07 February 2005	Monday	27 Zilhaj 1425

"The Securities and Exchange Commission of Pakistan (SECP) has decided to effectively check unethical business practices, mismanagement and corporate frauds with a view to promoting good corporate governance in the country" , says a news report published in Dawn(18-1-05).

Implicit in the noble intent of SECP are two daunting challenges. One is to communicate that "good ethics is good business." Second is the concept of good corporate governance which will not only allow for transparency and accountability but will also result in competitive and sustainable business operations in a dynamic external environment.

So, is ethics an add-on for business operations or is ethics all about those principles of good business administration that must be followed to do business successfully? Implicit in this is the question regarding the meaning of "success"? That is, is success personal success in terms of material or hierarchical gain or is success the success of the organization from which should emanate the success of individuals? Unfortunately, success in our country is viewed as material or hierarchical success of individuals which in many cases is achieved at the expense of the interest of the organizations.

This is the reason why we have a whole lot of successful individuals but not too many organizations whose success we can boast of. For as long as the meaning of individual and organizational success remain divergent, good principles of business administration might come in the way of attaining personal, material and hierarchical "success" sure and fast.

And, for as long as these principles will be viewed as "coming in the way" instead of being "the way" of attaining success, ethical issues will keep emerging and ethics will be viewed as an add-on instead of a surefire route to mutual success of the organization and the individuals. Unless this win-win relationship is struck, interests of individuals and organizations may not converge.

For as long as this dichotomy of interests prevails, consumers may not get value for their money, employees may not be treated fairly, shareholders may not get their due return, suppliers' contracts may not be honoured, obligations to financiers may not be met, competitors' interests may be trampled upon, government may not have confidence in business effort, the community as a whole may remain at a disadvantage, environment may be damaged, and society as a whole may remain ignored with its interests superceded by individual interests first and foremost.

Benefits from the society will then fail to "trickle-up" to businesses and it will then be that much more difficult to get businesses going in a dynamic environment. People will then have another reason to deviate for quick individual success and the issue of "unethical practices" will recede further on to the back burner.

The crux of the above explanation is that it is the state-of-the-art in management that business schools must impart with force and vigour and businesses must assimilate. The state-of-the-art views businesses as "open systems." That is, businesses take inputs from the society and give back outputs to it.

These inputs are taken from each one of the stakeholders (not shareholders ) mentioned above. And, each one of the input providers receives outputs from the business entity. The quality of output will be as good as the quality of the input and the quality of the input will be as good as the quality of the output the input providers receive from the business entity.

For, consumers will not beat the path to the door if they do not get value for money. A dissatisfied workforce will not create value for money nor will unhappy suppliers fulfill obligations nor can creditors continue to provide financial resources if previous commitments are not honoured nor can the government provide the facilities it should if it does not receive its due share in the form of taxes nor can an impoverished community or society throw up consumer demand in a big way if it remains bypassed in a process that reinforces dualistic tendencies instead of minimizing the same.

In this kind of a situation, can a business prosper if it tries to maximize the interests of only one preferred stakeholder? Certainly there is contradiction in this argument. For, to maximize the interest of only one stakeholder is to do so at the expense of the interests of the other input providers/stakeholders. And, if interests of others are compromised upon, will they then put in their best and if they do not can the interest of one preferred stakeholder be maximized? Certainly not.

The traditional argument that businesses must focus on the maximization of the interest of only one stakeholder is, therefore, self-contradictory and self-defeating for businesses.

Sole emphasis on "maximization of profits" for the shareholders must, therefore, be contextualized. While profits are important and required as financial resources, this is not what a business exists for just like humans do not live to eat.

According to Peter Drucker, a management guru whose fans abound, "The average businessman when asked what a business is, is likely to answer: 'An organization to make a profit.' And the average economist is likely to give the same answer. But this answer is not only false; it is irrelevant."

For as long as this one interest of one stakeholder is focused upon in thought and action, business is not expected to bloom as business, defined by Herbert Simon, comprises all stakeholders internal and external and not just the shareholders or owner managers. So, a flourishing business should have all its stakeholders flourishing with it without which it will not receive the inputs needed for the business to grow sustainably that it surely cannot only at the behest of just one stakeholder as believed by the traditionalists.

So, issues of ethics can be dealt with only through the incorporation of the state-of-the-art in management of business organizations. And, the SECP appears headed in this direction as is evident from the code of corporate governance that the SECP is having the companies adopt. We, therefore, see vision and mission statements in many annual reports in addition to statement of compliance with the prescribed code of corporate governance. This takes us to the second part of the above cited news item ((Dawn, 18-1-05) on corporate governance.

While the current measures aimed at reforming corporate governance focus on transparency and accountability, there is a need to also incorporate strong concern for developing competitive edge for sustainable business operations that requires concerted effort from the organization as a whole. For this purpose, there will be a need to graduate beyond the issues around the composition and criteria for board's membership, their importance notwithstanding.

Somehow, it will need to be ensured that the boards of directors (BOD) do not fall into the trap of the majority --into groupthink that is euphemistically called "team play." For, while team play is all about incorporation of diversity, it is viewed as conforming to the view of the dominant group in our country.

This stifles creativity and resolution of divergent views which, in turn, gives rise to resistance however passive it may be. Goals of the organization, therefore, become that much more difficult to achieve and organizational goals, inter alia, in such stifling and frustrating situations stand replaced and superceded by individual material and hierarchical goals. Since the organization fails to coalesce around "shared organizational goals," it fails to develop the binding force required to drive all organizational activity.

In the absence of this "jazb-e-baham," we not only have tenuous governance but we also have overarching individual goals that people try to achieve in an organizational setting with organizational goals pretty much displaced that the dominant group tries to get to but has difficulty figuring out why they are having limited success at it. This also squares with the issue of ethics that the SECP is now going to be grappling with.

So, while weak ethics may flow from an unbalanced emphasis on the interests of various stakeholders, weak ethics may also flow from a mode of governance that tends to exclude diversity. So long as diversity is viewed as "disruptive," organizations will not coalesce around shared values.

And, so long as values are not shared, there will be people meeting in an organizational setting but they may not necessarily be organized enough to pursue organizational goals that will also not be shared. So, there will be an organized form without a true organization. For, true organization is one that includes all. Only then can shared organizational goals be pursued as a unified whole.

And, only then is corporate governance of the organization considered to be effective. Corporate governance reform in the country should, therefore, move beyond the structural concerns to be able to also influence the board politics and dynamics. For this purpose, there is a need for a further corporate governance reform effort that should be specific to industrial sectors and even units if need be.

While this is indeed a tall order, a SECP that could drive the reform process thus far despite heavy odds can take it even further to effect the change needed to favourably influence micro level organizational performance as this collectively influences the macroeconomic scene we all want to see transformed sooner rather than later.