Chapter 12. Globalization and Business Ethics – Business Ethics and Corporate Governance

CHAPTER 12

Globalization and Business Ethics

INTRODUCTION

Today, commerce, be it industry, trade or mutual exchange, has truly become global. No country, however well endowed in terms of human and natural resources, can afford to be isolated and claim to be self-sufficient. Human wants have expanded and increased so much that no economy fulfils all the needs and wants of its constituents on its own. Added to this is the fact that there is a lot of difference between countries in terms of natural resources, the degree of development, incomes and their distribution, increasing pent-up demands and so on. Communication explosion too has added its own dimension in as much as it has exposed the people of poor countries see for themselves the affluence of people in developed countries and the amenities, comforts and luxuries they enjoy. This kindles in them the desire keep up with the Joneses through what is called the ‘demonstration effect’. Corporations tend to exploit this trend and spread out their wings to encompass the global village to their advantage. In this chapter, we study the role of business ethics in such a globalized scenario.

GROWTH OF GLOBAL CORPORATIONS

International business has become an important economic force during the second half of the 20th century. Today few countries, if any, can claim to be economically self-sufficient. India, even with her vast human and natural resources, cannot insulate herself from the world economy. Though there was tremendous political opposition from within, India was constrained to open up her economy and join the World Trade Organization (WTO). In every country, developing or developed, international business touches people’s lives.

Today, most business enterprises, big or small, are drawn to doing business across national borders. They may purchase raw materials from foreign suppliers, assemble products from components made in several countries, or sell finished goods or services to customers in other nations. With time and with more countries reducing trade barriers, the number of firms affected by international competition keeps on increasing every day. In our day-to-day life we consume goods and services that have an international character about them—clothes, books, CDs, computers and soft drinks. Many MNCs have subsidiaries, affiliates and joint venture partners in most of the developing countries so much so that, in some cases, the number of foreign employees of these corporations may exceed that of the home country.

FACTORS FACILITATING GLOBALIZATION

In recent times, many factors play a facilitating role to promote and foster international trade. Many developing countries adopted protectionist policies and raised huge tariff barriers for decades to protect their vulnerable home industries from foreign goods. Global business opportunities were also limited by poor communication facilities, slow development of infrastructure, inordinate delays in travel and shipping and a host of non-tariff trade barriers raised by many countries. Today, people can reach any place on the globe in one day and international communication is instantaneous. ‘Business operations can be managed effectively simultaneously’. Increasingly, global corporations set up production units in developing countries having better factor endowments and plentiful human resources with a view to exploiting them for their benefit and profit.1

At the beginning of the 21st century, nations are more closely linked to one another than ever before through trade in goods and services, flows of capital, movement of labour—though to a limited extent—and through investments in each other’s economies. There are several factors that have played a key role in promoting international trade. These are as follows:

  1. Falling trade barriers: Liberalization of trade has been recently accelerated as a result of free trade agreements, emergence of trade blocs and the facilitating roles played by international organizations such as the WTO, International Monetary Fund (IMF) and the World Bank.
  2. Political reforms have opened up new frontiers: As pointed out by James Post et al.,2 the former communist nations of Eastern Europe are now open to doing business around the world. Millions of people in these countries are now able to take advantage of goods and services that global commerce provides in an open and free market. There have been other factors such as the reunification of East and West Germany, and the enormous growth in global tourism, transport and communications that have added to this stupendous growth in world trade.
  3. More developing nations joining the bandwagon ofglobal business: Several countries such as Taiwan, Thailand, Malaysia, Singapore and Indonesia have been growing rapidly in recent years in addition to the industrial prowess of Japan and South Korea in the Asia-Pacific region. China, India, Brazil and Russia have recently emerged as successful global players and have invited business from across the world to invest in them.
  4. Emergence of new technologies and businesses spanning continents: New technologies and business based on them such as computer hardware and software, pharmaceuticals, and communications that have worldwide investments and markets, have brought about a tremendous transformation in fostering world trade. Likewise, business process outsourcing (BPOs) and several information technology enabled services (ITES) have widened the horizons of international business opportunities.
DOING BUSINESS IN A DIVERSE WORLD

Earlier, corporations doing business in many countries considered the country of their origin as the major source of their capital, revenues and personnel. Under this ethnocentric perspective, the home country’s laws were viewed as dominant, but nowadays companies have understood that they should consider the entire world as their home and have to adapt their business practices to different environments and cultures while sticking to global identity and policies. Under this geocentric perspective, firms develop managers at all levels from a worldwide pool of talent and seek to use the best people for all jobs regardless of where they come from. In fact, in recent times transnational corporations which used to deploy persons from their home countries in senior management positions in their subsidiaries in India and elsewhere, have started recruiting their future managers from top-notch Indian educational institutions such as the IIMs and IITs to man their units worldwide. Banking companies like Citibank and Standard Chartered Bank and firms like Bata and Hindustan Lever have a number of Indian managerial personnel not only manning their subsidiaries, but even the parent organizations.

In this context, James E. Post et al.3 have this to say: ‘Companies such as IBM, General Electric, and Exxon have long histories of bringing their managers from around the world to meetings and workshops’ with a view to widening and deepening their understanding of the environment in which their company functions. For instance, the world’s largest chemicals producer, Dow Chemicals, the American chemical MNC with global presence, ensures that technical experts from its facilities around the world are connected by information technology and meet many times a year to discuss improvements in science and technology for their mutual benefit. This practice is also followed by other MNCs including the Finland-based communications equipment producer, Nokia. Internationally diverse corporate board membership is seen in some European firms such as Nestle (Switzerland), ABB (Asea, Brown Boveri, a Swedish–Swiss Company), and Unilever (Great Britain-Netherlands).4

However, in the making of the geocentric outlook, it is not the size of the firm that matters, but the geographic location and awareness of the social and cultural characteristics of the firm’s stakeholders that reinforce the importance of an open approach to cultural differences. ‘To be a global company in the modern economy is to build a geocentric perspective into the very fiber of the business organisation.’5

For instance, when Nestle and Unilever carry on business in the Indian subcontinent, they face different political systems: India has a vibrant democracy, Pakistan a dictatorship and Bangladesh a fledgling and brittle democracy. In terms of economic systems too, there are substantial variations which are reflected in the kinds of economic policies they pursue. Though all these countries are supposed to have a common culture, their divergent religious and linguistic affinities bring in considerable variations in the manner they live and consume things. With different socioeconomic and political environment, legal framework, institutional set-up, fiscal, monetary and commercial policies, factor endowments, production techniques, nature of products and consumption habits, these companies will not only have to acclimatize themselves to the existing realities of each of these countries, but also be prepared to fine-tune their policies and business strategies to the fast moving changes that occur in these dynamic societies. As commerce becomes more global, customers, suppliers, competitors from other nations and cultures and managers have to understand and appreciate how diverse socioeconomic systems affect the markets and the socio-political environment of business and act accordingly, if they have to be successful in their global business.

ROLE OF MULTINATIONAL CORpORATIONS

Businesses in the present global society are carried on by multinational or transnational corporations, most of which are based in developed countries. ‘Multinational corporations’, or MNCs, are business entities that operate in more than one country. The name ‘multinational corporation’ is distinct from ‘international corporation’. The latter name was used in the 1960s to identify a company with a strong national identification. The home market was the company’s primary focus. Overseas operations were usually carried out by wholly owned subsidiaries controlled by home country nationals. By the 1980s, international corporations had evolved into more globally oriented companies. While still maintaining a domestic identity and a central office in the country where it was incorporated, a multinational corporation now aims to maximize its profits on a worldwide basis. The corporation is so large and extended that it may be outside the control of a single government. Besides subsidiaries, an MNC may have joint ventures with individual companies, either in its home country or foreign countries.

Box 12.1 illustrates how MNCs whose sales/revenues are adversely affected by recession/depression depend on their own or subsidiary companies’ better performance in developing countries.

BOX 12.1 MNCS TURN TO INDIA TO COMBAT RECESSION

Multinational companies are increasingly focusing on emerging markets, including India, and launching new products and services tailor-made for these regions as developed markets are reeling under recession. India along with China had been the cynosure of MNCs even before the onset of the economic crisis. Once the recession was found to have a relatively lesser impact in these countries, it made sense to the MNCs to focus more on these booming markets rather than to be fully engaged with developed markets. Increasing per capita income, rising domestic demand for goods and services, conducive spending pattern of consumers and controlled inflation, and such other favourable economic parameters only go on to prove that a sharper focus on these economies can ensure better growth for MNCs. LG Electronics India, for instance, believes that India is relatively less affected by recession than many other countries, and expects 15 per cent growth in 2009.

IT security company Trend Micro has recently set up three technology support labs in India as part of its Affinity Partner programme. Trend Micro intends to grow in India and to interact with its customers and partners in order to offer ‘the best-of-breed secure content management solutions’. In their perception, there are not too many economies that grow at 7 per cent or more in the world, as India.

The optimism over India is manifested in foreign direct investment (FDI) inflows. While China registered a total FDI inflow of USD 92.4 billion in 2008, up 23.6 per cent from 2007, India’s FDI inflows rose from USD 19.1 billion in 2007 to USD 32.4 billion in 2008. The positive results are already being seen. In July 2008, IT major Sun took a strategic business decision to make its presence strengthened in fast-growing markets such as India. To closely align sales with key growth areas, it created a business division to focus on emerging markets sales region, which inter alia included India. Producers of consumer durables, automobiles, telecom and infrastructure companies are also focusing more on emerging market in these tough times. Sun’s emerging markets sales region, for instance, announced in the financial year 2008, recorded an increase in revenues of 13.8 per cent over 2007 at USD 1.969 billion. Total revenue for the second quarter of 2009 in the emerging markets region was USD 558 million, up 20.5 per cent from USD 463 million in the first quarter of 2009. Sun also is positive that governments and businesses in emerging markets would be increasingly using the latest open source technology with a view to innovate at the lowest cost. Likewise, Sun rolled out a telecoverage model in December 2008 in the emerging markets. The model is aimed to help Sun reach out to high growth small- and mid-size businesses (SMBs), start-ups and Web 2.0 companies in these economies, thus optimizing its drive to success and profitability.

