Monday, September 03, 2007

Capitalist morals 15 July 2007

In a meeting of the board of directors that I joined recently, the company disclosed that it had paid a bribe to recover an overdue payment from the government. My first reaction was: Holy cow, how did I land in this unholy mess! I thought about my responsibilities as an independent director. Should I resign from the board? Do we sack the managing director (MD)?

Seventy percent of the company’s sales came from this government customer, who had always received 2% of the invoice under the table for expediting payments. The bribe was shared by many state employees. Our new MD, who had joined a year ago, refused to pay the bribe. As a result, the company’s bills were not paid for nine months. The MD tried everything—cajoling, political influence, cutting off supplies—but nothing worked. One painful morning he found that the company was bankrupt and would cease operations in 48 hours and 829 people would lose their jobs. He closed his eyes, said a prayer, and ordered the bribe to be paid. Thus, he saved the company but disclosed the improper payment to the board’s audit committee.

‘Why doesn’t this problem occur with your private sector customers?’ I asked. The MD replied that in the private sector, it is somebody’s money--the founder’s or shareholders’. Hence, accountants and auditors are vigilant, and no one dares. But it is no one’s money in the government. If supplies stop because of non-payment, no one cares. No one is accountable. He is right, I thought. I have been a director or consultant to lots of companies. I have never heard of bribing a private sector customer. If you are unlucky enough to do business with the government, you always have to bribe someone.

The board decided that morning to close its government business. Sadly, 390 workers lost their jobs. I felt guilty, but I think we did the right thing. If you have to work, you might as work honestly. We are aware of the missed opportunities and the economic loss from Nehru’s decision to place the state at the ‘commanding heights’ of the economy. We don’t realise how much damage Nehruvian socialism has done to our moral character. Our reforms are rightly shrinking government’s role in business, but it will take much longer to rebuild character.

Are people honest only because of the fear of punishment? Without checks would people behave like Duryodhana in the Mahabharata? Modern social scientists assume that people are only motivated by ‘self interest’. But is that true? If a child is in danger, don’t we have a natural desire to rush and save it? Adam Smith called this sentiment ‘sympathy’ in his Theory of Moral Sentiments. Rousseau called it ‘pity’ in his classic, Discourse on the Origin of Inequality. We are not purely selfish, but our public institutions have to hold individuals accountable. In our case accountability is eroded because our idealistic labour laws relied on the worker’s ‘good’ nature and his superior’s ‘bad’ nature. Hence, there isn’t quick punishment for corruption in the government (while you are sacked in the hour in private companies.)

Institutions have to depend both on the ‘good’ and ‘bad’ in human beings. If one is cautious and re-designs government only on selfish motives, you might erode whatever public spirit that exists. But ours was the opposite mistake--we relied on too much public spirit. To restore accountability now you don’t need new solutions. Just adopt the accountability systems of high performing governments like Canada and Australia. Even better, follow the recommendations of our own administrative reforms commissions.

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