IMA India 1 The India CEO Forum

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THE INDIA CEO FORUM

EXECUTIVE BRIEFING: Business & Management

IMA India July 2007

When Good Ethics is Good Business

It is common knowledge that India is among the world’s more corrupt countries – and, over time, most firms have adapted to this fact. Many, in fact, regard corruption, and the payment of ‘speed money’, as part of the cost of doing business in this country. Despite this, businesses continue to thrive, and, in this warped reality, therefore, one might even presume a positive correlation between a firm’s ‘success’ and its level of corruption. There is, though, a stronger case for the opposite – that is, good ethics can, and does, make good business sense. As the long history of the Tata Group illustrates, the refusal to be corrupt can actually work to one’s advantage. Linking ethics and values Ethical practices must necessarily be based on sound values. In turn, values can be seen as both an anchor, and a beacon. Just as a ship’s anchor holds it in place even during a storm, values provide an individual, or a firm, with a solid grounding. Taking this simile further, values can also act as a lighthouse – guiding one to safe harbour even in troubled waters – by making the choice easier in the presence of clear principles. The Tata Group is steeped in, and known for, its values of trust, integrity, and leadership. Given that the business house has survived, and continued to grow for 130 years, these values have had a lasting impact. Profits as a means to a (worthy) end Jawaharlal Nehru once told JRD Tata that ‘profit’ is a dirty word. This runs contrary to the Tata philosophy: it is not the quantity of wealth created, but what a firm does with that wealth, that sets ethical companies apart. The Group has long believed that it must give back to the people from the wealth it creates. Clearly, though, unless one first generates wealth, there can be nothing in hand to redistribute. Charity must follow wealth generation, and not replace it. However, instead of creating individual wealth, the Group’s profits are used to start hospitals, educational facilities, and other social projects. Thus, despite the Group’s obvious success, no Tata name figures in any list of the 10 richest people – or even the 100,000 richest. Learning to work with conflicting values In business, it is not possible to always associate only with people or institutions that share one’s values and standards. Rather, it is necessary to continuously interact and coexist with others – while not compromising on one’s own ethics. This is a particular challenge when dealing with certain governments and politicians. More often than not, however, it pays to stand one’s ground. In parts of India, the Tata Group has operations that date back a century, and sometimes longer. On the other hand, politicians, governments, and Group business managers come and go. This means continually having to forge new relationships, and making others aware of one’s boundaries and principles. In this context, the Group has consistently and repeatedly refused to offer ‘speed money’ or other personal favours. (However, it does fund social causes that benefit society, and the State, at large – which it makes clear to politicians and bureaucrats that make demands.) In turn, the Group abides by the laws and rules of the land – and never demands any ‘special treatment’. Over time, many outsiders come to understand and even respect this view – and eventually cease to make improper requests. One Chief Minister reportedly told his bureaucrats that there was no point in approaching the Tata Group for favours or money. After all, he said, one does not go to a South Indian vegetarian restaurant and ask for Tandoori chicken: it simply isn’t on the menu! Although his value systems and instincts would have directed him to try to ‘grab’ as much as possible from the firm, he learned to coexist with the Tata ‘way’, and to gain from it as best possible without disturbing the

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status quo. In fact, he has, at times, helped remove impediments for the Group, with no expectations of a ‘payoff’ of any kind. And in return, he has used Tata largesse in offering equipment and labour to civic improvement projects such as urban sanitation. The lesson here is that one need not fall in line with the rest of the world – and it is possible to play the ‘game’ of business according to the rules, even if one’s competitors do not. Reputation matters more than size Some believe that the Tatas have been able to stick to their principles only on account of their size. However, while size may have made some difference, the Group’s reputation for probity is a far more important factor. In fact, having set a precedent, it finds itself able to get its work done faster than by paying a bribe. Typically, bribery brings with it negotiation, and therefore, often protracted time lines as ‘under the table’ agreements are reached. In the Tatas’ case, inspectors usually realise that they will not be paid anything for doing their job, so they tend to clear papers and shipments faster. One glance at the blue-coloured Tata ID card is often enough to get the job done, rapidly. None of this was easy, or will be. Only a sustained, unwavering stand over decades, even in the face of tremendous loss, has made this possible. Funding politics, but not politicians Although the Tatas do not fund individuals, they do fund elections. Unlike Western Europe, India does not have Government-funded elections, and political parties must raise their entire electoral expenses privately. This aggravates corruption, by driving the political funding process underground. In response, the Tata Group has established a rule-driven, discretion-free Electoral Trust. (Private individuals and other corporations are allowed to contribute to this fund, making the Group, effectively, its custodian.) To discourage the fractionalisation of politics, the Trust provides funding only to large parties, i.e. those with at least 3% of the seats in Parliament. Thus, only a handful of parties – the Congress, the BJP, the RJD, the BSP, and certain Left-front parties – are currently eligible. Further, the funds are distributed in proportion to a party’s strength in Parliament (both before and after elections), which entirely removes the discretionary element. Moreover, funding is not based on a party’s ideology or political agenda, and all funds are deposited with the central party office, rather than with individuals. This system ensures that Tata Group employees have no authority to fund political parties – which, in some ways, helps reduce the level of interference in its operations. Additionally, it permits the Group certain benefits that other firms may not enjoy. For instance, close to elections, high-ranking politicians are reluctant to be seen meeting businessmen – for fear that allegations of bribery will surface. Yet, the doors are always open for Tata executives – since everyone knows that no money will change hands – and business can proceed uninterrupted. CSR as a business driver A good example of how ethics can drive profitability is the operations of the Tata coal mines in Bokaro, Jharkhand. Today, Tata Steel is one of the world’s lowest cost steel producers – mainly on account of its access to exceptionally low-cost coal (less than one-tenth the cost of imported coal). While the Bokaro area is now infested with Naxalites, the Tata operations there continue uninterrupted1, and supply 50% of Tata Steel’s total requirements. The reason for this is simple: for the last 30-40 years, the Group has comprehensively looked after the community through its CSR programme. (This includes providing educational and medical facilities, building roads, combating epidemics, etc – in other words, doing what a government is meant to do.) As in other areas where Tata operates, this stems from a belief that prosperity cannot survive in a sea of misery – and, more fundamentally, because it is the right thing to do. The Bokaro programme long preceded the arrival of naxalism, and even the start of mining operations in the area.