The launching of a slew of new products and initiatives for emerging markets only goes on to strengthen this process. Microsoft India, for instance, showcased recently for the Indian market a host of custom-made offerings such as Language Interface Packs (LIPs) in 12 Indian languages, and Windows Live, comprising email, instant messenger, online storage, photo gallery and social networking, in seven Indian languages.

The Dutch global major and the consumer durables company Philips has created a model to scale up their presence in the emerging markets with a view of transforming itself into a focused, less cyclical company in the coming years. In 2007, approximately 40 per cent of the company’s revenues came from emerging markets. Going forward, emerging markets, especially India, will play a significant role for Philips. In 2008, Philips acquired two companies in India in the health care domain—Meditronics and Alpha X-Ray Technologies—with a view of stepping up its focus on emerging markets. Philips decided to focus on health care as it is a recession-proof industry, and to generate maximum revenues from this sector over time.

 

Source: Swati Prasad, “MNCs Turn to India, China to Combat Recession,” ZD Net Asia, 26 February 2009.

EXCESSIVE ECONOMIC CLOUT

Global business does not function in a vacuum. It operates within the context of international, and where necessary, regional rules and regulations set up by appropriate government agents. Global business is dominated by MNCs that have their businesses spread across continents. According to a study conducted by Sarah Anderson and John Cavanagh for Corporate Watch 2000,6 the world’s top 2000 corporations have combined sales that are far greater than a quarter of the world’s economic activity and are bigger than the combined economies of all countries minus the biggest nine (economies), that is, they surpass the combined economies of 182 countries. The surprising thing about the inequities these corporations have brought about in the world economy is the fact that of the 100 largest economies in the world, 51 are global corporations; only 49 are countries. A study by the Institute for Policy Studies (IPS) indicates that 200 giant corporations, most of which are larger than many national economies, now control well over a quarter of the world’s economic activity. For instance, Philip Morris is larger than New Zealand, and operates in 170 countries. Instead of creating an integrated global village, these firms are weaving webs of production, consumption and finance that bring economic benefits to, at most, a third of the world’s people. Two-thirds of the world (the bottom 20 per cent of the rich countries and the bottom 80 per cent of the poor countries) are left out, are marginalized, or are hurt by these webs of activities.

CURRENT ISSUES—MULTINATIONAL CORpORATIONS

Multinational corporations face many of the same issues as domestic companies7 such as maximizing profits, meeting customer demands and adapting to technological change. In addition, MNCs must be up-to-date with trends and events in the various countries where they operate. Political reforms in South Africa, economic liberalization in India and social trends in Europe are examples of matters that are important to corporations operating in these countries.

Accountability is another issue that MNCs face. Because they are so large, MNCs can, and sometimes have, exerted questionable political and economic power in some countries. As a result, critics view MNCs suspiciously and sometimes seek to have host countries impose restrictions on them. They have also aroused intense distrust among socialist-oriented parties as exploiters of the wealth of the developing countries. Since almost all the MNCs are incorporated either in the United States or in European countries, which were colonial powers that impoverished the colonies for centuries, the MNCs are considered as neo-colonial powers that are out to exploit the erstwhile colonies economically.

INTERNATIONAL BUSINESS ISSUES

Efforts to promote free trade and simultaneously protect domestic industry from foreign competition, is one of the most pressing issues in international business today. Intellectual property rights are another important issue. Countries that fail to protect the rights of international companies in terms of their patents, trademarks and industrial secrets may lose out from lack of foreign investment and access to technology. The issue of exploitation of natural resources of developing countries by MNCs from the West has also assumed importance in recent years. International business is business conducted across national boundaries. It is concerned therefore with political, economic, social and cultural conditions in a variety of countries. As technology improves, international communications and transportation links, international business and international corporate activities will expand. This growing trend of business issues opens the need for dialogue on the role of corporaions in a global society (Box 12.2).

BOX 12.2 NEED FOR DIALOGUE ON THE ROLE OF THE CORPORATION (CONTINUED)

With the onset of globalization and the business corporation spreading its wings outside the home country, there is an urgent need for a sustained dialogue, initially among senior business leaders from around the world, and then the leaders of governments and other institutions, to define the critical role of the corporation in a global society. Whether in the physical, social or economic environment, business leaders can no longer rely solely on past traditions, established strategies or earlier expectations of society. For such a dialogue to be fruitful, it requires a common framework and guidelines. The following beliefs can be considered as a framework for that discussion:

  • The primary responsibility of the corporation is to conduct its operations proficiently, i.e., to be technologically innovative, competitive and financially sound.
  • Corporations must be increasingly responsive to issues affecting the physical, social and economic environments not only because of their impact on business performance but also out of a proactive sense of responsibility to all constituencies served.
  • Corporations need to consider the balance between the short-term interests of shareholders and the longer-term interests of the enterprise and its stakeholders.
  • Meeting traditional objectives and performance criteria is not sufficient. Voluntary standards which exceed the requirements of prevailing law and regulations are necessary to the development of sustainable practices. Society’s ‘license or franchise to operate’ has to be earned.
  • Corporations should lead by example through business practices that are ethical, transparent, and that reflect a commitment to human dignity, political, economic freedoms and preservation of the planet.
  • Corporations cannot act alone but should seek to address key societal issues through cooperative efforts with governments, other institutions and local communities.

 

Source: Ingrid Shafer, The Caux Round Table: An Introduction: Caux Round Table, 1999, available at http://astro.tem-ple.edu/~dialogue/Antho/caux_in.htm. Reproduced with permission from the author.

BENEFITS OF MNCS TO THE HOST NATION
  • Better access to worldwide markets: We have seen earlier that MNCs are huge in terms of their business and reach, and they cater to worldwide markets. Manufacturers like Nike and traders like Wal Mart can provide access to very large markets. This leads to production of quality goods at low prices because of economies of large-scale production and compulsions of fierce world competition.
  • Best access to capital investment: MNCs that are headquartered in developed countries have access to a large quantum of capital. Their stocks are listed in international stock exchanges. Apart from their own capital, they can also bring in considerable amounts from pension funds.
  • Transfer of advanced technology: Many MNCs because of their large presence worldwide bring in several benefits as in R&D. With their heavy investment in technology and R&D, they transfer superior technology to production units located in poor countries. Poor countries and developing nations cannot afford heavy investments in R&D. India, for example, spends hardly 0.5 per cent in this vital area of technology development.
  • Encouragement of local supplier development: Multinationals because of their large needs, encourage local suppliers. For instance, MNCs like Ford and Hyundai outsource their spare parts and components to small Indian companies, which flourish and provide employment to thousands of people.
  • New jobs for labour: With a worldwide market to serve, MNCs prefer to establish their manufacturing units in low income countries like China and India, and would use the cheap labour in these countries with a view to reducing cost of production and increasing their profits. This increases employment opportunities in these countries.
  • Advanced training for labour: MNCs offer immense opportunities for advanced training of their labour force, to suit their requirements.
  • Better access to managerial talent: Big corporations with worldwide business interests scout for managerial talents from wherever such talents are available. For instance, many MNCs recruit their future managers from IIMs and IITs and train them not only for their operations in India but also to work in their offices abroad.
  • New products for consumers: Consumers are the greatest beneficiaries when MNCs are allowed to operate in their countries. They are able to enjoy all the amenities and appurtenances available to their counterparts in advanced countries. They get the latest technologically superior products at affordable prices. Besides, they get to choose from a wide array of products.
  • Low-cost products and/or better products: Due to increase in efficiency, MNCs can produce goods on a large scale, get materials from cheapest sources, and enjoy economies of scale. Thus, they can bring down prices.
  • Exports contribution to the host nation: Exports contribute favourably to the host nation’s balance of payments position, additional taxes and payments for the public exchequer. This is of great help to poor nations. For instance, MNCs like Hyundai8 and Nokia export thousands of their cars and mobile phones respectively every month, and this brings in considerable amount of foreign exchange to the country offsetting unfavourable balance of payments that arise due to heavy bills for importing petrol, etc. When a country has several big MNCs, the coffers of the government are enriched by direct and indirect taxes paid by them.

    Two of the most significant benefits of MNCs:

    • Access to world-wide market (host country will produce for a larger market).
    • Broad access to capital (which may be in short supply in the host nation).
DISADVANTAGES OF MNCs TO THE HOST COUNTRY
  • Loss of national sovereignty, as the host nation cannot control what an MNC does in other nations, which may be inimical to its interest.
  • Political interests of MNCs may mirror the political interest of their respective home nations, and this may be detrimental to the host nation. For instance, an American MNC may serve the interest of America, while operating in India.
  • The host nation may lose control over its own economy.
  • Negative impact on the host’s balance of payments because of heavy imports of spares and components.
  • Exploitation of the hosts’ irreplenishable natural resources leading to the dwindling of these.
  • Exploitation of labour of the host when the country needs it.
  • Indulgence in harmful environmental acts.

The host nation’s industries may be destroyed due to unfair competition by MNCs. They may not be able to compete in an uneven playing field. MNCs have their industries established much earlier, have developed expertise and are in a position to sell qualitatively superior products at cheaper prices. It has been the practice of MNCs to acquire popular brands of products of host countries and kill them to ensure that their own products survive in the market place. For example, Coca Cola acquired several popular Indian soft drinks and gradually destroyed them.9

Much can be said on the positive and negative sides of MNCs operating in several countries. The ethics in MNC’s actions lies in making their activities beneficial both to them and the natives.

INTERNATIONAL CODES OF BUSINESS CONDUCT

In response to the growing world trade and the increasing influence of MNCs several attempts have been made during 1970s to establish and institutionalize international codes for ethical business practices. One such initiative was that of the International Labour Organization (ILO), which developed covenants with regard to better labour practices and encouraged member nations to practice these and their earlier covenants and incorporate them into their own national statues and codes.

In 1974, the United Nations established the UN Commission on Transnational Corporations (UNCTC), at the instance of 77 developing countries that sought the creation of a new international economic order. In 1976, The UNCTC called for the creation of a code of conduct for transnational enterprises that would have a legal sanction. However, neither of these attempts had been successful as they were resisted by both developed countries and business associations.

