Corporate Debacles

Veer Sanghvi, a suave and swanky newspaper editor, whose weekly column “Counterpoint” in The Hindustan Times was one of the most read. Barkha Dutt, a poster child of the new breed of Indian journalism, whose television reporting during the Kargil War earned her many plaudits. As the Indian economy moved into a higher growth path post-1991 economic reforms, so did the clout of these journalists.

With easy access to both political leaders and corporate honchos, their news reporting made headlines and often changed the political and business landscapes.

The reputation of Sanghvi and Dutt, however, came under heavy scrutiny last month due to their active involvement with Nira Radia, a public relations (PR) face of multinational companies such as Tata and Reliance. Radia was actively lobbying, with the help of these two journalists, to make A. Raja telecom minister in the United Progressive Alliance (UPA) government. Radia wanted to ensure that with Raja at the helm of the Telecom Ministry, her clients would get favours during the licensing of the second generation (2G) mobile spectrum in India.

And she was successful in her mission. A. Raja, after becoming telecom minister, gave out 2G licenses without adopting proper auction procedures to maximize Indian government revenue. Radia’s client Tata Telecom was one of the key beneficiaries of that decision. As a result, according to Indian media reports, the Indian public may have lost as much as US$ 40 billion during the issue of 2G licenses.

Radia-gate has tarnished the image of not only Sanghvi and Dutt, but to some extent also that of Ratan Tata. Once a venerated figure not only in the Indian corporate world but all over the globe, Radia-gate has put a huge dent in his legacy. It’s not that business tycoons have not used (or misused) political connections for business dealings or special interests. It’s done all over the world; and in the Western world, they have a fancy name for it called “lobbying”. Before the 1991 economic reforms in India, the late Dhirubhai Ambani made his early fortunes during the License Raj era largely due to his close connections with political leaders.

However, in this particular episode, popularly known as Radia-gate, the extent of the corporatization of political decision making is alarming. It shows how, overriding the larger national interest, companies such as Tata were, and maybe still are, able to influence cabinet choices and consequently policy decisions.

Back home, recently, the Commission for Investigation for Abuse of Authority (CIAA), raided the factory of Dabur Nepal and found that this multinational company was involved in tampering with the manufacturing date of one of its popular products to dupe its customers and increase its bottom line. Prior to this incident, this company was in the news because of the inferior quality of that same product. However, at that time, the company, aided by influential decision makers, dismissed those allegations as fabrication on the part of some media houses. In fact, the company went on a new marketing campaign to dispel these rumours. This time, the truth is there for everyone to see.

Pursuing profit and stockholders’ wealth maximization, companies such as Tata and Dabur have ignored the societal aspect of their business. In the short run, they were able to increase their profits. However, in the long run, the fallout from this kind of activities will be far reaching. In case of both Tata and Dabur Nepal, the true losers from their malpractices have been the general public, those who are clients as well as prospective clients of these companies.

There are a few important take-aways from these corporate debacles. First, corporations should not just blindly follow profit and stockholders’ wealth maximization and ignore other stakeholders in their business. Although any well known textbook in corporate finance teaches everyone that a firm’s objective should be profit or stockholder maximization, instances like these underscore that maybe it’s time for firms to pursue stakeholder — anyone from employees to customers—maximization. Manage-ment thinkers have also started arguing that the premise of stockholders’ wealth maximization is a flawed one.

In one of the recent issues of the Harvard Business Review (HBR), Roger Martin, dean of the University of Toronto’s Rotman School of Management, argued that firms should focus on maximizing customer satisfaction instead of shareholders’ value.

Second, which is closely related to the first, corporations should not indulge in anything that will alienate the general public. As a former regular consumer of Real Juice, I feel cheated and I have friends and families who feel the same. Dabur will need to do a lot of convincing to regain mine, and others’, trust.

First published in the Kathmandu Post on Jan 10, 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/01/09/money/corporate-debacles/217063/