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Chairman Speaks - 2011

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100th Annual General Meeting

Making Markets Work for Green GDP and Sustainable Livelihoods
 

Address by Chairman, Shri Y C Deveshwar

I have great pleasure in welcoming you today to the 100th Annual General Meeting of your Company.

On this historic milestone, I would like to once again express my warmest greetings and thank you most sincerely for your sustained encouragement, faith and support. Your continued trust and goodwill provides us immense strength as we move ahead to an even more fulfilling future.

To commemorate this momentous occasion, the Board of your Company has recommended a Special Dividend of Rs. 1.65 per share in addition to a Dividend of Rs. 2.80 per share for the year ended 31st March, 2011. This recommendation once again acknowledges, with gratitude, your long-standing and continued support.

As in earlier years, I would like to first present to you the highlights of your Company’s Triple Bottom Line performance during the year gone by.

Triple Bottom Line Performance

(Figures in Rs. Crores)

ITC: Financial Highlights 1996-2011

1996

2011

Gross Income

5,188

31,423

Profit After Tax

261

4,988

Return on Capital Employed (%)

28

43

Net Assets Employed

1,886

16,854

Net Worth

1,121

15,953

Market Capitalisation*

5,571

1,60,636

CAGR in Total Shareholder Returns in the period 1996-2011: 25.6%

*As at 22nd July, 2011

Your Company’s progressive investments in multiple drivers of growth continued apace together with sustaining high quality top-line and earnings growth. Gross Income in the Centenary Year grew by 16.9% to over Rs. 31,400 crores. Pre-tax profits increased by nearly 21% to over Rs. 7,260 crores while Post-tax profits registered an increase of nearly 23%.

I draw deep satisfaction that your Company is today acknowledged as one of India’s most valuable corporations. Market capitalisation, which stood at Rs. 5,570 crores in 1996, has multiplied 28-fold to cross Rs. 1,60,000 crores. Profitability measured in terms of Return on Capital Employed, also improved substantially from 28.4% to 43.4%. Total Shareholder Returns, measured in terms of increase in market capitalisation and dividends, have grown at a compound rate of 25.6% per annum during this period.

Even more significantly, your Company has demonstrated outstanding achievement in the environmental and social dimensions of the Triple Bottom Line. For the 9th year in a row, your Company has sustained its ‘water positive’ status, creating freshwater potential that is twice its consumption. For the 6th year in succession, ITC is ‘carbon positive’ sequestering twice its emissions. It has also been ‘solid waste recycling positive’ for 4 years now. As a result, your Company is the only enterprise in the world of comparable size to have achieved and sustained these three global environmental distinctions.

In addition, the inclusive strategy that defines your Company’s innovative business models has also led to the creation of sustainable livelihood opportunities for over 5 million people.

Today, it gives me immense pride to announce yet another global distinction achieved by your Company. I am delighted to place on record, at this historic Annual General Meeting, that this year, all the luxury hotels of ITC have been accorded the LEED Platinum rating under the aegis of the US Green Building Council. This achievement makes ITC Hotels the “greenest luxury hotel chain” in the world and places your Company at the forefront of global environmental stewardship.

I will dwell further on the sustainability initiatives of your Company a little later as part and parcel of the subject of my address today, namely, “Making Markets Work for Green GDP and Sustainable Livelihoods.”

Towards Sustainable Economies:
Fostering Green GDP and Inclusive Growth

There is an increasing realisation, the world over, that development in its truest sense can only take place when economic growth fosters social equity. For developing nations in particular, growth must translate into the creation of sustainable livelihoods and replenishment of scarce environmental resources. Therefore, a constructive public-private-people partnership for socially responsible growth is critically important and must also occupy a larger space in corporate strategy. Only then can we secure the future and leave a better tomorrow for the coming generations.

A few weeks ago, the Ministry of Corporate Affairs, Government of India unveiled the National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The new guidelines build upon the Corporate Social Responsibility Voluntary Guidelines released in 2009 and reflect a conscious shift from what is generally termed as CSR to a more encompassing concept of “Responsible Business.” The guidelines cover an extensive landscape and the Ministry must be lauded for this comprehensive effort. From the enunciation of basic Principles to defining a broad set of Indicators for self-assessment, it also rightfully provides a Reporting framework for making disclosures to stakeholders. These guidelines indeed mark an important first step towards a movement for greater corporate contribution in creating societal welfare. Evidently, these recommendations have been inspired by a larger and urgent underlying concern.