Although efforts of such broad spectrum disciplining of MNCs did not bear fruit until 1994, efforts to put in place legally binding codes focused on highly specific targets like the ‘Montreal Protocol’ on chemical processes that endangered the ozone strata of the atmosphere, the ‘Kyoto Treaty’ on global warming. In 1997, the Organization for Economic Cooperation and Development (OECD) statute prohibiting the bribing of foreign officials was made.10

Although not legally binding, the OECD guidelines had been adopted by the 30 members and 8 non-members. The guidelines provide voluntary standards and principles to encourage firms to follow responsible business practices. The guidelines are wide-ranging and include employment, labour relations, environment, information, disclosure, combating bribery and protection of consumer interests.

By 1985, a series of initiatives was made by international civil society organizations to make the business community, more socially accountable both at the national and global level. These initiatives included the Caux Round Table (CRT), the Social Accountability International (SAI), the Global Reporting Initiative (GRI), Account Ability, and the Global Compact.

In view of its widespread acceptance by the global business community and its contribution to the evolution of business ethics on a wider horizon, the CRT is discussed in detail later in this chapter.

Social Accountability International offers a practical-oriented initiative by seeking to promote ethical business practices worldwide by developing an objective certification instrument called SA 8000. Companies can obtain this certification by having their practices audited by registered, objective third parties. According to Frederick Bird,11 thousands of companies from more than 30 countries, representing 36 different industries and more than 1,70,000 workers have benefited by receiving the SA 8000 certification, and the numbers are increasing. SAI, like its counterpart ISO, sponsors extensive training programmes to promote both awareness of these standards and compliance with them. SAI has been consistently striving to promote business responsibility, particularly with regard to labour practices through these common, objectively administered and thus credible certification process.

The GRI, founded in 1977 jointly by the Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme (UNEP), attempted to develop standards on several issues which impacted global trade. Unlike SAI, GRI sought to address broad rather than narrow or specific social and environmental issues. It laid stress on auditing practices focussed on public disclosure of relevant information. The GRI tried to encourage corporations to report on their activities in response to a format of basic standardized questions covering parameters on the economic impacts on stakeholders, environment, society at large, treatment of workers and product responsibility. The GRI has also prepared a set of guidelines to help members prepare reports that are relevant, complete, accurate, transparent and timely in their form and content. As a result of committed involvement of business, trade unions, academia, civil society and the international association of professional accountants, and in response to the changing dynamics of global business, GRI’s reporting guidelines have been modified several times, the latest modification being in 2006. Frederick Bird,12 reports that more than 300 firms had followed the GRI in their sustainability reports in 2004, while around 600 companies from as many as 34 nations were using GRI reporting guidelines in 2005.

Like GRI, The Institute for Social and Ethical Accountability, popularly known as Account Ability was established in 1995 with its headquarters in London. It has developed the AA 1000, an independent index to grade business practices and to evaluate firms on the basis of their learning process and commitment to social and ethical causes. AA 1000 is a self assessment process to help socially responsible organizations gain an appropriate perspective of their activities. It also helps corporations and their divergent stakeholders to understand and improve ways of meeting their several singular, as well as overlapping interests.

Another well-received and popular initiative in this direction is The Global Compact. It was initiated by the United Nations in 2000 in response to a suggestion by Kofi Annan, the then Secretary General.

Of late, GRI has been working closely with the UN Global Compact so that the organization can widen the number of corporations using its guidelines to report on their progress in implementing the 10 principles of the Global Compact.

The Global Compact is dealt with in greater detail later in this chapter.

THE LIMITS OF VOLUNTARY APPROACH

Kavaljit Singh13 lists several inherent weaknesses and operational difficulties in implementing the codes, even if these are framed by organizations such as United Nations, OECD and ILO: (i) These are purely voluntary, legally non-binding codes, the non-compliance of which will not attract any censure or penalty; (ii) In spite of these codes being there for a longtime, very few firms have adopted them and besides, they cover limited areas and sectors. A large number of them remain outside these; (iii) A firm, even while becoming a follower of the code, may choose to implement only one type say, the one on environment, while not complying with other important ones such as labour protection, health and safety; (iv) Most of these codes are limited in scope and usually set standards that are lower then prevalent national standards. ‘For instance, labour codes recognize the right to freedom of association, but do not provide the right to strike. In many countries, such as India, the right to strike is a legally recognised instrument’;14 (v) The multiplicity of these voluntary codes often work at cross purposes and ‘in an era of deregulated business, raises serious doubts about their efficacy’. These are also often misused by firms to deflect public criticism of corporate misdemeanor.

CAUX ROUND TABLE: PRINCIPLES FOR BUSINESS

In the context of promoting world trade in a principled manner, the Caux Round Table (CRT) has done yeoman service. The CRT, an international network of principled business leaders working to promote a moral capitalism was founded in 1986 by Frederick Phillips, former President of Phillips Electronics and Oliver Giscard d’Estaing, former Vice-Chairman of INSEAD, as means of reducing escalating trade tensions. In due course of time, the CRT began focusing attention on the importance of global corporate social responsibility in reducing social and economic threats to world peace and stability.

The CRT believes that business has a crucial role to play in helping to identify and promote solutions to issues that impede the development of a society that is more prosperous, sustainable and equitable. The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and be sustainable, socially responsible prosperity can become the foundation for a fair, free and transparent global society. The goal of CRT is to diffuse its suggested principles, standards, benchmarks, management concepts and practices, and understanding of a moral capitalism as widely as possible.

At the company level, the CRT advocates implementation of the CRT Principles for Business (Box 12.3) as the cornerstone of principled business leadership. The CRT principles apply fundamental ethical norms to business decision making. A specially designed process for incorporating the CRT Principles into the culture of a corporation, the self-assessment and improvement process, is available for companies to use. Ethical training for corporate boards of directors and new ethics curriculum for business schools are being developed.

To promote better outcomes for globalization, the CRT is working to raise the level of awareness of senior business leaders, and to gather elitist opinion from around the world about new opportunities to attack global poverty. These include legal and regulatory changes in developing countries that will improve the environment for productive investment of foreign and domestic equity capital. The CRT is working in alliance with global business leaders, international institutions and policy makers to improve investment environments in selected developing countries by suggesting certain principles for governments and advocating the adoption of the 12 core ‘best practice’ standards for transparent management of national financial institutions.

The formation of the CRT was a significant step taken by senior business leaders from Europe, Japan and North America to address global issues arising from the performance and conduct of international business. Deeply concerned with the issue of promoting solutions to the tensions arising from trade imbalances, the CRT has monitored the continuing changes in the economic and political landscape, and its influence has grown through the formulation and wide circulation of its Principles for Business. The CRT Principles for Business are recognized by many as the most comprehensive statement of responsible business practice ever formulated by business leaders for business leaders. The CRT Principles for Business were formally launched in 1994, and presented at the United Nations World Summit on Social Development in 1995. These principles articulate a comprehensive set of ethical norms for business operating internationally or across multiple cultures. The principles emerged from a series of dialogues catalysed by the CRT during the late 1980s and early 1990s. They are the products of collaboration among executives from Europe, Japan, and the United States, and were fashioned in a document called ‘The Minnesota Principles’.

BOX 12.3 CAUX PRINCIPLES FOR INTERNATIONAL ETHICAL BUSINESS

In the context of ever-growing international business with its attendant problems affecting physical, social and economic environments, there is a need to create certain ethical benchmarks to reduce potential conflicts amongst various stakeholders and promote sustainable and equitable solutions to the problems. The CRT Principles seek to serve a global society by offering guidelines for ethical principles for worldwide business.

Towards Worldwide Business

  1. The responsibilities of business are beyond shareholders and towards stakeholders;

  2. Economic and social impact of business to world community;

  3. Beyond the law and towards a spirit of trust;

  4. Respect for rules;

  5. Support for multinational trade (GATT/WTO);

  6. Respect for environment; and

  7. Avoidance of illicit operations, for example, bribery, money laundering, support for terrorists, gun running, drug trafficking.

    Stakeholders

     

  8. Provide highest quality of products, services, etc. at reasonable prices;

  9. Remedy customer dissatisfaction;

  10. Health and safety of customer and quality of his or her life not impaired by ‘the’ work;

  11. Ensure human dignity in goods or service offered; and

  12. Respect the integrity and culture of customers.

    Employees

     

  13. Work conditions to be fair and improved consistently;

  14. Health and dignity of worker to be borne in mind;

  15. Open in dealings, share all but classified information;

  16. Listen to and, where possible, act on employee suggestions, ideas, requests and complaints;

  17. In the event of conflicts, engage in good faith negotiation where possible, act on employee suggestions, ideas, requests and complaints and not legal wrangle; and

  18. No discrimination on any ground;

  19. Put the principles of ergonomics in practice;

  20. Update the skills and knowledge of employees; and

  21. Sensitive problems of employees to be tacked amicably.

    Owners/investors

     

  22. Fair and competitive return on capital by efficient management;

  23. Disclose all relevant information except those in the ‘classified’ list;

  24. Conserve, protect and increase owners’ assets; and

  25. Respect their complaints for solutions.

    Suppliers

     

  26. Pricing to be fair;

  27. No coercion or litigation; and

  28. Long-term stability.

    Community

     

  29. Human rights respected and maintained; and

  30. Good corporate citizen through charitable donations to educational, cultural and civic needs of society.

Source: Caux Round Table, “Principles of Business”, Caux Round Table: Charting a New Course for Business, 2003, available at www.cauxroundtable.org/documents/Principles%20for%20Business.PDF. Reproduced with permission from the Caux Round Table.

 

Globalization has facilitated free movement of people, capital, jobs and enabled trade and information and businesses to operate in a borderless manner. Consequently the role of nation states has become less important leading to the development of ‘soft’ laws, that is, the effect of international conventions and bilateral treaties being used by NGOs as representing society’s expectations of conduct, in advance of their adoption into the laws of individual nation states. Reluctant as some corporations have traditionally been to go beyond their operational objectives, the time has come for the roles of corporations, governments and other institutions to be significantly redefined—a time for new partnerships and greater cooperation at a global level.

