Tuesday, April 3, 2007

Global View

How do you build trust in the global marketplace?

The challenge for a rising economy is how to go beyond the trust based on family ties, clubs, neighborhood, caste and creed, especially in a diversified and multicultural society like India, so that investors can repose their faith in the system—a system that must be so open and transparent that it creates a spiral of trust. Tatas, Mittals and the Reliance boys are showing the way and building the infrastructure of global trust. There lies the future of India.
Doing business is essentially building social trust, which is a necessary condition for capital investment. Family is the basic unit of mutual trust. Families, whose members trust each other, because of transparency and openness, do well in business, provided they are enterprising and risk-take people. But in the age of globalization, when capital flow swirls like digits, trust cannot be limited to families.
When enterprising families join hands with government, business growth can be rapid in the initial stages, because regulatory constraints and market accountability can be waived to access credit and investment. The rapid economic growth of the South-East Asian tiger economies before the currency collapse in 1997 was not due to the miracle of Asian values but because of the government-family conglomeration of economic interests, contemptuously though rightfully called crony capitalism.
Although crony capitalism is present in every society, it flourishes best where flow of information, both economic and political, is limited. This has been the pattern in most of the Pacific Rim countries. China fits into this pattern at present.
But the protected family-based business system reaches its limits of growth when it needs infusion of technology and capital investment for expansion, which can come from sources outside the family. Investors, especially now when they have many competitive opportunities available all over the world and can electronically transfer their investments instantly, demand sunshine—transparency, openness and accountability.
Investors do not care, for example, whether Ford Motor sells or keeps its prestigious Aston Martin, the James Bond car (with price tags starting at $110,000 for the V-8 Vantage coupe), so long the company gets out of the red. Last year Ford posted a loss of $12.7 billion. The company has to rebuild its trust, even if it has to sell parts of it; or move its headquarters to some other country, as the oil service company, Halliburton is doing.
It is possible to create trust beyond the family-based business system but it can be done only under the supervision of an independent watchdog authority that creates a level-playing field for all. In the United States, the Security and Exchange Commission (SEC) monitors business corporations and stock markets. Markets are complex but fragile systems, which thrive not on family ties but on honest and open communication with investors.
Since the market crash of 1929 and the Great Depression, corporate America is required by the law to make full disclosures and communicate regularly with the investing public in certain prescribed manners, under the vigilance of the SEC. This has been the foundation of trust, which attracts millions of investors not only in America but also from rest of the world. A Japanese or Chinese would rather invest in Wall Street, where there are checks and balances, than in Shanghai where he may be playing the Russian roulette.
At the heart of the US market vigilance system is the anti-fraud provision (Rule 10b-5), which operates to prohibit insider trading. Insider trading is a serious crime and occurs when knowledgeable insiders in a corporation, who are privy to critical information not available to outside investors, purchase or sell the corporation’s securities, stocks and bonds based on prior knowledge.
To create an equal opportunity field for all investors, whether they live in Mumbai or work in the corporation, material information about the company must be made to the investing public by the release of reports to the financial press and general circulation newspapers promptly, without any attempt to mislead.
But rules and regulations are meaningless unless they are enforced and the violators punished. Take the notorious textbook case of R. Foster Winans, who many years ago wrote a column "Heard on the Street" for the Wall Street Journal, which analyzed market forces that might influence the price of a company's stock (Read his op-ed piece in the Times http://www.nytimes.com/2007/03/13/opinion/13winans.html). He also noticed that share prices rose or fell significantly after his column appeared. Snared by the temptation of making money on the inside information he collected for the column, he joined hands with a few stockbrokers and a copy clerk from the Journal. Their trading pattern was soon noticed by the SEC, which on investigation, found a conspiracy to commit security fraud through insider trading. The columnist and his co-conspirators were found guilty and sentenced to prison. The SEC and other agencies keep a hawk eye on the stock market, which is the source of America's vitality and worldwide trust in capitalism.
During the past few years so many US company executives have gone to jail. One of them was Martha Stewart of the Living Omnimedia who having served her time in jail for five years for inside trading is back in business and is doing well. The United States is a country of second chance. You fall and rise again.

1 comment:

  1. China fits into this pattern at present.

    Don't use your India's situation to judge China. China's enterprises changed from state-owned to capital-owned, not family-owned as India.

    In India, most of big companies are family-owned. Such as Tata, Infosys, Wipro........ any you can name.

    This articles shows how limited the author's knowledges are. A typical Indian bigmouth.