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The main questions addressed in this brief note are: a)
does the route to the attainment of macroeconomic financial
market development and its stability pass through principles
and practices of corporate governance? b) If yes, how
does the passage or mechanism work in terms of relevant
causes and effects?
The World Bank Annual Report 2002 stated that the loss
of over US $1 trillion in developing countries as a result
of banking crises in the 1980s and 1990s suggests an urgent
need for promoting a robust financial system. The role
of compliance with international standards of financial
reporting, accounting, monitoring and evaluation has been
emphasized in this context. Earlier, the global Financial
Stability Forum in its 2000 report of the Working Group
on Capital Flows recommended that national governments
should devise corporate laws and accounting regulations
to ensure financial transparency of assets and liabilities
and promote good corporate governance. It was suggested
that such an infrastructure could minimize financial crises
and promote proper risk management at corporate and investor
levels.
If cascading and contaminating effects of financial failures
at corporate and aggregative levels are to be avoided
there is an important need for the provision of a common
infrastructure for financial governance. This infrastructure
comprises: promotion of sound principles of corporate
governance in general and financial governance in particular;
provision of legal apparatus (including effective Arbitration
or other Alternate Dispute Resolution mechanisms) to support
investor rights and cost-effective enforcement of contracts;
promotion of competitive and efficient capital markets.
Is there any empirical evidence to support these prescriptions?
Let us summarise a few noteworthy studies. In an empirical
study of corporate finance in 49 countries La Porta et
al (1998) found that legal protection of shareholder rights
affects the degree of concentration of ownership, and
adversely influences access to equity financing. Good
financial accounting standards and shareholder protection
measures have been found to be associated with a lower
concentration of ownership; ownership is apparently a
response to the type and degree of legal provisions. Countries
with poor investor protection measures have been found
to have significantly smaller equity and debt markets.
The provision of broader laws of financial contracting
and enforcement affect the quality and efficacy of these
instruments.
Differences in the legal rights of creditors, and the
efficacy with which legal systems enforce those rights
account for over half of the cross-country variations
in banking development in a sample set of countries (Levine,
1998). The main features of creditor rights recognized
for the analysis were: whether a country’s laws impose
an automatic stay on the assets of the firm upon its filing
a reorganization petition (whereby banks cannot gain possession
of collateral or liquidate the firm to meet loan obligations),
whether the firm itself or some other court-ordered team
manages the firm during the process of reorganization,
and whether secured creditors have seniority over others
in the distribution of proceeds of the firm in the event
of dissolution. Let us recognize that the latter is material
only when the rule of law enables cost-effective enforcement
of such rights.
Is there a win-win scenario where companies adopt good
governance, get rewarded, and thus contribute toward aggregate
performance efficiency? There seem to be very few empirical
studies that go beyond one-to-one cause and effect relationship
between firm value maximization as a return to good corporate
governance practices. A notable exception is the following.
Black et al (2002) examined the evidence for Korean case
and found that corporate governance is a major determinant
of the firm value. The study has included 540 major companies
(not all of these are financial companies, however) and
the cross-section study has been limited to the year 2001.
Their index of corporate governance comprised the components
including shareholder rights, role of the corporate board
of directors, information disclosures to investors, and
audit practices. The above summary points to the complementarities
of efficient provision of legal infrastructure, corporate
governance, firm value, and financial stability at corporate
and macroeconomic levels. The role of public authorities
in providing requisite infrastructure is seen as significant
as the practices of private entities. Clearly substantial
additional investigations are useful to pin down several
specific ingredients relevant for promoting corporate
governance in relation to financial governance.
References
Black,
B. S., H. Jang and W. Kim, 2002, Does Corporate Governance
affect Firm Value? Evidence from Korea, Stanford Law and
Economics Olin Working Paper 237, Stanford University.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer and R.
W. Vishny, 1998, Law and Finance, Journal of Political
Economy, 106, 1113-1155.
Levine, R., 1998, The Legal Environment, Banks, and Long-Run
Economic Growth, Journal of Money, Credit, and Banking,
30, 596-613.
Rao, P. K., 2003, Development Finance, Berlin: Springer-Verlag.