CHALLENGES OF GLOBALIZATION IN THE CONTEXT OF GROWING MARKET ECONOMIES

Some commentators suggest that we are at a major turning point in history—a time that occurs only once every hundred years or so, when adequate vision is lacking, leadership is weak, new technology sweeps across nations, gaps widen between people, laws and institutions break down, values weaken, crime and corruption increase and human relations falter. Such factors inherently threaten world peace, stability and prosperity, while business globalization is accelerating in both the historically major economies and the strong new economies. The period since the CRT was founded has encompassed the completion of the General Agreement on Tariffs and Trade (GATT) agreement, strongly endorsed by CRT participants, and the formation of the WTO. Other developments include the completion of the Single European Market, the formation of North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN) agreements. The collapse of communism in Central and Eastern Europe has created both opportunities and challenges.

The emergence of India and China as major economies, together with the resurgent growth of the South East Asian economies known as ‘Tiger’ economies, has generated unprecedented prosperity and industrial muscle. The emergence of market economies challenges expanding global businesses to help enable those markets to reach their potential and to enhance the prosperity of their populations. Threats to a prosperous and sustainable society include the gulf between the rich and the poor, between the successfully industrialized nations and their less developed neighbours. Social unrest and discontent are increased by religious fanaticism and organized crime. Unlawful immigration is a destabilizing influence as those without money, jobs, knowledge or opportunity are attracted to centres of prosperity. Business leaders rightly see major opportunities to access new markets, for the wider utilization of intellectual property and technology, and for new investment. But they are also faced with formidable challenges to reduce the attendant risks.

PUBLIC AWARENESS AND SCRUTINY

There has been a revolution in communications, itself a source of huge new global business operations. With easier and more immediate access to information, and the stimulus of media analysis, public interest in the conduct of business has intensified. Sophisticated media presentation focuses particular issues and heightens concern, especially where there are perceptions that public interest is threatened or power is being abused. Demands increase for greater transparency and for effective public scrutiny. Society expects corporations to be accountable, not just in traditional areas of financial performance, but across all functions that impact on the physical, social and economic environments. Society’s confidence is undermined by ignorance and suspicion, but reinforced by information and understanding. Without confidence and trust society cannot be expected to review its ‘license’ or ‘franchise’ for business to operate. It exercises its sanction through legislation and regulations—the operation of choice in the market place, actions of pressure groups, and corrosive public criticism of targeted sectors, corporations or key position holders.

Recent campaigns on top executive compensation, environmental performance, employment conditions, sale of arms, and customer service standards provide evidence of the potentially harmful effects of public alienation. Conversely, companies that have addressed the challenges openly have been able to win public support even while undertaking major changes involving restructuring, adoption of new technologies sometimes seen as threatening, and in resolving highly controversial issues such as disposal of toxic waste. Increasingly, competitive advantage and customer loyalty are achieved through providing access and dialogue and demonstrating genuine concern for public interest and the needs of communities.

TECHNOLOGICAL CHALLENGES AND OPPORTUNITIES

Never in the chequered history of the human race, has there been such an explosive growth of technology in such a short span of time as there is now. Technological innovations have brought in immense changes to manufacturing, transport and communications, information and knowledge management, pharmaceuticals and biotechnology, banking and financial management and to a host of other spheres. The impact of these innovations on business and industry, as in other walks of life, is immeasurable. Methods and processes of productions have been shortened, distances reduced, and time taken lessened in every human endeavour. Business and trade have become global. The world itself has become so small as to be called the global village. In this fast-changing environment—social, political, economic and governmental—corporations have to adapt themselves faster, reckon competition and work out successful survival strategies. Even while they have to swim against the rising costs of technology-induced processes and changes, they have to acclimatize themselves to newly evolving corporate cultures and governance practices. Values keep changing and corporations have to be in the vanguard of these changes to succeed in their business. If challenges arising out of technological innovations are many, opportunities too are plentiful. An ever-increasing global market, large-scale manufacturing with its attendant economies of scale and lowered costs, escalating profits and a chance of becoming transnational corporate players are too significant a gain for corporations to ignore.

THE PHYSICAL ENVIRONMENT

Business has increasingly faced several challenges with regard to its effects on the physical environment and its sustainability. It is in this area that issues have become most global and intergovernmental conventions and NGOs have had significant influence. Increasing awareness on this issue has reshaped legislations around the world and has led to the formation of new international institutions, with a huge impact on the policies and practices of businesses and their representative organizations. There are few remaining international corporations that have not published statements of environmental, safety and health policies, while significant sectors have adopted a coherent voluntary worldwide code of responsible practice. Considerable progress has been made in disclosure, and in introducing reporting and verification procedures. Although many aspects of environmental concern still await scientific verification, the concept of a voluntary precautionary approach has evolved, coupled with significant public commitments on performance goals. Science and emerging technology have enabled business to take many beneficial initiatives in areas such as efficient agriculture, safe water and hygienic food processing. However, maturing public attitudes introduce new challenges in terms of what is acceptable to the public. The adoption of unfamiliar risks raises deep public concern. Important examples include the application of biotechnology and pesticides in agriculture, and of additives and radiation in food preservation. Business must make both practical and ethical decisions on the adoption of risk, its assessment and communication to its constituencies.

THE SOCIAL ENVIRONMENT

Population growth and consequent unemployment, increasing inequalities between the rich and poor, public health, immigration flows and social disorder interact to affect the conditions in which business develops. The prevailing political framework determines whether the responses are subject to command economy rule, to free-market economies or to what are called mixed economies. Education and training are the precursors to economic development, and most political regimes give these high priority. However, the resources required to ensure efficient delivery may be inadequate, depending upon the general economic climate and social infrastructure. A natural consequence of successful business activity is that employment opportunities and wealth are created, together with an increasingly cohesive and supportive social fabric. Successful business depends upon its efficiency, competitiveness and its flexibility to adapt to changes in the marketplace. In the global market, even the most enduring businesses have to adapt, through measures affecting employment levels and disposition. Significant factors include changes in demand, new technology and the emergence of competition.

KEY GLOBAL ISSUES FOR BUSINESS

All of these developments have far-reaching consequences. Some of these favour business while others threaten it. The CRT affirms that the primary purpose of the corporation is to manage its business effectively. In doing so, however, global business cannot assert that ‘the only business of business is business’. It should seize the opportunity to be an active participant in contributing to peace, stability and prosperity. Many business leaders have recognized the implications of globalization for their corporations and have given increasing attention to the social concerns. A broad consensus has developed that business has a responsibility towards the communities it serves and depends upon, to contribute beyond the strict requirements of the law, and beyond the needs of self-protection. Participants in the CRT affirm this perspective, and seek to define the responsibility of global corporations in relation to certain key issues.

In such a situation the following issues should be given precedence:

  • the employment dilemma;
  • sustainable practices and values;
  • trust, honesty and transparency; and
  • collaboration and partnerships for action.15

These issues need to be examined in the context of the fundamental social, economic, political and technological changes taking place throughout the world today.

Employment Dilemma

The CRT has addressed the need for job creation regularly. Job creation involves a complex set of issues with far-reaching implications both in industrialized and developing nations. Resolution of the global employment dilemma may be fundamental to reducing risks of social upheaval and to finding solutions to other key global issues. One of the greatest strengths of business has been and must continue to be job creation, even as restructuring of current activities continues. Country after country has decided that increased private sector employment is the lynchpin to sustainable economic growth. Business has a responsibility to provide working conditions that respect each employee’s health and dignity, and to provide jobs and compensation that improve the living conditions of workers and their families. But some crucial questions must be answered:

  • What can and should be the role of business in promoting job creation?
  • What responsibility should business take for promoting flexibility and employability?
  • What is its role in seeking to change regulations which inhibit change in employment practices or impose administrative burdens that threaten competitive employment?
  • What steps must be taken to assist those without jobs?
  • Is it true as some suggest that technological advances of recent years have eliminated more jobs than they have created? Or, on the contrary, does the problem lie in protectionism and resistance to change?
  • What rectifying actions can be taken?

Within a wider social and economic context, business also needs to address questions such as

  • the gulf between rich and poor within nations and between well-developed and less-developed economies;
  • the urgent need in developing nations for the rule of law, necessary infrastructure, nurturing of a new work ethic and other measures to assure sustainable development of a market economy; and
  • the impact of increased immigration and freer trade agreements upon all sectors of societies, both within developed and developing nations.

Global business leaders and their counterparts in governments must draw from past successes to develop policies that promote job creation, review regulatory constraints that inhibit job creation, and consider new risk-sharing between business and government. Above all, business leaders need to identify the factors that promote creativity and innovation, and inspire confidence in enterprise rather than resorting to protectionism.

Sustainable Practices and Values

It is widely understood by people now that short-term performance criteria have to be balanced against long-term considerations involving the effects of business on its environments, and thus its sustainability. While laws and conventions focus on particular provisions for the conduct of business, there is a growing consensus that attitudes, standards and practices must exceed legal requirements. Business needs to monitor the impact of its products and services, and to stand for values with which society will identify. Extending the practice of many corporations which already publish their general principles for the conduct of their business, and of a large number which publish their policies and performance in areas of safety, health, the physical environment and energy efficiency, business should define its role in areas such as

  • resource management;
  • technology transfer;
  • human exploitation;
  • employee development;
  • illicit substances and their abuse;
  • the family; and
  • encouragement of sound values in society.

Business will also have to determine the extent and scope of its responsibility in such sensitive areas, and find the right balance alongside other institutions involved.

Trust, Honesty and Transparency

CRT and other such similar organizations believe that business, as well as the professions have a duty to the society to be trustworthy, honest and transparent in their dealings. Public suspicion of business motives and behaviour is a negative influence that can lead to restrictive legislation and can threaten job creation and other potential benefits to society. A loss of trust may result in a virtual revocation of business’s ‘license’ or ‘franchise’ to operate in public interest. Communications technology and media intensify the call for information and explanation. To obtain trust, worldwide business practices must satisfy the perceptions of society as to what is ethical. Global businesses should not participate in or condone bribery, money laundering or other corrupt practices but should cooperate with others to eliminate them. Some of the key questions to be addressed include the following:

  • What are the practical obstacles to greater openness and transparency?
  • What is a right balance between proactive and reactive measures to achieve public understanding of the standards of business and its performance?
  • How should business leaders approach the problem of corruption, given the diversity of cultures?
  • How can business engage in sustained dialogue with all its constituencies to define shared responsibilities for resolving issues?

