The Hindu Business Line : Are companies like governments?

MANY would tend to dismiss the financial collapse of Parmalat, Italy's iconic food and dairy company, as nothing more than another financial and accounting scandal. Yet, there may be other dimensions to the debacle that need urgent attention. These include defining the role of a company, its stakeholders, its responsibilities, and the penalties for failing to meet these responsibilities. Simultaneously, there is also a need to fix responsibility on those who coerce companies into playing roles that are really not theirs to play.

If one looks at the decade gone by, there has been a continuous pressure on companies from civil societies to redefine the term, "stakeholder". Traditionally, the stakeholders were the shareholders of the company, including the promoters (dominant partners), the institutional investors (the silent partners) and the public (small partners).

Yet, today, companies serve many masters. The definition of stakeholders has now been expanded to include employees, environment and society. Companies are constantly told that good governance (answerability to shareholders) is the same as corporate social responsibility (answerability to society).

The constant message that is being dinned is that chasing lucre is shameful, greedy pursuit of wealth needs to be redressed with doing good to society, wealth generation is at the cost of larger good and that good managements must compensate society for what they have taken away from it by being socially responsible.

What is lost in this din is the fact that companies are increasingly being made to take on responsibilities akin to government's. But companies are not governments. They do not raise taxes. Hence, they are do not share the same kind of relationship that governments share with those they govern.

Yet many companies toe the line of the civil societies. Some buy peace from the ire of the NGO brigade. Others come to believe that they are socially obligated to direct the redistribution of wealth in socially desirable activities instead of leaving it to market forces.

Such logic has been fine so long as companies have not gone under performing their socially responsible roles. The link is not as clear even in the Parmalat case.

For Italy, Parmalat is an iconic company. The Tanzi family is credited with building up a single delicatessen started in the early 1960s into a business monolith.

Its annual revenues are in the range of 7.6 billion euros, it employs 36,400 people, has production facilities at 139 places in 30-odd countries and its stock is listed on several stock exchanges. The Parmalat milk has come to be considered "the" Italian milk. Santal, its fruit juice brand, occupies the pride of place of being "the" Italian fruit juice.

The powerful aura of the Parmalat brand does not end there. The company picked up 99 per cent stake in Parma Football Club in 1991. It has continuously pumped in the company's fund into the club to turn it into a stalwart. Few of those who have chosen to take the company's name with pride during the period have tried to the uncomfortable question: What is a food and dairy manufacturer doing running a football club using corporate funds? And even if the promoters have a yen for such indulgences, why are they not fulfilling them with using their personal stock? Such questions obviously do not cross anyone's mind when the going is good.

Today, everyone is distancing themselves from the murky Parmalat story. There is a flurry of activity to fix responsibility on the management of the company, its officers and employees, its auditors and just about everyone, except, of course, those who have seen virtue in the company performing such extra-constitutional roles. There is confusion on whether this is an accounting fraud or a mismanagement issue.

The EU and the EC are tightening their accounting norms. The OECD has issued another round of draft corporate governance norms. The Italian Government has removed the existing management and a state administrator has taken over the administration of both the company and the club. Arrests have been widespread. One of the auditors, Mr Grant Thornton, has been forced to quit. The investigators are questioning the company's heavy reliance on off-balance-sheet accounting using derivatives and swaps.

While this drama is being played out, it is becoming clear that not only are losses mounting for Parmalat, but also for other constituents. The Bank of America has pegged its losses at $274 million. The Italian Government has estimated its loss at $11 billion. This is roughly 1 per cent of the country's GDP. It is also the sum that the Italian Government had decided to save through belt-tightening measures in order to bring down its fiscal deficit from 2.5 per cent of GDP to 2.2 per cent.

In all this din, one question that is not being asked is whether the company would have had a hole, or at least as large a hole, in its finances, had it concentrated on what it did best — manufacture and sell dairy products — instead of running a football club. And yet, that is the question that needs to be asked urgently to avert another Parmalat.

(The author, a freelance writer, can be contacted at jayanthiiyengar1@yahoo.com)

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