Conférence de Narayana Murthy (mercredi 14 septembre 2016)


Making respect more respectable in the corporate world


I consider it a great privilege and a pleasure to speak at this famous place. I worked in Paris in the early seventies. I thank the organizers for providing me with the opportunity of coming back to the world’s most beautiful city.

After much thought, I have decided to speak on a fundamental issue that has relevance to businesses in France, India, the United States, and, in fact, the whole world. We live in an interconnected world that has embraced globalization, seen tremendous advances in communications, and that has had an increased focus on universal concerns such as multicultural workforce, carbon emission and laissez-faire capitalism. Any strategic issue that has relevance to India must have value to France and vice-versa. Hence, I want to speak on how we, the business leaders in France, India and the world, can save capitalism from the wheelers and dealers, restore its glory, and leverage its power to make this a better world. I believe that the primary remedy we have is restoring respect for values in the boardrooms and corner offices. Our task is to make respect much more aspirational than money and power among our current and future corporate leaders. Hence, I have chosen this title for my talk.

My talk will have three parts. First, I will define the relevance of capitalism even in today’s context of deep skepticism about it. Second, I will talk about the various reasons why there is so much skepticism about capitalism. Finally, I will talk about a few ideas that inspirational corporate leaders have practised to make respect more important than money or power.

Several years ago, I was talking to a well-known business school professor about some highly-improbable but decidedly-impactful changes I have seen in the world during the last 30 years – fall of the Berlin Wall, collapse of communism, and the end of apartheid in South Africa. He smiled and said that I would live to see many more such events. Little did I realize then that I would be a witness to the cataclysmic events that have happened since September 2008 – the massive financial tsunami that has led to the fall of several major financial institutions, the shenanigans of the disciples of the God of greed, the multi-trillion dollar recovery package by various governments, equity participation in major private sector institutions like Citigroup, AIG, RBS and Barclays by the US and UK governments, the failure of Fannie Mae and Freddie Mac, and the unimaginable book-cooking scandal of inflated revenues, and fabricating profits and cash balances by the founder at Satyam, once a respected and, today, a disgraced software services company from India, fortunately saved by the timely efforts of the Government of India. No wonder that the CEOs have been ranked the lowest in trust-coefficient in citizen surveys of trustworthiness of various professions in most countries in the world. Skepticism about capitalism is growing every day in developing countries.

Therefore, it is fair to answer the question whether capitalism needs to be preserved. According to most dictionaries, capitalism is an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations. It is a system that incentivizes individuals to use their enterprise, drive, hard work and innovation to create wealth for their team and jobs for the society. It is a system most conducive to the elimination of poverty. Other political systems like communism and socialism, practised by most developing countries during the 50s, 60s, 70s, and 80s, have failed to deliver on their promise. They fail in one fundamental premise of development – individuals need incentives to create wealth and jobs for the society. This is where capitalism has succeeded eminently. Even China, ostensibly, a communist country has practised state-directed capitalism and made stunning progress. We see a similar example in Vietnam, also a communist nation. In India, there are several examples of shift towards capitalism. India’s tele-density, a measure of the number of telephone connections per 100 persons, increased from 0.7 in 1991 when the highly controlled socialist economy was liberalized to 80 today. This was primarily driven by large-scale private sector participation and adoption of mobile telephony. Thus, in my opinion, there is no alternative to capitalism to ensure better prosperity in both the developed and the developing world.

Is everything hunky-dory with this elixir for poverty reduction and prosperity? Why has it become effete? Why is it, then, that even in this mono-ideological world, there are currents of disenchantment with capitalism? Why are our corporate leaders the least trusted people in the world? I believe there are several reasons for this.

Greed has played a major part in this drama. Headlines like “CEOs earn big bonuses in a bad year”, “CEOs look at public companies like personal ATMs”, “Five biggest lies on Wall Street”, and “Satyam Scam – A shame for the nation” have brought the attitude of corporate chieftains and boards to the front burner and have shocked the public and the average worker. The propensity of a few senior management professionals in large corporations in the US to sell large chunks of stocks based on insider information while promising a rosy picture of future performance of their crumbling corporations to outsiders and even their own employees has tarnished their image seriously for three reasons. One, it is patently unfair and illegal to resort to such insider trading. Second, it results in the destruction of the corporation, and third, it depletes the precious savings of the employees as most of the savings of the employees in 401K funds are invested in the stocks of these corporations.

