Chapter 10 Homework Since Inception The Tata Group Has Placed

BECG/130

Ethical Leadership:

Ratan Tata and India’s Tata Group

TEACHING NOTE

SUMMARY

This case is about the Tata Group, one of the leading business houses in India, a key emerging

market. The group had a long–standing reputation for ethical leadership and was well known for its

corporate social responsibility and principles such as the “Tatas don’t bribe” and the “Tatas don’t

indulge in politics”. Under the leadership of Ratan Tata, the group carried forward this legacy and

consolidated its businesses further in India while also acquiring a global footprint.

Group, came under the scanner.

Ratan Tata refuted these allegations and argued that he had not been able to expand more in his

home country due to bureaucratic delays, arbitrary regulatory decisions, and widespread corruption

in various sectors. Despite this, the group upheld its traditions and did not indulge in corruption, he

said. The case study deals with one of the major challenges that organizations face in many

emerging markets: corruption. It is designed to spark a discussion on whether corruption should be

encouraged; whether this is a necessary but transient phase in the development of modern

capitalism in emerging markets; what organizations should do to fight the menace of corruption;

and whether ethical leadership is the answer while operating in emerging markets.

TEACHING OBJECTIVES AND TARGET AUDIENCE

This case is designed to enable students to:

• Understand the leadership challenges facing organizations operating in emerging markets,

particularly in India.

Ethical Leadership: Ratan Tata and India’s Tata Group

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• Discuss and debate whether corruption is a normal part of business, especially in emerging

markets such as India, or an economic malaise that needs to be urgently curbed.

IMMEDIATE ISSUES

• As an organization operating in a emerging market, how to deal with the problem of

bureaucratic delays, arbitrary regulatory decisions, and widespread corruption

BASIC ISSUES

The case will provide the teacher and the students with an opportunity to explore issues and

concepts related to:

• Emerging markets; strategies for emerging markets; leadership issues in emerging markets

• Corruption; bribery; crony capitalism

ASSIGNMENT QUESTIONS

• Is corruption a normal part of business?

• Corruption is often linked to the qualities of a particular country and society. Are some

countries more corrupt and prone to crony capitalism than others?

TEACHING PLAN (Total: 80 min)

1. Introduction of the case (05 min)

2. Class discussion for question 1: (10 min)

3. Class discussion for question 2: (15 min)

4. Class discussion for question 3: (15 min)

5. Class discussion for question 4: (15 min)

6. Class discussion for question 5: (15 min)

7. Summary (05 min)

* Distribution of case and discussion of questions 2–5 days before class.

Ethical Leadership: Ratan Tata and India’s Tata Group

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TEACHING APPROACH AND STRATEGY

The instructor may start the discussion by referring to Ratan Tata’s quote. “I think corruption has

become worse and if you choose not to participate in this, you leave behind a fair amount of

business. . . . You have a non–level playing field and those who do not participate in this (paying

bribes) live at a disadvantage.” Then ask the question: Is corruption a normal part of business?

The response of students to the question may take many forms. Some arguments for and against

the statement, “corruption is a normal part of business,” are given here:

For

Against

Until recently, corruption was regarded as

business as usual. Experts such as Samuel P.

Huntington felt that a corrupt government may

actually be more efficient. According to

Huntington, “In terms of economic growth, the

only thing worse than a society with rigid, over–

centralized, dishonest bureaucracy is one with a

rigid, over–centralized, honest bureaucracy.”

Corruption distorts competition and the

functioning of free markets by giving an

invisible advantage to companies that are

ready to pay a bribe or enter into any other

illicit arrangements. This is a slippery

slope.

the highest bribe as a result of having the lowest

bribery is used to limit competition.

In the case of the 2G scam, rather than the

passed on to the consumers, some of the

companies sold their stake to other

further to drive down operational costs.

companies at a windfall price.

Bribes are viewed as speed money because they

help the companies overcome red tape and the

inefficiency of the public sector. Corruption may

speed up the slow process of government

bureaucracy for those who can pay the bribes. In

the case of the telecom sector in India, it can be

the advantage gained.

