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Wednesday, June 1, 2011

Individual Interests vs. Public Good

Personalized interests that confine to natural boundaries can alone result in public good.

“Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end, which has no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.”  

– Adam Smith

True, companies work towards creating shareholder value by identifying and undertaking investments that generate returns far greater than the firm’s cost of raising money and in so doing they do a favor to the society—the favor of facilitating allocation of capital to the best of the projects. Similarly, an individual’s investment in a project, though for personal gain, produces the maximum public good that caters to the felt needs of the individuals. This is perhaps what Adam Smith meant by the “invisible hand” at work in the capital market.

But the string of scandals which poured out of America’s most high-flying corporates—Enron, Xerox, Tyco, Global Crossing, WorldCom and most recently, investment banks, companies such as Satyam from India—are challenging this belief, for investor’s portfolios have shrunk in value while the CEO’s pockets have puffed-up. Worse, the much talked about USGAP and the regulatory institutions— the so called beckon lights of capitalism, have all been found wanting while corporate bosses were busy “cooking the books, shading the truth and breaking the laws.”

Further more, even the outside directors and auditors have failed to detect the growing corporate malfeasance. Responsible CEOs have continued to collect huge bonus packages while the value of their companies dramatically declined, resulting in a move towards filing for bankruptcy. Indeed, most of the Americans and their media are squarely blaming the executive pay and granting of stock options as the root cause for all the bad that had happened in the banking industry and elsewhere as well. In certain quarters, there is a strong argument that it is the huge amount of stock options dished out to executives that encouraged the bosses to behave despicably.

Once the venerated corporate bosses were exposed as fraudulent hucksters, the whole world has been gunning at their heads. Every one is lamenting that faith in the integrity of business leaders world over was being undermined by executives “breaching trust and abusing power”. The agony of common man over the corporate happenings is well captured in the statement—“the business pages of American news papers should not read like a scandal sheet.”

These misdeeds have only swelled up public anger and in the process, much abuse is being heaped upon the business executives that as a class they are being condemned as untrustworthy and venal. The anguish generated by these outpourings from the citizens over the business executives is indeed making the likes of Intel Chief feel “class alien”.

Set against this long list of American corporate failings, one is ill at ease in appreciating Adam Smith’s “invisible hand” and its supposed role in promoting public good. That apart, the present focused pursuit of personal interests by the corporate executives of Enron, etc., ended up eroding the value of real stake-holders. Amidst this mess, “Where is the prophesized public good?”—remained as a moot question.

Hang on, for there are reasons for optimism. There is another side to the history of American corporate world that is equally interesting. The corporate landscape of the USA is equally swamped by philanthropic deeds of the corporate barons who poured their individual fortunes made out of their personal investments into great universities, art galleries and medical schools. As recently as last year, Gordon Moore of Intel reported to have donated US $5.8 bn to their family foundation and another US $300 mn to California Institute of Technology. It is an acclaimed fact that the richer the Americans become, the higher the amounts that they contributed to charities, just as Bill Gates, Warren Buffet did.  

The American business system besides being highly creative has virtues as well as vices. And there is nothing surprising if the Americans had alternately deified and demonized the corporate bosses. That aside, what now matters most is, “What this history of philanthropy exhibited by the business barons got to say about the ongoing ruckus over corporate malfeasance?”

This conflicting exhibition of virtues and vices perhaps reveals that pursuit of personal interests purely driven by “infectious greed” is less likely to do any public good. The “invisible hand” becomes visible if only the individuals or corporates pursue their interests purely with honesty of purpose and integrity of approach. Any deviation from the commonly expected rational, cool-headed and law-abiding behavior is more prone to belittle Adam Smith’s proclamation. In the ultimate analysis, who knows, it might not do any good even to the pursuer of chickenary, for he is likely to be haunted by the law enforcing agencies compelling him to cough-out the ill-gotten money. Even jail-terms cannot be ruled out as is currently being contemplated by the political bosses. Such a reaction from the society for reversing these alarming trends when there is still time, hopefully should put the system back on rails enabling it to contribute its expected might to the public good. And who knows if this mechanism is a part of the “whole” that constitutes Adam Smith’s invisible hand working silently towards public good. If that is true, it is time for the eminent public-spirited businessmen of integrity to come forward and take the lead in devising measures to combat this metastasizing malignancy. Else, there is every danger of political bosses, in their anxiety to prove their commitment to sanitize the system, enacting stifling legislation that may ultimately prove to be more harmful than the disease itself.

Whether such a movement would restore the role of the corporates in contributing to the public good as contemplated by the great Philosopher and Economist, Adam Smith way back in 1776 or not is one for the corporate world and its leaders to decide.

GRK Murty


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