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Ladies
and gentlemen,
It
is a pleasure to be here at the Lal Bahadur Shastri Institute
of Management. Lal Bahadur Shastri was a man of strong
values and he epitomized simple living. He was a freedom
fighter and innovative administrator who contributed to
nation building in full measure. It is indeed a matter
of pride for me to be chosen for the Lal Bahadur Shastri
Award for Public Administration and Management Sciences.
I thank the jury for this honor.
When
I got the invitation to speak here, I decided to speak
on an important topic on which I have pondered for years
- the role of Western values in contemporary Indian society.
Coming from a company that is built on strong values,
the topic is close to my heart. Moreover, an organization
is representative of society, and some of the lessons
that I have learnt are applicable in the national context.
In fact, values drive progress and define quality of life
in society.
The
word community joins two Latin words com ("together"
or "with") and unus ("one"). A community,
then, is both one and many. It is a unified multitude
and not a mere group of people. As it is said in the Vedas:
Man can live individually, but can survive only collectively.
Hence, the challenge is to form a progressive community
by balancing the interests of the individual and that
of the society. To meet this, we need to develop a value
system where people accept modest sacrifices for the common
good.
What
is a value system? It is the protocol for behavior that
enhances the trust, confidence and commitment of members
of the community. It goes beyond the domain of legality
- it is about decent and desirable behavior. Further,
it includes putting the community interests ahead of your
own. Thus, our collective survival and progress is predicated
on sound values. There are two pillars of the cultural
value system - loyalty to family and loyalty to community.
One should not be in isolation to the other, because,
successful societies are those which combine both harmoniously.
It is in this context that I will discuss the role of
Western values in contemporary Indian society.
Some
of you here might say that most of what I am going to
discuss are actually Indian values in old ages, and not
Western values. I live in the present, not in the bygone
era. Therefore, I have seen these values practiced primarily
in the West and not in India. Hence, the title of the
topic. I am happy as long as we practice these values
- whether we call it Western or old Indian values.
As
an Indian, I am proud to be part of a culture, which has
deep-rooted family values. We have tremendous loyalty
to the family. For instance, parents make enormous sacrifices
for their children. They support them until they can stand
on their own feet. On the other side, children consider
it their duty to take care of aged parents. We believe:
Mathru devo bhava - mother is God, and pithru devo bhava
- father is God. Further, brothers and sisters sacrifice
for each other. In fact, the eldest brother or sister
is respected by all the other siblings. As for marriage,
it is held to be a sacred union - husband and wife are
bonded, most often, for life. In joint families, the entire
family works towards the welfare of the family. There
is so much love and affection in our family life. This
is the essence of Indian values and one of our key strengths.
Our families act as a critical support mechanism for us.
In fact, the credit to the success of Infosys goes, as
much to the founders as to their families, for supporting
them through the tough times.
Unfortunately,
our attitude towards family life is not reflected in our
attitude towards community behavior. From littering the
streets to corruption to breaking of contractual obligations,
we are apathetic to the common good. In the West - the
US, Canada, Europe, Australia, New Zealand - individuals
understand that they have to be responsible towards their
community. The primary difference between the West and
us is that, there, people have a much better societal
orientation. They care more for the society than we do.
Further, they generally sacrifice more for the society
than us. Quality of life is enhanced because of this.
This is where we need to learn from the West.
I
will talk about some of the lessons that we, Indians,
can learn from the West.
In
the West, there is respect for the public good. For instance,
parks free of litter, clean streets, public toilets free
of graffiti - all these are instances of care for the
public good. On the contrary, in India, we keep our houses
clean and water our gardens everyday - but, when we go
to a park, we do not think twice before littering the
place.
Corruption,
as we see in India, is another example of putting the
interest of oneself, and at best that of one's family,
above that of the society. Society is relatively corruption
free in the West. For instance, it is very difficult to
bribe a police officer into avoiding a speeding ticket.
This is because of the individual's responsible behavior
towards the community as a whole. On the contrary, in
India, corruption, tax evasion, cheating and bribery have
eaten into our vitals. For instance, contractors bribe
officials, and construct low-quality roads and bridges.
The result is that society loses in the form of substandard
defence equipment and infrastructure, and low-quality
recruitment, just to name a few impediments. Unfortunately,
this behavior is condoned by almost everyone.
Apathy
in solving community matters has held us back from making
progress, which is otherwise within our reach. We see
serious problems around us but do not try to solve them.
