Corporations are privileged citizens now. IndiGo crisis shows boards must answer to society

Corporations resent regulations that curb their freedom to operate. If they want to be trusted, they should respond to society’s needs, rather than lobbying against regulations.

Passengers stranded at Indira Gandhi International Airport amid IndiGo flight delays and cancellations | ANI

The breakdown of governance systems in IndiGo, the country’s largest airline, admired for its world-class operational standards (so far), is another reminder of the need to reform corporate governance. The management failed to prepare the airline to comply with the changes in regulations required by the government for ensuring the safety of passengers and the health of its pilots, leading to an operational crisis that lasted for days.

In the wake of this, the Institute of Company Secretaries of India (ICSI) has called for “stronger board oversight”, also noting “an urgent need for strengthened corporate governance practices across India.”

A corporation’s board is not merely a supra-management body supervising management. The board has broader responsibilities to ensure that good management systems are functioning to enable the corporation to fulfil its responsibilities to all its stakeholders, not only its financial investors.

Yet, around the world, business corporations are viewed as purely economic institutions, whose primary, if not sole, purpose is to produce financial returns for their investors.

 

Corporates as privileged citizens

With shareholder value as the ultimate measure of performance, customer and employee satisfaction, as well as social responsibility, have become merely means to an end, not values in their own right.

In this narrow frame of reference, public perceptions of damage caused by the corporation to the environment and community, which harm customer confidence and the brand, are seen only as risks for investors, rather than deeper failings of corporate responsibility to society.

Indeed, according to most strategy consultancies and business management schools, the justification for CSR (corporate social responsibility) is the positive effect it can have on long-term shareholder value. In this view, if CSR had no effect on shareholder value, it would not be worth bothering about.

Nevertheless, corporate leaders would not like to be seen as doing bad things.

No corporation today would like to be compared with the East India Company, one of the earliest instances of the modern corporation with limited liability. It was expressly created to produce returns for shareholders in London, and given permission to operate in India and the East. While paying attention to its shareholders’ requirements, it was insensitive, to say the least, to the needs of the societies in which it operated. It induced, even forced, farmers in Eastern India to abandon growing food crops on their fields, and instead to grow indigo and opium for the company’s trading operations. It forcibly opened Chinese markets for import of opium. The company made enormous profits from such operations while destroying the lives of millions in India and China.

The East India Company is long gone, but the imbalance it embodied is not.

Capitalist corporations are legal constructs created by society to provide fair returns to investors. Corporations have acquired all the rights of individuals under the law—rights such as free speech, protection of property, and due process for justice. At the same time, corporations have been granted limited liability for their actions, whereas individuals are completely liable for their actions, and can be put away for life, or even lose their lives as punishment. Individual office-bearers within corporations can be punished, but the corporate citizen lives on. And whereas natural human beings must perforce die at some time, corporations—artificial citizens—can carry on perpetually.

Thus, corporations have become privileged citizens of societies. With special privileges must come greater responsibility. When combined with the enormous financial clout they have within society, spreading across the jurisdictions of sovereign nations, corporations have acquired a power in human affairs that ordinary citizens do not have: to change laws to suit their needs.

 

The business responsibility ladder

 Laws are created when societies find that informal contracts are not being observed, or cannot be enforced without the power of the law and the state behind them. Corporations resent regulations that curb their freedom to operate; they would rather be trusted to do the right thing. However, if they want to be trusted, corporations should proactively listen to, and respond to, society’s needs, rather than lobbying against regulations.

Whether they are sensitive or not, corporations interact with society in five domains. They are like five rungs up a ladder of business responsibility.

The first, accountability to investors and lenders—the financial domain, covering corporate accounting, auditing, corporate law, and stock market regulators. This is the principal focus of corporate governance.

Second, accountability to the direct participants in the corporate value-creation process—customers, employees, and vendors. This encompasses the domain of consumer protection, labour laws, and commercial contracts, and remains the secondary focus of corporate management. Corporations would rather not have laws and regulators tell them what they must do for their customers’ and employees’ well-being. They would rather be left alone to voluntarily do what is right. This, of course, is not happening, with the IndiGo embroglio being the latest example.

Third, accountability for the effect of their operations on the physical environment; the domain of environmental regulations.

Fourth, accountability for the general human condition around their operations—health, education, employment; here corporate responsibility is not much regulated, and these domains are the focus of most corporate philanthropy.

Fifth, accountability for the good governance of the societies in which they operate—human rights, fair democratic practices, etc. Corporations want the ‘rule of law’ wherever they operate. The question is, what should the laws be and whose rights should the laws protect? The rights of the most powerful citizens, and corporations who are the most powerful citizens of all? Or the rights of the least powerful and poorest citizens when they are trampled upon by corporations’ legal rights?

With the dictum that the business of business must be only business, which has ruled capitalism since the end of the last century, corporate boards have not advanced much beyond the first two rungs of the business responsibility ladder. Sadly, even those who had climbed higher have been pulled down toward the first rung to respond to the demands of stock markets and financial investors. Stock prices seem to have become the prime metric of a company’s good governance. Stock markets have even become a measure of the health of a national economy and its governance.

Boards must drive reform

Corporate boards would do well to look at broader indicators of whether their company is fulfilling its responsibility to society. They must ensure that the CEO and executives they oversee are not carrying their quest for efficiency for profit production so far that society is being harmed. Else the company’s license to operate will be curtailed. And even though the corporate sector is lobbying for less regulation of the economy to release entrepreneurial energies, regulators will have to tighten controls to protect society and the environment.

The boards of large companies must also voluntarily reform their governance systems. The process of institutional reform is like redesigning an airplane that is flying, with its passengers and crew in it. The plane cannot be grounded; it must keep flying. The condition of many systems in the airplane must be checked and changed while the plane is in the air. This is the responsibility of the board of the company.  The board must conduct a comprehensive governance audit; then, improve and modify some systems and add on new ones to provide the plane with new capabilities. A principal requirement is a system for voluntarily measuring, periodically, the satisfaction of societal stakeholders with the performance of the corporation.

Arun Maira, a former member of the Planning Commission, is the author of ‘Transforming Capitalism: Business Leadership to Improve the World for Everyone’. Views are personal.

(Edited by Asavari Singh)