Dr Shashi Tharoors keynote on Looking beyond Profit at IIM Summit: Full text - Part 1

Union Minister of State for HRD Dr Shahi Tharoor delivered keynote address at IIM World Conference in Goa on May 31, 2013.
His address was based on the theme Education & Looking Beyond Profit. The two-day world conference on Emerging Issues in Management was jointly hosted by Indian Institutes of Management.
In his address, Dr. Tharoor urged businesses and B-schools to look beyond profit and come forward to contribute towards the overall development of the society.
Here follows the full text of Dr Shashi Tharoors address at IIM Meet on May 31:Let me begin by saying how delighted I am to be amongst you all today for the inaugural edition of the IIM World Conference with the theme Emerging Issues in Management. Coming as I am from an academic background devoid of any formal education in management theory unlike my senior colleague Pallam Raju, who actually has an MBA but, given my seven years of professional experience managing the largest department of the United Nations Secretariat, with over 800 staff in 77 offices around the world, a shrinking budget and political pressure to prune overheads, the theme I have chosen for my remarks today and one of the overarching themes being addressed at this conference is Looking Beyond Profit. I chose it because I think it represents a vital area where management theory meets the challenges of the real world and is forced to acknowledge both its internal limitations and external constraints. Given the experience of the developed world in the last half-decade or so, especially the recent backlash against the Anglo-American model of laissez faire capitalism, in the wake of the global recession, and given the difficult choices we have had to make during our own six decades of experience as an independent nation, and we will need to make for the foreseeable future, I am sure you will all agree that it is a theme that is more relevant than ever for not just teachers and students of management such as yourselves but for all of us who care for Indias present and future.
Before I do so, let me compliment the Directors and faculty members of the IIMs who were part of the team that has conceived and organised this conference. In over six decades of their existence, Brand IIM has well and truly come into its own and is today synonymous with a world class management education with a distinctively Indian flavour. The story of the recent economic resurgence of India would be essentially incomplete without acknowledging the critical role collectively played by the IIMs in providing our country with an amazingly talented, highly motivated and highly successful group of managers who have gone on to transform every area of our society and economy with their exceptional leadership. I cannot even begin to enumerate the extraordinary achievements of IIM Alumni and the difference they have made to India. But I am proud to affirm that your alumni have more than realized the hopes and vision with which Pandit Jawaharlal Nehru first envisaged your existence. As in so many other areas of our nation-building, we must pay homage to his farsightedness for realizing that to meet its tryst with destiny India would need world class leaders of business and industry.
I want to outline before you my view of the challenges we will face in the 21st century, and I put it to you that how we think of profit must also change to reflect the ways in which we, as a society and a nation, will take on those challenges. We are dealing with two topics of long-standing controversy here: the role of profit in economic activity, and the role of government in economic activity. The former has seen much debate and evolution since Adam Smiths work on The Wealth of Nations was decried as promoting the worship of Mammon. The latter, too, has seen its share of theorists and trials, be it the dominant Keynesian formulations of the 20th century, or Indias own experiments with Nehruvian / Fabian socialism and the planned economy.
What we are seeing evolve today, however, is a sophisticated and interconnected system which I like to think of as an emerging knowledge society. Note that I say knowledge society, and not merely the knowledge economy whose benefits, we are told, India stands to reap. A knowledge society is dedicated to the greater goals of development and integration in an atmosphere of enlightenment; the rules of the market economy certainly have their role to play, and indeed are of great benefit when applied in their proper place, but that is no invitation to apply the economics of the market-place indiscriminately to every field of human endeavour. After all, another long-running debate has been about whether rules of economic rationality also approximate rules of justice, fairness and morality. The jury is still out on this one there is, for instance, Justice Richard Posners persuasive writing in the USA regarding the economic efficiency of the Common Law but suffice it to say that human rationality can factor in more variables than the traditional economic model would permit.
In this emerging (also, emergent) system, our concept of profit too must be re-examined, to align more closely to what is profitable in a knowledge society. Traditionally, profit (and its related concept, profitability) reflect simply an assessment of the extent of returns one can expect from any economic enterprise that is, how much one can expect to make over and above the amounts needed to cover the costs involved in that enterprise. Profitability is also a factor for assessing the merit of any such enterprise. The rationale for such evaluation is elegant in its simplicity: the goal of any such economic activity is to provide the greatest possible returns on the resources invested in it, presumably with each investor gaining a share proportionate to their contributions. A profitable endeavour can best provide such returns, hence succeeding in its prime goal. That is to say, barring any form of impropriety or diversion, shareholders can expect to see their share of profits generated by enterprises in which they have invested.
