The article is consultants from McKinsey who talk about how the future of companies is intricately tied to the socio-political issues of the times. These days, the issues are far more in number - and social lobbyists far too strong – for companies to ignore them. The solution is to adopt a strategic long-term approach, and engage with NGO’s, Govt. etc. for two reasons: • These issues can affect their reputations if the companies are seen as culpable • Companies may capitalize on the issues as business opportunities.
Companies have a social contract (Hobbes, Locke, and Rousseau) as a set of laws, regulations and obligations that guide corporate behaviour. These vary from industry to industry, region to region. • It can be formal, like regulations/ laws (what Enron faced), • Or informal, like labour standards, healthy food (related to obesity etc. ), environment These are complex – eg. A bank is expected not to lend to companies that are harmful to nation, but also grant equal access to all. The 5 R’s: Risk: Predict and handle new risks that result from changing societal expectations.
(If you react late to an issue, it might hurt your reputation. Eg: ‘green’, ‘climate change etc. ) Renewal: Approach societal expectations as opportunities for growth (new products, processes, markets). (Eg: Hybrid cars) Regulation: Shape policy agendas to reflect society’s and company’s interests. Relationship: Identify stakeholders to build relationships. (NGO, Govt. ) Reputation: Foster public trust, not just with PR, but with action. (One wrong step can cause great harm. Promote consumer concerns, and demonstrate your progress on them) How to tackle these issues:
Prioritize Issues: (Public concern and effect on company) Collaborate: with NGO’s, Govt. , or other companies. (May also choose to capture early bird advantage and not collaborate with competitors, in some situations) Communicate clearly: Show people you’re making a trade-off between profit and common good Lead from the top: CEO should set example Become an agent for change: Indulge in debates, speak to diverse people. How to Manage government and Influence Politics Rishikesha T. Krishnan “How to Manage Government and Influence Politics” Sensex, April-June 2009.
Amartya Singh(0911291) The article basically talks about the association between the government and the corporate India. The article starts with the liberalisation in 1991. Initially the Industry has raised its opposition to the deregulation process. Later, they realised the benefits of exploiting new opportunities, which clearly outweighed the benefits of a previously protectionist regime. The author gives several example as to how various policies by government have helped the business enterprises:- 1. India’s power projects, post 1991, benefitted companies more than public.
2. During Deregulation in telecom sector, licensing conditions had to be completely changed to rescue the telecom conditions who had given over-optimistic bids 3. Land acquisition for companies in India still requires political support(Eg – Sterlite over POSCO in Orissa) 4. Lack of clear regulatory authority by TRAI, CERC, IRDA. 5. Legal system not as fast as China. Late resolving of cases. In some cases, Indian firms have had vested interests in delaying court decisions 6. Lack of competition regulation in India Importance of Politics.
The only constraint before the politician-business-bureaucrat nexus is the democratic electoral compulsions. The closures of Dabhol power project, pulling back SEZ formation in West Bengal in face of oppositions and maintenance of power tariffs for small domestic consumers are some examples. Another issue of interest for politics and business people is the availability of skilled manpower. Industry bodies have been involved in development of skilled manpower. E. g –Infosys. CII has setup a center of excellence for development.
While many business people have entered politics of late, there have not been many business men taking up stands to fight on contentious issues. The exceptions include Ratan Tata against violence in Nandigram and Anu Aga against Gujarat riots Politicians owning institutes of higher education has also been controversial. In Perfect Balance Indian government has lobbied hard abroad for the rights of the Indian businessmen. E. g – in acquisition of Arcelor Mittal by LNM and lobbying against protectionism by Obama government for the betterment of the outsourcing companies.
The government has not taken proper care of labour rights vis-a-vis companies The article concludes by saying that an understanding has been reached between the current UPA government and the business industry. Equilibrium has been reached which will perhaps be disturbed if say BSP comes to power at the center. The Corporation The Social Responsibility of Business is to Increase its Profits Milton Friedman “The Social Responsibility of Business is to Increase its Profits”, New York Times Magazine, September 13, 1970. Ashis Nayak(0911296)
Writer Friedman doesn’t buy to the concept of businessmen speaking eloquently about “businesses have social responsibility” According to him (a) Business or corporation having social responsibility is a vague statement with corporation being an artificial person/entity; but it’s the corporate executives who have the social responsibilities. (b) Again the corporate executives are the persons who are appointed by the owners or the stockholders of the firm to run their business; His first responsibility is to adhere to the stockholders’ interest;
(c) When these corporate executives exhibit social responsibilities, they do with their own money, let it be to the community or to the church they go to; but again, it is their personal social responsibility not the corporation’s. (d) The executives perform social responsibilities when they use the company’s profit or the money for some social acts like using costlier techniques (which is consuming company’s profit) to reduce the pollution generated by the firm and likewise; in these cases he is using someone else’ money for the social cause.
