THEORY OF TRUST AND A POSSIBLE IMPLICATION ON PREVALENCE OF CORRUPTION

Being corrupt implies destroying integrity by being dishonest and tainting the object in question. The object is generally a relationship between an institution (or an officer of an institution) and an individual (a customer or stakeholder of that institution) in most cases. However, corruption also extends to individual relationships and that is in the simple form of trust. Trust is the corner stone of all relationships in my view; be it a parent-child or sibling relationship, friendship, boss-subordinate or peer-peer liaising, a doctor-patient association, state-civilian relationship etc. The presence of trust provides confidence that the individuals/institutions related in the equation will conduct themselves in an expected fashion. When that expected behavioral pattern is altered, uncertainty increases and doubts creep in causing friction in an otherwise agreeable equation.

In my experience and discussions, such encounters of broken trust are becoming increasingly common and frequent across social set-ups. These instances are of also of varieties and intensities. I am told there once was an individual who feigned illness with one friend to be able to go out partying with another set of friends. All was well until the time the friend who was lied to spotted her friend all hale and hearty making merry. No big deal really, but this definitely corroded an otherwise solid friendship especially since the trust was broken for a trivial reason. There are innumerable stories of bosses filling in their own bonus kitties and not fulfilling promises made to subordinates or alternatively unwarranted promotions being granted out of partiality. At the end of the year not only does it lead to heartburn but increases churn rates of employees in an organization impacting the team morale and general foundation of the entity in question. Negligent and unconcerned doctors cause grave damage to lives and the medical profession alike. Spousal mistrust leading to violence and abuse is only on the increase if media is to be believed. The state and the representatives of the state not delivering on their promises is now sadly an accepted part of life in India.

Why the breakdown of trust at individual levels leads to societal and professional discord is quite interestingly illustrated by Roy J. Lewicki’s framework[1] of trust and distrust.

HIGH TRUST characterized by: Hope, Faith, onfidence, Assurance, Initiative	· High-value congruence · Interdependence promoted · Opportunities pursued · New initiatives	· Trust but verify · Relationships highly segmented & bounded ·Opportunities pursued & risks/vulnerabilities continually monitored
LOW TRUST characterized by: No Hope, No Faith, No Confidence, Passivity, Hesitance	· Casual acquaintances · Limited interdependence · Bounded, arms length transactions · Professional courtesy	·Undesirable eventualities expected & feared · Harmful motives assumed · Interdependence managed · Pre-emption, Best offense is good defense · Paranoia
	LOW DISTRUST characterized by: No fear, No Vigilance, Absence of Skepticism, Absence of Cynicism, Low Monitoring	HIGH DISTRUST characterized by: Fear, Vigilance, Skepticism, Cynicism, Wariness, Watchfulness

If we were to assume a starting point, it may be fair enough to say that most relationships start in the quadrant of Low Trust – Low Distrust(1). There is little expectation from the involved parties of one another. However, a society largely prevailing in this mode is prone to be inefficient given the limited interdependence.

From this quadrant, the relationship in the best case scenario moves to the quadrant with High Trust – Low Distrust (2). Entities and societies in this mode are more likely to be very proficient, cohesive and with a higher quotient of well being as they are most prone to resolving conflicts arising due to trust issues[2]. With a high trust factor and a low distrust factor there is a higher likelihood of people not wanting to destroy integrity. Once that integrity is broken the relationship moves into a place which has the presence of High Distrust. It will be unfair to assume that with one instance of broken trust the relationship cascades into the least desirable quadrant of Low Trust – High Distrust (4).

Taking the case of the friend sighted above and that of professional environments, it is likely that from quadrant 2, the relationship first transgresses to High Trust – High Distrust quadrant (3). If repeated interactions lead to situations where the expected behavioral patterns are altered and/or dishonesty pursues, then the relationship is doomed for quadrant 4. In this environment interactions are fairly guarded, conversations monitored, information exchange not optimal and there are significant inefficiencies in the system.

If I take the context of the urban Indian environment today we are in the High Distrust quadrants. With the state, the relationship of the civilians is in the least desirable quadrant 4. In the case of urban middle class amongst themselves, in my view we are in quadrant 3. There are too many expectations that are laid on people in personal contexts and when these are not met with, the situation is of quadrant 4. This partly explains, in my view, the rising spousal violence, killings of employers (unorganized sector) etc. In the true professional environment money is becoming a key motivating factor and that in the environment of recession if monetary payments are not met there is severe corrosion of trust. Thus at work we are shuttling between quadrants 3 and 4. There are fewer people who trust in the “goodness” of another individual or institution.

