IFIM Focus Sept 2015 by Marushka Monette

APRIL 2014 - SEPTEMBER 2014

Vol: 10. No: 1

ISSN: 0973-9165

www.ifimbschool.com

AN EMPIRICAL ANALYSIS TO ASSESS INTANGIBLE ASSETS IN TUNISIA AND ITS RELEVANCE IN THE KNOWLEDGE -BASED ECONOMY Soumendra K. Dash, Ph.D, African Development Bank, HQs, Tunisia Dhekra Azouzi, Tunis El Manar University, Tunisia

FOCUS, the management journal, is being brought out by the Institute of Finance and International Management (IFIM) with a view to facilitate effective dissemination of information with regard to various management issues and problem solving methodologies relevant for practising executives as well as for academicians working in the field of management. This is to foster a better understanding of the theories and practices of management. More specifically, the coverage will include discussions on theories and concepts, problem solving through consultancy assignments, research papers based on industry studies or on findings of research projects executed and case studies as an important tool for getting an insight into industry practices and to understand the need for adopting an integrated approach to problem solving. The following could be some representative topics or focus areas for writing an article: • Services marketing • Strategic issues, discussions, approaches with regard to different functional specialisation • Operations management • Logistics and supply chain management • Papers focusing on globalisation issues • E-business and e-marketing • Business process outsourcing • Environmental management systems • Service operations management • Entrepreneurship and small business management • Computer applications • Human resources management • Insurance, health, infrastructure management, etc • Financial management • Case studies related to the above topics • Review articles on state-of-the-art topics, issues, subjects, concepts, strategies, techniques and management approaches. Guidelines for authors are available at www.ifimbschool/focus Frequency of publication: Biannual - April/October Annual subscription for authors are available at www.ifimbschool/focus Views expressed in the articles are those of the respective authors. IFIM, Bangalore does not accept any responsibility and do not necessarily agree with the views expressed in the articles. All copyrights are respected. Every effort is made to acknowledge source material relied upon or referred to, but IFIM FOCUS journal does not accept any responsibility for any inadvertent omissions. Except as authorised, no part of the material published in IFIM FOCUS may be reproduced or stored in retrieval systems or used for commercial or other purposes. All rights reserved. Copies of published material from the journal may be obtained on prior permission for limited and specified reproduction sought on payment of prescribed charges. The Refereeing Process All articles received by the journal will be first reviewed by the Editor for their appropriateness and completeness in terms of the requirement of the journal. Articles, that meets the committee’s basic requirements, will be reviewed by two referees conversant with the subject. Once the papers are cleared by the referees, they will go for final publication in the journal. This is keeping in with the standards stipulated by any international refereed journal.

IFIM International Journal of Management | FOCUS April 2014 - September 2014

Contact Address: The Editor, FOCUS: The International Journal of Management Digest, Institute of Finance and International Management (IFIM) #8P & 9P, KIADB Industrial Area, Electronics City, Ist Phase, Bangalore-560 100. Tel: 91-80-4143 2888, 4143 2800. Fax: 91-80-4143 2844. Website: www.ifimbschool.com/focus Email: research@ifimbschool.com

Editorial Board: 1. Mr. Sanjay Padode, Secretary, Centre for Developmental Education, Bangalore 2. Dr. Madhumita Chatterji, Director, IFIM Bangalore 3. Dr. R. Satish Kumar, Chief Editor, Professor, Marketing and Dean (Research & International Relations), IFIM Bangalore 4. Dr. M. R. Gopalan 5. Dr. Prakash Apte, Ex. Director, IIM Bangalore 6. Dr. Pankaj Chandra, Ex. Director, IIM Bangalore 7. Dr. S. Sadagopan, Director IIIT-Bangalore 8. Dr. C. Jayachandran, Professor & Director, Center for International Business, School of Business, Montclair State University, Montclair, NJ 07043 9. Dr. Namjae Cho, Director, Digital Business & Management Center, HIT # 309, Hanyang University, Seoul, 133-791, Korea 10. Prof. John Bicheno, Reader of Operations Management Department, Business School, University of Buckingham, U.K. 11. Dr. Paul Swamidass, Director of Thomas Walter Center for Technology Management, Auburn University, USA. 12. Dr. R. Balachandra, Professor, Information, Operations and Analysis Group, College of Business Administration, Northeastern University, Boston, USA Editorial Representative Outside India 1. Dr. R. Nat Natarajan, Asst Dean, W.E. Mayberry Professor of Management, 407B, Johnson Hall, College of Business, Tennessee Technological University, Cookeville, TN 38505, USA, is our representative for outside India Editorial Committee (Operations): 1. Dr. R. Satish Kumar, Chief Editor, Professor - Marketing and Dean (Research & International Relations), IFIM Bangalore 2. Dr. M. R. Gopalan 3. Dr. Sridevi, Associate Professor, Finance, IFIM Bangalore 4. Prof. M H Sharieff, Associate Professor, IB & Strategy area, IFIM Bangalore Referee Panel: 1. Dr. G.G. Hegde, Associate Professor of Business Administration, Katz Graduate School of Business, USA. University of Pittsburgh 2. Mr. S. Suresh, Head of Software Projects, Glaxo SmithKline, Mumbai 3. Prof. Ramesh Kumar, Professor of Marketing IIM, Bangalore 4. Dr. Nat Natarajan, Tennessee Technological University, USA 5. Dr. Rishikesh Krishna, Director IIM, Indore 6. Dr. Mathew Manimala, Chairperson, Organisational Behaviour and Human Resources Management Area, IIM Bangalore 7. Dr. Vasanthi Srinivasan, Chairperson, Centre for Corporate Governance and Citizenship 8. Dr. Ravi Anshuman, Professor of Finance & Editor IIMB Management Review, IIM Bangalore 9. Dr. R. Srinivasan , Professor of Finance & Control, IIM, Bangalore 10. Dr. Madhumita Chatterji, Director & Professor, Chairperson - Centre for Social Enterprencship and Mannagement IFIM, Bangalore 11. Dr. R. Nargundkar, Professor of Marketing and Sr. Dean (Academics), IMT Business School, Ghaziabad

Published by Dr. R. Satish Kumar on behalf of Institute of Finance and International Management, No-8 (P) & 9 (P), KIADB Industrial Area, Ist Phase, Electronics City, Bangalore - 560100. Email: satish.kumar@ifimbschool.com

IFIM International Journal of Management | FOCUS April 2014 - September 2014

From the Editor's Desk

Imparting Quality Management Education: A Major Challenge for Indian B-Schools IFIM Business School situated in IT hub of India Electronics City, Bangalore. It was established in the year 1995 by CDE Society and is going to complete 20 years in the year 2015. “The Focus” was launched in the year 2005 and is going to complete ten years in the year 2015. In the past 19 years IFIM strived hard to meet upto the expectations of students, parents and recruiters. To meet the expectation of our stakeholders, we at IFIM B-School have come out with a few innovative measures. This also helped our Business School in getting ISO 9001 Certification, and prestigious SAQS Accreditation. We have set up state –of- the art Business Analytics Lab in association with IBM and Finance Lab in association with Prabhudas Lilladher. Recently we have initiated setting up of Innovation Lab and applied for AACSB Accreditation. There are over 4000+ AICTE recognised B-Schools in India. There are innumerable challenges ahead of B-Schools in attracting quality students, faculty members and in the process transforming our students into professional managers of tomorrow. The big concern for B-Schools is of imparting Quality education through continuous improvement in management curriculum, adopting innovative pedagogy and teaching tools such as Innovation Labs, Simulation and Management Games. Few challenges before B-Schools in India are as follows: 1. Upgrading the Infrastructure: To ensure quality Management Education, B-Schools have to upgrade their Infrastructure such as Classrooms, Computer labs and libraries. Libraries should possess required quantity and quality of books with the Electronic databases 2. Updating the Curriculum: MBA curriculum needs to be updated every two years to ensure the quality management education and in turn make our students employable. 3. Attracting and retaining experienced Faculty: To attract and retain experienced faculty members, the B-Schools need to offer salaries and other benefits on par with the reputed B-Schools. It is imperative for the B-Schools to provide, MDP and Consulting opportunities to motivate the faculty members and keep them abreast of current Industry trends and practices.

IFIM International Journal of Management | FOCUS April 2014 - September 2014

4. Ranking of B-Schools: Ranking of B-Schools by various magazines and agencies have become increasingly popular among the stakeholders and hence B-Schools have to upgrade their capacities and enhance their performance to get competitive ranking. 5. Employability of MBA graduates: As per the recent studies, the employability level of our MBA graduates is very low posing major challenges to the B-Schools in imparting best of the knowledge, skills, attitude, and soft skills to students and make them job ready. 6. Academia-Industry Collaboration: It is high time for the B-Schools to collaborate with Industry and involve Industry practitioners in Admission, Curriculum Development, Teaching, obtaining Projects, Summer Placement and Final placement for the students. 7. Research & Publications: In addition to all the above, in order to be contemporary, B-schools have to engage in business research, training and consulting activities on an ongoing basis to deliver their best to academia and industry. The above initiatives will definitely help B-Schools in enhancing the quality of Management Education and make our MBA graduates job ready.

Dr. R. Satish Kumar Chief Editor - FOCUS

IFIM International Journal of Management | FOCUS April 2014 - September 2014

Index

Title and Name of the Author

Page No.

AN EMPIRICAL ANALYSIS TO ASSESS INTANGIBLE ASSETS IN TUNISIAAND ITS RELEVANCE IN THE KNOWLEDGE

07-12

IS LEADERSHIP WITH RESPECT TO INDIAN CSR STILL IN A CONFUSED STATE ?

13-44

ATTITUDE OF EMPLOYEES TOWARDS ETHICAL LEADERSHIP

45-49

ETHICAL HUMAN RESOURCE PRACTICES -Prof. Shampa Chakraberty

50-59

DO GRADE ASSIGNED TO COMPANIES AFFECT UNDER PRICING?-A STOCHASTIC ANALYSIS FROM THE INDIAN EQUITY MARKET -Souvik Banerjee

60-65

THE PRICING PERFORMANCE PUZZLE OF INITIAL PUBLIC OFFERINGS (IPOS)-EVIDENCE FROM INDIAN IPO MARKET

66-75

RUPEE VOLATILITY AND STOCK PERFORMANCE -Dr. A. Satya Nandini & Mr. Ganesh Kumar.R

76-84

SUSTAINABILITY AND LONG TERM GROWTH IN THE FINANCIAL MARKET SYSTEM

85-94

THE IMPACT OF SPIRITUALITY ON INDIVIDUAL ENTREPRENEURIAL ORIENTATION -AN EMPIRICAL STUDY

95-103

INTERVIEW WITH AJAI CHOWDHRY

104-109

CAPITAL IN THE 21st CENTUARY (BOOK REVIEW) -Abhishek Narasimha

S.No.

-Soumendra K. Dash & Dhekra Azouzi

-Prof. Sumona Ghosh

-Dr. Radha. R

-Dr.A.Satya Nandini & Leena Guruprasad

Dr. Aloy Soppe

-Dr. Muhammad Shahid Qureshi, Dr. Muhammad Mubashir Mukhtar & Mr. Adnan Hussaion

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110-113

Cover Story

AN EMPIRICAL ANALYSIS TO ASSESS INTANGIBLE ASSETS IN TUNISIA AND ITS RELEVANCE IN THE KNOWLEDGE -BASED ECONOMY Soumendra K. Dash, Ph.D ^

Dhekra Azouzi ^^

Abstract

1. Introduction

It is the first work to measure intangible investment in Tunisia based upon the CHS methodology and different databases and statistics. Expenditures on intangibles in Tunisia amounted to around 11 billion US dollar, accounting for around 25% of GDP in 2008. This paper attempts to find out how important intangible assets are in the present knowledge based economy like Tunisia. Intangible assets are country's weightless wealth which helps to obtain real growth and real profit for a company. Every country should understand that paying needed attention to knowledge management in general and to intangible assets especially may help to understand and nurture its core strength and competencies. This is how each developing and underdeveloped countries can create their own competitive advantage in the world market. More precisely, the country's intangible assets should be priced at fair market value. The strategic relevance of intangible assets management for a country's competitiveness, understanding the way these assets are converted into value is of paramount importance. It is very vital for the country to harness the value from its intangible assets. The further research in this field will develop not only the direction of testing researched models but also the direction of developing and testing other models of intangible assets valuation, management and optimal allocation of intangible assets in various countries.

In today's economy, the intangible assets play a key role and have become very important in achieving sustainable development. The developed economies are becoming knowledge based economy. These intangible assets are generally obtained from traditional factors like labour, land and capital. However, the differentiating factors among the developing and developed countries have been the quality of knowledge management and innovation management. The main characteristics of innovation based economies are: knowledge replaces traditional factors of production land and labour as the fundamental factors of production. Intangible assets create a significant part of the value differentiator between countries. Intangible assets are non-physical sources of value generated by discovery, unique organisation designs, or rare human resource practices. These are non-material sources or creating country's value based on the cities capabilities, organisations' capabilities. They are non-physical in nature, they are capable of producing future economic benefits, and they are protected legally through intellectual property rights. The country like Tunisia has been able to harness economic benefits significantly in the past but the momentum has been lost due to changing socio-economic and political priorities.

^African Development Bank, HQs, Tunisia s.dash@afdb.org | ^^Tunis El Manar University, Tunisia , adhekra@yahoo.fr

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2. Measurement of investment in intangibles Various definitions of intangible capital are associated to various approaches to measuring intangibles: on the one hand, definitions of intangibles are mostly due to Schumpeter's classification based on product and process development, organizational change, management, marketing and finance (Schumpeter 1934). However, despite this great variety in defining intangibles, the common and durable problem is the 'invisibility' of many of these intangible assets which makes their measurement difficult. On the other hand, According to Sichel (2008), there are three recent approaches that can be used to measure intangibles; these approaches are the financial market valuation (Hulten et al., 2008), the alternative performance measures (Cummins, 2005) and the direct expenditure approach (Nakamura, 1999 and 2001). The latter approach was adopted by Corrado, Hulten and Sichel (CHS 2005; 2009) who developed a wide array of expenditure based measures for many intangibles employed by American firms and distinguished between three categories of intangible assets: computerized information, innovative property, and economic competencies. Originally, the CHS method was applied to American data and it has now been the corner stone of many studies focused on different countries. We use the same methodology as CHS (2005; 2009) for Tunisia for the purpose of creating a set of estimates for intangibles in Tunisia. It is worth to note that for some intangibles, it has been very difficult to construct reliable measures over time and it has been compulsory to make a number of assumptions to cope with the limited available information. Our estimates are a starting point in this area of study as it is the first attempt to apply the CHS methodology to measure intangibles in Tunisia.

2.1. Computerized Information According to Corrado et al. (2005), computerised information consists of two elements: software and computerized database. In other terms and according to Miyagawa &Hisa (2013), 'Computerized information consists of custom and packaged software, and own account software'. For the custom and packaged software, we have no indication about how to calculate their value. That's why; we assume that this expenditure is about 35% of the total

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Information and communication technology (ICT) expenditure. These data is obtained from World Bank. However, we have total Information and communication technology expenditure per capita; to obtain the total of these expenditures for the whole population, we multiply the ICT expenditure by the population. Since spending on software is not capitalized in the Tunisian System of National Accounts, we use the Miyagawa & Hisa's (2013) estimation method inspired from the JIP database. Hence, we begin by estimating the number of workers who are involved in the development of software for their own firms and their salaries to be able to assess the value of own account software. These data are obtained from the World Bank and the National Institute of Statistics (INS); the number of these workers is available for a period of four years spanning from 2005 to 2008, but we have the wage data only for 2007, this salary is in Tunisian dinars and we have to convert it in US dollars. In these conditions, we have assumed that the average monthly salary of each worker does not fluctuate from 2005 to 2008. The next step is to multiply the number of workers by the annual salary to obtain an estimation of the own account software investment.

2.2. Innovative Property Two categories of innovative property: research & development and oil & gas & mineral exploration. These data are available from the World Bank and the National Institute of Statistics (INS). However, data extracted from INS are in Tunisian dinars and should be converted in US dollars. It is worth to mention that the second category is the sum of three groups as they are mentioned in the INS: oil and natural gas extraction, mines and petroleum refining.

As in Corrado et al. (2009) and Barnes & McClure (2009), we find other categories of innovative property: Ÿ

development costs in ﬁnancial industry; new architecture and engineering design; and other science and engineering services (purchased and own-account).

Copyright and licence costs are obtained from the World Bank as charges paid for the use of intellectual property. The ﬁnancial services industry consists in research and development of new processes and products. Since it is not explicitly observed, development costs in the ﬁnancial industry are approximated by only 20% of the total of financial services according to Corrado et al. (2005). These data are obtained from the INS and are in Tunisian dinars. For new architecture and engineering design, Corrado et al. (2005) estimated their value as 50% of total expenditure on architectural and engineering. For our work, these data are obtained from the INS and are in Tunisian dinars. Own-account other science and engineering investment is given by 'internal expenditure in research & development' calculated by the National Observatory of Science and Technology. However, purchased other science and engineering investment were taken into account in other parts of expenditures as it is mentioned by Baldwin et al. (2009).

2.3. Economic Competencies The third category of intangible assets is economic competencies. It consists of the brand equity, the firm specific human capital and the organizational capital. Inspired by anterior studies focused on intangible assets, this study includes advertising expenditure as brand equity, direct and indirect firm expenses on training as firm-specific human capital and purchased and ownaccount organizational capital in the economic competencies category. Advertising expenditures are estimated as 60% of total expenditures on advertising services and products. These

data are due to Media Scan agency and Sigma Group. Direct firm expenses are the costs of developing workforce skills such as training and indirect expenses consist of the opportunity cost of employee time spent on formal and informal training. Only direct expenses are available in the National accounts of Tunisia. Hence, we consider that investment on firm-specific human capital is given by the data on direct firm expenses. Investment in organizational capital is composed of purchased investment in organizational structure and own-account investment in organizational structure. According to Corrado et al. (2005), purchased investment in organizational structure is approximated by the total revenue of the management consulting services industry which is between 10 and 20 TND million (UTICA Survey, 2011). To cope with this lack of data, we consider that this expenditure is of 15 TND million for the period of study. For the own-account investment in organizational structure, it is estimated as 20% of labour compensation of total management

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3. Results In this part, we measure intangible assets in Tunisia in nominal terms for the period spanning from 2005 to 2008.

As it is shown in Table 1 and figure 1 and referring to Barnes and McClure's (2009) work, we can see a clear similarity between Tunisia, Japan and Germany in the composition of intangible investment (in terms of the main categories) with an important weight for the innovative property (Table 1). The share of the innovative property in the total amount of nominal investment in intangibles was more than 60%. Scientific research & development is the most important component of the innovative property. This result is, however, in contradiction with Muntean's (2013) findings mentioning that the economic competencies are the dominant category in intangible assets. Computerised information and economic competencies have approximately the same proportion in the composition of intangible assets in Tunisia.

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FIGURE 1. COMPOSITION OF THE TOTAL INTANGIBLE INVESTMENT IN TUNISIA

Figure 1 gives us an idea about the evolution of the intangible assets, three categories between 2005 and 2008; it seems clearly that only the innovation property has been growing during this period while computerised information and economic competencies have known a steady stagnation. This can be explained by the government's efforts to encourage innovation. To build just a small idea about the contribution of intangible investment to economic growth, we have calculated, in the last row of table 1, the percentage of these assets in the GDP. The corresponding percentages are so high and exceed the rates mentioned in anterior studies. In fact, intangible assets account for 9% of GDP in Japan (Miyagawa and Hisa, 2013), 11% for United Kingdom in 2004 (Marrano and Haskel, 2006), 9.1% for Finland in 2005 (Jalavaand Alenen, 2007), 5.2% in Italy and Spain, 7.1% in Germany and 8.8% in France (Hao, Manole and van Ark, 2008), 10% for the Netherlands over 2001-2004 (Van Rooijen et al., 2008), 13.2% for Canadain 2008 (Baldwin et al., 2011).

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occupations (Corrado et al., 2005). For this reason, we multiply the number of managers by their average salary. These data are obtained from the INS. However, it is important to mention that we have only the average salary for 2007. That's why we assume that this salary does not fluctuate for the period of study.

6. Conclusion In Tunisia, it is found that innovation is playing a dominant role in intangible assets where are economic competencies and computerized information do have very small contribution to the overall economic growth and both of them have very small contribution. Intangible assets like Economic efficiencies and computerization, information & technology are not growing over the years in Tunisia. However, it seems that the government does encourage the growth of one type of intangible assets to improve i.e. innovation. The aggregate impact of intangible assets could be much more widely felt in the growth of Tunisian economy if the government could understand and encourage the simultaneous growth of all the intangible assets in the country. The knowledge, innovation are the intangible assets which have become a locomotive that defines the contemporary development of all the countries in the modern knowledge based world.

References: Baldwin, J.R., W. Gu and R. Macdonald (2011), Intangible Capital and Productivity Growth in Canada, Statistics Canada, mimeo. Barnes, P. & McClure, A. (2009), Investments in Intangible Assets and Australia's Productivity Growth, Productivity Commission Staff Working Paper. Corrado,C.,Hulten, C., &Sichel, D. “MeasuringCapitalandTechnology:AnExpanded Framework,” in C. Corrado, J. Haltiwanger, and D. Sichel (eds), Measuring Capital in the New Economy, Studies in Income and Wealth, Vol. 65, University of Chicago Press, Chicago, 2005. Corrado, C., Hulten, C., &Sichel, D. (2009).Intangible capital and U.S. economic growth, Review of Income and Wealth, International Association for Research in Income and Wealth, 55 (3), 661- 685, 09. Cummins, J. (2005), A new approach to the valuation of intangible capital, in C. Corrado, J. Haltiwanger and D. Sichel (eds), Measuring Capital in the New Economy, National Bureau of Economic Research, Studies in Income and Wealth, Vol. 65, Chicago: University Chicago Press, pp. 47-72. Hao, J., V. Manole and B. van Ark (2008), Intangible Capital and Growth – An International Comparison, Economics Program Working Paper Series, EPWP No. 08-14, Conference Board Inc., New York, December. Hulten, C. R., J. Hao, K. Jaeger (2008), Intangible Capital and the Valuation of Companies: A Comparison of German and US Corporations (Interim report), The Conference Board, New York. Jalava, J., Aulin-Ahmavaara, P. &Alanen, A. (2007). Intangible capital in the Finnish business sector, 1975-2005, ETLA Discussion Papers no. 1103. Marrano, M. G., Haskel, J., & Wallis, G. (2009). What happened to the knowledge economy? ICT, intangible investment and Britain's productivity record revisited, The Review of Income and Wealth , 55 (3), September, 686-716. Miyagawa, T. and S. Hisa. (2013). “Measurement of Intangible Investment by Industry and Economic Growth in Japan”, Japan, Public Policy Review, 9 (2), pp. 405-432. Muntean, M. T. (2013). Intangible Assets and Their Contribution to Productivity Growth in Ontario, Ontario Ministry of Finance. Nakamura, L. (1999), Intangibles: What put the New in the New Economy?, Federal Reserve Bank of Philadelphia Business Review, July/August, pp. 3-16. Nakamura, L. (2001), What is the US Gross Investment in Intangibles? (At Least) One Trillion Dollars A Year!, Working Paper 01-15, Federal Reserve Bank of Philadelphia, Philadelphia. Sichel, D. (2008), Intangible capital, in S.N. Durlauf and L.E. Blume (eds), The New Palgrave Dictionary of Economics, 2nd edition,

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FOCUS Research Papers

IS LEADERSHIP WITH RESPECT TO INDIAN CSR STILL IN A CONFUSED STATE

A STUDY OF THE PARTICIPATION OF THE PRIVATE SECTOR COMPANIES OF INDIA IN CORPORATE SOCIAL RESPONSIBILITY ACTIVITIES.

Prof. Sumona Ghosh^ Abstract Purpose –This paper aims to explore in to the aspect of establishment of a pattern of participation of CSR activities amongst private sector companies as reflected in the respective company documents in the public domain, taking absolute profit as the parameter. The paper also focuses on the policy implications that follow from the present study.

Design/methodology/approach –An empirical and analytical study was undertaken whereby the corporate official websites of the companies were analyzed for the time period 2006-2007 to 2008-2009. Data was then generated from such an analysis using Qualitative Document Analysis. For this study we used “number of sentences” as the unit for measurement of CSR participation. Data were entered into SPSS to generate descriptive statistics; Pearson's Correlation, Multiple Regression Analysis and Conjoint Analysis were used to analyze the data. Average sentences (mean) spent on

the various fields of CSR activities were calculated. Coefficient of variance was also calculated to study the level of consistency or dispersion. Pearson's Correlation Analysis was conducted to establish a pattern across deciles with respect to CSR activities, deciles being characterized on the basis of absolute profit. A Multiple Regression Analysis was conducted to identify those attributes in the form of CSR activities that had a significant impact on the deciles. Conjoint analysis was performed to: To estimate the relative importance attached to the significant CSR activities by the deciles, deciles characterized on the basis of absolute profit. Ÿ

Ÿ To estimate the relative importance attached to different levels of the CSR activities by the deciles, deciles characterized on the basis of absolute profit.

^Assistant professor, Department of Commerce and Business Administration, St. Xavier's College, Kolkata, INDIA

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Findings – The study showed that the most preferred CSR activities were education, health and environment. Drinking water and sanitation and urban upliftment were the least preferred activities. A high level of dispersion was observed with respect to the least preferred activities and a low level of dispersion was observed with the most preferred activities. Significant correlation was observed with respect to various CSR activities that the companies were responsive to. The activities which had a significant impact on the companies divided into deciles at different levels as per the multiple regression analysis were: Education, health, environment, employability, rural upliftment, others and empowerment. Companies belonging to the manufacturing sector and the diversified sector have shown the highest responsiveness towards such activities. It was observed that the relative importance attached to different CSR activities varied across all decile groups for private sector companies. We also observed that the relative importance attached to different levels of CSR activities varied across all decile groups for private sector companies. Implications: -This paper would throw light on to the aspect of establishment of a pattern of participation of CSR activities amongst private sector companies in India as reflected in the respective company documents in the public domain, since very limited study has been made regarding this issue. It will also inspire the leaders to think how and in what new different ways organization must engage in dialogue with stakeholders to address their needs and achieve synergy between claims of multiple stakeholders

1. Introduction In the western frontier the idea that top managers or executives are drivers for corporate social responsibility came from the business sector itself. According to Frederick (2006), one of the first such calls came in 1951 from Frank Abrams (Abrams, 1951), chairman of the board of directors of Standard Oil of Jersey about the duties executives have to society. Later, in 1971, the Committee for Economic Development (CED, 1971), composed mainly of top – level corporate executives, encouraged business to adopt a humane view of its functions in society. The myth that corporate social responsibility advocates and business representatives are in opposing camps is not well founded given that business practitioners helped shape ideas about the social role of business. With respect to India, we observe that, it has always tried to exhibit the hallmark of a “harmonywith-nature relationship” between humans and their

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environment. Chakravorty (1985) had shown the deep roots of the Indian ethos from which Indian managers can develop a structure of values on the basis of which they can develop stakeholder policies. Gandhi's theory of social trusteeship epitomizes this “prosperity for all' attitude. His theory of social trusteeship is a weapon to address economic inequalities. We find that many great ancient texts and scriptures like Manusmriti, Ramayana, Shanti Parva and ViduraNeeti of the Mahabharata and Kautilya'sArthashastra which dates back to many millennia had already elaborated on the stakeholder approach to management. These texts elaborated on how the Kings (leaders) ensured the welfare of all stakeholders within the kingdom before taking a decision. Stakeholder management as given in a variety of Indian scriptures has usually dealt with the aspects of relationship between the leader and the stakeholders, reciprocation from stakeholders, guidelines for stakeholder policies and stakeholder policies. Therefore the belief that the companies should look into the interest of all the stakeholders was present in India for a long period of time too. But we still experience pictures of dehumanizing poverty in our country. Hanumanthappa of Rampura turned out to be one of the rank holders of the secondary school leaving certificate results of Kannada in spite of being a coolie's son and being denied of some of the basic necessities of life. Does this not ignite us to think further? Or improving the social and economic conditions of our tribal and rural areas in respect to health, education, employment, and the other basic social primary indicators, not important for us? These people are ready to develop and improve, it is for us to take the initiatives like the tribal children of Shyadri Hills in Karnataka, who requested Sudha Murty “We have heard of computers but we have not seen them except on TV. We want to learn about computers. Do you have any book on computers written in Kannada?” (Sudha Murty, 2006). Such alarming situations questions us “Dare to reach out your hand into the darkness to pull another hand into the light” (Norman B. Rice). Whose responsibility is it to address such issues – the government alone? India is a country where a big percentage of people live in absolute poverty. They are disadvantaged not only because of a shortage of material resources but because social, political and economic structures prevent them from accessing and controlling the resources needed for a life of dignity.

FOCUS Research Papers It reminds us of an incident of an old women named Veeramma living in one of the many huts in the leprosy colony where Sudha Murthy used to pay her regular visits to listen to the agonies, difficulties and frustrations of those people, people who had lost their self-confidence and their acceptability by the society due to this disease which has been with mankind for many centuries. In one of her visits, Sudha Murthy visited Veeramma. On constant calling, when she got no response she entered her hut shocked to see a frail, near to skeleton figure huddled in one of the corners. In very low and depressed note Veeramma stated that irrespective of her age she was unable to come out in front of others without any clothes. It was then Sudha Murthy realized that Veramma was almost naked. It was a picture of dehumanizing poverty in our country even after more than fifty years of independence and it was this time Sudha Murthy stated “I felt guilty wearing a six-yard saree” (Murthy, 2006). India does not always mean technology, fashions, malls, and films. The real India or “Bharat” is in the neglected interiors of our country where helpless miserably poor people live beyond the reach of any government. What constitutes socially responsible behavior in an Indian (and indeed any developing country) context is that it would include all activities that a company undertakes that benefit people and communities: Especially for those who are socially and/or economically disadvantaged, like small and marginal farmers, landless labourers, tribals, slum-dwellers to name a few. Governments have a central role to play in building the policy framework to stimulate more inclusive forms of growth. But there is a need of effective leadership and good governance to implement such sustainable policies, which is often missing. But business is uniquely positioned to contribute towards fostering such an inclusion. It needs to do so to ensure its own survival and sustenance. The current prevalent business model-excessively focused on shareholder value is flawed. Inclusive growth as a core and futuristic strategic component of a business is essential because by embracing this challenge they will not only be contributing towards a secure collective future but will find new ways to reinvent and re-vitalize themselves. If we want to transform India to a “Better India” (as J.R.D Tata had envisioned “A happy India”) the business ethos of corporate India needs to focus on “Inclusive growth” which is not just profit driven but is also value driven.