But in this case there is every chance of him being fired. So, it is a very improbable case. (e) In certain cases the companies act on Social corporate responsibilities (CSR) but they are stunts performed to reduce their tax. They use the money they would have given to government as tax for SCR. All in all the only CSR for corporations is to use its resources and engage in activities designed to gain profit so long it remains within the rules and regulations of the game without deception or fraud. The Corporation’s Rise to Dominance.
Joel Bakan “The Corporation’s Rise to Dominance” [Chapter 1 from Joel Bakan The Corporation: The Pathological Pursuit of Profit and Power, Free Press, 2004] Jagadeesh R (0911313) Note: This article is not the author’s opinion, but merely a roster of events tracking the history of emergence of corporations through major events arranged in their chronological order. The corporations have managed to rise from relative obscurity to become the world’s largest economic institutions, their remarkable growth is analysed below: From late 16th Century to the Bubble Act:
The corporation first emerged in the late sixteenth century with the basic idea of separating ownership from management. This was a departure from the prevalent form of business then, Partnerships, where the owners ran the business. Sceptics argued that this was a recipe for corruption and scandal, stemming from the fact that other people’s money was being poured into the company run by managers. This was indeed what happened between 1690 and 1720, when many bogus companies were floated in London’s Exchange Alley which flourished on speculation, only to collapse soon after.
After the collapse of South Sea Company, taking down many people with it, the Bubble Act (1720) was passed by the British Parliament, which outlawed the creation of corporate bodies. From 1712 to the repeal of Bubble Act: In 1712, the steam-driven machine unwittingly started the Industrial revolution, leading to the development of large-scale industries such as textiles, mining, breweries and distilleries. These industries required more capital investment, thus leading to an explosion in the number of corporations in the US.
England, not to be left behind, repealed its Bubble Act in 1825. From early 19th century to the Limited Liability Act: With the invention of the steam locomotive, railways became the engines of growth of the corporation. Since railways were mammoth undertakings requiring huge capital investments, they soon became heavily reliant on the corporate form of financing. This led to a national market for company securities, with numerous people investing in it. Despite its popularity, the stock market still had one major barrier, which kept the middle-class out of the process.
Unlimited liability – which meant, irrespective of the amount invested, every shareholder was personally liable to pay the debts incurred by the company without a limit. Supporters for limited liability mushroomed, selling the idea to be an antidote to class conflict by co-opting workers into the capitalist system. They predicted that once the limited liability was brought into force, the common man would become a shareholder. There were some detractors of the idea too who believed it would undermine personal moral responsibility.
Nevertheless, limited liability was incorporated into the law in 1856 in England, followed by the US. By the early years of the 20th century, numerous publicly traded corporations dotted the economic landscape. Early 20th century to the Great Depression: The era of corporate capitalism began with many provinces relaxing restrictions on corporations, especially regarding mergers and acquisitions, this lead to the consolidation of many individually owned enterprises into a few huge corporations. Corporations assumed the role of a ‘person’, complete with rights to ‘due process of law’ and ‘equal protection of the law.
The voices of the stockholders died out in large corporations. With their size, their powers grew, making them unpopular among the general public who viewed them as soulless leviathans. Sensing their vulnerability to public discontent and organised dissent from growing labour movements, huge corporations like AT&T and GM launched advertising campaigns aimed at humanising and softening their image. Especially after the great depression, to reverse the adverse public opinion, the corporations initiated Corporate Social Responsibility. From the New Deal to Neoliberalism: Post depression, Franklin D.
Roosevelt created the New Deal, which among other things curbed the powers and freedom of the corporations. This stifled the unbridled growth of the corporations. Then, the advent of technology and convergence of ideology and law in the 1970s led to economic globalisation. This together with the crisis created by the surging oil prices led the governments to embrace neoliberalism. Thatcher and Reagan who came to power in late 70s were active proponents of neoliberalism, whose core policies were deregulation and privatisation. The era of WTO: Technology grew rapidly and aided in the rapid advent of globalisation.
Corporations were no longer limited to a particular country and now scoured the earth for cheap labour and rich markets. Thus corporations now leveraged their independence to dictate terms to governments. States started deregulating and slashing taxes with little regard to social welfare, to attract investments. With the creation of WTO (1993), all regulatory measures weakened. It became a powerful, corporate-influenced overseer of government’s mandate. The states who became members came under pressure from WTO to change or repeal laws designed to protect public interest, which hindered trade.
