Wanted: A charter on the public purpose of private enterprise

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 5 min read . Updated: 13 Apr 2021, 09:55 PM IST Arun Maira

Every business should be designed to manage resources efficiently and also deliver well against a scorecard of public needs

The Indian state has an enormous task ahead of it, to ‘build back better’ an economy that was not growing well before the covid pandemic. Neither was it producing enough jobs and incomes for workers and farmers. Nor was it delivering good public health and education to its citizens. The government has a financial problem: It must find money for providing public goods. Therefore, it is stepping on the accelerator to ‘privatize’ public sector enterprises (PSEs) for funds, and to also get private companies to run these businesses more efficiently.

Last month, the US’s Securities and Exchange Commission (SEC) said it will require listed companies to report their all-round performance against ESG indicators, i.e. the impacts their businesses have on the environment and conditions of society. They can no longer get away with reporting only their financial performance—the growth of their revenues, profits and shareholder value—that financial investors are most concerned about. All enterprises must become more transparent about what value they are creating for society. The US Business Roundtable, the chief executive officer (CEO) of private-equity firm BlackRock, and other business leaders have already mooted the urgent need for private enterprises to serve broader public purposes. The SEC knows the time has come for official reinforcement. ‘Total shareholder returns’ is no longer a good measure of a company’s health and gross domestic product (GDP) is no longer a good measure of an economy.

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If the pandemic has taught global problem- solvers a lesson, it is this: Beware of the side-effects of strong solutions, such as lockdowns and vaccines, that may cause more harm to the health of the system than the problem being solved. Therefore, the Indian government must be cautious in prescribing a medicine for the economy whose toxic side-effects are already known.

While privatization can provide much-needed financial resources for the government, doing it without first fixing the formulation and dosage of the medicine will harm the economy and society in other ways. Privatization was a strong medicine that Margaret Thatcher applied to the UK economy, though its National Health Service was spared. Private health services are the medicine the US has been addicted to, though its inefficacy has been known for long and became even more visible during the covid pandemic. Private health care does not serve the public well.

In India, the performance of many PSEs must be improved. And the public accountability of private enterprises must be improved too. A better design is required—of an enterprise that manages all resources efficiently and also delivers well against a scorecard of public needs. The contours of a new design are emerging. Responsible business leaders had designed ‘national voluntary guidelines’ for Indian businesses 10 years ago. These are evolving further. Around the same time, the second Administrative Reforms Commission had recommended ‘agencification’ as an institutional solution for the governance of PSEs, which can be run as professionally as the best private enterprises while also creating public value. New concepts of ‘social enterprises’ are emerging from the financial and social sectors too. We need to formulate new enterprises with these ideas before handing over PSEs to the private sector. In fact, these new solutions must be applied to the private sector too.

A professionally-managed enterprise that fulfils public purposes must be founded on three pillars. One is a clear statement of its purpose. Whether an enterprise is public or private, its purpose cannot be restricted any longer to the production of profits and financial wealth for investors. Goals and measurements must be defined and aligned with that purpose for the public to judge the performance of the enterprise and its managers.

Second, the enterprise’s managers must have the freedom to find the best ways to achieve its objectives, unencumbered by any bureaucratic meddling that does not add to the creation of public value. The managers must be supervised by an independent board that is accountable for the fulfilment of the enterprise’s purpose.

The third requirement is that broad constraints that conform with social values must be laid down within which the board can exercise its freedom. Guidelines are necessary for financial decisions and also for human resource management. The need for prudence in financial decisions is well understood in private-sector organizations. However, constraints on executive compensation have been thrown aside to a large extent with economic liberalization. This has contributed to the more than tenfold increase in the gap between the compensation packages of CEOs (and other top executives) and workers in private-sector organizations around the world in the last 30 years. No doubt, people at the top have greater responsibility and can contribute more to the overall performance of an enterprise. But it is not understood how they began to add ten times more real value in the last three decades.

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Companies run by financial controllers will not survive long, though they may make short-term profits. The economies of countries these days are being run principally by central banks and finance ministries, with economic theories on the management of money and finance. While sound financial management is necessary, this is only a means and cannot be the final goal for the management of companies and countries.

All private companies use public resources to produce profits, though they may not account for them. For example, India’s information technology companies’ remarkable financial performance was enabled by publicly-funded educational institutions that provided them high-quality resources at low cost. Ethical questions need answers for us to design an enterprise fit for the 21st century. For whom do our so-called ‘wealth-creators’, i.e. businesses, create wealth? What resources do they use to produce that wealth? And how much of the wealth do they return to society (and when), and how much do they, as cashiers in our economic system, retain for themselves?

Arun Maira is a former member of the Planning Commission and the author of ‘A Billion Fireflies: Critical Conversations to Shape a New Post-pandemic World’

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