This is, of course, an exaggeratedly simplified view of profit and business. The devil is in the details, or in this case, in the definition. We all know profit equals earnings less costs, but exploring that simple formulation in any detail opens a fair few cans of worms. What revenue qualifies as an earning, and what exactly does one account as a cost? What exactly does one do with whatever amount has been identified as profit, and what (if any) implications does that have for profitability? And on which of these does onehave to pay taxes, as opposed to those on which one can safely claim an exemption? (Incidentally, it is by virtue of their mastery over this arcane knowledge that CAs, CFAs and tax lawyers are such feared and respected figures in our community. This is an example of information arbitrage, and it is one of the traditional means of cornering profits which the 21st century knowledge society, with its tax submitting software, might well make increasingly obsolete.)
The moment we delve into the definition of profit, some reservations can arise. One is fairly evident and well-explored: a preoccupation with profit in the present too often translates into neglecting the sustainability of profit (or the enterprise, community or society itself) into the future. The practically universal adoption of Corporate Social Responsibility (CSR) norms and practices can be seen as one form of awareness of this shortcoming: businesses across the world now accept that their earnings, their profits, come from society, and as such they must take steps to ensure the health and vibrancy of society if they are to thrive. Further, as we are coming to realise, globalisation and a shrinking planet on which, more to follow do not permit the commercial equivalent of slash and burn agriculture. Rather, a society or community must be cultivated with care and attention if it is to serve as a lasting asset. As the global financial crisis most recently established, anyone who erodes parts of the foundational linkages between economics and people anywhere in the world soon finds that he has undercut himself in the bargain. Regaining a steady footing from that position is proving a challenge for two entire continents even today, and the measures those nations take in this effort continue to have implications for every one of us, even here in India. The changing profile of tourists visiting the lovely state of Goa and the nationalities of those purchasing property here is but one illustration of how financial instability, change and rebalancing in the economic centres of the West can be transmitted to our shores!
This idea that profits ultimately stem from society can be thought of in terms of Public Trust doctrine. Gandhiji had spoken of trusteeship, this is a related idea. Simply put, we are given only temporary stewardship over the resources we use, which makes it our duty to pass on to our successors resources undiminished in quality or value, though they may be transmuted in form. (Environmentalists have long made this argument: an African proverb which my former boss, Kofi Annan, often quoted says the Earth is not ours, it is a treasure we are meant to safeguard for the next generation.) This leads to an entirely new understanding of profit one which would restrict it largely to the benefit gained from our resources, without depleting the resources to which others, including future generations, are entitled. This is the exact opposite of the traditional view of using resources to generate profits, from whence comes our concern with efficiency, i.e. reducing the extent of those resources wasted in this conversion. In this new conception, 100% efficiency is the minimum we demand, because trading off our resources for gains in the short term would be a loss. Applying gains to improving our stock of resources would be true profit. The implication is that the idea of profit must be reconsidered, to reflect not so much those who can best secure value for the resources they hold in trust, but rather those who can ensure that their resources will be maintained and even grow in value. Profit is inherently judged also in terms of the capacity to make future profits. I put it to you, then, that an understanding of profit suitable to the 21st century is this: profit is a measure of capacity building, and profitability is the ability to improve on existing assets.
In thinking of profit as capacity-building, we resolve many of the definitional conflicts to which I earlier alluded. For instance, when we speak of improvements on existing assets, this must take into account the extent to which our activities are consuming or degrading them in the first place. Evidently, profitability refers to net improvement. (I say this is evident, because if resources are held in trust by society at large, then distinctions between my resources and someone elses resources are rather artificial. If using my resources to generate a profit also causes the degradation of someone elses resources, then that is a loss, and a loss that must be taken into account before declaring a profit!)
The remaining part of Dr Tharoors keynote on 'Looking beyond Profit' at IIM Summit is published in the next part of this series.
Stay tuned to MBAUniverse.com for more special address by policy makers on MBA Education.
Shashi Tharoor, Union Minister of State for HRD, IIM Summit, Dr Shashi Tharoor

Part 2 of full Speech