 Namaskar, I'm Prasad Devadeep Prakastha from IIT Bombay and I welcome you to my course, Business Fundamental for Entrepreneurs Part 2, External Operations. I also welcome you to this guest session by Mr. H. V. Harish on how to build responsible businesses. As background, Mr. H. V. Harish is the founder and managing director at E-Cube Investment Advisor and he has deep experience in the ESG domain, which is Environment, Social and Governance Domain. Before founding E-Cube, he was a partner and in the India leadership team at Grand Tonten. He has over 31 years experience in corporate finance and consulting. He has studied at IAM Kolkata and the Harvard Business School. With that, over to Mr. Harish. Hello everybody. It's a pleasure to be here and talk to you on the responsibilities of business today as part of your learning and I look forward to an engaging discussion with all of you. Let's look at the responsibilities of business in the following perspective. First is why should businesses do anything other than what they are supposed to do? What are the specific responsibilities of business? And then we will cover three basic frameworks. One is the UN framework. The second is what is called triple bottom line. And the last is a topic that I work more actively on which is called ESG. Now, if you look at the statement of a purpose of a corporation, it is reflected in the views of the members of the CEO around table that to succeed and profit over long term, they need to consider the interest of all their stakeholders, invest in their employees, keep the trust of their customers, partner with suppliers and be a good member of their communities all to ensure that their enterprises flourish far into the future. The best modern CEOs have been running companies this way for a long time. So what's the essence of this statement is businesses are not here only to make profit but in order to make profit and survive in the long term, they need to do much more. Now, I just want to set a bit of global context to where we are today in the world. And I'll take you to some challenges that the world is currently facing. And you might wonder what does this got to do with responsibilities of business, but I'll come to that shortly. The first and most important challenge we are facing today. And as we all know, the heat is on us is on environment and climate. Here you'll see some charts and data on global warming, where we are seeing many of the food producing regions are projected to become drier. There will be more precipitation in other areas. And I think we are seeing the effects of global warming and climate change in everything we do. The other big challenge. And here I'm sitting in Poway is the rise in sea levels. It is estimated that a billion people who live in low lying coastal areas would be impacted. And there are threats that maybe Naruman Point won't be around once the sea level starts rising. And the sea levels are continuously rising, as you can see from the chart below. Again, it is not just climate and sea levels. It's also a loss to GDP for a number of countries, which is causing economic damage. Here is an estimate of the kind of economic damage that global warming is causing. And the environment is not just about global warming. It is about pollution of land, air and water, hazardous chemicals and waste, land degradation, loss of biodiversity and ozone depletion, which is in turn causing climate change. So this is one of the big challenges the world is facing today. The second challenge that we are looking at is rising inequality in society. Now, here is a chart of wealth inequality in India, which shows the share of population group in total wealth in terms of percentage over a period of from 61 to 2020. So if you see in 1961, the top 1% controlled about 12% of the wealth in India. Today, it controls 42%, whereas the bottom 50% had 12% of the wealth in India, but today they are just 2.8%. So this is a big challenge that as we see in the common phrases, the rich are getting richer and the poor are getting poorer. Again, we are seeing growth in compensation in the IT sector. For example, over the last 10 years, the CEO compensation grew 840% over 10 years, whereas the salaries of entry level grew by 47%. The ratio of salaries between the CEO and the entry level grew from 163 times in 2012 to 1048 times. So we are seeing a huge challenge in terms of the wage gaps and we are seeing many other non-economic inequalities. There could be inequalities due to gender, race, caste, class, etc. So there is a lot of inequality out there in the world. The third problem is governance. We are seeing a number of governance challenges in corporates, whether it is Indian or international. We are all familiar with stories of Satyam, Enron, Theranos and a number of other stories. Even in startups, we are seeing a number of challenges due to poor governance and oversight. For example, Go Mechanic, Zilingo where the founders admitted to taking the wrong decisions and helping themselves more than they should be doing. So this is a huge challenge again in today's society. Again, if you look at the public listed companies, people are pushing back on governance. A lot of listed companies are facing challenges in getting approvals for a number of decisions. Here is some data. For example, more than 20% institutions have voted against many of the parameters that typically in the past would get approved. So there is a pushback towards governance and that is seen as a challenge. Again, in the