1 Although a Tata officer was once kidnapped by the Naxalites, he was released, unharmed, three weeks later, without any ransom having been paid once it was established that the man was a Tata employee. (As a matter of principle, the Group does not pay ransoms, regardless of the circumstances.) Since then, no kidnappings have taken place.

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Resultantly, the community is solidly in support of the Tata Group, and would not tolerate any excesses on the part of the Naxalites. Weighing the costs and benefits of the programme, there is little doubt that it makes business sense. Its cost – a little over Rs 1 crore a year – pales in comparison with the losses from any potential disruption to the mining operations. Substituting one day’s worth of output from Bokaro (10,000 tonnes) with imported coal (costing Rs 6,000-7,000 more per tonne) would cost Tata Steel Rs 6-7 crore. Thus, a disruption of several days would cost as much as the entire CSR programme has in its entire existence! Clearly, while the aim of the programme is altruistic, it has proven financially rewarding as well. The price of being upright Again, all of this is easier said than done. Corporations have to be prepared to ride losses and believe that in the final analysis, the adherence to an ethical code of conduct will yield balance positive gains, despite the fact that the refusal to be corrupt will sometimes comes with a price. A case in point was when, in the mid-1990s, a State Government refused to renew an existing Tata lease on a mining concession. At that time, the Centre, and not the States, was the final authority on such matters, even though the States needed to recommend a case in order for the Centre to sanction it. Holding a long-term lease, the Group approached the State Government for the periodic 10-year renewal, which was sanctioned. Matters stalled however, at the Centre, where a ‘financial obligation’ to the Minister in charge needed to be fulfilled. As this went against the Group’s principles, the only option would have been to go through the Electoral Trust. However, the party in question did not meet the Trust’s strict criteria for funding, and neither was there any confidence that the Minister would accept funding to the party’s electoral fund and a lining of his personal coffers. No options were left open and the Tatas geared up to await the outcome of their request. In frustrated response, the Minister in charge changed the relevant laws almost overnight – suddenly leaving the Tatas ineligible, under specific clauses, for the mining lease. Consequently, the Group spent 2 or 3 years fighting a case in court, spending far more on legal expenses than it would have on the ‘speed money’. As a result, it permanently lost its concessions – which were given to another company. Although the Tatas took this matter to the PMO level, there was little that could be done, since the Central and State Governments were not allied. Incidentally, the Minister in question was later caught red-handed in a sting operation, and subsequently removed from office, and jailed. The loss of the concession, though, proved irreversible – and highly expensive. The way forward India’s leading institutes of business produce bright managers who are adept at finance, marketing, HR – and all the other aspects of running a business successfully. However, there is little or no emphasis on business ethics. Thus, a pressing need is to ensure that ethics forms a part of the curriculum in as many institutions as possible. On a broader level, many wonder – given the sheer ubiquity of corruption – whether it is possible to not be corrupt, or to avoid participating in this ‘game’. The answer to this is that, for every hand that takes, there is at least one that gives. If you remove the latter, hopefully, the former will wither away. QUESTIONS & ANSWERS Question: On the allegations, a few years ago, against Tata Tea for funding the ULFA and Bodo groups in Assam:

Answer: This needs clarification. Tata Tea did not fund these groups – it merely provided facilities, under duress, for them to meet in its tea gardens. Further, while providing its facilities, Tata Tea had kept the Indian intelligence informed about the meetings. The Indian Government was thus fully aware of the situation. The affair only came into the light because one of the ultra leaders was pregnant, and suffered some complications after being admitted to a Tata hospital. The Group helped to bring her to Mumbai for treatment, as it would have any other person that needed help; this was a purely humanitarian gesture. However, the leader was apprehended after treatment, and the Bodos

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subsequently came to know of the Tatas’ cooperation with the authorities. This caused serious problems, and was the only time in his life that Ratan Tata needed, or was given, Government protection. Question: How does the Tata Group manage to keep corruption out of its organisation? Dealing with the outside world is a corporate decision; internally, though, it is an individual decision to be honest.

