The dichotomy between the economic systems of Capitalism and Socialism has wide connotations and applications - like yin and yang, heart and head, selfish vs selfless, extravagance against austerity, Oriental vs Occidental. Like most things in life, there is no clear dichotomy also, it is a continuum. An individual can be somewhere in between and at different points at different times.
As an economic system, capitalism has proved to be way more successful, measured in terms of the period that it has sustained, or its domination as a global economic system. In fact socialism has largely become obscure, such that it is associated with antiquity and stagnation while capitalism is considered modern, and progressive. The world is yet to find another more accepted form of social and economic system.
Do I fully comprehend these systems? Hell no! But I do subscribe to capitalism. Possibly because I have grown up in it. Capitalism stands for free competition, for selfish pursuit, and in combination of the two. Meaning that when a good number of people who are rational and who are chasing self-interests, compete freely, it is good for the society at large. Freedom translates into non intervention by the State, and absence of controls. Selfish pursuits translates into profit motive. And a good enough number of participants is essential for competition, as it prevents sloth and complacency. Forces of capitalism ensure that the efforts and resources flow to their most optimum state or usage. Expanded further, a capitalist system allows for more correct determination of price of a thing - a product of its perceived worth, its demand, and its supply - in an uncontrolled environment. Profit pursuit would allow for resources to move seamlessly to prevent any arbitrage to remain for long.
Yet, I feel capitalism is the antithesis of a social structure, or the structure necessary for survival. Pursuit of profit can be relentless, selfish, brutal and ugly, while the survival of any society is built on cooperation, co-habitation. Unfettered can mean untamed, wild, rushed, frenzied, dangerous, even remorseless. The self-centered and competitive instincts of capitalism in an environment of limited resources (or zero sum) mean success at the expense of others. That for one to win somebody has to lose, for somebody to be in advantage somebody else has to be disadvantaged necessarily.
Thus arises the need to temper the capitalistic system, else it may be too powerful for its own good, it can self-destruct. Thus the need for regulators, for systemic controls. Yet capitalistic entities keep getting out of hand, they keep sneaking out of all controls. This leads to fraud, or malpractice. But regulations alone have limited success in controlling capitalism. One, because too much regulation starts to look like socialism and that is intolerable. Two, the regulators, those entrusted with the task to make and implement regulations, too are a product of capitalist systems and thus not comfortably detached.
Increasingly capitalistic instincts are being reined in by the concepts of ethics and corporate governance. Ethics means application of morality to the animalistic tendencies of humans. This means chaining capitalism to the premise of good vs bad behaviour, to be able to control it. It also means bringing a degree of self-regulation. So now we have regulations around corporate governance, and courses in ethics. But it was always going to be difficult to define and contain. And the lines between right, legal, and self-interest keep getting messed up.
India’s track record in corporate governance is shoddy, and it is becoming increasingly apparent. For those willing to look beyond the over-voluble, self-congratulatory ‘India Shining’, and ‘next-superpower’ script, the last few years of reading of corporate India is a tale of blatant and not-so-blatant frauds, misgovernance, regulatory lethargy, and judicial blankness. Over the years, I have been perceptive to ethical standards in the Indian society. In my experience, we are not the most ethical, especially when no one is there to police. This manifests in small forms - readiness to jump a queue, skip a red light, littering, disrespect for public property, and an overall casual, even subversionary, attitude towards rules and laws. Part of this stems from a very individualistic view that we take. I read an article some time back on this topic, which reaffirmed my view:
This is not to say that India is all murky and the West is all shiny. But the number of instances in the past few years confirm to me my cynical view. The Indian banking system is now visibly in a mess, something which people-in-the-know have known for long. It emerged only when it became too difficult to manage. And behind this mess is a trail of companies which have got busted. While the subject is not straightforward and requires debate, analysis and deeper understanding, some factors are apparent. Part of the problem is extraneous related to the economic factors and industry-specific malaise. But a big part, and this is not even the elephant in the room any more, is fraud. Perpetrated by the businessmen who come in all hues - slick and suave, highly educated, or pan-chewing lalas. And around these there is a web of consultants, fixers, agents, valuers, auditors, CAs, and bankers.
Large projects or expansion plans are essential to the growth of economy as these are drivers of many tangible good things. But these are also the cesspool from which most frauds emerge, because they allow for large sums to be discussed and they allow for higher uncertainties, which is the best refuge of scoundrels. So it is common to overstate project cost, invest little of own money and a lot of bank’s money and then pronounce the project stuck or even unviable. Meanwhile because the project cost is overstated, own money is comfortably withdrawn.