Thus, in my view, whether we eradicate corruption or not is dependent on whether we can restore trust and eradicate distrust. If we can at least lower the prevalence of distrust, we will be able to move towards creating an environment where dishonesty is lower. Lower dishonesty will promote trust. There is a chance then that we may be able to create an environment of existence are quadrants 2 and 3. Whether, the Jan Lokpal bill, can achieve this aim, I remain skeptical! Not because of lack of trust or dominance of distrust, but because I do not believe centralization of an issue is an efficient means of arriving at a resolution.

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[1] Ref: A Cognitive Theory of Trust, Hill & O’Hara

[2] Lewicki et al., A Cognitive Theory of Trust, Hill & O’Hara

Has India Really Arrived?

The July 9th edition of the Economist carried an article with the title “Overconfident India”, claiming that “Indians are complacent about the perils of multi-lateral diplomacy, and much else”. The article which had a very condescending tone evoked a variety of responses from the Indian diaspora in London. There were some who felt that recently the Economist has taken a holier than thou approach towards emerging markets (recently the publication carried a similar article on Russia) which should soften. A few opined that the general judgemental nature of the bi-weekly magazine is on a rise and creating a bad taste in their mouths. Strangely some people I met were indifferent to this article as in their view it made no difference what the Economist had to say, India had arrived. And then there was a bunch, admittedly a minority, which did think the article was based on strong arguments and stating only the obvious albeit a little too abrasively.

After having read and re-read the article and having discussed it with a number of people, I have been trying to figure out where is it that I stand. I am not sure that the tone of the article is acceptable but then the truth of the content cannot be ignored either. As difficult as it is for me to admit, I have to be truthful and say that I do believe that we Indians have let the bull markets drive our confidence to a point where it is now bordering on arrogance. Like the group of indifferent Indians we would like to believe that India has arrived on the global map and we can demand the moon and the stars and the world should deliver.

However, is it really true that we can still tempt global investors to pump their money into our country which desperately needs foreign investment? Is FDI in India still as viable an opportunity? Will FII money get the same returns in India as opposed to say the Middle East? Has India Inc generated sufficient confidence with investors to back them in difficult times? Have our regulators worked with a larger view in mind? Is our legal framework strong enough to handout timely judicious decisions? These are questions that need some honest answers in order for us to be able to really review as to how truly India has arrived.

In the last few years, it is a fact; India has received a record amount of foreign investment. While lower than some other emerging markets, the capital inflow into India had been rising until the credit crunch started. However, if one inspects more closely, most of that investment came as all global investors wanted a piece of the action. The numbers also justify this. From April 2007 – March 2008, while the FDI in the country was c. USD 29.89bn, net FII into the country was also similar at c. USD 29.40bn. In fact this FII figure would have been higher had the market not tanked in 2008 when foreign investors were net sellers of c. USD 10.64bn in the months of February and March. Hence my conclusion that investors came into India to gain from an upward momentum in the stock market not with an intention to invest from a long term basis. This in itself should indicate that we as a country have not arrived. People are not buying into our long term strategy yet.

An infrastructure deficit country, representing a USD 500bn opportunity in the next four years, India should be able to attract a lot more FDI. What is rather interesting is that the highest FDI has come into the services sector (financial and non-financial) which is almost 2.5x that of infrastructure inflow. In fact the cumulative FDI figures from April 2000 – March 2008 indicate that the most attractive investment proposition has been the services sector with 22.64% (financial and non-financial) share of the entire pool, with infrastructure accounting only for 9.35%. There has to be a reason for foreign investors not putting money into Indian infrastructure. Yes, initially infrastructure was a closed sector; however, even with 100% ownership being permitted the sector is not attracting investors. Is it the absence of independent regulators? Is it the fear of governments not being able to fund annuities? Is it the absence of quality strategic partners? There needs to be a reason for this slow moving inflow. And we need to address this. In the absence of a domestic corporate debt market and limited availability of bank funding currently (both domestically and internationally) are we planning to fund the entire spend via equity markets, PE funds and sovereign reserves?