Corrupt officials usually slow down the

system rather than speed it up. Company

officials engaging in corrupt practices

have to spend more time dealing with

government officials. It may set off a

vicious cycle in which repeat payments

Ethical Leadership: Ratan Tata and India’s Tata Group

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For

Against

centralized dishonest bureaucracy because they

have to pay a bribe only once. With the telecom

policy being formulated and spectrum being

allocated centrally, it was easier for well–

connected people to have their way.

corrupt practices cannot be enforced

through law. In this case, one move that

the government is mulling over now is to

cancel all the licenses. In early 2012, the

Supreme Court ordered the scrapping of

and regulations. Capitalism inherently breeds

Corruption is best described as a malaise that undermines efforts to pursue economic growth. The

dishonesty of public officials has been viewed as particularly detrimental to social and economic

development. According to the World Bank, corruption is one of the main obstacles to economic

and social development. It holds that corruption is particularly detrimental to the well–being of the

poor who are least able to pay bribes. When public office is misused, a broader societal goal may

be compromised for the benefit of some. In the 2G scam, the money lost could have been used for

At this point, the instructor may bring to the attention of the students the quote from the the New

York Times given in the case—“The incestuous world revealed in the telecom scandal—one in

which ethical lines are blurred between journalists, lobbyists and politicians, and corporate bosses

curry favor with the ministers—has reinforced the perception of an Indian economy dominated by

a small, tightly connected elite.”—and ask the question: Corruption is often linked to the qualities

of a particular country and society. Are some countries more corrupt and prone to crony

capitalism than others?

• Some economists argue that corruption is possible when public servants hold power over

licenses, taxes, and other forms of regulations. The more the power, the greater the opportunity

for corruption available for public officials.

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• It has been noted that countries with lower levels of income are usually more corrupt than

those with a higher level of income.

• The human capital theory holds that levels of education affect the quality of governmental

institutions. A certain level of education is needed for the public to keep the government

accountable.

A discussion of these points makes it quite clear as to why corruption is such a problem in

countries such as India. This may be a good point to make it clear that corruption is not only a

developing and emerging country problem. The conditions that supported irregularities in the

Indian 2G spectrum scam are similar to those that promote bribery and crony capitalism in any

country. (Refer to Figure I for conditions that favor crony capitalism.)

Figure I

Conditions that Favor Crony Capitalism

state

coherent

fractured

III: predatory state

type: top–down

IV: laissez–faire

type: residual

small-N

I: mutual hostages

type: PD collusion

II: rent seeking

type: bottom–up

Source: David C. Kang, Crony Capitalism: Corruption and Development in South Korea and the

Philippines (Cambridge University Press, January 2002)

A country, in the context of corruption, is said to be in cell I in the figure shown here when the

government and business groups have equal strength by virtue of being guarded by time–tested

policies. Mature democracies such as the U.S. and the U.K. have such coherence. Neither

government nor the business community can take advantage because the damage caused by

favoritism would outweigh the advantages. This typically results from strong subgroups within the

Ethical Leadership: Ratan Tata and India’s Tata Group

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Crony capitalism could occur through (i) top–down predation by a strong state on society

(autocracy is the best example of this), and/or through (ii) the bottom–up powerful business groups

that undermine the ability of the state to contain corruption and fulfill their demands by tempting

both politicians and bureaucrats.

In bottom–up crony capitalism (cell II of Figure I), privileged entrepreneurs who can solicit undue

favors from the government will flourish at the cost of other entrepreneurs who are not close to the

government. When such instances of undue favoritism become burdensome to society at large, the

government is rendered incapable of making rational decisions and thus economic growth is

stifled. This type of corruption is typical of a democracy where the political system is not strong

enough to counter the power wielded by business groups. India in its current state of coalition

According to Rostow’s growth model, the economic transitions of countries are accompanied by

the evolution of new political and social institutions that support industrialization and thus

economic development. Any transition would create friction among the newly evolving

institutions, and this friction might lead to chaos before order is restored.

Even in such countries, it is the interaction between government and business that matters most,

and one needs to understand which types of business are vulnerable to corruption. The basic

The instructor may now bring the attention of the students to the quote of Rajeev Chandrashekar—

“Ratan Tata has set an example with his transparency and integrity. In a milieu haunted by

wheeler–dealers and a business climate where companies will stop at nothing to pouch contracts,

[Ratan] Tata is an inspiration for young entrepreneurs.”—and ask: What is your opinion about the

Tata Group? What role did ethical leadership play in the success of the group?

