There is no dearth of laws to promote ethical practices in business, but that hasn’t prevented corporate scams and scandals, in India and overseas. An analysis of the business responsibility reports over the last three years of the top 100 companies mandated by the Securities and Exchange Board of India (Sebi) shows that the corporate sector in India is lagging behind and has a long way to go before it can claim to have a culture rooted in ethical practices.
Is the external environment conducive to ethics? Corruption is endemic in India and has affected all spheres of life. Companies, too, can’t claim to have bypassed it. Some of the most successful companies in India have been embroiled in controversies and still continue to flourish. The sudden removal of Cyrus Mistry from the chairmanship of the Tata group last year was completely unexpected and led to a debate on governance issues, especially on the role of the board and independent directors.
Laws governing the corporate sector have been made to regulate companies and protect the rights of investors. Unfortunately, these laws are applicable only to the formal sector in India, which constitutes a mere 10% of the entire Indian economy. This makes the informal sector even more vulnerable to violations of law. Several committees such as the Rahul Bajaj committee, the N.R. Narayana Murthy committee and Sebi committee have been formed in the past to ensure good corporate governance. However, instances of corporate misconduct have repeatedly come to light over the years, pointing to the lack of adherence to the law.
Violations are easy when a weak regulatory system fails to monitor the wrongdoings of companies. Today we find ourselves in a pro-corporate environment, where tinkering with the laws has become the norm. Whistle-blowers play a crucial role in disclosing any abuse of power in a company but all efforts are wasted if the regulatory system fails to perform its duty.
If a company does not value ethics, it ultimately impinges on its reputation and brand value. The general public’s respect for such brands reduces over time. Some of the biggest multinationals have faced criticism from consumers globally because of unfair trade policies, treatment of labour, unregulated supply chains and for causing environmental damage.
Looking at the current corporate climate, it is not easy to find companies that have a clean track record. Having said that, a handful of Indian companies is proving that it’s possible to have a clear ethics policy, which is followed across the board within the organization. Known to follow ethics in its processes, Eicher Ltd has a well-defined legal, social and personal conscience framework in place. Similarly, IT company Mindtree Ltd and engineering giants Thermax Ltd and Forbes Marshall Pvt. Ltd have earned respect for the value systems they practice.
In his book, Firms of Endearment, co-author Jagdish N. Sheth argues that companies that pursue passion and purpose will also be profitable. He lays emphasis on the need for companies to engage their new stakeholders—the government, media, partners and communities—apart from traditional stakeholders such as investors, employees and customers. Laying out new rules for the radical social transformation of capitalism, Sheth talks about why nurturing nature, creating a culture of responsibility, leadership and innovation creates “firms of endearment”.
Businesses need to recognize their role in an interdependent ecosystem and understand that they need social sanction to operate in a globalized world. Listening to and communicating with communities and workers creates a mindset of shared growth. Vedanta Resources Plc and Posco’s struggles in Odisha show that unless companies build trust with local communities, and respect local laws, they cannot go ahead with their business.
The purpose of corporate social responsibility is defeated if companies continue to flout labour laws, violate human rights and abuse the environment. Needless to say, an ethical company must abide by the law of the land and act as a legitimate corporate citizen. If a company is part of the problem, it cannot become the solution unless it can desist from doing harm in the first place through its products and services.
A new breed of transformational leaders needs to drive change within their companies. A culture of responsibility that is mainstreamed ensures that firms do not short-change people and the planet to make profits. Work culture and values play a crucial role in defining an ethical company. By setting up responsive grievance redressal systems, creating an inclusive workplace and communicating policies transparently are some of the ways in which corporate entities can gain trust in society, reduce litigation, gain acceptability and work towards long-term sustainability.
Amita Joseph has a background in management and a degree in law from Delhi University. She has worked in the corporate, legal and development sectors for over three decades. She is a director of Business and Community Foundation, an organization working on promoting responsible business practices.