As of late the issue of who businesses are responsible to has been generating a lot of buzz around the world, from the BP oil spill to the role of major financial institutions in the recent economic crisis. I firmly believe that many firms in the developing world and those firms run by families have plenty to teach firms ran by our peers, other western educated business school students, about how to run a successful business and also positively impact the environments those businesses operate in. Take this excerpt from a 2008 Forbes article:
Ten terrorists launched a violent attack on India’s main business center in November 2008. The three-day rampage ended with the death of more than 170 people, including 28 foreigners, the chief of Mumbai’s antiterrorist squad and the chairman of Yes Bank. One of India’s most prominent business leaders, Anil D. Ambani, executive chairman of Reliance ADA Enterprises, was scheduled to visit the U.S. a few days after the attack. India’s prime minister, Manmohan Singh, asked him to remain at home as a sign of stability. Not only did Ambani heed the call, but in a well-publicized event the veteran marathoner jogged with several friends near one of the scenes of the carnage just hours after it had been secured. A newspaper called the act ‘a symbolic display of the resilience for which Mumbai is widely admired.’ – ‘The India Way of Doing Business’ Forbes
Contrast that to global US based companies such as Coca Cola that have been implicated in financing anti-union aggressions, including the assassination of over nine union leaders in Colombia and have denied all implications and dragged negotiations to compensate the union and family members of those leaders for years only to insert last minute deal breaker conditions that stalled those negotiations. Now you might say that Coca-cola’s operations are so large that they couldn’t possibly attempt to improve the quality of life of the communties in the places they operate. Add to that the fact the Coca-cola’s corporate role is to franchise the distribution and production of the beverages to local franchisees and provide them with marketing support and the proprietary syrup to make the drinks and you could say that they don’t have any localized responsibility except to their HQ country, the US. But that just isn’t true. Coca-cola’s competitive advantage is its cheap distribution and production system that allows them to have unprecedented scale, therefore making it affordable to outmuscle the competition through marketing and brand awareness. Its ability to be everywhere for cheap is what makes the company so profitable. Coke’s net margin hovers at a staggering 20%, margins unheard of for manufacturer/retailer firms. Not only that, their ROE for the last quarter was 26%!
Indian firms on the other hand, such as the TATA group are not only leaders in innovation and have therefore derived unprecedented growth, invest heavily in the wellbeing of the communities they operate. The TATA group for example builds education facilities and health facilities in the communities it operates, enhancing the overall wellbeing of its employees and their communities. TATA not only focuses on improving the wellbeing of its employees, it also has a deep commitment to ‘race to the bottom of the pyramid’ with any initiatives it decides to embark on, including the widely publicized $2,500 car the Nano and an affordable water filtration system. This has cost the company in profitability. TATA boasts on average net margins of between 2.5% and 6% while their ROE is also correspondingly lower. However TATA has experienced unprecedented growth in the last decade and has been able to those profits into tangible benefits for India, producing 3% of its GDP and bringing accessible products to Indian people and soon to people with little resources around the world.
Now Indian firms aren’t without their own dirty secrets as evidenced by the struggle between Indian Maoists and major steel firms producing firms such as TATA Steel that has left many dead, but the net result has been a positive one for most of communities TATA operates in. The major difference for me lies in how Indian business people view the role of a company and how us western business school educated folk see that role. In India there is an inherent belief that companies have not only a duty of care to the people in the places they operate, but also carry part of the responsibility of improving the quality of life of the employees that allow them to be profitable in the first place. In the west we see the role of the company as mostly to make money for the shareholders that fund it. It is my strong opinion that the extra cost brought upon companies from such efforts are part of the cost of doing business and such be taken into account when creating a business model. This especially true as we move forward into a future with an increasing population, dwindling resources and the looming threat of a destabilized global weather system. If more corporations took the approach of incorporating the cost of improving the quality of life in the communities they operate in as a cost of doing business less atrocities would be committed in the name of profits and the world would be a much better place.