Bringing about such a change requires a new mind set in the twenty-first century. Eminent global thinker C.K. Prahalad had once stated “being a developing country is just a mindset”. So with a vision based on strong sense of reality, real commitment and leadership necessary transformation can take place. This is where leadership has a major role to play because the strategic use of CSR begs the question about the role of the leaders in determining the propensity of firms to engage in these activities. This study therefore explores the extent of participation of the private sector companies in CSR activities. With the inclusion of this introduction, the paper has been organized into seven sections. Section two gives a brief insight into the aspect of development of corporate social responsibility in India. Section three highlights on the literature review. Section four outlines the objectives. Section five outlines the theoretical frame work and hypothesis. Section six states the methodology. Section seven looks into the analysis. Section eight presents the conclusion and section nine highlights the policy prescriptions. .

2. Development of Cor por ate Social Responsibility in India The development of CSR in India can be divided into four main phases: First phase: CSR motivated by charity and philanthropy. The first phase of CSR was predominantly determined by culture, religion, family tradition, and industrialization. In the pre-industrial period up to the 1850s, merchants committed themselves to society for religious reasons, sharing their wealth, for instance, by building temples. The merchant class in pre-industrial India played an important role in laying the cornerstones of philanthropy in their society. They built and maintained educational and religious establishments, social infrastructures and donated from their repositories at times of hardship (Sundar, 2000). Religious undertones characterized these charitable efforts, and were often restricted to members of the same caste. At the turn of the 19th century, these charities expanded to include all members of the society. The term “corporate social responsibility” did not exist at that time, being coined only in the 20th century. A company's engagement in social aspects was rather seen as philanthropy, in times of crisis, such as famine or epidemics throwing open go-downs of food and treasure chests” (Arora, 2004). Under colonial rule, Western types of industrialization reached India and

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changed CSR from the 1850s onwards. The pioneers of industrialization in the 19th century in India were a few families such as the Tata, Birla, Bajaj, Lalbhai, Sarabhai, Godrej, Shriram, Singhania, Modi, Naidu, Mahindra and Annamali, who were strongly devoted to philanthropically motivated CSR (Mohan, 2001). Second phase: CSR for India's social development (1914-1960): The second phase of Indian CSR (1914-1960) was dominated by the country's struggle for independence and influenced fundamentally by Gandhi's theory of trusteeship, the aim of which was to consolidate and amplify social development. During the struggle for independence, Indian businesses actively engaged in the reform process. Not only did companies see the country's economic development as a protest against colonial rule; they also participated in its institutional and social development (India Partnership Forum 2002, 11).The corporate sector's involvement was stimulated by the vision of a modern and free India. Gandhi introduced the notion of trusteeship in order to make companies the “temples of modern India”: businesses (especially well established family businesses) set up trusts for schools and colleges; they also established training and scientific institutes (Mohan, 2001). The heads of the companies largely aligned the activities of their trusts with Gandhi's reform programmes. These programmes included activities that sought in particular the abolition of untouchability, women's empowerment and rural development (Arora, 2000). A strong nationalistic element was visible among the philanthropic practices, and many of the upcoming and prominent business leaders contributed to the causes of social reforms, poverty alleviation, women empowerment, caste systems, etc. (Sundar, 2000). After independence in 1947, the overall socio-political goal focused on building a solid industrial base while nuturing the Indian cultural traditions. This led to a highly centralized economy ( Davies, 2002) and saw a rapid growth in capital intensive manufacturing plants. Consequently, by the 1960s Indian economy had entered an era of focused growth and protectionism for the domestic industries ( Nag, Ganesh, Pathak, and Sharma, 2003), and the government took on many social obligations. Kumar et al. (2001) calls this 'NehruvianStatism,' after India's first premier Jawaharlal Nehru, who introduced this practice. Third phase: CSR under the paradigm of the “mixed economy” (1960-1980): The paradigm of the “mixed

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economy,” with the emergence of PSUs and ample legislation on labour and environmental standards, affected the third phase of Indian CSR (1960-1980). This phase is also characterized by a shift from corporate self-regulation to strict legal and public regulation of business activities. Under the paradigm of the “mixed economy”, the role of the private sector in advancing India receded. The 1960s have been described as an “era of command and control”, because strict legal regulations determined the activities of the private sector (Arora, 2004). The increased encouragement for domestic industries also led to a concentration on maximizing profit, resulting in corruption and unethical practices by many companies (Sundar, 2000). As a result, corporate governance, labour and environmental issues rose on the political agenda and quickly became the subject of legislation. In 1970s, India began to adopt industrial pollution control measures, and the first set of environmental regulations began to emerge (Sawhney, 2004). However, the assumption and anticipation that the public sector could tackle developmental challenges effectively materialized to only a limited extent. Consequently, what was expected of the private sector grew, and the need for its involvement in socio-economic development became indispensable. The fourth phase: CSR at the interface between philanthropic and business approaches. (1980 onwards): In the fourth phase (1980 until the present) Indian companies and stakeholders began abandoning traditional philanthropic engagement and, to some extent, integrated CSR into a coherent and sustainable business strategy, partly adopting the multi-stakeholder approach. In the 1990s, the Indian government initiated reforms to liberalize and deregulate the Indian economy by tackling the shortcomings of the “mixed economy” and tried to integrate India into the global market. The Indian economy experienced a pronounced boom, which has persisted until today. (Arora and Puranik, 2004). This rapid growth did not lead to a reduction in philanthropic donations; on the contrary, “the increased profitability also increased business willingness as well as ability to give, along with a surge in public and government expectations of businesses” (Arora,2004). However Indian companies realized that if it had to compete with the western market they need to comply with international standards. So from 90s onwards the companies started adopting the modern approach with its underlying objective, “doing all that we can to do the most good, not just some good” since it supports corporate objectives as well. This was regarded as a win-win situation for all because when

FOCUS Research Papers a particular company does well to the society genuinely and for a cause, it has to be good and along with this process, it succeeds in building a name for itself.

3. Literature review Corporate India has always boasted a strong tradition of corporate philanthropy, and the Indian society had viewed its business leaders as leaders of social development (Mohan, 2001). Regardless of this strong tradition on philanthropy, the CSR research in India in the recent past has primarily focused on identifying the ideal 'how to carry out CSR,' often leading to contradictory findings on the related practices (e.g. Ruud, 2002; Kumar, Murphy, Balsari, 2001). Although CSR has been steadily gaining exposure in India in the recent past but empirical evidence from CSR research in India suggests that there are differences with regard to India's perceptions, operationalization, and expectations of CSR practices when compared to those of the West (Kumar et al., 2001; Mohan, 2001). Several studies e.g. ( Arora andPuranik, 2004) found CSR policies to be positioned far from the core corporate activities and are regarded as philanthropy, with companies not expecting much in (immediate financial) return for their CSR efforts. As a result, and despite being around for a while, CSR is not as yet a popular term in the Indian business parlance. In 2002, a survey, this time under the joint patronage of the Confederation of Indian Industry CII), United Nations Development Programme (UNDP), British Council and Price Waterhouse Coopers (PWC), the CSR Survey 2002 India, (UNDP 2002) noted some improved trends and concluded that. According to this study social responsibility is not the exclusive domain of the government and 'passive philanthropy' alone no longer constitutes CSR. A desire to be a good corporate citizen and improved brand image were the drivers for CSR. More than 90 per cent of the respondents believed that investors would demand greater transparency in disclosure of financial and non- financial information. More than 90 per cent and 63 per cent of the respondents expected to be more transparent in reporting financial and non- financial information respectively. In 2003, Partners in Change (PIC) conducted its third survey on CSR in India in partnership with the research group IMRB (Arora & Puranik 2004). The survey captured the views of 536 companies, with annual turnover exceeding rupees 25 billion across the country. The 2003 Survey also included the views of other key stakeholders such as

government, media, NGOs and other civil society organizations (CSOs). The survey concluded that for the majority of companies (64 per cent), the main CSR driver was philanthropy, followed by image building (42 per cent), employee morale and ethics (30 per cent each). It also found that only one out of five PSUs (public sector units), and very few MNCs (21 per cent) and Indian companies (14 per cent) have a CSR policy document (Deo 2004).These are found largely among business sectors such as infrastructure, finance, food & beverages, pharmaceutical and chemical Industries. PIC (2004) concluded that CSR in India has moved beyond corporate philanthropy, and has become more methodical in its approach. The CEO and other members of the top management team emerged as the principal initiator of CSR activities in a company (PIC, 2004), in a nod to the tenets of transformational leadership theory (Waldman, Siegel, &Javidan, 2004). If we therefore assume that “CSR in India has moved beyond corporate philanthropy, and has become more methodical in its approach” then the 2009 report from Karmayog, a Mumbai-based online organization, which found that while 51 percent of Indian companies practice CSR in some form, only 2 percent publishes a separate sustainability report, and only 3 percent report the amount they spent on CSR and the Emerging Markets Disclosure (EMD) Project of the US-based Social Investment Forum (SIF), Lessons Learned: The Emerging Markets Disclosure Project, 2008 – 2012,showing that Indian companies were among those in emerging markets with the lowest disclosure rate on CSR rating and in adhering to CSR benchmarks and goals, would really be an eye raiser. Therefore some researchers (Arora & Puranik, 2004, Jamal &Mirshak, 2007; Husted & Allen, 2006; Waldman et al, 2006, Ruud, 2002; Kumar, Murphy, Balsari, 2001) are of the opinion that India's economic reforms and its rise to become an emerging market and global player had not resulted in a substantial change in its CSR approach. Researchers had observed that companies had highlighted on just “how to carry on CSR”. Contrary to various expectations that India would adopt the global CSR agenda, its present CSR approach still largely retains its own characteristics, adopting only some aspects of global mainstream CSR. The government is trying to encourage the best practices in corporate governance and corporate social responsibility for which it had issued guidelines at the

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conclusion of the first India Corporate Week (December 1421, 2009). The guidelines set out six core elements for companies. Companies should engage with all stakeholders, it must function in an ethical manner, respect the rights of workers in the areas of workplace environment, career advancement, and freedom of association, should not employ child or forced labor, and should maintain equality of opportunities without discrimination, respect human rights, adopt sustainable environmental policies, undertake activities for economic and social development of communities .What is noteworthy is the fact that the report highlighted that in order to facilitate implementation of the CSR guidelines, “companies should disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their website, annual reports and other communication media” (First India Corporate Week ,December 14-21, 2009). But unfortunately it failed to materialize the way it was meant to be which again speaks of the necessity of transformational and inspirational leadership here. A few CSR studies on emerging economies (including India) that has been carried out tend to rely on the companies' CSR reporting. Chambers, Chapple, Moon, and Sullivan (2003) reveal that although India leads in providing coverage to their CSR practices in annual reports in Asia, only two percent of Indian companies produce dedicated CSR reports, and they point to Maitland's (2002) observations that there is high probability of CSR repots to consist of inconsequential information. In a study conducted by Singh and Ahuja (1983) on 40 Indian public sector companies for the years 1975/1976, they found that only 40 per cent of the companies disclosed about 30 per cent of the total social disclosure items included in their survey. This is the first study in India on CSR that could be found in international journals and is based on CSR practices of the country 35 years ago. Another study on CSR in India conducted by Hegde et al. (1997) is a case study of the Steel Authority of India Limited (SAIL) a public sector manufacturing company. SAIL had a social balance sheet and income statement. They also reported on human resources. In the most recent study conducted by Raman (2006), the annual reports of the top 50 companies in India were examined to understand how the top management perceived corporate social responsibility and reported on it. This study found that the nature and extent of such disclosures is varied with a large emphasis 18 IFIM International Journal of Management | FOCUS April 2014 - September 2014

placed on products and services and the development of human resources. Community involvement is highlighted by less than 50 per cent of the sample organizations. Hossain&Reaz, (2007) examined determinants of voluntary disclosure in annual reports for Indian banking companies. Social disclosure represented one category of voluntary disclosure categories. The empirical results, based on a sample of 38 banking companies, show that corporate size and assets in-place are significantly associated with disclosure, while corporate age, multiple exchange listing, business complexity, and board composition (percentage of non-executive directors) are not associated with disclosure. In a climate that is arguably marked by more informed publics and a critical media, companies are facing more clearly articulated expectations from customers and consumers regarding their contributions to sustainable development, which puts pressure on them to maintain transparency and be proactive in communicating with its publics. Dawkin, in 2004, had lamented that even though CSR is an ongoing business priority now, “communication often remains the missing link in the practice of corporate responsibility” (p108). Manheim and Pratt (1986) specifically, argued that the public either does not know about or does not appreciate the effort and resources devoted to the case of responsible corporate behaviour. Chambers, et al. (2003) noticed that “the greater the extent of the reporting the more engaged the company is with CSR and the more seriously it is taken therein” (pg 20) because they do attest to the amount of effort that the leaders of a company has put in to communicate its commitment. The problem with corporate social responsibility (CSR) in India is that nobody is very clear about what exactly it encompasses. Today, CSR to some companies means providing lunch to employees. To others, it's about tackling global warming and environmental issues, to some it is organizing marathons and campaigns and collecting funds to be given to trusts or NGO'S. Instead of defining CSR, the Indian government recast it as "responsible business" in a set of voluntary guidelines for firms; hence there are very limited studies which have actually attempted to investigate into the aspect of pattern of participation of CSR activities by the private sector companies because of non –clarity of the term “CSR” and lack of detailed, transparent and effective communication. Recently of course the Indian government has made it mandatory for companies to spend at least 2% of net profits on CSR through the new Companies Act of 2013 but its impact is yet to materialize and studied. The present study would therefore attempt to fill the above gap by trying

FOCUS Research Papers to establish a pattern of participation of CSR activities amongst private sector companies in India.

4. Objectives In the light of the above discussion the main objective of the study is to analyze the extent to which the group of private sector companies have disclosed their proactiveness/ responsiveness towards various CSR activities and identify a pattern across the private sector companies as reflected in the respective company documents in the public domain. The companies have been analyzed on the basis of absolute profit. Apart from the main objective the study also intends to look into the following: Ÿ To estimate the extent of information that the companies had communicated with respect to their field of CSR activities that they were responsive to.

To estimate those CSR activities that had a significant i mpact on the private sector companies divided into decile groups, deciles being characterized on the basis of absolute profit.

benefit their business in the long term (Herrmann, 2004, pp. 206-207) and improve their competitiveness (Porter and Kramer, 2002, 2003, 2006; Porter, 2006). As Grayson and Hodges (2004) pointed out, a genuine commitment to sustainability and CSR can bring about opportunities for new products and services, markets and business models. In fact, some scholars (Jones, 2005, p. 93) even believe that responsible behavior will only be permitted by shareholders if it generates such benefits. However, for corporate enterprises, the capacity to influence the CSR activities taken up by them depends on the capacity to communicate with different stakeholders and on the support obtained from them. In fact, CSR has been defined as “an extremely complex web of interaction between an organization and its stakeholders” (Sjoberg, 2003, p. 192). So this study treated CSR activity and action as interrelated rather than mutually exclusive functions. We adhered to the following explanation offered by Fukukawa and Moon (2004):

To identify the sectors and their responsiveness towards CSR activities. Ÿ

To estimate the relative importance attached to different CSR activities by all the decile groups, deciles being characterized on the basis of absolute profit. Ÿ

Ÿ To estimate the relative importance attached to different levels of the CSR activities by all the decile groups, deciles being characterized on the basis of absolute profit.

5. Theoretical Framework and Hypotheses The role of corporations is currently undergoing an important transformation as stakeholders develop and modify their perceptions of the place and responsibilities of such organizations in society, (Brønn and Brønn, 2003). The responsibility of business has become central to the agendas of corporations, governments, supranational organizations, such civil society groups as non-governmental organizations (NGOs) and the general public. The appropriate relationship between business and society has become the focus of the debate (Schwartz and Carroll, 2003, p. 503). This would help them to enter new markets and build up a reputation which in turn would have a positive impact on their products and their profitability. Many enterprises have adopted CSR practices largely because they believe it will

“The communication of CSR does not necessarily denote activity, and the activity levels that lie behind the communication may well vary. By the same token, the absence of communication of CSR does not necessarily indicate non-activity. However, in the light of the assumption that reporting, transparency and accountability are part and parcel of CSR, there is reason to expect increasing congruence between communication and action” (p. 48).So based on this the argument is that it would be the usual behaviour of companies to be more responsiveness towards CSR and its communication as the profits increased. The following hypotheses have therefore been developed for this study. Hypothesis1: Average sentences used to communicate about their responsiveness towards different CSR activities disclosed in the websites for the stakeholders is likely to be higher amongst companies belonging to the higher deciles than those belonging to the lower deciles for private sector companies, under absolute profit . Hypothesis2: Level of dispersion with respect to the sentences used to communicate about their responsiveness towards different CSR activities disclosed in the websites for the stakeholders is likely to be less amongst companies belonging to the higher deciles than those belonging to the lower deciles for private sector companies under absolute profit. Hypothesis3: Pattern with respect to the attributes

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(CSR activities) varies across all decile groups for private sector companies under absolute profit. Hypothesis4: Responsiveness of the sectors towards significant CSR activities is not uniform for private sector companies under absolute profit. Hyputhesis5: Relative importance attached to significant CSR activities varies across all decile groups for private sector companies under absolute profit. Hypothesis6: Relative importance attached to different levels of the CSR activities varies across all decile groups for private sector companies under absolute profit.

6. Methodology 6.1. Data source and Study design An empirical and analytical study is undertaken for the study. In our study we explored the opportunities of finding a pattern of corporate social responsibility activities undertaken by the private sector companies in India by taking absolute profit for the year 2008-2009 as the parameter, for the financial years 2006-07, 2007-08 and 2008-09. We had taken this as a parameter keeping this in mind that it would be the usual behaviour of companies to be more responsiveness towards CSR as the profit increased. The study is based on secondary sources, i.e., by analyzing the corporate official websites of the companies. Data is then generated from such an analysis using Qualitative Document Analysis. Qualitative Document Analysis according to Glaser and Strauses (1967) described the meanings, prominence and the theme of messages and emphasized the understanding of the organization as well as how it is presented. For this study, CSR has been defined as corporate discourse and/or programs that constitute (1) responsibility to the environment, and (2) responsibility to community development (Besser, 1999). The array of terminology to be used within the broad CSR realm includes corporate social responsibility, corporate citizenship, stakeholder engagement, community development, social contribution, philanthropy. (Waddock,2004). Through Qualitative Document Analysis we identified the dominant fields of CSR activities and also the extent of information that the companies had disclosed to communicate their proactiveness/ responsiveness towards those activities. Units of analysis under Qualitative Document Analysis may be number of words, phrases, character, lines or

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sentences, pages or proportion of pages devoted to different categories of social disclosure (Unerman 2000). For this study we used “number of sentences” as the unit for measurement of CSR, since, sentences provided complete, meaningful and reliable information for further analysis (Milne and Adler 1999). The measurement in terms of sentences is justified in that; (1) sentences can be counted with more accuracy than words, (2) sentences are used to convey meaning whereas discerning the meaning of individual words in isolation is problematic, (3) sentences overcome the problem of allocation of portions of pages and remove the need to account for the number of words, (4) in addition, sentences are a more natural unit of written English to count than words(Hackston& Milne, 1996:8485). Walden & Schwartz, (1997) argued that a sentence consider conventional unit of speech and writing, while portion of pages is not. We counted the number of sentences the companies had dedicated for the various fields of activities disclosed on their corporate websites.

6.2. Selection of companies Top five hundred private sector companies were selected from, the BT 500 list published in Business Today, belonging to the India Today Group, for the years 2006-07 07-08 and 08-09 as per average market capitalization. Market capitalization refers to stock price multiplied by the number of outstanding shares. Average market capitalization is chosen to rank the 500 most valuable companies since this parameter gives us an indication of not only the present but future prospects of the company as well. To arrive at the list of India's most valuable companies, BT relied on the Center for Monitoring Indian Economy's (CMIE's) Corporate Database Prowess for all the years under consideration, for the study. Now from the list of five hundred most valuable companies for the years 2006-07, 2007-08 and 2008-09 the common companies which had succeeded in maintaining its rank and position within the list of “500 most valuable companies” for all the three years were selected. The total data set consisted of three hundred and twenty nine companies. From this total data set, companies with negative or declining profit were excluded. After exclusion, the comprehensive list (select data set) consisted of two hundred and eight companies. The companies (select data set) were grouped and ranked on the basis of absolute profit for the year 2008-09. The two hundred and eight companies which constituted the select data set were ranked on the basis of this parameter, in the descending order. They were divided into

FOCUS Research Papers decile groups consisting of twenty one companies each i.e. ten percent of the select data set. The companies under each decile group were analyzed on the basis of the study design specified above.

education, Hi = i th level of health, ENi = i th level of environment,EMi= i th level of employability, RUi = i th level of rural upliftment, EMP i = i th level of empowerment, Oi = i th level of other activities and Epsilon

6.3. Empirical model

7. Analysis

With reference to the sentences spent on the different fields of CSR activities, the companies were first divided in to decile groups consisting of 21 companies each i.e. 10% of the select data set on the basis of absolute profit. Having stratified, we calculated the average sentences (mean) spent on the various fields of CSR activities disclosed by the companies in their corporate websites with respect to all decile groups. Co-efficient of variance was also calculated with respect to the sentences spent on various fields of activities to study the level of consistency or dispersion. Pearson's correlation analysis was conducted to establish a pattern with respect to the average number of sentences spent on the various CSR activities by the companies across deciles. Similarly Pearson's correlation analysis was also conducted to establish a pattern with respect to the Coefficient of Variance regarding the extent of information disclosed and communicated by the companies in their corporate websites about the various field of CSR activities undertaken by them across deciles. A Multiple Regression Analysis was conducted to identify those attributes in the form of CSR activities that had a significant impact on the deciles and the levels at which they had a significant impact on the deciles where Level 1 indicated (Very high level), Level 2 (High level), Level 3 (MediumLevel) and Level 4 (Low Level). For conducting the regression analysis, we recalculated the average sentences (mean) spent by the companies on various CSR activities that they were responsive to for all the deciles under the parameters specified above by removing the outliers. The model which is used in this Conjoint Analysis is specified as under:

After analyzing the corporate websites we had found that the companies had involved themselves mainly in the fields of education, environment, rural upliftment, employability, health, empowerment, disaster relief, drinking water and sanitation, urban development. Besides these, some companies had involved themselves in volunteering programmes, sports, raising funds, protection of art & culture which we had combined together and placed them as â&#x20AC;&#x153;other activitiesâ&#x20AC;?.

rank = 0 + 1 ED1+2 ED2 + 3 ED3 +4 H1 + 5 H2 +6 H3 + 7 EN1 + 8 EN2 +9 EN3+ 10EM1 +11EM2 +12EM3 13RU1+ 14RU2+ 15RU3+ 16EMP1+ 17EMP2+ 18EMP3 + 19O1+ 20O2+ 21O3 + error , where,rank = ordinal scaling of the parameter( parameter defined by absolute profit) with highest integer corresponding to lowest values of the parameter, next highest integer corresponding to the next lowest value of the parameter and so on , 0 = Constant term, ED i = i th level of

7.1. Comparative analysis of mean across deciles In order to make a comparative analysis across deciles with respect to the extent of information disclosed about the various field of CSR activities in their corporate websites, that they were involved in, the mean is calculated. This has been represented in Table 1 (see Table 1). On the basis of absolute profit the following is observed: average sentences disclosed with respect to all the CSR activities is observed to be the highest amongst companies with very high profits. Average sentences disclosed with respect to all the CSR activities were observed to be the lowest amongst companies with low profits. The most preferred activity on the basis of mean value is observed to be education, health and environment, out of which environment is most prominent amongst most of the deciles. The least preferred activitieson the basis of mean value with respect to the deciles were observed to be mostly disaster relief, drinking water and sanitation, empowerment and urban upliftment, out of which drinking water and sanitation is least prominent amongst most of the deciles. 7.2. Comparative analysis of Co-efficient of Variance across deciles In order to make a comparative analysis across deciles Co-efficient of Variance was also calculated with respect to the sentences spent on various field of activities to study the level of consistency or dispersion under this parameter. A high CV indicated a high level of dispersion and a low CV indicated a high level of consistency. This has been represented in Table 6 (see Table 6). On the basis of absolute profit the following is observed: A high level of dispersion

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was observed amongst companies with low profit with respect to education, health, employability, rural upliftment and “others”. A high level of dispersion was observed amongst companies with high profits with respect to environment and both amongst companies with high level of profits and very low level of profits with respect to disaster relief and urban upliftment. It was noteworthy that a high level of dispersion was observed amongst most of the deciles with respect to drinking water and sanitation. A low level of dispersion was observed amongst companies with high profits with respect to all the CSR activities. Education, health, environment, “others” were the activities with the lowest level of dispersion as observed amongst the deciles. Disaster relief, drinking water and sanitation and urban upliftment were the activities with the highest level of dispersionas observed amongst the deciles. 7.3. Analysis of the correlation results Table3 (See Table 3) presents the correlation results between the average numbers of sentences disclosed by the companies for each of the CSR activities undertaken by them and communicated in their corporate websites on the basis of the above specified parameter. The following results were noteworthy: Positive correlation was observed between deciles and average sentences disclosed by the companies about their responsiveness towards environment, rural upliftment, employability and livelihood, health, empowerment, disaster relief, and others signifying an upward trend. Thus as we moved from decile 1 to decile 10, average sentences disclosed increased. A further analysis of the correlation table also revealed the following: In respect of average sentences spent, the combination of education with health, environment, disaster relief, employability, rural upliftment, others, empowerment and urban upliftment is preferred by most of the companies. In respect of average sentences spent, health with education, environment, disaster relief, employability, rural upliftment, others, empowerment and urban upliftment is preferred by most of the companies. In respect of average sentences spent environment with education, health, disaster relief, employability, rural upliftment, others, empowerment and urban upliftment is preferred by most of the companies. In respect of average sentences spent disaster relief with education, health, environment, employability, rural upliftment, others, empowerment and urban upliftment is

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preferred by most of the companies. In respect of average sentences spent employability with education, health, environment, disaster relief, rural upliftment, others and empowerment is preferred by most of the companies. In respect of average sentences spent rural upliftment with education, health, environment, disaster relief, employability, others, empowerment and urban upliftment is preferred by most of the companies. In respect of average sentences spent others with education, health, environment, disaster relief, employability, rural upliftment, empowerment and urban upliftment is preferred by most of the companies. In respect of average sentences spent empowerment with education, health, environment, disaster relief, employability, rural upliftment, others and urban upliftment is preferred by most of the companies. In respect of average sentences spent urban upliftment with education, health, environment, rural upliftment, others and empowerment is preferred by most of the companies. Table4 (see Table 4) presents the correlation results between coefficients of variance regarding the extent of information disclosed and communicated by the companies in their corporate websites about the various fields of CSR activities undertaken by them on the basis of the above specified parameter. The following results were noteworthy: Significant negative correlation was observed between deciles and the level of dispersion with respect to sentences disclosed by the companies about their responsiveness towards education, employability, others, empowerment and rural upliftment signifying a downward trend. Thus as we moved from decile 1 to decile 10, the level of dispersion decreased. A further analysis of the correlation table revealed the following: It was observed that regarding coefficient of variance with respect to average numbers of sentences disclosed by the companies, disclosure on education is likely to be positively associated with employability and drinking water and sanitation. Similarly coefficient of variance with respect to the average numbers of sentences disclosed on health is likely to be positively associated with drinking water and sanitation. Positive correlation was observed between coefficient of variance with respect to the average numbers of sentences disclosed on disaster relief and coefficient of variance with respect to the average numbers of sentences disclosed on employability, drinking water and sanitation and rural upliftment. Positive correlation was observed between employability and education, disaster relief,

FOCUS Research Papers drinking water and sanitation, rural upliftment and “others”. Positive correlation was observed between drinking water and Sanitation and education, disaster relief, employability, rural upliftment, empowerment and “others”. Positive correlation was observed between rural upliftment and disaster relief, employability, drinking water and sanitation, “others”, empowerment and urban upliftment. Positive correlation was observed between “others” and employability and rural upliftment. Positive correlation was observed between empowerment and drinking water and sanitation, rural upliftment and urban upliftment. Positive correlation was observed between urban upliftmentand disaster relief, drinking water and sanitation, rural upliftment and empowerment. 7.4. Regression analysis A multiple regression analysis was conducted to identify those attributes in the form of CSR activities that had a significant impact on the deciles identified, on the basis of absolute profit. For conducting the regression analysis, we re-calculated the average sentences (mean) spent by the companies on various CSR activities that they were responsive to for all the deciles under this parameter by removing the outliers. The re-calculated mean has been presented in Table 5 (see Table 5) .Table 6 presents the model specifications on the basis of the re-calculated mean (see Table 6). Table 7 specifies the sectors and their responsiveness towards activities that were found to be significant as per the multiple regression analysis (see Table 7). From Table 6 we observe the following: 88.1 percent of the variation in education and environment can explain the variation of decile 10 and 11.90 percent remained unexplained. Similarly with respect to decile 9, 87.7 percent of the variation in education, environment and “others” can explain the variation of decile 10 and 12.30 percent remained unexplained. 91.5 percent of the variation in education, health, environment and employability can explain the variation of decile 8 and 8.5 percent remained unexplained. 83.9 percent of the variation in health, rural upliftment and “others” can explain the variation of decile 7 and 16.10 percent remained unexplained. 90.3 percent of the variation in education, health and environment can explain the variation of decile 6 and 9.7 percent remained unexplained. 74.8 percent of the variation in education, health, environment and

7.employability Analysis can explain the variation of decile 5 and 25.2

percent remained unexplained. 89.3 percent of the variation in education, and “others” canweexplain the variation After analyzinghealth the corporate websites had found that the of decile 4had andinvolved 10.70 percent remained unexplained. companies themselves mainly in the fields92.7 of percent of the variation inrural education, health,employability, environment education, environment, upliftment, and empowerment can disaster explain the variation of decile and health, empowerment, relief, drinking water3and 7.3 percent urban remained unexplained.Besides 60.2 percent the sanitation, development. these, of some variation in environment canthemselves explain the variation of decile 2 companies had involved in volunteering and 39.8 percent remained 56.1 percent of the programmes, sports, raisingunexplained. funds, protection of art & variation in education and environment explain culture which we had combined together andcan placed themthe as variation of decile 1 and 43.9 percent remained unexplained. “other activities”. Hence education, health, environment, employability, rural 7.1. Comparative analysis of mean across deciles upliftment, others and empowerment had a significant impact deciles at different analysis levels under thisdeciles parameter. In orderon tothe make a comparative across with respect to the extent of information disclosed about the 7.5. Sectors and their responsiveness towards significant various field of CSR activities in their corporate websites, CSR activities that they were involved in, the mean is calculated. This has Through this weOn triedthe to basis find out been represented insection Table 1( see (seeTable Table7)1). of which sectors consistently responsive towards absolute profit thewere following is observed: average sentences education, environment, employability, rural disclosed withhealth, respect to all the CSR activities is observed to upliftment , others and empowerment(activities thatprofits. had an be the highest amongst companies with very high impact on the deciles under this parameter). Average sentences disclosed with respect toForallthis theanalysis CSR out of thewere two observed hundred and companies we deducted the activities to beeight the lowest amongst companies non-CSR companies and the companies who to with low profits. The most preferred activity onhad the failed basis of disclosevalue information on the websites regarding mean is observed to corporate be education, health and these selectedout CSR activities. Thereforeisthere ninety environment, of which environment most were prominent two companies whodeciles. had shown their responsiveness to amongst most of the The least preferred activitieson education, seven ninety were four the basis of seventy mean value withtowards respect health, to the deciles towards environment, six relief, towards employability, fifty observed to be mostly forty disaster drinking water and two towardsempowerment rural upliftment , eighty towards “others” sanitation, and urbanthree upliftment, out of and forty five water towards empowerment companies which drinking and sanitation is. These least prominent were then categorized under different sectors on the basis of amongst most of the deciles. their activities and their proportion calculated to achieve our 7.2. Comparative analysis of Co-efficient of Variance across objective. Thus from Table 7(see Table 7) we observed that deciles the companies belonging to the manufacturing sector and the diversified sector had shownanalysis the highest responsiveness In order to make a comparative across deciles Cotowards all the activities identified under this parameter. efficient of Variance was also calculated with respect to the Responsiveness of the sectors towards significant CSR sentences spent on various field of activities to study the level activities was not for under privatethis sector companies of consistency or uniform dispersion parameter. Aunder high absolute profit. CV indicated a high level of dispersion and a low CV indicated a high level of consistency. This has been 7.6. Conjoint analysis: represented in Table 6 (see Table 6). On the basis of absolute Thisfollowing analysis was conducted twolevel partsofillustrated in profit the is observed: A in high dispersion Tableobserved 8 and Table 9(see Table 8 and with Table low 9).From Table was amongst companies profit with8, we observe that barring decileemployability, seven, all the rural otherupliftment deciles had respect to education, health, attached the highest degree importance education and and “others”. A high levelofof dispersionto was observed environment. However seven had the highest amongst companies withdecile high profits withattached respect to

IFIM International Journal of Management | FOCUS April 2014 - September 2014

degree of importance to rural upliftment. Thus relative importance attached to significant CSR activities varied across all decile groups for private sector companies under absolute profit. From Table 9 we observed that with respect to decile 10 companies have given the greatest emphasis on level two for both education and environment which signifies that although both education and environment are significant CSR activities for the companies of this decile yet the importance attached to these activities is observed to be very low. Similarly with respect to decile 9, companies of this decile attached the highest importance for “others” (level 1). With respect to decile 8 companies of this decile attached the highest level of importance for environment (level 1). With respect to decile 7 companies of this decile attached the highest importance for rural upliftment (level 1). With respect to decile 6 it is observed that companies attached the highest importance for education and health(level 1). With respect to decile 5 companies of this decile attached the highest importance for education (level 1). With respect to decile 4 companies of this decile attached the highest importance for health (level 1). With respect to decile 3 it is observed that companies have attached the highest level of importance for education, health and environment (level 1). With respect to decile 2 it is observed that companies have given the greatest emphasis on level one for environment which signifies that companies of this decile attached the highest level of importance for environment (level 1). With respect to decile 1 companies of this decile attached the highest level of importance for education (level 1). Hence relative importance attached to different levels of the CSR activities varied across all decile groups for private sector companies under this parameter.