While there will be some discordant notes struck by some students, others will quickly come out

with many facts from the case that support the view that the Tata Group had been exemplary in

promoting ethical leadership.

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• Considered pioneers in the area of CSR in India, the Tata Group played an active role in nation

building and socio–economic development.

• Since its inception, the Tata Group sought to function with ethics, integrity, social

consciousness, and fairness. These values were an integral part of the group.

• Sixty–three percent of the equity capital of Tata Sons was held by Tata trusts, which were

philanthropic in nature. Ratan Tata’s had a stake of less than 1 percent in Tata Sons: “What

came from the people has gone back to the people many times over” (JRD Tata).

• The combined development–related expenditure of the trusts and the companies amounted to

around 3 percent of the group’s net profits in 2011. The group was engaged in social welfare

and environment–related projects worth US$59.7 million for the FY2011.

• Since inception, the Tata group has placed equal importance on maximizing financial returns

and on fulfilling its social and environmental responsibilities: focus on triple bottom line.

• The group started institutionalizing its CSR initiatives in the 1970s. Suitable amendments were

made to the Articles of Association of the major Tata Group companies in the 1970s to

include: “Company shall be mindful of its social and moral responsibilities to consumers,

employees, shareholders, society, and the local community.”

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• The Tata Council for Community Initiatives (TCCI) was formed in 1996 to co–ordinate the

group’s CSR initiatives. TCCI’s approach was to shift the community from philanthropy to

• In order to align its CSR initiatives with business processes, the Tata Group made efforts to

develop mechanisms for integrating social responsibility with corporate excellence. Linking

CSR with TBEM made social responsibility and citizenship core values of TBEM.

• The group followed the same standard of ethics and values in other countries where it

operated.

The Tata Group, a value–based organization, viewed ethics, values, and CSR as core to its

operations. It viewed these as a strategic and important part of the Tata brand. The discussion here

shows how the company had not indulged in just empty rhetoric but had followed it up with

Now, the students may be asked the question: What do you think of Ratan Tata’s leadership? Do

you think that Ratan was able to carry forward the legacy of the Tatas in letter and spirit?

The responses of the students, especially for the second part of the case will be divided, some

arguing that Ratan had been able to take forward the legacy of the Tatas and others opposing this,

citing the 2G scam.

Ratan demonstrated good leadership by:

• Setting up a vision for the company to be globally competitive.

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• Succeeding in taking the group global through a series of acquisitions (Tyco International’s

undersea telecom cables business, Daewoo’s commercial vehicles operations, Incat

International, Corus, Jaguar–Land Rover, etc.). The group had operations in 80 countries

across the globe, and its companies exported products and services to 85 countries. It had

revenue of US$83.3 billion in 2010–2011, with 58 percent of this coming from business

outside India.

This last point will raise a debate in the class with some students arguing that the aftermath of the

2G scam suggested that the group had not walked the talk and might have engaged in practices that

ran contrary to its stated purpose, values, and Code of Conduct.

• Tata Teleservices was one of the companies that had grown by taking advantage of the

government’s ignorance of the telecom sector in the earlier years of the rollout of services.

These companies manipulated the government’s policy by acquiring the bulk of the scarce

spectrum for a very cheap price.

bribes.

• A preliminary report by the Comptroller and Auditor General of India computed the loss to the

exchequer at around US$40 billion (Rs. 1760 billion) due to the MCIT favoring allocation

rather than open auctioning. The report stated that the Department of Telecom (DoT) had

allotted 4.4 MHz GSM spectrum to Tata Teleservices at the 2001 price, for which the

company had paid around Rs. 16 billion. The CAG report stated that the same amount of

spectrum could have cost anywhere between Rs. 90 billion and Rs. 200 billion for Tata

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Telecom Regulatory Authority of India, and shared the information with Ratan and other

senior Tata Teleservices employees.

• The lobbyist wanted Raja in the cabinet as Minister of Communication and Information

Technology. Niira Radia: “I am talking to Raja every day and I know, I can see his body

language. Raja will be very cautious with what he has to do but we have to step in. Tatas and

Mittals (are) telling him that we will take you all the way.”