It is now widely acknowledged that emerging nations like India will drive growth in world GDP in the years ahead. Indeed, there is already a major shift in the axis of economic power towards Asia as advanced nations grapple with the after-shocks of a deep recession. However, is this aspiration of emerging economies to grow at near double-digit rates a viable long-term proposition? Are the traditional factors of production and growth solely capable of delivering this high trajectory of growth, so critical to meet the growing needs of their massive population? Is there a larger lesson in the deep-rooted recession that overwhelmed the advanced nations and put the brakes on in their pace of progress?

There seems to be growing evidence that limits to future growth will be defined more by vulnerabilities flowing from social inequities, environmental degradation, and climate change than by any other economic factor. Admittedly, these are global challenges and a result of faulty economic growth models pursued over decades across the world. Yet, these concerns are very real today and going forward can seriously constrain the fulfillment of a nation’s aspirations.

The impatience of civil society with economic models that have not delivered social equity is apparent in the growing intolerance for injustice, corruption, bad governance and uncaring corporate behaviour. Perhaps not without reason. The magnitude of social imbalances across the world is indeed alarming. Today, the richest 1% of adults control 43% of the world’s assets. The bottom 50% has access to only 2% of world’s assets. The UNDP Human Development Report 2010 says that around 1.75 billion people, living in as many as 104 countries, are in a state of “multi-dimensional poverty”, a new indicator that reflects acute deprivation in health, education and standard of living. In addition, indiscriminate growth without environmental replenishment has destroyed a sizeable portion of the world’s eco-systems. The spectre of climate change will inexorably aggravate these miseries even further. Its impact will also be the most severe on the world’s poor, an overwhelming majority of whom live in developing countries and are dependent on agriculture for their livelihoods.

By 2030, a mere two decades from now, the world’s population will have touched 8 billion. By that time, 3 billion people are estimated to live in areas of extreme water scarcity. The world will have to produce more food in the next 20 years than it has produced in the last 3000 years to feed this large population. Energy needs will increase exponentially over this period with rising incomes and urbanisation. Clearly, a rising population of such magnitude will pose new challenges as the global demand for food, fuel, feed, and fibre increases with a consequent reduction in arable land and water availability.

It is clear that we cannot address the challenges of tomorrow with the policies and strategies of yesterday. The global challenges of food, energy and water security, climate change and sustainable livelihood creation will need far more impactful and innovative solutions. It is no longer a debate about making lifestyle choices, it is about finding life-changing solutions required for the world’s poor and most vulnerable.

Unfortunately, conventional methods of calculating economic growth, such as the GDP, does not take into account the costs on account of environmental depletion, degradation, or loss of biodiversity. It is said that what does not get measured does not get managed. As a result, economic growth mostly reflects the creation of material wealth, largely ignoring the environmental and social costs of that growth process.

The growing discourse on sustainability challenges has sparked a welcome attempt to recast traditional means of calculating economic growth. It is increasingly being felt that GDP calculations must now account for the cost of environmental degradation as well as its replenishment. This new approach, popularly known as the Green GDP, is expected to reflect the true dimensions of economic growth. It will also provide policymakers as well as civil society a realistic assessment of issues that need to be addressed for a more sustainable growth of the economy.

India’s sustainability challenges mirror the global challenges and are indeed even more daunting. The UNDP Human Development Report places India 119th out of 169 countries. It says that around 55% of the population suffers from widespread deprivation. Nearly 421 million live in multi-dimensional poverty. In addition, with nearly 17% of the world’s population, India has just 1% of global forest resources and 4% of water. Already, half of the country’s arable land is water-stressed. Climate change for the predominantly agri-based rural population means future loss of livelihoods apart from escalating the problem of food security. To compound matters, India will add another 500 million people by 2050. The pressure on limited resources will become even more acute.

It is abundantly clear that the challenge before India is to enlarge the size of its Green GDP while accelerating the creation of Sustainable Livelihoods. Long-term sustainability of growth of the Indian economy will depend on how effectively this twin task is achieved.

How do we therefore begin to engage on such a mammoth task? Surely, it is not a task that any segment of society can accomplish in isolation. Challenges of this magnitude can best be resolved through collective action by all stakeholders in an economy. It calls for multi-dimensional efforts on the part of Government, Business and Civil Society – individually and collectively. The Government of India has already initiated some laudable efforts. The Missions launched under the National Action Plan on Climate Change, the initiative on Energy Certificates by the Bureau of Energy Efficiency, schemes like the Mahatma Gandhi National Rural Employment Guarantee Act and programmes such as the Bharat Nirman will undoubtedly contribute significantly to the goal of sustainable and inclusive growth.