Well it can be proposed that infrastructure and FDI represent areas where interest is just beginning to develop and so over the coming years there is tremendous potential. I will buy that for a while. Let us turn our attention to India Inc in that case and see if we as a country have given the world enough confidence to invest in our propositions because that is the key to unlocking the dollar inflow. Indians are well known for their entrepreneurship and that has never been of any concern. However, corporate governance in India has questionable for quite some time now. To quote our premier Dr Singh from his recent (July 01, 2008) speech at the Jubilee year celebration of the Institute of Chartered Accountants of India, “….I do not find adequate attention being given to corporate governance. Unless Indian firms come to be recognized world wide for good corporate governance they will not be able to compete globally in an increasingly interdependent integrated world. In the era of protectionism few bothered about corporate governance and transparency in accounting and management. Such laxity, however, is no longer possible.” For the head of the nation to say this is publicly indicates that corporate governance is indeed an issue which needs to be addressed. The question is how are we addressing this.

Corporate governance depends on the commitment of managements towards integrity and transparency in business. The legal support provided by the judiciary also goes a long way in determining corporate governance standards in a county. Most of our businesses are promoter backed businesses with decision centres being at the helm of the family. While professionals are employed, in a number of cases, these individuals do not have the authority to make judgement calls. Why talk only about the corporates. Even Indian banks (public and private sector) which have offshore branches have a system where by all decisions are made by the same central committee in India. This decision making process behind closed doors does not suggest sufficient transparency. With a lack of autonomy and accountability it is difficult to retain talent which impairs management quality. With families owning majority of the voting rights in corporate India, sometimes via cross holdings, achieving an impartial vote is difficult. Concentrated shareholding also greys the area between generating shareholder value and creating personal wealth. It becomes even more critical, in countries like India, for the law of the land to protect rights of the shareholders. The English common law legal system, which India follows, could come to our rescue here. India in fact ranks highest in the shareholders’ rights index with a score of 5. However, the rule of law index which measures the implementation of written law shows a different picture. India ranks 41st out of 49 countries ahead only of Nigeria, Sri Lanka, Pakistan, Zimbabwe, Colombia, Indonesia, Peru and Philippines. In fact our judiciary has limited capacity to deal with securities cases. While High Courts of Delhi, Mumbai, Kolkatta and Chennai are equipped to deal with such cases, they can only deal with the cases that belong within their territorial jurisdiction and only if the claim is above a certain threshold.

India’s ranking in the global corruption perception index is not spectacular either. As a nation we rank 74th, down four positions from 2006. That does not sound like progress. In fact Transparency international reports that Indians below the poverty level cough up almost INR 9bn annually to pay for basic necessities such as electricity. In addition, recently the attitude of the Indian government toward the German government offering free information on un-accounted money belonging to Indians, lying in Liechtenstein, has raised eyebrows. While other nations have taken the information provided, Indian government has taken no action and only maintained silence. This does not speak well about our attitude towards transparency and curbing corruption.

Corruption can be cleansed with time and corporate governance can be developed with time. These arguments could be put forth. Well then let us see how our regulators stack up. As opposed to dealing with one or two regulators, Indian corporates need to deal with the government of India, the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). While the government formulates big picture policies, the RBI and SEBI are responsible for implementation and execution. There is a clear lack of co-operation and co-ordination between the government and the regulatory bodies. Take for example the 2007 budget speech of the finance minister. He announced that post the February 2007 budget, short selling for institutional investors would be permitted. There was no action taken by SEBI until late 2007 when it was announced that short selling would come in effect on 21 February, 2008, however, there is still no sign of this being put into operation anytime soon. Similarly, the same budget spoke about exchangeable bond issuance being permitted. The RBI published the guidelines only in early 2008 and even then the execution framework has not been detailed. For a country that is looking to invite investors these delays just seems too long and irresponsible. And while these are just two instances, many more such examples exist. Investors do not wait for anyone but the right opportunity and if when the cash is available our policies are not, the country will lose out as it has in the past. In fact with multiple bodies governing inflows into India, it is already tedious to set up vehicles investing in the country.

When investigated closely, there is not a single stakeholder of the Indian economy totally developed and ready to take on responsibilities and accountabilities full on. There is still a long way to go for each party involved. How can we then claim that India has arrived?

