Shashi Tharoor on Business, Ethics, and The Meaning of Profit (ability) Today

Shashi Tharoor is an Indian Renaissance man of today, for his achievements as a brilliant student (a Tufts Ph.D. at the age of 23!), diplomat (UN Under Secretary General to Ban Ki-Moon), politician (currently, Member of Parliament and Minister of State for HRD), thought leader, writer, and columnist.

 

His words on sustainability and ethics in business will hopefully influence global business leaders and statesmen to turn the tide away from self-interest and profit-making alone, and towards an inclusive, committed, and ethically aware global management vision.

 

Here is his (edited) address at the Indian Institute of Management's World Conference. It is a seminal speech because it points out the need for a value-driven knowledge society led by not only value-driven captains of industry but also ethical civil servants and politicians. After all, the world we inhabit has been driven by political economy, so why not?

 

I am sure it will be a point of reference in the future, in management and history classrooms and corporate training seminars...

“EDUCATION & LOOKING BEYOND PROFIT”

Keynote Address by Dr. Shashi Tharoor

Hon’ble Minister of State for HRD

IIM World Conference, Goa, 31^ST May 2013

Let me begin by saying how delighted I am to be amongst you all today for the inaugural edition of the IIM World Conference with the theme “Emerging Issues in Management”...The theme I have chosen for my remarks today...is “Looking Beyond Profit.”

 

I chose it because I think it represents a vital area where management theory meets the challenges of the real world and is forced to acknowledge both its internal limitations and external constraints.

Given the experience of the developed world in the last half-decade or so, especially the recent backlash against the Anglo-American model of laissez faire capitalism, in the wake of the global recession, and given the difficult choices we have had to make during our own six decades of experience as an independent nation, and we will need to make for the foreseeable future, I am sure you will all agree that it is a theme that is relevant for not just teachers and students of management such as yourselves but  for all of us who care for India’s present and future.

We are dealing with two topics of long-standing controversy here: the role of profit in economic activity, and the role of government in economic activity. The former has seen much debate – and evolution – since Adam Smith’s work on The Wealth of Nations was decried as promoting the “worship of Mammon”. The latter, too, has seen its share of theorists and trials, be it the dominant Keynesian formulations of the 20^th century, or India’s own experiments with Nehruvian / Fabian socialism and the planned economy.
 

What we are seeing evolve today, however, is a sophisticated and interconnected system which I like to think of as an emerging knowledge society...dedicated to the greater goals of development and integration in an atmosphere of enlightenment; the rules of the market economy certainly have their role to play, and indeed are of great benefit when applied in their proper place, but that is no invitation to apply the economics of the market-place indiscriminately to every field of human endeavour.

After all, another long-running debate has been about whether rules of economic rationality also approximate rules of justice, fairness and morality. The jury is still out on this one – there is, for instance, Justice Richard Posner’s persuasive writing in the USA regarding the economic efficiency of the Common Law – but suffice it to say that human rationality can factor in more variables than the traditional economic model would permit.
 

In this emerging (also, emergent) system, our concept of profit too must be re-examined, to align more closely to what is profitable in a knowledge society.   Traditionally, profit (and its related concept, profitability) reflect simply an assessment of the extent of returns one can expect from any economic enterprise – that is, how much one can expect to make over and above the amounts needed to cover the costs involved in that enterprise. That is to say, barring any form of impropriety or diversion, shareholders can expect to see their share of profits generated by enterprises in which they have invested. This is, of course, a simplified view of profit and business.
 

The moment we delve into the definition of profit, some reservations can arise. One is fairly evident and well-explored: a preoccupation with profit in the present too often translates into neglecting the sustainability of profit (or the enterprise, community or society itself) into the future.

The practically universal adoption of Corporate Social Responsibility (CSR) norms and practices can be seen as one form of awareness of this shortcoming: businesses across the world now accept that their earnings, their profits, come from society, and as such they must take steps to ensure the health and vibrancy of society if they are to thrive. Further, as we are coming to realise, globalisation and a shrinking planet – on which, more to follow – do not permit the commercial equivalent of slash and burn agriculture.