context of climate change, we are seeing a number of challenges because everybody wants to appear that they are clean and green and they sometimes resort to, how shall we say it, fudging to claim that they are green or climate neutral. And here are some headlines that show what is happening in the world. Now, whether it is climate change, whether it is environment, whether it is growing inequality or governance, why should corporates be concerned? Typically in the past and the common sense view is these are challenges that government should address or society should address. There is nothing to do with the corporation. So the change which I'm talking about is that the corporations have reached a level of wealth and influence that they cannot disengage from the problems of society and the environment anymore. It is also in their self-interest. If tomorrow the rising inequality causes social tensions or climate change is caused significant economic damage, the people who would be damaged or who would be impacted would be the corporates. So if you are a sensible corporate, you need to do your bit on whether it is social issues or climate issues or environmental issues. Just to give a sense, the scale of large corporations as a proportion of world GDP is growing very rapidly. The business factor contributes to 72% of GDP in the OECD countries and corporations with a billion dollars in revenue are a very significant share of that. The top 50 companies by value added 4.5 trillion dollars of stock market capitalization in 2020, which is about 28% of the global GDP. This was less than 5% some years ago. India is no different. We are seeing again a very significant increase. The market capitalization of listed companies is 99% compared with 79% in the previous year. So corporations have become very important. They control a large portion of global assets, employ a huge number of people directly and indirectly impact through their supply chains, both suppliers and consumers and therefore engage directly with most of the global population. This leads to a disproportionate ability to influence policy and society. A lot of corporations are active in lobbying and getting advantages for their own business. Given all this and the fact that many corporations today are larger than many countries, it is important that corporates start thinking beyond their own bottom line. And as I said, this is in their own self-interest. So why should corporates take responsibility? First is that the world has changed a lot compared to the past. Society expects businesses not just to provide goods and services. They expect that the businesses are responsible because the society is giving them labor, natural resources and it expects something good. Reputation. I think corporations which have managed and we'll see some examples later to do well for both society and the environment, generate positive brand image for themselves and for their goods and products and it will result in more sales, more profits and attracting good talent. Again, governments have become very active in these areas and if you as a corporate can be more responsible, you will be ahead of the curve of regulations. You can influence regulation and in turn therefore impact people who are not following the regulations. So it's better that you become self-disciplined than become disciplined once there is a law. And of course, as a corporate citizen, you ought to follow the law. And as I said, in the long term for our society and for our business to prosper, we need a good environment. We need a healthy social climate and if these two are not there, your own long-term survival as a business is at a challenge. Businesses themselves create social problems like pollution, inequality, discrimination, etc. Therefore, it is your duty to do that. We've talked about environment and today's consumer is also demanding that they need products and services from companies which are doing the right practices. So you will suddenly see that people boycott a particular brand because they are using child labor or they are being extremely polluting or any other such negative consequences. And particularly the younger generation is more conscious of these and are willing to vote with their wallets to shun products and services from companies which they see are not following the right thing. And again, you need to optimize the use of resources. One of the aims is to produce goods and services effectively and efficiently. And resources are becoming scarce. A number of resources are reducing in terms of availability. So one of the mantras of environment is reduce, reuse and recycle. And the more you do that, it is better for your own long-term prosperity. So we just heard about why businesses should be responsible. Now what should they be responsible about? I think it's important that businesses look at all aspects while they decide how to run their business and how to operate. So we looked at different different areas of responsibility for a business. For example, economic, legal, ethical, social, environmental, shareholders, employees, suppliers and bankers, customers and community. So businesses need to manage all these responsibilities just like any other citizen or to do all this. And sometimes you will see conflicts between these two. They also need to be managed. So the first and foremost responsibility of a business is obviously to generate profits, otherwise the business itself will not be sustainable. So they need to generate revenue and profit. And