Collaboration and Partnerships for Action

The CRT believes that solutions to complex global issues require the cooperative efforts of business, government and other institutions. Working alone, these powerful players are likely to fail. Working together, they can apply local models to international situations and find multifaceted solutions to complex problems. The partnership developed in many cities where businesses collaborate with local authorities, central government, education, emergency services and special interest groups could be adapted to global initiatives. Although the difficulties in achieving effective collaboration are likely to be daunting, business needs to take the initiative and persevere in this process. Business needs to consider its role and approach in

  • developing a coherent strategy for addressing global problems;
  • establishing a constructive network embracing its principal world centres;
  • developing dialogue with relevant public institutions;
  • mounting and funding agreed initiatives and action programmes; and
  • monitoring and reviewing progress and outcomes.
CORPORATE GOVERNANCE IS A PREREQUISITE FOR GLOBALIZATION

‘Tiger economies’ refer to economies such as South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, the Philippines, Thailand and Vietnam that had undergone rapid economic growth generally accompanied by an increase in the standard of living of the people. The South East Asian crisis developed in June 1997 in Thailand, which faced a problem of loan repayment. Fears of loan defaults resulted in foreign creditors withdrawing their funds from the country’s financial institutions. It gradually spread to the Philippines, Malaysia and Indonesia. Two major reasons were attributed to the crisis: (i) The macro economic fundamentals of the economy were weak leading to low productivity and lack of competitiveness; (ii) Inadequate supervision of financial institutions and poor corporate governance practices resulted in overborrowing, overlending and overinvestment. Further, current account deficits, inadequate capital inflows and currency speculation led to a high appreciation of the US dollar and devaluation. There was a dent in investor confidence and decline in overall investments.

If India wants to ensure that a crisis of the same proportion experienced by Southeast Asia never occurs here, and if Indian companies want to be globally competitive in the new millennium, then good governance is an utmost necessity. The East Asian crises occurred due to the lack of public governance and corporate governance. Singapore suffered the least because it had good governance rules in place. Public governance involves setting up of regulatory bodies and a legal framework, and the establishment of institutions that ensured transparency. Rule of law and a proper financial system are essential. The first requirement of corporate governance is professional management. Even in familyowned companies, where family members often held the highest offices in companies, it is imperative that such family members are professionally qualified and competent for the office they hold.

Few companies will voluntarily adopt ‘corporate governance codes’ because in their perception these will add to their costs without bringing much tangible benefits. Hence, the government must regulate their adoption and take the lead to enforce corporate governance through institutions.

If the government fails to enforce governance codes, then businessmen must themselves take the initiative out of self-discipline. It will be best if private sector companies and public sector enterprises act in concert in this respect. Even if the government or public sector enterprises are not interested, private sector companies must adopt global corporate governance standards, because ‘globalization demands good corporate governance’. After all, globalization is likely to benefit private sector corporations more than public sector enterprises.

Some analysts are very pessimistic and even suggest that Indian companies should not globalize until good governance rules are put in place, as otherwise India would go the East Asian way. In East Asia, all the good work built up over 10 years and more was destroyed in a matter of weeks, simply because the necessary framework was not there. If Indian companies want to globalize, they must adopt good corporate governance standards. One reason why Indian Info Tech companies were able to raise funds in the markets abroad such as Nasdaq was because they had adopted global corporate governance standards that satisfied the American investors.

Another area of concern in the country as elsewhere is the lack of independent auditors. In the present times, it is imperative to have independent auditors who are reputed and above board. Due to the distrust in Indian auditors, most of the multinational companies have insisted that the parent company’s auditor should also audit the subsidiary companies in India, often at much higher costs. One of the problems with corporate governance is the fact that different regions have different economic philosophies. ‘In the US, the only concern is increasing the shareholders’ value, in continental Europe it is creating employment, while in Japan the companies worked in tandem with the government as per the national strategy. Thus, it is very difficult to have a universal governance code, but there are minimum standards that all companies worldwide can and must adopt.’16

GLOBAL COMPACT

Kofi Annan, the United Nations’ Secretary General, presented to the World Economic Forum at Davos on 31 January 1999 his proposal for a ‘Global Compact’. On 26 July 2000, Kofi Annan’s vision was put into action. Global Compact is a worldwide initiative under the aegis of the UN to make corporate social responsibility an area (CSR) of paramount importance to business. The Global Compact conists of 10 principles concerning issues of human rights, labour standards, environment and anti-corruption (Box 12.4).

‘The Global Compact is a voluntary initiative that seeks to advance universal principles on human rights, labour, environment and anti-corruption through the active engagement of the corporate community in cooperation with civil society and representatives of organized labour. The initiative is not designed, nor does it have the mandate or resources, to monitor or measure participants’ performance.’17

BOX 12.4 THE 10 PRINCIPLES

The Global Compact’s 10 principles in the areas of human rights, labour, the environment and anti-corruption enjoy universal consensus and are derived from

  • The Universal Declaration of Human Rights;
  • The International Labour Organization’s Declaration on Fundamental Principles and Rights at Work;
  • The Rio Declaration on Environment and Development; and
  • The United Nations Convention Against Corruption.

The Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values spelt out below:

Human Rights

Principle 1:

Businesses should support and respect the protection of internationally proclaimed human rights; and

Principle 2:

make sure that they are not complicit in human rights abuses.

Labour Standards

Principle 3:

Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4:

the elimination of all forms of forced and compulsory labour;

Principle 5:

the effective abolition of child labour; and

Principle 6:

the elimination of discrimination in respect of employment and occupation.

Environment

Principle 7:

Businesses should support a precautionary approach to environmental challenges;

Principle 8:

undertake initiatives to promote greater environmental responsibility; and

Principle 9:

encourage the development and diffusion of environmentally friendly technologies.

Anti-corruption

Principle 10:

Businesses should work against corruption in all its forms, including extortion and bribery.

 

Source: United Nations: Global Impact, Note on Integrity Measures: The Global Compact, 2007, available at www.unglobalcompact.org/AboutTheGC/Integrity.html. Reproduced with permission from the United Nations.

Under the terms of agreement of Global Compact, participating companies should publish annual reports and display on their Web sites ‘specific examples of how they put the Global Compact Principles into practice’. The United Nations’ reputation and moral authority are such that more than 700 companies, including a few from India like Tata Steel Limited, have subscribed to the Global Compact.

Today very few countries can claim to be economically self-sufficient. Most business enterprises are drawn to doing business across national borders. Many factors such as falling trade barriers, newer technology and political reforms have come to play a facilitating role in recent times to promote and foster international trade. Businesses in the present global society are carried on by multinational or transnational corporations, most of which are based in the developed countries. Global business operates within the context of international and where necessary regional rules and regulations set up by appropriate governmental agents. It is dominated by multinational corporations that have their businesses spread across continents. International business is business conducted across national boundaries. It is concerned therefore with political, economic, social and cultural conditions in a variety of countries. As technology improves, international communications and transportation links, international business and international corporate activities will expand. In the context of promoting world trade in a principled manner, the CRT has done yeoman service. The CRT was founded in 1986 by Frederick Phillips, and Oliver Giscard d’Estaing, as a means of reducing escalating trade tensions. The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and sustain, and socially responsible prosperity can become the foundation for a fair, free and transparent global society.

The goal of the CRT is to diffuse its suggested principles, standards, benchmarks, management concepts and practices, and understanding of moral capitalism as widely as possible. Global business opportunities have grown tremendously in recent times, thanks to the opening up of the hitherto fettered markets of socialist and developing countries and the active role played by international organizations such as GATT, WTO, IMF and the World Bank. Stupendous growths in transport and communications and cutting-edge technologies in IT and IT-enabled services have added their own dimensions to this growth process. If this process of global trade in goods and services is to continue and sustain itself, the important players in this game, namely, corporations have to play their parts fairly and ethically. Corporations that are involved in the production and distribution of goods and services for a worldwide market should not only live by and exhibit ethical principles and good corporate governance practices, but also should be seen practising them. No corporation that is found to be unethical and wanting in terms of corporate governance will have a future. If transparency, honesty, fairness, integrity and ethical behaviour along with protection of all the stakeholders’ interests are commendable virtues within the country, they are far more preferred outside. The wide popularity of CRT’s Principles of Business bears ample testimony to the fact that the world likes and prefers to deal with good and reliable corporations than ones whose fairness and integrity are questionable.

KEY WORDS
  • Reduced trade barriers
  • Multinational corporations
  • Subsidiaries and affiliates
  • Joint venture partners
  • Global corporations
  • Bandwagon of global business
  • Businesses scanning continents
  • Business in a diverse world
  • Geocentric outlook perspective
  • Domestic identity
  • Economic clout
  • Values and lifestyles
  • Creative experience
  • Need for dialogue
  • Employment dilemma
  • Sustainable practices and values
  • Destabilizing influence
  • Technological challenges
  • Physical environment
  • CRT principles for business
  • Corporate governance
DISCUSSION QUESTIONS
  1. Why is it that even countries with abundant natural and human resources cannot afford to insulate themselves from others?
  2. Discuss the factors that facilitate the integration of the global economy.
  3. What are the benefits and disadvantages MNCs bring to the host country?
  4. Explain the background under which the Caux Round Table was established. What are its objectives and the issues it seeks to address?
  5. Discuss the various initiatives of global organizations to ensure ethical business worldwide.
FURTHER READINGS

Caux Round Table, “The Critical Role of the Corporation in a Global Society: A Position Paper of the Caux Round Table (CRT),” 1997, available at www.cauxroundtable.org/documents/CriticalRoleofthe Corporation10-97.doc

Dixon, P., “The Future of Corporate Governance,” Future Trends, 2007, available at www.globalchange.com/corporategovernance.htm

Jebamalai, V, Myths and Realities of East Asian Model of Development—Lessons for India (Chennai: Centre for Research on New International Economic Order, 1999).

Lopez, J., “Global Technology Slowdown Hits ‘Asian Tiger’ Economies,” 14 September 2001, World Socialist, available at www.wsws.org/articles/2001/sep2001/asias14.shtml

Rajshekar, N. and Subbulakshmi, V. (eds.), Asian Banking Crisis in the 90s—Perspectives and Lessons (Hyderabad: The ICFAI University Press, 2004).

