Ethics and Managerial Excellence

Mr Sanjay Kirloskar, President of AIMA, and CMD of Kirloskar Brothers Ltd.,

I feel truly privileged to address all of you as MMA is considered one of AIMA’s best Local Management Associations. I had agreed to deliver the speech in person in Chennai, but things being the way they are, I am compelled to address you online. I have decided to speak on “Ethics”, as I think ‘ethics’ forms a part of Managerial Excellence.

MMA speech and a storm

MMA has stuck in my mind since March 1981, when your Association conferred its Business Leadership Award upon my Grandfather, Mr. SL Kirloskar. At that time, he told the members that he was glad that the occasion presented him an opportunity to express his views on what he saw as problems of grave concern, and on our economy which was degenerating, even after three decades of Independence.

Educated at MIT in the 1920s and having grown up and started working in pre­Independent India, he was a firm believer in Free Enterprise. During his speech, he proposed a 14­point programme for successfully meeting the challenges of the 1980s, which included doing away with the Planning Commission.My grandfather was known for calling a spade a spade, and as you could well imagine, all hell then broke loose. There were responses in newspapers by Dr. DT Lakdawala, then Dy. Chairman of the Planning Commission, as well as Dr. Tarlok

Singh, who was a member of the same body. Without going into those details, all I will say is that my grandfather was thrilled when Mr. PV Narsimha Rao and Dr. Manmohan Singh started the process of economic liberalisation. At that time, he told us, his grandchildren, that he wished he were 60 years younger. What I would also mention is that after this speech, the then Government rejected every licence the Kirloskar group had applied for and my grandfather, for a few years at least, was persona non­grata in certain parts of the national capital. This is why I remember MMA, more than anything else.

I would say that I am blessed to have been born in a family like this, because we too could speak our minds to our elders. As I grew up, I also learnt the life my forefathers had lived. Part of the family was intensely capitalist, but few people outside Maharashtra know that the company I now run also published three magazines from the1920s. They were known to be extremely progressive for their times, and possibly would be considered that even today, with articles promoting education of the girl child and widow remarriage on one hand and writing against blind superstition on the other. Many people credit these magazines for modernising Maharashtrian society.

US degree and a sweeping task

Returning from the US after getting my degree in Mechanical Engineering, like my grandfather, father, uncles and siblings before me, I joined the family business. Like them, sweeping the factory shop­ floor was my first job after getting an American degree, followed by running almost every type of machine the company owned. We were expected to produce more than the norms set by the Industrial Engineering department of the company. More than anything else, I got an education on what it feels like, to be on the other side of the table.

A few years later, again like for all members of my family, I was given the responsibility to set up a project and soon ran into Indian bureaucracy, as the project needed approval from what was called the MRTP Commission. That was when I learnt that the Kirloskar Group, unlike a few others, had never opposed any project promoted by other industrial groups to enter businesses it was in; that my grandfather always held that competition would make one better. This attitude actually made us ready to face global competition when India opened up in 1991 and our exports went up to 28% of our revenues soon after liberalisation. It helped us to become a true MNC within 10 years. Step by step I learnt the family traditions.

Times change but stick to values

My father passed away as I turned 30 years of age. One evening, a few years earlier, he had asked my brother and me a question; He mentioned that until then, our businesses had grown on the quality and reliability of our products and our all­ India marketing network. But times were changing and now there were other expectations which clashed with family values. He asked both of us whether we should join the bandwagon to grow quickly, or should we be known as a group that stopped growing because we did not change our principles with the times.

Since then, my father’s query has always been at the back of my mind. As the company grew over time, many an opportunity was missed or not grabbed. And at the end, when things turned impossible, we gladly moved out from large business opportunities when we realised that other than good products and service, we could not deliver what was being demanded. After that, the company changed its profile as a business, and the part that just 10 years earlier had contributed to over 75% of our turnover, now contributes around 4%. Yes, turnover stagnated, dipped with attendant hardships, and then rose again to levels of 10 years ago, but we are a stronger company as a result. As the company continues to be No. 1 in its business, I certainly have no regrets.

