Business Sutra |4.1| Board versus CEO

Business Sutra |4| Conflicts

We have covered three episodes of Devdutt Pattanaik’ TV serial on CNBC 18:  Business Sutra.

The first presented to us the most visible form of the business – the corporation: its meaning, its purpose and its action perspective. In the second episode Devdutt Pattanaik discusses Leadership: Role of the leader, Context of the leader and Leadership in different business cycles. The third episode relates to the Business Ethics and Morals:  business ethics and dilemmas, relationship between owner and the organization  and The Right (Dharma) – the Ramayana way and the Mahabharata way.

The present episode, 4^th one in the series, deals with Conflicts.

When one is looking at conflicts, we automatically seek answers. In this case, we want mythology to answer all our problems. After all it is the repository of ancient wisdom. But a repository does not offer prescriptions. It cannot offer prescriptions because every context is unique. All repositories can offer are principles and frameworks that facilitate decision-making. So, one feels that he is cheated by mythology. It is not the fountain of solutions, we hope it will be. It makes us skeptical.  As humans we seek prescriptions. In today world, gurus are becoming prescription-providers, rather than decision-facilitators, which not a good thing to have happened in the first place.

Business Sutra |4.1| Board versus CEO

A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, one of which could possibly corrupt the motivation or decision-making of that individual or organization.

The presence of a conflict of interest is independent of the occurrence of impropriety. Therefore, a conflict of interest can be discovered and voluntarily defused before any corruption occurs. A conflict of interest exists if the circumstances are reasonably believed (on the basis of past experience and objective evidence) to create a risk that a decision may be unduly influenced by other, secondary interests, and not on whether a particular individual is actually influenced by a secondary interest.

A widely used definition is: “A conflict of interest is a set of circumstances that creates a risk that professional judgement or actions regarding a primary interest will be unduly influenced by a secondary interest.”

Few videos to further clarify the concept:

Ethics Defined: Conflict of Interest

Conflict of interest

Beware conflicts of interest | Dan Ariely

In this short talk, psychologist Dan Ariely tells two personal stories that explore scientific conflict of interest: How the pursuit of knowledge and insight can be affected, consciously or not, by shortsighted personal goals. When we’re thinking about the big questions, he reminds us, let’s be aware of our all-too-human brains.

Conflict of Interest

John is a successful business man and has many great things going on for him. Today however will challenge John in a way he never thought possible….he has to interview his ex-girlfriend that is applying for a job where he works for.

Conflict of Interest: A Discussion

Dr. Daniel Sweeney, Director of the Institute for Enterprise Ethics, Discusses “Conflicts of Interest,” with Professor John Holcomb, Department of Business Ethics and Legal Studies, Daniels College of Business.

Sample of Keith White’s Conflict of Interest presentation

We also examine a few articles that relate to the conflict between the Board and the CEO:

What CEOs Really Think of Their Boards  – Jeffrey Sonnenfeld, Melanie Kusin and Elise Walton : CEOs believe it is important to address problems and opportunities they are uniquely positioned to observe. They know that their strategic visions and personal legacies can be undone by bad governance, and they have plenty to say on the subject. … The conversations showed that the CEO–board relationship is more complicated and nuanced than the standard debates about corporate governance recognize. Undoubtedly, those debates will continue…. In the end, therefore, is the advice to the experts and advisers seeking to improve board performance: Turn the focus to the human level—to “what’s really going on in that boardroom,” in William Donaldson’s phrase. And listen to every informed perspective on what goes on there, including the CEO’s.

The Four Tiers of Conflict of Interest Faced by Board Directors by Professor Didier Cossin and Abraham Hongze Lu :

A tier-I conflict is an actual or potential conflict between a board member and the company. Major conflicts of interest could include, but are not restricted to, salaries and perks, misappropriation of company assets, self-dealing, appropriating corporate opportunities, insider trading, and neglecting board work. All board members are expected to act ethically at all times, notify promptly of any material facts or potential conflicts of interest and take appropriate corrective action.

Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company is compromised. This would happen when certain board members exercise influence over the others through compensation, favors, a relationship, or psychological manipulation. Under particular circumstances, some independent directors form a distinct stakeholder group and only demonstrate loyalty to the members of that group. They tend to represent their own interest rather than the interests of the companies.

