Shareholder Capitalism to Responsible Capitalism


Vijay Govindarajan & Srikanth Srinivas
Oxygen is essential for survival. Without it we would die in minutes. On the other hand, if we were to give someone only pure oxygen and nothing else, they would suffocate to death. Oxygen needs to be balanced with other nutrients for survival and prosperity.

capatalismWe believe profits for an organization are like oxygen. They are necessary for survival, but not sufficient. Organizations that are driven primarily by profit maximization will also eventually suffocate to death. Profit and purpose need to go hand in hand for an organization’s survival and prosperity.

When you take a picture of yourself with the Taj Mahal in the background, you want the Taj Mahal in all its majesty. At the same time, you want your picture to be prominent enough; not so small that you have to strain your eyes to see it, but not so big that the Taj Mahal gets obscured.

Similarly, in a company, purpose, while in the background, should shine through in all its majesty in everything the company does. And profits should be just right, not so prominent that it clouds the judgment of the executives and employees, and not so minuscule that it cripples your ability to fulfill your purpose.

Let us take two examples:

Satyam: The profit perspective was so prominent that purpose got obscured. Judgment of the executives was so clouded that the company suffocated to death.

Narayana Hrudayalaya: Purpose shines through in everything they do. “Affordable, quality cardiac care for the masses” serves as the primary driver. With that as the background, careful attention is paid to the profit perspective — costs, economies of scale, pricing etc. In spite of the fact that only half the patients pay the full fee, and they are cheaper than comparable Indian hospitals by at least 50% (and much cheaper by international standards), they are a profitable organization. How did they do it? They started with the question , “How can we provide quality, affordable care to the masses?” (Not with, “How do we make money? How do we earn 20% return on our capital ? How do we maximize profits for investors? “). That led them to a strategy that involved attracting paying patients with its reputation for high quality, and, at the same time, having a relentless focus on lowering costs; and to use the surplus gained from the paying patients to subsidize the rest. They implemented this strategy by procuring the highest quality equipment and hiring the best surgeons and cardiologists with extensive training and experience in world-class institutions ; and, at the same time, to contain costs, they increased equipment utilization by a factor of 8 compared to industry average.

With the large volume of surgeries performed and with specialization of surgeons, their productivity was high, the quality outcomes were world class, but at a fraction of the cost. They used the volume to negotiate better deals with suppliers. Every process was critically examined with the express purpose of dramatically reducing unit costs while keeping quality high. When they realized that this was still not enough to reach the masses, they partnered with a farmer’s cooperative to create a very affordable insurance scheme that brought 1.7 million people into the fold. In other words, they were looking at every avenue to realize their mission. Purpose was the driver. Profits were the enabler of their dreams.

Narayana Hrudayalaya serves as a shining example not only for India, but also for the rest of the world. They have demonstrated that having a clear purpose (the specific value contribution to society), supporting that purpose with a strategy of highest quality at the lowest cost, implementing the strategy by using the best equipment and people to ensure the highest quality and critically examining every process to dramatically lower unit costs, looking at the entire value chain and partnering as needed to provide all the services needed for consumers, and then appropriating a fair share of the value created is a sound way to stay profitable for ever. If an organization focuses on efficiently and effectively achieving the purpose, profits will follow. It is not the other way round.

India and the rest of the world have seen an enormous fallout from the effects of greed; with companies and executives grabbing value even as they were destroying value to society. Companies need to rethink the way they operate.

Capitalism is the best system to promote economic prosperity. But we must shift from shareholder capitalism to responsible capitalism. Companies need to focus first on contributing significant value to society and then appropriating a fair share of that value for themselves. Organizations like Narayana Hrudayalaya show the way.

There is enormous scope for companies to contribute value to Indian society: in healthcare, education, infrastructure (roads, electricity), housing, environment (clean air, potable water), basic needs (hygienic food, clothing), etc. This contribution can drive significant profits. In addition , there are so many countries in Asia and Africa where the same principles can be applied. We see unlimited growth opportunities for such organizations.

The single-minded pursuit of short-term profit maximization, personal greed, and cronyism nearly choked the global economy. While it was resuscitated, it is still crippled, and the remnants of the damage are still to be seen everywhere . It is clear that this model has to change.

Now is the time for India to lead the world with “Perpetual Profit” organizations. We need foreigners coming to take pictures with Taj Mahal in the background AND with world-famous , Indian “Perpetual Profit” organizations in the background.

Vijay Govindarajan is a professor at Tuck School at Dartmouth and the author of the NYT and WSJ Best Seller Reverse Innovation. Srikanth Srinivas is a retired management consultant and the author of Shocking Velocity.

(The Article First Published in Times of India on 28 December 2012)

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