The Co-Creation of Societal Value: Role of Business

It is, however, my belief that innovative energies of business can also be much better harnessed to deliver meaningful solutions in co-creating societal value. Businesses are represented in the frontline of economic activity with numerous touch points in society. Their physical presence in communities around their operations gives them an opportunity to directly engage in synergistic business activities that generate livelihoods and add to the preservation of natural capital. More importantly, they possess valuable managerial expertise to guide and implement projects of societal value and at far lower incremental cost to the economy. As a result, effective corporate participation in the delivery of social projects can lead to a far more optimum utilisation of scarce national resources.

Unfortunately corporates are often viewed through a very narrow lens that concentrates only on its ability to extend financial support to socially relevant projects. This approach ignores the immense transformational capacity of business in innovating business models that can synergistically deliver economic and social value simultaneously. As a result, on issues of corporate social responsibility, there is a disproportionate focus on outlays rather than on outcomes. Consequently, the “capacity to pay” far outweighs the “capacity to do good”. The net result unfortunately is grossly sub-optimal.

This misplaced perception is regrettably finding expression in proposals to measure CSR contribution in terms of financial expenditure. A case in point relates to the proposal to prescribe mandatory spends of 2% of net profits on CSR.  Though well intentioned, such a proposition is not merely unimaginative in terms of its capacity to unleash corporate energies but also one with potentially undesirable consequences. Prescribing outlays is akin to an additional tax on corporates that seeks ‘compliance’ rather than ‘commitment’ in making social investments. In unscrupulous hands, such an expenditure obligation will only encourage creative accounting to channelise funds for partisan purposes. Such prescriptive spends are unlikely to tap the larger managerial and creative capacity of business to create self-sustaining and enduring social upliftment. On the other hand, it may potentially enlarge the scope for corruption and personal gain.

If the focus on outlays persists rather than on outcomes, it is a matter of time before large investments are necessitated to create an enforcement machinery to ensure that funds are not diverted away from desired outcomes, rendering it a zero-sum game. I am sure that many in the business fraternity will be particularly relieved to note that the new National Voluntary Guidelines do not contain any allusion to such outlays.

Global research by renowned experts such as Prof Michael Porter and Mark Kramer of Harvard have established that societal value creation delivered through a strategic business context is more meaningful and scalable. The focus of strategic CSR is on outcomes that enhance the business context and simultaneously add value to the social dimension. A focus on outcomes spurs proactive innovation to deliver meaningful social interventions optimising resources and capacities at hand.

Incentivising outcomes, therefore, is the key to drive business innovation and managerial capacity for societal value creation. Unfortunately, it is in this area that policies and systems are woefully inadequate. As things stand today, Responsible Business practices do not evoke significant consumer support, sizeable investor interest or preference in Government policies. As a result of this ambivalent market response, corporate social action attempts the minimum, often defined by compliance to regulations, and does not ignite wider innovative capacity to accelerate social benefit. In a sense, at the current moment, the market does not differentiate between a company that follows strong sustainable business practices and one that does not. This absence of an effective incentive and reward framework for sustainable business practices is today the largest barrier in harnessing the innovative capabilities of Business.

A paradigm shift can however take place if strong market drivers emerge to support corporate action for societal development. Sustainable business practices will then become an essential part of the attractiveness of the business proposition and in turn translate into a financial dimension for such companies. Delivering Green GDP and an Inclusive growth model will then become an integral part of corporate strategy and a part of balance sheet deliverables. Societal value creation will no longer be left to corporate conscience alone, but will be defined by market forces.

How do we then create a market that contributes to corporate action for Green GDP and Inclusive growth ? How can we unleash new competitive forces that will favour Responsible Business ? What is it that will continuously spur innovation, creativity, scientific capacity and temper, and also ignite entrepreneurial dynamism ?

Fortunately, there are answers and viable solutions. I have shared some of these thoughts earlier in the course of my addresses in previous Annual General Meetings. Given that these issues have now attained greater prominence, particularly with the Government enunciating new Guidelines for Responsible Business, it will be worthwhile to look at those propositions in fresh light.

Mobilising Markets for Green GDP and Sustainable Livelihoods

To my mind, the most powerful force that can bring about a dimensional change in societal value creation is the power of consumer franchise. I use the term ‘consumer’ in a broader context to include all market participants such as the Government, both in its role as a regulator and a buyer, customers, investors, employees, job-seekers and other segments of civil society.

