Will manufacturing industry lead the move towards ‘social capitalism’?

  • Articles
  • Feb 03,23
Each company, whether small or large, must calculate a ‘Social Capitalism Index’ and an ‘ESG Index’. The debate will be about what will constitute the indices, says R Jayaraman.
Will manufacturing industry lead the move towards ‘social capitalism’?

It is well known that industries like iron and steel, power generation, telecom, aluminium, mining are all capital intensive. Many years back, one needed Rs 4,000 crores for a million tonne per annum integrated steel plant. Similarly, Rs 4 to 6 crores per MW for a coal-based power plant. These costs do not reflect the amount of loading due to the requirements of environmental friendliness, societal commitments (CSR) and other sustainability factors. For example, between the years 1985 to 1995, Tata Steel spent more than 2,500 crores to completely revamp the technology of iron and steel making, mainly due to technology upgradation and environmental controls. Several ESP’s (Electro Static Precipitators) were installed to capture dust particles.  With the advent of ESG, these costs, either capital or operating (CSR is typically an operating cost, although locating a plant in a remote area can also lead to a higher capital cost), have gone up. Profitability has been affected, but, in the long run, society as a whole has benefited. 

A ‘pure’ capitalistic approach – i.e., bottom line is not everything, it is the only thing – which had worked well so far, has led to large, irreversible environmental and societal damage. The high degree of pollution and particulate matter, high levels of carbon dioxide, income distribution inequality, etc., have led to an acceleration in the destruction of forests, cultivable lands, and unliveable standards of AQI (Air Quality Index). The earliest reaction came when the Brundtland commission of the UN declared a sustainable development model in 1987, after which the concept of the ‘Triple Bottom Line’ (TBL) was accepted, especially for the industry. Manufacturing was naturally included. 

The TBL was a step towards addressing the speedily deteriorating environmental conditions, mainly due to ‘limitless growth’ of the corporate sector, driven by the bottom line and ‘corporate greed’. Unbridled competition, a lust for money based quarterly results, financial engineering as a fine art were all responsible for a world driving speedily towards doomsday. The TBL was immediately welcomed by the business excellence community, which saw an opportunity to mainstream the excellence models into practice. TBL demanded all round excellence to run organisations, bringing into the foreground the importance of governance.

Beginning 1990’s, the TBL movement triggered excellence practices, which started yielding results. Effluent treatment plants became the norm for any new plant construction, ESPs were installed in many power plants and other polluting processes, new technologies were introduced (which were intrinsically more friendly), waste reduction through the adoption of lean manufacturing led to considerable reduction in waste and improved productivity. However, the societal and community angle was not much in evidence. While many companies were happy to begin environmental addressals, they were not willing to spend money on societal activities, such as, building parks, adopting schools, etc. These were bottom-line unfriendly. 

The declaration of the 17 SDG’s (Sustainability Development Goals), and the favourable experiences on the actions taken to be environmentally friendly, convinced the UN to declare the new directions for corporates to grow in a sustainable manner. Sustainability is comprised of three dimensions –environment, social and governance. And thus, we now have ESG. In other articles in the press, I have argued that business excellence practices, including certification to ISO 9000, 14000, 18000, 45000, 27000 etc., are essential to making sustainability happen in the long run. While the certifications have become the norm in many companies, the societal aspect still remains an unfunded, or, largely ignored, activity. Barring some significant exceptions – once again, the Tata group comes to mind – most corporates have not yet accepted that CSR is a profitable activity. Accountants have not yet figured out a way to monetise ‘goodwill’. Until that is done, the ‘capitalistic’ way of thinking will not allow societal consciousness of companies to come out openly. 

It is at this point that one is proposing a ‘social capitalism’, capitalism with a societal commitment. Already, the world over, ‘monetary inequality’ has been widely discussed. Only the day before, print media in India were reporting that 1% of the Indian population owned 40% of the wealth. That is, roughly, 13 million out of a population of 1,300 million people. Most of these 13 million will be found in the metros, leaving vast areas of rural India unwealthy or poor. This situation needs to be remedied, and the Indian manufacturing industry, which currently contributes about 25 % of the GDP, and employs a large portion of the workforce – 27 million out of a registered workforce of 68 million – across the country, needs a new mantra to grow sustainably. 

Social capitalism is a concept where the state provides a framework for industry to operate in. The key features of this framework include: the state has a legitimate role to play in the way business is conducted, the state should not get into the day to day or even the long term operations of most sectors, develop a strong private sector base for rapid advancements in technology, patenting and investments (through banks, financial institutions, venture capital). Each state has to decide on the contents of the framework, but given below is a structure of the same. 

 

Policies refers to the ones made by the central/ state governments, to run the industry on sustainability lines, as described and envisaged in the UN declaration, to be achieved through business excellence practices (BEP) to cover ESG. Governance is in two parts. Governance by companies, to ensure adherence to BEP, and governance by the governments through compliance monitoring. Actions are, again, by both the parties. Typically, companies take actions to establish SDG’s and the government takes actions to promote, facilitate and formalise schemes, like the PLI, Awas Yojana etc., to keep industrial activity on a high keel. Results are obtained by both the participants – government and companies. Improvement is common for both, although companies have to do more at a micro level. This cycle of social capitalism is a non-negotiable for the next many years. Each company, whether small or large, must calculate a ‘Social Capitalism Index’ and an ‘ESG Index’. These two are intricately connected to each other, while one measures the overall impact of the company, the other measures the enablement for a company to establish its social capitalism credentials. The debate will be about what will constitute the indices. Let it begin. 


About the author:
R Jayaraman is the Head, Capstone Projects, at Bhavan's S P Jain Institute of Management & Research (SPJIMR). He has worked in several capacities, including Tata Steel, for over 30 years. He has authored over 60 papers in academic and techno economic journals in India and abroad. Jayaraman is a qualified and trained Malcolm Baldrige and EFQM Business Model Lead Assessor.


*Image Courtesy: Freepik.com
Image by <a href="https://www.freepik.com/free-photo/origami-chain-people-with-globe_9393824.htm#query=CSR&position=0&from_view=search&track=sph">Freepik</a>

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