Profound change is taking place in the business landscape. Rapid and accelerating advances in science and technology are transfiguring the work place as never before. The knowledge era is empowering the customers and employees, democratizing the social, economic and political institutions and creating a sustainable relationship between environment and the human kind. Social and psychological engines fired by the knowledge era are transforming the business, government and societies all around the world. This transformation is also wreeking havoc on the institutions, creating chaos, causing disruption and disequilibrium. Consequently directors have become a besieged lot. Criminal prosecution has been launched in the UK against the directors of the railway track company Rail track for the Potters Bar rail tragedy where track failure resulted in loss of seven lives. Following recent legislation in the U.K. directors could face criminal prosecution if they fail to tackle the cause of workplace stress. The issue of work/life balance has become as important as pay disputes. The humiliation of the world's biggest brands, Coke and Pepsi, at the hands of an NGO is a microcosm of the things to come in the new era. Using a British cliché, if you think we are already in the midst of knowledge era "you ain't seen nothin yet".
New era possesses immense capabilities, tremendous increase in productivity-enhancing technologies, efficiency-enhancing corporate systems, innovation-spurring mechanisms and cost-lowering globalisation which can work synergistically to open endless possibilities. All this is at a cost. Dartmouth Business School Professor Richard D'Aveni, in his concept "hyper competition" advocates that the goal of strategy is to disrupt the status quo. All this means the end of business as usual.

The current scenario of global recession is primarily due to the lethargy of innovation and increasing mismatch between the board's expectations and customer aspirations. This is attributed to the fact that while boards are dominated by males nearing retirement, the markets are being driven by teenagers and those in their twenties who have no say in the strategies of company boards. Reforms such as the ones proposed by Derek Higgss and Naresh Chandra are essential to add diversity in experience, skill, gender, age and ethnic background that will help make boards more tuned to the 21st Century needs. Already leaders of successful organisations are involving these diverse groups including teenagers, embracing the symbols, languages and ideology of what was earlier called the counter culture flouting tradition in favour of disorder and chaos. Thus you have stores like GAP catering to the counter culture and slogans such as Berger King's "Sometimes You Gotta Break the Rules".

Success of a business today is achieved by a succession of second curves started before the first curve fades. Leader's job is to assess the place of the company in the Sigmoid Curve. Things, which have worked well earlier, are no longer doing the trick now. The first curve is peaking everywhere. Organisational learning in successful companies is increasingly being achieved through learning by accommodation rather than learning by assimilation. Learning by accommodation calls employees to undergo an internal structure change in belief, ideas and attitudes.

It may sound paradoxical but excessive freedom and choice is also causing its own anxiety. According to Michael J. Mazaar, author of "Global Trends 2005", individual human beings, cut off from the social and natural objects that surrounded them, shorn of their faith but possessing freedom, confront a multitude of complex, fragmented roles and choices". One of the most challenging tasks of the business leader, therefore, is to prevent alienation of the work force.

Knowledge era can be hugely rewarding provided we understand the way it works and develop skills to turn it to our advantage. In traditional societies land was the measure of wealth. Measure of wealth in industrial society was capital. We are now in the age where knowledge is the primary index of wealth. Information is the basic raw material of this knowledge age. Laws of knowledge economy are different from that of the industrial age. In industrial society when people shared things they got divided - one person's gain was another's loss. This is not so when knowledge is shared - both parties gain.

There is yet another phenomenon that governs our actions. Interaction among people in a knowledge society can bring results, which could be vastly superior to the one intended. Flying birds react to the behavior of each other producing a graceful flocking that no bird had individually planned. Belgian physicist Ilya Prigogine won a Nobel Prize in 1977 partly for explaining this phenomenon. This concept has been refined by Michael Waldrop in his book called "Complexity, the emerging science at the edge of order and chaos". Known as complexity theory, it argues that random interactions produce carefully ordered behaviors through a process called self-organisation. People trying to satisfy their material needs would unconsciously organise themselves into an economy through a myriad of individual acts of buying and selling without a single person controlling them. Complexity theory makes a strong case for decentralization and empowerment for competitive advantage of the firms. Kelvin Kelly editor of "Wired" magazine has developed nine principles of complexity to take advantage of the phenomenon.