Strong multipliers will emerge when enlightened consumers exercise a preference in favour of Businesses that contribute significantly to environmental and social sustainability. By expressing a direct and distinct choice for the products and services of such enterprises, consumers will unleash a multitude of positive actions that will eventually create greater shareholder and societal value. For one, corporates will need to vie for a larger share of the consumer spend by positioning sustainable business practices as a compelling value proposition. This will spur innovation as corporates will increasingly need to integrate social objectives into their business models. Sustainable business practices will emerge as a definitive market differentiator and consequently attract Investors, given the larger market gains accruing to such companies.  Such organisations would also attract and retain better talent, enabling superior and sustained performance. The net result will also be a groundswell of corporate initiative to build natural and social capital leading to a more sustainable and inclusive future.

The key, therefore, lies in enhancing awareness of market participants with a view to empowering an enlightened choice. Consumers need to be made aware of the immense power that rests in their ability to make an informed choice, and the consequences of using this power wisely to engender huge social change. At the same time, it would be important to build an institutional framework and market mechanisms that would support the empowerment of consumers and reward the innovative capacity of corporates. Let us examine the contours of such a framework :

  • First, Disclosures of Triple Bottom Line Performance.

    • All companies operating in India beyond a threshold size, including Indian operations of multinationals, must be encouraged to make Sustainability Reporting an integral part of their annual disclosures. Such Reports could conform to the guidelines laid down by international organisations like the GRI or adopt the framework suggested by the National Voluntary Guidelines issued recently by the Ministry of Corporate Affairs.

    • Over a pre-determined time-line, such Reporting could be made mandatory. Third-party verification would lend reliability and credibility to such disclosures.

  • Second, Creating Institutions for Measurement & Rating.

    • How do consumers make an informed choice for the products and services of responsible corporates ? It would be critically important to create new Institutions that can design, develop and award Ratings to companies based on their triple bottom line performance.

    • I had, in my earlier addresses, suggested that Government support the development of a Responsible Business “Trustmark” Rating System that could be used to convey to the consumer a company’s environmental and social performance. An enterprise could be awarded ‘Credits’, based on an objective evaluation of its triple bottom line performance, and an accumulation of such Credits could earn the enterprise Trustmark Ratings on a progressive scale. These Ratings could then be displayed on products and services of the company to help consumers make an informed choice.

    • Apart from establishing new institutions to administer the Trustmark Rating Systems, it will also be essential to create a new cadre of social auditors who would be better placed to evaluate a company’s sustainability performance. Either existing financial auditors will need to be re-skilled or a new discipline will need to be created.

    • Going forward, it may even be possible to trade in these Credits, if a system similar to carbon credits or energy efficiency certificates can be developed so that organisations with surplus credits are able to monetise their efforts.

  • Third, the Creation of Preferential Incentives.

    • Government must consider the provision of a differentiated and preferential set of incentives, fiscal or financial, to companies that demonstrate leadership in sustainability performance. Priority fast track clearances, purchase preferences and other such incentives could be extended to corporates with high Trustmark Ratings. This would spur powerful market drivers that will incentivise innovation for larger triple bottom line impact.

    • Banks and Financial Institutions could also factor in the Trustmark Ratings in their lending operations providing benefits to more responsible corporations.

  • Fourth, Spreading Awareness and Empowering Decisions.

    • Civil society organisations and consumer bodies can play a vital role in spreading awareness among consumers so that their buying preferences are channeled towards sustainable enterprises.

    • Schools and educational institutions could also promote awareness amongst its constituents or design elements in their course curriculum to groom citizens of tomorrow as enlightened consumers.

    • As one of the most influential forces of shaping public opinion, Media can also play an extremely effective role in raising awareness for a responsible buying movement.

I firmly believe that by aligning policies, regulations, civil society action and corporate efforts, powerful market drivers can be created to make societal value creation an integral part of corporate strategy. Responsible Business will then move from a realm of conscientious philanthropy to one that is driven by a competitive value proposition.

As markets evolve, it is also possible to envision the emergence of social entrepreneurs who would specialise in the execution and delivery of socially relevant projects. Corporates who are otherwise unable to execute social ventures would then find ways of buying Credits from the social entrepreneurs to strengthen their own triple bottom line, thereby creating sustainable financial markets for social entrepreneurs.

Recognising the critical importance of enabling transformational change through the larger adoption of responsible business practices, your Company, in partnership with the Confederation of Indian Industry, has supported the creation of a unique institution – the CII-ITC Centre of Excellence for Sustainable Development. The Centre provides thought leadership, promotes awareness and builds capacity of Indian enterprises on issues of sustainable development and inclusive growth. Over time, the Centre has emerged as a focal point among Business, Civil Society and Government helping shape policy and corporate action in this area. Its Annual Awards seek to recognise outstanding efforts in sustainable business practices celebrating not only the achievements of these progressive corporations but inspiring others to follow as well.