8. Conclusion From the above analysis therefore we can come to the following conclusions: Ÿ The most preferred activity communicated in the corporate websites was observed to be education, health and environment, out of which environment was most prominent amongst most of the deciles. The least preferred activities with respect to the deciles were observed to be mostly disaster relief, drinking water and sanitation, and urban upliftment. Education, health, environment, “others” were the activities with the lowest level of dispersion. Disaster relief, drinking water and sanitation and urban upliftment

24 IFIM International Journal of Management | FOCUS April 2014 - September 2014

were the activities with the highest level of dispersion. Average sentences used to communicate about their participation in different CSR activities in the corporate websites for the stakeholders was observed to be more amongst companies belonging to higher deciles (deciles defined by absolute profit) than those belonging to the lower deciles for private sector companies. Ÿ

Level of dispersion with respect to the sentences used to communicate about their participation in different CSR activities in the corporate websites for the stakeholders was observed to be less amongst companies belonging to the higher deciles(deciles defined by absolute profit) than those belonging to the lower deciles for private sector companies. Ÿ

With respect to identification of a pattern across deciles in relation to average sentences spent to communicate about their participation in CSR activities, it was observed that the average sentences disclosed by the companies about their responsiveness towards environment, rural upliftment, employability and livelihood, health, empowerment, disaster relief, and others showed an upward trend except education, drinking water and sanitation and urban upliftment where the pattern was random. Ÿ

With respect to identification of a pattern across deciles in relation to Coefficient of Variance it was observed that the level of dispersion with respect to sentences disclosed by the companies about their participation in education, employability, others, empowerment and rural upliftment showed a downward trend. The pattern was random with respect to dispersion relating to environment, health, disaster relief, drinking water and sanitation and urban upliftment. Ÿ

Ÿ Regarding identifying those CSR activities that had a significant impact on the deciles through multiple regression analysis the following observations was made, that with companies categorized by deciles (10 percent of select data set), defined by absolute profit, the activities which had an impact on the deciles at different levels as per the multiple regression analysis were:- education, health, environment, employability, rural upliftment , others and empowerment. Ÿ Regarding estimating a pattern with respect to the “responsiveness of the sectors and significant CSR activities”it is observed that companies belonging to the manufacturing sector and the diversified sector have shown the highest responsiveness towards education, health,

FOCUS Research Papers environment, employability, rural upliftment, others and empowerment under this parameter . Regarding estimating “the relative importance attached to the CSR activities” by the private sector companies it is observed that the deciles have attached the highest degree of importance to education and environment. Thus relative importance attached to different CSR activities varied across all decile groups for private sector companies under this parameter. Ÿ

Ÿ Regarding estimating the “relative importance attached to different levels of the CSR activities” by the private sector companies, it is observed that companies have attached the highest importance (level 1) to the following CSR activities: education, environment, health, rural upliftment, others. Hence relative importance attached to different levels of the CSR activities varied across all decile groups for private sector companies under this parameter.

Thus we observe that the companies failed to adhere to the hypothesis that companies belonging to higher deciles with higher profits would be more responsive towards participation in CSR activities, where CSR participation was captured through the number of sentences used to communicate about their responsiveness thus using it as a proxy variable for CSR participation. It was noticeable that with respect to private sector companies attitude towards CSR in India has still not changed and undoubtedly CSR in India is still in a confused state where, the business community has shown its responsiveness towards various CSR activities but the level of importance that was attached to such activities was not uniform across deciles, deciles being characterized by absolute profit. Responsiveness and inspirations to involve in CSR activities and its communication do not seem to show any particular association with absolute profit. Hence it can be stated that India's progress from the concept of “corporate philanthropy” characterized by randomness to “corporate social responsibility activities”, which is systematic and integrated with the core business objectives, is still to reach its

peak which indirectly speaks about the effectiveness of leadership and their belief on CSR . To bring about a change in this scenario we need transformational leadership. Transformational leaders are likely to engage in behaviour and advocate policies that culminate in CSR. Their own ideas are likely to stimulate followers' thinking regarding how socially responsible outcomes can be achieved, while simultaneously generating adequate returns for shareholders. In addition, followers will admire such leaders since their visions are likely to be based somewhat on values of altruism, justice, and humanistic notions of the greater good (Bass &Steidlmeier, 1999). The end result is that followers will be inspired to work toward the realization of such visions.

9. Policy recommendations When the business community engages in responsible social action towards amelioration of poverty or deprivation of the suffering humanity, the questions are more important than, quick-fix answers. Are we ready to learn from the circumstances of the receiving community before we prescribe our mental morals of their progress or development? The business community must address the needs of the recipients (stakeholders) as they experience and not as we think that they would desire to experience. Thus the companies that aims to be leaders in the field of CSR need to review their policies and practices in areas like: Ensuring greater internal dialogue between CSR departments and government and public affairs team. Ÿ

Ensuring that CSR and public policy issues are taken up more seriously at the board level. Ÿ

Identifying and publicly communicating the company's positions on key public policy issues through their official websites /sustainability reports or annual reports. Ÿ

Hosting stakeholder forums for their feedbacks.

Creating new kinds of Public-Private Partnerships.

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Walden, W. D. and Schwartz, B. N., 1997, “Environmental Dwasclosures and Public PolicyPressure”, Journal Of Accounting and Public Policy, 16: 125-154.

Welford, R. (2004). Corporate social responsibility in Europe and Asia: Critical elements andbest practice. The Journal of Corporate Citizenship, 13, 31-47.

Wood, D. 1. (1991). Corporate social performance revwasited. Academy of Management Review16,691-718.

Official websites of the selected companies.

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Appendix 1

SELECT DATA SET AND THE NUMBER OF SENTENCES DISCLOSED ON DIFFERENT CSR ACTIVITIES

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FOCUS Research Papers Biographical Note Prof. Sumona Ghosh has been associated with St. Xavier's College Kolkata since 2002. Presently the Head of Business Regulatory Framework in the Department of Commerce, she is also engaged as a Guest Faculty in the Business Administration Department of her college. After completing her post graduation in Commerce with rare distinction, Prof. Ghosh is currently pursuing her Doctoral Research on Corporate Social Responsibility (CSR) from University of Kolkata. She has published in journals of national and international repute in areas like Social Accounting and CSR. Prof. Ghosh has been highly acclaimed for her guest lectures on CSR in premier institutes of higher learning including the Indian Institute of Management (Calcutta), Indian Institute of Management (Shillong): She has taken sessions in Management Development Programmes conducted by premier institutes on CSR. She has presented papers on CSR at various national and international conferences. Contact Details: Institution:St. Xavier's College 30, Mother Teresa Sarani (Park Street) Kolkata-700 016, KOLKATA Residence: 163, Raja Dinendra Street Kolkata-700 004, W.B., INDIA Email: sgsxc2003@gmail.com Phone: (033) 2554 5367; 9830791765

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ATTITUDE OF EMPLOYEES TOWARDS ETHICAL LEADERSHIP An Exploratory Study of Employees of Indian IT Sector and Fmcg Sector Dr. Radha. R ^

Abstract: Ethical Leadership can be defined as â&#x20AC;&#x153;the demonstration of normatively appropriate conduct through personal actions and inter personal relationships, and the promotion of such conduct to followers through two way c o m m u n i c a t i o n , r e i n fo rc e m e n t a n d d e c i s i o n makingâ&#x20AC;?.(Brown, Trevino & Harrison 2005) . The term ethical leadership tends to draw from the concepts of both ethical manager and ethical person. In Indian context we tend to believe that only an ethical person can be an ethical manager. But previous studies on ethical leadership have proved that the concepts of ethical person and ethical manager need not be related. Therefore, this study is in the direction to find out whether the employees in Indian IT and FMCG sector feel that their managers are ethical at workplace and whether these managers are also ethical persons from the point of view of the employees. The study has been conducted in IT and FMCG industry by collecting the response of 205 respondents.

The study has been based on both Ethical Leadership Scale (ELS) and the Corporate Culture Ethical Leadership Scale (CCELS) developed by Brown. The ELS consists of 10 items and CCELS consists of 20 items measured on 5 point Likert Scale ranging from strongly agree (5) to strongly disagree (1). The score points were obtained by assigning 5, 4, 3, 2, 1 points respectively to SA, A, N, D, SD and by multiplying them by the relative frequency. The product was divided by total respondents. Thus, the average score was obtained. A highly acceptable item will get an average point of 5 and an unacceptable or least acceptable item will get an average point of 1. Further, correlation between ELS and CCELS was also studied. The study has revealed that there is a moderate level of correlation between ELS and CCELS. The findings of the study reveal that the Indian managers are less of a moral manager because they are more concerned about financial results of the organization rather than ethics. This was the opinion put forth by majority of the FMCG employees. But, the employees from the IT industry feel that their managers are comparatively more ethical.

Keywords: Key Words: Ethical Leadership, Model of Brown, Moral Manager, Moral Person, ELS & CCELS, Likert Scale ^M.Com., M.Phil. ACS., Ph.D, Assistant Professor, Ramaiah Institute of Management Studies, RIMS, Bangalore 560054

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Introduction: In this era of liberalization, globalization and privatization the companies are under constant pressure to operate, grow, compete and succeed in a very highly competitive environment. Total quality management, getting quality tags like ISO 9001, CMM etc. has become a thing of the past. The new buzz words are ethics and corporate governance. The concept of ethical leadership has attained gigantic proportions and studies have proved that ethical leadership in organisations, leading by example by the leaders evokes a positive response from the employees and improves their attitude at the workplace. Previous studies have proved that ethical leadership has positive and beneficial effects both on the organizations and the managers. It is known to improve the job satisfaction of employees and also reduce absenteeism amongst employees. Ethical leadership also had positive effects on important aspects such as organizational citizenship behavior. Ethical leadership also plays an important role in promoting recruitment in the organizations, encouraging retention for a longer period of time and also develops loyalty and a sense of belongingness among the employees. Brown, Trevino and Harrison, 2005 have defined ethical leadership as â&#x20AC;&#x153;the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two way communication, reinforcement and decision makingâ&#x20AC;?. This study is made to find out the level of ethical leadership in two prominent industries of FMCG and IT industry in India and also measure the attitude of such leaders.

Review of Literature: A study was conducted by Tanner, Brugger, Van and Lebherz in 2010 to study the positive effects of ethical leadership on employees. The study has revealed that ethical leadership provides benefits to both employees as well as the organizations. It improved the job satisfaction levels of employees and reduced absenteeism. A study done by Rubin, Dierdorff and Brown in 2010 has proved that ethical leadership is one of the foundations for success in business and ethical leadership is positively associated with manager promotobility to senior leadership positions. A study by Mayer, Acquino, Greenbaum in 2012 has established that higher ethical leadership makes the organizations more attractive and the employees have less intention of quitting the organization. A study conducted by Picolo, Greenbaum,

46 IFIM International Journal of Management | FOCUS April 2014 - September 2014

Den Hartog and Folger in 2010 found that Organisational Citizenship Behaviour (OCG) was positively related to ethical leadership. A study done by Trevino, Hartman and Brown in 2000 has indicated that a manager should be basically a moral person and a moral manager who should continuously imbibe the message of ethics to his people. Kaptein in his study in 2011 found that there was less unethical employee behaviour when the managers were perceived to be ethical role models. This study intends to examine the concept of ethical leadership as perceived by the IT and the FMCG industry.

Methodology of the Study: This study was conducted to find out whether the employees in Indian IT sector and FMCG sector feel that their managers are ethical at workplace and whether these managers are also ethical persons from the point of view of the employees. The study has been conducted in IT and FMCG industry by collecting the response of 205 respondents. The study has been based on both Ethical Leadership Scale (ELS) and the Corporate Culture Ethical Leadership Scale (CCELS) developed by Brown. The ELS consists of 10 items and CCELS consists of 20 items measured on 5 point Likert Scale ranging from strongly agree (5) to strongly disagree (1). The score points were obtained by assigning 5, 4, 3, 2, 1 points respectively to SA, A, N, D, SD and by multiplying them by the relative frequency. The product was divided by total respondents. Thus, the average score was obtained. A highly acceptable item will get an average point of 5 and an unacceptable or least acceptable item will get an average point of 1. The sample consisted of 205 respondents drawn from both IT and FMCG industries consisting of 140 respondents from IT industry and 65 respondents from FMCG industry. The following is the breakup of the respondents

Serial No. Name of the industry

Total No. of Respondents

Male

Female

140

FMCG

Total

205

136

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The Ethical Leadership Scale was administered to the respondents. This ELS was advocated by Brown et al., 2005 to measure the aspects of moral person and moral manager. This scale has been used by a number of countries and has been very successfully used to measure ethics and ethical leadership in an organisation. ELS consist of 10 statements asking response about the leader and his quality. When the ELS was administered to the respondents the following was the response

Response to the Ethical Leadership Scale: ITEM

The study has revealed that many employees feel that their managers are ethical persons. They believe that they can trust their managers and also feel that the managers are there for them whenever there is a need. It is very interesting to note that majority of employees from the Indian IT industry felt that their managers were ethical. But, the employees from FMCG sector felt that even though their managers are ethical to a certain extent, they feel that they are not ethical all the time. They also expressed their opinion that many of their managers feel that end is always important and did not bother so much about the means. In this world of cut throat competition the managers had to compromise to reach the targets and finish the target on deadlines. There is another dimension to this. The employees who report to managers who are not so ethical also feel that it is fine to be unethical sometimes. They believe that the end justifies the means and it is done in the best interest of the organisation. Yet again, this study has proved that if the manager or the supervisor is not a moral person the employees also follow suit and have a lax attitude towards ethics. Therefore, it is very important for organizations to have ethical leadership and their employees will automatically fall in line and try to follow the ethical leader. The respondents felt that there was a need for open and transparent discussion about ethical issues between the managers and the employees and this could lead to more clarity on the subject. The employees were also of the opinion that ethical compliance should be voluntary and any reprimand or punishment is not going to improve the cause of ethical compliance.

MY DIRECT SUPERVISOR/MANAGER:

MEAN

Conducts his/her personal life in an ethical manner

4.01

Can be trusted

3.77

Asks “what is the right thing to do?” when making decisions

3.65

Listens to what employees have to say

3.74

Has the best interest of employees in mind

3.64

ITEM

Defines success not just by results but also the way that they are obtained

3.61

Makes fair and balanced decisions

3.70

Discusses business ethics or values with employees

3.56

Sets an example of how to do things the right way in terms of ethics

3.55

Disciplines employees who violate ethical standards

Response to the Corporate Culture Ethical Leadership Scale:

3.25

MOST SUPERVISORS AND MANAGERS IN THIS ORGANIZATION:

Are concerned about profit and the company's financial success

MEAN

4.24

Have good personal moral behavior — they never behave in shameful ways at work and off-the-job

4.01

Are concerned about long-term, not just the short-term

4.00

Can be trusted — they have integrity and can be relied upon to fulfill their responsibilities

3.97

Source: Primary Data

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MOST SUPERVISORS AND MANAGERS IN THIS ORGANIZATION:

MEAN

Promote or set ethical standards and expectations about appropriate and inappropriate employee conduct at work

3.94

Treat all of their employees well

3.71

Care about and respect all of their employees

3.65

Are honest — they tell the truth and do not act in corrupt ways

3.51

ITEM

Are concerned about how business goals are achieved, not just the end results

3.45

“Do the right thing” — they try to be fair when making decisions

3.34

Are open communicators and good listeners — they say what they think and people feel comfortable talking with them (even about “bad news”)

3.21

Use their power wisely — they use power to help most people and not just to benefit themselves and/or their “close people.”

3.20

Are concerned about relevant stakeholders suppliers, the community, etc. — including customers,

3.10

Do what they say they will do — their actions match their words

3.01

Are concerned about how their decisions/actions will be judged by others (inside and outside the organization)

2.98

Create values (e.g., mutual trust) and manage by these values on a regular basis.

2.97

Are “role models” for other people how leaders should act— they serve as good examples of Are concerned about the organization and society). “greater good” (especially about the

2.94

Reprimand or punish unethical employee behavior

2.90

Recognize or reward ethical employee behavior

2.85

Recognize or reward ethical employee behavior

2.71

The administering of the CCELS has thrown certain results from the 205 respondents. The respondents have rated very high the aspects such as morality of the individuals, trust and care for the employees. The lowly rated items include holding people accountable for ethical or unethical behaviour. This is rather a worrying scenario because the employees do not feel that they should be held responsible for ethics in an organization.

Findings of the Study: 1. Both ELS and CCELS have revealed a similar employee attitude towards the ethical leadership. The employees are very well aware about the need for ethical leadership and appreciate an ethical manager. But, they are also equally aware about achieving the targets and also opine that “end can always justify the means”. 2. The respondents from FMCG industry have perceived their managers as relatively weaker moral managers. They felt that their managers had the compulsion of showing good financial results and therefore quantity rather than the quality mattered a lot in their industry. Therefore, the employees felt that their managers were less ethical when compared to other industries and had a problem when discussing ethics, ethical practices with their employees. 3. The respondents from the IT industry have perceived their managers as morally and ethically very strong. They felt that they encouraged ethical practices and integrity was one of the most sought after qualities of the employees. Transparency, customer satisfaction and all such healthy practices happened only because of ethics. 4. All the respondents felt that even though their managers were ethical in following the given code of conduct, they did not do well in encouraging other employees to follow the same. In short, the respondents felt that their managers should be more proactive in encouraging ethics in the workplace.

Recommendations:

48 IFIM International Journal of Management | FOCUS April 2014 - September 2014

1. Ethical leadership can have a greater impact on the organizations if the managers “walk the talk”. They should through their words and actions set an example to the other employees and be a role model.

FOCUS Research Papers 2. Insisting on ethics should be initiated right from the day of induction of the employees so that ethics becomes part and parcel of day-to-day aspect in the workplace. 3. All training programmes should insist on creating awareness about ethics to the employees and create a lasting impression in the minds of employees about ethics and ethical leadership.

Conclusion: The moral conduct and ethics should become an integral part of the organizational culture. When ethics percolates the hierarchy in the organization and reaches even the grass root level it almost becomes a second nature to the organization. The employees of such organizations will internalize the meaning of ethics and follow it without much supervision. Only then, the code of conduct will be followed in spirit and it will not become just another document for the organization.

References: Brown, M.E. & Mitchell, M.S. (2010) Ethical and Unethical leadership: Exploring new avenues for future research, Business Ethics Quarterly, Pages 583-616 Fryer, B., (2007) The Ethical Mind: A conversation with Howard Gardner, Harvard Business Review, March 85 Kaptein.M. (2011) Understanding unethical behavior by unraveling ethical culture, Human Relations, 64, 844-869 Mayer, Acquino and Greenbaum (2012) Who displays ethical leadership and why does it matter?, Academy of Management Journal, 152-171 Rubin, Dierdorff and Brown (2010) Do ethical leaders get ahead? Business ethics quarterly, 20, 215-236

Contact Address: Dr. Radha.R, M.Com., M.Phil. ACS., Ph.D, Assistant Professor, Ramaiah Institute of Management Studies, RIMS, Bangalore 560054, INDIA Email: radharavishankar@hotmail.com Ph: 98802 10716

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ETHICAL HUMAN RESOURCE PRACTICES CASE STUDY ON MARUTI SUZUKI INDIA, MANESAR Prof. Shampa Chakraberty ^

Abstract: Seven strikes in the last 16 years (1995-2011) â&#x20AC;&#x201C; that is the picture we get of Maruti Suzuki India at their Manesar plant. This case study highlights the practices which were adopted by the management at the Maruti plant at Manesar and the repeated rejection of the same by the educated workers of the plant. In spite of the repeated strikes by the workers, the management was firm on implementing some of the measures, which ultimately led to serious consequences. What were the issues which made the workers disgruntled and what were the compulsions of the Maruti management which resulted in this faux paus? The case study looks at some of the reasons which increased the friction

between the workers and the management namely the working conditions at Manesar, the composition of the workforce, their age, their qualification and training, salary and perquisites of permanent workers which included attendance and performance rewards vis'-a-vis' that of the contractual workers and management's initial decision to reject the attempt by the workers to form a separate trade union. The case tries to deal with the ethicality of the measures taken to increase production which impinged on the various rights of the workers. Through this case study it may be determined whether the structures and decisions of the management of Maruti Suzuki India were ethically correct and what implications these may have for the future in terms of human resource management practices.

^Assistant Professor, NSHM Knowledge Campus, Kolkata, theshampa59@yahoo.co.in 50 IFIM International Journal of Management | FOCUS April 2014 - September 2014

Introduction: The purpose of highlighting the governance at the Maruti Suzuki factory at Manesar in Haryana with the help of this case study is to point out the ethicality of employing methods which are alien to the Indian culture. Ethics constitutes the values and social system for individuals and organizations. Ethics and values are deep rooted in our traditional heritage of culture and beliefs. It promotes an orderly corporate life and a disciplined society. Today's contemporary business and society seems to be deviating from the ethical precepts in their lust for maximizing their personal gains. The accepted practice that, increasing the productivity of workers by fair means or foul will generate increased production, goes against the very grain of the concept of human beings as resources, who by their very nature require different handling methods than other resources namely financial, material, machine, information etc. This case study highlights some of the reasons why labour-management relations have to be handled with care taking into consideration the culture, region- specific features, the labour policies of the state, the education level of the workers etc. and shows what happens when force is applied to sensitive issues. This case shows that only profit maximization will lead to short term success of the business but maximization of the stake holders' interests will ensure its long term survival, growth and goodwill.

Background: Maruti Suzuki India Limited commonly referred to as Maruti and formerly known as Maruti Udyog Limited, is an automobile manufacturer in India. Maruti Udyog Limited (MUL) was established in February 1981, though the actual production commenced in 1983 with the Maruti 800, based on the Suzuki Alto kei car which at the time was the only modern car available in India, its only competitors- the Hindustan Ambassador and Premier Padmini were both around 25 years out of date at that point. It is a subsidiary of Japanese automobile and motorcycle manufacturer Suzuki. As of November 2012[update], it had a market share of 37% of the Indian passenger car market. Maruti Suzuki manufactures and sells a complete range of cars for every segment of the population. Originally, 18.28% of the company was owned by the Indian government, and 54.2% by Suzuki of Japan. The BJP-led government held an initial public offering of 25% of the company in June 2003. As of May 2007[update], the Government of India sold its complete share to Indian financial institutions and no longer has any stake in Maruti Udyog Ltd.

In 1997, there was a change in ownership, and Maruti became predominantly government controlled. Shortly thereafter, conflict between the United Front Government and Suzuki started. Labour unrest started under the management of the Central Government. In 2000, a major industrial relations issue began and employees of Maruti went on an indefinite strike, demanding among other things, major revisions to their wages, incentives and pensions. Employees used slowdown in October 2000, to press for a revision in their incentive-linked pay. Simultaneously after elections and a new central government led by NDA alliance, India pursued a disinvestments policy. Along with many other government owned companies, the new administration proposed to sell part of its stake in Maruti Suzuki in a public offering. The worker's union opposed this sell-off plan on the grounds that the company will lose a major business advantage of being subsidised by the Government, and the union has better protection while the company remains in control of the government. The standoff between the union and the management continued through 2001. The management refused union demands citing increased competition and lower margins. The central government prevailed and privatized Maruti in 2002. Suzuki became the majority owner of Maruti Udyog Limited. The company exports more than 50,000 cars annually and has domestic sales of 7, 30,000 cars annually. Its manufacturing facilities are located at two facilities Gurgaon and Manesar in Haryana, south of Delhi. Maruti Suzuki's Gurgaon facility has an installed capacity of 9,00,000 units per annum. The Manesar facilities, launched in February 2007 comprise a vehicle assembly plant with a capacity of 5,00,000 units per year and a Diesel Engine plant with an annual capacity of 100,000 engines and transmissions. Manesar and Gurgaon facilities have a combined capability to produce over 1,450,000 units annually. The company is 54.2% owned by the Japanese multinational Suzuki Motor Corporation . The rest is owned by public and financial institutions. It is listed on the Bombay Stock Exchange and National Stock Exchange of India. Since its founding in 1983, Maruti Udyog Limited experienced very few problems with its labour force. The Indian labour force it hired readily accepted Japanese work culture and the modern manufacturing process. There have been 7 strikes at Maruti factories in the last 16 years. The first occurred in April, 1995 for 3 days at Gurgaon when the demand was more wages. The second was in March, 1998 at

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FOCUS Research Papers Gurgaon factory for 2 days when some local issues was the reason. The third strike impacted Maruti for 89 days, the longest ever strike at any factory of Maruti where the demand was of more wages at the Gurgaon plant. The fourth was for 13 days at Manesar plant when the management did not allow the workers to form a new, independent union. The fifth strike was again of a long duration, for 33 days at Manesar when the workers were directed by the management to sign a “good conduct bond” and they refused. This bond was to seek an assurance from the workers that they will not resort to go-slow, sabotage production or indulge in activities which would hamper the normal production in the plant. The sixth strike was for 2 days in the sister concerns of Maruti who were supporting the Manesar workers. The seventh strike went on for 10 days at Manesar and the two sister concerns where the workers demanded restoration of the services of 1100 contract workers. The last two strikes resulted in the full closure of Suzuki Motor's Indian operations. The strikes at Manesar in the year 2011 portray a disturbed industrial relations scenario with demands of the workers ranging from formation of a new independent union to permanency of contract workers.

