Nandan M. Nilekani, CEO, Infosys Technologies Ltd.
December 17th, 2005
The 1st Gen. K. S. Thimayya Memorial Lecture was held on Saturday, December 17, 2005 at the J. R. D. Tata Auditorium, National Institute of Advanced Studies (NIAS), Indian Institute of Science Campus, Bangalore 560 012, at 6:00 p.m. The event commemorated the 40th death anniversary of one of India’s greatest Generals. The keynote address was delivered by Nandan M. Nilekani on “Corporate Social Responsibility: Emerging Leadership Trends & Issues”.
Mr. Nilekani – the keynote speaker – is the CEO, President & Managing Director of Infosys Technologies Ltd., India’s flagship IT company, and is one of its co-founders. Amongst several accolades to his credit, Mr. Nilekani along with Infosys Chairman & co-founder Mr. N. R. Narayana Murthy, received the Fortune magazine’s prestigious ‘Asia’s Businessmen of the Year 2003’ award. He is an alumnus of IIT (Bombay) and an illustrious Old Cottonian (1967).
Mr. Nilekani’s exhaustive address touched upon the various facets of Corporate Social Responsibility (CSR) including the ethical, philanthropic and environmental, as well as CSR advocacy. He pointed out the effect of CSR models on the corporate sector at large, by setting trends for others to follow as well as creating pressure in the system by provoking curiosity of shareholders of other companies who then debate the feasibility of CSR with their respective managements.
The keynote address was followed by a stimulating Q & A session, when Mr. Nilekani deftly handled questions ranging from Corporate-Government intercourse and sustainable development, to career planning and role of corporates in education. The Lecture was followed by a Fellowship dinner, with over 200 guests in attendance. Earlier, after the introduction of Gen. Thimayya, Mr. Balraj, Former Principal, Bishop Cotton Boys’ School (1970-1985) introduced Mr. Nilekani.
The guests in attendance included distinguished Old Cottonians such as Air Marshal M. S. D. Wollen (Retd.), Maj. Gen. Sultan Mahmood (Retd.), Dilip Thakore, Akbar Khaleeli, C. V. Ranganathan, M. G. Muthanna, Professors P. R. Kumar & Vijay Kumar, Dr. B. D. Chengappa, Dr. Nandakumar Jayram, V. P. Mahendra, M. N. Chitiappa, Rev. Kiran Sebastian, and several others. Other eminent guests included Maj. Gen. & Mrs. Chengappa (Gen Thimayya’s son-in-law and daughter) and their son K. C. Belliappa & his fiancée Nicole, Mr. N. R. Narayana Murthy & Mrs. Sudha Murthy, Mrs. Rohini Nilekani, Ramchandra Guha and officers from the Kumaon regiment which Gen. Thimayya commanded. Former Principals of the School – Mr. Balraj and Dr Samuel (& his wife Dr. Mrs. Samuel), and several Masters (Dr. Iqbal Ahmed & Mr. M S Shankar included) & Teachers also attended.
The event was webcast live over the internet to Old Cottonians all over the world, courtesy Webex (India).
Click here to view the webcast from the 2005 lecture series (Courtesy Webex Systems).
It is a great honor to be here. I thank you for this opportunity to speak at the General Thimmayya lecture.
General Thimmayya – an alumnus of this very school – is one of India’s military heroes, and is spoken of as much for his impressive, colorful personality as for his military record. As a young army officer in Allahabad, he once met an elderly gentleman at a cinema theatre, who asked him how it felt to be an Indian wearing a British military uniform. Thimmayya replied with one word: Hot. The gentleman was Motilal Nehru. When Thimmayya later wanted to quit the Army regiment and join the freedom movement, Motilal Nehru advised him against it, saying that a free India would need officers like him.
General Thimmayya was known for his fearlessness in standing up for his beliefs and convictions. For example, he failed to see eye-to-eye with India’s Defence Minister Krishna Menon – while General Thimmayya believed that India faced a military threat from China, Menon insisted that the threat came from Pakistan, and the bulk of India’s troops were deployed along that border. Thimmayya stuck to his guns and resigned from his post in protest – withdrawing it later, only when Nehru intervened. He was eventually proved right in his judgment, when the Chinese increasingly pushed forward on the border and India was unable to match the power of the country militarily.
