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C. Gopinath

STANLEY Works is a venerable company making tools that is based in the state of Connecticut and began operations in the last century. It thought it would be a great idea to move its incorporation to Bermuda, a tiny island in the mid-Atlantic. Apart from lovely weather and golden beaches (which is attraction enough), Bermuda also does not levy income taxes on corporations. Thus, Stanley's plan was to leave its headquarters and operations in the US, only to change its incorporation and thus save $30 million (Rs. 144 crores) annually in taxes. Like any true profit maximising corporate, Stanley made its rational decision and was well on its way to obtaining shareholder approval. Several other companies have already made the move to Bermuda. They include the highly respected Fidelity Investments, a gigantic mutual fund, Accenture Ltd., the consulting firm, as well as the not-so-reputable Tyco that has been in a lot of trouble lately.

But all those companies made their moves a long time ago. Stanley's decision, coming after all the hullabaloo following the corporate scandals, attracted a lot of criticism as another example of irresponsible corporate behaviour. With one eye on elections, the US Congress started fuming and threatening legislation that would deny such firms government contracts. Stanley meekly contended that it was not unpatriotic but only concerned with the fact that US corporations are taxed on their income received from all over the world, which it wanted to avoid. Now that it had raised the attention of Congress to this issue, it said, it would drop the idea of moving.

Now, in our globalised world, it may be argued that the corporation must have its right to move and incorporate anywhere. How can a government pressure a company that wants to take a global perspective in order to generate the maximum benefit for its shareholders? But even in the US — the haven of free trade and globalisation — national sentiments still dominate. The recent moves of the federal government on steel tariffs and farm subsidies shows that the rhetoric on globalisation and scrapping of borders is just that.

Economic systems are to be placed within their context and no system is perfect. Take free markets and laissez faire. Adam Smith provided the philosophical justification for that system when he argued that pursuit of self-interest by individuals ensures that society benefits since the individual entrepreneur seeking profit brings forth goods and services to the market. And, in his scheme of things, unfettered competition would ensure prices are kept low, innovation is encouraged, and everyone is happy. This is the working of the `invisible hand.' But social structure, and expectations of society have changed a lot since the late18th century. Unfortunately, self-interest and competition do not seem to be too concerned with issues like integrity, and character, and sometimes, legality which is important to us today.

Moreover, in pursuing Adam Smith's logic, an underlying question that is in the minds of all those watching corporate America today is what should be the limits to self-interest. When does self-interest cross the border to become greed? Taking just one index, clearly self-interest has gone awry. The Economic Policy Institute based in Washington, DC., calculates that in 1965, the average CEO earned 26 times more than the average employee. By 1978, this ratio had increased to 36.5, by 1989 to 71.7 and in 2000, to 310. And as several business magazines frequently point out, there is very little relation between pay and performance.

One source of limits is from external regulation. But quite often regulation merely addresses the symptoms. There simultaneously needs to be a debate of the fundamentals. Another weakness of the free market system operating in today's complex economy shows up in the call-in shows and on the newspaper pages. The average person is vociferously complaining about how his retirement funds have been devastated by a corporate fraud or the stock market collapse. However, the media is also full of the strategies followed by the corporate elite in protecting their investments or cashing out on time.

Now, this is not in a third world country with low levels of literacy. This is in the fount of capitalism and free market, the US, which has 97 per cent literacy. And it highlights an important pre-requisite for free markets to work today — the assumption of free exchange of information and the ability of people to understand and make the right decisions based on that information. That did not happen in the US. It is less likely to happen in many countries which are being encouraged by multilateral agencies to free their markets and cut back on regulation. With the stock market down 50 per cent from its high in 2000, the US style capitalism with minimum governmental involvement is not so popular.

Latin America is emerging as another example of what can go wrong with economies in transition. Even after decades of reform, currency crisis and financial meltdowns are taking place in Brazil and Uruguay. Serious criticism of market-based economies is emerging in Paraguay, Ecuador and Peru. The election of a Leftist leader in Venezuela has only brought the conflicts onto the streets.

Japan's economic success made its management techniques the rage in the 1970s. The Japanese Ministry of Trade and Industry (MITI) was praised by the sympathisers of governmental planning as the model for formulating a role for the government. In the 1980s, Japan had a hot stock market, and eight of the world's ten biggest banks. In the 1990s, Japan saw its real-estate bubble (several buildings in Tokyo are referred to as bubble buildings) burst and this has brought the economy to a grinding halt. Japanese banks are nowhere today in the list of the top banks in the world. Japan's model of free market capitalism with a heavy government involvement has now fallen into disrepute.

The collapse of the Soviet Union laid to rest any hope of communism providing an alternative. By killing individual motivation and system efficiencies, the surprise is that it lasted the time it did. The hasty rush of the former constituents of the Soviet Union to adopt anything other than communism has only given capitalism a bad name with the creation of oligarchies. China with a capitalist economic system and an autocratic, communist political system is sitting on a razor's edge.

Even while the tweaking of existing laws and regulation goes on, we need today a debate on these fundamental questions of what should be the economic system that suits a nation.

All systems have their flaws, and the past is full of lessons for the future. What we need to most ponder about is the role of the economy and business in our lives. Mustafa Ceric, the Grand Mufti of Bosnia said recently in a speech on terrorism in Vienna: "I believe neither the weak nor the aggressive will inherit the earth, but the cooperative." Do we need to re-consider the (Adam) Smithian notion that it is competition that drives us to excellence and it must be unfettered?

Dr Amartya Sen has for long argued that Adam Smith's philosophy is not incompatible with ethical behaviour. Should artha as the Hindu sages will have us believe, by subsumed under the principles of dharma?

Gandhiji's notion of trusteeship wherein the pursuit of wealth is fine as long as the individual (and the corporation) believes that what is in excess of his needs is being held in trust for the larger needs of society is also an alternative that deserves serious consideration as an alternative philosophy of business.

What would be even more challenging is to derive a set of business principles based on revised systems of business philosophy. Rather than be despondent about the deficiencies of current economic systems, these are exciting times when alternative philosophies can begin to develop strong roots.

(The author is a professor of international business and strategic management at Suffolk University, Boston. His Internet address is cgopinat@suffolk.edu)

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