1. Distribute being. Decentralized operations; networked models.
2. Control from the bottom up. Empower low-level actors; pursue decentralization.
3. Cultivate increasing returns. Invest in advances and education to accelerate your competitive edge.
4. Grow by chunking. Build the system in pieces, not all at once.
5. Maximize the fringes. Focus on the randomness and unpredictability that leads to progress.
6. Honor your errors. Look for accidents that are competitive advantages.
7. Pursue no optima; have multiple goals. You can't forecast accurately; have alternative plans.
8. Seek persistent disequilibrium. Industry revolutionaries create turbulence to open spaces for their product.
9. Change changes itself. Static or incremental strategies often fail.

In this knowledge economy incremental improvements are organisations' enemy number one. They deliver a false sense of reassurance and delay the real solution. This is why Gary Hamal the author of "Leading the Revolution" talks of revolutionary and radical change through a tornado of innovation. One of the greatest tyranny of our economy is the tyranny of either/ or. People tell you, or may be they believe, that you can either do this or that. You can have either higher production or better quality, either profits or growth. The leaders' job is to assure the employee that both can happen like the founding family value of France's most profitable brand L'Oreal - "To be at the same time the creative poet and the conservative peasant".

The role of business today is far more pervasive than ever before. Its constituency is global. Power of the MNCs has arisen enormously in the new era. There are over half a million foreign affiliate corporations in the world. The largest 100 multinationals $2000 billion in foreign assets outstrip the combined GDP of China, India, South Korea, Malaysia, Singapore and Philippines. Today it is the economy that drives politics. It is the business that drives governments. Business is shaping the social values and also becoming a powerful cultural force. The political system has failed to address the human problems of inequity, poverty and terror. The governments of today and politicians particularly, have lost the moral authority. For the first time in human history, the business has the power to make a difference to human lives and can fill the vacuum eminently.
One of the greatest debates is on what is the purpose of the company. Arie de Geus in his book, "The Living Company" argues that companies are not machines owned by individuals to make as much money as possible for its owner. They are living beings having their own purpose. Companies are not controllable but influencable through complex interactive processes which are just as likely to alter the influence as the influence. He defines a living company as one that exists primarily for its own survival and improvement in order to fulfill its potential and become as great as it can be.
Charles Handy has discussed the changing "meaning of business". A business, he writes, "is no longer just an economic instrument." Part of the reason can be found in its purpose. "The principal purpose of a company is not to make a profit, full stop. It is to make a profit in order to continue to do things or make things, and to do so even better and more abundantly. To say that profit is a means to another ends and not an end in itself is not a semantic quibble, it is a serious moral point."
High profile corporate collapses have shown that unbridled greed poses the biggest threat to the business market economy. John Kay says in his book "The Truth about Markets", "the facile interpretations of the real nature of the modern market economy that gained credence in the 1990s are not only false but damaging. The rape of corporations for personal enrichment of their senior executives, the creation of ventures whose business plan did not extend beyond initial public offering: these developments were predictable consequences of the glorification of greed. The practical outcome of the maximum freedom within a framework of rules was the deceitful exploitation of these rules by people intensely interested in their letter but not in their spirit."
Greed has been pushing the envelope everywhere. Calpers, the world's biggest pension fund who screen companies for good practices before investing in them and who ought to have embedded good corporate governance practices are themselves in the dock for raising excessively the salary of their own managements. The biggest challenge before us is how to replace greed as a driver of the market with something sublimal. Adam Smith usually condemned for the culture of mammon, also wrote "The Theory of Moral Sentiments". He emphasised the importance of enlightened and moral self-interest. Corporate governance has to focus on this enlightened and moral self-interest not because its absence can expose companies to huge regulational risk but because it is ethical. The reason for good behaviour should not be because its absence affects the value of their stock but because it is the right thing to do.
The biggest bane of the corporations is the stock market's obsession for quarterly reports. In a recent times Prof. Jensen, with Joseph Fuller of the Monitor Group, argued: "As the historic bankruptcy case of Enron suggests, when companies encourage excessive expectations or scramble too hard to meet unrealistic forecasts by analysts, they often take risky value-destroying bets. In addition, smoothing financial results to satisfy analysts' demands for quarter-to-quarter predictability frequently requires sacrificing the long-term future of the company." It is the fear of the quarterly results that drives CEOs to find ways to inflate earnings and go for short-term objectives. According to Warren Buffet '"spoon-feeding analysts" quarterly guidance puts undue focus on short-term results and leads companies to avoid provident risks that would pay off over time.
The dean of Oxford University's School of Management Studies, John Kay argues in his book "Foundation of Corporate Governance" that a firm's network of social and business relationship can provide it with a competitive advantage over other companies. One recent poll found 95 percent of the Americans agreeing with a sentiment long shared in Europe and Asia: Corporations owe a larger debt to society than simply making profits. One reason why this is true is the growing recognition of an independent, networked society in which business plays a key role. James Moore's "business ecosystem" model, for example, along with such concepts as industrial ecology, stress that corporations are not narrow institutions distinct from the social contexts in which they are embedded. The recognition among business leaders that they cannot thrive if their surroundings ecology is perishing is already leading many companies to broaden the scope of their activities. "Ten years from now, I am firmly convinced," Moore has concluded, "business leaders will be actively and daily addressing social and environmental issues."

