March 2004

Scylla and Charybdis: The business of business

What makes a good enterprise a great one? R Gopalakrishnan, executive director, speaks of the integral role of corporate responsibility in a world obsessed with topline and bottomline growth

R Gopalakrishnan
There are important voices in society which question whether business has any purpose other than to maximise profits. Milton Friedman famously proclaimed in 1963: "There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game." Many in business swear by Fredman. And then there is a Jack Welch who said in 1999 after extolling the virtues of legitimate profit-making, "These times will not allow companies to remain aloof and prosperous while the surrounding communities decline and decay."

On the one hand, investors show increasing impatience to see superior returns, which is a tough enough call by itself. On the other hand, society has increasing expectations about corporate social behaviour. To do both is really tough, but it is important to note that profit-making is skill-based while corporate social behaviour is attitude-based. The former represents what you do, the latter represents who you are.

So, the question remains as to what is the business of business? What is a company's corporate purpose? Purpose statements of value are written by great intellects, debated and fine-tuned by others. As Gandhiji said, "There is just the same unavoidable connection between the means and the end as there is between the seed and the tree."

I have spent 36 years as a professional manager in two outstanding institutions — Unilever and Tatas — this has been a great privilege for me. They both represent the best, but differently: Unilever [particularly Hindustan Lever], as a leader in delivering shareholder returns by fair means and with due concern for the community; and the Tatas as a leader in corporate social responsibility, with decent long-term returns to shareholders.

I have observed them both from very close quarters. I spend most of my time managing and solving problems but, occasionally, I reflect on the larger issues of what is the business of business — which is what I propose to do. My reflections synthesise the two strong ideas in contemporary management literature that define the purpose of business: maximising profits and being good corporate citizens.

Often, these appear as opposite hemispheres and it appears necessary to choose between the Scylla of maximising profits and the Charybdis of social responsibility. In Homer's Odyssey, one of the adventures was to sail safely past two extremes on either side of the Strait of Messina: a whirlpool called Charybdis and a sea monster called Scylla.

Unilever
Trusts or foundations are a 20th century phenomenon. The first major American foundations were the General Education Board established by John D. Rockefeller in 1902, followed by the Carnegie Foundation in 1911. The first major British foundation to be established was the Leverhulme Trust Fund in 1925.

William Lever was born in 1851. At 26 he started the Lancashire business which became Lever Brothers. At the age of 33, he introduced Sunlight Soap. He never looked back. When he built the Port Sunlight soap factory at Liverpool, he bought 56 acres across the Mersey River because from the very start, he envisaged it as a community as well as a business. This was a bit like the community the Tatas built up in Jamshedpur. Lever believed firmly in profit as a reward for and as a test for enterprise, but profit was never the chief incentive that moved him personally. Through his will in 1924, he left a part of his wealth to the Trust. Since then, millions of pounds have been awarded to projects and proposals aligned to Lever's own philosophy, i.e. those which combine commitment to the adventure of learning and research with a concern for practical results.

Commentators believe that William Lever himself did not realise quite what he was starting when he endowed the Trust, just as he did not foresee the creation and development of Unilever within a few years of his death. This would not have worried him because he said, "The road-maker is the best anonymous servant of humanity. He drives a great broad thoroughfare from town to town, and for generations men travel over the road, with their hopes and fears, with all their cares and joys, never once asking who it was that made their way easier for them."

Tatas
Long before the establishment of the Rockefeller and Carnegie Trusts, as early as 1892, Jamsetji Tata established the JN Tata Endowment Scheme to provide higher education for deserving Indians. Since then 3,500 Tata scholarships have been awarded, including to President KR Narayan and Dr Raja Ramanna. Before the dawn of the 20th century, Jamsetji had already introduced accident compensation for his textile workers, something then unheard of, and he said, "We do not claim to be more unselfish, more generous or more philanthropic than other people. But we think we started on sound and straightforward business principles, considering the interests of the shareholders our own, and the health and welfare of the employees the sure foundation of our prosperity."

Those who followed Jamsetji have built on the legacy they inherited. His son, Dorab, even went to the extent of inviting well-known socialists Sydney and Beatrice Webb to Jamshedpur in 1917 to organise the medical services of Tata Steel. Through the 1940s, several philanthropic trusts were set up — Trusts that have given to the nation a host of pioneering institutions — IISc, TIFR, TISS, Tata Memorial Hospital, TERI and NCPA. Most of these are now national institutions.

Indeed, JRD Tata was very conscious that the social responsibility of his companies should not be left to individuals; it should be institutionalised. The trusts are only one instance of that. Therefore, in the 1970s, the Articles of Association of the major Tata companies were formally amended to read that the "company shall be mindful of its social and moral responsibilities to the consumers, employees, shareholders, society and the local community". Companies commit themselves to their social expenditure in their business plans and this outlay is sacrosanct. In the last few years, when business conditions have been difficult, this has gone up from Rs 52 crore in 1995-96 to Rs 169 crore in 2002-03. This is apart from what the Trusts do, which is quite independent of the companies.