Factors contributing to the industrial unrest: The 750 acre Manesar facilty of Maruti Suzuki, a highly automated factory that produced 6,00,000 units for India's largest automaker each year was in the news for labour unrest that resulted in a number of strikes from 1995 to 2011. Maruti's record of following labour guidelines and practices has been far from remarkable. In the automotive industry, while Japanese peers like Honda and Toyota have managed to keep their workers happy, Maruti's labour trouble has been growing. Strikes and unrest have been growing with a rapid decline in workers' trust, keeping the labour situation at a low ebb. The company also failed to maintain agreements signed with workers on the creation of Works Committee and the Grievance Committee, which was part of the October, 2011 agreement and which had not yet been formed. While the formation of these committees would have increased the trust of the workers, it would have been a subtle weapon in the hands of the management while dealing with workers' grievances. The fragile industrial relations at the factory premises took a turn for the worse as an unrelenting management, a union lacking mature leadership and a dithering state government all contributed in lighting the fuse. Since any business today is operating in a highly socio52 IFIM International Journal of Management | FOCUS April 2014 - September 2014

political environment where social demands and political laws are constantly changing, management has to meet the demands of business and people by not just focusing on wealth creation but also by adding values to the system in which they are operating. Ethics is a set of moral principles. It brings discipline and order and improves and strengthens relationships amongst superiors, peers and subordinates. Values are the beliefs that guide individual's actions. Values lay standards against which individual's behavior is judged. Although Indian management does not preach morality the problem lies elsewhere – it is how to implement good values in real life and yet become a great achiever. Indian managers practice how good values pay better dividends, how honesty helps to grow industry and business, how cooperation and not competition are better growth strategies. Yet the above concepts were blown away when Mr. M.M. Singh the then company's Head of Manufacturing commented, while addressing a meeting of the company's functional heads - “How did we lose the connect with our workers?” and part of the answer lay in measures he spearheaded in early 2010 when Maruti saw a spurt in demand which led to outstripping its capacity. Since longer waiting periods for Maruti cars meant that rivals will step in and start eating into its market share, Singh and his team put in place a series of measures to produce more. This included more frequent maintenance of machines, reprogramming robots that control the assembly line to squeeze out efficiency and implementation of a “flexi-line” that could produce multiple models. These measures resulted in creating a capacity of 350,000 cars per year as compared to 250,000 earlier. Incentives of workers were aligned to production; in short life was like a machine on the shop floor with production accelerating by 40 % at Manesar. Hence the environment on the shop floor took a turn for the worse. From the foregoing there is considerable doubt about the effectiveness of the employees in delivering quality products i.e. cars to the customers. Quality of product here refers to those products that satisfy our customer needs and expectation in every respect on a continuous basis. Out of the factors affecting the quality of a product, those of worker motivation and management support are of relevance here. To keep workers motivated, workers should be actively involved in all relevant areas concerning their work for example education, training, accountability, recognition, reward, teamwork, communication etc. which should be introduced/supported/present in the organization;

organizational ethics or a business code of conduct that outlines guidelines that all employees should adhere to, to increase performance of their work should be present. The unionization problem, a perennial cause of unrest is predominant in the Manesar area where the Gurgaon-Manesar-Dharuhera-Rewari belt in Haryana employs about 400,000 workers in about 1000 companies. Here trade unions which are popular are the All India Trade Union Congress (AITUC) and the Hind Mazdoor Sabha (HMS). Since AITUC is a left leaning trade union it is thought to be prone to violence, so HMS is the lesser evil of the two. Apart from the above two unions, CITU and NTUI also enjoyed support among the workers. When Manesar workers wanted their matters to be taken up exclusively by a trade union, they first approached the Maruti Udyog Kamgar Union (MUKU), the Gurgaon based union recognized by the company as the union for all Maruti workers. However the Manesar workers demanded a separate union which the company bypassed by persuading the workers to join the Gurgaon based union. The company management also promised elections to the existing union while warning the workers not to form a second union in Manesar. Election eventually did take place in July, 2011 but the Manesar workers boycotted it. Management went so far as to force workers to sign a declaration(Good Conduct Bond) that they were happy with the Gurgaon union and did not want a new one and went so far as to stop workers who were collecting signatures of all workers for the purpose of formation of a union during factory hours. This sort of faux pas by the management was further aggravated when management summarily dismissed workers for indiscipline including 4 office bearers of the new union for the formation of which the workers had filed an application on the day before. It seems childish on the part of the management to resort to such tactics to be one above the workers. The workers went on strike for 10 days from 10th of June, 2011 to 16th of June, 2011, at the end of which the dismissed workers were reinstated by the management. The loss of face suffered by the management was the result of indelicate handling of a volatile situation. As per The Industrial Disputes Act, 1947 the 5th Schedule deals with Unfair Labour Practices wherein it is stated that employers and employers' trade union , if they interfere, restrain, coerce workmen and do not allow them to engage in concerted activities, it will be treated as unfair labour practice. Violation of the Act will lead to penalty as specified under Section 25U, Chapter V-C of the said Act. Union leaders, among them Amitabh Bhattacharya, General Secretary of Mazdoor Kranti Parishad who was a key figure in the Hindustan Motors strike in 2007 as well as in Mamata

Banerjee's agitation against land acquisition at Singur for the Tata Nano factory was waiting in the sidelines ready to strike once the iron was hot. It was to the credit of the workers that they were receiving advice from all the above unions but were confiding in none.

Worker profile and work processes: The Manesar plant draws its employees mostly from Haryana. The permanent workers in Maruti have passed out of the ITI's (Industrial Training Institute) and were hired through campus interviews. However Maruti determined that Haryanvis were better workers hence most of the workers are from various places in Haryana. These workers were recruited in 2007 as trainees and became permanent in 2010. As batch after batch of trainees became permanent the demand to form a union was raised towards the end of 2010. The workers consist of 60% regular employees and the rest contract workers. Average age of the workers at Manesar is under 25. The regular workers became regular after three years of training entitling them to privileges which trainees and contract workers do not enjoy. The strategic decision to squeeze out more cars from existing plants involved adopting regressive policies which were harmful for the workers. For example, workstations have 40 seconds in which the worker has to do the job assigned to him. This duration may be compressed or expanded depending on the production target. All Maruti workers are young and able bodied. Hence in an eight hour work shift workers get a 30 minute lunch break and two 7.5 minutes tea breaks. This is easier said than done because one has to remove the safety equipment, run 500 meters to grab tea and snacks, then run to the washroom 400 meters away and come back in 7 minutes, which becomes very tight at times. There is no scope for leaving the work station and no extra breaks are given; besides any absence from work results in a heavy pay cut. For example if an attendance reward of Rs 2000/- has accumulated in respect of a worker, he may forfeit the same if he is absent 3 days in the next month. The time for breaks may be reduced which does not give workers enough time to go to the washroom, change his clothes, run to the canteen 450 metres away and get back on the job before the belt starts running. These measures speak of the stringent policies being implemented as part of the performance linked pay. However these measures were not properly explained to the shop floor workers but dictated by the demands of the assembly line. If a single worker does not do his part in the specified time the production halts. As the General Secretary of the proposed Maruti Suzuki Employees' Union, Shiv Kumar says that Maruti is like a family and all workers are

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willing to do their bit provided the management treats them with understanding and respect. It was issues like the aforesaid ones which prompted the Maruti workers to demand a union to negotiate with the management.

Role of trade unions: About 400,000 workers are employed by about 1,000 companies in the Gurgaon-Manesar-DharuheraRewari auto hub. Trade unions have had a mixed track record here. AITUC and HMS are the two most prominent trade unions operating here. AITUC is regarded as Left aligned and has a propensity for violence while HMS is more conciliatory. However in the run up to the formation of the new union the Maruti workers had grown close to the AITUC who helped them file the application for the new union. But there the role of the established union ended. A lot of unions started advising the Maruti workers. However the union leaders namely Gujjar and Kumar both remained indifferent to all the unions. Here the issue of union leadership comes into focus. Initially the Gurgaon based union Maruti Udyog Kamgar Union (MUKU) looked after the affairs of the workers at Manesar. However the highly automated factory suffered a series of strikes in 2011. When the workers were inclined to form a new union Mr. Gurudas Dasgupta of the AITUC helped them. He assumed the role of a mentor since he too had a stake in the Manesar pie. Union leaders of other unions such as CITU, NTUI etc. also started helping the young workers. The worker leaders listened to all of them but trusted no one. These young workers had managed to force the Maruti management to reinstate the sacked workers. Next they demanded a separate union, colouring their demand with aggression. The general secretary of Maruti Udyog Kamgar Union (MUKU), Kuldeep Jhangu originally organized the Manesar workers. But the workers were wayled by other forces and demanded a separate union. However the methodologies adopted by the workers of Manesar were too violent even for MUKU. Instead of starting with a tool-down protest and slowly progressing up to a full-fledged strike, they started off with a full strike; they also wanted the Gurgaon plant to shut down and join the strike, but when the MUKU general secretary refused, he became their enemy. These workers were young, impressionable and eager to fight for what they felt was their right; the leaders of these workers namely Gujjar and Kumar too were raring to go. They were young and inexperienced. They were not elected leaders

54 IFIM International Journal of Management | FOCUS April 2014 - September 2014

since they had boycotted the election process of MUKU, but nominated. The workers were angry young men and expected a lot from the union leaders. These young workers were aware that the production in India contributed to half of Suzuki's worldwide profits. They were disgruntled with the fact that there were massive salary hikes of the top management (419% for the CEOs between 2008-10) whereas workers' pay rose by barely 5%. However, these union leaders were new to their position and had little track record in leading workers as well as little acceptance among them. Hence they were being guided by unknown external leaders of various trade unions such as Hind Mazdoor Sabha, New Trade Union Initiative etc. This new union had the support of the management since it was set up with the cooperation of the management. It was also the union recognised by the management. The workers were a little wary about this. Though the union leaders promised a lot but could not deliver that much; as a result workers became disgruntled. The new leaders were impatient on the negotiating table, a fact that was noticed by the Haryana labour department officials. These leaders were not as tactful and patient as was required under the circumstances. Veteran AITUC secretary D.L. Sachdev rued the fact that the leadership lacked maturity and this may lead to ultra-left elements misleading the workers. Unionisation raised expectations of the workers sky high. They expected the new union to deliver the goods, forgetting that union leaders tend to promise more than they can get out of the management. This resulted in the union leaders coming under constant pressure to be a more effective political force. These leaders are first-time leaders with little or no track record of sitting at a negotiating table. One cannot be impatient there as the HR managers are not authorized to take decisions on behalf of management. Hence one has to be tactful and patient. However the leaders were neither tactful nor patient and they failed to temper the expectations of the workers. These workers felt that they now had a recognized union that would represent them in the upcoming wage negotiations and they could negotiate with the management on equal terms. However the workers' unionization had exacerbated tensions on the shop floor. The worker-supervisor friction received a new twist with the union being a new variable in the checkerboard. Earlier, the relationship between the supervisors, who were more or less of the same social standing as the workers and the workers were cordial; it turned frosty with the new union being

established and equations changing between the workers and the supervisors as a result.

Dependence on contract and casual labour: The central government had identified the increasing reliance on contract and casual labour to get routine operational jobs done at cheaper costs, as the primary reason for the recent increase in labour strife and violence. This dependence was resorted to so that gratuity and provident fund benefits can be denied to these temporary workers. Social security benefits are not reaching out to the casual workers and as a result this is leading to labour disputes and labour violence. They are victims of the system where the company is getting work out of them for half the wages. These contract workers have no job security and are denied benefits like gratuity, provident fund and health insurance. The union wanted higher wages for the contract labour and regularization of casual labour since these casual labourers have strong ties of clan, caste and region with the permanent workers. A large number of them are related or have been employed through references from permanent workers to the labour contractors. But once on the shop floor they work together with very different terms and conditions and remuneration. After the violence which resulted in the death of General Manager (HR), the Chairman Maruti Suzuki said that contract labour from contractors would be phased out and Maruti's own HR department would take in contract workers and give priority to them when permanent worker vacancies arise. Necessary amendments to the Contract Labour (Regulation and Abolition) Act,1971 where provisions for securing the rights of contract labourers have been identified, have not yet seen the light of day. International Labour Organization has recommended a nationally determined social security floor for all workers, which is a comprehensive package consisting of medical aid, educational funds, old-age income security, gratuity, provident fund, etc. This has received support from India; it remains to be seen whether this can be put to practice in the form of a labour law by the Indian Parliament.

Role of management The Maruti Suzuki management played an uncertain and devious role here. When we look at the ethical side of management various models are there to help us understand the qualities required by management to manage today's knowledge workers: I.

The Jitatmananda model – talks about the holistic

paradigm which focuses on the following two concepts – a) since all minds and all lives are interconnected, a respectful attitude of honesty, help, care and encouragement are the only policy in management and b) since a living organism can regenerate himself a worker can regenerate himself more when he is offered empowerment, encouragement, trust, faith and support. The holistic paradigm teaches that love begets love, hatred begets hatred, trust begets trust, gratitude begets gratitude, respect begets respect, empowerment begets responsible productivity and meditation and spiritual practice bring internal growth and flowering of the higher personality. 1. Creation of ethical leaders – Such a leader must have the following essential qualities – a) evenness or equanimity of mind, b) attention to means as a road leading to the end, b) capacity to face adverse situation with strength and calmness, d) show respect to others and respect to all works, e) learn to be the servant to be able to rule, f) ability to make the place of work a place of worship, g) ability of creating the environment of a corporate family; 2. The leader is one who has learnt the art of drawing different kinds of people towards him and extracting the best from each one according to his qualities and aptitude – here the worker must know that the leader sincerely feels for them; the workers must see that the leader himself loves to share all the work that the workers do; the workers must see that the leader practices what he preaches and the leader must be pure in body and mind. 3. A creative leader must be both a visionary and a missionary – he must be a contemplative man, a quintessential thinker, a doer, a visionary with the power to envision and capacity to transmit that vision and spiritual dynamism into others. 4.

Vedic idea of corporate culture – company is a family.

The manager as a leader holds centre stage in Jitatmananda's model. In this model the likely ill effect of competition on the company's ethical behavior is also shown. The pre-eminence given to the competitor in Japan today has subtly changed the ethos and culture of Japanese companies with deleterious results. If the end objective of excellence is higher profitability, competition is bound to have its ill effects on ethics. IFIM International Journal of Management | FOCUS April 2014 - September 2014

So the seeds of ethical dilemma persist in this model. In case of a conflict regarding objectives and visions, an ethical manager may have to leave the company. II. However an alternative model which stands on the twin foundations of, a) allowing the whole world to be happy – i.e. desire for the organization to spread happiness to all and b) encouraging the organization to aim at objectives and mission beyond mere profit. Hence the organization should pursue profit motive as a requirement for achieving the aforesaid super ordinate objective. The stakeholders expected return should be the furtherance of the organization's objectives.

Fair implementation of labour laws: As already stated, the Gurgaon-ManesarDharuhera-Rewari belt in Haryana employs about 400,000 workers in about 1000 companies. Here a large number of companies have taken licences for contract labour but they are making the contract workers do work which should be done by the permanent workers. This violates provisions of the Contract Labour (Regulation and Abolition) Act, 1971. Minimum wages as per the Minimum Wages Act, 1948 are not being given, Employees State Insurance deductions and Provident Fund deductions are not being deposited – these are the grievances of the union leaders operating in the above belt. Maruti engages contractual workers and tries to ensure that they are paid at least the minimum wages by asking the contractor proof, which in turn allows the contractor to fudge documents. Workers' grievance is that the contractors bill the company more than what they pay the labourers and pocket the difference.

Worker unrest and management incompetence Maruti's record of following labour guidelines and practices has been far from being remarkable. Strikes and unrest have been on the rise; the company has failed to maintain agreements signed with workers on the creation of the Works Committee and the Grievance Committee. Following the strikes and unrest the management decided to introduce a Good Conduct Bond in August, 2011 wherein the workers would be promising to show good conduct during working hours. Punitive measures introduced by Maruti meant that the workers suffered pay cuts. For example, for each day of strike in the year 2011 two days wages were deducted from the striking workers. Again, if the workers have come to work braving the strike they are locked out of the factory if they have not yet signed the “Good Conduct Bond”.

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After peace was made with reinstatement of the dismissed workers, these workers started flouting all rules of the company, appointing their own representatives in each machine area and encouraging workers to listen to only these representatives and not those of the management. Here the workers' views are different; they said that company officials started harassing and victimizing the workers through show cause notices, pay cuts, etc. The workers in turn resorted to go-slow policy. There were various instances when management made a blunder in handling sensitive issues. The management of the auto giant made a major miscalculation in handling a labour incident, as a result of which violence broke out in the factory. Two office bearers of the workers' trade union were suspended following accusations of manhandling of a supervisor. They were let off after an oral apology; but in a similar incident in which an ordinary worker was involved in manhandling, the company launched disciplinary proceedings against him. This different treatment affected the morale of the workers. Again there was an incident of scuffle of an ordinary worker with a supervisor and suspension and disciplinary proceedings followed, unlike what happened with the union office bearers. The case of the union office bearers were dealt with by bending some of the clauses of the Maruti's Standing Orders. Violence resulted leaving a senior company executive dead and many more injured. Some analysts who track labour issues believe that the increasing instances of labour strife in the Guraon-Manesar region comes on the back of rising attrition of workers. As the auto industry moves towards automation the rampant use of contract workers has tensed up an already fragile situation. The general secretary of New Trade Union Initiative, Mr Ashim Roy says that “the industrial relationship in the belt is cracking as is evident with breakdown of wage negotiations…. The wage share has declined rapidly in relation to productivity gain and value addition in the auto sector. The unions are demanding a rise in basic wages and allowances and not just take-home salary consisting of incentives and overtime.” Trade union activist and CPM leader Dipankar Mukherjee said “… statistics indicates that economic development and high growth are being culled out at the expense of major violation of labour rights….” According to Abhijit Gangopadhyay, a professor of Organizational Behaviour at XLRI, the existence of two sets of high skilled, high-wage employees and low-skilled, lowwage workers will weaken the democratic empowerment of the working class movement and the pattern of industrial relations”.

FOCUS Research Papers The management of Maruti Suzuki started recognizing the workers from the perspective of an economic man, a concept propounded by Fredrick Taylor, the father of scientific management. The concept of human beings as machines gained ground with the sayings of Rene Descartes who stated that nature worked according to mechanical laws and everything in the material world could be explained in terms of the arrangement and movement of its parts. This view of the universe as a mechanical system provided scientific sanction for manipulation and exploitation of nature in a typical business scenario. The relentless search for raw materials and markets on the part of business has led to the following implications: 1. Continued notion of differentiating between brain and other motor organs like hands and feet have led to downgrading 'blue collar workers' as compared to management 2. The mechanistic model of the universe has generated a technology aimed at control, mass-production, standardization and centralized management that pursues the mirage of infinite growth The concept of social Darwinianism held the belief that all life in society had to be a struggle for existence ruled by 'survival of the fittest'. Accordingly competition has been seen as the driving force of the economy and the 'aggressive approach' has become the ideal of the business world. Combined with the mechanistic model of the universe with its excessive emphasis on linear thinking, this attitude has produced a technology that is unhealthy and inhuman. This technology is aimed at control, mass production and standards and is subjected to centralized management that pursues an illusion of endless growth in which employees and management are expected and required to submerge their personal identities and adapt to the corporate identity and a prescribed behavior pattern; a situation and behavior pattern which has become typical of today's management. According to Descartes's statement â&#x20AC;&#x153;I think, therefore, I existâ&#x20AC;? led to the development of a method of analysis and derivation of conclusion totally opposed to a holistic approach which had a profound influence on business and management thinking and attitude. He tried to explain nature as a perfect machine, governed by exact mathematical laws. This mission was fulfilled by Newton who said all physical phenomena are reduced to the motion

of material particles, caused by their mutual attraction, i.e. by their force of gravity. These mathematical laws guiding the activities of the material universe had a great influence on the growth and character of the world of business. In addition to the above factors operating in the environment, today's business is facing competition from various sectors: 1.

Potential entrants in the industry

From buyers

From suppliers

4. From substitutes, since the substitute may be better in terms of technology, quality, usefulness, cost etc. 5.

From the competitor already operating in the industry

Social forces

7. Technological forces impacting upon the technological environment in which the company is performing 8. Economic forces impacting upon the general economic and financial environment 9.

Political and legal forces

10. Stakeholders including financial institutions, management and employees 11.

Labour unions

12.

State policies and regulations

13. Other interest groups including neighbourhood populations, local bodies etc. Today's business has started realizing that the above factors may deter optimum performance; hence bodies of organizations like FICCI and CII have started admitting the social responsibilities of business and industries.

Resultant effects of the strike Rising inventory, underused plants, idle workforce etc gave the vendors of spare parts and components sleepless nights. These vendors had invested more than Rs. 10000/crores in capacity expansion in 2010-11 when car sales were growing by about 30%. 14 of these are joint venture companies setup exclusively for Maruti. They were allowed to supply to other car manufacturers' during the ongoing

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disturbances at Maruti. However these vendors lost about 15-20% of their revenue or about Rs. 1400 crores during the ongoing dispute at Maruti Suzuki. These vendors were in a dilemma about whether to retain their temporary workforce, whether to give holidays to their permanent workers or whether to ask them to resign. Foreign car makers who source components from the Manesar auto belt were scared that the agitation could affect supplies. In order to de risk their business they were thinking of relocating to places like Gujarat, Rajasthan or even Thailand. Scores of industries, including original equipment manufacturers (OEMs), component suppliers and other ancillary units spread out in the Gurgaon-Manesar belt are the life line of large manufacturers like Maruti Suzuki, Hero MotoCorp and Honda Motorcycles & Scooters India(HMSI). Some of these firms had called for an impartial enquiry into the recent violence at Maruti Suzuki's Manesar plant. They had the audacity to warn the lawenforcing authorities against harassing the Maruti workers. Their union leaders demanded fair implementation of labour laws by the companies operating in the region, housing facilities for workers and a rise in minimum wages of entry level workers from Rs 4850/- to Rs 15000/-. According to the General Secretary of Honda Motorcycle & Scooter India Employee Union, various companies were blatantly violating contract labour laws, not depositing provident fund and ESI of employees etc. Work done by the contract workers were actually the work assigned to the permanent workers. Here a holistic approach to decision making is required. The contemporary business environment is governed by selfish motives. Managers work to maximize business profits, workers want maximum wages, supplies want high process for their supplies and shareholders want maximum dividend. Hence there is need to introduce a holistic approach to management. It advocates growth and prosperity for everyone and not any one stakeholder. The whole world is seen as a family and decision making process is not oriented to the interest of companies only. All corporate members work together for the good of all people. Holistic management is value-driven and based on ethics and values in business. Values are represented by ethics. Increasing profits at the cost of social benefits may be the economic values of one enterprise and sacrificing a part of profits for benefits of society may be the social values of another business enterprise. On the other hand business values are beliefs that develop a system, based on sound 58 IFIM International Journal of Management | FOCUS April 2014 - September 2014

business principles. These values become guides for employees' actions. The business unit derives values from the nation where it is established, the industry to which it belongs and the people who constitute its workforce. The workers realized their power and made full use of the volatile situation. The wage settlement which expired in March 2012 was effective till a new settlement was put in place. The charter of demands of the Manesar union included the following: Ÿ

Basic salary of at least Rs 25000/-

All contract workers to be made permanent

At least 20% annual hike till 2014 when the next agreement will be due

D A of at least Rs 10000 a month

HRA to be hiked to 60% of basic and DA

Laundry allowance of Rs 3000 /-per month

Child education allowance of Rs 8000/- a month

Transport allowance of Rs 10000/-a month

City compensatory allowance @ 40 % of basic pay

A new joinee's salary at Maruti Suzuki after the wage revision is Rs 38000/- and the average salary is Rs. 65000/-. However the top demand of the union related to contract workers. The workers wanted higher wages and regularization of casual workers because even though the contract workers are not part of the union they have strong ties of clan, caste and region with the permanent workers. A large number of them are related or have been employed through references from permanent workers to labour contractors. But once on the shop floor they work alongside for very different terms and remuneration. The workers tried to extract the maximum out of the management and the resultant wage settlement saw a 50% jump in the basic salary of the Maruti workers. It remained to be seen whether ethics was won or lost on the Manesar battlefield. The story does not end here. The key faces behind the unrest at Maruti Suzuki, Manesar which resulted in the carmaker loosing Rs 1600 crore, quietly resigned from the company pocketing several lakhs of rupees as payouts. Sonu Gujjar and Shiv Kumar the two union leaders had taken between Rs 16-40 lakhs. This turned the table on the workers and could give the company an upper hand in any future negotiations with

FOCUS Research Papers the workers. It is a matter of conjecture which side is more ethical, management or the trade unions.

Conclusion

positive image to the public and manage their human resources efficiently and carry out business so as not to harm others. For this the following steps should be followed in order to promote an ethical climate:

Ethical and value driven management is the result of the following factors:

Organizational objectives and policies should be clearly laid down

The ethical behaviour of top management is a precedent for others in the organization.

Righteousness – Right actions are those taken for the benefit of maximum people, based on ethics and values and hope to achieve objectives of the organizations in an optimum manner.

Imposing penalties and threats to induce ethical behavior.

Educational institutions should conduct training courses in business ethics.

Fearlessness – Right actions create fearlessness in the managers.

The Vedic vision of the essential unity and oneness of all life is aptly stated in the following lines of the Rig Veda which wipe away all thoughts of unethical thoughts and deeds:

Spirit – Corporate spirit is defined in the actions of its managers. A right decision for the benefit of all reflects decisions in the light of spirit of Dharma.

We know that successful management means managing men, money and material in the best possible way according to circumstances and environment. However, it is to be seen whether management is effective or efficient or both. Effectiveness means doing the right things and efficiency means doing things right. Most enterprises of today face conflicts, tensions, low efficiency and productivity, absence of motivation and lack of work culture etc. The reasons are that managers of today are moving away from the concept of values and ethics. Hence organizations today have realized that that they need to present a more

“Common be your prayers, common be your goal. Common be your purpose, common be your deliberations. Common be your desires, united be your hearts. United be your intentions, perfect be the union amongst you.”

References: Banerjee P. Bani (2005). Foundations of Ethics in Management; Excel Books Economic Times, August, 2011 to October, 2011, August, 2012 The Telegraph, October, 2011 Vasishth Neeru and Rajput Namita (no year). Business Ethics and Values; Taxman's Publications Pvt. Ltd. ISBN: 978-81-7194-522-1 Wikipedia- Maruti Suzuki- retrieved on 16th July, 2013.

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FOCUS Research Papers

DO GRADE ASSIGNED TO COMPANIES AFFECT UNDER PRICING? A STOCHASTIC ANALYSIS FROM THE INDIAN EQUITY MARKET Souvik Banerjee ^

Abstract

1.Introduction

IPO Grading was made mandatory by the Indian Capital Market Regulator (SEBI) in 2007. There are five Credit Rating Agencies, registered with the regulator, and entrusted with the grading of the IPO bound companies. Grading is done on a scale of 1 to 5, with 1 being the lowest. One of the expected outcome of the IPO grading is efficient price discovery. Post listing, if the price settles higher than the offer price, the issue was under priced. In this paper we explored whether IPOs with different grade being assigned, have the same extent of under pricing. The statistical analysis showed that, there is no significant difference to the extent of under pricing, as far as different companies with different grades are concerned.

Grading of fixed-income instruments, is a universally accepted feature. However Indian Equity Market Regulator, Security Exchange Board of India (SEBI) is credited with coining a new concept, i.e. grading of equity instruments.

Key Words: IPO Grading, Under Pricing, Statistical Analysis JEL Classification:G12,G14

We know, that stock markets play a major role in the development of national economies (Bohnstedt, 2000). Indian equity market has seen complete transformation, from the days of Controller of Capital Issues (CCI) to setting up of SEBI (Securities Exchange Board of India) in 1988, to abolition of CCI in the post reform years of early 1990s. In the reforms initiated under SEBI, centralised power to determine price of equity issues gave way to information dissemination in the public domain. These led to stricter information disclosure norms, Book Building(BB) of Issues and finally IPO Grading.

^Assistant Professor, Sri Sri Institute of Management Studies Margao, Goa, India 60 IFIM International Journal of Management | FOCUS April 2014 - September 2014

Financial performance of the company preceding the issue plays an important role, to signal investors regarding the quality of the issue. There are other formal and informal certification processes available to investors, to enable them to take an informed decision. Some of these are reputation of the underwriter of the issue, venture capital firm affiliation, shareholding pattern of decision makers (board of directors), reputation and track record of the lead manager of the issue, promoter group affiliation, analyst recommendation etc.

Unique features of the Indian Equity Market: Number of investors in the equity market, compared to the total population is minuscule in India(about 1%). There is a significant mistrust among the risk averse investors as far as the equity market is concerned. The reasons for this trust deficit are manifold. Securities Exchange Board of India (SEBI), the statutory body that governs the stock exchanges in India, has taken several initiatives to bridge this deficit. Initial Public offer (IPO) grading is one such initiative. The primary equity market in India is also characterised by huge over-subscription of issues, sometimes running into hundreds of times. Until recently, there were very few instances of IPOs getting withdrawn or cancelled. Retail investors(investors who put less than Rs. 2 lakh in an IPO) lack capability to analyze, the relevant financial information disseminated in the public domain. “The unsophisticated investors either do not read the disclosure documents or lack the analytical sophistication to understand them. Furthermore, inferior investment decisions may occur due to the limited information processing capabilities of lay investors and the 'information overload' produced by the information disclosure” (Jain and Sharma, 2008). There were many weak as well as fraudulent issues hitting the market. The number of such issues hit the roof, whenever the stock market performance is extra ordinary. Some dubious companies also want to bask in the glory of well performing stock market.

IPO Grading: SEBI introduced IPO grading on voluntary basis in April,2006. It was optional till 30th, April, 2007. However, the experiment was not successful as borne out by the

relevant data; although around 40 companies tapped the primary market in that time frame, only 4 companies approached Credit Rating Agencies (CRAs) for grading. These 4 companies also did not accept the grade assigned to them. Reviewing the result of the optional IPO Grading, SEBI made Initial Public Offer Grading mandatory with effect from May 1st, 2007. Credit rating agencies like CRISIL, CARE, ICRA, FITCH and Brickwork Rating are entrusted with the job of IPO grading. The rating scale used is 1 to 5, with 1 being the worst, and 5 being the best.

IPO Grading Framework:

According to SEBI guidelines, Credit Rating Agencies (CRAs) are supposed to analyse companies, for the purpose of grading on the following parameters: a. Business Prospects and Competitive Position i. Industry Prospects ii. Company Prospects b. Financial Position c. Management Quality d. Corporate Governance Practices e. Compliance and Litigation History f. New Projects—Risks and Prospects With respect to financial position of a company, parameters like revenue, profit after tax (PAT), return on equity(ROE), earning per share (EPS) as well as their growth rate, capital structure are considered. Under the management quality parameter, people who are

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers associated with the company as key decision makers, their credentials and track records are being analyzed. A company's corporate governance practice includes, the checks and balances being in place in the top echelons of the organization structure. The credentials of the independent directors play a big role in this respect. The costs of the Grading are to be borne by the IPO bound firm. Therefore, there is likely to be conflict of interest between the rating agency (which is supposed to grade the IPO) and the equity issuing firm, which is bearing the costs of this grading process. However, there is a reputational stake for the rating agencies in the long term.