The next common form of deceit is funding for working capital - inventory and receivables. In inventory, it is usually items which are difficult-to-measure accurately like rice bags (lakhs of them). And debtors are usually cross border ones - in geographies with easy-to-manage laws and paperwork. Another common form of malfeasance is to undertake public issue of company’s shares to raise money from investors (thousands/lakhs of them) by showing a blatantly false company position. Behind all these duplicities is a complex web of group companies, trusts, partnerships, offshore entities, to make it difficult to unearth the reality (whatever that is), give safe passage to the promoters and park money for them, far away from any redemption or claim.
Last five years of corporate news in India are littered with thousands of examples of the above types. And miles of news reams have been dedicated to commentary. Companies of all sizes and relevance have come under the microscope. And interestingly many have vanished without a trace. So many listed companies have effectively ceased to exist, evaporating thousands of crores of market capitalisation. The biggest sufferers in this are - investors, for many of whom the money invested was a big part of their savings, and lenders (banks not bankers, they usually have a good time). And retail equity investors may not get any closure, because the truth of what went wrong never emerges, no learning. What the just get is reiteration of caveat emptor. But that is supposed to mean risks beyond reasonable control of anyone, not outright crime perpetrated by the promoters and assisted by all and sundry.
The perplexity of all of it is trumped only by its comedy. I find it difficult to fathom how a company just ceases to exist - employees leave I understand, but what happens to the promoter(s), the offices, the legal entity. It is like one day, the shop just shuts and the promoters disappear - that too in today’s times of surveillance, information, and technology. While I would like to believe that legal redressals are being undertaken by the powers that be, I am not holding any hope. And most people in India have grown up on such regular diet of power abuse that they write it off as just another bad luck, shake their heads and walk away. This is what most appreciate as the ability to laugh at adversities, the Indian flexibility.
The track record of Indian judiciary punishing, for good, the rich and powerful is abysmal, something which is amply demonstrated in corporate India. Most promoters know the security blankets that they enjoy - they know that while they will lose some zeros of their net-worth, they will be able to stash away enough for many generations to live lavishly. Leave aside any thought of a firm punishment. India can serve its patented cocktail of greed, power, and jugaad.
I wonder at the psychology. Discussing with a businessman uncle of mine, we identified a few scenarios. Assuming a promoter starts with good, honourable intention of making some money, bending only as much rules as most businessman in India have to but with no venal plans. Let us assume the business faces deep distress, not of promoter’s doing. Now the promoter is faced with a dilemma - his morality is getting tested. One of three paths emerge here:
- In the most righteous one, the businessman gives highest priority to maintaining a clean name. He will sell the family jewels to ensure that the lenders are paid off. Technically, as per terms of finance, the promoter is not obligated to do this. My uncle says that such businessmen used to exist back in time, but not anymore.
- In the second path, the promoter would try and make an honourable settlement with his creditors, asking lenders to suffer a haircut, possibly keeping some money on the side for himself. While this is most reasonable approach because it is a balance between promoter’s selfish interests and lenders’ recovery. In today’s times, even such promoters are a rarity.
- The third path is most commonly taken. Here the promoter stashes away whatever he can. He knows when things go kaput much before the outside world does, and he uses this knowledge to bleed the enterprise dry. He then offers whatever is left to the creditors raising his hands in solemn helplessness.
There are no absolutes, nobody can be easily compartmentalised to a particular category. Mostly, a promoter would go through a transition. He may start with best intentions but gradually descend - or may just snap - to poorer choices, goaded by greed, and a malleable institutional framework.
Of course, in all these cases, governance concerns arise if in the first place the company got into trouble because of promoter misconduct - not poor decision making, but cheating, or embezzlement. And there is the extreme case of promoters who start an enterprise with the sole intent of defrauding, or at least a major stashaway. They are counselled by experts like CAs, or consultants on loopholes in laws, or procedures which can be exploited with limited risks. They can be only commended for their audacity. The best part in India is that the last two categories rarely face any natural justice. It is not unusual to find such promoters resurface a few years after their first adventure, without having paid off for it, this time with a new enterprise. The fact that India allows this time and again and in today’s times when there is scope for higher transparency, is the best testimony to our flexibility.
All instances of promoter misconduct may not get caught, more so in India. This acts as a positive reinforcement. More businessmen are emboldened when they see their peers amassing great wealth by duping the system. If anything, their wealth makes them more immune to the law, strengthening them further. Time is another panacea. Over time, past evils are forgotten, cleansed, or buried under mint-fresh wisdom and righteousness. Wealth often makes the bedrock of the moral high-ground.