We behave as if the problems do not exist or is somebody
else's. On the other hand, in the West, people solve societal
problems proactively.
There
are several examples of our apathetic attitude. For instance,
all of us are aware of the problem of drought in India.
More than 40 years ago, Dr. K. L. Rao - an irrigation
expert, suggested creation of a water grid connecting
all the rivers in North and South India, to solve this
problem. Unfortunately, nothing has been done about this.
The story of power shortage in Bangalore is another instance.
In 1983, it was decided to build a thermal power plant
to meet Bangalore's power requirements. Unfortunately,
we have still not started it. Further, the Milan subway
in Bombay is in a deplorable state for the last 40 years,
and no action has been taken. To quote another example,
considering the constant travel required in the software
industry; five years ago, I had suggested a 240-page passport.
This would eliminate frequent visits to the passport office.
In fact, we are ready to pay for it. However, I am yet
to hear from the Ministry of External Affairs on this.
We, Indians, would do well to remember Thomas Hunter's
words: Idleness travels very slowly, and poverty soon
overtakes it.
What
could be the reason for all this? We were ruled by foreigners
for over thousand years. Thus, we have always believed
that public issues belonged to some foreign ruler and
that we have no role in solving them. Moreover, we have
lost the will to proactively solve our own problems. Thus,
we have got used to just executing someone else's orders.
Borrowing Aristotle's words: We are what we repeatedly
do. Thus, having done this over the years, the decision-makers
in our society are not trained for solving problems. Our
decision-makers look to somebody else to take decisions.
Unfortunately, there is nobody to look up to, and this
is the tragedy.
Our
intellectual arrogance has also not helped our society.
I have traveled extensively, and in my experience, have
not come across another society where people are as contemptuous
of better societies as we are, with as little progress
as we have achieved. Remember that arrogance breeds hypocrisy.
No other society gloats so much about the past as we do,
with as little current accomplishment. Friends, this is
not a new phenomenon, but at least a thousand years old.
For instance, Al Barouni, the famous Arabic logician and
traveler of the 10th century, who spent about 30 years
in India from 997 AD to around 1027 AD, referred to this
trait of Indians. According to him, during his visit,
most Indian pundits considered it below their dignity
even to hold arguments with him. In fact, on a few occasions
when a pundit was willing to listen to him, and found
his arguments to be very sound, he invariably asked Barouni:
which Indian pundit taught these smart things!
The
most important attribute of a progressive society is respect
for others who have accomplished more than they themselves
have, and learn from them. Contrary to this, our leaders
make us believe that other societies do not know anything!
At the same time, everyday, in the newspapers, you will
find numerous claims from our leaders that ours is the
greatest nation. These people would do well to remember
Thomas Carlyle's words: The greatest of faults is to be
conscious of none. If we have to progress, we have to
change this attitude, listen to people who have performed
better than us, learn from them and perform better than
them. Infosys is a good example of such an attitude.
We
continue to rationalize our failures. No other society
has mastered this art as well as we have. Obviously, this
is an excuse to justify our incompetence, corruption,
and apathy. This attitude has to change. As Sir Josiah
Stamp has said: It is easy to dodge our responsibilities,
but we cannot dodge the consequences of dodging our responsibilities.
Another
interesting attribute, which we Indians can learn from
the West, is their accountability. Irrespective of your
position, in the West, you are held accountable for what
you do. However, in India, the more 'important' you are,
the less answerable you are. For instance, a senior politician
once declared that he 'forgot' to file his tax returns
for 10 consecutive years - and he got away with it. To
quote another instance, there are over 100 loss making
public sector units (central) in India. Nevertheless,
I have not seen action taken for bad performance against
top managers in these organizations.
Dignity
of labor is an integral part of the Western value system.
In the West, each person is proud about his or her labor
that raises honest sweat. On the other hand, in India,
we tend to overlook the significance of those who are
not in professional jobs. We have a mindset that reveres
only supposedly intellectual work. For instance, I have
seen many engineers, fresh from college, who only want
to do cutting-edge work and not work that is of relevance
to business and the country. However, be it an organization
or society, there are different people performing different
roles. For success, all these people are required to discharge
their duties. This includes everyone from the CEO to the
person who serves tea - every role is important. Hence,
we need a mindset that reveres everyone who puts in honest
work.