IPO Grading Initiative in Other Countries: India became the first country to make IPO Grading mandatory. The capital market regulator SEBI (Securities Exchange Board of India) is a pioneer in that sense. Following on the SEBI's footsteps countries like Sri Lanka also initiated discussion in the public domain in this direction. The capital market regulator in Sri Lanka, Securities and Exchange Commission of Sri Lanka has published one discussion paper and sought opinion from various stakeholders about the pros and cons of the method.

Literature Review:

Formal certification may be a new thing introduced by the Indian capital market regulator(SEBI), but informal certification in the form of past performance by the company, group affiliation of the company, reputation of the underwriter, in case of venture capital (VC)backed firms, the reputation of the VC, the reputation of the merchant banker, which is acting as the lead banker, analysts recommendation etc. is available. Informal certification plays an important role as a signal for especially retail investors. There is a plethora of literature available regarding informal certification's effect on a company's IPO. Barry, Muscarella and Vetsuypens (1990) and Megginson and Weiss (1991) find that under pricing is lower for IPOs of firms with a strong venture capital participation than for those without such investors. That means post listing return of these firms are lesser. Contrary to this, a recent study by Lee and Wahal (2004), based on a much larger sample size concluded that, VC backed firms have a higher under pricing.

62 IFIM International Journal of Management | FOCUS April 2014 - September 2014

Regarding underwriter reputation, there is a vast body of research in the western world, among the prominent studies Logue (1973), Beatty and Ritter (1986), Titman and Trueman (1986), Masksimovic and Unal (1993) and Cater, Dark and Singh (1998) found that the under-pricing of IPOs brought to the market by reputable underwriters is lower than those brought by non-reputable underwriters. Loughran and Ritter (2004)found that during the dotcom bubble, the prestige of the underwriter went hand in hand with leaving more money on the table. Financial market's structure also plays its role in the under pricing phenomena. For example Michaely and Shaw (1994) showed that under pricing is lower in the capital markets where uninformed investors know beforehand that they do not have to compete with financially savvy investors. This can be the case where different investor segments have separate quotas(as is the case in the Indian capital market). On analyst's recommendation, equity analysts give recommendation regarding Initial Public Offer (IPO) of firms. However more recommendations are seen post listing. Objectivity of these recommendations is in serious doubt as past studies have shown biased behaviour on the part of the analysts. Analysts can put buy or avoid call on the IPO, but past data shows analysts in majority instances had given buy call. For example, Bradley et al. (2003) find that analyst coverage is initiated immediately for 76 percent of IPOs during 1996 to 2000, almost always with a favourable rating. As far as, the relationship between the IPO grading and the under pricing is concerned, there are conflicting results. For example, IPO grading has no significance in pricing according to Khurshed et al.(2011).However, according to Deb and Marisetty(2010), the grading significantly reduces under pricing. In a later study by Jacob and Agarwalla (2012), it was concluded that the grading process has failed to influence the under pricing phenomena.

Objective of the Research:

The objective of the research is to explore, whether under pricing is impacted by the fundamental quality of the companies. As it is expected that fundamentally stronger companies, should have lesser under pricing, as investors would have more faith in them, enabling them to have more

efficient price discovery.

HypothĂ¨ses of the Research :

Null Hypothesis : There are no differences to the extent of under pricing as far as different IPO bound companies, with different grades are concerned. Alternative Hypothesis : There are differences to the extent of under pricing as far as different IPO bound companies, with different grades are concerned.

Research Methodology:

Data is collected from the Capital Market, SEBI and BSE(Bombay Stock Exchange) databases. SPSS version 16.0 is used for the research purpose. Under pricing is calculated as the difference between the offer price and listing day closing price, adjusted for the difference in the benchmark index(BSE Sensex, in this paper) between this two dates(Khurshed et al.,2011). Under pricing in terms of percentage for the various companies, are tested for the normal distribution. As the data is not normally distributed, as borne out by Q-Q test, non parametric statistical analysis in the form of Kruskal Wallis Test is employed for the analysis.

Empirical Results and Analysis :

In this paper 171 companies which went through the IPO process between 2007 and 2013 are analyzed. Grade wise number of companies are as follows:

The results show that, although there are differences in the extent of under pricing, these differences are not statistically significant, at 5% level of significance(as the Asymp. Sig. or the p-value is 0.114). Thus it could not be proved that, the extent of under pricing differs based on grade assigned to different companies. As a result, we failed to reject the null hypothesis. If we consider some typical cases as examples, it clearly shows that the IPO Grade has no role vis. a vis. return on the day of listing. For example, Timbor Home Ltd., which obtained an IPO Grade of 1, gave a positive return of 49.86%, over its issue price at the closing of the listing day's trading. Similarly M&B Switchgears Ltd. with Grade 2, SRS Ltd. with Grade 3, Muthoot Finance Ltd. with Grade 4 and L&T Finance Holdings Ltd. with Grade 5 gave listing day return of 63.48%,-48.83%,6.24% and 3.52% respectively. These returns are based on listing day prices in Bombay Stock Exchange(BSE), adjusted for movement in benchmark 30 share BSE-Sensex (between the closing day of the issue and the listing day).This is represented in a tabular form below:

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FOCUS Research Papers

Table1

Conclusions: All though IPO grading was introduced to give signal to the investors(especially retail investors), regarding the fundamental quality of the IPO bound companies, it has had no material impact on efficient price discovery till now. So short term (especially listing day) return, cannot be predicted, based on IPO Grade of an issue. One reason for this can be Grading is done of a company, and not of the issue. A fundamentally good company may price its IPO too aggressively, thus show low or negative return in the short term. On a longer term the price movement can be checked, for a better perspective instead of only listing day price, which is, according to certain researchers, subject to manipulation. The future course of research can move in this direction.

References: 1. Akerlof, G. (1970).”The Market for Lemons: Quality Uncertainty and the Market Mechanism”, Quarterly Journal of Economics,84,488-500. 2. Barry, C.B., Muscarella, C. J., Peavey, J., and Vetsuypens, M. (1990). “The Role of Venture Capital in The Creation of Public Companies”. Journal of Financial Economics, 27,447-471. 3. Beatty R. and J. Ritter( 1986), “Investment Banking, Reputation, & the Under Pricing of Initial Public Offerings,” Journal of Financial Economics,15,213-232. 4. Bohnstedt, A. (Ed). (2000). “Recent Development in Uganda's Finance Sector: Crises of Transition?” Kampala: Bank of Uganda”. FSD series No. 3. 5. Bradley, Daniel, Bradford Jordan, & Jay Ritter, (2003). “The Quiet Period Goes Out With a Bang”. Journal of Finance, 58,1-36. 6. Carter, R., Dark, R., and Singh, A.(1998).”Underwriter Reputation, Initial Returns, & the Long-run Performance of Initial Public Offering Stocks”. Journal of Finance, 53, 289-311. 64 IFIM International Journal of Management | FOCUS April 2014 - September 2014

7. Deb, S. S. and Marisetty, V. B. (2010). “Information Content of IPO Grading”. Journal of Banking & Finance, 34(9),22942305. 8. Jacob Joshy & Agarwalla Sobhesh Kumar(2012).” Mandatory IPO Grading: Does It Help Pricing Efficiency?”, W.P. No. 201212-07,IIM, Ahmedabad. 9. Jain Tarun & Sharma Raghav(2008).” Mandatory IPO Grading: Reflections from the Indian Capital Markets” retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1113225 10. Khanna Tarun and Krishna Palepu. (2000) “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups”, The Journal of Finance, 55(2),867-891. 11. Khurshed, A., Paleari, S., Pande, A., and Vismara, S. (2011). “Grading, Transparent Books & Initial Public Offerings”. Online paper. Retrieved from http://www.unibg.it/dati/persone/1823/4211-Grading%20paper.pdf. 12. Krishnamurti, Chandrasekhar and Thong, Tiong Yang and Vishwanath, S. R (2009).” Does Certification Work in Emerging Markets? Evidence from the Indian IPO Market” . Published in Conference Proceedings of JCF Conference on Emerging Market Corporate Finance, 24-25 August,2009, Beijing, China. 13. Lee, P. M., and Wahal, S. (2004). “Grandstanding, Certification & the Under Pricing of Venture Capital Backed IPOs”. Journal of Financial Economics, 73,375-407. 14.

Ljungqvist, A.” IPO Under pricing” Handbook of Corporate Finance: Empirical Corporate Finance, 1,375-422.

15. Ljungqvist, A., Nanda, V., and Singh, R. (2006).”Hot Markets, Investor Sentiment, & IPO Pricing”. The Journal of Business, 79(4),1667-1702. 16.

Loughran, T., & Ritter J. R. (2004).“Why Has IPO Underpricing Changed Over Time?”Financial Management, 33,5-37.

17. Logue D.(1973).”On the Pricing of Unseasoned Equity Issues, 1965-69”.Journal of Financial and Quantitative Analysis, 8 (1),91-103. 18. Maksimovic, V., & Unal, H. (1993).” Issue Size Choice & Underpricing in Thrift Mutual-to-Stock Conversions”. Journal of Finance, 48,1659-1692. 19. Megginson, W. & Weiss, K. (1991) .“Venture Capitalist Certiﬁcation in Initial Public Offerings”. Journal of Finance,46, 879–903. 20. Michaely, Roni & Kent L. Womack, (1999).“Conflict of Interest and the Credibility of Underwriter Analyst Recommendations”, Review of Financial Studies,12, 653-686. 21. Michaely, Roni, & Wayne H. Shaw,(1994).”The pricing of initial public offerings: Tests of adverse selection and signaling theories”, Review of Financial Studies,7, 279–319. 22. Pham, P.K., Kalev, P. S., and Stein, A. (2003). “Under Pricing , Stock Allocation, Ownership Structure & Post-Liquidity of Newly Listed Firms”. Journal of Banking and Finance, 27, 919-947. 23. Poudyal Sanjay (2008).”Grading Initial Public Offerings (IPOs) in India's Capital Markets A Globally Unique Concept”, W.P. No.2008-12-08,IIM, Ahmedabad 24.

Rajan, R., Servaes, H.” Analyst Following of Initial Public Offerings” ,(1997). Journal of Finance,52,507–530.

25.

Shah. A., and Thomas, S. (2001). “Policy issues in the Indian securities market”. Working Paper No. 106, Stanford University.

26. Titman, S. & Trueman B.(1986).” Information Quality and the Valuation of New Issues”, Journal of Accounting & Economics, 8(2),159-172.

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FOCUS Research Papers

THE PRICING PERFORMANCE PUZZLE OF INITIAL PUBLIC OFFERINGS (IPOS) EVIDENCE FROM INDIAN IPO MARKET Dr.A.Satya Nandini & Leena Guruprasad

Abstarct

Introduction

The introduction of the Book-building process for Initial Public offerings (IPOs) improved IPOs pricing & performances. This paper with a sample of 24 IPOs attempts to study the long run & short run performances. Results indicated 33% of the issues were under-priced. In the shortrun, they reported positive average Market Adjusted Abnormal Return (MAAR) of upto 42.85%. In the long run, using buy-and-hold abnormal return (BHARs), these IPOs significantly underperformed the market benchmark up to a period of 1 month from the date of listing and vanish thereafter. The investors who buy at offer get positive returns throughout the period, while the initial day traders are required to wait for more than 1 month to earn a minimal positive return.

Thousands of firms around the world have preferred to go public in the last decade. An initial public offering (IPO) occurs when a security is sold to the general public for the first time. There is considerable international empirical evidence unanimously indicating that IPOs outperform in the short-run, especially on the first day of trading. The phenomenon of IPO underpricing1 has long existed in the global stock market, although the magnitude of underpricing varies from country to country. However, several academic researchers found in their studies that IPOs show underperformance in the long-run or have negative abnormal returns over holding periods after the IPO issue date. This implies that most IPO investors earn large positive returns in the early aftermarket period; their returns, however, will be diminished in the long-run. In contrast, the

Key Words: IPO Grading, Under Pricing, Statistical Analysis JEL Classification:G12,G14

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findings of Jelicet al. (2001), Ahmad-Zalukiet al. (2007) and Chorruk and Worthington (2010) show IPO long-run over performance in developing countries such as Malaysia and Thailand. However, the issue of IPO over- or underperformance in the long run is still controversial. As noted among researchers, the results of long-term performance studies may differ as a result of differences in the methods and approaches used to measure the abnormal return. The purpose of this study is to extend the existing literature on the aftermarket performance of IPOs by examining the Indian IPOs on the NSE. In particular, the issues of firms that took place between 1999 and 2004 are analysed. This paper focuses on the evaluation of price performance of IPOs up to a period of 10 years including the listing day. This paper presents fresh evidence on IPO performance, i.e., short-run under pricing and long-run underperformance for 24 Indian IPOs issued during the period 1999-2004. It is reported that on an average the Indian IPOs are underpriced to the tune of 46.55 per cent on the listing day (listing day return vis-Ă -vis issue price) compared to the market index. Another contribution of this paper is the evaluation of the long-run post-issue price performance of Indian IPOs. The long-run performance of IPOs up to a period of 10 years are measured by using the most promising evaluation techniques, i.e., buy-and-hold abnormal rate of return (BHAR), after being adjusted with market index, CNX-Nifty. Broadly, this paper is structured as follows: Section 1 consists of the introduction, Section 2 consists of the literature on short-term & long-term IPO performance. The data samples & methodology are described in Section 3 while Results and statistical analyses are indicated in Section 4. Finally, the conclusions of this study are presented in Section 5.

Review of Literature:

Performance of IPOs in the long run and short run has attracted considerable attention in the literature in recent years. Most of the existing studies from international markets provide evidence indicating initial public offerings (IPOs) being under-priced or showing outperformance in the short-run. The evidences for the same are indicated as below:

Ritter (1991) examines 1,526 IPO stocks in the long run and found that three-year market-adjusted buy-and-hold returns are negative to the extent of -23.4%. Their explanation of this long-run underperformance is that firms go to the public when investors are over-optimistic about the growth of such IPO companies. In the same way, investors are periodically over-optimistic about the earnings potential of young growth companies. Akhigbe et al. (2006) studied long-term performance of 2,483 IPOs in the US using industrial sector classification. They also reported that the mean one-, two-, and three-year buy-and-hold abnormal returns of the IPO firms were 27.07%, -19.05% and -10.16% respectively and were statistically significant at an 0.01 level. Kulabutr

Komenkul*,

Janusz

Brzeszczynki and Mohamed Sherif(2013) examined long-run performance of 227 IPOs in the Thai stock market during the period from 2001 to 2012. They analysed that large IPOs are characterized by a worse longrun performance while the IPOs of smaller companies perform better than those of larger ones. Goergenet al. (2007) studied 252 IPOs listed on the London Stock Exchange between 1991 and 1995. They also found poor long-run performance of UK IPOs, in particular of the smaller firms while those of the large firms performed better in a cross-sectional study. This finding is consistent with that of Burrowes and Jones (2004) that showed the long-run underperformance or negative returns from Alternative Investment Market (AIM3) IPOs during the initial two years of seasoning. Lee et al. (1996) investigated the short- and long-run returns of 266 Australian IPOs during 1976-1989. Their results also showed that the equally-weighted cumulative abnormal return at month 36 was -51.26% and was significant at an 0.01 level. Moreover, they suggested that the performance of Australian IPOs is considerably poorer than that of the US IPOs in Ritter's (1991) study. Jelic, Saadouni, and Briston (2001) studies the share price performance of Malaysian IPOs listed on the KLSE (Kuala Lumpur Stock Exchange) Main Board during the period 1980 â&#x20AC;&#x201C; 1995. They report that the month 36, CAR (Cumulated Abnormal Return) is significantly positive at 24.83 percent; buy-and hold returns (BAHRs) adjusted for the KLSE index are also positive and statistically significant for month 36, at 21.98 percent and is consistent with CAR. IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers Ahmad-Zalukiet al. (2007) supported Jelic by examining that investors buying IPOs in Malaysia on the first day of trading and holding them for a three-year period can gain significant abnormal returns for equally-weighted event time CARs and BHARs using two market benchmarks.5 Their study reported positive and statistically significant long-term returns up to 3 years after listing for Malaysian IPOs during the period 1980 to 1995. Omran (2005) studies 53 Egyptian firms from 1994 to 1998 and shows that these firms yield statistically significant initial excess return. He finds mixed results in the aftermarket of those IPOs. Sullivan & Unite (1999) show first-day returns earned by investors purchasing the initial public offer of a Philippine company are consistent with what has been documented in other countries. This finding confirms the view that investors in smaller countries with a less developed capital market are subject to greater risks. However, this underpricing of Philippine IPOs is dramatically less severe than under-pricing documented for other emerging market countries and less than other Pacific-Rim countries. Possible reasons for these differences include: (1) Stage of market liberalization, (2) Development of the stock market, (3) Stock market regulations, (4) Information disclosure and accuracy, and (5) Specific firm characteristics. Few studies on IPOs have been done in India as well and some of them are quoted below. Shah (1995) documents a phenomenal 105.6% excess return over the offer price in a study of 2056 new listings over the period January 1991 to May 1995. However, this study provides evidence on the short run performance only. Madhusoodan and Thiripalraju(1997) examined the initial and aftermarket returns of 1,922 companies listed on the BSE from 1992 to 1995. The returns given by the Indian IPOs were very high in the short-run compared to the experiences of other countries. In the long-run, the returns were still positive and high, compared to negative returns in most other countries. Kakati (1999) analysed the performance of a sample of 500 IPOs that came to the market during January 1993 to March 1996 and documents that the short run under-pricing is to the tune of 36.6% and in the long-run the overpricing is 40.8%.

68 IFIM International Journal of Management | FOCUS April 2014 - September 2014

Madan (2003) examined under-pricing and long-run performance of 1,597 Indian IPOs listed during 1989-95 on the BSE. His study also confirms that in the long-run (fiveyears after listing), there was a drastic fall in the IPO returns. Satya Nandini and Shivraj (2005) examined the initial returns(as on Listing day) of 20 IPOs from different sectors issued during the year 2003-2004 & concluded that the returns of each IPO varied from 25% to 209%, with the average first day returns of 48%. Singh and Singh (2008) conducted a study based on a sample of 1,963 fixed price IPOs for the period July 1992 to August 2006. The results show that the adjusted initial returns, reputation of lead manager, and age of the company provided a certification to issues leading to over subscription in Indian IPOs. Pande and Vaidyanathan (2009) studied 55 firms listed on the National Stock Exchange from March 2004 to October 2006 and they demonstrate that the degree of under-pricing in the Indian stock markets has reduced over the years,from 105.6% as reported by Shah (1995) to 22.6%. Seshadev Sahoo and Prabina Rajib (2010) presented fresh evidence that on an average the Indian IPOs are underpriced to the tune of 46.55 per cent on the listing day (listing day return vis-Ă -vis issue price) compared to the market index. The long-run performance of IPOs up to a period of 36 months are measured by using the two most promising evaluation techniques, i.e., wealth relative(WR) and buyand-hold abnormal rate of return (BHAR), both being adjusted with market index, CNX-Nifty. Further, the results evidence that the underperformance is most pronounced during the initial year of trading, i.e., up to 12 months from the listing date followed by overâ&#x20AC;&#x201C;performance. S SS Kumar (2010) examined the performance of IPOs issued through the book building process in India over the period 1999-2006 with a sample comprising of 156 firms that offered their shares through the book building route on the NSE. They inferred that upon listing the IPOs on an average offered positive returns (after adjusting for market movements) to investors and a large part of the closing day returns on the listing day were accounted for by the opening returns. In the long run, the IPOs offered positive returns up till twenty four months but subsequently they underperform the market.

From the literature review the following inferences can be made: · Short-run under-pricing of IPOs is an international phenomenon. · Under-pricing in the Indian market is quite high compared to the international experiences. · On the other hand, the results of IPO over- or underperformance in the long-run are mixed. · From 1999 onwards most of the IPOs were issued through the book building process. · So far all the study on Long-run IPO performance in India is been limited to 60 months (5 years after listing). Hence, it will be of interest to examine the price performance of all IPOs being issued during the year 19992004 till date (10 years after listing).

Sample and Research Methodology

The sample in this study includes all the new equity issues offered through book building route on the National Stock Exchange (NSE) & Bombay stock exchange (BSE) from 1999 till May 2004. The entire list of public offers made through NSE & BSE are available on their web site (www.nseindia.com)& (www.bseindia.com). However, we have excluded all offer for sale issues, follow on public offers. For the listing day and the next day (second day) we collected the opening price and closing price of the IPO from the NSE's web site. Table 1 presents total IPO activity in the Indian market during the period 1999-2014. The numbers are inclusive of both fixed & book-built IPOs helping us to analyse the IPO trends in India. The data were provided by PRIME Database. It is an agency monitoring and compiling information on all public issues in Indian markets. Table 2 presents the Book-built IPO activity at NSE during September, 1999 to May, 2004, which is the scope of this study.

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers A sum total of 37 IPOs are issued during the period 19992004. From this sample, we excluded 1 IPO due to missing offer price. To examine the after-market performance (both short-run and long-run), we exclude another 12 IPOs due to non-availability secondary market price data reducing our

sample to 24 new issues, which represents 64.86 per cent of the population. Each of the 24 IPOs was tracked for 60 months from the date of listing to evaluate the long-run price performance. Table 3 explains the sample size and its selection methodology.

The details of the IPOs listed with their date of listing, listing price & issue price are presented in Table 4. As it can be inferred, the number of IPOs during this period peaked in 2000 â&#x20AC;&#x201C; dot com boom. The number of book building issues has become a significant part of the IPO market over the years. Over the sample years, though the number of public

issues was relatively less the size of the issues were large. The closing prices were obtained from NSE website to calculate the yearly returns. Of the 37 IPOs analysed in this study, the majority were from the IT sector. Some of the other prominent sectors represented were banking, pharmaceuticals, media and entertainment.

70 IFIM International Journal of Management | FOCUS April 2014 - September 2014

Empirical Methodology

In this study, we examined the price performance of the IPOs both in the short-run as well as in the long-run.i.e., performance on the listing day, followed by an estimation of long-term pricing performance over a period of 120 months or 10 years from the date of listing. IPO long run performance is gauged by examining the returns beyond the second day of their listing at half yearly & yearly intervals till May 2014 subject to a maximum of 120 months or 10 years. Therefore, for those listed in May 1999 yearly returns will be observed till May 2014 encompassing higher than 120 months or 10 years returns. However, for a stock listed in May 2004 we could analyze its performance for a maximum of 10 years or 120 months. Methodology for computation of Short-run price performance of IPOs To examine the initial returns of the Indian IPOs, we calculate market-adjusted initial returns for all IPOs. Market-adjusted abnormal return (MAAR) for the listing day is calculated as the difference of initial return calculated for (i) the security on day one and (m) the benchmark return on that day which is S & P CNX Nifty of NSE. Miller and Reilly (1987), calculated MAAR using the formula as given in Eq. (1). The MAAR for the IPO stock (i) on day 1 is calculated by using Eq. (1).

Where, MAARi1 is the market-adjusted abnormal rate of return for the stock i on day 1, Ri1 reflects the percentage change in list price vis-Ă -vis offer price. Rm1 is calculated as the percentage change in closing market index value on the listing day to market index on the date of closure of issue. The initial day price performance of each IPO has been calculated by using Eq.(1). The above methodology is also in line with Sohail and Nasr (2007). The S & P CNX Nifty (hence after Nifty) closing value has been used to calculate the market index return. A positive MAAR on the initial day of listing can be interpreted as a better performance for the IPOs compared to the benchmark return (NIFTY) for the same period &

provides an evidence for under-pricing of IPOs. From the investors' point of view, such IPOs provide investors with positive initial excess abnormal return, through buying stocks at subscription prices in the primary market and selling them on first trading day in stock market. Methodology for computation of Long-run price performance of IPOs Motivated by the existing international practice, we use Buyand-Hold Abnormal Returns (BHAR) to evaluate long-term performance for a period of 120 months or 10 years from the date of listing. Market-adjusted BHAR are calculated with reference to both issue price and list price. In this method, we assess the change in the wealth of the investors for the sampled IPOs by assuming that the same amount of money is passively invested in the initial day and held for a specified period (excluding initial day) and then compare these with a market benchmark (CNX NIFTY). The market-adjusted BHAR as the excess return for the IPOs over and above the market return is computed as:

Where, Rit is the return of the individual IPO stocks i at time t and Rmt is the market index return for Nifty for the corresponding time t. The above methodology is also in line with Sohail and Nasr (2007) & Seshadev Sahoo and Prabina Rajib (2010). The Nifty closing value has been used to calculate the market index return. A positive BHAR for a specific time period can be interpreted as a better performance for the IPOs compared to the benchmark return (NIFTY) for the same period. The advantage of this method is that the terminal values of both of the investment strategies, i.e., investment on a portfolio ofIPO and market index, are compared. From the investors' point of view, BHAR indicated whether the benefit(positive initial day return) accrued in terms of investing through IPO subscription is extended to the late buyers or is completely exhausted on the listing date. The average BHAR for the entire sample is also calculated to find out the overall performance of the portfolio of IPOs for

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers a specific period of time. The mean BHAR is computed as the arithmetic average of abnormal returns on all IPOs in the sample of size N. Mean BHAR is computed by the following formula:

Analysis & Interpretation

Short-run price performance of IPOs on using MAAR Table 5 details the short-run performance of IPOs using MAAR. It reports the distribution of MAAR from the Issue close day up to the listing day (close price). In other words, it is the excess return over the market benchmark being computed on using Eq. (1). Table 5 also indicates that underpricing (UP) persists in theIndian IPO market during

72 IFIM International Journal of Management | FOCUS April 2014 - September 2014

the study period. For 8 IPOs, the list price is below the offer price indicating IPO overprice for these issues. It is found that the investors outperform (i.e. there is underpricingof IPOs in the market), through buying stocks at subscription prices in the primary market and selling them on first trading day in stock market. The results reveal that 33% (8 out of 24 IPOs) provide investors with initial negative return, presenting that these IPOs are overpriced while 67% (16 out of 24 IPOs) provide investors with positive initial excess abnormal return, presenting that these IPOs are under-priced. However, jointly, all 24 IPOs provide investors with positive average Market Adjusted Abnormal Return (MAAR1) up to 42.85% after having adjusted with the benchmark (CNX NIFTY) returns.The higher percentage of undervaluation in comparison with international findings could be interpreted as Indian issuers leaving too much on the table.

Long-run Price Performance of IPOs on using BHAR Table 6 details the long-run performance of IPOs using BHAR. It presents the distribution of BHAR from the listing day up to 120 months or 10 years, with reference to both offer price and list price. Panel 'A' shows marketadjusted 'BHAR List,' computed from the list price. Panel 'B' reports 'BHAR Offer' being evaluated with reference to offer price. The empirical results in Panel A of Table 7 shows negative BHARs up to 1 month from the date of listing. For longer periods, e.g., 6 months to120 months/10 years, positive BHARs are reported. Negative BHARs can be interpreted as IPOs underperforming the market benchmark(CNX NIFTY)during the period, while positive BHARs indicate overperformance in relation to the market index. This suggests that there is significant underperformance till1 month from the listing day which vanishes thereafter.The results also suggest that the investors who are investing in IPOs at a list price must hold these shares beyond one month to earn a positive return on it. The mean BHAR from 6 months to 120 months/10 years are found to vary between a minimum return of 10.11% up to a maximum return of 172.22%. In contrast to international evidence (Aggarwal, Liu andRhee, 2008; Alvarez and Gonzรกlez, 2005; and Ritter

andWelch, 2002), where the underperformance even continued up to 36 months and earlier Indian evidence (Seshadev Sahoo and Prabina Rajib, 2010), where the underperformance continued up to 12 months , we find positive benchmark adjusted return after one month. The empirical results in Panel A of Table 7 presents average BHAR Offer at 0.44% on the listing day, which fails to keep its momentum as the trading continues. However, throughout the period of study, the IPO portfolio records positive BHAR, suggesting that the investors investing at the offer price are able to get positive returns throughout the holding period. Exactly at 8 years/96 months from the listing day, the IPOs are able to generate a maximum marketadjusted BHAR of 258.23%, which is significantly higher than the initial day return. This can be attributed to large scale bullishness in the market during the period 2000-2001 and 2005-2006.While comparing the BHAR List and the BHAR Offer, it is evident that the list day traders cannot get short-term excess returns in India (at least up to one month from listing). It is only those investors who acquire stocks through direct subscription to IPOs are able to earn excess returns compared to the market index. Hence, it can be concluded that if investors buy shares during IPO offer period at offer price, they will get a return higher than the market return across all periods.

Note: Most of the IPOs in our study got listed during the period 2000 and 2004. 4 years from the listing day for these set of IPOs falls in the period 2004 & first half of 2008, and 8 years from the listing day of the same set of IPOs fall in the period of 2008 & 2012 which witnessed financial market boom.

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers 1.

Conclusion

This study has examined the short and long run share price performance of Indian IPOs during the period 1999 to May 2004.The under-pricing is also observed in Indian IPOs, which is widely documented in the literature. Our findings from the sampled 24 IPOs reveal that the 67% of IPOs are under-priced and generates a market adjusted abnormal returns of 42.85% to those investors who would have bought such stocks at subscription prices in the primary market and sold them on first trading day in stock market. This is definitely, the profit opportunity to those investors who borne the risk of price uncertainty in the primary market. Using buy-and-hold abnormal return (BHARs) as price performance measure, we estimate the long-run performance for the sample IPOs up to a period of 10 years/120 months from the date of listing. We find that the IPOs significantly underperform the market benchmark up to a period of 1 month from the date of listing and vanish thereafter. In fact, we also report that the IPOs are significantly over-performing the CNX NIFTY at 8 years from the initial day. In conclusion, this paper reports the fresh evidence on IPO price performance in long run of up to 10 years or 120 months. In contrary to international evidence where the underperformance continues up to three to five years, our results show underperformance up to 1 month of trading only. Moreover, by using buy-and hold return as an alternative measure for evaluation of IPOs, we find that investors who buy at offer get positive returns throughout the period, while the initial day traders are

Dr.A.Satya Nandini is the Professor & Head at the Department of Management Studies & Research Centre, BMS College of Engineering, Bangalore. She is presently guiding 4 students for Ph.D in BMSCE Research Centre affiliated to Visvesvaraya Technological University & one student in Bharathiar University. She has around 30 research publications in refereed journals & conference proceedings. Her teaching & research interests include: Macro & Micro Economics, Indian capital Market & Financial Securities. Email :satyanandini@hotmail.com Contact No : 9844071921

74 IFIM International Journal of Management | FOCUS April 2014 - September 2014

required to wait for more than 1 month to earn a minimal positive return. The results obtained from the study provide important information to investors intending to invest in IPOs. Wefind that IPOs are under-priced on the listing day. Investors investing in IPOs at the offer price and holding these shares over a longer period are better-off compared to investors investing in shares on the listing day. Investors investing at the list price would not get excess returns at least up to one month from the date of listing.