ITC: Inspiring action for a better tomorrow

As global citizens we may either remain passive bystanders as half the world reels under poverty and irreparable environmental destruction or stand up and champion efforts to create a better world for future generations. I do not think we are really left with a choice anymore. It is time that we rally together to champion positive outcomes that can create a better tomorrow.

Your Company takes pride in pursuing a super-ordinate commitment that goes beyond the market to create new benchmarks in Sustainable and Inclusive business practices. ITC’s social investments are implemented in the strategic context of its businesses.  As a result, it has been possible to meaningfully scale up these initiatives to ensure large-scale impact in terms of sustainable livelihoods and creation of natural capital.

Given the predominantly agricultural base of ITC’s businesses, your Company has engaged proactively with rural communities to support and nurture the creation of self-sustaining economic organisations. This manifests itself in diverse initiatives such as self-help groups for women, water-user groups, village development communities and even forestry groups that have been successful in registering a project under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change. Concerted efforts have been made over several years to organise these communities into self-sustaining entities by empowering them with know-how, resources and training. All these rural-based projects require significant managerial resources and a large commitment of time to acquire scale and stability. This value of human effort and time is seldom taken into account by those who propound only financial outlays for social projects. Such value can only be measured in terms of the substantial outcomes accruing from social and environmental contribution.

The substantial positive impact of your Company’s large-scale sustainability initiatives is well acknowledged. ITC’s e-Choupal initiative has pioneered rural transformation and benefited over 4 million farmers in over 40,000 villages.The Social and Farm Forestry Initiative of ITC has greened nearly 1,15,000 hectares, creating 51 million man-days of employment among poor tribals and marginal farmers. Addressing the problem of critical water shortages particularly for irrigation, ITC’s Watershed Development Programme provides soil and moisture conservation to nearly 65,000 hectares in rural India. In a manifestation of constructive public-private-people partnerships, your Company has forged partnerships with the Governments of Maharashtra, Rajasthan and Madhya Pradesh to bring nearly 100,000 hectares under soil and moisture conservation over the next five years.

Recognising the need to broad-base farm based livelihoods, ITC’s Animal Husbandry Programme has reached out to nearly 5,00,000 milch animals leading to a significant increase in milk yields. In the course of time, it may also form part of your Company’s value chains in the FMCG sector. To help expand off-farm income opportunities, over 37,000 sustainable livelihoods have been created through focussed Women Empowerment Programmes in rural areas. Many of them are engaged in the value chain of your Company’s Agarbatti business. Around 2,50,000 children have also been provided Supplementary Education to help shape a better future for them.

Demonstrating your Company’s commitment to pursue a low carbon growth path, over 35% of energy consumed in ITC is now from renewable sources and carbon neutral fuels. You will also be happy to know that ITC’s Wealth-out-of-Waste programme, that promotes Recycling, is supported today by over 3 million citizens including 500,000 school children and over 1500 commercial organisations.

Indeed, a passionate commitment to serve a larger national purpose is at the core of your Company’s business strategy. Your Company is today an acknowledged exemplar in triple bottom line performance contributing significantly to the national goals of sustainable and inclusive growth. It is my strong belief that, going forward, your Company’s relentless endeavour to create new benchmarks in sustainable business practices will lend it a unique source of competitive advantage in an increasingly challenging socio-economic environment.

Conclusion

Your Company continues to remain engaged in building a portfolio of world-class businesses leveraging enterprise strengths, new technologies and carefully nurtured competencies. A strong rural connect which has earned the trust of millions of farmers, a spirit of innovation, and a focus on game changing R&D sharpen your Company’s competitive strengths as it moves into the future. In addition, unique strengths in trade marketing and distribution, world-class manufacturing, superior service delivery, together with a rich experience in branding and deep consumer insights add enduring vitality to your Company. It is this bouquet of competitive strengths that provide us the confidence as we step ahead into an exciting future.

As I conclude this address at the 100th Annual General Meeting, it is indeed satisfying to witness a fulfilling journey of an enterprise that is so deeply motivated by its commitment to create value for the Indian society. Your Company looks to the future with confidence, driven by an inspiring Vision, Values of Trusteeship and Vitality powered by a dedicated world-class team of human resources.

May I once again thank all of you for being a pillar of support in helping accomplish our shared aspirations. On behalf of the Board and the employees of your Company, I will look to you as always for your continued goodwill and encouragement.

Thank you, Ladies & Gentlemen.

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