India is indeed on a growth path, a path that will lead us towards prosperity. However, it is naïve to assume that we have arrived simply because we have been seeing witnessing inflows of capital. It is presumptuous and pretentious. Since the economy has only opened 16 years ago we have only started seeing the colour of money in the recent times. This does not illustrate our supremacy in any way. If we want to continue on the growth path then as a country we need to come out of the current very difficult environment. The global financial markets are in turmoil. Domestic inflation is increasing rapidly caused by the rally in oil prices. A net importer of oil, with subsidies on oil, Indian deficit is only widening. To curb the inflation we need to increase domestic rates which in turn will slow the growth. And a net import economy we have a weak rupee (the rupee depreciated c.9% since Jan 2008) which does not bode well again does it? Let us not forget that we also need to fund the rising food costs and an upcoming election which will eat into the exchequer’s reserves. These are difficult times. Times which call for prudence and perseverance. Times which call for collective measures to be taken. It is high time for India to wake up and smell the coffee!

Money Money Money

India ranks 74th globally in the latest global corruption polls and is deemed less corrupt than Pakistan and more corrupt than China. After the report has been published, what we (or rather our journalists) would like to focus on is not how India’s position has deteriorated but how India is still better than Pakistan.

Let us forget that comparisons should not be made and absolute progress is what should be considered. If we do want to compare ourselves, then why compare ourselves with a nation that is economically and politically still quite a few years behind us. Why can’t we compare ourselves with a Japan or a Singapore or even a Bhutan which is apparently the least corrupt country in Asia? Why do we take solace in the fact that someone is behind us? Why can we not look at adopting the best practices of those doing better than us?

My own opinion is that we should not compare ourselves with anybody but see the actual progress we have made. In this case, in fact, there is no progress - we have only moved two steps behind. For a country that talks about morality and spirituality at every given opportunity this digression is quite ironic.

I believe that each one of us Indians has a role to play in aiding and promoting corruption. Starting with procurement of a personal driving license, to getting government approvals for corporate projects to getting asset managers to invest money in a company, there are people who have resorted to under the table transactions. Then to top it all, we the educated, do not even want to vote in elections stating that each candidate is corrupt and that one less vote will not make a difference. When we do not want to take responsibility for the simplest democratic obligation that we have, how can we hold anyone accountable to carry on their duties responsibly?

A very amusing incident happened with me a few weeks ago. I was meeting a senior professional visiting London. In his view I should be moving back to India as the opportunities there are far more. Could be a valid point. However, his pitch to me was I could make more money because in India I could “manage” my taxes more “efficiently”. In his words “You should give this a very serious thought because money is the only thing that talks and gets you what you want in life!” This is an interesting view indeed. I am not saying that money is not important. I do like my holidays and perfumes and the ability to afford some luxuries. However, I will not accept as true that money gets one what they want in life. Money is essential but not the most vital source of achieving ambitions.

If this attitude and belief of money being supreme is held by the well educated, well traveled and prosperous Indians, I am not sure anyone can blame the less privileged to resort to the available means to “make the most of what little they earn”. With this vicious cycle in place there is very little that can be done to improve India’s position in the global corruption ranking. Is it just economic growth that we Indians want to talk about? Is that the only benchmark to judge if India is shining or not? Or is it the only parameter that we are willing to understand?

PS: Interesting article on this topic sent to me by Mr. Cold Caller (how about trying this is India?)

BEIJING (Reuters) - Anti-graft authorities in a southern Chinese city are questioning mistresses of suspected corrupt officials and finding the information is paying off prettily, state media said on Thursday.

Mistresses and "second wives" are common among government officials and businessmen in China and are often blamed for driving officials to seek money through bribes or other abuses of power.
"At least 80 percent of corrupt officials exposed in Dongguan had mistresses who gave us important information that we did not possess," Zhou Yuefeng, deputy director of the industrial city's anti-graft bureau told the China Daily. He declined to give details.

Besides having mistresses, Zhou said receiving bribes in the form of share dividends was also common among corrupt officials in Dongguan. "Our focus this year will be on the taxation and medical departments." he said. "However, that doesn't mean we won't be looking at corruption in other areas."

A report by China's top prosecutor's office last year said that of 16 provincial-level officials punished for serious graft in the previous five years, most were involved in "trading power for sex," along with gambling, money-laundering and shady land sales to developers.