EXPLORING THE INTERPLAY BETWEEN BUSINESS REGULATION CORPORATE

EXPLORING THE INTERPLAY BETWEEN BUSINESS REGULATION & CORPORATE CONDUCT Partners: CUTS, NUPI Research Advisor (CUTS): Vasanthi Srinivasan, Chairperson, Centre for Corporate Governance and Citizenship Indian Institute of Management Bangalore

Agenda • • Brief introduction Research question Objectives Methodology Challenges faced in the design Outputs from the project Any other ideas and observations

Background • Deregulation and liberalization – benefitted the economic growth of the nation • Potential impact of this rapid economic growth on social development is unclear • Visible consequences: higher inequality between rural and urban India and the rural growth rate is half the urban growth rate. Poverty reduction not happening at the rate at which economic development is occurring.

Role of Regulation • Delivery of public good like health care and education • Link between market dynamics and competition and reducing inherent inequalities in distribution can often conflict • A number of private corporations have begun to create “inclusive business models” and engage with “responsible competitiveness” and “social entrepreneurship”. • Need to understand the interplay of regulation (self and mandated ) and responsible behaviours of corporations

Research Question What is the nature of the relationship between business regulation and corporate conduct in the context of economic growth in India?

Understanding Business regulation • Public regulation (legal) and self regulation. • Financial, labour, consumer, supply chain, environmental or any other forms of legislation. • Instruments used in Public regulation: – Reduction in Information asymmetry: truthful disclosure – Proscription: physical or quantitative restrictions (emission levels) or special taxes or subsidies – Mandates or Sanction: explicit expectations which provide “hidden incentives” or can be seen as “hidden tax”

Continued…. • Public regulation has costs – monitoring and enforcement • Re allocation of costs and hence can alter profitability of corporations (stricter emission norms or higher standards of effluent treatment) • Impact output and productivity – alteration in employment patterns, capital deployment • Impact of regulation on big vs. small firms

Self Regulation • Often seen as a more enabling process for organizations • Voluntary standards and norms • Enlightened behaviours of the actors like Good Corporate Governance practices, energy and water conservation, etc arising out of ethical standards • Market based pressures, global climate changes, consumer preferences, societal expectations are likely to drive self regulatory behaviours.

Regulation & Performance • Most studies are at a macro-economic level and sectoral level • Firm level studies need to be explored • Countries with better institutions (structural and processual) tend to create regulatory environments aimed at improving business conditions rather than favoring special interests • Such countries are likely to enforce regulation in a transparent manner that reduces the margin for rent-seeking and corruption.

Business Regulation in India • Public regulation in India is complex – over-regulated and under regulated sectors, multiplicity of legislations, reforms required in some areas, weak enforcement • Evolving institutional frameworks – new regulatory bodies set up in recent past (SEBI, TRAI, IRDA) • A host of amendments to existing legislations since 1990’s • Many elements of social development on concurrent list – enables the Centre and State to legislate – can be enabling but also widens the disparity across states in the context of economic development

Business behaviour in India • Is Responsible behaviour new to Indian businesses? – Business houses have had a strong philanthropic institutions – Much of education and health care in India gets delivered through these institutions – In 1942, the “Principles of Trusteeship” were drawn up by Mahatma Gandhi – In 1960, the first national seminar on “Social Responsibilities of Business” was held

Some more… • Judicial activism and strong civil society participation increasing awareness since the 1990’s • Domestic competition forcing company’s to change their behaviours • Reputation costs associated with weak ethical behaviour • Increasing awareness among senior business leaders on global standards • Draft voluntary guidelines on Social, Environmental and Ethical responsibilities of business in 2010 by Ministry of Corporate Affairs with support from GIZ.

Research question that the project intends to address What are the key elements of business regulation that are likely to stimulate responsible behavior among firms operating in India?

MACRO LEVEL: COUNTRY • How does regulation (legal and voluntary Guidelines) around responsibility impact country/state level economic performance? • Do certain states have a better track record in managing responsible behaviour of corporations and yet achieving economic development – what are the emerging lessons for other states? Does political constituency influence the distribution of ethical considerations across states?

MESO LEVEL: SECTOR • How does regulation (legal and voluntary Guidelines) around responsibility impact sector level economic performance? • Are there certain sectors where regulation (legal and voluntary) is stronger (given the nature of activity, international codes and agreements, supply chain requirements , market competition based) compared to other sectors?

MICRO LEVEL: FIRM • How does regulation (legal and self) impact economic performance of firms, and vice versa? • Do state level regulations impact business conduct of corporations differently? • What broad policy and legislative issues govern the decision of a firm to invest (or an entrepreneur to set up a business) in a particular state? Is there a cross-country analysis of such experience of firms available? • What are the drivers for businesses to adopt a differential approach to responsible business conduct in different states?

Research Methodology • Three parts to this research design: – Literature review – a comprehensive review of the business regulation and their positive /negative impacts on responsible behaviour and competitiveness of organizations. Focus on existing measurements of business conduct – Identification of sectors/organizations that have attempted self regulation or have managed such regulation driven changes (expert based process) – Innovations that are being attempted by organizations in the area of regulation and responsible behaviour (case study based)

Scope of the study • Multi state, multi sector study – four states and two sectors • Need for a broad based sectoral survey followed by firm level case studies • Choice of the states: – Option A: look at the parameters of social and economic development in tandem (Gujarat/TN/Kerala) – Option B: FDI and Domestic investment attractiveness (States where FDI flows have increased significantly in the last five years )

Choice of sectors • Shortlist the sectors : – Identify key stakeholders for a firm (customer, supply chain, employees, environment and shareholder) – Identify the extent of common and sector specific regulations across identified sectors based on CMIE classification – select those sectors where the interplay of regulation and business conduct have significant consequences for the firm and the larger ecosystem. – It appears that any which way, we need to use an expert panel to determine the state, sector and firm level choices.

Criteria in selecting the firms • We are looking at two sectors and four states • What criteria do we look at while selecting a firm? – Nature of ownership – Scale and scope of operations (profitability and competitiveness) – Best practices or/and normal firms? ? ? – Existing responsible company cases – can we do this through secondary research and consciously explore new companies. – Large sector or SME too

Outputs • Thematic research report outlining the focus of the study and the deliberations of the workshop in shaping the research agenda • Four State level report on business regulation • Two sector level reports on business conduct and business regulation relationship • A National policy paper on examining the relationship between regulation and conduct • Developing material for capacity building in this area

References • Loayza N V & Serven Luis (2006) “Business Regulation and Economic Performance” UNRISD • Social Development Report, 2010 • Stiglitz J (2010) as mentioned in Balasubramanian N & Satwalekar. D M (2010) Corporate Governance : an Emerging Scenario. NSE. • Sood A & Arora B (2006) “The political economy of Corporate responsibility in India” UNRISD • Doing Business 2011: Making a difference for Entrepreneurs. IFC • Balasubramanian N & Satwalekar. D M (2010) Corporate Governance : an Emerging Scenario. NSE.