Moral Relativism

Last evening I had occasion to meet a very senior finance sector executive from the US –now involved in equity investments. He invests serious amounts of money in India, his own as well as that of others –in private equity and public markets.

While commenting on investment opportunities in India, he mentioned that valuations in India do not mean much since corporate reporting is suspect. To use his words – “why should I pay for the expenses of the promoter”? The implication was that all companies “cook” books and therefore investors were seriously disadvantaged.

I mentioned that while it may be true that many company founders tended to take some money out of the business, it appeared to me that this was not significantly different from the behavior of professional managers, especially in the US, who paid themselves disproportionately. I mentioned that I would tend to rate the behavior of Mr. Vikram Pandit of Citicorp in the same category. In my book, taking $165m (out of an estimated $800m) for selling a lemon of a fund to Citi (subsequently shut down one year after it was taken over) and then offering to manage the company for a salary of $1 smacks of extreme cynicism. The response was that this was legal and above board – and more a mistake made by Mr. Prince the earlier CEO of Citi (who, incidentally, received $138m for his efforts at Citi over 4 years).

This is correct. However, the question I ask is – if something is legal is it necessarily morally acceptable? Should society not expect a higher level of ethical behavior from its leaders – political and corporate? In other words – is there a case for expecting moral absolutism rather than accepting behavior because “others do it too”. If the latter, why should society not make such behavior legal – thereby making it “acceptable”.

The shenanigans of corporate America are too well known to bear repeating. Enron through Madoff, the story continues. What is however, only now attracting comment, is the excesses that corporate America has resorted to – well within the law, but way over the top of what one should classify as acceptable behaviour. John Thain’s $35,000 commode is symptomatic. When the senior executives of the top 3 American car companies went to Congress for a bail-out package, they went by private luxury jets.

If Satyam’s Raju is accused (correctly) if siphoning of large sums of money, the story of Merrill is interesting in that it is legal! In a letter dated Feb 10, 2009, the Office of the Attorney General, State of New York, points out that Merrill, with the apparent complicity of Bank of America, paid out $3.6bn of performance bonus on Dec8, 2008 – well before the due date, and after having lost $15.31bn in the last quarter of the year alone. This necessitated a take-over by Bank of America, and a subsequent bail out by the US tax payer. Does the fact that this is legal make the shareholder’s risk lower? I think not!

It would be well to remember that it is not the case of “poor corporate governance in India” vs “rule of law” in the US. It is simply a case of human greed tilting the scales. At the current moment, it can be safely argued that the level of greed exhibited in the West far outstrips that in other other part of the world – perhaps in human history.

Does this mean that Indian corporate governance standards should not be raised? Or, investors should blindly trust the numbers that companies put out – either in India or anywhere else in the world? The answer, clearly, has to be in the negative. As investors, the cardinal rule has to be “buyer beware”. But this is true as much in India as any other part of the world.

The repeated failures of credit rating companies to predict credit defaults, and audit firms to collude with managements point to the acceptance of moral relativism that has, unfortunately, become a norm in corporate behavior.

John Bogle’s recent book “Enough” (an apt book for current times) quotes Henry Kaufman as saying –

“Trust is the cornerstone of most relationships in life. Financial institutions and markets must rest on a foundation of trust… Unfettered financial entrepreneurship can become excessive and damaging as well – leading to serious abuses and the trampling of basic laws and morals of the financial system. … Only by improving the balance between entrepreneurial innovation and more traditional values can we improve the ratio of benefits to costs in our economic system”

An “us vs them” debate at this stage is futile. We all need to look within to see that we act in a manner that can truly be called “professional”.