Findings

· We found that on an average 33% of the issues were under-priced. · In the short-run, the sampled IPOs reported positive average Market Adjusted Abnormal Return (MAAR) of upto 42.85% on the initial day of listing, after having adjusted with the market benchmark (CNX NIFTY) returns. · Using buy-and-hold abnormal return (BHARs) as price performance measure, we examined that in the longrun, same set of IPOs significantly underperform the market benchmark up to a period of 1 month from the date of listing and vanish thereafter. · Moreover, we find that investors who buy at offer get positive returns throughout the period, while the initial day traders are required to wait for more than 1 month to earn a minimal positive return.

Mrs. Leena Guruprasad is an Assistant Professor of Finance at the Department of Management Studies & Research Centre, BMS College of Engineering, Bangalore. She is pursuing her Doctoral Research on “IPO Performance” at BMS Research Centre, Bangalore. She has published research papers in reputed journals & conference proceedings. Her teaching & research interests include: Micro financing, IPO Pricing, Mutual fund, Economic Indicators & Indian capitalMarket. Email :Leena.guruprasad@gmail.com Contact No : 9845811005

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Akhigbe, A., Johnston, J. and Madura, J.,( 2006), Long-term industry performance following IPOs. The Quarterly Review of Economics and Finance, 46, pp. 638-651.

Goergen, M., Khurshed, A. and Mudambi, R.,(2007), The long-run performance of UK IPOs: can it be predicted? Managerial Finance, 33, pp. 401-419.

Jelic, R., Saadouni, B. and Briston, R.,(2001), Performance of Malaysian IPOs: Underwriters reputation and management earnings forecasts. Pacific-Basin Finance Journal, 9, pp. 457-486.

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Ahmad-Zaluki, N. A., Campbell, K. and Goodacre, A., 2007, The Long Run Share Price Performance of Malaysian Initial Public Offerings (IPOs). Journal of Business Finance & Accounting, 34, pp.78-110.

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Levis, M (1993). “The Long-Run Performance of Initial Public Offerings: the UK Experience 1980-1988,” Financial Management,22(1), 26-41.

Loughran, T and Ritter, J R (1995). “The New Issues Puzzle,” Journal of Finance, 50(1), 23-51.

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FOCUS Research Papers

RUPEE VOLATILITY AND STOCK PERFORMANCE AN EMPIRICAL STUDY Dr. A. Satya Nandini & Mr. Ganesh Kumar.R Abstract

1. Introduction

The research tries to understand the volatility of the Indian Rupee (INR) / US Dollar ($) exchange rate and its relationship with Indian stock market. The data used is monthly opening and closing prices of SENSEX and NIFTY over the aeon of 11 years (2003 - 2013). Testing persistence for SENSEX and NIFTY found a weak correlation but they had a correlation coefficient of 0.99 indicating movement in the same direction. A negative correlation was found between stock returns and the returns from dollar with less significant impact which means a positive correlation with the returns from Rupee. As stock market gains a positive sentiment prevails, improving investments in Indian capital market. This in turn increases the demand for INR and the price of INR in terms of $ increases, thereby depreciating the value of $ and vice versa. Hence, it is statistically established that $ fluctuations are influenced by stock market performance in India.

This study attempts to establish a relationship between the fluctuations in INR/ $ with the stock indicators of the Indian stock market, SENSEX and NIFTY.

KEY WORDS: SENSEX, NIFTY, Exchange Rates, Fluctuations, Foreign Exchange.

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The rupee was pegged to the value of a basket of currencies of major trading partners till 1991. But India started having Balance of Payments deficit since 1985, and by the end of 1990, we found our country in a serious economic crisis. The Government's position was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks' worth of imports. This situation was followed by huge budget deficits. This situation turned the government to devalue the rupee twice in the last decade of the 20th century. During the period 2000â&#x20AC;&#x201C;2007, the rupee stopped depreciating and stabilized between Rs. 44 and Rs. 48 per USD. In late 2007, the Indian Rupee reached a record high of Rs.39 per USD, due to growth of foreign investment into the country. This posed problems for major exporters, IT

and BPO firms located in the country who were incurring losses in their earnings given the appreciation in rupee. This trend later reversed in 2008 during the global recession as foreign investors took back funds from India to their own countries. This appreciation reflected in many currencies, e.g. the British Pound, which had gained against the dollar and then lost again during the global recession of 2008. Some studies in the past discussed the relationship between Currency and stock performance which are presented here. Apte (2001) investigated the relationship between the volatility of the stock market and the exchange rate fluctuations on the daily closing INR/USD exchange rate, Sensex and Nifty over the period 1991 to 2000 and the study suggests that there appears to be a spillover from the foreign exchange market to the stock market but not the reverse. Richard A.Ajayi and Mbodja Mougoue (1996) have studied recent advances in the time-series analysis to examine the inter-temporal relation between stock indices and exchange rates for a sample of eight advanced economies. An error correction model (ECM) of two variables was employed to simultaneously estimate short-run and long-run dynamics of variables. The ECM result revealed significant short-run and long-run relationship between two financial markets. Specifically, the results show that increase in aggregate stock prices has negative short-run effect on domestic currency value. In the long-run, however, stock prices have positive effect on domestic currency value. On the other hand, currency depreciation has negative short-run and long-run effects on stock market. Alok Kumar Mishra, Niranjan Swain, and D.K. Malhotra (2007) explored volatility spillovers between the Indian stock and foreign exchange markets. The results indicated that there exists a bidirectional volatility spillover between the Indian stock market and the foreign exchange market with the exception of NIFTY and CNX S&P 500. The findings of the study also suggested that both the markets move in tandem with each other and there is a long run relationship between these two markets. The results of significant bidirectional volatility spillover suggest that there is an information flow (transmission) between these two markets and both these markets are integrated with each other. Christopher K, Ma And G. Wenchi Kao (1990) found that the exchange rate level is positively related to the stock index relative at the one percent level, while the exchange rate

change is negatively related at the five percent level. The entire model is significant at the one percent level. K N Badhani, Rajani Chhimwal and Janki Suyal (2009) examined the interaction between changes in the exchange rate of Indian Rupee and returns on different BSE-based indices representing the firms of different sizes and industries. The returns on all the stock portfolios were found to be positively correlated with the external value of Indian Rupee. However, the analysis with an extended market model of asset pricing shows that the indices of export-oriented industries are negatively associated with change in exchange rate, after making the adjustment for market trend. Among them, IT, technology and knowledgebased sectors show high sensitivity towards exchange rate fluctuations. On the other hand, the indices of financial sector and import-intensive industries show a positive association with the exchange rate of rupee. Agrawal Gaurav, Srivastav Aniruddh Kumar, Srivastava Ankita (2010) analyzed the relationship between Nifty returns and Indian rupee-US Dollar Exchange Rates. It was found that Nifty returns as well as Exchange Rates were nonnormally distributed. Through unit root test, it was also established that both the time series, Exchange rate and Nifty returns, were stationary at the level form itself. Correlation between Nifty returns and Exchange Rates was found to be negative. Further investigation into the casual relationship between the two variables using Granger Causality test highlighted unidirectional relationship between Nifty returns and Exchange Rates, running from the former towards the latter. Santosh Kumar, Raju G and Tanveer Shahab (2012) investigated the sensitivity of return on various indices with respect to change in exchange rate, especially in dollar and euro. They found that appreciation of rupee with respect to dollar, and euro has adverse impact on the returns of indices and vice versa. However, the exposure of euro is vindicated only in large and most liquid stocks as compared to wider exposure of dollar. On the other hand, significantly varying sensitivity coefficients of various indices have far-reaching importance in deciding the optimal volume of currency to be hedged in order to make it competitive and profitable. Thus, having continually widening current account deficit in India, resilience of capital account flows also plays an important role in offsetting the impact of currency exposure in India.

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers 2. Research Objectives The purpose of the study is to understand the volatility of the INR / $ and its relationship with stock markets with special reference to SENSEX and NIFTY.

3. Methodology 3.1 RESEARCH DESIGN AND HYPOTHESIS The study uses Causal Research Design where the objective is to identify variables and analyze whether any cause and effect relationship exists among them, and if so, to quantify the extent of the relationship. A causal relationship can be interpreted if some external factor, (an independent variable) produces a change in the dependent variable. The research assumes the stock indicators to be independent and tries to examine the impact of the performance of stock markets on the volatility of INR. This research helps to establish a cause-and-effect linkages between the volatility of the Indian Rupee and the stock markets through its indicators with special emphasis on SENSEX and NIFTY. The research also tries to examine the extent of relationship of the time series to its own past using auto correlation so as to enable us to identify the trend. The Approach used for hypothesis testing is the classical or sampling theory approach. In this approach, the hypothesis is accepted or rejected on the basis of sampling information alone. Any sample might vary from its population and so it is important to judge whether the result from the sample is statistically significant or not. To test the significance null (H0) and alternate hypotheses (H1) are used. The Hypotheses for the study are: a)

To test the relationship between SENSEX and NIFTY:

Null Hypothesis (H0): The movement of NIFTY is independent of the performance of SENSEX. r = 0 Alternative Hypothesis (H1): The movement of NIFTY is not independent of the performance of SENSEX. r≠0

Alternative Hypothesis (H1): The movement of INR / $ is not independent of the performance of BSE Sensex. r≠0 c) To test the relationship betweenNIFTY and INR / $ Exchange Rate: Null Hypothesis (H0): The movement of INR / $ is independent of the performance of Nifty. r = 0 Alternative Hypothesis (H1): The movement of INR / $ is not independent of the performance of Nifty. r≠0

3.2 SAMPLING DESIGN The Population considered for the study is the stock market indicators, SENSEX and NIFTY. Non-probability sampling design is adopted to select a sample from the population of Indian stock indicators. From the population of Indian stock indicators, purposive judgment sampling technique was adopted to select SENSEX and NIFTY. 3.3 LIMITATIONS: · As this study revolves around the Volatile Upshots of the Indian Rupee and its relationship with Indian stock market, the sampling unit is restricted only to the Indian stock market. · The study assumes the stock indicators are independent and tries to measure its impact on the volatility of the INR. ·

Data for 2013 is considered till August 2013.

3.4 DATA USED The study relies mainly on secondary data. The data consists of monthly opening and closing prices of SENSEX and NIFTY for the period 2003 to 2013. These values are used to calculate the monthly returns, average monthly returns to correlate it with the average monthly returns on $.

3.5 DATA ANALYSIS TECHNIQUES

b) To test the relationship between SENSEX and INR / $ Exchange Rate:

The following techniques are used for data analysis:

Null Hypothesis (H0): The movement of INR / $ is independent of the performance of BSE Sensex. r = 0

For Capital Market's performance: For SENSEX and NIFTY the opening and closing prices for each month for

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the period 2003 to 2013 was used to calculate the monthly returns and then the average monthly returns was calculated. For Currency performance: The movement of INR against $ were tracked over the period 2003 to 2013. The opening and closing values for each month were used to calculate the returns and average of all monthly returns was calculated and compared with the average monthly returns of SENSEX and NIFTY. End of month price â&#x20AC;&#x201C; Beginning of month price Monthly returns (%) = _______________________________________ x 100 Beginning of month price

3.5 STATISTICAL TECHNIQUES USED:

b) The t-test for correlation tests the significance of r assuming the population coefficient, and the formula used is that of small samples for size < 30. The critical value of t is considered in the table for a significance level of 0.05. This research considers the level of significance for a two-tailed test. If the calculated t value is larger than the critical value, the result rejects the null hypothesis and supports the alternate hypothesis. If the critical value is larger than the calculated value then the null hypothesis is not rejected.

4. Analysis and Interpretation. The data collected with reference to performances of SENSEX, NIFTY and INR/$ was used to calculate the returns for the stated time periods and comparison of their performances was done using Karl Pearson's Correlation Coefficient, r. The analysis is presented as follows: The SENSEX, NIFTY and INR/$ opening and closing values for each month for the period 2002 to 2013 was used to calculate the monthly returns and the average monthly returns. The average monthly returns for the time period t and t+1 is used to calculate auto correlation which is a measure of persistence of a time series data with its own past and it accuracy to predict the future.

a) Pearson's product moment correlation coefficient r symbolizes the coefficient's estimate of linear association based on sampling data. This study uses correlation coefficient to express the relationship of the Performance of SENSEX and NIFTY with the performance of INR / $. TABLE 4.1: AUTO CORRELATION OF SENSEX

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers

The auto correlation data of -0.4199 is not significantly different from 0 which indicates a weak correlation of the data with its own past and using this data to predict future returns t will have a very low level of accuracy. 2

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The auto correlation data of -0.4409 is not significantly different from 0 which indicates a weak correlation of the data with its own past and using this data to predict future returns will have a very low level of accuracy.

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers The above table indicates a comparison of the performances of two major indicators SENSEX and NIFTY. A correlation coefficient of 0.99 between Average Monthly Returns of SENSEX and NIFTY for the period 2003 to 2013 indicates a very high degree of correlation between them confirming their movement in the same direction. The T test carried out to test the significance of 'r' presented a calculated value of 35.9. The critical t value of 2.201 was found from the t distribution table for a significance level of 5% for a two tailed test. In this case, the critical value is lesser than the calculated t value failing to accept the null hypothesis.

The above table indicates a correlation coefficient of -0.76 between Average Monthly returns of NIFTY and $ in terms of INR for the period 2003 to 2013. As the NIFTY gains, $ in terms of INR is depreciating showing a negative correlation which in turn indicates a positive correlation between SENSEX and INR. The T test carried out to test the significance of 'r' presented a calculated value of 3.52. The critical t value of 2.201 was found from the t distribution table for a significance level of 5% for a two tailed test. In this case, the critical value is lesser than the calculated t value failing to accept the null hypothesis.

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The auto correlation data of 0.0057 is not significantly different from 0 which indicates a weak correlation of the data with its own past and using this data to predict future returns will have a very low level of accuracy.

Karl Pearson's s Correlation Coefficient, r = 0.996527872 T Test Cal = 35.9066727; T Test table value = 2.201

IFIM International Journal of Management | FOCUS April 2014 - September 2014

FOCUS Research Papers 5. Findings and Conclusion The study conducted for the period 2003 to 2013 correlating the performance of SENSEX and NIFTY with the performances of $ in terms of INR presented the following findings: ·

The measure of persistence for SENSEX and NIFTY revealed the auto correlation data to be significantly different from 0 which indicates a weak correlation of the data with its own past and using this data to predict future returns will have a very low level of accuracy.

A comparison of the performances of two major indicators SENSEX and NIFTY presented a correlation coefficient of 0.99 for the period 2003 to 2013 which indicates a very high degree of correlation between them confirming their movement in the same direction

As the BSE Sensex gains, $ in terms of INR is depreciating showing a negative correlation which in turn indicates a positive correlation between SENSEX and INR and vice versa. The T test carried out to test the significance of 'r' fails to accept the null hypothesis. This is in favor of the alternate hypothesis which proves the INR / $ fluctuation is dependent on the performance of SENSEX

As the NIFTY gains, $ in terms of INR is depreciating showing a negative correlation which in turn indicates a positive correlation between NIFTY and INR and vice versa. The T test carried out to test the significance of 'r' fails to accept the null hypothesis. This is in favor of the alternate hypothesis which proves the INR / $ fluctuation is dependent on the performance of NIFTY.

Hence, it is statistically established that $ fluctuations are influenced by stock market performance in India.

6. References: 1.

Mishra, Alok Kumar, Swain, Niranjan, and Malhotra, D.K., 2007, 'Volatility Spillover between Stock and Foreign Exchange Markets: Indian Evidence', International Journal of Business, 12(3), 343-359

Christopher K, Ma And G. Wenchi Kao, 1990, On Exchange Rate Changes And Stock Price Reactions, Journal of Business Finance & Accounting, 17(3), 441 – 449

K N Badhani, RajaniChhimwal and Janki Suyal, 2009, Exchange Rate Volatility: Impact on Industry Portfolios in Indian Stock Market, The ICFAI Journal of Applied Finance, Vol. 15, No. 6, 33 – 48

Agrawal Gaurav, SrivastavAniruddh Kumar, Srivastava Ankita, 2010, A Study of Exchange Rates Movement and Stock Market Volatility, International Journal of Business & Management, Vol. 5, Issue 12, p62-73

Santosh Kumar, Raju G and Tanveer Shahab, 2012, Contagion Effect of Dollar and Euro on the Indian Stock Market, The IUP Journal of Applied Finance, Vol. 18, No. 3, 84 – 94

Dr. Prakash G. Apte, March 2001, The Interrelationship Between the Stock Markets and the Foreign Exchange Market

Richard A. Ajayi and Mbodja Mougoue, 1996, On the dynamic relation between stock prices and exchange rates, Vol. XIX, No. 2, 193 – 207 www.nseindia.com

last accessed on 10th September, 2013 www.bseindia.com

last accessed on 10th September, 2013 www.rbi.org.in

10.

last accessed on 10th September, 2013

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Dr. A. Satya Nandini (Corresponding Author) Professor and Head Department of Management Studies and Research Centre BMS College of Engineering, PO Box 1908, Bull Temple Road, Bangalore - 560019 Email: satyanandini@hotmail.com Phone: +919844071921

Mr. Ganesh Kumar. R (Asst. Professor) Department of Management Studies and Research Centre BMS College of Engineering, PO Box 1908, Bull Temple Road, Bangalore - 560019 Email: kumarganesh1986@gmail.com Phone: +919591988151

FOCUS Research Papers

SUSTAINABILITY AND LONG TERM GROWTH IN THE FINANCIAL MARKET SYSTEM Dr. Aloy Soppe^ Abstract:

Introduction

This paper discusses the implications of an unequal growth rate of the international financial market on the one hand and the growth of the real economy on the other. Based on balance sheet equilibrium as a point of departure for a sustainable economic growth, a discussion is presented of an optimal level of interest rates depending on the natural real economic growth of the economy. In the final section, two propositions are presented and motivated. The first proposition is that the average interest rate should vary with the growth rate of the real economy, which is an estimator for organic growth in the economic process. Lower interest rates are not desirable from an economic idea of opportunity. Higher interest rates are rejected because of the implicit additional positive time preference that this entails. The second proposition is about the accumulation of wealth. Under the assumption of a positive interest rate, the absence of financial tax and the absence of bankruptcies, financial capital grows exponentially and therefore needs to be managed institutionally, in a positive way. A structural imbalance between the monetary sector on the one hand and the real economy on the other, leads to an illusion of purchasing power in the hands of the public.

The ending of the convertibility of the US dollar to gold in 1971 by president Nixon can be considered as a landmark in the modern global economy. By de pegging the dollar from gold, all world currencies officially started floating and from then on, structural changes took place in the financial industry. Now, 40 years later, we can see that the crash of 1987, the internet bubble of 2001, the many discoveries of financial fraud at corporate and individual level, and the banking crisis of November 2008 are clear indications of the vulnerability of the global financial system as developed and built in the last decades of the former century. Three major developments are regarded as drivers of the modern financial culture in the Western world. Firstly, the 'communications revolution' as initiated by that major innovation - Internet, that facilitated the financial sector in such a globalizing way that it changed its culture from being service driven to that of leading the process of economic growth. The banking and investment industry, for example, used to be a gentlemen's business that primarily served its clients, based on high standards of honesty, integrity, care and diligence. In the profession of the last two decades, the

^Associate Professor of Financial Ethics Erasmus University Rotterdam, THE NETHERLANDS IFIM International Journal of Management | FOCUS April 2014 - September 2014

entry barriers have disappeared and key employees are creative, risk-taking, success-driven, analytical and intelligent people who lack training in the common ethical values of the profession (Caccese [1997]). Making money for the sake of making money has become a well-accepted goal. A second crucial aspect on the changing financial environment is the securitization process of international financial markets. During the last few decades, a gradual change has taken place from the importance of transparent traditional bank lending instruments to anonymous markettraded assets. Important in that financial cultural change was the influence of the increasing role of institutional investors, hedge fund activities and the necessary risk diversification and reinsurance processes. Closely related to this trend was the substantial rise of the trade in off-balance-sheet products, derivatives and the development of program trading. The inherent volatility of underlying assets prices required an adequate set of financial instruments with which to manage the financial exposure. Goldman Sachs has become an iconic example with respect to product development, financial culture and market manipulation . A third important factor is the growing influence of the 'civil society' regarding the responsibility for social welfare. In the last few decades, Europe in particular was characterized by sizable privatization projects of industries that traditionally belonged to the domain of the public sector. The increase in private competition created a competitive advantage of the private sector over the public sector – with the latter gradually becoming a judicial infrastructure and more or less a 'lender of last social resort'. At the same time, we saw that sustainable development was becoming increasingly important for modern companies as challenged by customer trends and reputational discipline. The objective of this paper is to provide a long-term analysis of financial markets in the developed economy. After the collapse of communism – in which corporate control was dominated by the production factor of labour the question at stake right now is whether financial capitalism will be able to survive. Today, it is the production factor capital that dominates corporate control. Do we not perhaps need alternative and more democratic corporate models in order to take care of things like the interest of the natural environment (the third major production factor) and other stakeholders? The approach that has been chosen is based on a moral-philosophical foundation that covers a wider 86 IFIM International Journal of Management | FOCUS April 2014 - September 2014

analytical terrain than does the modern economic theory, which is based on a strict utilitarian foundation. The inherent normative approach integrates principle and consequence based ethics. The primary function of money and financial capital – its role as a unit of account and exchange – is in danger of becoming subordinate to the creation of financial wealth as a goal in itself. Collective trust in financial markets, the major issue in finance, is at stake. The very moment that the neutrality of money and long-term capital is attacked by moral hazard and adverse selection, the financial system loses its scientific objectivity. The structure of the paper is as follows. Section 2 provides a short introduction of an alternative philosophical thinking on the subject of interest and money. Given that, in practice, interest payments have facilitated the real economic process for centuries now, it is essential that modern developments are also examined against this background. The following sections translate the previous theoretical discussion into two fundamental propositions relating to the current financial system. These propositions are subsequently explained and justified. Finally, a summary and conclusions are presented in the final section.

Philosophical theoretical background Our financial and economic analysis begins by asking where value comes from. Since economic life was strongly allied with religious life in the Middle Ages, this economic question really only became important with the introduction of the division of labour. A natural product can only take on an economic value if it undergoes a process carried out by people (e.g. coal and oil only have a value once it had been mined). Capital goods subsequently come into being as a result of human ideas and action. In other words, capital goods are chiefly created through intellectual work. These capital goods become productive because a decreasing amount of labour produces an increasing quantity of goods. The actual abstraction process that takes place here results in capital goods becoming productive without requiring any labour. And because capital goods can be traded, their value can ultimately be expressed as a sum of money: the assets. In this sense, assets are the realisation of intellectual thinking. Even though capital goods can be considered as the realisation of past intellectual thinking, their value is determined through their application by the present owner of the capital goods. In other words, the value of assets is determined by a combination of realised intellectual activity and future events.

FOCUS Research Papers Steiner then goes on to argue that the division of labour has caused the physical exchange economy to evolve into a money and skills-based economy. The economic system has explicitly absorbed the legal system due to the very existence of money itself. It is a fact that money can be considered as a right to future purchasing power and as such takes on an importance equal to that of the production factors nature, labour, assets and capital goods. Steiner distinguishes between three types of money: buying money, lending money and gift money. Buying money is the counterpart to a commodity and is only used to trade and to gain diverse commodities. Lending money is created with every new direct investment. This is young and productive money which entails economic improvements allowing for the generation of short term revenues as induced by human ideas and actions. Then there is gift money. Gift money is money without receiving any commodity or service for it. This money is needed for people who are not able to produce commodities like children, pensioners or sick people who cannot work. This money is needed to create social value which is not a commodity like education, or the work of artists, scientists, religion, etc. A basic problem in the economic analysis of the financial sector is its inherent lack of sustainability. Steiner reasons from a closed worldeconomic model and from a general universal law that is considered applicable to economic life as a whole: Die einzelnen Wirtschaften haben nämlich die Eigentümlichkeiten eines jeden Organismus, daß sie übergehen in ein immer schwächeres und schwächeres Leben. Das ist einfach algemeinen Weltgezetz, auch fur das Wirtschaftsleben. Ein Wirtschaftleben das keine Aufbesserung erfährt, geht herunter. [Steiner (1922, p. 161)]. Based on this 'universal law', Steiner goes on to suppose that all material objects such as consumer goods, capital goods and services age continuously and therefore intrinsically diminish in quality and value - in contrast to money! Money represents a right to future purchasing power with an essentially everlasting quality, which implies that in the course of time money acquires too much value in relation to goods and services. At the same time, interest payments lead to a social injustice (in terms of distribution of income), because the quality of material goods and services can only be maintained through labour while the interest mechanism causes capital to increase in value (even exponentially) without the need for labour. This inevitably results in value

accumulation, something that occurs, in Steiner's vision, to the value of land and capital goods. So how does Steiner solve this unbalanced growth situation? Loan capital offers the opportunity to achieve economic growth. Lending money gives the right, as it were, to a service in return. So Steiner goes on to define interest as that which one receives if one renounces a service in return. In this sense, the interest represents the dissolution of the physical exchange that is veiled behind a monetary transaction (caused by the division of labour). In other words, the forces of the conflict are transformed and bundled in the interest. And to compensate for this, contraforces must be brought into play. In Steiner's theory, these united forces are represented by the association. Products, consumers and traders belong in this association. These are parties who together play a subtle game of forces and who ensure that the primary survival instinct and greed of the microorganisms are finely tuned. According to Steiner, the accumulation of value in land and capital goods mentioned above must now be creamed off by means of gifts (which in fact result in destruction of capital) from the economic order to the cultural order. The association is tasked with managing this process. If capital is not destroyed voluntarily through gifts from the traders, then depreciation will occur involuntarily in the form of inflation and bankruptcy. There should therefore be a continuous and institutional transfer of value from the economic order to the legal system and the cultural order. Through gifts, capital will acquire a temporary character (just in as the real business cycle) and will cease to exist if the recipient has consumed it. In my opinion, Steiner, with his encouragement of gifts, combines the Greek philosophers' approach to the problems of redistributing wealth with the Jewish and Islamic ethics with respect to interest-free loans. Interest-free loans in close circles can also be considered as a gift from one to another. However, there is one great difference. Steiner makes a distinction between money for purchasing, money for lending and money for giving. Money for purchasing belongs to the economic order and may not be given interest free because this would redeem or reimburse, as it were, the underlying realistic exchange transaction. But money for giving has a twofold nature. On the one hand, such a transaction is initiated in the economic life in order to facilitate the cultural life. On the other hand, it prevents value accumulating in land and in excess capital.

Propositions for Sustainable Finance IFIM International Journal of Management | FOCUS April 2014 - September 2014

An important question is whether the culturally, historically and often religiously-based discussion regarding the level of interest – including the possible risk of capital accumulation - is still relevant in modern times. The financial sector has dominated the global economy during the 1970 – 2012 period, with, admittedly, a positive impact on income and employment, but with a clearly negative impact on global and local financial stability. The market interest rate as an information carrier has become indispensable in modern economic processes. Interest payments and rates in current financial markets signal financial power and weaknesses of nations (with the yield curve as intertemporal price differentiation). The essential task of interest rates is to enable a flexible allocation of financial assets between buyers and sellers on the open market. Successful real economies without well-functioning financial markets are still hard to imagine. The historical and ethical approach of interest payments – as presented in the former sections – forms the ethical-introductory framework for the coming analysis on the long-term equilibrium between the real and financial markets in the modern market economy. In this paper it will be argued that capital global growth rate should be similar to the rate of the real economic growth process. As an extension of the social discount rate (Turner 1994), excess interest rates (either too low or too high) are interpreted as ethical premiums because of the assumed sustainability premise that long-term financial claims should equal long-term physical assets. From that perspective, interest rates are not just the market price of capital depending on demand and supply, but a variable with important implications for the welfare economy.

free bonds (Grossman and Razin 1984) and international markets (Hodder and Senbet 1990). As a result, the necessity of capital markets is widely accepted from a utility perspective, which leads to the next question: if we need capital markets in the market economy, what then is the optimal level of interest rates, from a social and ethical perspective? In the paper, two major propositions are hypothesized. The first proposition is rooted in the historical explanation for the charging of interest based on two main motives in the literature, namely the opportunity cost of capital and the time preference of Fisher (1930).