Governments lost their abilities to protect their citizens from corporate exploitations. The curse of power: In the present day, though the corporations have arguably become more powerful than governments, it is their very power, which makes them vulnerable. Corporations today attract mistrust, fear and demands of accountability as in the past. And they, like their predecessors, are trying to humanise their image through branding exercises. Corporate social and environmental responsibility is offered today as an answer to the growing public concerns.
Beyond just being a marketing strategy, CSR lends legitimacy and presents corporations as responsible and accountable rulers of the society. The Biggest Contract Ian Davis “The Biggest Contract” The Economist May 26, 2005 Om Prakash H (0911322) This article tries to shed light on the long-running debate about the role of the business in society. Ppl on one side argue that the “business of business is business”. Social issues are not of prime concern to the corporate management. Their sole purpose is to create shareholder value. On the other side, we have the corporate social responsibility(CSR).
But both fail to notice the significance of social issues to business’s success, and the contribution of business to society. Now we talk about the problem with the business of business is business attitude. This attitude blinds the corporate management to 2 important realities: • Social issues are not so much tangential to the business as fundamental to it. Companies that ignore public sentiment make themselves targets for public attack. But these social pressures can also act as indicators for company's profitability: by adhering to the regulations and public-policy environment, for example.
• If companies treat social issues as distractions or unjustified vehicles of attack on business, they are making a big mistake, because, these public sentiments can have a major impact on the company’s strategic future. Most stock market value in American and European markets depend on expectations of company’s cash flow beyond the next 3 years. In food & restaurant industry, the general concern on obesity has led to a stronger control on the marketing of unhealthy foods; public and planning resistance to establishment of new stores of big retailers, etc.
As can be seen, these social issues can eat away billions of dollars of shareholder value, if unnoticed. Usually, managers focus excessively on short term performance of the business, and tend to forget the long term opportunities and issues, of which, society is vital, and so is the customer trust and growth prospects. So, large companies need to articulate the business’s social contribution and define its ultimate purpose in a way that has more subtlety than “the business of business is business”. Another interesting aspect is that, business can profit by spotting and supplying unmet social needs and consumer preferences.
Ex: in the era of fast foods, providing healthier meals, in the polluting energy industry, the creation of cleaner fuels. But CSR is not the best answer to ensuring that the companies are bound to the social welfare. CSR is very defensively perceived and disconnected from the corporate strategy. The main reasons could be the anti-corporate campaigns and anti-globalization protests during the 1990s. This prompted the companies to draw CSR as a means to avoid the NGO and damages on reputation. Big companies bring with them, productivity gains, innovation & research, large scale investments, and above all, global economic welfare.
Companies which undertake stakeholder dialogues with the NGOs will be much aware of the potential social issues and would have already incorporated in the corporate strategy. Even then, the company usually takes up CSR initiatives by adding a new policy here and there, just for the sake of it. They tend to operate at a distance from the strategic decision-making within the company, and exist for rebutting criticism. In view of these, a new approach for business needs to be created.
Three main points stand out in this regard: 1. Business needs to make sure that social issues and forces are discussed at the highest level as a part of overall strategic planning, by the way of introducing explicit processes. 2. The need for realization of the fact that business and society have an implicit contract. Even though it has been successfully portrayed as a bargain thru which only business benefits, the need to highlight the fact that the society has very much benefited from the business is high. At the same time, business should acknowledge that it is subject to rules and constraints. Company should also actively manage this “contract” by the means of transparent reporting, developing and deploying voluntary standards of behavior.
Ex: GE’s announcement of extending its spending on eco-friendly technologies. 3. The need to shape debates on social issues much more consciously. This means that the companies should more actively be involved in external debates and in media about the social issues that shape the business context; to describe business’s ultimate purpose as the efficient provision of goods and services that society wants. The point is that, profits should be seen as a signal from society that the company is succeeding in its mission of providing something ppl want, and in a very efficient manner.
Rousseau’s social contract helped to seed the idea among political leaders that they must serve the public good; in similar lines, the CEOs should take the opportunity to restate and reinforce their own social contracts in order to help secure the invested billions of their shareholders, in the long term. Merck Case A Mayank (0911319) Merck case is classical situation of Friedman’s B3 Vs Social responsibility. In the coastal region of some African countries, people used to suffer with a incurable disease known as River blindness.