Crisis—The litmus test of character

The Covid crisis has put attention back on business ethics. Gouging of medical supplies and food has tainted the good work done by many individuals and companies that have contributed to the healthcare effort. Unfortunately, ICU bed and ventilator allocation have also raised questions about the ethics of many hospitals around the country. Even the odd medical research firm has been found to be fudging data at a time the world is desperate for answers to the pandemic. Quite often, we fail to realise that behaviour during a crisis can make or mar the public perception of individuals and businesses forever.

Wherever it happens, a crisis like this exposes the faults and frauds of a business. A jolt to the system rattles skeletons in the cupboard and dodgy deals and practices become hard to cover up. The last couple of decades have seen multiple booms and busts, and unfortunately, business scandals have become ever more frequent and bigger.

Scams galore

In the past few years, India has seen a spate of corporate frauds, mainly involving poor business practices and bank loans. The unravelling of the Indian economy and the resulting pressure on banks to collect overdue loans have uncovered a lot more muck. Many icons and superstars of Indian business, including those given awards by respected institutions have been disgraced, and some have even ended up getting arrested in India and overseas.

Some more have fled the country and are resisting return. While they are there, dirty linen about their business practices and the enabling environment is being washed in public as foreign courts consider their applications.

We live in an inter­connected and globalised world, with information available at one’s fingertips. This was the case before Covid, and we will still be inter­connected but possibly less globalised after Covid. But with the way technology has moved since Covid, one can safely assume that information will just reach faster. One only needs to Google an individual or a business to get more knowledge on that individual or business. Forget spreading like wildfire, now it will go viral. Each and every one of these scandals have tarnished the reputation of Indian businesses around the world. Imagine meeting a new customer in a foreign land and hoping he or she isn’t aware of our business practices back home. Going forward, how much respect will outsiders, including those of Indian descent, have for Indian business practices? To my mind, if we desire to grow and be respected around the world, our businesses desperately need to reestablish our credentials for ethical behaviour and practices.

Forget what people will think when we go out of the country to do business or to invest; think of what foreigners will need to consider when they want to come into India for business. As we all know, we need trillions of dollars to build our infrastructure to compete in the modern world.

Exit China, but why not India?

As all of us are aware, there is also an urge on the part of Japanese and Western firms to move out of China so that all their eggs are not in one basket. We are concerned why people are not rushing in to invest in India but are going to other countries around us. With such a reputation, what incentive do foreigners have to invest here despite our attractive market and the opportunities that we can offer? People do understand the environment that they will have to operate in, before they invest. When will we improve our environment and our governance?

Trust, business ethics and rule of law are essential ingredients of a vibrant market. Long-­term contracts involving huge sums of money cannot be accepted without an assurance of enforceability, and more importantly, the trust in the other party’s character, business practices and culture. A company’s wealth depends on stakeholders’ trust, in the legality of its business, veracity of its accounts, reliability of its products, and fairness of its dealings. Just imagine the number of people in India who have lost their lives’ savings because of these scandals. Companies that demonstrate high standards of ethics tend to have more stable businesses and deliver greater shareholder value over time.

Corruption—A global syndrome

The point I would also make is that it is not just Indian Business which is giving its country a bad name. There are frauds around the world; Japanese companies have been caught for giving false material quality assurance certificates and French companies for bribery. Imagine the loss of reputation these companies and countries face, leaving aside the fact that world over, buyers would be wary of dealing with such companies.

Wirecard, a German electronics payment multinational, has been caught fudging revenues for a blue­chip status. The result is that the reputation of German financial sector and regulators has been tainted. The German government is axing the existing financial regulator, who would be replaced with a new, more intrusive one. This has followed “Diesel­Gate” where Volkswagen was caught fudging emission data, and ended up giving German businesses a bad name, a reputation that had been built up by two generations of Germans after WW2. Just like Indira Gandhi had famously remarked about corruption, this too it is a global phenomenon.

Corporate scandals do not affect the involved parties alone. They tar everybody, and governments have to respond to the cries for doing something about it. The most famous case of a strict regulatory response to a business scam is the Sarbanes­Oxley Act in America that followed the Enron scandal. It substantially increased the scrutiny of accounting practices and the responsibility of boards for listed companies. The unintended consequence of this regulation was that companies began to avoid listing on stock exchanges to save compliance efforts and costs.