Proposition 1: In a sustainable financial system, the average interest rate needs to be equal with the real economic growth in the long term. This proposition is derived from the well-known quantity theory of money by the Monetarist School. It states that the quantity of money should equal the quantity of real economic production: M*V=P*T

(1)

where during a fixed period: M = the total amount of money in circulation on average in an economy V =velocity of money circulation (the number of times money changes hands) P = average price level of goods and services

The role and the optimal level of interest rates The basic theory on the justification of capital markets in the real economy is expressed by the separation axioms of Fisher (1930). Assuming markets under perfect certainty, the financing decision can be taken independently of the investment decision. The introduction of capital markets increases the utility of both the agents with an abundance of wealth (savers) and the usefulness of agents with investment opportunities (the entrepreneurs). The integration of real trade theory and the theory of finance markets under certainty and uncertainty is described by MacDougall (1968). Later, these models are refined and expanded to include risk-

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T = volume of transactions of goods and services in an economy The point of departure is the monetarist requirement that there is a short-term balance sheet equality between the monetary sphere on the one side and the real economic sphere on the other side. The purpose of the monetary market balance sheet equation by the monetarists was to show that in order to control inflation (represented by the level of P), the growth rate of the supply of money (M) needed

FOCUS Research Papers to be balanced and if necessary restricted, depending on the money velocity (V) and growth of the real trade (T). During the 1980s and 1990s, the FED published a weekly overview of the targeted money supply in the United States of America in an attempt to manage inflation. Building on a similar balance sheet equality, it is stated that as with the supply of money, the growth of capital (financial claims with a maturity of longer than one year) also needs to be in line with the long term growth rate of the physical economy. The short term equality of the monetarists is thus converted into a long-term balance sheet equality of sustainable economics (Figure 1) Figure 1:Balance sheet of a sustainable economy

Real Assets

Monetary Assets

Physical Infrastructure Stocks Buildings Bonds Machinery, etc. Human capital (number of educated people) ∑ Physical Assets

∑ Monetary Assets (claims) MA

Splitting the sum of the physical assets and the monetary claims into a volume and an average price level component, we get:

gpa + ppa = gma + pma (3) where gpa = Volume growth of physical assets ppa = Price change of physical assets (inflation) gma = Volume growth of monetary assets (accumulation) pma = Price change monetary assets (interest rate) Expressed in words: by making the static balance sheet equality dynamic, the growth rate of the longer term monetary economy (the average interest rate: pma plus the volume change of capital claims: gma), should equalize the growth rate of the real economy in a sustainable economy (the change of the average price level of assets ppa plus the change in volume of physical assets gpa). If we assume that the volume change of capital and the volume change of real assets remain constant (growth of zero), proposition I states that the change of interest rates (pma) should equal the price change of real assets (ppa).

where:

The question at hand right now is what is the optimal level of interest rates? What are relevant motives to explain sustainable interest rates, and not only from an economic perspective. Many dimensions and factors are involved in the pricing process of interest rates; a few are mentioned below. A positive rate is desirable and induced due to the following:

VPA = Volume of all physical (real) assets

(I)

VPA * PPA = VMA * PMA ( 2 )

PPA = Average price level of physical assets VMA = Amount (volume) of capital; capital is defined as financial claims with a maturity of one year or longer PMA = Average return on stocks and bonds Expressed in words: the value of real economic assets should equal the value of financial long-term claims (capital). This balance sheet equation is based on the premise that if the value of financial claims increase faster the that of the real assets, the trust in the financial sector diminishes because the ratio between real economic assets and financial claims becomes too low. Long term income can only be generated from real economic projects and not from trading financial claims. From this balance sheet equation can subsequently be derived that for keeping a stable ratio between real and financial assets, the levels can be converted into growth rates. We get:

The opportunity cost argument. The opportunity cost in this context means the productivity of inherent production capacity in the real economy. Starting with the classical labor theory of value – stating that only labor is value enhancing in the production process – a positive interest rate is needed to explain the opportunity cost. Then, adding the value-creating energy of entrepreneurship and acknowledging the creative role of humans in our economy, a positive interest rate is needed in the sustainable global economy. Thoughts and ideas from the past accumulate into capital goods that facilitate more productive future production and are represented by an independent value given in the form of capital. Capital goods are realized human creativity from the past. In other words: physical labor, entrepreneurial ideas and technological innovations of the past, accumulated in a value called capital goods at t = 0, which continues to produce values into the future.

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Note that the values in this view are therefore not determined by future cash flows that are capitalized, but by the inventiveness and creativity (perhaps even spirituality) of the realized concept of the past. This natural vigor of the economic process justifies a positive real interest rates in order to facilitate economic progress financially. This ex-post driven growth component is thus at odds with the conventional wisdom that economic value is only determined by the discounted future cash flow. (ii)

Fee earning capacity. In order to finance the entire banking sector, a positive interest margin is required (the transaction costs argument). A positive interest rate from this point is helpful. However, a positive interest rate is not a prerequisite. Even with negative deposit rates, it is possible to create positive interest margins.

In addition to these arguments for a positive pressure on interest rates, the traditional upward pressure on interest rates resulting from a pure liquidity preference is considered less desirable from an ethical point of view because: A)

Based on the principle of equality between generations, an interest rate of zero can be argued for and thus no time value difference between time periods. There are as many reasons for a negative as for a positive time preference. Each choice in this respect is a normative moral choice far from a positive value (see the discussion in Section 3.1 and the six traits of time preference as formulated by Fisher (1930)). Pure time preference is, I believe, best described as Fisher's 'impatience to consume'.

Starting with the premise of a sustainable society, the intertemporal analysis of risk is less relevant since time as a variable is considered infinite and consequently cut off from analysis. This has serious implications for the modern concept of risk. Risk is an accepted phenomenon in investment theories as the explanation for a premium in the yield (interest), but if time is lost as a source of uncertainty, the risk lapses. A lower than anticipated growth is something against which one cannot hedge, but something that one should always be prepared for – also in a moral sense. Risk management and other forms of fixation of future cash flows are therefore less important.

High or too high interest rates - as often applied in the current market model -frequently lead to negative consumption effects.

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The Keynesian analysis indicates that a high interest rate negatively affects the real economy because of the higher capital expenditures on real investment projects. Based on the concept of duration, it has been found that high interest rates lead to lower interest rate sensitivity. In other words, the higher the interest rate, the lower the indifference of investors with respect to interest rate variability. Inflation and overheating of the real economic growth is, in the modern monetary policy, contested by an attempt to tighten the money supply by raising interest rates. This tightens future growth, because the investment decision is correct only if the anticipated growth at t = 0 is actually realized. If at t = 1 the realized growth is lower (because the market rate for whatever reason has fallen), the net present value analysis has failed just as inter-generational decision criterion at t = 0. The ex-ante analysis that prevails in the current financial analysis is, in my opinion, only a partial theoretical justification for an optimal rate. D)Higher interest rates lead to greater income inequality. Empirical research shows that of all the countries in the world in the period from 1948 to 1993, roughly 80% paid interest on the remaining 20% (Van Schaik 1996, p. 61). Krueger and Perri (2006) find that consumption inequality is much smaller than income inequality. The difference can be explained by the fact that the poor and middle classes take more debt to support their consumption, thus keeping the consumption inequality in check, while the rich invest their savings in assets backed by loans to the poor and middle classes. This eventually leads to an even higher income inequality (Kumhof & Rancière 2010). In summary, it is argued that the real interest rate functions optimally when it varies equally with the real growth rate of the economy, which is a natural estimator for organic growth in the economic process. Lower interest rates are not desirable from the economic idea of opportunity. Higher interest rates are rejected because of the implicit additional positive time preference that it entails.

Capital accumulation A second proposition focuses on the volumes of physical assets and the volume of capital claims with a maturity longer than one year. Expressed in symbols: VPA = VMA, assuming that ∆ PPA and ∆ PMA is zero. Just as physical capital goods and immovables have a natural tendency to wear, capital claims also need to have a finite maturity. If not, the volume of capital claims grow exponentially due to the compound interest mechanism.

FOCUS Research Papers Proposition 2: In a sustainable financial system, capital accumulation needs to be prevented through institutional capital destruction and charity in order to have the same volume growth as the volume growth of physical goods. Although interest rates are widely seen as the price of money and capital, interest can also be interpreted as the growth rate of output. This forgotten dimension is only stressed by certain authors (e.g. Boulding 1992, p.79-80), but is essential for understanding the stability of the economic system. The real economic process is driven by a natural process of wear and cessation of energy. This is caused by consumption and the physical wear processes of all material things. For a consumer, this is clearly visible (after consuming a piece of bread, it has completely gone), but for durable capital goods such as buildings and other fixed assets, a longer period of time is involved. Nevertheless, the ravages of time are there and do their natural job. In the accounting profession, new financial resources are earmarked by depreciations in order to overcome this physical decline of equipment. The monetary process is different. The essential difference between the real economic atmosphere and the monetary atmosphere is rooted in the character of the transactions involved in our monetary and economic process. Where, in real economic transactions, physical goods are exchanged for money or a claim on money, in financial transactions, money is exchanged for a claim to money (see CBS 1983, p. 16). The difference now is that because of the interest mechanism, a monetary contract is a claim on a monetary asset that intrinsically increases in value due to the expected return on that underlying, and possibly derivative, asset. This is in contrast to the physical goods in the real economic transaction. A commodity is consumed immediately after the transaction. For example, the legal financial claim on a newly issued bond yields a permanent potential cash flow after interest payments and repayment if the very same bond is permanently reinvested. (1) If these rights, once created, are transferable to inherent debt security may therefore, in theory, retain its purchasing power quality indefinitely. For equity, this is not the case. Shares, as a classic example of capital, have a permanent maturity and the value of the share depends on the quality of the underlying, real assets. Many other examples of financial assets that are traded, such as CD (Certificates of Deposit), CP

(Commercial Paper), CDOs and CDSs etc., have, theoretically, an eternal quality as long as there is a positive net return achieved and the initial loan is repaid. The primary goal of financial assets is future consumption, whereas in a real economic transaction, the consumption takes place immediately. The idea, described above, of exponentially growing financial assets is based on three major quality conditions. Firstly, the absence of bankruptcy risk is assumed. When companies go bankrupt and debt will not be repaid, this has the same effect as an enforced gift of the creditors to the company. In that case, capital is destructed and the macroeconomic volume of capital decreases, in other words, capital is consumed. Secondly, it is assumed that no capital tax is levied. Capital tax is money earned by the government at the expense of the investor and which will be spent (consumed) immediately in the economy. This also reduces the volume of capital because it cannot be reinvested immediately. Thirdly, it is assumed that a positive real interest rate is paid. If inflation is higher than the nominal interest rate, the purchasing power of capital decreases, implying once again a destruction of capital. Based on the previously mentioned difference in character between real economic transactions on the one hand and financial transactions on the other, it is argued that the imbalance between the real and the monetary sector needs to be monitored and managed positively. Where capital goods have a natural tendency to wear and decrease in value, financial capital grows, in theory, exponentially through the compound interest mechanism. (2) In practice, however, the value of capital is permanently endangered by inflation, moral hazard, defaults and taxes. By borrowing money from a bank (= debt for one party and capital for the other), temporary purchasing power is obtained until the moment the debt, including interest payments, is repaid. The repayment destroys the capital initially created by the loan, but the initial created capital grows with the interest paid. This process of borrowing and lending creates a permanent stream of income from debtors to lending parties, potentially leading to serious income differences (see Figure 2 as an example of the actual European situation). Figure 2 Capital and Debt of European Central Banks at the ECB

Source: The Dutch daily newspaper 'Financieel Dagblad', 5 July 2012

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Why has the financial system not already gone bankrupt under the pressure of the accumulation rate? The value of the accumulated capital is systematically destroyed and damaged by inflation, stock market crashes, bankruptcies and natural or other disasters. Wars are also effective in destroying capital. The paradox now is that economists do everything they can to prevent bankruptcies and inflation, but this turns out to be necessary for a sound reduction of capital accumulation. This attitude is socially desirable because disasters, bankruptcies, wars and inflation are economically, politically and socially regarded as negative. However, from the technical perspective, capital reduction turns out to be valuable and necessary in order to equal the balance with the real economic supply of capital goods. How then could we tackle the accumulation of capital in an institutionally positive way? The regular way to destroy capital is by repaying debt. As we all know, that becomes increasingly difficult as the amount of debt increases (would Greece succeed?) However, who is morally responsible for a defaulting institution? The borrowing institution in an attempt to recover control, or the lending institution that receives higher interest rates because of higher risks? Apart from repayment of debt there is only one fundamental positive way to destruct capital and that is charity and donations. There are basically two forms of charity: private donations and redistribution via the government (taxes), the latter having a more or less forced character. Let us start with donations. A donation is a gift that does not have to be repaid - capital would be destroyed and the money consumed completely. That is exactly what we need economically. Moreover, it leads to socially desired effects. The donor feels appreciated and is economically free in searching for his own targets. The receiver is obliged to spend the money, which in a natural way leads to consumption or production in the poorest or in vulnerable sectors of the economy such as music, art and non-commercial education and health care. The latter sectors, as we can all observe, are under the highest pressure in the current economic climate. The private donations as described above are the purest form of charity. Taxes aiming at redistributing wealth between citizens can be seen as a more collective form of charity. Our current tax system runs primarily on taxing income and taxing spending (VAT). In this context, we should consider the proposed Financial Transaction Tax (FTT) in Europe. The potential tax revenue is enormous, trillions of Euros of revenues per year worldwide. Assuming

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that banks act morally responsible and do not increase their fees to clients, financial taxation enables governments to decrease the growth rate of capital and increase spending for educational and social purposes. Why is the destruction of capital now so crucial in order for the financial markets and institutions to become sustainable? The key is that all participants are mortal in the real economy. People and human capital die and are reborn, and like physical inputs (buildings, machinery, and infrastructure) are permanently depreciated, demolished and rebuilt. Furthermore, if the inputs are of good quality, these impulses are funded with savings from the past, namely depreciation. Why then does a debt title, theoretically, have an eternal life? Why not introduce gift bonds? For example, a 4% regular 10-year bond may, in principle, be indefinitely reinvested and accumulate in volume exponentially. An alternative debt title could be a 10% ten-year bond which does not have to be repaid. In that case, only the principal is repaid in the subsequent 10 years, without interest. This does not automatically increase the amount of capital; the initial loan can be consumed in ten years. Is this irrational lending behaviour? In itself, this behaviour could be explained, for example, by a possible negative time preference for a lender with a shorter time horizon (Fisher 1930), or Calvin formulating his restrictions on raising interest. Even better than the above example bond would be a 10-year 4% bond, whereby only 400 has been repaid after 10 years and 600 Euros in assets is therefore destroyed immediately at the issue of the bond. Are these ideas unrealistic and utopian? Maybe. On the other hand, the time preference of a potential donor institution is structurally different from today's dealers and speculators. The banking system after the crisis will hopefully not neglect the long-term balance equation between the real economic and the monetary sector as described in the beginning of this section. What is utopian, in my opinion, is unbridled faith in the current financial paradigm. The structural disparity between the real sector on the one hand and the financial balloon on the other hand is not sustainable. As in the past the collapse of communism occurred primarily because the dominance of the production factor labour proved to be unsustainable - we are now waiting for the downfall of a system that floats on the dominance of the service factor capital. A sustainable economy can only be achieved with the democratic and fair implementation of a market economy in which the production factors labour, capital and natural

FOCUS Research Papers environment are of equal importance. The FTT tax has so far proved politically unfeasible. The morality of participants in the market economy and the absence of international regulation and supervision are to blame. Let us hope that the recent US and European financial crisis lead to the insight that the financial sector needs be drastically reformed. A tax on financial transactions is a fair way to bring financial markets back into a balanced position. In summary we can say that the compound interest rate mechanism on the one hand and a lack of institutionalized destruction of capital claims on the other hand cause that the economy diverts from a sustainable growth rate. In the goods and services economy, a natural decrease in volume occurs (because consumer and capital goods age and physically destroyed), which leads to a growing imbalance between the monetary sector on the one hand and the real economy on the other. This imbalance between the volume of actual production and the volume of capital remains statistically hidden as long as the world's total assets may be insufficiently mapped and are no policy variable of monetary authorities. Nevertheless, it should be clear that the structural difference between the monetary and the real economic sectors leads to an illusion of real purchasing power. Proposition 2 is intended to signal this imbalance. Empirical verification is necessary but difficult due to the existence of large

international black and grey economic data. It is nevertheless a topic for future research.

Conclusion This paper discussed the implications of the decoupling of the growth rate of the international financial market from the growth rate of the real economy. Based on balance sheet equilibrium as a point of departure for sustainable economic growth, a discussion was presented on the optimal level of interest rates depending on the real economic growth of the economy. Our first proposition stated that the average interest rate should vary with the growth rate of the real economy, which is an estimator for organic growth in the economic process. Lower interest rates are not desirable from an economic idea of opportunity. Higher interest rates are rejected because of the implicit additional positive time preference that this entails. Our second proposition was about the accumulation of wealth. Under the assumption of a positive interest rate, the absence of financial tax and the absence of bankruptcies, financial capital grows exponentially and needs to be managed institutionally if we want to achieve sustainability.

References Boulding, K.E., 1992, From Chemistry to Economics and Beyond, in Eminent Economists, edited by M. Svenberg, Cambridge University Press, ISBN 0-521-38212-2. Fisher, I., 1907, The Rate of Interest, MacMillan Company, New York. ----- , 1912, The Nature of Capital and Income, , MacMillan Company, New York. ----- , 1930, The Theory of Interest,- as determined by impatience to spend income and opportunity to invest it-, Reprint of economic classics, Augustus M. Kelly Publishers, Clifton 1974, ISBN 0678000034. Grossman, G.M. and A. Razin, 1984, International Capital Movements under Uncertainty, Journal of Political Economy, vol. 92, 286-306.

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Hodder, J.E. and L.W. Senbet, 1990, International Capital Structure Theory, Journal of Finance, December, 1495-1516. Keynes, J. M., 1936, The General Theory of Employment Interest and Money, The royal economic Society, 1973.. Krueger, D., and Fabrizio P., 2006, .Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,.Review of Economic Studies, 73, 1, 163-194. Kumhof, M., and Rancière, R., 2010, “Inequality, Leverage and Crises,” IMF Working Paper 10/268 (Washington: International Monetary Fund) Steiner, R., 1922, NationalÖkonomischer Kurs, Vierzehn Vorträge, gehalten in Dornach in Juli bis August 1922, 5., neu durchgesehene und ergänzte Auflage, Gesamptausgabe Dornach 1979. Turner, R.K., D. Pearce and .I. Bateman, 1994, Environmental Economics, Harvester Wheatsheaf, ISBN 0-7450-1083-0

Notes See e.g. the flash crash of May 6, 2010, where algorithmic program trading initiated a fall of the Dow Jones of 10% in half an hour that has been recovered at the end of the day. See for example the CDO deal called Abacus 2007-AC1 taken to court by the SEC in April 2010. This analysis draws heavily on the work of Rudolf Steiner (1861-1925). He is given a prominent place in this paper because his original economic thinking in the National Ökonomischer Kurs (1922) forms the foundation for my stance concerning the sustainability of money and capital in the coming sections.

Dr. Aloy Soppe is associate professor financial ethics at the Erasmus University in Rotterdam. He was a stock analyst for the Amsterdam Stock Exchange at the ABN/AMRO bank, and later worked as director of Soppe Currency Consultants and advisor for the implementation of option strategies in managing currency risk. Since 1987, he has worked at the Department of Finance and Investments at Erasmus University in Rotterdam. In 1993, he moved into sustainability research and started teaching Financial Ethics. In 2001, he joined the Erasmus University Law Faculty to teach Financial Ethics at the department of Fiscal Law in the discipline Financial Law. He publishes in national and international journals.

Contact Details: Burgemeester Oudlaan 50 P.O. Box 1738 (Room L4-039) NL-3000 DR Rotterdam The Netherlands Email soppe@law.eur.nl T +31 10 408 1349

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FOCUS Research Papers

THE IMPACT OF SPIRITUALITY ON INDIVIDUAL ENTREPRENEURIAL ORIENTATION -AN EMPIRICAL STUDY Theme: Meaningful Way of Inspiration of Spirituality on Entrepreneurship

Dr. Muhammad Shahid Qureshi^

Dr. Muhammad Mubashir Mukhtar^^ | Mr. Adnan Hussaion^^^

Abstract: With the varying research directions on exploring the factors influencing the entrepreneurial orientation, this research attempts to investigate the impact of individual's spiritual orientation on individual's entrepreneurial orientation. In theory the spirituality provides a sense of purpose, meaningful life, interconnectedness and community consciousness; all these attributes helps in forming a sound entrepreneur who has a positive attitude and strong motivation to be innovative, take calculated risk and be able

to foresee the possible hurdles. For empirical analysis the Spiritual Orientation construct is used as a latent variable and is measured by self-efficacy and life scheme, following the Spirituality Index of Well Being (SIWB), (Frey et al., 2002); whereas, the Individual Entrepreneurial Orientation (IEO) construct is measured by three variables i.e. innovativeness, risk-taking and proactiveness, (Bolton and Lane, 2012). Data has been collected through questionnaire filled by 246 university level students, belonging to various degree programs, representing six major cities of Pakistan - Karachi, Sukkur, Multan, Faisalabad, Islamabad and Peshawar. All

Keywords: Spirituality, Individual Entrepreneurial Orientation, Self-Efficacy,Life Scheme ^Program Director CED, Assistant Professor, Institute of Business Administration, University Road, Karachi-75270. Pakistan ^^Research Assistant, Center for Entrepreneurial Development, Institute of Business Administration,University Road, Karachi-75270, Pakistan ^^^Lecturer IFIM International Journal of Management | FOCUS April 2014 - September 2014

these students were participating in an entrepreneurship training workshop, which prepared them to participate in a business plan competition titled, â&#x20AC;&#x153;INVENT - The Entrepreneurial Challengeâ&#x20AC;?, conducted by Institute of Business Administration, Karachi in April 2013. Factor Analysis and Structural Equation Modeling is used to test the impact of spiritual orientation on individual entrepreneurial orientation. Through this exploratory and confirmatory analysis we find that the individual entrepreneurial orientation does vary with the level of spiritual orientation. This positive relation between the two constructs adds to the literature on entrepreneurship. Moreover, these findings can be incorporated in entrepreneurship pedagogy to promote environmentally, socially and ethically sensitive entrepreneurship.

Introduction With the growing literature supporting the stance of 'entrepreneurship can be taught' , it becomes apparent to investigate the factors that enhance the entrepreneurial learning. In particular the factors which not only ignite the entrepreneurial spirit but at the same time imbibe a socially, environmentally and ethically sensitive mindset before becoming selfish, arrogant, and impassive to society. In this context we intend to research on the individual entrepreneurial orientation with a focus on spirituality. The main characteristics of an entrepreneur closely relate with the variables of spirituality i.e. he is innovative, takes calculated risks, has high self-esteem, perseverance, selfefficacy, also has the ability to foresee possible hurdles; on the other hand spirituality provides a sense of purpose, a meaningful life, interconnectedness and community consciousness. In this paper we have two objectives to fulfill; firstly to check the validity of individual entrepreneurial orientation (IEO)and spirituality construct, secondly to explore the relationship between the two constructs - both of them in the context of Pakistan. The data was collected from undergraduate and graduate level students participating in business plan completion (INVENT 2013, The Entrepreneurial Challenge), organized by Centre for Entrepreneurial Development of Institute of Business Administration, Karachi (IBA-CED).The concept of IEO

(Individual Entrepreneurial Orientation) is relatively new and there has been very less research in this area, in contrast to firm level entrepreneurial orientation (EO) where a lot of research has been carried out. We would be following IEO construct as developed by derived from the firm level EO construct developed by . For spirituality we have followed the construct developed by , 'Spirituality Index of Well-Being', although it has been developed by keeping in view the health care sector, but still its relevance can be seen in management and especially in entrepreneurship. For testing the validity of both the constructs factor analysis has been employed while empirically testing the proposed model structural equation modeling is used in order to see the significance of casual relationship. This theoretical and empirical study is a pioneering work, especially when seen among the entrepreneurship literature available in Pakistan's context. This paper is divided into three parts and a conclusion; literature review, empirical analysis and discussion. The literature part will cover important studies within the area of entrepreneurship and spirituality, while empirical part will discuss the data collection methodology and techniques employed, whereas the discussion part will look into the results and outcome of hypothesis. Conclusion part identifies some important further research directions.

Literature Review In the exhausted 140 articles literature review by on the impact of spirituality at workplace, three different perspectives were explored, which identifies the role of spirituality in benefiting the employees and enhancing organizations performance. Firstly, spirituality positively impacts on quality of life and well-being; secondly, it provides a sense of purpose and meaning at work; lastly, a sense of interconnectedness and community is developed. These three perspectives have implications from the viewpoint of interpersonal commitment, human resource and philosophy. Interpersonal perspective is about relationships, social dynamics and collective dimensions which increases loyalty, attachment and belonging to organization. From the human resource view, spirituality increases the morality, commitment and subjective well-being as it helps in overcoming the climate of uncertainty, fear and chaos. From a philosophical view, the spirituality addresses the questions

Associate Director and Faculty Member, Center for Entrepreneurial Development (CED), Institute of Business Administration (IBA), Karachi, Pakistan. Research Assistant, Center for Entrepreneurial Development (CED), Institute of Business Administration (IBA), Karachi, Pakistan. *Corresponding author: Room # 102, CED Building, Main Campus, IBA Karachi; Tel: +92-333-3147454; +92-21-38104700 Ext:2703; Email: mmukhtar@iba.edu.pk

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FOCUS Research Papers which an individual tries to search i.e. meaning and purpose of life and work. It has deep implications in individual's life, needs, aspirations, career and passion. concludes that spirituality has to play a vital role in transforming the workplace into a more calling one, and practitioners have to positively connect it in their organizations. On the same theme tested workplace values and its outcome in context of individual, organizational and in combination of both. The empirical results showed that the individual spirituality was positively related to total work rewards satisfaction i.e. intrinsic – recognition and sense of achievement; and extrinsic – compensation and promotion. Whereas the organizational spirituality was positively related to work reward satisfaction, organizational identification, job involvement; and it was negatively related to organizational frustration. The crux of this study was that workers desire for a spiritual tending organizations even though they themselves are not spiritually oriented.

are; clear goals and feedback, challenge existing skill sets, reduction in ego, focused concentration, sense of control, time distortion, autotelic experience. It was concluded that the entrepreneurs who showed high ranking in spirituality i.e. who saw meaning and purpose of life as integrated - also showed high values in flow characteristics – fully engages in respective activity. listed seven dimension of spirituality related to entrepreneurs; consciousness, grace, meaning, transcendence, truth, serenity and inner directedness. In a conceptual paper on spirituality and entrepreneurship by a construct has been developed which combines variables from commercial and social entrepreneurship in the light of perennial philosophy. They also presented a definition of spiritual entrepreneurship as, “an activity aimed at creating an organization with a universal outlook that fosters a spiritual program and recognizes existing opportunities and needs within its environment, by engaging in a process of innovation and adaptation, despite limited resources.”

According to the family businesses cultivates more spirituality at work than non-family businesses; this is due to the cultural characteristics that they possess within. have listed internal and external characteristics of a spiritual business. The internal characteristics includes a calling attitude of work for employees, leaders are compassionate and have commitment with values, teams are committed, the organization focus is on virtues and is value driven, organization is accountable for its value, the organization is creative and adaptive, long-term orientation is based on common good rather on profit maximization, strong commitment of service to each other and a sense of family. The external characteristics comprises of commitment to social responsibility, active involvement in charitable activities and with community, spiritually nurturing buildings, communication of spiritual values with vendors and customers, reflection of spirituality in marketing and public relations by imagery and terms, involvement in spirituality in the workplace movement.

Deep believe structures have some critical aspects in developing an expert entrepreneur mindset, , as entrepreneurial thinking is ultimately anchored to deeply seated beliefs and belief structure. “Behind entrepreneurial action are entrepreneurial intentions; behind entrepreneurial intentions are known entrepreneurial attitudes; behind entrepreneurial attitudes are deep cognitive structures; behind deep cognitive structures are deep beliefs”, . Where beliefs has been defined as, “deeply held strong assumptions that underpin our sense making and our decision making”, e.g. scripts, role identity, maps, schema or even deeper beliefs of religion etc. .

From an entrepreneurial point of view, spirituality is useful in nurturing creativity, innovation, honesty, trust, mindfulness, and develops down-to-earth attitude despite being successful, . studied the relationship between spirituality and entrepreneurship in the context of play and flow theory; where work and play are synonyms, and flow is the phenomena of fully engaging in an activity, thus it leads to better focus and job satisfaction. The flow characteristics

A renowned construct 'Spirituality Index of Well Being (SIWB)' developed and empirically validated by , captures the level of spirituality of an individual. The SIWB is based on two constructs; self-efficacy and life scheme. The selfefficacy of an individual shows the internal commitment of himself in overcoming the challenges which he confronts in real life, regardless of his capacity or perceived resources. Life scheme refers to 'meaning making', that provides a sense of purpose and order of one's life, it is described as “a positive, pervasive way of viewing the world and one's life in it, lending elements of comprehensibility, manageability, and meaningfulness”, . Although it has been tested in health related studies, but still it is of relevance in entrepreneurship – due to its sub constructs of self-efficacy and life scheme. In a more recent research, spirituality and entrepreneurship was

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tested on graduate level students, – . It studied the impact of spirituality on entrepreneurial intentions, entrepreneurial networking, entrepreneurial capability and entrepreneurial success; where the spirituality scale is developed through the variables of vision, hope/faith, altruistic love, meaning/calling and membership. The study concluded with giving relative importance for introducing spirituality in entrepreneurship teaching as it does away with all types of fear, jealousy, anger and guilt and builds in the constructive emotions of loving fellow human being, show commitment in learning and appreciate other people – all characteristics are vital for an entrepreneur on individual level. assessed and validated entrepreneurial orientation scale at individual level (IEO); while following entrepreneurial orientation scale of , earlier developed for firm level analysis. Firm level EO is defined as “the strategy-making processes that provide organizations with a basis for entrepreneurial decisions and actions” . Whereas when looking into IEO the quires addressed are, “what are the personal characteristics or attitudes a person possesses that might increase propensity to

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engage in and be successful at entrepreneurial activities?” . EO has been explained thorough five different behaviours, found in entrepreneurship literature and business strategy; autonomy, competitive aggressiveness, innovativeness, proactiveness and risk taking. All these five dimensions can be considered collectively or separately .The five behaviours defined by are detailed below in Table 1. The performance of the firm is dependent on high EO scores. This EO can further be equated with the individual's behaviour, as the firms – particularly the SME's –are initiated by individuals. EO has been significantly tested at firm level so it can be tested on individual basis' . has considered IEO as a form of personality traits and attitude towards entrepreneurship. Factor analysis was employed to study the IEO among university level students, resulting in an evidence of three behaviours of significance; risk taking, innovation and proactiveness. From this study it can be derived that psychological traits are useful in predicting individual entrepreneurial orientation; consensus of researchers is also in this regard, '' . Figure 1 depicts the model which we tested in this study.

FOCUS Research Papers Empirical Analysis The constructs developed by and have been used in this study. developed the spirituality construct by using focus group interviews in order to capture the patient voice regarding well-being concept. replicated the five behaviour study of , after transforming the questionnaire from firm level to individual level in order to capture the individual entrepreneurial orientation. The IEO constructs were reduced to three variables due to insignificant results in reliability analysis; this step increased the overall cronbach alpha. The two dropped variables – autonomy and competitive aggressiveness – are the least studied variables in entrepreneurship literature as well, . The survey questionnaire carried out for this study is given in the appendix. The spirituality construct is based on two sub-constructs; selfefficacy and life scheme. Where each constructs contains a set of six reverse questions, with a scale of 1 to 5, representing 'strongly disagree' to 'strongly agree'. The IEO contains three constructs; risk, innovativeness and proactiveness. With three questions assessed the risk and proactiveness, and four questions assessed the innovativeness. The scale for IEO ranged from 1 to 5, representing 'strongly disagree' to 'strongly agree'. Data was collected from university level students (undergraduate and graduate) participating in a business plan competition, 'INVENT – The Entrepreneurial

Challenge', organized by Centre for Entrepreneurial Development, Institute of Business Administration, Karachi. It started from January 2013 and concluded in August 2013. Workshops were held across the country in which students were given training on developing an entrepreneurial mindset, developing a business plan and preparing a rocket pitch. The training was reinforced with internal and external mentoring. Workshops were conducted in seven major cities of Pakistan; Karachi, Sukkur, Multan, Faisalabad, Lahore, Islamabad and Peshawar. IBACED had a prior memorandum of understanding signed with the hosting university in respective cities. Around 1500 students from different Higher Education Council (HEC) recognized university attended these workshops, 350 ideas were registered in this process and 50 teams submitted their business plans for the competition – where each team comprised of 4 members. Questionnaires were distributed and collected on the day of workshop – April 2013. A total of 311 responses were collected out of which 246 were found to be useful. The questionnaires which were significantly incomplete were dropped out, as for the few missing variables; we opted for logically deducing the few missing items, in line with methodology. Viewing the number of questionnaires received, it seems reasonable, as the total members who submitted their business plans were 200. We received no questionnaire from the participants of Lahore, resulting in a data collection from six major cities of Pakistan; Table 2 shows the survey response frequency city-wise.