For this to happen boards have to get out of the box and learn to think ecologically, interdependently and holistically. The simplistic view that prevailed in the 1990s that business leaders need to focus exclusively on shareholder value as determined by the share price and that financial analysts are the best judge of business strategy simply cannot hold ground today. In a millennium survey 60% of those interviewed said they would punish companies, which were not environmentally or socially responsible. This shows how social good has become a powerful competitive differentiator. Business run on true principles of transparency, equity, accountability, integrity and responsibility can make a difference that could give enormous pride to executives and provide the true incentive for driving the corporations.
Once corporations internalise that their profitability depends on the public perception of the difference they make to the society, governance of corporations will become easier. Boards will rise up to meet the expectations of all stakeholders. Only then will our focus shift from rhetoric to implementation and we will realise that what we need most urgently is not more codes but training to change our beliefs, ideas and attitudes of how things will work in the new era. This is why there is an urgent need to change governance strategies and get directors truly on board. The wrenching change taking place all around cannot allow directors to remain aloof and leave the job to management. Boards today have to be proactive and not pliant, intrusive and not quiet, radical and not staid, innovative and not incremental.

This insight will help corporations find innovative ways to contribute to broader needs of society by collaborative problem solving. They will find new models of constructive engagement involving all stakeholders to bring about change in the society. They will be forced to look for innovative formats that stimulate systemic thinking and dialogue. The question will no longer be whether the business has a role in social change but how it should play this role.
Humans are worse when it comes to box ticking approaches. They are highly creative and know how to beat the system. So many of our grand solutions have failed because they were based on ticking the box. This has been particularly true in the governance of corporations. Increasing emphasis on codes has only increased the number of frauds. The classic case of the futility of an externally directed approach to corporate governance is the example of penalties paid recently by the ten big banks in the US. The fines and restitution amount of $1.4 billion imposed on the big US banks were expected to end the multimillion dollar pay packets some analysts enjoyed in the bill market, which were justified by the amount of investment banking business they brought in. But such is the bizarre world of corporate finance that soon after CSFB had offered an equity analyst at JP Morgan Chase a package that could earn him up to $4 million in the first year. Where will this money come from if not from the unholy alliance between the analysts and underwriters?
Our corporate attitudes can change only by making the boards diverse. Diversity is the wellspring of creativity . It is the diversity that generates a clash of ideas that in turn fosters innovation. It is the innovation that provides the grist to company's mill. Innovation cannot be nurtured unless the corporations consciously encourage dissent. The value today is created not by conformity but diversity; not by deference but difference. Darwin told us in 1859 that growing a variety of crops improves the yield. We have still not applied this to humans. What the 21st century boards need is training to harness the differences.
Diversity is vital for the knowledge economy. When knowledge is shared the resultant gain to the parties depends on their diversity. Greater the diversity, more is the aggregate value of knowledge. Knowledge societies have no role for yes-men and think-alikes. This has transformational value for the societies and nations hitherto clinging to their own race, caste, region, religion. Realisation that the value increases not by cloning of same but cooperating with the opposites will begin the end of the hatred spurred by the accidents of birth and mark a new era of ethnic integration.
New economy has seen massive transition to private economies. There is a considerable rise in the volunteerism and the social sector. America today has 1.5 million non-profit organisations that employ over 10 million peoples and account for 7% of its GDP. U.K. has over 300,000 charities. More and more young graduates are moving to voluntary work. NGOs in China have grown from 100 in 1950 to 200,000 today. Social consciousness among young has become so heightened that 40% of MBAs in a survey said they would refuse to work for an unresponsible business. 80% said they would accept a lower pay for a company that was "very socially responsible". The generational divide is obvious.