Answer: There is a prominent case, which is still in court, of the MD of a Group company attempting to walk away with clients’ money. When this affair was exposed, the Tatas did not try to sweep it under the carpet. Instead, even while under no legal obligation to do so, they decided to return what people had lost. Although this created a massive financial hole, Tata Sons accepted the moral responsibility of filling that hole. Further, they ensured that the person involved was caught and put behind bars. There is a simple process in place to facilitate honesty: that is, not to tolerate even a ‘minor’ case of dishonesty. All employees are made aware that there are four ways to leave the company: death, retirement, a voluntary shift, or having a case of dishonesty proved against oneself. So ingrained is this idea that even the unions do not take up a case on behalf of a dishonest person. There is, moreover, a culture of openness, with not just employees, but vendors and customers being encouraged to speak freely, and without fear of reprisal. There are also ethics counsellors, and an ethics manual is in place – which is now being amended to reflect the evolving and more international nature of the Group. Any charges made under anonymity are considered baseless and rejected. But the concept of whistle blowers is supported most seriously and every allegation by identified personnel pursued to ensure justice. Question: Many discussions on ethics centre on bribery, or dealings with the Government. Strictly speaking, bribery is illegal, so it should be beyond the spectrum of choices that companies have. In this context, what is general state of affairs in India – and what is the longer-term outlook on what works, and what doesn’t?

Answer: While giving bribes and dealing with corrupt officials is something that is very personal in nature, it is clear that more and more business houses, particularly in Western and Southern India, are following a more ethical model. As a country, India was, for very long, moving in a downward direction on ethics, but has now turned a corner, and is improving again – both on the individual level, and at the company/institutional level. This is part of a worldwide trend: globally, large institutional investors, including hedge funds, now invest almost exclusively in companies that are ‘ethical’. Today, investors are unwilling to tolerate a corrupt management, and many customers in turn prefer to buy only from ethical organisations. That said, there is a broader question of principles, and the willingness to accept one’s moral obligation in a particular situation. For instance, there are many cases where a parent company has not come to the rescue of its subsidiary, which may have been imperilled by corruption among its employees. In contrast to the Tata case cited above, these companies have been allowed to go into liquidation – and the parent has refused to take responsibility. Those who achieve a position of seniority in the Tata Group tend to value ethics highly. Although the Group pays higher salaries than it once did, these are nowhere close to what other firms are prepared to pay. Yet, there are cases of managers who leave the firm for a salary three times higher, and then return to the Group for such ‘intangibles’ as ethics. Question: In its M&A and JV dealings, does the Tata Group place an emphasis on the ethical code? Would it refuse to go ahead with a partnership if the partner firm fell short on the ethics front, even though compelling financial reasons pointed otherwise?

Answer: Most emphatically, yes. On account of its reputation, the Group is inundated with requests to form joint ventures with outsiders. However, there is a strong emphasis on due diligence, and the Group never proceeds with partnerships where its ethics may be compromised. For instance, it does not participate in the film industry, on account of the possible ‘underworld connections’ that exist. Yet, a particular Tata firm decided that it would enter the film industry as an extension of its existing business. Since its board was independent, it decided to do so regardless of the Group’s expectations and beliefs. Immediately, Tata Sons withdrew its nominee from the board, sold its share in the firm,

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and withdrew its name. As a policy, the Group does not go into areas where it risks compromising on its ethics. It also avoids entering the liquor and tobacco businesses as a matter of principle. Question: How can third parties be aligned with one’s governance structure – through an audit, or a contract?

Answer: This is a challenge. In general, there should be an understanding that the party one is dealing with will follow the same principles as oneself. If it ever proved that ethics were violated, the Tata Group terminates its relationship with the third party – but proof is a necessary precondition. At times, third parties complain that their work cannot proceed quickly due to visits by Government inspectors, who demand a pay-off. In such cases, the Tatas commit to stand by their partners, and support them as much as possible even monetarily. It is, however, difficult to judge whether the partner is being honest on this account and you have to just try to do your best in the due diligence. At the broader, country level, this is the real difference between India and China. Even as bureaucracy is prevalent in China - 18 clearances were required to set up a new manufacturing unit of a Tata company in the country - unlike in India, on each of the days when the sanctions were required, these were delivered by the authorities to the Tata offices.

The contents of this paper are based on discussions of The India CEO Forum with Dr JJ Irani, Director, Tata Sons in Mumbai. Some elements of the discussion are not encapsulated in the above due to the closed-door

nature of the session and with due respect to confidentiality.