Roberts, M., “Tiger Economies in Crisis: Slump in South East Asia,” 30 October 1997, available at www.marxist.com/economy/tiger.html

Sinha, A., “Xeroxing Corruption,” September 2002, available at www.indiaresource.org/issues/globalization/2003/xeroxingcorruption.html

Weissman, R.,“When the People Speak, the Corporations Squeak,” 1998, available at http://lists.essential.org/1998/corpfocus/msg00014.html

———, “Environmental Bad Guys,” 1999, available at http://lists.essential.org/corpfocus/msg00008.html

———,“The Criminal Element,” 1999, http://lists.essential.org/corpfocus/msg00037.htm

(This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image of the corporate or the executives discussed.)

COMPANY PROFILE

Sterlite Industries (India) Ltd (SiIL) is a leading producer of copper in India. It was founded in 1986, bringing together several metal related activities managed by the Anil Agarwal family. SiIL pioneered the manufacturing of continuous cast copper rods in the country, and established India’s largest copper smelting and refining plant for production of world class refined copper. It is the first company in India to set up a copper smelter and refinery in the private sector and operate the largest capacity continuous cast copper rod plants. SiIL’s main products, copper cathodes and copper rods meet global quality benchmarks. It is the first private sector smelter in India with operations extending from the mines in Australia. The company went on stream in a record period of two years, with full stabilization of operation at rated capacity. The stateoftheart technology is on par with the best in the world and is an added advantage to the company.

Sterlite was first listed on the Mumbai Stock Exchange in 1988, while its parent company Vedanta Resources was listed in the London Stock Exchange in 2003. SiIL is the Indian subsidiary of the London-headquartered Vedanta Resources. In 1995, Sterlite acquired 80 per cent of MALCO, an integrated aluminium producer in Mettur in Tamil Nadu, establishing its stronghold in aluminium production. In 1995, it commissioned the copper smelter at Tuticorin. In 1999, it acquired the copper mines of Tasmania Pvt Ltd and Thalanga Copper Mines Pvt Ltd to source copper concentrate for Tuticorin. In 2001, Sterlite acquired a 51 per cent interest in BALCO—an integrated aluminium producer in central India—and a 26 per cent stake in Hindustan Zinc Ltd. (HZL)—an integrated zinc and lead producer—both from the Government of India, and a further 20 per cent through a compulsory open market offer. In 2003, it exercised an option to acquire a further 19 per cent of HZL to take the total holding to approximately 65 per cent. In 2004, Sterlite acquired 51 per cent stake in Konkola Copper Mines, Zambia, the largest producer of copper in the Zambian copper belt. Sterlite controlled just under half (42 per cent) of the Indian market in copper; nearly a quarter (21 per cent) of the country’s aluminium output, and a whopping 62 per cent of its trade in zinc.

Sterlite always maintains total quality management (TQM) as a way of life for continual improvements. It uses TQM extensively to constantly reach new frontiers of excellence and to maximize employee involvement. The Tuticorinbased Sterlite is the first copper smelter in the world to be accredited with ‘Five Star’ rating and the International Safety Award by the British Safety Council. The company has been given the ‘Star Trading House’ status for export by the Government of India.

SiIL has zero-effluent discharge systems integrated at every plant. It has dominant market shares in the various segments of copper consumption. The company has been a consistent national award winner for excellence in energy management.

SiIL’s VISION 2010

SiIL’s vision is ‘To be the world’s “bestinclass” copper producer and build a progressive organization that all stakeholders are proud to be associated with’.

SiIL’s MISSION1
  • To harness technology to its full potential in a safe and clean environment in the entire business cycle and integrate quality with continuous improvements.
  • To harness the profitable and growing CCR market from 125 kmt to 300 kmt per annum.
  • To achieve and sustain cost leadership in the global market.
  • To become a vibrant, learning organization by building skills and competencies of employees for growth.
  • To be the best and most respected corporate citizen.

The group’s Executive Chairman, Anil Agarwal, is the group’s original promoter and founder having built the group from its inception in 1976. Volcan Investments Limited, a company controlled by Agarwal and his family, remains the group’s controlling shareholder with a 54 per cent interest. The relationship between Volcan, Anil Agarwal and the group is governed by a relationship agreement that was created at the time of listing in December 2003; it is designed to ensure that the company can operate independently of the controlling shareholder.

THE BOARD

The board is responsible for setting leadership standards for the group, sponsoring and monitoring its principal businesses, securing financial and other resources to enable those businesses to pursue their strategic objectives, ensuring that the group maintains appropriate internal control systems and ensuring that effective relationships with shareholders are maintained.

  • Board Composition—The board consists of an executive chairman, three executive directors and four independent non-executive directors.
  • Independence—The board considers all of the non-executive directors to be independent of the company as defined by Code Provision A.3. 1.

Ethical Code

The Ethical Code of Sterlite stipulates the following:

  • Uphold the rule of law and respect human rights solely in public interest.
  • Maintain the highest standards of probity and integrity.
  • Conduct themselves in such a manner that the public feels that decisions taken or recommendations made are objective, transparent, and not calculated to promote improper gains for anyone. This is particularly significant to the customers of the public service.
  • Should not seek to frustrate or undermine policies, decisions and actions taken in the public interest by the management by declining or abstaining from action which flows from the management decision.
  • Where following the instructions of the superior authority would appear to conflict with the exercise of impartial professional judgment or affect the efficient working of the enterprise, set out points of disagreement clearly in writing to the superior authority or seek explicit written instructions.
  • Employees of Sterlite, if required by superior authority to act in a manner which is illegal or against prescribed rules and regulations, or if any legal infringement comes, decline to implement the instruction, and would also have a right to bring the facts to the notice of Chairman/Managing Director or Secretary.

Accountability and Responsiveness to the Public

  • Practice accountability to the people in terms of quality of service, timeliness, courtesy, people orientation and readiness to encourage participation of, and form partnership with citizen groups for responsive management.
  • Be consistent, equitable and honest in treatment of the public, particularly the weaker sections of society and not even be or appear to be unfair or discriminatory. Decision in pursuit of discretionary powers should be justifiable on the basis of non arbitrary and objective criteria.
  • Accept the obligation to recognize and enforce customer’s right for speedy redressal of grievances and commit them to provide services of declared quality and standard to customers.
  • Respect right of public to information on all activities and transactions of the organizations except where they are debarred in the public interest from releasing information by provisions of law or by valid instructions.

Environmental Consciousness

SiIL takes active interest in the protection and conservation of the environment through development of environment friendly systems. The prestigious ISO 14001:1996 Environment Management Certificate awarded to the Tuticorin plant in Tamil Nadu, by Det Norske Veritas BV Netherlands, is evidence of its commitment to the cause of strict adherence to standards and constant endeavour to improve environmental protection.

Sterlite Copper’s effort towards safeguarding the environment includes the implementation of Environment Management Schemes at an investment of more than INR 2,000 million.

A REPORT CARD ON STERLITE’s ADHERENCE TO ETHICAL PRACTICES

Controversies Surrounding the Sterlite Tuticorin Plant2

A proposal by Sterlite to set up the present (Tuticorin) facility in the Ratnagiri district of coastal Maharashtra had to be abandoned after farmers and fisher folk there put up a spirited fight. Upon the invitation of the then Tamil Nadu Chief Minister Jayalalithaa, Sterlite put together a copper smelter in Tuticorin in 1995 using outdated secondhand equipment from Australia, the United States and other countries. The proposal was pushed through without public consultation despite vociferous opposition by residents and political parties in Tuticorin.

The Tamil Nadu Pollution Control Board’s (TNPCB) stipulations regarding where the factory should be located, or how much it should produce were promptly violated in spite of the fact that many conditions were relaxed in favour of Sterlite. Instead of locating the smelter 25 km away from the sensitive coral reefs of the Gulf of Mannar Marine National Park as stipulated in the TNPCB’s consent to establish the plant, the company located ‘the arsenic and sulphur dioxidespewing smelter 14 km from one of the protected coral islands’. Rather than restrict its annual production to 40,000 tonnes of blister copper as per TNPCB’s consent to operate, Sterlite went on to produce more than 1,70,000 tonnes of copper anode from its smelter, and proudly announced its production achievements to impress its shareholders. Encouraged by the government’s pliability, the company went ahead with an ambitious capacity expansion plan to make its Tuticorin assets more attractive to global investors.

Operating at higher than permitted capacity, and the setting up of a number of unapproved plants within the complex seems to have had an immediate bearing on the safety, health and environmental conditions within the factory. According to workers and exworkers, most of the occupational injuries and fatalities go mostly unreported, and the local police, and even the district administration ‘cooperate’ with the company to cover up all but the most notorious of incidents.3 Between 1999 and 2004, accidents at the Tuticorin plant reportedly killed 13 people and injured 139. Criminal proceedings have been initiated in only 3 out of 15 incidents reported by workers. Ironically, the Tamil Nadu government issued safety awards to the company in 1999 and 2000, during which time at least 11 people were injured, and villagers had apprehended company staff for releasing toxic effluents into a village drinking water pond.

SiIL claims that it believes in conducting its activities with a ‘social conscience’. ‘As a responsible corporate citizen,’ Sterlite has undertaken several initiatives to conserve the environment and serve the society. Even though Sterlite has its own code of conduct, the following are some of the ethical issues of the company. Some of Sterlite’s ethically unjustifiable activities should come as no surprise, given the company’s history of controversial dealings. The company has also been responsible for unfair labour practices as well as bypassing norms of environmental and worker safety.

ETHICAL INFRACTIONS

Environmental Issues4

Environmentalists accused the company for its issue in the Tuticorin Environmental Impact Assessment (EIA), as it has omitted the critical assessment of suspended particulates and heavy metals in the smelter discharges. Coastal protection regulations forbidding the location of industrial plant within 25 km of the Gulf of Mannar biosphere reserve were flagrantly sidetracked. The plant has been emitting large quantities of arsenic, sulphur dioxide, lead, cadmium, antimony and bismuth.