No better substitute for ethics

In India, the Satyam scandal is the equivalent of the Enron affair. It involved a company fabricating accounts and supporting documents. The fallout was that the new Companies Act in 2013 made auditors and independent directors liable for the management’s errors and omissions. SEBI too amended the listing conditions. Now, auditors have to be changed every few years and internal audits have been made more intense and intrusive.

While stricter regulation has largely improved corporate governance, it has introduced a box­-ticking approach to ethics. Regulations are expensive substitutes for ethics, and as the compliance burden grows, the focus shifts to avoiding getting caught rather than doing the right thing in the first place. Litigation is becoming the way to prove integrity, by both the government and the companies. Moreover, the fear of retrospective blame is deterring business initiative and innovation.

The public sector is a great example of regulation killing entrepreneurship. However, the responsibility of creating and maintaining a reputation for ethics is on management. It is easier to bear the cost of ethics than the cost of regulation. As can be seen, industries suffer when there is over­regulation.

Myths on ethics

However, one’s stand on ethics should not depend on where one sits. People with advantage expect integrity from others but justify their own “pragmatism”. Many see ethics as trading —one rate for buying and another for selling. Another popular belief is that one can have only as much ethics as one can afford. Then, there are people who consider ethics as the crutch of the weak and the unimaginative. Many see winning at all costs as the only ethic. They argue that winning cleanses everything and public adulation is the only measure of ethics. Today, it seems that quite a few people had been valued for what they seemed to be, not for what they really were.

And it is not like there was a shortage of regulations when all our frauds came to light. To my mind, these company frauds have taken place thanks to an enabling environment, with so-called independent directors turning a blind eye, and a fear of taking a stand against wrongdoers. All company directors are meant to act as trustees, looking out for the best interest of the organisation, not those of the Chairman and MD, or for that matter, the promoters of the company. Quite often I am reminded of what my late father-in-­law would say, “The cemeteries are full of indispensable people.” Because many times people stay quiet so as not to lose perks. Fortunately, in one case, there was a whistle­blower who took a stand to expose the rot at the top.

Practise, rather than preach

No number of rules and regulations can stop greed; only each one of us as an individual who understands, and is true to his or her responsibilities, can. It requires special strength of character and conviction to adhere to business ethics, especially in the policy and regulation sensitive markets. Where companies jostle for access to land, utilities, licences, permissions and for protection from inspection and taxation, practicing ethics can get very tough.

Companies routinely face a choice between ingratiating themselves with powerful people or getting pushed to the periphery of the market. Executives from top to bottom are expected to bring increasing revenues, and the pressure to win business obstructs the desire to do the right thing. Therefore, leaders who are serious about building strong and long­lasting organisations must make ethics integral to business strategy. To my mind, a well­documented Code of Ethics must be adopted by organisations to ensure that our colleagues understand how to behave and what has to be done in various situations they could encounter in the course of business.

Justice delayed is justice denied

I have always marvelled at the American justice system; especially yesterday, when a majority of Supreme Court Justices nominated by the current President’s political party, told President Trump, that no one, including him, was above the law. There, Justice is dispensed quickly.

If you remember the fraud that was Enron, once the case was made in the court, I think sentences were passed within 18 months. Despite being a friend of the then President George W. Bush, Kenneth Lay the Chairman of Enron, was found guilty of conspiracy and fraud. We have seen similar cases of financial conditions sustained by an institutionalized, systemic and creatively planned accounting fraud in India. One wonders how long our system will take to decide the cases before it, because Justice delayed, is Justice denied. And lakhs of crores have been lost by individual citizens and the banks. When Justice is delayed, a fraud enabling environment is created, as individuals realise that there is no one or nowhere to go to.

Corrupt nations vs. Corrupt companies

Every year, I never fail to be amused by a list made by a German NGO called Transparency International of the most corrupt countries in the world; amused, because while they do tell us which countries are corrupt, they never make a list of countries whose companies corrupt others. I have wondered many times whether the order would be reversed if they made that list. When one reads newspapers, one comes across cases of Americans catching Europeans doing naughty things across the world; I am not saying Americans are saints, either.