Rather, a society or community must be cultivated with care and attention if it is to serve as a lasting asset. As the global financial crisis most recently established, anyone who erodes parts of the foundational linkages between economics and people anywhere in the world soon finds that he has undercut himself in the bargain. Regaining a steady footing from that position is proving a challenge for two entire continents even today, and the measures those nations take in this effort continue to have implications for every one of us, even here in India.
 

This idea – that profits ultimately stem from society – can be thought of in terms of Public Trust doctrine. Gandhiji had spoken of trusteeship, this is a related idea. Simply put, we are given only temporary stewardship over the resources we use, which makes it our duty to pass on to our successors resources undiminished in quality or value, though they may be transmuted in form. (Environmentalists have long made this argument: an African proverb which my former boss, Kofi Annan, often quoted says the Earth is not ours, it is a treasure we are meant to safeguard for the next generation.)

In this new conception, 100% efficiency is the minimum we demand, because trading off our resources for gains in the short term would be a loss. Applying gains to improving our stock of resources would be true profit...I put it to you, then, that an understanding of profit suitable to the 21^st century is this: profit is a measure of capacity building, and profitability is the ability to improve on existing assets.
 

Evidently, profitability refers to net improvement...If using my resources to generate a profit also causes the degradation of someone else’s resources, then that is a loss, and a loss that must be taken into account before declaring a profit!
 

We have environmentalists to thank for drawing our attention to this concern. In the decades since Rachel Carson first wrote about the environmental costs of pollution, most nations have brought in legislation to ensure that firms are forced to take account of these implicit costs – paying taxes equivalent to the damage they cannot avoid, and liable to massive fines if they cause damage by negligence.

Whether it is superfund legislation in the USA, methane taxes on livestock in New Zealand, international treaties to protect fish stocks under the Law of the Sea, or our own Supreme Court’s 2009 judgment in the Vedanta / Niyamgiri alumina mining case, we already have an understanding that costs are no less real merely because they are imposed on others. How else can one explain the outrage against clothing or sporting goods multinationals when their products were found to be the result of sweatshop labour, or the willingness of customers to pay a premium – a loss to them! – for Fair Trade goods?
 

The challenges and opportunities that corporations and industries pose for business leaders, nations and governments pose for politicians. Owing to my own background, much of what I have to share with you about leadership today will be applicable to both business and politics in equal measure.  

By now, most of you would have heard endless times that a new age is upon us. This is a banal and trivial truism if ever there was one, for new ages are always dawning upon the generations that live in them. The old order is always changing and yielding to the new, sometimes smoothly and sometimes in extremely disruptive and disorienting ways. What makes this new age of our times so different from the new ages of the past?  I believe it is the speed with which it has come into being.

In the last 25 years or so, beginning with the fall of Communism in 1989, a paradigm shift has taken place in politics and business. The salient features of this paradigm shift are – the spread of globalization, the growth and success of democracy and universal ethical standards, and the occurrence of sudden systemic shocks both in politics and business. Related to these features are the no less significant changes caused by the spread of technology and environmental degradation.
 

The first challenge for leaders in our new age is of course globalization. Professor Theodore Levitt, a marketing professor at the Harvard Business School, first employed it in a 1983 article in the Harvard Business Review. Globalization became a buzzword following the end of the Cold War, but the phenomenon has long been a factor in the foreign relations of the United States.

Globalization is a complex, controversial, and synergistic process in which improvements in technology (especially in communications and transportation) combine with the deregulation of markets and open borders to bring about vastly expanded flows of people, money, goods, services, and information. This process integrates people, businesses, nongovernmental organizations, and nations into larger networks. Globalization promotes convergence, harmonization, efficiency, growth, and, perhaps, democratization and homogenization.
 

But globalization has a dark side too. It promotes convergence but also disruption: the era of increasing globalisation is also an age of terrorism, religious intolerance and the so-called clash of civilisations. It produces economic and social dislocations and arouses public concerns over job security; the distribution of economic gains; and the impact of volatility on families, communities, and nations. 

In the words of the distinguished Nobel laureate Amartya Sen, “We cannot reverse the economic predicament of the poor across the world by withholding from them the great advantages of contemporary technology, the well-established efficiency of international trade and exchange, and the social as well as economic merits of living in an open society. Rather, the main issue is how to make good use of the remarkable benefits of economic intercourse and technological progress in a way that pays adequate attention to the interests of the deprived and the underdog. The question is not just whether the poor, too, gain something from globalization, but whether they get a fair share and a fair opportunity.” The assets of the 200 richest people in the world are more than the combined income of 41% of the world’s people; this would be one indication that our ideas of profit and profitability have some disconnect from ground reality.
 