The General clearly represented the Cottonian values that we are all proud of – a deep sense of integrity, a commitment to doing what is right, and a belief that each individual can make a difference in our society. As an alumnus of this school, the opportunity to address you here is a special pleasure for me. Today, I will be speaking on Corporate Social Responsibility.
While the debate on Corporate Social Responsibility – CSR – has continued to grow, we remain a long way from consensus on what corporate social responsibility means to the industry. Some view CSR as a broad involvement in community and social affairs and in sustainable development; some see it as sound economic objectives, and transparent business practice.
Still others see CSR as a distraction – the economist Milton Friedman, for example, believes that corporations should operate with narrow goals, and that the business of business, is business. The Economist asserted that Business cannot be trusted to get CSR right, and lack the wherewithal to frame intelligent policy in these areas. The economist Adam Smith also contributed to this view, writing in The Wealth of Nations that It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard for their own self-interest.
The debate surrounding competing definitions of CSR has also become more complex with the rise of global corporations, and the increasing impact businesses have on our economic and social lives. According to a report by the Institute for Policy Studies, 51 of the largest 100 economies in the world today are corporations, not countries. The gross revenue of Walmart is larger than the economies of Indonesia and Denmark; British Petroleum is bigger than Hong Kong, and GE is larger than Malaysia and Argentina.
Corporations also increasingly dominate investment in both developed and developing economies. For example, at the beginning of the 1990s private investment accounted for less than half of international money flowing into developing countries. By 1995, private investment had risen to 78% of international investment. By 2000, the world’s 200 largest corporations controlled 28% of the global economy.
When corporations play such a significant role in our social and economic systems today, they must move beyond the legally defined mandate of merely pursuing economic self-interest. As corporate influence has broadened, the definition of a corporation’s stakeholders has also expanded – from customers, employees and shareholders, to the community and society the business operates in.
Consequently, the minimalist view of the role of the corporation – of the ‘self-interest of the capitalist’ as defined by Adam Smith and Milton Friedman – can no longer be the valid one. Today, corporations must consider the full scope of their impact on society and the environment while making economic decisions. They must balance the needs of all their stakeholders with their need to make a profit. They must integrate their economic, social and environmental goals into a ‘triple-bottom line’ for sustainable growth, to ensure development that is truly equitable.
How can corporations integrate these goals effectively into their business objectives? How can they clearly define a more socially responsible role in society? CSR – also referred to as responsible corporate citizenship – is extensive in its definition of the role of the corporation within society. It encompasses corporate governance, sustainable wealth creation, corporate philanthropy, public-private partnerships and corporate advocacy.
Corporate governance defines the goal of a corporation as creating wealth legally and ethically, while being fair to all its stakeholders – customers, employees, investors, vendor-partners, government and society. Corporate governance encompasses a company’s culture, policies, how it deals with its stakeholders, and its commitment to values.
Good corporate governance is not merely legal compliance. Today, global corporations are faced with varying regulatory, legal and governance standards – or even the absence of such standards – across the countries they operate. Consequently, firms which focus solely on ‘legal compliance’ implicitly endorse an ineffective ethical and moral code. For effective governance, firms must instead focus on what they define as ‘ethical business conduct’ – going beyond legal requirements to employ ethical practices that benefit their shareholders, customers and employees. This will enable companies to adopt uniform, responsible standards of operation across countries.
Firms that work within legal standards but are still seen to be acting unethically, will hurt their relations with employees, governments, communities, and consumers – which can directly impact on the company’s bottom-line. For example, a global sportswear company paid its Asian workers wages that were the legal minimum in that country, but below what was globally regarded as an acceptable level. The firm was charged with operating ‘sweatshops’. A McKinsey study concluded that over 70% of investors were willing to pay a premium for companies with high governance ratings. Clearly, good governance is good business.
Infosys has consistently focused on the highest standards of corporate governance. For example, in 1995 Infosys suffered losses in the secondary market. Under Indian GAAP, we were not required to make this information public. Nevertheless, we published this information in our annual report. Infosys adopted transparency and disclosure standards in India even before they were mandated by law. Infosys was the first company in India to publish audited quarterly results, and to voluntarily comply with the US GAAP accounting requirements. Even today, we are the only company on NASDAQ which provides the balance sheet and income statement according to the generally accepted accounting principles of eight countries.
