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
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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.