The second element of leadership in the new age is learning how to deal with black swans – especially the psychological bias that makes people individually and collectively blind to uncertainty and unaware of the massive role of rare events. Black swans have existed throughout history, yet their shape has transformed.  The Cretaceous-Palaeogene extinction event, almost 66 million years ago, wiped out the entire dinosaur population; while closer home, one of the greatest financial crisis of all times threatened to throw the Euro zone into darkness. Uncertainty affects decision making in many ways. For instance, if firms cannot predict future levels of effective demand or growth rates, how can they take a rational decision regarding investment? Similarly, how can banks lend to potential borrowers if they do not know whether they will be able to repay their loans, given the uncertain levels of effective demand in the future?   Malcolm Gladwell’s theory on uncertainty provides some valuable insights.
 

In his book 'Blink', Gladwell narrates the story of a statue dealer. A dealer brings a new statue to the Getty Museum, a Greek Kouros.  The Museum was ecstatic, but first wanted to check the statue’s authenticity. The lawyers went first and found no problem with the paperwork. Next the Museum checked the stone to see if it came from the right quarries and see if it had been out of the ground long enough. So far, so good. Getty’s then decided to buy it, pay a huge amount of money ($10M) for it and invite an expert to see it.

The expert takes one look at the statue and says it’s a fake, but can’t explain why. Another expert is called in; he too gives the same immediate response, but is unable to say why. The Museum takes the statue to Greece and unveils it to a huge audience of experts who then have the same response. When they get back, the lawyers call to say that there is now in fact a problem with the paperwork and the geologists calls to say that there is a problem with the age test. In the end, the data proves that it is indeed a fake, just like the experts thought it was. In the statue example the experts were doing a kind of complex pattern matching – taking a pattern they had in their head about real Kouros statues and matching it to the actual example in front of them. In military circles they talk about coup d’oeil – at a glance – the ability to see immediately what was needed.

Building such deep levels of intuition requires great amounts of experience. Research suggests that a person needs 10,000 hours of experience to build the kind of knack we described.
 

One of the effects of globalisation and the knowledge society will be to give any person easier access to others who possess such expertise, and to reduce the opportunities for arbitrage based on unequal access to information (though opportunities for discretionary arbitrage will remain nonetheless). Despite that advantage, though, not everyone can be an expert, and even an expert can be wrong. In dealing with uncertainty, there will always be those who make the wrong bet; I put it to you that there is nothing wrong with this, unless (as with white swans) they persist in making the wrong bets by being repeatedly and predictably wrong.
 

The third and last element relevant in this new age that I would like to talk about is one that is often characterized by grey – ethics in business. The key difficulty surrounding business ethics is that ethics, by definition, goes beyond the merely legal— but how far beyond? No institutionalized rules exist defining an upper limit. Public opinion is not a very good guide. It is subject to change. Ask Ramalingam Raju! Then as leaders how do we judge what is right and what is wrong?

A great philosopher who sought to establish ethical rules on the firmest possible foundation was Immanuel Kant. His deontological ethics principle puts forth a simple question – “What if everyone did that?” When one is in doubt about a particular course of action, consider the impact if everyone does the same thing. If it will lead to greater harm to society – to a loss to everyone involved – then it is just as wrong for even a single person to do it.
 

Ethics in business & government has to be the anti-clogging device that cleans the system every now and then, lest it burst from the pressures of greed and corruption. So in a world mired with shaky souls and broken promises, we must each find the will to stick to the right path as leaders of not only a knowledge-driven but also a value-driven society. The experience will be an eloquent argument for appreciating the role of societal context in determining profit, and of ensuring that we do our part to protect and maintain that context in its most conducive state.
 

I’d like to end by quoting a few lines by Rabindranath Tagore, “The highest education is that which does not merely give us information but makes our life in harmony with all existence.” This is a wonderfully Indian idea – a Tagorean idea of harmony. I thank you all and I have been able to strike some modest chords of my own.
 

Thank you, and Jai Hind!