Indians
become intimate even without being friendly. They ask
favors of strangers without any hesitation. For instance,
the other day, while I was traveling from Bangalore to
Mantralaya, I met a fellow traveler on the train. Hardly
5 minutes into the conversation, he requested me to speak
to his MD about removing him from the bottom 10% list
in his company, earmarked for disciplinary action. I was
reminded of what Rudyard Kipling once said: A westerner
can be friendly without being intimate while an easterner
tends to be intimate without being friendly.
Yet
another lesson to be learnt from the West, is about their
professionalism in dealings. The common good being more
important than personal equations, people do not let personal
relations interfere with their professional dealings.
For instance, they don't hesitate to chastise a colleague,
even if he is a personal friend, for incompetent work.
In India, I have seen that we tend to view even work interactions
from a personal perspective. Further, we are the most
'thin-skinned' society in the world - we see insults where
none is meant. This may be because we were not free for
most of the last thousand years.
Further,
we seem to extend this lack of professionalism to our
sense of punctuality. We do not seem to respect the other
person's time. The Indian Standard Time somehow seems
to be always running late. Moreover, deadlines are typically
not met. How many public projects are completed on time?
The disheartening aspect is that we have accepted this
as the norm rather than the exception.
In
the West, they show professionalism by embracing meritocracy.
Meritocracy by definition means that we cannot let personal
prejudices affect our evaluation of an individual's performance.
As we increasingly start to benchmark ourselves with global
standards, we have to embrace meritocracy. In the West,
right from a very young age, parents teach their children
to be independent in thinking. Thus, they grow up to be
strong, confident individuals. In India, we still suffer
from feudal thinking. I have seen people, who are otherwise
bright, refusing to show independence and preferring to
be told what to do by their boss. We need to overcome
this attitude if we have to succeed globally.
The
Western value system teaches respect to contractual obligation.
In the West, contractual obligations are seldom dishonored.
This is important - enforceability of legal rights and
contracts is the most important factor in the enhancement
of credibility of our people and nation. In India, we
consider our marriage vows as sacred. We are willing to
sacrifice in order to respect our marriage vows. However,
we do not extend this to the public domain. For instance,
India had an unfavorable contract with Enron. Instead
of punishing the people responsible for negotiating this,
we reneged on the contract - this was much before we came
to know about the illegal activities at Enron. To quote
another instance, I had given recommendations to several
students for the national scholarship for higher studies
in US universities. Most of them did not return to India
even though contractually they were obliged to spend five
years after their degree in India. In fact, according
to a professor at a reputed US university, the maximum
default rate for student loans is among Indians - all
of these students pass out in flying colors and land lucrative
jobs, yet they refuse to pay back their loans. Thus, their
action has made it difficult for the students after them,
from India, to obtain loans. We have to change this attitude.
Further,
we Indians do not display intellectual honesty. For example,
our political leaders use mobile phones to tell journalists
on the other side that they do not believe in technology!
If we want our youngsters to progress, such hypocrisy
must be stopped.
We
are all aware of our rights as citizens. Nevertheless,
we often fail to acknowledge the duty that accompanies
every right. To borrow Dwight Eisenhower's words: People
that values its privileges above its principles soon loses
both. Our duty is towards the community as a whole, as
much as it is towards our families. We have to remember
that fundamental social problems grow out of a lack of
commitment to the common good. To quote Henry Beecher:
Culture is that which helps us to work for the betterment
of all. Hence, friends, I do believe that we can make
our society even better by assimilating these Western
values into our own culture - we will be stronger for
it.
Most
of our behavior comes from greed, lack of self-confidence,
lack of confidence in the nation, and lack of respect
for the society. To borrow Gandhi's words: There is enough
in this world for everyone's need, but not enough for
everyone's greed. Let us work towards a society where
we would do unto others what we would have others do unto
us. Let us all be responsible citizens who make our country
a great place to live. In the words of Churchill: Responsibility
is the price of greatness. We have to extend our family
values beyond the boundaries of our home.
Finally,
let us work towards maximum welfare of the maximum people
- Samasta janaanaam sukhino bhavantu. Thus, let us - people
of this generation, conduct ourselves as great citizens
rather than just good people so that we can serve as good
examples for our younger generation.
Thank
you.
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