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Gender wise, 70 percent of the respondents were males and 30 percent were females. 88 percent of the students ranged between 18 to 25 years of age, 7 percent ranged between 26 to 45 and rest were reported missing. 75 students or 30 percent reported that they belonged to business background family and 15 percent didn't respond to the question. Twenty five percent of the students said that they are entrepreneurs currently; as the questionnaires were filled in a business plan competition workshop, we can safely assume that all of them were at least intending to become an entrepreneur. The data was analyzed by using SPSS and AMOS. The questions related to SO were transformed as it contains all reversed questions in order to match it with IEO construct. Overall reliability analysis of all items showed Cronbach's Alpha of 0.853, showing very reliable constructs. Factor analysis was then used to check discriminant validity between constructs. Varimax rotation methodology was employed to check the loading of variables on the latent constructs. The factor analysis also resulted in five latent factors, with Eigenvalues greater than one, explaining 56 percent of total variance. It shows that five latent variables successfully extracted on 22 variables. Table 3 shows the factor loadings

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between 0.840 and 0.519. The only problem was seen in the first variable of innovation construct, which loads with the risk construct. This can be due to the question, as it contains the words similar to risk construct. Structural equation modeling (SEM) was used to test the impact of SO on IEO. For initial level causal testing, we opted for second order SEM. The result shown in Figure 1 depicts a strong positive impact of spirituality on individual entrepreneurial orientation. The regression analysis shows that when SO increases by 1 the IEO increases by 0.73. Fit indices shows that the model has a good data fit; Normed chisquare (i.e. CMIN/DF) is 2.104 well below the cut-off of â&#x2030;¤ 3; the Comparative Fit Index (CFI) shows result of below the threshold value of 0.92 i.e. 0.859; and the Root Mean Square Error of Approximation (RMSEA) falls between the acceptable range of 0.5 and 0.8. Chi-square probability is significant, but it doesn't show any problem as it can be due to large sample size and it can happen due to the non-normal distribution of the data. In our case the data was rightly skewed for IEO and SO, reflecting higher orientation in both scales.

FOCUS Research Papers

Conclusion In this preliminary and pioneering paper – in context of Pakistan, especially – we qualitatively and quantitatively assessed the role of spirituality in the field of entrepreneurship. The empirical analysis verified our hypothesis that spirituality does play a significant positive role in shaping the individual entrepreneurial orientation. Thus variables of spirituality – self-efficacy and life scheme – do play a vital role in enhancing innovativeness, proactiveness and risk-taking attitude – key traits of an entrepreneur. There has been private-public collaboration in UK for disseminating the entrepreneurial pedagogy within the lines of spirituality such that it fosters cooperative and ethical entrepreneurism, . This study has a potential to carry out the entrepreneurial pedagogy in the same context. philosophically argues that man is essentially an innovative animal or an entrepreneur, where the ultimate purpose of an entrepreneur is to benefit the mankind by producing beneficial goods and services, especially disadvantageous beings. He provides a “better and more beautiful way of life” in such a way that it is more ethical, more equitable, less harmful to the planet, increasing the quality of life on planet and so on. The sole purpose is not of profit maximization or peaking the utility curve or creation of new business for the sake of its own good. As for developing ethics, there is need to nurture the spiritual characteristics as a “major motivating force”, resulting in an authentic care and develop “oneness with others and with the universal source of creation”, . The SO and IEO have the potential to connect the dots of the theory outlined by and . For future research directions, we recommend to carry out a comprehensive literature review which would direct towards many other dimensions within the domain of entrepreneurship and spirituality. It is also recommended to carry out a detailed study to refine the spirituality construct and explore other possible items to make it comprehensive. The direct impact of self-efficacy and life scheme as a first order construct on IEO needs to be investigated as well.

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References Agbim, Kenneth Chukwujioke, Oriarewo, Godday Oriemgbe, & Ijie, Nafisa. (2013). The Relative Importance of Spirituality in Entrepreneurship Development Among Graduates of Nigerian Tertiary Institutions. International Journal of Business and Management Invention, 2(4), 23-35. Allinson, Robert. (2011). The Ethical Producer Spirituality and Ethics in Management (pp. 53-73): Springer. Amram, J. (2009). THE CONTRIBUTION OF EMOTIONAL AND SPIRITUAL INTELLIGENCES TO EFFECTIVE BUSINESS LEADERSHIP. (Phd), Institute of Transpersonal Psychology, Palo Alto, California. Bolton, Dawn Langkamp, & Lane, Michelle D. (2012). Individual entrepreneurial orientation: development of a measurement instrument. Education + Training, 54(2/3), 219-233. doi: 10.1108/00400911211210314 Chin, Susan Tee Suan, Raman, Kavitha, Yeow, Jian Ai, & Eze, Dr Uchenna Cyril. (2012). Relationship Between Emotional Intelligence And Spiritual Intelligence In Nurturing Creativity And Innovation Among Successful Entrepreneurs: A Conceptual Framework. Paper presented at the International Conference on Asia Pacific Business Innovation and Technology Management. Covin, Jeffrey G, & Slevin, Dennis P. (1989). Strategic management of small firms in hostile and benign environments. Strategic management journal, 10(1), 75-87. Ericsson, K Anders, & Charness, Neil. (1994). Expert performance: Its structure and acquisition. American psychologist, 49(8), 725. Frey, Bruce B., Daaleman, Timothy P., & Peyton, Vicki. (2005). Measuring a Dimension of Spirituality for Health Research. Research on Aging, 27(5), 556-577. doi: 10.1177/0164027505277847 Karakas, Fahri. (2010). Spirituality and Performance in Organizations: A Literature Review. Journal of Business Ethics, 94(1), 89-106. doi: 10.1007/s10551-009-0251-5 Kauanui, Sandra King, Thomas, Kevin D., Sherman, Cynthia L., Waters, Gail Ross, & Gilea, Mihaela. (2010). An exploration of entrepreneurship and play. Journal of Organizational Change Management, 23(1), 51-70. doi: 10.1108/09534811011017207 Kolodinsky, Robert W., Giacalone, Robert A., & Jurkiewicz, Carole L. (2008). Workplace values and outcomes: Exploring personal, organizational, and interactive workplace spirituality. Journal of Business Ethics, 81(2), 465-480. doi: 10.1007/s10551-007-9507-0 Krueger, Norris F. (2007). What lies beneath? The experiential essence of entrepreneurial thinking. Entrepreneurship Theory and Practice, 31(1), 123-138. Kuratko, Donald F, Ireland, R Duane, Covin, Jeffrey G, & Hornsby, Jeffrey S. (2005). A Model of Middleâ&#x20AC;?Level Managers' Entrepreneurial Behavior. Entrepreneurship Theory and Practice, 29(6), 699-716. Lumpkin, G. T., & Dess, G. G. (1996a). Clarifying the Entrepreneurial Orientation Construct and Linking it to Performance. Academy of management Review, 21(1), 135-172. Lumpkin, G.T., & Dess, G.G. (1996b). Clarifying the entrepreneurial orientation construct and linking it to performance. The Academy of Management Review, 21(1), 135-172. Lumpkin, GT, Cogliser, Claudia C, & Schneider, Dawn R. (2009). Understanding and measuring autonomy: An

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entrepreneurial orientation perspective. Entrepreneurship Theory and Practice, 33(1), 47-69. Neal, Judi, & Vallejo, Manuel C. (2008). Family Firms as Incubators for Spirituality in the Workplace: Factors That Nurture Spiritual Businesses. Journal of Management, Spirituality & Religion, 5(2), 115-159. doi: 10.1080/14766080809518697 Rauch, A., & Frese, M. (2007). Let's Put the Person Back into Entrepreneurship Research: A Meta-Analysis of the Relationship between Business Owners' Personality Characteristics and Business Creation and Success. European Journal of Work and Organizational Psychology, 16(4), 353-385. Rauch, Andreas, Wiklund, Johan, Lumpkin, George T, & Frese, Michael. (2009). Entrepreneurial orientation and business performance: An assessment of past research and suggestions for the future. Entrepreneurship Theory and Practice, 33(3), 761-787. Runyan, Rodney, Droge, Cornelia, & Swinney, Jane. (2008). Entrepreneurial orientation versus small business orientation: what are their relationships to firm performance? Journal of Small Business Management, 46(4), 567-588. Shinde, Jaysinha S., & Shinde, Udaysinha S. (2011). The Perennial Perspective on Entrepreneurship. Journal of Strategic Innovation and Sustainability, 7(1), 72-86. Wang, R, Sedransk, J, & Jinn, JH. (1992). Secondary data analysis when there are missing observations. Journal of the American Statistical Association, 87(420), 952-961. Woods, Philip A., Woods, Glenys J., & Gunter, Helen. (2007). Academy schools and entrepreneurialism in education. Journal of Education Policy, 22(2), 237-259. doi: 10.1080/02680930601158984 Zsolnai, L谩szl贸. (2010). Ethics Needs Spirituality. In S. S. Nandram & M. E. Borden (Eds.), Spirituality and Business (pp. 8790): Springer Berlin Heidelberg.

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In FOCUS Interview

Ajai Chowdhry

Interview with

Ajai Chowdhry -HCL

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In FOCUS Interview Can you share your memories about the birth of HCL?

How could you strike a balance between the motivation to start a new venture and risk/resistance to quit job?

“6 of us were working in DCM (Delhi Computer Machines) Data Products, one of the early companies that got into electronics and hardware. One day we decided to leave DCM and start our own business. Our dream was to take the 'microprocessor' which had just come out and change the world, as you have big dreams when you are young. So that's how the idea of HCL was born. All of us resigned and wanted to go ahead with our dream of starting a new company but were not sure about the name. Also we had financial crisis and managed to collect just 1.8 lakhs out of everyone's personal assets. Those days, it was 'License Raj'. We required having license to start a company in the line of computers, which we did not have as we were very small. Meanwhile we started marketing of calculators of other manufacturers as a start not to waste any time and also because of the financial constraint. Somehow we came to know that UB government is giving license. We met the Chairman of UB government company and asked why we cannot join hands. That is how we created a joint sector undertaking wherein they had 26% equity share and rest was ours. Naming the company was a big challenge. 'Hindustan' could be used only if one is a very big company or a Government company but as we had a joint sector we also got that privilege to name our company as Hindustan Computer Limited.”

“I was aged 25 at that point in time and there was no risk associated. If I do not shine well in the business I will very well get a new job. My decision of resigning the job was already taken and then communicated to my parents. According to me that was the time when you can actually afford taking a risk.”

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HCL is the pioneer in Indian computer industry. What was your vision at the induction time? “We started it as a small company. The idea of vision and Mission would arise once you grow big as a company. At that time we thought we are going to create a computer company and we are going to do it here and now. That is it. Later on we came to know that when we created the first computer, Apple too created its first computer at around the same time. So, we are not just pioneer in India but 'Global Pioneers.”

Please let us know your growth and prosperity with HCL.

“HCL's growth is a legend. In one area we created a hardware industry and in another area we created training industry and in the third area we created software industry and finally infrastructure management industry, the last two happened much after other companies already created. All this happened over a period of time and made us stand at the 4th position today The challenge that lies in growth and prosperity is how, when and what strategy you undertake. The one factor which has always been associated with HCL as a company and its employees is 'Passion.” “It is the people who make a company.”

Success mantra of HCL in creating a place for itself. “Pride, Passion and Performance.' Pride for the company as well as for the country which is obvious because of the name Hindustan, passion to achieve your dream and towards your work, pride and passion together will result in performance.”

Hardships underwent in stepping up the ladder of success. “There were many hurdles in the way. The biggest one was in 1989 when we decided to go to the USA based on McKinsey's report on our product quality and benefit. So we set up a manufacturing plant to manufacture our computers over there in Silicon Valley. We started manufacturing and got a lot of orders. But at the time of delivery, we discovered that we did not have 'environmental approval' from the US government on our power supply and hence all

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In FOCUS Interview

our orders went waste and whole place had to be shut down. We had to convert soon and from the problem we created an opportunity. We took lot of our engineers who designed our computers and operating system and planted them into the R&D's of various companies. That's how our software business started. In the history of a company you have to go through ups and downs.”

What was the motto behind starting HCL Info systems, the service provider?

“Fundamentally we were focused on IT. Whether it was hardware or software or infrastructure management or BPO, all of it was around IT. We stayed in the basic thinking of being an IT company and over a period of time separated the two businesses, the software business became HCL Technologies which is a listed company and the hardware and system integration business is called HCL Info systems.”

Idea behind acquisitions and strategic alliances and how far they have been fruitful. “We started our software business much later when compared to other companies. So in order to have that capability, to grow fast and to have a lot of customers we did a lot of acquisitions, around 6-8 both big and small. Our biggest acquisition was in the UK which is an 800 million dollar acquisition of a SAP. Alliances and partnerships are a part of business and very important as they help us grow a lot.”

Can you elaborate on the differences in working environment in the rest of the 31 countries where you operate when compared to India? “As an Indian, you have that benefit because in India also we are in a manner multiple countries with different languages, different cultures etc. So as an Indian company it is much easier to adapt than anyone else and at the end of the day people anywhere do have aspirations and ambitions. It is basically a HR issue to manage people by talking in a soft and cajoling way and make them sit together and work along with you. If you know how to manage people you

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can manage any nationality. That is the reason why lots of Indians have made to the top of large companies globally. The operation is different in different countries as we have subsidiaries in different countries which are registered there and we do employ local people as well. We are a good mix of Indian and local people.”

How HCL preserves its stakeholder's values? “About 8-10 years ago we realized that we needed to create a big brand as we felt that lot of people don't know HCL that well. Although we were big, people did not know how big we were in the terms of its brand equity, which they came to know after doing some research. No one knew the fact that it was 3,000 crore company. So we decided to do 'branding' campaign for HCL, which runs even today informing about the no. of employees working in HCL and its brand equity. Branding and positioning greatly helped our stakeholders. It gave pride to our employees, a lot of information to our prospective customers and gave good positioning to the stock market.”

Whom do you consider as your role model? “There is no single person whom I can name because I learnt a lot from many people. Two of my co-founders made a lot of impact on me, which is Arjun Malhotra and Shiv Nadar, who were my bosses in DCM and then we became co- founders but still the regard for each other remained in the same manner. I learnt from Jack Welch, CEO of General Electric that as a leader you should spend 70% of your time in a day with people. On every New Year I used walk up to shake hands with 2000 People in 3 days in Noida which really meant a lot. You have to be a people's person.”

Where is HCL heading to in the next 5 years (short term goals)?

“I disconnected from HCL in 2012 because I worked for 40 years and I told my board that let us make it a professional board. So, we hired someone from outside, I mentored him for a year and he now runs the company. My objective was then to start working on to giving back something to the society and the country. That is what I do today.”

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In FOCUS Interview What was your immediate reaction when you received Padma Bhushan award?

“I was of course very happy that your work has been recognized and that was the first time a Padma Bhushan was being given to somebody from Hardware. So, I felt that Hardware has been recognized.”

Let us know about the birth of 'swayam'.

“My whole idea in my second innings is about giving back. I have been doing a lot of work with the government. I chair three institutions of the government which include IIT- Patna, IIITRaipur, Skills council for IIM. Swayam is a charitable trust to make people 'self sufficient'. I said charity starts at home. So I have been giving education for all the people who work at my home and peons and drivers of HCL.”

Please give your advice to MBA students and upcoming entrepreneurs.

“Any graduate passing out from an institute should not just think that he needs a job but should look for what is the job he wants. Quality of the work is much more important the salary initially. 'Chase your passion, Live your dream'. Don't compromise on your dream. Now there is lot of opportunity for people to create businesses. You need to talk to your parents about starting up a new business and convince them by providing suitable examples.”

Your opinion on the Indian quality of education

“Indian education should adapt to the newer ways of teaching along with the use of technology and should be in a constant flux of change. The essence is that the change should be from 'teaching' to 'learning' .The students are focusing just on the subject and becoming very tunnel visioned. Students have to be well rounded with a world view and appreciate students of others areas, develop communication skills and thinking skills.”

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In FOCUS Book Review

CAPITAL IN THE ST

21 CENTURTY Thomas Piketty Capital in the 21st Century (2013) Harvard University Press (March, 2014) ISBN 978-0674430006

1. Capital in the 21st Century by Thomas Piketty

Reviewed By: Abhishek Narasimha, Research Associate, IFIM Business School abhishek.n.@ifimbschool.com

Capital in the 21st Century is a discourse on modern economic problems and income inequality prevalent in the globalized world. This book is a masterpiece on economics written by a 40 something left leaning professor called Thomas Piketty from the Paris School of Economics. This book was written in French last year and was translated into English in March 2014 by Arthur Goldhammer with the English version becoming a bestseller on the NewYork Times list. Unlike many other books on economics this one is not obsessed with ambiguous mathematical modelling but uses simple data analysis wherein Piketty along with his colleagues like Emmanuel Saenz has gathered data of economic relevance on income levels in USA and UK back into the early 20th century and France until the late 18th century. Statistical techniques have been used that make it feasible to track the concentration of the wealth and incomes deep into the past. From this data theoretical inferences are drawn which are used to analyse the economic conditions and devise conclusions regarding income inequality. Eminent economist and Nobel Prize laureate Paul Krugman has called this book a masterpiece and feels it has given a new direction to the manner of writing of economics text books. He feels â&#x20AC;&#x153;Piketty doesn't only offer what is happening with 110 IFIM International Journal of Management | FOCUS April 2014 - September 2014

unmatched depth but also offers what amounts to a unified field theory of inequality, one that integrates economic growth, the distribution of income between capital and labour and the distribution of income among individuals into a single frameâ&#x20AC;?.

CAPITAL IN THE ST 21 CENTURTY

Thomas Piketty

The quantum of data which has been gathered is a product of a decade of research and was very challenging. Most of the economic data has been gathered from economic surveys conducted by the Federal Reserve and the Central Bureau in the USA wherein households are sampled reflecting the truncated demography of USA and their rise in income levels along with household expenditures are assessed. However, there are limitations to this data as it is difficult to gauge the return on capital investment and most of these surveys take us back to a few years. There is also lack of transparency since households often give an optimistic rather than an accurate measure of their income. In order to circumvent this Piketty and his colleagues have turned to a new source of income called tax records. They give a clear indication about the economic elite and Piketty has merged this with other forms of data to derive conclusions based on strong evidence. Moreover tax records dwell deep into history since UK has had an income tax since 1909 and USA since 1913. France has had some or the other form of taxation since the late 18th century thus bringing out economic data historically and acting as a source to analyse the economic history of USA and Europe. Piketty through the gathered data has come up with two parameters defining income. Wealth which is defined as assets held by the government, corporations and private individuals which can be traded in the market and wages which represents the salary of the workforce. There are two related parameters namely rate of return on capital (r) and rate of economic growth (g). Rate of return on capital (r) includes profits, dividends, rents, interests and other incomes from capital while rate of economic growth (g) signifies an increase in wages depending upon the demographics and technological changes. For a sustainable economic growth, Piketty argues rate of economic growth must exceed the rate of return on capital (r) while income inequality and disparity is always created when the rate of return on capital (r) is greater than the economic growth (g) Since capital is distributed disproportionately in a capitalist society with a small section of society having greater access to capital, any growth on capital would result in benefits accruing to a small percentage of the population creating income disparity, patrimonial capitalism, oligarchy and low social mobility being detrimental to democracy in the long run. Thus he has busted the stereotypical rhetoric on inequality about income levels for white collar workers being greater than blue collar workers and income inequality as a function of wage showing that income inequality is greater in the case of capital than wages. His findings have led to an understanding of income disparities in early 20th century UK, USA and France during the Gilded Age era in USA and the BelleĂ&#x2030;poque period in France. The data when analysed has revealed that rate of return on capital was around 4-5% while the rate of economic growth was around 1%. Even the ratio of capital to wage was around 6 to 7. In these countries 1% of the population had more than 1/3rd of the income and inheritance of wealth resulted in greater standards of

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In FOCUS Book Review

living for the off springs of the elite thus creating a oligarchic and patrimonial structure of society. Piketty has tried to supplement his arguments by invoking the works of authors like Honore de Balzac and Jane Austen to highlight the inequality and economic problems during that era. A peek into Charles Dickens' works would give one the idea of income disparities in early 20th century Britain wherein the city centre was beautiful but the suburbs were squalid with underpaid workers. This environment helped in the blossoming of socialist political thought by Karl Marx and Proudhon.

CAPITAL IN THE ST 21 CENTURTY

However the income from capital reduced drastically from 1915 to 1945 due to two world wars, great depression and destruction of the old oligarchic order. The savings were used to fund the war efforts. This trend continued until the mid 1970s wherein there were increasing returns on capital but the rate of economic growth had overshadowed them due to a young population, greater access to technology and improvement in the skills of the labour. The post WWII governments in America and Western Europe were characterised by high wage growth, progressive taxes on income, public expenditures on welfare measures like health, education, pensions and housing and strong worker unions. The contribution of capital in the income was reduced while rate of economic growth was higher than the rate of return on capital leading to an improvement in the standards of living. During this period the heirs of the wealthy saw a decline in their standards of living and a Keynesian style of growth had occurred. However this trend has changed since the mid 1970s due to slowing down of the economic growth rate which is a result of changing demographics, weakening of the labour unions and saturation in technological advancements. This has resulted in substitution of manual labour with capital goods (mechanised labour) and has therefore increased the rate of return on capital diverting the income from labour to capital. Therefore, there has been an increase in rate of return on capital and the income disparity is increasing. Piketty has also shown an improvement in the standard of living among the heirs of the 1% from 1980 onwards and feels that the current economic trend if continued could result in income disparities of the levels prevalent during the BelleĂ&#x2030;poque era.

2.After Tax Rate of Returns Vs Growth Rate at World Level from Antiquity Until 2100.

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CAPITAL IN THE 21 CENTURTY

However, according to Piketty, capitalism today is different from capitalism during the Gilded Age or BelleÉpoque era since it has resulted in ridiculously high wage increases for the high level employees. Piketty believes that capital inequality still matters since income from capital exceeds the income from wages, salaries and bonuses but the rise in the income levels of top notch business executives is alarming. The wages of the top 1% and 0.1% have increased more than 150 % since the 1970s. While the 2008 Wall Street financial crisis resulted in job losses for the common man, the business executives increased their salary and created skewed remuneration packages. In the US not only do the richest 10% own 75% of the wealth but from 2010 to 2012, 95% of overall income growth has resulted in benefits to 1% of the population. Piketty feels these people would invest their money into capital in the future and create a patrimonial and oligarchic system analogous to the BelleÉpoque era. Thus the days of early 20th century capitalism are around the corner. Therefore Piketty proposes a system of progressive taxation with taxes on wealth and income. He feels a tax of 80% on annual income in excess of $500,000 and a progressive global tax on wealth rising to 10% on fortunes in excess of $1 billion could ameliorate this problem. These taxes would be redistributed by the government to the people in the form of inflation adjusted economic aid, pensions, healthcare and welfare measures. This would truncate the growth rate in capital thereby eliminating inequality. This measure is highly utopian and very much impossible since the economic oligarchs not only hijack public policies but also monopolize political power. This is evident in sudden decrease of taxation rates and increase in wages for the super-rich as well as stalling of many populist measures by the so called socialist governments. The progressive rates of taxation in the post WWII era were driven by sociopolitical expediencies (there was disorder, chaos, fall of the old order and fear of socialist movements) rather than a drive to bridge inequality. A quote by Upton Sinclair “it is difficult to get someone to understand something when his salary depends upon his not understanding it” puts the current scenario into perspective. Moreover, Piketty has neglected the concept of spirituality, Gandhian economics of trusteeship, CSR, ESOPs and enlightened capitalism. He has also shown the Kuznet's curve as false. Kuznet's curve proves that inequality is a defining feature initially but as the society matures with better work skills, training and education; the curve flattens. Piketty accepts that the fruits of economic maturity do promote greater equality. But there is a strong tendency towards inequality whenever demographics, low taxation or weak labour organization allows it. So this analysis leads to a new question. Is Piketty the Karl Marx of the 21st Century? The answer is a clear cut no since Marx wasn't obsessed with inequality but a breakdown in the system of capitalism. He always saw the economic order as a relation between two social groups whereas Piketty sees the order as a relation between the two parameters which are wealth and income. Marx believed in a system of revolution whereas Piketty believes in a system of progressive taxation. Therefore such comparisons are overtly romantic. Piketty has also challenged the view of the centre-left economists who believe in mild redistribution and gradual skill building among the workforce to promote social justice. Piketty feels that social democracy would result in the oligarch's yacht coexisting with the food bank. Therefore Piketty's book is an eye opener insofar as economic problems are concerned and has even shaken the faith of neo-liberal economists since he has put forth challenges which they cannot ignore and could change the political environment. As Paul Krugman puts it “he has rewritten the economic textbooks of the 21st century”.

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Guidelines to Contributors/Authors

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All papers submitted by authors will be reviewed by the members of the referee panel. Soft copies of the paper should be in MS Word format and should be sent to the Editor through e-mail. The text should be double-spaced. The front page should include the following : a.The title of the paper b.Name of the authors c.Complete address for communication d.Name of the author to whom the communication should be sent e.E-mail address of all authors f.Brief background of the authors including the present position held Following the front page, there should be a page giving an abstract of the paper (within 100 words). Tables and charts should appear at the end of the text indicating the likely place in the text where it is to appear. All tables and charts should be numbered serially. List of references should appear on a separate page as per the format indicated below. Reference citations in the text should appear, for example, as Gopalan (2000). Specifications of the format for reference material used in text:

Articles in Journals: Beardsley, T, 1995, 'For Whom the Bell Curve Really Tolls', Scientific American, Vol 272, No 1, Jan, pp 14-17

Books: John Bicheno and M R Gopalan, 2000 'A Management Guide to Quality and Productivity', New Delhi, Wheeler Publications

Chapter in Books: Bhattacharyya, Asish K, 2004, 'Corporate Financial Reporting' in Reed and Mukherjee, eds, Corporate Governance, 'Economic Reforms and Development', pp 94-115

Websites: Gerwig, K, and R Carlson, 2001, 'AT&T & Comcast: Dividing Their Businesses to Conquer', Current Analysis, Dec 20 http://www.currentanalysis.com/Current Compete/Eventview.cfm?reportid=6744&nav=1 Last accessed on Jan 24, 2004 9 10 11

Authors should give a declaration that papers sent to us for publication have not been published or sent for publication elsewhere. In addition to the soft copy of the paper, two hard copies should also be sent to the editor to facilitate the reviewing process. For feedback please mail us @ bindushree.p@ifimbschool.com

IFIM International Journal of Management | FOCUS April 2014 - September 2014

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RNI No. MAG/(2) CR/PRB/102/02/05-06KARENG/03083/10/1/04-TCEXCEPT/CO/NO-7&8

IFIM Business School, Bangalore was founded in 1995 with its first batch of students graduating in 1997. It is an AICTE approved institution which today finds its place among the Top 20 from amongst the 500+ Business Schools that were started post 1990 in the private sector. Today students from across the country have come to IFIM to go on to graduate as one of the fine managers at corporate India. IFIM Business School offers 4 distinct PGDM programs: 1. Two year full time Post Graduate Diploma in Management (PGDM) program 2. Two year full time Post Graduate Diploma in Management- Finance program 3. Two year full time Post Graduate Diploma in Management- International Business program 4. Two year full time Post Graduate Diploma in Management (PGDM) program for working professionals IFIM Business School has acquired a unique â&#x20AC;&#x2DC;institutional equityâ&#x20AC;&#x2122; with all its incumbent attributes: excellent Curriculum and Faculty inputs, Infrastructure, Industry Internship Program, Academia-Industry interface and Placements. IFIM Business School is persistent in its endeavour to be the best and therefore has taken many bold and progressive initiatives to include collaboration with leading academic, research and corporate bodies for conducting Continuing Education programs, Research, Corporate Training, Consultancy and offering a Ph. D program in Management. IFIM Business School has achieved a unique distinction. It has probably become the first management institute in the country to make sports and wellness a compulsory activity for its students. A certified fitness trainer monitors the progress of the students. This is supported with a Centre for personality development which works in the holistic development of the students. Overall, IFIM provides a three pronged platform for its students to excel. The two year full time Post Graduate Diploma in Management (PGDM) program for working professionals being offered by IFIM is a unique program. This allows the working professional to continue with their respective jobs whilst they study for a full time PGDM degree at IFIM Business School. The program is designed to accommodate the job environment of the professional. The program is designed in a manner in which the working professional can aim to move up the echelons of management. The Centre for Developmental Education, under the aegis of which IFIM Business School operates, has a new memberIFIM College. IFIM College was started in year 2010 and is successfully imparting graduate programs in the areas of Commerce, Management and Computer Applications. These programs are approved by the Bangalore University. IFIM Campus is located in the IT hub of Bangalore- Electronics City. With an environment-friendly campus situated among the top blue chip companies, IFIM has made a steady progress. The placement record of the college has been very impressive and the students have carved a niche for themselves in the corporate world. The B-School has a strong alumni network and the illustrious alumni look up to their alma mater for the sound management foundation they have received.

IFIM Business School

An ISO accredited Institution #8P & 9P, KIADB Industrial Area, Electronics City 1st Phase, Bangalore-560 100 Tel: 91-80-41432888 41102820/ 21/ 22/ 23 Direct: 41432825 Fax: 91-80-41432844 www.ifimbschool.com

Published by Dr. R. Satish Kumar on behalf of Institute of Finance and International Management, No-8 (P) & 9 (P),KIADB Industrial Area,Ist Phase, Electronics City, Bangalore - 560100.