Today, few corporations pay attention to the second facet of responsible corporate citizenship – that companies must focus on sustainable, long-term wealth creation.
Businesses cannot prosper and create wealth on a sustainable basis, unless they make a difference to the context in which they operate. Industry growth in an economy can be significantly impacted over the long-term by failing infrastructure, low levels of human development, and widespread inequities. For example, high levels of illiteracy in India – 300 million people in the country today are illiterate – affect the access of business to good human capital, and present a key bottleneck to industry growth. Corporations must realize that a country’s broader social and economic issues are not tangential to the interests of business – they are cardinal to it.
Businesses must, therefore, help address the social and economic challenges of a country to ensure long-term, sustainable growth. Targeting wider economic and social goals increases the ‘license to operate’ for corporations within communities. Essentially, corporate involvement in community development efforts creates long-term support for such businesses within the community. This improves the capacity of businesses to sustain future wealth creation and growth. Such a fusion of corporate citizenship and business goals has led companies such as Hewlett Packard to pursue broad-based development programs. The company has invested in creating digital communities in Brazil, villages in India and South Africa to promote economic development.
An example of how Infosys has incorporated development goals into business objectives is Campus Connect, an initiative aimed at significantly enhancing the quality of technical education in the country. Through this initiative, Infosys shares educational experiences and best practices with faculty across colleges; we work with institutions to help upgrade college curriculum; and provide access to technology-related information and courseware for students and professors.
Companies can also create widespread support for business within communities, by broadening access to products and services through innovative strategies. This is especially important in developing countries such as India, where the majority of the population has low purchasing power – 170 million households in India earn less than US$5000 a year. This population remains at the fringes of India’s markets, unable to participate in the economy as consumers. As a result, this segment of India’s population is unable to derive economic benefits from the private sector and the market economy, and is often hostile to organized business.
By targeting these households as consumers, businesses can build the broad support and enthusiasm for markets which is essential for sustainable wealth-creation, and long-term growth. By enabling such access to their products and services, businesses also play a critical role in creating economic opportunities and choices for the poor, and empowering them as consumers. In fact, C. K. Prahalad in his book The Fortune at the Bottom of the Pyramid, cited corporations in Mexico, India, Brazil, Peru who have come up with innovative, market-driven solutions to target the poor as consumers, and simultaneously help address development goals.
For example, GrameenPhone, a mobile phone services company launched in Bangladesh, allows local entrepreneurs – mostly women – to buy cellular handsets with micro-credit loans, and rent the phones to neighbors. Today, GrameenPhone is Bangladesh’s largest phone company in terms of subscribers, and provides phone access to 50 million people. Indian farmers, due to a lack of easy access to bank loans, borrow from moneylenders, who charge interest rates between 36% and 3,000% per annum! Today an estimated 50% of all Indian farmers are in debt. ICICI, an Indian private sector bank, addresses this issue by first educating, and then providing need-based loans to rural self-help groups (SHGs). The money is used by the SHGs to start a business, or to fund their agriculture operations. The bank now lends to over 8,000 SHGs across India.
A focus on sustainable growth has also led corporations to implement initiatives aimed towards environmental sustainability, and the conservation of natural resources. For example, BP (British Petroleum) has integrated environmental sustainability goals into its corporate objectives, through its participation in emissions trading, and its goal of “zero impact” on the environment from its upstream operations. The company has also developed various renewable energy initiatives. For instance, last year BP opened a 4 MW solar farm – one of the largest in the world – near Merseburg, Germany, which supplies enough power to meet the needs of 1,000 households.
Another company which has integrated sustainability goals into its business objectives is HSBC. The bank recently announced that its operations for the final quarter of FY ‘05 would be carbon neutral – three months ahead of its original target date for carbon neutrality. Toyota’s research into environmentally friendly hybrid technology led to the development of the hybrid car Toyota Prius, which became the fastest selling car in the US in 2004! At Infosys, we have developed an Environmental Management System – the Ozone initiative – to save power, recycle water, conserve resources, reduce waste material and create a green campus. The Ozone initiative has brought Infosys in line with global environmental sustainability standards.
