The last year has seen a few (well, okay, just two) financial sector chief executive officers I know question their Rs3 crore remuneration packages, even as their peer group races ahead for that “bonus at any cost” management mantra. Those racing forget, of course, the old Indian adage that the shroud has no pockets. Parallel news of greed from the US sees some frenzied sewing of pockets as we hear of taxpayers paying companies to take luxury junkets and multimillion-dollar bonuses from companies still on taxpayer-funded life support. How is it that a small group of people have been able to corner so much of the world wealth? Is it some special skill, some special attribute that allows sellers of coloured soda water or creators of products nobody can understand to earn exorbitant numbers? Not just while they work, but even when they bail out for errors that cost investors, employees and customers losses and hardship. How did the manager get so powerful?
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While upclose the situation is unbearable on all counts of fairness and justice, looked at in the context of the Tocquevillian democracy argument, we are where we should be. Alexis de Tocqueville, the early 19th century French political thinker and author of the seminal book Democracy in America, wrote that democracy constitutes the sole model of acceptable governance and will prevail in all spheres of organized activity. In English, this means that wherever there is organized activity (religion, governance, business), the organizational structure will finally move towards democracy, which he defined as a progression of three stages. First comes the “enfranchisement”, or freedom and equality for the common man. Second comes the “separation of powers” between direction and control that we see as the split among the legislative, judicial and executive powers in governance. And third is “representation” or the ability of an average individual to influence the political (decision-making) process.
While he wrote mainly in the context of democracy in the US, efforts to extend this discussion to the corporate sector have led to much academic thought. A paper by Pierre-Yves Gomez and Harry Korine titled Democracy and the Evolution of Corporate Governance tests the Tocquevillian hypothesis about democracy in the transformation of the corporate structure in four countries—the US, UK, Germany and France—to see if the power structure shifted along the Tocquevillian path. They found that it did and we’re at the last stage. The first phase, or enfranchisement, in the context of business meant that any person could own, create and use capital for production. The owners of capital were also the managers and were manifest in the powerful founding family of businesses. Begun sometime during the Industrial Revolution, Gomez and Korine saw this period extend till about the 1920s. The power sharing began around the 1920s when the owner separated from the manager. Marked by the rise of the professional manager, the period extends till 1970s. The third or representation phase sees the ability of the average individual to influence business decisions. This period, they write, began in the 1970s and is marked by increasing accountability of business to society as seen by the growing corporate governance debate and experiments. There is an overlap of each period into the next, as the participants take time to get used to a power equation. Usually the excesses of the old incumbent will peak before they subside.
Which is where we are today—bang in the middle of the period of excesses. The US CEO compensation grew at an average annual 12.2% between 1980 and 2004, while corporate earnings in the US grew at half of this. CEOs’ real average remuneration rose at least seven times to $4.5 million (around Rs22 crore) while that of the average worker rose just 0.3% a year—from $14,900 to $15,900. Change does not come by itself, but by pressures from within the system as opinions and debates boil over. Navel gazing in the US is resulting in a growing chorus rejecting the current concentration of power with the manager. John C. Bogle, the grand old man of mutual funds, wrote in a paper titled Democracy in Corporate America in 2007: “If chief executives were angels, no corporate governance would be necessary. Yet, what is clear is that CEOs are not angels. Not just the convicted felons like Ken Lay of Enron, I am referring...to a far larger cohort of chief executives who stretched generally accepted accounting principles to their very limit.”
According to Gomez and Korine, the world should see the role of the independent director and institutional shareholder getting enhanced as the concentration of power with the manager reduces. India did not go through the pain of Europe and the US in establishing democracy as the preferred form of government. We cherry-picked what we put in our Constitution. Luckily for India, much of the experiential work in transforming the corporation to a democratic organization has been on in the US. Smart observation may yield in importing the fruit of their lab tests on real markets. Without so much of the pain.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and adviser, Pension Fund Regulatory and?Development Authority.?
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