Tuesday, February 3, 2009

India: A two-book nation

Can India rebuild global trust?

From The Statesman

The challenge of Satyam is the challenge for a rising economy, a rising nation that wants to play a global role: how to go beyond the trust based on family ties, old boys’ network, caste and religion, especially in a diversified and multicultural world, so that investors can repose their faith in the system ~ a system that must be so open and transparent that it creates verifiable trust; and trustworthiness. There lies the future of India.

But what is trust? Carolyn McLeod writes in Stanford Encyclopedia of Philosophy that “Trust is both important and dangerous. It is important because it allows us to form relationships with others and to depend on others ~ for love, for advice, for help with our plumbing, or what have you ~ especially when we know that no outside force (for example, the law) compels them to give us such things.” But trust can be risky because the trusted person or organisation may not be able to fulfil the obligation whether it is due to inability or changed circumstances. Or sheer greed, as it happened in the case of Wall Street trader Bernard Madoff whose Ponzi (pyramid) scheme defrauded investors of $50 billion, including several charities, Hollywood celebrities and his own Jewish community members, who trusted him as one of their own. Satyam’s B Ramalinga Raju is a mirror image of Bernard Madoff. Crooks are found everywhere.

Erosion of trust is a global phenomenon. President Barack Obama sees the rebuilding of public trust as one of his major challenges and therefore the subject of transparency reverberates in his public communication; for example, in a memo on the Freedom of Information Act he said that the government would work “to ensure the public trust and establish a system of transparency, public participation, and collaboration. Openness will strengthen our democracy and promote efficiency and effectiveness in Government.” What is good for the government is equally good for corporate governance.

Doing business is essentially building social trust, which is imperative for foreign direct investment (FDI) especially if a company is dependent upon global customers as many Indian companies are increasingly becoming. 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-taking people. But in the age of globalisation, when capital flows in and out at warp speed, 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 growths of companies like Satyam was not due to the miracle of unique Indian entrepreneurial spirit but because of the government-family conglomeration of economic interests, contemptuously though rightfully called crony capitalism.

To build a company like Satyam you need more than one person; you need a community ~ of political supporters. Although crony capitalism is present in every society, it flourishes best where the flow of information, both economic and political, is limited. This has been the pattern in most of the Asian countries and India fits into this pattern. India is a two-book nation and if you are in the accounting & auditing profession, you know what I mean, don’t you? A few years ago, I asked an Indian economic expert visiting the Tuck School of Business at Dartmouth about the size of the informal (black) economy in India; he said it might be about 40 per cent. If Satyam were only a local domestic company, it would have easily gotten out of the trouble. In fact no one would have noticed any problem. But being a global player, Raju like Madofff, went to jail.

The protected family-based business system reaches its limits of growth when it needs infusion of technology and capital 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, the new mantra of the Obama administration. You cannot separate business from politics, global corporate from global politics. 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 do not thrive on family ties but on honest and open communication with investors. But even the best system is open to abuse, as we have been painfully observing (and suffering the consequences of) what has been happening to some of the legendary banks and financial institutions.

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. At the heart of the US market vigilance system is the anti-fraud provision, which is supposed to operate in order 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 are investors or employees of 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.

This had been the foundation of trust, which attracted millions of investors not only in the United States but also from rest of the world. That trust has suddenly disappeared. Rebuilding global trust is the biggest challenge for corporate and political leadership in the age of uncertainty.

(ND Batra is professor of communications at Norwich University)

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