Corporations can also practice responsible corporate citizenship through public private partnerships (PPPs) – partnerships between private corporations and public interests. Through such partnerships, the private sector can provide unique resources to the efforts of NGOs and the government to drive change, such as intellectual capital, market research, communication skills, expertise in product and service development, project management, and experience in creating transparency and accountability.
A good PPP is one that marries the effectiveness and efficiency of the private sector to the equitable outcomes desired of the public space. An effective PPP has clear objectives; a commitment to producing profitable, sustainable, and replicable change; and a long-term strategy to sustain and continue these results. An example of a public-private partnership here in India was the BATF (the Bangalore Agenda Task Force). The BATF was a coalition of industry, civil organizations and the Karnataka state government, to upgrade Bangalore’s infrastructure and public governance systems. The PPP focused on employing corporate expertise and industry best practices in building efficient delivery of civic systems, and enabling internal capacity building in state infrastructure.
Corporate philanthropy is an aspect of CSR that has seen a diminishing role among corporations today. For example, charitable contributions in the UK by FTSE 100 companies in 2003 – including gifts in kind, and staff time devoted to charitable causes – averaged just 0.97% of pre-tax profits. In the US, corporate giving averaged 1.3% of pre-tax profits among Fortune 500 companies. At Infosys, philanthropy is a key part of our CSR responsibilities. Infosys donates a fixed percentage of its net profits every year to the Infosys Foundation. The Infosys Foundation was founded in the year 1996, and focuses on projects for the underprivileged in rural areas, as well as healthcare and education for the poor.
Our economic systems today don’t encourage or require corporations to approach business in a sustainable manner. This presents an important issue for socially responsible corporations. While responsible business practices are essential for long-term growth, it can affect the profitability of the organization in the short term. Consequently, if ‘triple bottom-line’ competitors are not emulated by the rest of the industry, then such innovating corporations will fail to sustain competitive advantages in their business. Corporate advocacy by businesses is therefore essential to broaden socially responsible practices across industries.
For example, when the multi-national apparel firm Levi Strauss advocated its “terms of engagement” labor policy – which defined labor standards for Levi’s business partners globally – every other company in the industry looked the other way, and argued that labor standards in other factories weren’t their responsibility. However, Levi’s advocacy of its policy created strong social pressures among competitors to adopt similar, progressive policies or risk widespread criticism from shareholders, customers and the media.
Clearly, socially responsible corporations and business leaders must play a key advocacy role, by actively promoting responsible behavior in industries. Leaders can foster collective action towards adopting responsible business practices, by raising awareness and creating an enthusiasm for responsible corporate behavior among industry stakeholders. This will help create market mechanisms that systematically reward responsible practices, and enable the dissemination of such practices across industries.
It is often argued that a focus on CSR affects the competitiveness of corporations in an economy. However, the opposite has been illustrated in countries like Finland – the WEF ranks Finland first in the world in economic competitiveness, and also first in environmental sustainability; on the other hand, the US ranks second in economic competitiveness and 45th in environmental sustainability. The Nordic countries – Finland, Sweden, Denmark and Norway – all rank in the global top ten in economic competitiveness, and are at the same time, known for their focus on responsible corporate practices. Over 60% of companies in these countries issue corporate responsibility reports, compared to 35% of companies in the US.
Today, India faces real social and economic challenges on its path to development. 260 million people in the country are below the poverty line; 39% of the country is illiterate. Unemployment in India hovers around 10%. India will add 325 million people to the working population by 2016. This demographic dividend can yield significant gains for the country, if the population can be integrated into the economy through rapid job creation. India has to create ten million jobs a year in the next five years. However, the economy has been adding only around a million jobs a year.
As Jeffrey Sachs has demonstrated, a consistently high economic growth rate is instrumental in dramatically lowering poverty rates, creating jobs and raising the standard of living in a country. Rapid economic growth also helps address social problems in a country. As Benjamin Friedman argued in his book, The Moral Consequences of Growth, periods of rapid economic growth when people see a significant improvement in their quality of life, also help foster democracy, tolerance and generosity to the downtrodden. Clearly, to address the issues of poverty, unemployment and social and economic inequity, India must create conditions for rapid economic growth. We must create an environment for a sustained growth rate of 10% in the country.