The Smelting Pot

The expansion of its Tuticorin copper smelter has been most threatening to people and ecology. The smelting pot was imported from Australia in 1994 as a cheap secondhand, decommissioned plant. The smelter was rejected by the state of Maharashtra as too dangerous. But it was constructed 9 km from the Gulf of Mannar special biosphere reserve in Tuticorin, in violation of marine protection rules. The smelter had to be closed thrice within one year because of the order issued by the state government in the wake of protests staged by thousands of fishermen and other Tuticorin townspeople, adversely affected by waste discharge. In spite of unauthorized discharges of waste already made into streams outside the plant it was allowed to reopen notwithstanding the fact the waste contained toxic material. Recently, the Supreme Court Monitoring Committee on Hazardous Wastes (SCMC), set up by the country’s topmost court, discovered to its horror a huge pile of phosphorous and gypsum at one corner of the site. At the other end, a huge quantity, running into thousands of tonnes of slag bearing arsenic was dumped, exposed to rain and wind. An order of the much concerned Monitoring Committee to remove the toxic waste urgently was ignored by Sterlite. The company chose to almost double its design capacity, thereby enhancing its facilities. This doubling of capacity obviously caused the overload of the smelter. Sterlite, in spite of the adverse findings and advice of the team of experts appointed by the country’s topmost court, did pretty little to reduce the piling of the hazardous waste. Outraged by the inordinate delays and open defiance by the company, the SCMC issued an order in July 2005 to close down the smelter for ‘fully violating the Hazardous Waste Rules 1989 and the order of the Apex Court, dated 14-10-1993’ and also revoked the consent of TNPCB.

Deforestation

In 2003, Sterlite with a view to quickening the pace of construction of the Lanjigarh alumina factory that would process the Nyamgiri bauxite appointed an Australian engineering company, Worley Parsons. Even though the Ministry of Environment and Forests had not granted any clearance the construction work went apace. In an appalling incident, two Majhi Khond villages were destroyed, their residents being brutally and illegally removed and housed in a sort of concentration camp. A study by an environment-based NGO pointed out that the entire bauxite deposit at Nyamgiri lies on top a protected forest area which boasts of many endangered species of flora and fauna. The company was least bothered about the havoc the building caused to these very rare species of medicinal plants, pests and animals.

Forcible eviction of tribal families from their homes, illegal and violent takeover of private property belonging to tribals, unlawful confinement of local villagers by Vedanta security forces, and the use of police and district administration to suppress dissent were some of the other unethical practices resorted to by the company.

Safety Consciousness

The company has been insisting that it believes that environmental concerns and safety should go together, and encourages its employees and contract workers to follow such good corporate practice. Sterlite claims that their workers are provided a safe, accidentfree work environment by applying international benchmarking and process improvements. As a result of all these efforts the company has received the OSHAS: 18001 certification for Occupational Health and Safety Management and Systems by Netherlands-based DetNorske Systems Veritas BV, apart from the British Safety Council Society Award for two years.5

Notwithstanding all these averments, Sterlite did not care to follow the basic safety standards at its Tuticorin plant and took advantage of the ignorant contract labourers. The company totally ignored warnings of impending disaster at the plant. In 1997, the anticipated disaster finally struck at the plant when in the aftermath of an explosion at the top of the rotary kiln, molten metal dropped on the workers, charring to death two of them and maiming two others. The plant was forced to close its doors for a brief period. Finally, the TNPCB permitted them to reopen in 1999 with an order that the management should provide a new environment management plant (EMP) However, Sterlite managed to get away with not fully implementing the EMP.

Likewise, Sterlite violated basic safety standards at its other sites as well. No other Indian company violated them with such impunity as Sterlite did. For instance, at its largest single mining complex in Mainpat in Chattisgarh, tribal workers were not given any safety gear, and were exposed to heat and dust, even while doing hazardous manual work.6

Social Consciousness

Sterlite stresses the importance of social consciousness. The company knows its success depends on the contribution of the community around it. Its Community Care Program aims to fulfil its social obligation in improving the quality of life of the community around its facilities. With a view to promoting the overall sustainable community development, SiIL focuses on special groups—women, children and youth.

Further, Sterlite stresses on a ‘bottomup approach’ under which the local community is encouraged to participate actively from the conceptual to the execution stage of its community development projects. This participatory approach ensures that the benefit reaches the weaker sections of society, besides achieving the fullest utilization of resources in the four major thrust areas—education, health, sports and community welfare.7

In spite of all these pious pronouncements of Sterlite, there is nothing that may be called development that communities in and around the company’s facilities see except for the handful of jobs that the highly mechanized mining and refining may provide. As for the local people, they do not get more than a fraction of even those few jobs. The Sterlite group of companies has promised jobs only to one member of each family whose house site has been acquired. They are being trained in various trades, but they have been careful not to put it down in writing anywhere that, at the end of the training, they will get jobs as a matter of right.

Health and Hygiene

One of SiIL’s initiatives in promoting health and hygiene is to conduct regularly, health programmes in rural areas to create awareness among the people of the need to be healthy and hygienic. The company’s three-pronged strategy to provide better healthcare for the neighbourhood community focuses on prevention, diagnosis and treatment.8

However, almost all bauxite miners employed by Sterlite are contract labourers who have to fund for themselves in matters of health and hygiene. At Mainpat, on a good day they can earn just over INR 60, while it is still less for women, for delivering one tonne of ore. The appalling living conditions in which these workers are kept in the quarry are beyond description. These tiny thatched hovels have no electricity and very little water. The company offers them no medical facilities and even workers injured at the worksite have to be taken down to the plains by taxi, at their own expense. They are not provided security equipment in spite of the workers’ demand. This laxity caused a worker’s death on 18 July 2005 at the Balco Korba expansion project, triggering one of the several strikes by workers of Sterlite.9

Sterlite’s integrated aluminium facilities at Mettur, in northern Tamil Nadu, display the worst health and environmental impacts of a notoriously polluting industrial sector, as well as toxic effects from an unsafe coalfired captive power plant. The company’s claim that it has made bricks out of the large quantity of residues of red mud (caustic soda wastes), besides taking a long time to be implemented fully, is not an acceptable solution since it poisons agricultural soil, contaminates water bodies and kills cattle. Moreover, there were emissions from the power plant and the refinery causing unhealthy living conditions to the poor local residents, who suffered from respiratory problems, skin allergies, eyerelated diseases, stomach disorders, chest pains and the like.10

Community Welfare

Sterlite boasts that ‘Based on the requests from the community, SilL supports projects that improve the community infrastructure’.

However, the boast seemed to be without any basis. For instance, the company’s project to build the Mansil Wakal dam at Udaipur in Rajasthan state, which the company managed and to which it contributed about one-third of the funding, was meant to promote its own interest. In fact, the project was opposed for more than 15 years by the local population.

Though attempts were first made by the then public sector company, HZL, the effort to build the dam acquired momentum only after Sterlite took over HZL in 2002. Sterlite literally seized village lands for the project.

In should be noted that the dam is built on the rivers Joi and Wakal in a scheduled area, where lands cannot be acquired without the consent of the village administration and before making provisions for the resetting and rehabilitation of affected persons. In its zeal to build the dam for its own benefit, Sterlite went ahead without their consent.

In fact, more than 80 per cent of the affected people are tribals whose livelihoods were threatened by the construction of the dam, which also inundated their homes and lands. More than 13,500 persons in 23 villages were adversely affected by the Mansi-Wakel dam project, while it only served the interests of Sterlite.11 But then, Sterlite was least concerned of their plights or of the law of the land meant to protect them.

Concern for Value of Public Asset and Funds

Sterlite stresses, ‘Avoid wastage, extravagance and ensure effective and efficient use of the public money within their control. In cases of disputes or grievances, make efforts to resolve them quickly. No unlawful stoppage or disruption of work or damage to assets’.

In June 2005, Sterlite was accused of grabbing around 1,000 acres of government land. It was also accused of illegally cutting down 20,000 trees to facilitate the threefold expansion of its refining and smelting complex at Korba.12

BALCO Acquisition

‘Sterlite’s 2001 takeover of Stateowned BALCO (Bharat Aluminium Company) sparked one of the major Indian political controversies of that year.’13 Through his manipulative efforts with politicians, Anil Agarwal engineered the controversial BALCO acquisition for a pittance. It was wellknown that the company was grossly undervalued. Several assets of the public sector enterprise were not taken into account during the final valuation which enabled Sterlite pay a measly INR 5.51 billion, instead of its real worth of INR 30.00 billion. ‘Sterlite’s further acquisition of a 65.9% controlling stake in Hindustan Zinc was less controversial at the time; although it was later challenged in a submission to the Supreme Court which questioned the legality of the Government’s sale.’14

The [BALCO] deal is ‘economically irrational, politically deplorable, legally unsustainable and environmentally unsound,’ it violates a fundamental rights verdict of the Supreme Court in the landmark Samatha case, which vests ownership of Adivasi land to tribal people.15 Fortunately for the country, it has become difficult for Sterlite to acquire the residual stake of 49 per cent, with the change of government at the centre. Both the Attorney General of India and the Core Group of Secretaries on Disinvestment (CGD) have opined that the government need not sell 49 per cent in BALCO to Sterlite. The Attorney General has suggested that the government could choose to retain 49 per cent stake, float a public offer, or opt for sale of shares in the market or even sell it to any other party.16

There were allegations that India’s rightwing BJPled Central Government at that time deliberately prevented BALCO from modernizing on its own terms and with its own funds. In any event, the company was grossly undervalued; according to some estimates, Sterlite secured assets worth up to 10 times what it paid for.