if you look at the core function of a business is to generate profits. Now the other responsibility is help in not generating profit just for a short period but in the long term. So legal responsibility, the corporation and the business is just like an individual. They need to follow the laws of the society and meet the regulations wherever they operate. And now that we have multinationals, they ought to follow rules and regulations and the laws of the countries in which they operate and within the regulations that are required. Clearly if you don't do that, you fall fall of the law and you end up either in trouble, either in terms of paying fines or sometimes even going to jail. Obviously as a business, you are well within your right just like any other citizen. To lobby if you find that a particular law is not working in favour of yourself or the society, you will have to justify it but that is something you can do. The next is ethical responsibilities. First is obviously to follow the letter of the law but also follow the spirit of the law in by being fair to all the stakeholders and not knowingly cause harm to anybody. Social responsibilities. Again, you ought to be responsible to the society in which you operate but don't offer products and services that impact any of these issues. You ought to be sensitive to the cultural milieu in which you operate and be sensitive to the feelings of people and engage actively with society and political system in a fair and non-partisan manner. Occasionally you need to take stances. For example, if you believe that there is gender inequality in the society, you can take a stance to promote gender equality through your actions and your products. Environmental responsibilities. You obviously ought to comply with regulation. Avoid hazardous substances being let into the atmosphere or the soil. Ensure and make sure that waste and recycling is properly addressed. Don't challenge the conservation and biodiversity in the places you operate. Don't allow pollution and related incidents and don't do this only for your operation but from the supply chain to the end. For example, if you are using plastic packaging, you ought to figure out how can you do something to use recyclable plastic or can you reduce the amount of plastic you're letting into society. Shareholders. Again, a very important aspect. Good governance is a sine qua non for any corporation today and it rests on two pillars being fair to all shareholders and transparency and disclosure. Employees' responsibility. Providing fair compensation and benefits to employees is key. You ought to take care of them properly. We saw the example earlier of IT companies in India where it clearly seems that the CEO's compensation is going at a very, very significantly different rate than the employees who joined the company and that, to me, does not seem fair. We also provide opportunities for personal growth and development and sense of belongingness. Companies need to ensure that equal opportunities are provided regardless of gender, social status or other divisions. Ensure a culture of respect and reduce the pay gap between the senior most and the junior most employees within a company. Customers. Again, you ought to supply products and services at what is considered reasonable prices without profiteering to your customers. Don't fall in cartels to make obscene profits. Don't supply products which are unsafe or cause harm to consumers or the environment. Provide them with after sale services as required. Avoid misleading and inappropriate advertisements and do this across your supply chain and address grievances that are required. Again, you ought to have responsibilities to your suppliers. The first is obviously pay them on time. Pay a reasonable and fair price. Provide technical advice. Advise them if you're going to change your product or service so that they can make appropriate changes. And obviously bankers, you need to be transparent with them on the status of your business if there are any challenges. Share it with them early and obviously do your best to pay them on time. So we've learned about the various responsibilities of business after understanding why businesses have to do more than just make a profit and earn a lot of money. There are some frameworks which we need to look at and these frameworks are the UN SDG goals, triple bottom line and the ESD. We will quickly learn about them and in particular spend a little more time on ESD as I mentioned in the beginning. That's a topic that I work currently more actively. So the SDGs, there are 17 SDGs which cover various aspects of how the whole world should look at various problems and which are the problems which are critical and need to understand. So all companies can contribute to the SDGs because these are critical for the future of the world, for the future of society and hence nobody is too big or too small. So there are a lot of details of this and just to give an example of what SDGs ask companies to do, it could be to join the water mandate which is the CEO water mandate that the UN is putting together, set science-based emission reduction targets, endorse women empowerment principles, implement children's rights and business principles, engage in preparing a blueprint for SDG leadership and a number of other actions that are listed on the slide that companies and CEOs should do to help the SDG goals. The next is the triple bottom line which is basically also called the three P's people, planet and profit. As