At CII’s Annual Meeting, the PM appealed to CEOs to voluntarily consider their salaries and personal expenditures. He was concerned about the effect rapidly rising top salaries and ostentatious expenditure may have on the social fabric of the country and the process of economic reforms. Industry should be concerned too. It is the immediate beneficiary of economic reforms. The reaction to the PM’s appeal has been shrill: government should not regulate salaries; it should let market forces prevail. Déjà vu. At CII’s annual meeting last year, the PM appealed to industry for ‘affirmative action’. There was an immediate reaction. CEOs spoke out in the media: quotas and reservations would compromise merit and kill the competitiveness of Indian companies. Yet, at CII’s annual meeting this year, its President proudly reported the measures industry had voluntarily taken for affirmative action. One wonders what industry will report to the PM at CII’s annual meeting next year.
What the PM did not say at the meeting last year was that government was proposing quotas in the private sector. What he did say was that he would like industry leaders to consider affirmative action in their enterprises. Similarly, what he has not said this year is that government is proposing to regulate salaries. He has appealed to CEOs to consider the condition of Indian society and determine their actions accordingly. Indeed, Manmohan Singh, who industry leaders never fail to thank for giving them the freedoms they are now enjoying—freedoms to produce what they want, sell where they want, and at prices they choose, was appealing to them to exercise their freedom to lead in other matters also. One of which is the tone of our democratic society. With his observations about CEOs salaries and ostentation, the PM has drawn attention to the finery of some peacocks in the midst of pigeons and sparrows scrambling for grain. Shifting the metaphor, his remarks have set the cat amongst the pigeons. The ideologues of the Left and Right are a-flutter. And the media have sensed the opportunity for some colorful big fights, as they had last year.
One should pause and consider the issues. Two arguments are made against restraint on CEO salaries. One is that salaries must conform to market forces. The other is that it is good for people to show off their wealth because it encourages those who do not have to strive for such wealth too. Let us consider these arguments.
There is competition for leadership talent. Therefore the argument goes that industry has no option but to pay more to get the best. However there is no clear correlation between salaries paid to CEOs and the performance of their companies. Even in the USA, companies with the best paid CEOs do not necessarily produce the best results. In fact, companies with lesser paid CEOs often perform much better. The explanation is simple. What is placed on the top is not always a real leader. Leaders are not corks passively bobbing on an ocean of market forces over which they have no control. Leaders have choices and make decisions that influence the forces around them. Moreover, real leaders have goals that go beyond their personal wealth. Indeed, they have options about how much they want to be paid, how they will spend their money, and what they will do with their lives. Though they should be paid a ‘reasonable’ salary no doubt, it is often not more money that those with real leadership potential seek.
What is ‘reasonable’? This brings up the broader issue of the condition of the society in which businesses operate. Even in the USA to which we turn for ideas about how free markets should operate, mainline business journals have begun to comment on the inappropriate and iniquitous increase in CEO salaries. In democratic societies, leaders are permitted to lead and set their own standards provided they are sensitive to the aspirations and conditions of people around them. If they fail to do so, they lose support. Political leaders get thrown out if they do not make the connection. And controls are imposed on business if society perceives business leaders are not behaving responsibly. Sarbanes-Oxley, which US industry is chafing under, was a reaction by society to the irresponsibility of CEOs. If they had voluntarily governed themselves differently, there would not have been a need for such onerous regulation. Trust cannot be demanded: it must be earned.
The government must improve its own performance. But it is also the responsibility of the PM, as leader of a government that wishes to push ahead with more economic reforms that will give even more opportunity and freedom to private industry, to give his perspectives about Indian society to CEOs and to invite them to be his government’s partners in leading the on-going process of economic and social reform. To this argument some in industry respond that the PM should not talk about what industry should do but concentrate on what his government should do. The riposte could be that, in which case industry should not talk about what government should do and concentrate on what it should do. But surely, in a partnership, both sides must talk about what each can do and what they can do together.