Greed has been portrayed as good. The practice of CEOs arguing that a certain merger or acquisition is good for the corporation and then demanding retention bonuses after the merger is yet another example of the insincerity and greed of the CEOs. The huge severance compensation awarded to the failed CEOs has created tremendous loss of faith in the fairness and accountability of boards. I hope many of you have watched CNBC’s award-winning, prime time series – “American Greed” that portrays a compelling description of greed, treachery, dishonesty, fraud, profligacy and debauchery using corporate money. You appreciate the levels to which these apostles of greed can sink. The mindset has become one of equating being truthful with not being caught when telling a lie. The words of Gordon Gekko, a ruthless corporate raider played by Michael Douglas, that greed is good, greed is right and greed works seems to have become a gospel for some people on the Wall Street. A prominent business writer has even called such CEOs fiscal terrorists!

There is huge inequity in corporate compensation worldwide. An example of the unfairness in compensation is the fact that the top five officers of major US public corporations extracted as much as half a trillion dollars or roughly 9% of the profits of these corporations during the last ten years. An even more worrisome trend is that there is no accountability in compensation since their pay is not linked to performance. Several high profile CEOs received huge compensation during a period when their corporations were hurting and not performing. The average pay of CEOs in the US was estimated to be about 204 times that of the average pay of a worker in 2015. This ratio is between 11 and 22 in Japan, France, Germany, Italy and the UK. This ratio in the US was between 1000 and 2000 in some extreme cases. In other words, the CEOs of the extreme case companies earned in one day, what an average worker would take almost three to six years to earn. Equilar, an Executive compensation research firm located in Redwood Shores, California has published data on such contracts that do not meet the usual norms of fairness, transparency and accountability.

This ratio was 20 in 1995 in the US and it peaked at 375 in 2000. There was some moderation after the exposure of the 2002 shenanigans of Enron and a few other companies. But, it now looks like it will come back to the figure of the year 2000. What is sad, according to an article in the Economic Policy Institute published in 2014, is that during the period 1978 – 2013, the CEO compensation, inflation-adjusted, increased 937 percent, a rise of more than double the stock market growth. During the same period, the inflation-adjusted growth rate for compensation of a typical worker, I believe, was just 10.2 percent.

Another reason is the total disregard of truth and unbridled avarice. The case of Satyam, as stated by the founder himself, is shocking. According to a letter that Mr. Raju, the founder, wrote to the Securities and Exchange Board of India on the day he resigned, he admitted to inflating his revenues and cooking profits for over 6 to 7 years just to make sure that his stock price held up. As revealed by subsequent investigations, he had either sold or mortgaged most of his shares for loans that he had taken to support his private businesses. The Ponzi scheme of Bernard Madoff resulting in fabricated gains of almost $ 65 billion dollars over a decade is yet another blot on the reputation of fund managers. The inability of Enron’s Kenneth Lay, Jeff Skilling and Andy Fastow to answer the question of reporters – Bethany McLean and Peter Elkind – both of whom had the guts to ask tough questions on how Enron made money, and their bullying these reporters are examples of the hubris, arrogance and utter disregard for truth exhibited by the carpetbaggers in the corporate world. The face of capitalism received a huge knock recently when Sir Greene was censured by Parliamentary Committee in the UK for his mismanagement of BHS, and for allegedly siphoning money away from the employee pension funds. Reporters found that he was relaxing in his superyacht while the future of 20,000 of his employees was uncertain.

Therefore, the leaders of capitalism must work hard to correct this perception and regain trust. The first step is to set right the current structure and the magnitude of compensation and perquisites they receive. It is very important that fairness, transparency and accountability are strictly followed in fixing the compensation of the senior management of a corporation. Fairness with respect to the compensation of the lowest level employee, and fairness with respect to what part of the profits are kept for growth and payment of dividend are important. Transparency with the respect to the shareholders resulting in providing full details of the compensation and full details of the entire set of conditions under which such compensation is payable are very important. Finally, accountability has to kick in by making sure that a large part of compensation is variable and will become payable only when the targets are achieved on a medium term (3 to 5-year basis) basis with suitable claw back terms.