Merck has invested initial money in the research for drug formulation for the disease. They have come up with a version which is effective on animals. However, Merck is facing couple of issues before going ahead with the drug: • The cost of drug is really high for the poor. • There is still no guarantee that the drug will be successful for Human beings without side effects and research investment will pay off. • There is threat of drug sales in black market. • There is no proper distribution channel. • There is no organization which has come forward to deal with Merck in addressing of this issue.
The dilemma lies with Merck is that its main objective is to serve patients, so in this case, should Merck with go for further investment in drug formulation despite knowing of less profitability??? Role of Government The Public Sector in a Mixed Economy Joseph Stiglitz “The Public Sector in a Mixed Economy” [Chapter 1 in Joseph E. Stiglitz The Economics of the Public Sector (3rd edition), W. W. Norton, 1999 Rohit Jaiswal (0911339) There is a role of govt In lots of things from hospital to roads to travel. Economists always differ on the role of govt. To what extent and in which areas should govt.
play an imp role? Key concepts: 1. Mercantilists believe that govt. should promote trade and industry. Some countries had benefited from the active role of the government. On the other hand there were others where active government had caused a negative impact by squandering on wars or unsuccessful ventures 2. Adam Smith asked for very limited role of govt. Invisible hand: put forth by Adam smith- suggested that competition among individuals for pursuing their personal interest (profits), will indirectly serve public interest too. Adam smith was of the opinion that there was no need to rely on the govt.
People in the process of doing their own good will do the benefit for the society. Competition will lead to the prod of all goods at minimum cost Competition leads to efficiency and provides spur to innovation 3. Laissez Faire – Govt should leave the private sector on its own and should not attempt to regulate the private sector. 4. Keynes - He felt that govt should try to create employment and remove economic disparity. 5. Four major reasons for systematic failure of Govt a)
Limited Information – Govt has limited information required to do what it would like to do. For eg. Govt. might like to give some privilege to those who are disabled but with the limited info Govt. has it fails to differentiate b/w those who are really disabled and those who are pretending to do so. b) Limited control over private market responses – Govt has limited control over the consequences of its decision. c) Limited control over bureaucracy – Govt has limited control over those people who will be executing/implementing its policies. d) Limitation imposed by political process – Political interests come in picture when govt make decision. This raises additional difficulties.
Public sector economists are concerned with 4 fundamental questions of choice concerning the use of limited resources 1) What is to be produced? What kind of public goods to be produced 2) How should it be produced? Whether to produce privately or publicly? Whether to use more labor or capital intensive technique. 3) For whom is to be produced? Who is the target consumer of public goods/services? 4) How are decisions made? How to make collective decisions? What policies to adopt to reach to a decision affecting whole group? Four general stages of analysis to the above fundamental questions
1. Knowing what activities the public sector engages in and how are they organized? – Describing what the govt does. 2. Understanding and anticipating the consequences of the Govt activities 3. Evaluating alternate policies 4. Interpreting the political process. Positive Economics – It looks at the scope of govt activity and the consequences of it. Normal Economics – It tries to evaluate the alternative policies that might be pursued. Richard Musgrave thought of govt as having three economic branches 1. Stabilization – To ensure that economy remained at full employment with stable prices 2.
Allocation – How to allocate money to diff resources – education, military, how to impose tax. 3. Distribution – How the goods that were produced by the society were distributed among the members. Excerpts from Capitalism and Freedom Milton Friedman Excerpts from Capitalism and Freedom (2d Ed. ) University of Chicago Press, 1982. Bhawna Jain (0911301) The article talks about competitive capitalism – the organization of the bulk of economic activity through private enterprise operating in a free market – as a system of economic and political freedom.
As opposed to President Kennedy’s views “ Ask not what your country can do for you – ask what you can do for your country”, Friedman says that to the free man will ask “what I and my compatriots can do through government to help us discharge our individual responsibilities, achieve our goals and purposes and above all to protect our freedom? ” To a free man, the country is the collection of individuals who compose it, not something over and above them. One of the greatest threats to freedom is the concentration of power in political hands.
He asks how can we benefit from the promise of government while avoiding the threat to freedom? The solution : 1. The scope of the government must be limited. Its major function must be only to protect our freedom, to preserve law and order, to en force private contracts and to foster competitive markets. In both economic and other activities, we must ensure that private sector is a check on the powers of government sector. 2. The government power must be dispersed and decentralized.
By centralization and standardization, government actually replaces progress by stagnation, creativity by mediocre performance The role of the government cannot be spelled out once and for all since each day brings new problems and new circumstances. Its also why we need to reexamine the role of government from time to time. He goes on to criticize how the meaning of the term liberalism has changed from the late eighteenth century to the twentieth century. In the 18th century liberalism supported laissez faire and emphasized freedom as the ultimate goal and the individual as the ultimate entity in society.