New era is full of paradoxes. The biggest owners of capital in the world today are not cigar smoking Monaco based capitalists. They are state employees and ordinary insurance policy holders. The largest single pool of capital in the world is the $ 144 billion California Employees Pension Fund called CALPERS. The second largest is the $130 billion pension fund of Dutch civil servants & teachers, ABP of Netherlands. Worldwide pension funds and general insurance companies between them own assets which are ten times the entire value of the U. K. stock market and about one and a half times the value of the US stock market. They invest as much as $2.7 trillion, almost twice the entire value of U.K equity investment, on socially responsible companies. The criteria for these investments are employment practices, transparency, environmental, social responsibility, sustainable material, no animal testing, human rights etc. India does well in all these areas yet does not receive even a fraction of this investment. This investment has increased 10 fold in the last 4 years i.e., from $ 30 billion to $ 326 billion in UK alone. Even if 5% of this investment is diverted to India our FDI would increase seven fold, thus having a transforming effect on our economy.

The enormity of change in the business landscape can be witnessed from the fact that when we founded the Institute of Directors, 14 years ago, we had thought that implementation of TQM (Total Quality Management) was the panacea for all organisational ills. Experience of TQM in the ninetees showed little correlation of TQM with business success. We also noticed that definition of quality "meeting customer expectation" characterised a short-term approach. It took no regard of the long-term needs of the society and the impact of production processes on environment. Meeting quality expectations could mean collecting toxic non-biodegradable junk and leaving a poorer environment for our children. This made us focus on Total Eco-Effectiveness Management (TEEM) looking at both upstream and downstream sections of product chain. Soon we felt neither TQM nor TEEM could bring transformational effect without good participative and accountable governance. This required transparency, trust, honesty, integrity and equity in decision making process. These virtues are as difficult to find in corporations as WMDs in Iraq. Transparency and trust cannot be had unless people were taught courage to own their mistakes and indeed take pride in them. No success was ever achieved without failure. Yet our upbringing and schooling was designed to make us hide our failures. The job of the 21st Century leaders is to encourage more and more people to own failures and use them as learning triggers. We can do this by recognizing and rewarding good tries.

For business to have long-term growth and sustainability, we have to go through a profound metamorphosis from inside out. We have to change our metaphors of success of "winner takes all" and "success at all costs" and develop an inner value system that prides on ethics, innovation, equity, legitimacy, transparency, the courage to own failures.


All this focuses on the urgent need for behaviour change. This generation has enormous capabilities to improve the quality of life on this planet. The gap between what needs to be done and what can be done has never been smaller - only if we change our paradigms and beliefs and equip ourselves with an empowering vision. There can be no better example of a successful behaviour change than of Mahatma Gandhi. The great Mahatma narrates his attempt of behaviour change in his autobiography - "My Experiments with Truth". He describes his first encounter in a small cause court where he was required to cross-examine a witness of the plaintiff. The Mahatma writes, "I stood up but my heart sank into the boots. I could think of no question to ask. My head was reeling and I thought the whole court was doing like wise. The judge must have laughed and the lawyers no doubt enjoyed the spectacle. But I was past seeing anything. I told the agent "I could not conduct the case". Same Gandhi writes further, "But I persevered and I persevered and I persevered. I can now give a certificate to myself that a thoughtless word was neither entered my tongue nor escaped my pen".

Finally sustainable success of the organisation needs a collective effort of everyone. As Rigveda says: "Let us come together. Let us think together. Let us combine our intellectual strength. Let our collective brilliance shine. Let there be no ill will. This is the true way to progress".