A tier-III conflict emerges when the interests of stakeholder groups are not appropriately balanced or harmonized. Shareholders appoint board members, usually outstanding individuals, based on their knowledge and skills and their ability to make good decisions. Once a board has been formed, its members have to face conflicts of interest between stakeholders and the company, between different stakeholder groups, and within the same stakeholder group. When a board’s core duty is to care for a particular set of stakeholders, such as shareholders, all rational and high-level decisions are geared to favor that particular group, although the concerns of other stakeholders may still be recognized. Board members have to address any conflicts responsibly and balance the interests of all individuals involved in a contemplative, proactive manner.

Tier-IV conflicts are those between a company and society and arise when a company acts in its own interests at the expense of society. The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.

So we quickly take up what Devdutt Pattanaik has to say in Segment 1 of the episode 4 – Conflict – Board versus CEO, as the Indian Mythology’s point of view.

The Annunaki of ancient Sumerian texts were a council of gods and goddesses; perhaps the earliest known form of a consultative group – a concept that in modern business is referred to as the board of directors.

Mr. R. Gopalakrishnan, ED, Tata Sons: I would ask a question about corporate governance. I recognize that companies are social structures and we have imported the corporate concept from West. But at the end of the day, people interact between themselves within the corporation through the social mores of the society from which they have sprung up. We have devised corporate governance in the last 10 years based on the Anglo-Saxon model of  how the board should interact within  itself and with the management.  I wonder whether you have any suggestions on how the cultural moorings of Indians can be better played out in the way our corporate governance rules and procedures are currently laid out so that we can get a more effective form of corporate governance even if it’s not so efficient.

The question is how they are working together. If they are working well together then it’s fine. What happens when this conflict – who becomes more powerful. Usually it is not either or. What you have is a set of rules that are almost as if you have the commandments. You have the king and you have the prophets and each one is checking who is following the rules. There is a level of suspicion that you know the King on his own is perhaps not going to follow the rule.  Then he must be constantly watched.

Now if I’m the promoter. I have done the business on my own without board and have done a successful business on my own. Now as I grow in size per force the rules force me. Because I need more funds, I need to create a board of directors. Suddenly I  see that just because I’ve got access to  more funds my freedom is being taken  away from me – that same freedom that  enabled me to grow the business is being  taken away from me – and therefore the  relationship starts getting soured.

Let us look at the biblical examples. There are stories of King David of what he wants to do, but is constantly being warned by the prophets that you cannot do what you want to do; you have to align within the rules. Thus, there is this great tension between the King and the prophets. For example he has an extramarital affair which is forbidden; he wants to build a temple which is forbidden.  He is constantly doing things because he wants to fulfill his individual will rather than what is the appropriate conduct within the by the commandments and by the law and the voice of God.  That narrative is very strong in the Bible – you cannot be an individual you have to be subservient to an impersonal entity called the law.

These are the sources from which the idea of governance has come into India. The idea is relatively alien because the focus over here is on the king. If the king is an honest man then things will fall into place. The education of the kings played a lot of role. But today what we are saying is we want Ram and to create Ram, we will produce a set of rules. Rules don’t make Ram.

I’m curious. Even the Kings in ancient India must have had a council of ministers, ministers that advise the king and also kept the king in check, to some extent by offering him the right advice; nudging him constantly in the right direction. Is there a parallel in our scriptures that draws from the Western model of governance but Indianises that?

You see the king was never kept in check. The Council of Ministers was to counsel, to advise the king. But ultimately the king was like what is called a host (Yajman). He is performing the great sacrifice – a Yagya – and he is offering all the things to the fire (the Swaha). All his decisions are the swaha. Whatever comes from the Yagya is the result of his actions, his decisions, his swaha. What is the SWAHA. It is how you pour things into the fire.  Once you throw it out, it doesn’t come back.  It is your decision. What comes back to you is the direct result of your decisions. Nobody keeps you in check. There are ministers and there are the sages (rishis) and the wise men (pundits). Everybody sitting around you is supporting you to do the Yagya. Ultimately in the Yagya, who is the Yajman, who is the decision maker, who takes accountability? Is the Board taking the accountability or is the CEO taking the accountability?

It comes down to that that in today’s world and age it would be almost impossible to live without a set of rules, constantly telling people that hey if you’re not doing what these rules set out for you to do then you are doing the wrong thing. How do we leave companies entirely to the governance of an individual? How do we build in checks and balances through a board? And yet, how do we create equality between the board and the CEO or the promoter or the king?

Implicit in your questions is the premise that if the rules did not exist, there would be anarchy and chaos.

To some extent!