we understood earlier if we don't care about people and planet they won't be profit in the end. So we need to look at measuring all these three. What is the impact that you are having on people? What is the impact that you're having on profit and what is the bottom line that you generate at the end? So companies typically only measure the third bit which is the profit but if you start measuring the cost that you're causing to other people or the planet and start disclosing it, you can start improving those and therefore you will be a better corporate citizen. Now we come to ESG. What is ESG? ESG is environment, society and governance. These are three pillars that investors have come to talk about and they are demanding that companies adopt measurements to show what they're impacting. It is fairly similar to the triple bottom line and is sort of derived from there and now government and regulators are demanding that companies disclose what is happening to their operations in terms of the impact it is causing on ES or G. It's an idea whose time has come and the biggest waterways of ESG today are investors followed by the government, society and consumers. As we understood a little earlier if you are seen as adopting unfair or incorrect practices, consumers will abandon you and therefore you need to do that. The CEO of BlackRock, one of the largest investors in the world, this is what he has to say. Within the next five years all investors will measure a company's impact on society, government and environment to determine its worth. So if you're looking at what is the value of your company and it is not just based on your profit but what impact you are causing to society, to government and environment and the combined effect of it will generate the valuation that you as a company would command and if you're not doing well on any of these aspects you would lose your valuation. So the United Nations has come up with a concept called principles for responsible investment and you can see the number of signatories to these principles and the amount of wealth they are controlling. These are all investors who have a lot of assets under management and you can see the number is growing and growing and all these investors are committing that they will be promoting responsible investment and that could include investment where they won't invest in companies which are causing harm to the environment or to society. A simple example is the number of these people will not invest in cigarette companies because it is causing harm to the consumers and to society in general. Here are two examples of companies that are getting out of oil and gas because they cause a lot of damage to the environment. Now ESG just not focus on doing the right thing but it also addresses the risks that companies face. We learned that in the medium to long term if you don't address the problems of E and S you won't have a business to grow and here are some aspects of risk management that we need to address whether it is climate change, environment, shareholders rights, communities and health and safety. These are all important aspects so don't look at ESG more as something that you have to do to satisfy the government or the society. It is also a very important risk management tool. So what can you do to embrace what is called the ESG agenda? One is to improve diversity within your workforce, within your supply chain, strengthen the local communities that you operate with, align management incentives to not just profit but to ESG and measure what you are doing, measure your impact and disclose it very actively. In conclusion, it is possible for businesses to be profitable and responsible. It's not necessary that if you are responsible you won't be profitable. We are seeing a number of companies so for example Patagonia is a very large retailer and producer of fashion and many other products and the founder has put in all his wealth for the betterment of society and planet and the body shop again tries to ensure that it buys from suppliers and ensures they follow the right practices. It ensures that it uses products or it develops products which have the least impact to society and to the environment. So here are some other examples Starbucks, Patagonia and other companies have signed up for what is called Fair Trade Certified Ingredients. Ben and Jerry's has integrated social responsibilities again, purchases Fair Trade Certified Products. Lego has committed to reduce its carbon impact and got an award for it. Salesforce says 1% of its equity, 1% of product and 1% of employees time is given back to the community and closer home in India we see a lot of companies which are well known for their corporate engagement with society and the environment and they are all doing more and more and getting better and better. So it's not and you can't claim that any of these companies are suffering because they are focusing on these non-profit hearing activities. So let me conclude with a quote from none other than our own Mahatma Gandhi who saw all this many many years ago the visionary that he was supposing I have come by a fair amount of wealth either by way of legacy or by means of trade and industry I must know that all wealth does not belong to me what belongs to me is a right to an honorable livelihood no better than that enjoyed by millions of others the rest of my wealth belongs to the community and must be used for the wealth of the community thank you very much it has been a pleasure and talking to you today.