Others will counter these arguments by saying:

• While investigation was still running against other companies, the Central Bureau of

Investigations had given the Tata Group a clean chit.

• The Tata Group’s frustrations showed through as it failed to have a level playing ground. The

company had to fight an 83–day legal battle with the government to get its share of spectrum.

• Ratan Tata did not ask the government not to use the Radia tapes; he was praying for

restrictions on unauthorized publication to protect his privacy, considering that some of the

conversations between him and Radia were personal in nature.

• One cannot discount the fact that Ratan Tata had taken a lot of initiatives to further

institutionalize the group’s values and CSR and align them with the group’s strategy, for

instance, by formation of the Tata Council for Community Initiatives (TCCI), developing

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business climate where companies will stop at nothing to pouch contracts, [Ratan] Tata is an

inspiration for young entrepreneurs.”

As the dust settles, the instructor could bring the students back to Ratan Tata’s quote. “I think

corruption has become worse and if you choose not to participate in this, you leave behind a fair

amount of business. . . . You have a non–level playing field and those who do not participate in this

(paying bribes) live at a disadvantage.” By now, the students would be well acquainted with the

fact that corruption is a significant management and leadership challenge faced by organizations

operating in emerging markets. For a multinational company, the choice might be not to venture

into a market where there is widespread corruption, but this is not so for a company for which it is

the home market. This might be the right time to ask the question: What should Ratan Tata do to

ensure that the group carries forward the ethical legacy of the Tata Group and does not view

it as a burden while operating in emerging markets like India?

Students will note that Ratan himself was getting increasingly frustrated with the level of

corruption prevalent in his home country. He felt that the group did not have a level playing field

The question to be asked is, even if corruption pays, should management refuse to engage in

corruption because it is wrong? In the course of the discussion, it will come out that to indulge or

not indulge in corruption is a choice, and the Tata Group, ever since its inception, had grown and

prospered while maintaining high ethical standards. It was one of the leading groups in the country

operating in many important sectors. It was also India’s most renowned group globally. It might

have been pegged back somewhat by not indulging in corruption, but what it had lost in these

businesses, it had gained due to its reputation in other businesses. Its ethics and values were very

the need for and the extent of corruption.

In carrying forward the legacy of ethical leadership, Ratan and his predecessor had done well in

institutionalizing the values of the company. The company had clearly articulated the Tata Code of

Conduct to manage ethics internally. It had even adopted policies and standards of behavior that

companies are not obliged to do. Most of the group companies were signatories to the Global

Compact, which urged companies to “work against corruption in all its forms, including extortion

and bribery” through the development of policies and concrete programs. Such voluntary

participation could play an important role in finding innovative solutions to the malaise of

corruption.

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References and Suggested Readings:

Books

1. Paul Griseri and Nina Seppala, Business Ethics and Corporate Social Responsibility

(Cengage Learning EMEA, 2010).

2. David C. Kang, Crony Capitalism: Corruption and Development in South Korea and the

Philippines (Cambridge University Press, January 2002).

Articles

1. Nikhil Kanekal and Shauvik Ghosh, “Ruling Disconnects Telcos . . . ,” Mint, February 3,

2012.

8. Pradip R. Sagar, “2G Scam: Tata Group Gets Clean Chit,” DNA, April 3, 2011.

12. “DoT Begins Survey of 2G Scam–Hit Cos,” www.businesstoday.intoday.in, November 22,

2010.

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27. Kunal N. Talgeri and Sriram Srinivasan, “The Countdown Begins Now . . . ”

www.outlookbusiness.com, February 9, 2008.

28. Pete Engardio and Nandini Lakshman, “The Last Rajah,” www.businessweek.com, August

13, 2007.

29. Elliot Wilson, “Tata’s Global Ambitions Show No Sign of Abating,” www.asiamoney.com,

July 2007.

35. “Tatas Index Their Social Conscience,” Times of India, March 27, 2004.

36. Anant Nadkarni, “Convergence Process,” Tata Workout, www.hdrc.undp.org.in, June

2002.

37. B.G. Deshmukh, “Tata Workout,” www.hdrc.undp.org.in, June 2002.

38. J Ardeshir, “Convergence of CSR with TBEM,” Tata Workout, http://hdrc.undp.org.in,

June 2002.

39. “View from the Top,” www.tata.com. June 2002.