Is there a solution to this seemingly unsolvable global problem? I am an optimist and I believe we can succeed in our effort. There are two dimensions to solving this problem. The first is reforms in regulation at the institutional level. Such reforms are necessary but not sufficient conditions. For example, after ENRON, we have had the Sarbanes-Oxley act as well as several other changes in regulations in the US demanding better transparency and accountability. In India, we have had several committees on corporate governance including a committee headed by me to improve the level of honesty and decency among corporate leaders. However, they did not prevent a major violation of corporate governance like the Satyam scandal. The number of pages in the Accounting standards manual has increased significantly both in the US and in India during the last ten years. But, we continue to see major violations. The crooks seem to be always a step ahead of the regulators. Hence, tackling this problem just at the level of regulations alone will not suffice. In any case, there is a lot of improvement required in regulating fairness, transparency and accountability of the senior management compensation. The punishment amounts for any violation will have to be many times the sum that the senior management are awarded when they do not result in criminal prosecution.

The second dimension is enhancing the value compliance of corporate leaders. In my opinion, any system of regulation and compliance is as good as the people who are governed by it. The future of any corporation is as good as the value system of the leaders and followers in the corporation. Let me give you an example. In the 1970s, a friend of mine designed a computerized machine-maintenance information system for a government workshop in one of the emerging countries. After a couple of years, he was told that the system was malfunctioning. His team reviewed the working of the programs of the system and found them to be in order. After putting the storekeeper to a thorough cross-examination, my friend came to know that there was a scam. Whenever there was a request to the store keeper from the personal assistant to the minister in charge of the workshop for funds for minister’s entertainment, a certain spare part would be shown as faulty in one of the machines, the replacement for that part would be debited to that machine even though the machine was in perfect condition, the part would be sold in the market, and the money would be handed over to the minister’s assistant! When the demand from the minister became frequent, the spare part consumption soared! It required a smart engineer to conclude that the system was not working well, and my friend’s team had to conduct a thorough investigation to unearth the scam.

Therefore, I am a firm believer that a corporation is what its people are. As Thoreau once said,” It is truly enough said that a corporation has no conscience. But, a corporation of conscientious men is a corporation with a conscience”. That is why I believe that an important step in solving the problem of poor corporate governance is enhancing the desire for respectability among the men and women who populate corporations of this world. Hence, the solution to the vexing problem of raising the prestige of corporate leaders is to create a mindset that puts premium on earning respect from the society, and on defining success as going beyond just seeking money and power. Therefore, we, the business leaders, have to believe and act according to the words of Jon Huntsman, a former Chair of the Board of Overseers at Wharton, that winners never cheat and that decent, honorable people finish races and their lives in grand style and with respect. Whenever I have doubt about any action I have to take, I go back to his wonderful book – Winners never cheat. I suggest that every one of you buy this book and use it as your Pentateuch or Bible or Geeta or Koran in your moments of dilemma.

I will suggest a few simple ideas for enhancing respect for your consideration.

In any society, stability, peace and harmony exists only when leaders who are powerful show self-restraint in their actions. Self-restraint comes from civilized behavior. Even though in democracies, we are guaranteed the power of free expression and the right to criticize in the most strident form, we exercise self-restraint and use soft words so that we act as responsible citizens of the society. Such self-restraint is extremely important even in curbing profligacy in CEO compensation and perquisites.

Self-restraint comes from good culture. Good culture comes from transformation of our mind and our values. To me, decent behavior stems from an environment of good culture surrounding a person. What is culture? Culture is about things that bring me joy and sorrow; that defines my priorities in life; how I spend my time and money; the kind of friends I have; and the issues that excite me. In essence, culture is how I behave when I know nobody is watching me.

Hence, it is important to create a culture of openness, fairness, honesty, decency, transparency and accountability in a corporation. Such a culture is likely to discourage greed, fraud and misdemeanor. Creating such a culture requires that the leaders lead by example. Mahatma Gandhi wanted us to be the change that we want to see in the world. So, we have to take lead in creating such a culture around us. This task has to start right from day one and cannot wait until one becomes a CEO.

Respected corporate leaders cultivate simple and inexpensive habits. My father who was a high school teacher teaching Physics, Mathematics and English for most of his life used to tell us that the best way of overcoming greed is to derive pleasure from simple and inexpensive habits in life. He also believed that the best habits in life were inexpensive. Therefore, he would urge us to read books, listen to music, and enjoy conversation with good people. In the India of the early sixties, every small town had a public library from where we could borrow books free; every small town had a public park where music would be played every evening; and there was no tax on having good conversation with decent friends! Therefore, I have found that simple and inexpensive habits bring me joy.

