Asish K Bhattacharyya: Pragmatism in corporate governance

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I have received some comments on my views on ‘work with stakeholders’ published in this space on September 5, 2011. Some argued that the philosophy of working with stakeholders rather than managing them lacks pragmatism. Some others believe that the idea of ‘working with stakeholders’ is subsumed in the concept of corporate social responsibility’ (CSR). All these comments have induced me to elaborate on the concept of working with stakeholders.

We may illustrate, with an example, what we mean by ‘working with stakeholder’. There are two companies (Y and P). Both of them are in the growth path. Therefore, they require land to establish production facilities in different geographical locations. Assume that the proposed ‘Land Acquisition, Resettlement and Rehabilitation Act’ is in place.

Private companies are required to acquire land directly from landowners without government intervention. The law does not bar use of services of broker. Y takes a pragmatic view. It uses brokers to acquire land without getting its hand dirty, with the knowledge that most of them use coercive means to acquire land. P engages with landowners and others, whose livelihood is based on the current use of land, to understand their concerns, addresses those concerns adequately and acquires land from willing landowners.

In some cases, it pays compensation higher than what is required by law and considers it a moral responsibility to resettle and rehabilitate land losers. Therefore, it initiates many activities, which are not required by law. P’s policy is to work with stakeholders.

Is the land acquisition policy of P in conflict with the core objective function of a company to create shareholder value? Some may answer the question in affirmative.

They may argue that the company Y creates higher shareholder value than what is created by P because the cost of acquisition is much higher for P than the cost incurred by Y and perhaps the time required to complete the land acquisition process is much longer for P than that for Y. Moreover, P will continue its engagement with the local community to continually improve the living of locals, and will thus, continue to incur additional costs.

Above analysis is true in the short term. Usually life of companies is measured in decades. Therefore, it is worthwhile to form policies taking into consideration long-term sustainability and growth. The company Y, in our example, is exposed to high reputation risk, which might cost its fortune in the long run.

Current research shows that a company with low reputation finds it difficult to attract and retain talent and even customers. Moreover Y’s land acquisition strategy might create a social environment in its vicinity that is likely to inhibit high productivity as its employees at lower levels (who are mostly locals) and their families will remain unhappy over a very long period. Further, P will enjoy high reputation and will be able to collect equity capital at lower cost. In the long term, P creates higher shareholder value than what is created by Y.

One may argue that managers and investors live from quarter to quarter or at best year-to-year. Therefore, managers have no motivation to manage companies with long-term perspective. But this argument is flawed. Value of a company, at any point in time, depends on the amount, timing and uncertainty of cash flows that company is expected to generate in future over a long period of time. Therefore, even investors who invest in the equity securities of the company for a short period are also benefitted if the company works with stakeholders.

Working with stakeholders goes much beyond CSR. CSR is philanthropy linked to the business strategy. Companies select those CSR projects, which facilitate implementation of the business strategy. But essentially it is philanthropy.

Therefore, for most companies, it is a peripheral activity. Most companies cut expenditure on CSR activities when the going is not good. Managers do not get intensively engaged with the stakeholders, who might be beneficiaries of the CSR activities. Managers decides internally what projects will benefit the company most while benefitting the local community.

It is inappropriate to view the Voluntary Guidelines on Social, Environmental and Economic Responsibilities issued by the Ministry of Corporate Affairs as philosophical statements, which lack pragmatism. There are companies in India and abroad, which has successfully adopted the policy of working with stakeholders without compromising the core objective of creating shareholder value.

(Ashish K Bhattacharyya is the The Director, International Management Institute, D.H. Road, Joka, Kolkata – 700104. He can be reached at Email: asish.bhattacharyya@gmail.com )

(Sourced from Business Standard)

Image: akaritx.com

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