Employee Welfare

Another aspect of Sterlite’s unethical practices relates to its behaviour as an employer. Apart from the fact that the company mostly employed contract workers at its Tuticorin smelter plant, it adopted poor safety standards. There was an explosion in the factory on 30 August 1997 in which two workers died and two others were maimed. The unions claimed that this accident could have been averted had the management adopted corrective measures on time when they were complaining of an impending disaster. The deaths caused by the accident led to intense scrutiny by the media. The Chennai High Court ordered the factory to be closed in November 1998, as a result of a report by the National Environmental Engineering Research Institute (NEERI), Nagpur. The report also pointed out that the plant was set up against environmental norms inasmuch as it was located within 25 km of an ‘economically fragile area’ without any justification.17

CORPORATE GOVERNANCE INFRACTIONS

Insider Trading

In 1998, the capital market regulator, SEBI inducted Sterlite for insider trading, along with two other companies. This was, according to Praful Bidwai of Frontline was ‘the greatest indictment by any statutory body yet of Corporate malfeasance in the stock market’.18 As a result, Sterlite was banned from trading in Bombay Stock Exchange (BSE). The company had resorted to insider trading to push its scrip price in its failed effort to take over the Indian aluminum company.19

 

Table 12.1 Noncompliance of Laws and Violations of Shareholder Agreement by Sterlite

Name of the Act Violations by Sterlite
1 Factories Act (a) Denial of overtime payments to workers as stipulated in the Act
(b) Employing women employees at work after sunset that went against th Act
(c) Operating factories without gualified fire, safety and welfare officers.
2 Contract Labour Regulation and Abolition Act Noncomplianceofstipulation in the Act with regard to minimum wages, overtime and other benefits not being given to the contract workers.
3 Environmental Legislations Began setting up the Korba and Lanijigarh plants without waiting for proper clearance from the Union Ministry of Environment.
4 Forest Conservation Act Resorted to indiscriminate felling of trees without proper approval from the Forest Department.
5 Motor Vehicle Act Overloaded trucks with bauxite ore without being concerned about the safety of the men involved.
6 Registered Agreement With the Recognized Union (a) Termination of appointment on compassionate grounds
(b) Appointment of B.Sc, trainees on posts other than at the intake points
(c) Did not adhere to the agreement in merging dearness allowance with the pay structure of unionized employees.
7 Pay Commission (a) Retirement age reduced for a section of the employees, i.e., the executives and the officers
(b) The pay structure and other packages like leave travel concession, etc. of the executive and officers changed.
8 Apprenticeship Act (a) No apprentice inducted
(b) Apprentices trained at BALCO not considered for employment in the company.
9 Workmen Compensation Act Compensation not given as per provisions of the Act.
Clause No. 5.1: Restriction on Transfer of Shares 75% shares of the company were first given to M/s Sterlite Copper and then tc Twinstar Company. Finally, it has been made a part of Vedanta Resources—a Londonbased organization. All these transfers were against clause No. 5.1.
Clause No. 7,2 (e): Restriction on Restricting Contract workers have been retrenched in the very first year, against the stipulation in the clause.
Any Part of Labour
Clause No. 7.2 (f): Restructuring of Labour Force as Recommended by the Board (a) Labour engaged in the Profile & Tube Ship and Bidhan Bag unit have been placed in other units at Korba without any formal training, etc.
(b) BALCO employees were transferred without any deputation allowance, etc. to other units of Sterlite
(c) Almost the entire workforce of all the regional offices and Head Office and the Bidhan Bag unit have been transferred to Korba and kept with out work Humiliated, harassed, ignored and unwanted, these workers left the company on voluntary retirement on disadvantageous terms
(d) The company used a vindictive attitude towards BALCO’s employees who were kept without any work, marginalized, sidetracked and even made to leave the company on voluntary retirement, etc. Rank outsidei with no experience were brought in on better conditions of employmenl higher salary and better perks, etc,
Clause No. 7.2 (g): Reduction of Strength of the Company’s Employees (a) Employees were offered a voluntary retirement scheme (VRS) inferior tc the one in vogue; payment of ex gratia was distributed in five to eight instalments
(b) In the name of offering VRS, the company literally forced the employees to leave the company by opting for VR that was not in their interes
(c) To reduce employee strength, the company humiliated, harassed, ignored, insulted and discriminated BALCO employees to make it a hostile place to stay any further
(d) To reduce manpower it has even oPtained resignation virtually at gunpoint. Employees were made to resign by creating humiliating conditions

The London-based billionaire, Anil Agarwal’s analysis of India is extremely realistic. He was reported to have remarked: ‘I understand the Indian psychology. That’s my biggest advantage. In India, you must have patience. Everything will come through’.20 This has been demonstrated time and again in the country where large industrial houses violate laws with impunity while constructing and operating mines and factories. ‘The formula for violating laws is simple: If you want to construct an illegal factory, just do it quick, make it big, and ensure that the investment is substantial.’21

Agarwal has fallen foul of the law both in Britain and in India where he was accused of collaborating with the infamous stock market scamster, Harshad Mehta. Known as the ‘Big Bull’, Mehta was notorious for insider trading and manipulating stock prices. ‘SEBI’s investigation reveals that a set of brokers was happy to deal with these unknown companies with no financial standing or professional expertise and without taking any security or deposit, only because of their faith in the Harshad Mehta magic.’ It was found by SEBI that the three companies—BPL, Videocon and Sterlite—were privy to Harshad Mehta’s mechanization in the stock market. Between April and 4 June 1998, their share prices moved up to 137 per cent, 232 per cent and 41 per cent, respectively, while the BSE Sensex registered a fall of 11 per cent as a result of several causes, both national and international. SEBI’s investigations also revealed that these three companies provided the initial funds to the ‘Big Bull’ to build up his purchases of their scrips. Mehta purchased these scrips heavily at the end of each ‘settlement period’ so that it could provide price benchmarks for the subsequent settlement.22

Price Rigging

Sterlite’s shares manipulation, which began prior to its bid for Indal, was later dictated by the frequent upward revisions of its bid, when Indal decided to make a fight for it and announced a counteroffer. Sterlite’s first offer for Indal was at INR 90 a share in February 1998. The amount was later raised to INR 221, to be settled partly in cash and partly in optionally convertible redeemable preference shares. The company also made an unusual promise of a minimum conversion price of INR 350 to Indal shareholders. It was prompted to manipulate its scrip price to the level of April 1998 with a view to making its offer credible and attractive to them.23 The price collapse to INR 175 after the bid failed only proves the price rigging, according to SEBI. That same year, SEBI prohibited Sterlite from accessing the capital market for a period of two years for insider trading and other offences. However, a subsequent exoneration of the company by the Securities Appellate Tribunal (SAT) left many questions unanswered.

When confronted with the mandatory disclosure and scrutiny by SEBI, Sterlite attempted to delist its shares from the BSE and tried to shift its Indian stock holdings to the United Kingdom.24

If Vedanta made tall promises to its stockholders, especially with reference to its Lanjigarh and Tutricorin operations, it was because of the management’s belief that its violations would be condoned by Indian authorities. None of them, not even the company’s investors and financiers believed it otherwise. When Vedanta sought its listing in London Stock Exchange (LSE), a team of 120 persons comprising lawyers and bankers descended on India to scrutinize its assets. But none seemed to find out, anticipate or take seriously the legal issues and problems associated with the company’s legal infractions. Even At the company’s AGM in London in August 2005, a few shareholders concerned about the economic viability of the company’s Indian operations raised a few questions. But these questions were only met with a stoic and inscrutable smile from the CEO, Anil Agarwal.25

Violation of Shareholder Agreement26

There have been several complaints that Sterlite has not been complying with various provisions of laws and that they have violated them with impunity (see Table 12.1).

The Latest Position27

As on April 2011, the present capacity of the copper refinery is 2.05 lakh tonnes per annum. The total investment on the expansion is placed at INR 2,500 crore. The company claims that it has so far invested INR 500 crore in addressing environmental issues. The expansion scheme is expected to be completed by 2013, subject to getting clearances. However, the scheme is now put on hold due to cases on environmental issues pending before the Supreme Court. The company has put up a water desalination plant at a cost of INR 90 crore.

The Tuticorin-based Sterlite plant, with a turnover of INR 13,700 crore, annually provides direct employment for 3,000 people, while 20,000 people are employed indirectly. It contributes around 3.5 percent of the total GDP of Tamil Nadu. It is the secondlargest user of the Tuticorin port exporting copper worth about INR 6,000 crores in 2009–10. The plant supports about 50 ancillary industries in and around Tuticorin.28

CONCLUSION

The case of Vedanta’s subsidiary in India, SiIL illustrates how a business unit with money power and economic clout can achieve whatever it wants to—enrich its coffers, without worrying about the niceties of law. The company has been flouting the laws of the land with impunity. It has grabbed the lands of tribals, caused irreparable harm to the ecology and environment, treated workers as sheer vendible commodities, taken over public property for a pittance with the connivance of powers, thrown all corporate governance norms to the winds, indulged in price rigging and insider trading. Yet our system is such that it allows such proliferation of scams and scandals by the rich and influential. Companies such as Sterlite do tout their CSR initiatives to the world with great fanfare, but it is obvious that it is done more to camouflage the sins of commission and omission that goes beneath them, rather than out of a genuine concern for the poor and the marginalized sections of society.

KEY WORDS
  • Company profile
  • Copper smelter and refinery
  • Mumbai Stock Exchange
  • Total quality management
  • British Safety Council
  • Executive chairman
  • Relation agreement
  • Responsiveness to the public
  • Environmental consciousness
  • Report card
  • Adherence to ethical practices
  • Social conscience
  • Environmental impact assessment
  • Smeltipot
  • Deforestation
  • Ethical infractions
  • Safety consciousness
  • Social consciousness
  • Health and hygiene
  • Community welfare
  • Public assets and funds
  • Insider trading
  • Price rigging
  • Share purchase agreement
DISCUSSION QUESTIONS
  1. Discuss the wide chasm that exists between Sterlite’s claim as an ethical organization and its unethical practices.
  2. There seems to be wide variations between the profession of business ethics and actual practice at Sterlite. Do you agree? In your perception, why does this happen?
  3. Explain the controversies surrounding the Sterlite Tuticorin plant.
  4. Sterlite Industries Ltd. has been a profitmaking corporation, notwithstanding the fact that the company seems to have gained certain degree of notoriety for various ethical infractions and noncompliance of legal norms. How do you account for the success of the company?
  5. How do you account for the tremendous success Sterlite has achieved in spite of so many violations of law and acceptable governance practices?
  6. Discuss the corporate governance infractions of Sterlite.
FURTHER READINGS

BALCO Officers Association, “Sterlite’s Malpractices: Violating Share Purchase Agreement With Impunity,” People’s Democracy (Vol. XXVII, No. 50), 14 December 2003, available at http://pd.cpim.org/2003/1214/12142003_balco.htm

Nagaraj, S., “Balco Selloff: Secretary Panel Backs AG Stand,” Economic Times, 21 August 2006, available at http://economictimes.indiatimes.com/articleshow/1910502.cms