surplus (cost ‘delta’) gets diverted to the private accounts of the concerned promoters/proxies. ‘Promoter-promoted’ third party companies/agencies are used for ‘routing’, and these generate inflated invoices. To illustrate, a company ‘A’ owned by the promoter ‘P’ buys overseas material from ‘C’ not directly but via a company ‘B’. Here ‘A’ is a public company and ‘B’ is the privately held company by promoter ‘P’. ‘C’ company would have sold the material for 1,000 rupees a unit to ‘B’, but ‘B’ shall offer the same to ‘A’ for 2,000. This unethically created ‘surplus’ through ‘routing’, benefits the promoter ‘P’ was easy to appreciate even to Management Trainees. Now it is almost public and general knowledge. Through the MoU route of procurements of output of ‘A’, the inflated cost of input gets ‘passed’ to the unsuspecting and indifferent end-customers.

5.?????? Flexible Cash Operations - Cash Generation and handling happen liberally to bring-in the flexibility. Large companies engage smaller ‘sub’ agencies who operate with and bring-in the required ‘flexibility’. This primes the ‘not so open’ expenses for various ‘special’ purposes. This ranges from hosting the local leaders/authorities, engaging muscle men, paying the educational expenses for wards of officials and more such. This is seen as an investment for good-will generation for ‘special’ benefits which can be encashed when needed by the company. This spending is seriously overseen and accounted for more than the other accounts!

6.?????? Compliance checks and ticks – Insiders find that compliance ‘Checks’ happen less frequently but ‘Ticks’ happens more frequently. With good intent, the early years’ governments instituted ‘maker and checker’ type of systems. These were along the many lines of Food / Drug / Labor / Boiler / ‘Law’ inspectors. These are supposed to carry out frequent inspections more to serve as ‘preventive.’ However, these authorities get greased appropriately for their ‘cooperation’ and hardly visit the sites but do ticking to make the compliances look to have happened. Elevators, fire-fighting systems in public places and such come under similar umbrella.

7.?????? Corporate Affairs’ indulgence – Corporate affairs is often the wing inside the organization that facilitates regulatory approvals and business development. They front the organization in negotiations for ‘deals.’ They help converge on favorable, ‘pricey’ MoUs with willing government agencies. How do they achieve ‘convergence’ is not very transparent. An example of this is, if the power can be bought at Rs. 2 per kwhr, Corporate Affairs shall make the deal happen with the government / government owned agency at an inch higher at 2+. This ‘+’ can even be a few paisa per unit, additional burden created on the government / government owned agency. It may appear a few paisa per unit for general users but estimating the quantum of ‘excess billing’ that gets generated if the involved units are hundreds of crores per year for the next 10 or 15 years, makes one get shocked. That becomes an additional burden for the procuring agency and benefits the organization. Corporate Affairs of companies generally have their planted agents or ‘friendly employees’ of the department at the other side to do the tasks and for agreed consideration.

8.?????? ‘Financial engineering’ - Tax/Duty management is done in a proactive manner by companies. Often the smart agencies manned by sharp and willing retired employees from the tax/duty agencies ‘advise’ on creative compliances and help in documentation building. Additionally, these retired ‘professionals’ bring-in their contacts for facilitating as well. These also help companies in gaining advanced heads-up on upcoming developments, including upcoming regulatory policies or additional exemptions that are on the anvil. Planning for execution in future for the organization happens in the present as the ‘present’ from engaged agency/consultants.

9.?????? Funding ‘expenses’ through foundations - Often the organizations mix up the promoter’s (major shareholder) interests with the company’s interests. This is not done without knowledge, but sadly with full awareness. Global case studies are available on struggling companies spending to gift private planes or sea-facing resort homes for their CEOs for their ‘performance’. Atleast such direct purchases can be directly attributable. On the other hand, if such spending happens through the ‘Social Foundations’ set up by the company, it becomes difficult to pin. Company accounts are clean, and foundation foots the bill. Additionally, choppers/buildings/cars bought by the promoter owned companies are used not for business purposes but for the promoter and ‘first’ family’s consumption. The social and environmental related activities taken up by such foundations often become ‘ego trips’ for the family. Often the overheads become so high that the spending becomes indefensible. We can’t afford to indulge in four/five times the amount ‘X’ to spend ‘X’ rupees on a CSR mission! Chartered plane to distribute a score or two laptops! One regular classroom example in our Mumbai context has been, when the teacher gives students 1,000, they shouldn’t spend Rs. 800 on a two-way taxi trip from Vile-Parle and back to do a 200 rupees charity act at Siddhi Vinayak temple! Too much overhead to actual spend ratio.

On an optimistic closing note

All the above problems have solutions. It takes effort to find one and willingness to implement likely unpleasant solutions. These are unpleasant to currently unethically benefiting stakeholders. Market forces always correct the deviant behaviour is a lofty expectation. We all shall be happy to witness such a ‘correction’ happen. Times have happened while waiting. When it is not happening in terms of company’s stock getting dumped or customer’s rejection of products/services of such ‘smart thinking’ companies, we must depend actively on regulatory agencies, and canvas actively for strong punitive actions. As per the ‘double loop learning’ logic, we need to have ‘ethical’ regulatory bodies and ‘ethical’ implementation agencies to enforce the punitive awards. These can serve as corrective for current and preventive for future misbehaviors. Better tomorrow shall dawn soon.