You see this is a Western construct. What do I mean by that?  The idea that laws create order, if we remove laws there is no order and there is chaos is a Western construct.  In the Indian construct, if there were no laws it’s not chaos. Therefore in the Western mythology the images of dragons exist if you read a Mesopotamian mythology or if you read Greek mythology, there is always this image of dragons, which exists and it is the great hero, the great king who comes and tames the dragon and creates order with rules.  But in the Indian context if you take away the human being completely what exists is nature – Prakruti. What is nature?  Nature is not disorganized, the nature is not chaotic. What you have in nature is the instinct of survival and only the fit survive and might is right. Now that is what exists in nature. So when I create culture I am creating the very opposite.  It is not might as right. Meek have rights, too. So it is about a world where I go out of my way to help the helpless.

Now how do I do that?  Will the rules make me do that or I genuinely want to do that? If I don’t want to help the helpless, despite being a human being if I behave like an alpha male which rule is going to control me.

In short, your response to Gopal’s question is that no there is no Indian code of governance that can be created or a code of governance that is contextualized to our conditioning. Here in India there is no such thing because no set of rules can actually help you be a better person.

Let me give you an example of rules and from our story. When you read the Ramayana, you know one of the most famous lines in the Ramayana is Raghukul Rit Sada Chali AAyee, Pran Jaaye Par Vachan Na Jaye – There always has been a custom in the Raghu lineage, you may lose life, but never break a promise. When you read this line you have to ask us the question – when Ran goes to the forest, is he obeying his father or is he obeying the law?

Well, his father’s word is the law. So, meekly follow that.

It is not what father has said. It is Raghukul Rit – the law of the clan is more important. It is the Ragu family, the dynasty to which he belongs to. So, is Ram obeying the father or is Ram obeying the law?

There is no conflict in obeying either one because the both are saying the same. The law is the custom of his family or the tradition is to follow what your father says. He is obeying the both right now.

Let us look at the same narrative as it continues over time. At the last chapter of the book the same law says: the King’s wife shall be of unblemished reputation.

He followed that as well, didn’t he?

Exactly and so what is the narrative inadvertently saying – be careful of laws. If you stick to them and not look at the spirit of the law, then there can be trouble at the other end.  Why did laws come into being?  It came into being to help the helpless; to move out of the animal desire to dominate. For the might to have rights you had the law so that the meek have rights too. But look at this law – an innocent pregnant woman has been told to leave to the forest because the law becomes more important and Ram is Maryada  Purshottam (100% Compliance. So here we see too much of alignment to the laws. Indian scriptures are always wary of laws because laws seem to be arcane, removed from context; while Indian thought is all about context.

In business we cannot create rules that are contextual to every business, its leader and its future. So we need something that is uniform.  That is the honest truth of this game.  So, is there anything that is more suited to the Indian way of thinking as opposed to importing what is a Western code of governance, and then trying to fit it onto Indian companies and saying, ‘hey, we understand that you guys are not all equal; but the board is supposed to stand up to the CEO and the CEO is supposed to defer to the board. So how to make it work?

I think this is where the humanity has to be worked out. Everywhere we are talking about a code transforming people into good people. I need a code to make me good. That is what it comes down to this one single argument – give me this law which would make me good. That is a very difficult thing to achieve. We have to ask ourselves – are we working towards creating leaders who know why they are doing what they are doing? These are things that are not even being addressed. We are focusing so much on the law because we have given up on human beings.  Missing human beings do not work.

The processes are important, structures are important, laws are important, conducts are important. You have constitutions being changed every day. You can change Indian constitution 20,000 times. That will not make a politician’s honest.

So the answer to Gopal’s question is that boards at best can play an advisory role but they cannot really keep the CEO in check, they cannot stop him from exploiting a loophole which he has decided to nor can they make him a better person than he actually is.

Yes, Absolutely.  You see, while it will not be there in the rational world, but in Indian thought it is that for every action there are consequences – if not in this life then in the next.

So, in the end, if there has to be a conflict, that conflict has to be about whether we have been able to create leader, who follow the law in spirit, who has not lost touch with the humanity whilst in the search for the results, who does not follow custom because he has to but because he inherently values a better world – for now and for the future.

In the second part of the 4^th episode of Devdutt Pattanaik’s TV serial Business Sutra, we will see if The End Justifies The Means.

Note: The images used in this post are the irrevocable property of their respective creator. They have been taken up courtesy the internet, so as to illustrate the point under discussion.