Scams flourish in a booming economy

The Indian economy is showing signs of a recovery after a prolonged lull phase. High economic growth will result in higher GDP and in turn reduce poverty levels. But does higher economic growth result in higher unethical behaviour? Is higher incidence of bribery related to higher economic growth? Do the corporates and businessmen get greedy in times of boom?

If the past record is an indication, scams too flourish during days of boom. The bull run of the stock market in the past saw a plethora of stock market scams such as that of Ketan Parekh, Harshad Mehta and the recent one involving National Spot Exchange Limited and its promoter Jignesh Shah.

We have also seen many scams both in the private sector and in the public sector -- other than those in which politicians were involved (2G, Coalgate, the Commonwealth Games, Adarsh, etc.).

The most dramatic of all was the confession of Ramalinga Raju that he had cooked up accounts of Satyam Computers, which was a big story during heyday of the IT boom. Each of these scams pointed towards not just some lacuna in the regulatory systems, but also the lack of ethical safeguards in the business.

It is not that such scams have been confined to India alone. A notable case is that of Maxwell Corporation in 1991. There was heavy borrowing to finance the expansion of its publishing and media business which led to high levels of debt as reported in Financial Times , 1996. The case of Vijay Mallya and Kingfisher Airlines is similar.

Another well-known scam involved Enron operating in the energy market in 2001. When the company was declared bankrupt, it became instrumental in the collapse of Arthur Anderson, a global accounting firm.

After this scandal the US government implemented corporate governance reforms. There were revisions in the New York Stock Exchange’s (NYSE) listing requirements.

These events raise a basic question on the relationship between ethical responsibility and economic activity. The question becomes even more important when there are limited resources, such as spectrum or availability of coal near mega power projects.

They can make a big difference to the top and bottomline of any company. Such constraints on resources also tempt controlling authorities to derive personal benefits from the system.

Economic activity in such an environment defies Aristotle’s concept of ‘wealth and money for the good life of community’ and Thomas Aquinas’ concept of the “just price”.

This is the right time to revisit the issue of ethics in business and ensure safeguards.

Although academics call it ‘business ethics’, corporates would like to hide behind the veil of ‘corporate social responsibility’ to offset the impact of adverse public opinion by virtue of their actions on the environment and society.

Economic revival should not be allowed to be tainted by greed and immorality.

We need to take care of certain steps. The first step is not to cut corners to meet tight corporate objectives. Second, we need to create organisational systems which provide disincentives for unethical behaviour.

Third, inculcate a corporate culture that does not rationalise or ignore unethical behaviour. And last, do not promote performance evaluations that encourage short sighted decision making, or do not set unreasonable goals.

Unethical behaviour prevalent in business is systemic; organisations have created systems and encourage practices that pressurise people to do things they might not do ordinarily.

Therefore, there is a need to institutionalise ethical conduct in organisations. Governments and regulators should introduce ormodify legislation and regulations to prevent similar incidents.

We should follow examples of effective implementation of the Sarbanes Oxley Act of USA which is about disclosure and risk management. Here, we need to understand that the Indian business is dominated by family owned firms and the CEOs do not enjoy cult status as in the US. We are closer to the team spirit of European companies and the culture of Japanese companies.

We also need to look at the OECD framework for effective corporate governance.

Yet, we should develop our own model of corporate governance, distinct from the Anglo-American model and the European model.

Further, certain core legal and moral values are essential at the time of economic recovery. These would include, at the individual and corporate level, promise-keeping, financial probity, honesty, integrity, and reliability. Government has to create systems where there is avoidance of price-fixing, cartels and other monopolistic tendencies.

Even though Adam Smith was the founder of the modern economic doctrines of ‘self-interest’, he argued in his book The Theory of Moral Sentiments that the relationship between individuals and other mutual moral sentiments form the basis for economic action.

Ethics are not just an ideal to follow; they are also about social and political goals of economic behaviour.

When Prime Minister Narendra Modi says, “ Na Khaunga Na Khane Dunga ”, he is promising a sea change in our social, political and economic environment. Economic recovery without ethics would be short-lived. Who would know it better than our ex-prime minister and economist, Manmohan Singh!

The writer is Director, Vivekananda Education Society Institute of Management Studies and Research

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