The summer promises to be hot. Fresh heat will arise from pressures in the global economy and manmade walls that threaten job losses for Indians literally all around the world. Enough has been written about growth and prospects, the disappointment of livelihoods and jobs not materialising, the absence of investments. So I will not dwell on these but on softer factors to serve as food for thought towards nurturing a favourable business environment.

Act of faith

Government investment, collection of taxes, and social support spending are in essence reallocation of resources. But the foundation for generating resources, without which its reallocation is meaningless, is business investment, value-added services, and agriculture. Investment is an act of faith. One must go beyond numbers that prima facie analyse consumer and investor sentiments, because faith and/or trust have roots in perception.

The Harvard Business Review recently carried an article on the global decline of people’s trust in business, media and government. It suggested that mass outrage was not yet directed squarely against business or the elite, but there were signs that this could change.

The Edelman Trust Barometer 2017 notes that trust has moved beyond being a general feature, to a point when it is central to the functioning of a society. It suggests that a collapse of trust may by now be past a simple class versus mass problem, and could become a systemic threat. People more often speak of a dilution of trust between government, civil society and enterprise. General mistrust of enterprise hurts all businesses and, indeed, all participants in the economy.

One must reflect that entrepreneurs will simply avoid investing if they feel that business difficulty has potential to malign them, or even threaten personal ruin. It is impossible for an entrepreneur to succeed if enterprise is mistrusted.

Some misgivings

This premise assumes greater meaning in a world that sees many governments turn increasingly protectionist, populist and interventionist in the unflinching belief that the best reaction to crisis or aberration is more regulation and/or punitive punishment.

While many noisy debates have been directed to enterprise in recent times two significant points have been: (i) attributing company behaviour to individual influences; and (ii) debt servicing by business. Surely, addressing misgivings due to inadequate facts or incorrect impressions merit due effort by the business community.

Corporate structures exist for genuine and time-tested reasons. The separate legal personality is a basic tenet on which company law is premised. In this context the epic case Salomon v Salomon formed the core of commercial law across the globe. In essence, the legal concept that separates the personality of a company from the personalities of its shareholders protects the latter from being held unduly or personally liable for the company’s debts and other obligations.

The exception to this rule is lifting of the corporate veil under due process of law, where a court must determine if business was not conducted in accordance with corporate legislation or if a corporate form is either being abused or is a façade for improper, illegal or fraudulent actions. The choice to lift the veil cannot be arbitrary.

Law promotes structures where owner liability is per se limited, such as private companies, public companies (listed/unlisted) and LLPs. Company law casts strict obligations of governance and accountability in all cases, with tougher standards for listed companies where sensitivity to multi-stakeholder segments and broad-based decision-making becomes obligatory.

Summarising this aspect, reality dictates that organisational decisions follow due process. If the contrary is seen to occur, resolution must not be overbearing (and sometimes be forgiving) when there is no substantive cause, and be unsparing when there is. Enforcement will build trust.

Capital employed in a business typically exceeds the risk capital from shareholders. All financial exposures to a business must therefore accept a risk-reward weightage. Stressed loans do not all arise from poor decisions or losses; it is conceivable, for example, that a profitable entity may be generating inadequate cash flows.

Risks to integrity

But under a shrill debate by regulators, government and media on bank woes it becomes almost impossible to represent the fact that problem loans are most usually the outcome of investment enthusiasm confronting reality, while mala fide is the exception.

It’s also tough to calm the passions of and describe to society why a business loan is different from a personal loan to, say, purchase a car. Or that loans are funded significantly by liabilities to bank depositors rather than largely by taxpayers. The reality is that risks to system integrity outweigh risks to taxpayer money. It needs to be argued that under present governance norms and new insolvency laws, collateral devices such as personal guarantees create a deceptive sense of comfort (often delaying timely action). When entrepreneurs do assume (usually under duress) obligations of debt guarantee, its realisation deserves to be via contract enforcement and not through over-arching impositions. In addition, for enterprise to assign and/or abide by a moral accountability towards liabilities is more in harmony with our values and increases social trust.

An onerous task for all leaders is to rekindle trust in (business) institutions. Enterprise must also be sensitive that legacy pain, including that of an overbearing state or confiscatory taxation, can no longer be an alibi for present or future deviations. It’s a different world now. Trust in enterprise must not fall, else populism/activism will almost surely create havoc through divisive rhetoric and/or unpleasant policies. Objective introspection and course correction by all constituencies can lead to explicit assertion of trust and moderated approaches all around.

I paraphrase what my great-grandfather Sri BM Birla said at a Ficci assembly in April 1977: “I find a tendency among businessmen to...feel aggrieved that their role is not fully recognised and appreciated by authorities and public... If we are criticized...either our conduct has not been good, or we have not made efforts to set right uninformed criticism.” He could have been speaking now!

This column explores ideas and opinions on Indian enterprise and economy. The writer is an entrepreneur and former president of Ficci. The views are personal

comment COMMENT NOW