On the question of finance, I once had an interesting debate with a friend. In case a company faces a situation where it is not able to repay its creditors, is the promoter required to support by bringing in his own funds? Should the creditors demand that promoters infuse capital from his other successful businesses (if any), or even the cash stowed in his safe box at home (assuming that is legitimately accumulated)? Fundamentally, the promoter is not bound to. Creditors to the company have taken a known risk by lending to the business. If the business has gone south, too bad. While equity owner should be paid last and carries the highest risk, that is applicable only to the extent of his funds already invested in the company. He cannot be required to bring more funds to pay off the creditors, unless there is some contractual obligation to that effect.
When a promoter has generated sizeable net worth, or leads a flashy lifestyle, it comes under unreasonable questioning when his company defaults. All his actions get challenged in hindsight and he is unjustly maligned for. say. owning expensive cars, for taking luxurious holidays etc. It is expected that since he has so much personal wealth, he should support his defaulting company. While financially speaking, he does not have to; yet there is an ethical conundrum here. I am not saying that he should be pestered for his lifestyle choices - of past or present. That is ridiculous and an overreaction. Yet, it leaves a bad taste to see a promoter maintaining a luxurious lifestyle when employees of his company are unpaid for months, living in abjectness. Of course, the central assumption here is that the promoter has not done anything wrong and the business failed for other reasons - bad decisions may be but not bad intentions.
One can argue why to criticise India so much, no part of the world is devoid of similar examples. Agree, just that India considers itself to be the custodian of morality and with a culture steeped in scruples. More relevantly, it considers itself a fast-becoming developed country, whereas its corporate governance record is nowhere near one. The developed countries too have their share of misgovernance, but the key difference is that they have redressals which are swift and severe. And nobody is considered too big when it comes to that. Amongst numerous examples is the case of Bernard Madoff. He had been a non-executive chairman of the Nasdaq, and owner of a major financial firm - as big as they get. Yet, when a securities fraud of more than $50 billion came to light in December 2008, by June 2009 he was sentenced to 150 years imprisonment. A perfect example of being swift, severe and impartial to reputation.
Of course there would be many frauds which have not come to light, but for those which do, a bright bonfire is lit for all to take notice. Such instances set examples, they are the best form of deterrents. In India, we have very few instances of strong judgements against high-profile miscreants. This gives confidence to such people that they can largely get away with anything - if caught, then they would have to spend on lawyers, agents, fixers; lose some reputation; may have to flee the country, but nothing beyond. In India, deterrents come by way of more regulations. And most regulations are incremental, layer upon layer, such that we lose sight of logic, simplicity, and natural justice.
The Indian Express article that I listed above raises some interesting questions. Is corruption universal? Are people fundamentally immoral, and self-seeking. Thus ethics are just a function of the strength of deterrent systems - weaker systems, or lack of policing will see collapse of governance everywhere. In India, most people give this argument, because it allows for blaming the government and systems. But I believe that morality is an absolute, there is an innateness to it irrespective of the external factors - it has to be or else it loses meaning. As the article correctly says: “No amount of compliance and governance can substitute for sound moral fibre.” Does that mean that the developed world has higher morality? I don’t know.
Has there been a deterioration in integrity in India? The article says “That India’s politicians and government officials are venal is hardly breaking news... But the dark secret at the heart of Indian society is that the decline of public morality is now mirrored by a shameful fall in ethics in the private sector. The cancer of corruption has spread well beyond the corridors of power to our educated and affluent elites — professionals, salaried employees and businessmen” and also “...even as the economy has been liberalised to a great extent since 1991, corruption has only grown worse and today infects not just government but Indian businesses and corporate life”. Partly, there is a problem with the argument - is one set of citizens are more unethical than the others - that government officials were always corrupt but private sector, businessmen and professionals have only become so now. The fact is that the private sector was non-existent earlier - businessmen were there but not powerful enough. It is more relevant to compare the level of ethics in those with power. One pertinent consideration is whether ethics have gone down amongst the educated? Are educated supposed to have better moral compass - I would like to say yes but I am not sure. Greed/ethics/integrity may not have anything to do with education. Instead the quality of education was different - earlier because of the lingering British effect, education was more rounded, with greater world view, more holistic, which, if anything, could give better moral fiber. In that aspect, one can argue, partially that the ethics have deteriorated over the years.
It can be nauseating if you happen to be in an industry surrounded by examples of misgovernance. Especially is you also happen to have some scruples. Seeing absolute immorality or moral compromises can suffocate. In my opinion it leads to either of two situations - either one becomes wiser to this and learns to play systems, discounting morality and all that gyaan; or one becomes extremely cynical, cynicism which unhealthily sneaks into all spheres of life. Either ways one cannot come out good from this.
