Don’t forget society in pursuit of profits: Rajan

DAVOS: In his usual plainspeak, RBI Governor Raghuram Rajan has said companies should not forget society while maximizing 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 maximized 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 maximization 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 maximizing 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 maximizing 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 organized 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. -PTI