However in the 20th century, in the name of welfare and equality, liberalism has started favoring centralized government and the revival of the very policies of state intervention against which classical liberalism fought! Parkinson’s Law Northcote Parkinson C “Parkinson’s Law” This article first appeared in The Economist, November 1955. Parkinson’s Law is based on observations and can be stated as work expands so as to fill the time available for its completion e. g. An elderly lady of leisure can spend an entire day in writing and dispatching a postcard while it requires a mere 3 minutes effort from a busy man.
Law is mainly concerned about public administration work or paper work. According to Parkinson the number of the officials and the quantity of work to be done is not related to each other at all. The rise/growth in the total no. of employees is governed by Parkinson’s Law and this law is based upon an analysis of factors by which the growth is controlled. Before statistical proofs, the two motive forces that underlie the Parkinson’s Law are Factor I. The Law of Multiplication of Subordinates: An official wants to multiply subordinates, not rivals. To explain this, author gives an example of a civil servant A who finds himself overworked.
For this real or imaginary overwork, there may be three possible remedies: (i) He may resign or (ii) He may ask to share the work with a colleague B or (iii) He may demand the assistance of two subordinates C and D. By resignation he would lose his pension rights. By having B at the same level, he will feel more competition for promotion. So A would prefer to have two junior C and D below him. Here he has not chosen C alone because in that case C would be sharing the work with him and assume almost the equal status which has been refused in the first instance to B.
So to facilitate A’s own promotion he would like to have two subordinated rather than one. So this chain grows further in the same way. C and D will have the two juniors each namely E, F, G and H and hence the situation will facilitate X’s promotion. Factor II. The Law of Multiplication of Work: Officials make work for each other. Continuing with the previous example, now seven people are doing what one did before. For these seven make so much work for each other that all are fully occupied and A is also working harder than ever. Now an incoming document comes to all of them in turn before giving it to A.
But A is busier now because he is also handling seven people below him. He is the one to decide for their promotion, vacation, transfer and sickness leave related issues. But A is conscientious man; so besides these many problems created by his colleagues for themselves and for him, he is not going to shirk his duty. He reads each document coming before him for approval, undoes unnecessary changes done by other officials and finally produces the same reply he would have written if officials C to H had never been born. So here far more people have taken far longer to produce the same result. Statistical Proofs:
To prove statistically author has taken two examples, one is British Navy and other is of Colonial office estimates. In both the example, statistically finds that the in normal scenario rate of increase in staff is around 5. 5 to 6. 5 percent per year irrespective of increase in the work load. Parkinson’s Law in Mathematical form: In any public administrative department not actually at war a staff increase may be expected to follow this formula: X = (2km + p) / n Where k is the number of staff seeking promotion through the appointment of subordinates;
P is the difference between the ages of appointment and retirement; m is the number of man hours devoted to answering minutes within the department; and n is the number of effective units being administered then X will be the number of new staff required every year. Regulation The End Michael Lewis, “The End,” Conde Nast: Portfolio, December 2008. Available at: http://www. portfolio. com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom D DineshKumar (0911305) This article does not have any concept being conveyed. It’s more of an narration about the events which had let to this sub-prime crisis of last year.
Its just talks about the subprime lending, creation of complex securities like CDOs, negligence of the rating agencies, etc. , as events leading to this financial crisis. Article published in Dec 2008 – Author Michael Lewis ( and ex- Wall street Investment Bank employee who had written the famous book “Liar Poker” in which he has criticized the practices been followed in the finance companies) The author through the characters (Eisman, Daniel & Mossels) of certain financial analyst, tries to analyze what went wrong during the past decade which had resulted in this financial crisis.
The following events were cited and criticized by the author Prediction of housing bubble early in 2004: There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8. 5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds.
But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U. S. mortgage market. Subprime Lending: Lots of firms were lending money to people who shouldn’t have been borrowing it. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population Original & Ideal structure of Mortgage bond :
. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts’ BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return Modified structure of these bonds – resulting in crisis.
The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. Conversion of BBB rated loans to AAA: Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
Formation of CDO’s & the rationale : The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C. D. O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA.
These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. The Looting of America’s Coffers David Leonhardt, “The Looting of America’s Coffers,” New York Times, March 11, 2009 Shikha Rawat (0911344) The looting of America’s Coffers The article talks about the financial crises and gives a specific term to the actions of the financial giants – ‘looting’. The government has to bail out the banks and financial institutions to prevent large scale crises (spiralling out of control). This creates a moral hazard.