Covid: The boon and bane to nature

The Covid crisis has also highlighted environmental issues. Lockdowns have brought great relief to Mother Nature by shutting down human activities. Air and water quality have improved all over the planet, especially in the big cities. Carbon emission dropped as coalbased electricity production reduced, planes were grounded, and vehicles were parked. Water quality improved as fishing and shipping became minimal. Animals and birds returned as humans were locked in. Clean air improved human health and reduced routine sickness.

However, it seems the environment’s brief recovery was celebrated only by those who could afford lockdowns. Lockdowns were not all good for Mother Nature. In Brazil, deforestation of the Amazon area was accelerated while the world focused on the pandemic. In Africa, poachers had a free run as governments deployed their resources on enforcing lockdowns. Nevertheless, the deep cleansing of the environment during lockdown strengthened the case for using clean technologies and making consumption less resource intensive.

The Covid crisis has put a spotlight on environmental practices of businesses. Plastic has made a roaring come back during the pandemic, as contamination aversion has taken priority over environmental sensitivities. The crash in oil prices has also made plastics a lot cheaper. Plastic consumption has once again become rampant in single­use applications. The demand for disposable masks, protective suits, packaging etc., is booming. Businesses have settled for the cheapest and easiest material in the rush to meet this demand.

While the environment has been cleaned up by lockdowns and travel bans, air and water quality is deteriorating again as economic activity resumes. Businesses must be conscious of their responsibility to the environment in order to avoid health calamities in the future.

What will be the New Normal?

As the pandemic continues, one seriously needs to consider how the world will be, once it is over. What will be the new normal? Will we be going back to office every single day of work? On a humorous note, how many spouses will believe we are going to be actually working? How will work from home impact people in the transport, restaurant and real estate sectors? How much of the planned infrastructure will really be required? Will people again fill up malls, stadia and theatres, or will they develop a taste for online shopping, virtual sports and streaming entertainment? Will people still travel long distances and across borders for work? There is a lot that is up in the air and we cannot know where everything will settle when this pandemic eventually subsides or is subdued.

Leave the world a better place

This brings to my mind the kind of world we want to leave for our children. So many of my friends have remarked that the skies looked blue again, like they did when we were young and a few circulated pictures on WhatsApp of clean streams and the Himalayas from tens of miles away. Birds also seem to have returned; it is beautiful to wake up in the morning to birdsong rather than the sound of traffic.

I believe every generation should leave the world a better place for our next generation and we should make all out efforts to support clean technologies once business starts moving again. Now that we have the wherewithal, we must make the right selections to ensure that nature too can recover, rather than trying for easy but short­term monetary gains. Here too, there is an opportunity for a principled or ethical choice to be made.

In my case, this lockdown has led to introspection on the life that I have lived and what to do about the future. It has shown me what I need to survive and given me an idea of what real happiness could mean. Actually, the only thing I really miss is being close to my son, who has decided to continue running all our overseas businesses from London where he and his team are based. I must accept that my child has grown to become a leader in his own right. It has brought home the fact, that my own happiness and health is dependent on that of the community, and that to become rich in the face of disease and hunger is of no use; my father would often say, one cannot have a skyscraper in a slum. We must think in terms of the social whole —of what is best for the community, of the common or public good. Each of us should stop doing what is best only for ourselves. I hope at the end of this pandemic, there would be a shift to minimalism as a lifestyle and the competition to claim status through pomp and possessions will become less severe.

My spectacular role model

As managers, each one of us is a role model, not only to our subordinates, but to society at large. People almost worship successful managers and want to imitate them. They tell their children that these are ideals to be emulated. There are so many examples around us of how people have grown large businesses while following their consciences. Companies like Infosys and Wipro almost immediately come to mind. I have no hesitation in saying that the role model for me has been Mr. Azim Premji, who grew an edible oil business into one of India’s largest and most admired tech companies. To me, what he is doing now is even more spectacular, to ensure that the next generation of our fellow citizens has a far better future.

Finally, I agree with the saying that a true measure of one’s worth must include all the benefits that others have received from his or her success. Like respect, success, wealth and power are to be earned, and not to be demanded.

So, take care and stay safe. I hope that whenever the country opens up for travel again, I shall have the privilege of meeting you in Chennai.