Good corporate leaders do not equate success with money and power. Today, success in corporate circles is most often equated with money and power. This is a key reason for corporate leaders to become greedy. We glorify corporate leaders appearing in popular lists like “World’s Top 100 Billionaires” or “World’s 100 most powerful persons” published by leading magazines. Do we have a list to venerate “World’s 100 most respected persons”? The real success is not about money or power. I know several billionaires and have met several national leaders who are not happy. I have met several film actors and actresses who are rich and famous but are rarely happy because they are lonely, crave acceptance from their circle, and worry they are not successful. What is success? Success to me is the acceptance by the circle of my family, friends and my community that I am indeed valuable to them. That value does not come from my wealth but it comes from my generosity – generosity to share what little I have, and generosity to bring joy to people. To me, a successful person lights up the eyes of people and brings smile to their faces when he or she enters a room. Success is having sound sleep every night. Let us remember the words of Senator J. William Fulbright who said, “It is not our affluence, or our plumbing, or our clogged freeways that grip the imagination of others. Rather, it is the values upon which our system is built.”

Successful corporate leaders create an environment of happiness around them. « He is happiest, be he the king or peasant, who finds peace in his home », said, Johann Von Goethe. A happy leader has a circle of supportive family and friends. They share in his joy, cheer him in his marathon, applaud him on his success, and commiserate with him in his sorrow. Building such a circle requires lots of emotional investment. To do so, we have to learn to give back in good measure. We have to be present to celebrate their moments of glory and to provide our shoulder for them to cry on when they are down. We have to put our personal interest behind the interest of our loved ones. We have to level with them at all times. We cannot play games with our loved ones. I do not know of anybody who is a demon in office and an angel at home. We are the same everywhere. It is not easy to turn off our bad qualities in a jiffy. They ooze out from our mindset. That is why it is important to eschew greed, selfishness, intrigue and opacity in our dealings in the office, at home, among friends and in the community. As we know, families, friends and the officemates of most of the well-known villains of corporate frauds were unhappy with them.

Happy corporate leaders don’t get fixated on extreme desire. “Desire is the root cause of all sorrow”, said Buddha. While it is natural to have normal urges in life, extreme fixation with possession of material things is what leads to greed. It is such fixation that leads us to fraud and acts that we would later regret.

Contented corporate leaders shun jealousy. Jealousy is, in essence, another form of greed. Jealousy is a rationalization of our failure vis-à-vis another person’s achievement. Jealousy burns our own stomach and will not affect the other person. Jealousy does not help us to take constructive steps to improve our performance. Jealousy leads us to do things we would later regret. When I was a child, I remember my mother urging me to just look at my own plate while eating, and not to look at somebody else’s plate. She would urge me to eat what I could digest rather than feel bad that the other person was able to eat more than me.

Confident corporate leaders maintain transparency and develop a sense of humility. Whenever they have any doubt about their intended actions, they consult their well-wishers – spouse, family and friends. Most often, such consultation will help avert disasters. After all, our well-wishers want to see us successful – good-natured, happy, contended, healthy and, hopefully, prosperous. That is why it is best to practise the adage – when in doubt, disclose – with our family, friends and in our workplace. Such a mindset helps us to develop humility. Humility is about admitting that I could be wrong and that there could be other people who are better than me. Humility leads to open-mindedness and transparency and helps teamwork. More importantly, humility helps us avoid hubris. Hubris is what leads people to disaster.

Respected corporate leaders take part in a charitable activity in their spare time. This will put themselves among people that have elevated their desires beyond possessing the next mansion or the next million dollars. The opportunity to meet generous people outside the hierarchy of our organization is a sure way of escaping the orbit of jealousy and intrigue at least a part of the time.

Successful friends tell me that making a difference to people less fortunate than themselves and building a great institution made them happier and satisfied persons. In the end, it is very important to remember the words of George Sand who said, “Il n’y a qu’ un bonheur dans la vie, c’est d’aimer et d’être aimé”. No amount of money and power can match this privilege of loving your society and being loved by your society.

I have no doubt at all that the assembled leaders here have lived up to the expectations of this great society and groomed a new generation of corporate leaders who stand for the best values. While these values may appear very difficult to practise, I am inspired to work harder to succeed by a famous French saying, “Vouloir, c’est pouvoir”.

I will close with my favorite quotation from President Theodore Roosevelt who said, ‘Americanism means the virtues of courage, honor, justice, truth, sincerity and hardihood – the virtues that made America. The things that will destroy America are prosperity-at-any-cost, the love-of soft living, and the get-rich-quick theory of life’. These are truly immortal words that hold good for the US, France, India and all nations. I wish you all success in living up to these famous words.

Cette conférence a été organisée grâce au soutien de la Compagnie de Saint-Gobain

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Conférence de Narayana Murthy (mercredi 14 septembre 2016)


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