World Economic Forum @ Davos 2010 and VMD Syndrome The annual meeting of World Economic Forum at Davos just concluded with the world leaders looking back on the global meltdown of last year with a sigh of relief, sense of (false?) achievement and prospects for growth down the line. My flagship blog “Value Management Deficiency Syndrome”, dated March 5, 2009, dealt with global financial meltdown, tracing reasons thereof and leading to erosion of value systems in the world and deficiency in management of values. Almost a year later, I am delighted that the World Economic Forum at Davos 2010 has highlighted the need for a set of values which could apply to global financial institutions. In support of this, I am falling back on a published media report and I quote: Quote: “…reported survey, based on 130,000 Facebook members from ten G20 economies, also found that only a quarter of people believe that large, multinational companies have a "valuesdriven" approach to their sectors. The proportion rose to 40pc for small and mediumsized businesses. Half of respondents in France, Germany, India, Indonesia, Israel, Mexico, Saudi Arabia, South Africa, Turkey and the US believed that universal values exist. Klaus Schwab, founder and executive chairman of the WEF, said the report underlined the need for a set of values which must be applied to global economic institutions. "Our present system fails to meet its obligations to as many as 3bn people in the world. Our civic, business and political cultures must be transformed if we are to close this gap." When asked to identify which values were most important for the global political and economic system, almost 40pc chose honesty, integrity and transparency, 24pc chose others' rights, dignity and views, 20pc chose the impact of actions on the wellbeing of others, and 17pc chose the preservation of the environment. Almost twothirds of respondents felt that people do not apply the same values in their professional lives as they do in their private lives. When asked whether businesses should be primarily responsible to their shareholders, their employees, their clients and customers, or all three equally, almost half of the respondents chose "all three equally". Unquote I am glad that this realization has dawned at highest global economic body as rightly reflected by the respondents of the survey. It is sad that I was neither present at Davos 2010 nor a respondent in the survey. I have spoken exactly about the accountability and responsibility of the promotors or owners of business towards all the
stakeholders including financial institutions, employees and customers. I had taken reference of Mr. Ramling Raju of Satyam Computers Ltd in March 5, 2009 blog, which I reviewed in retrospects again on January 22, 2010 after take over and revival by Mahindra Group. Global Bandwidth of Values: Now it is for World Economic Forum to initiate the process to translate the findings of the survey into practice. They must institute, if not already done, an expert group to bring about uniformity in basic minimum set of values which should govern the relationships between different stakeholders. A clear line must be drawn where goodness ends and criminality creeps into corporate governance. But in the complex world of business & politics this is not possible due to divergent value systems of different nations of different shades & hues ranging from tax havens and capitalists to dictators and from oil Sheikhs to communists. So in order to bring some semblence of common values globally acceptable, there must be a bandwidth of values within which a business enterprise can operate without endangering the global financial and trading systems. Corporate Governance: Sarbanes Oxley Act 2002 (SOX) was introduced by President George Bush to address the corporate governance, accountability and responsibility. It was touted as most comprehensive reform in corporate governance post world war. And yet it was only in this period, and inspite of SOX, that the present global financial crisis was manufactured by US corporates. In fact SOX compliance became another money spinner for consultants. This simply goes to bring home the point that legislation alone can not reduce frauds. With globalization, the value systems of the promoters of business over ride all the legislations around the world and find the path of maximum benefits with least costs. So if governments wish to do something about frauds, they should work towards minimising the excessive benefits of bypassing laws & regulations and maximising the costs of doing so. From the hindsight we can say that nations have paid trillions of dollars in terms of financial bailouts and stimulous packages as costs of frauds perpetrated by corporate world. The costs simply shifted in multiples from fraudsters to the governments! Point of No Failure: One year later there is no convergence amongst governments in the developed nations on approaches to bring about checks and controls. US is encouraging banks to grow bigger beyond what I call “Point of No Failure”. Large banks like Citi Bank was too big and was bailed out. So they can continue to take undue risks without any costs to them. On the other hand European bankers want to be very cautious and have not hesitated in pulling
down the shutters. With such poles apart approaches how can the financial world becomer safer?
Compliance with Value Systems: This divergence brings out the need to leave the value system to the enterprenuers and promotors but within globally acceptable “band width”. The promotors should state their value systems chosen out of a set of approved principles, ethics and practices. This value system should be approved, modified or rejected by the stakeholders viz customers, employees and the financial institutions. Once ratified by all the stakeholders, the board must submit the same to the government authorities like Registrar of the Companies, or regulators like Securities & Exchange Board of India (SEBI), or other local bodies. Every organization then must comply with its own stated value systems and submit compliance reports to the stake holders every year in AGM for ratification. As Mahindra Satyam has done, there should be a chief compliance officer in charge of monitoring the ethics & value system of the organization with full accountability. To help achieve this objective, a company must elaborately identify the operating factors, out of the globally acceptable set of values, which need to be monitored within the permissible margins for variation ( the bandwidth) with lower & upper limits. That is the only way forward to arrest the decay in the global value system. There will always be deficiencies in values in any organization which must be identified, corrected and managed. Value Management Deficiency Syndrome is a default option and if we don’t work to stop the organizational decay, it is bound to happen with no efforts by itself. Value Deficit Tax: We have value added tax, fringe benefit tax, minimum alternative tax and security transaction tax and endless plethora of taxes. What about a Value Deficit Tax? A tax to be levied for non compliance with approved & stated value systems? Like GST (goods & services tax) there could be Value Defict Tax which can take care of all sorts of negative practices indulged in by a company. The Executive Chairman of World Economic Forum must be focussing on evolving set of values (or global band width of values) which must be applied to global financial institutions as well as business enterprises. A global Value Deficit Tax would make all sit up and do something about it. Davos 2011 then sould be an inetersting event to watch out!
Vijay M. Deshpande Corporate Advisor, Strategic Management Initiative, Pune February 5, 2010
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