Don't forget society in name of shareholder value: Rajan to companies

Davos: In his usual plainspeak, RBI Governor Raghuram Rajan on Friday said companies should not forget society while maximising shareholder value, even as he warned his own tribe of central bankers against becoming quick-fix solutions for plunge in markets.

Speaking here at a University of Chicago debate on corporate social responsibility (CSR), Rajan said, "I think what was supposed to be maximised in the history, that has changed" and ideally, a trader should not charge anything beyond the just price, otherwise he will have his reckoning with God.

"There are circumstances in which shareholder value maximisation doesn't work... Not everything done in the name of shareholder value is good for the company," the central banker said.

Stating that the meaning of the maximising of shareholders' value has gone through a change, Rajan gave example of "a bunch of employees contributing a huge value to a firm", but the benefits of the value actually going to the shareholders.

"If you are just maximising the shareholders' value, I think you are doing wrong to society," he said, while adding that there have been cases when a firm will give value to shareholders and then say let the shareholders decide what to give to society.

Speaking about the role of central bankers in the ongoing turmoil in global markets, Rajan maintained that the monetary policy may not do everything, but still there may be central bankers saying they have everything at their command and they will take all necessary steps.

However, such actions even from the word go to boost growth etc would lead to a time when harmful impact of such monetary policy actions would outweigh the benefits in the longer term, he cautioned.

"The bottomline is I will advise my tribe, that is the central bankers, that 'Enough, let the prices find their level. Otherwise, markets will start relying on you'," he said.

Rajan is on-leave Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He has also served as the Chief Economist of the International Monetary Fund (IMF).

He was participating in an expert panel discussion organised by the University of Chicago here on the sidelines of the WEF summit, along with a group of business leaders and the University of Chicago Booth School of Business economists.

The panelists included Deloitte CEO Catherine Engelbert and BlackRock Inc chief Larry Fink.

Rajan also said he is not worried about new forms of technology and communications. "But at the same time, suppose someone writes the software for a robot and then sells all the codes to a network-based structure, which may get the entire monopoly in the market. That tension is one tension in my mind that we will have to explore in future," he added.

"We need to calculate what is the value creation and what could be done to maximise the value for the social welfare also. If your employees do not believe in what you are doing, they won't be part of it.

"My daughter says she cannot work for a company if she feels the company is not doing something good. There is a complex maximisation programme that needs to be followed. It is a little more complicated, but we need to explore what can be done."

On a question about lobbying, Rajan said it obviously skews things in favour of or against someone, but it is not always like that and there are also the corporations, the unions or other strong organisations.

There are various forms of lobbying in society, but there is a need to take a holistic approach on this issue, he added.

"In India, we do not have a good resolution process, so what happens (is) that if a large corporation falls in distress, the entrepreneur calls up creditors and says I have a problem and I cannot pay.

"But if you take me to the court, it will take ten years and you may not get anything so why don't we do something that I give you some money and you forget the rest," Rajan said. At the same time, the small guy is at the mercy of creditors entirely, so what happens that the large guy gets away and the small guy gets into the court, the RBI Governor noted.

He, however, added that India is getting a new bankruptcy law which will help.