The Group institutionalised its social responsibility charter further when it included a clause on this in the Code of Conduct, by which companies have to actively assist in improving the quality of life in the communities in which they operate. In recent years, the Tata Council for Community Initiatives was created to give the Group's community activities greater focus and cohesion. Yet another institution is the Tata Relief Committee standing groups of volunteers for disaster relief, which operate out of Jamshedpur and Mumbai. There are heroic stories about the work done by these volunteers for the victims of the Koyna earthquake, the 1999 Orissa cyclone, and later for the victims of the Bhuj earthquake.

From my perspective, the most salient experience was the Group's approach after the Kargil war in 1999. The Group's cash collection was perhaps the largest from any business group, Rs 12 crore. But I was personally struck by the natural sincerity of purpose that drove the whole effort. Considerable top management time was invested to assure that the money it collected would not just vanish into some large pool where it may be less than optimally utilised. So the Group worked closely with the Army to understand the real needs of war victims and their families — what finally emerged was a Tata Defence Welfare Corpus, which is now being administered by a committee comprising both Tata and Defence people.

The Tata Group and the Army jointly decided that help would be provided to victims of not just the Kargil War, for whom a fair quantity had already been collected, but for the families of the victims of all conflicts since 1972. It was also decided that the corpus would focus its financing on education and rehabilitation — anything that would ensure a livelihood. Five years down the road, everything is in place and the disbursals have begun, and will undoubtedly go on for a long, long time. The number of beneficiaries of this scheme by now aggregates 178 individuals.

But social responsibility, as we know, is not just about coming to the aid of those hit by disaster: it is engaging with and solving society's most pressing current problems, like illiteracy. A few years ago, some of the finest minds in Tata Consultancy, led by the redoubtable FC Kohli, bent their minds to the issue of how they could leverage technology to make a dent in the problem of illiteracy. The problem was that, while literacy was growing at the rate of 1 per cent per annum, the population was growing at the rate of 2 per cent. Even if the rate of growth of both indices remained constant, total literacy would be a distant dream. However, if the rate of growth of literacy by some miracle could be stepped up 10 times, then the backlog of illiteracy could be wiped out within our lifetime.

The National Literacy Mission, the Tata Consultancy team recognised, had done very good work. But it was doing two things which could perhaps be improved: it was insisting on teaching the illiterate how to write — and we all know how much more daunting writing is, compared to reading and speaking. And it was going from alphabets to words — which is how we are all taught in schools. After six months of study, they came out with a package that would go from words to alphabets and would make adults functional literates — able to read newspapers, shop signs, bus numbers — through a computer-aided programme of 30-45 hours of learning.

This programme is currently being implemented in some 40 villages in Guntur district. The package has now also been taken by the Madhya Pradesh government, which intends to adapt it in over 600 centres from July onwards. A TV version of the lessons has been created, with the help of Siticable, which is being telecast every night for one hour in Guntur district. It's been found that the TV version works just as well as the computer version. Some NRIs have been so inspired that they have committed to financing 200,000 machines every year for the programme. Today the project is up and running and it has helped more than 20,000 people learn the most basic of the three Rs: reading.

The stuff of longevity
Of the profits made by the Tata Group, about a fifth is attributable to the Trusts if one calculates the profit streams and shareholdings. All of this of course, is not received in cash by the Trusts, they only receive the dividends declared. This attribution symbolises what JRD Tata said about the cycle being complete, that what comes from the people goes back to the people many times over. It epitomises what Jayaprakash Narayan said about how Gandhiji's concept of trusteeship has received a much-needed fillip in Tatas. It illustrates the spirit of what British economist Alfred Marshall wrote: "A score of Tatas might do more for India than any government, British or indigenous, can accomplish." And there is the Leverhume Trust which holds about a sixth of the British part of Unilever and worth billions of pounds, ranks in the top 10 in Europe in terms of expenditure.

So that is the story of two corporations, Unilever and Tata. Two organisations I have intimately known, whose founders lived about the same time and who established their business at about the same time, who espoused similar values about the purpose of business, whose institutions, today are over 125 years old, have probably far exceeded their founder's expectations by a huge margin, and who both have professionalised management to achieve what historian WJ Reader calls 'the stuff of longevity'. Yet, each one has done it in its own special way.

I have recounted these events for two reasons: firstly, history creates romantic notions about the past; secondly, it sheds some light on what I call the samskar of the business. Like individuals, business enterprises too have a samskar. It is the mark of a successful business that profits are earned competitively in the early days. It is a mark of a great business that, in addition, good samskar gets so deeply embedded that it becomes part of the DNA.

Arie de Geus wrote in The Living Company, that an economic company is like a puddle of rainwater — a collection of raindrops, gathered together in a cavity. The other type of company is organised around the purpose of perpetuating itself as an ongoing community. This type of company is like a river. It is turbulent because no drop of water remains in the same place for long, it finally flows out into the sea but the river lasts many times longer than the lifetime of the individual drops of water which comprise it.

Speech delivered by R Gopalakrishnan at the Northern Regional Convention 2004 organised by Allahabad Management Association, Allahabad, on March 13, 2004.

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