Economists from Adam Smith to David Ricardo have stressed the role of business in driving rapid economic growth. Business is a key driver of growth, through the most effective use of a country’s resources. It is the competitive environment of private enterprise that enables talent to be allocated where it generates highest value; it enables trade and capital investment where satisfaction and returns are the highest; it enables a dynamic economy where business experiments are made possible through entrepreneurship.
In fact, the Index of Economic Freedom created by the economists Gwartney and Lawson has shown a direct correlation between the participation of the private sector in an economy, and economic growth. For example, countries which saw significant improvement in private sector participation between 1970 and 2000, such as Hong Kong, Singapore and the US, were also among the top ten fastest growing countries in terms of GDP, for that period. The study concluded that a country that moved from the bottom sixth in freedom for business to the top sixth could increase its GDP growth rate by an average of 2.8% annually. Clearly, a vibrant private sector is essential to drive economic growth in a country.
The impact of a business-friendly economic policy has been illustrated in India over the last decade and a half. During the first 30 years after independence, India’s policy-makers had a deep suspicion of private enterprise, and business was highly regulated and controlled. GDP growth averaged 3.5%; Per-capita growth rate was barely 1.2%; industrial growth was less than 6%. The 1991 reforms greatly reduced friction to business. The reforms cut red tape and abolished licenses; the government reduced taxes on companies from a punishing 97% to 35%, and created an environment conducive to private sector growth.
Since reforms, India has averaged an annual GDP growth rate of 6%. India’s GDP per capita (PPP) has more than doubled, from US$ 1400 in 1991 to US$3100 in 2004. In 1990, India’s poverty rate hovered around 35%. By 2003, the poverty rate had fallen to 26%.
Clearly, it is the Indian private sector that will play the key role in driving economic growth in the country. However, corporations in India today continue to struggle under myriad regulations, and a persistent suspicion of private enterprise. The World Bank estimates that existing barriers to business in India impede GDP growth in the country by more than 2.3% a year. The government must remove existing barriers to business to drive rapid economic growth in the country. The economist Keynes once said that business is an act of faith. The government needs to encourage such faith among India’s corporations, by creating a strong, enabling environment for business.
However, the economic freedom that government provides to business must be reciprocated by corporations, through responsible corporate citizenship. Indian corporations must play a wider role in contributing to equitable growth and development in the country. Today, the private sector in India accounts for 74% of the country’s GDP and 71% of total investment. As the role of India’s public sector in the economy diminishes, the private sector is increasingly viewed as the key player in driving both economic and social development in the country.
Consequently, a failure by Indian businesses to proactively take up a broader social responsibility can trigger a reactionary stance from the government and society – through the imposition of social expenditures on businesses, increased regulation, and reduced flexibility for growth. This has been illustrated by the recent calls within the government for caste reservations in the private sector, and the levy of a 2% education cess on corporate taxes. The government today is shifting the onus on corporations to help drive equitable economic growth. Businesses must realize that as corporate citizens, our privileges can be no greater than our obligations. In the words of Peter Drucker, A country will perish, if those who have power do not exercise responsibility.
Indian corporations should seize the opportunity to contribute meaningfully to economic and social development in India. Corporations must proactively embrace social goals as part of their business objectives, and foster innovative corporate strategies to drive equitable growth. Indian businesses today have the opportunity to help create and establish effective and efficient economic systems for growth; corporations must partner with governments and civil society organizations to drive real social and economic change.
Corporate leaders must recognize the role of business in driving long-term, sustainable growth and generating social capital in the country. As the writer Charles Handy observed, Business is essential to deliver sustainable growth, for only business can produce the innovations, and create the means for genuine development. By creating new products, spreading technology and investment, raising productivity, enhancing quality and improving service, business has always been the active agent of progress. Indian corporations today are equipped with the strength of knowledge and the power of globalization to help accomplish India’s development goals – eliminating poverty, combating illiteracy, and driving rapid economic growth.
Let us, therefore, use our strengths and abilities to bring about positive, dynamic change – for both our corporations, and for our country. Thank you.