Thursday, November 27, 2014

How should companies and their bosses deal with social media?

Microsoft boss Satya Nadella learnt recentlythat just one faux pas can cause serious damage. His comment on women counting on karma to take care of their pay raise raised an enormous storm on the social media that only just settled after he apologised.

Of course, it's important for companies and their bosses to be careful. But slip-ups on the part of bosses is just one hazard that companies face in the social media. They have to face damaging disclosures, strong criticism and lethal photographs. Schumpeter points out that while anti-corporate types have made the most of social media, companies have been slow to adapt. He cites two reasons from a recent book on the subject:
The first is the nature of the internet. It is a beast that feeds on scandal and particularly delights in the flesh of the powerful and privileged. The media world used to be policed by editors who demanded proof in the form of two sources. Now amateurs can post anything they want online (though they may eventually face prosecution) and editors are subject to the tyranny of the click: the more the stories they publish are clicked on by readers, the longer they are likely to survive in their jobs.

......The second is the nature of companies. They are designed to stay in business rather than to be good at defending their bosses from scandal. No matter what PR resources they throw at killing a story, NGOs and prosecutors will always have more stamina. In America no sensible firm will risk gambling on a jury trial when a negative verdict could bar them from doing business with the government.....No sensible company will go to the mat to protect an embattled boss when there are plenty of replacements waiting in the wings. 
The book has useful tips:
 He tells CEOs to restrict the view into their glass houses: to cover the cameras on their phones and computers with masking tape; avoid the “reply all” function on their e-mail; think twice before sending any strongly worded message. He dismisses the idea that corporate social responsibility (CSR) bestows on firms the PR equivalent of a stock of political capital: digital vigilantes will always assume businesses are guilty and can add the charge of hypocrisy to CSR-obsessed ones, as they did to BP after its spill. He warns against one-size-fits-all approaches to crises: the common prescription to come clean quickly and fully sometimes stokes the fire, he notes.
Both the author and Schumpeter are, in my view, mistaken in seeing the social media entirely as some ugly ogre against whom companies must erect defences. Leaving aside scandals, keeping taps on the social media can help companies in several ways. They can identify typical customer complaints, they can get an idea of how they are viewed by ordinary people, they can see how they stack up against competition, they can identify unmet customer needs and they can get useful ideas for re-designing products or coming up with new ones.They can also the social media to convey the company's viewpoint on particular issues or to respond to negative perceptions.

Service-oriented businesses such as banks have been quick to latch on to the potential of scouring the media. Other businesses can learn too. It would be a good idea to pick somebody who understands the company's key businesses well and appoint him or her Head of Social Media. Getting such a person to interact with top management, the PR dept and the marketing heads could turn to be a good investment for companies.

Monday, November 10, 2014

B-schools: the dethroning of the financial sector

Financial firms, such as banks and investment banks, are out; consulting dominates and high-tech firms are in. This trend, which started post the financial crisis of 2007, now stands confirmed, going by two reports, one in the Economist and another in the FT. 
Mr Lewis charted the ascent into investment banking of the most talented graduates in the 1980s, a situation that still held true as the financial crisis struck in 2007. Then, 44% of Harvard’s MBAs landed a job in finance; 12% became investment bankers. Yet in the class of 2013 only 27% chose finance and a meagre 5% became members of Mr Lewis’s master race.
The trend is the same at other elite business schools. In 2007, 46% of London Business School’s MBA graduates got a job in financial services; in 2013 just 28% did, with investment banking taking a lower share even of that diminished figure. At the University of Chicago’s Booth School of Business, the percentage of students going for jobs in investment banking has fallen from 30% in 2007 to 16% this year.
What are the reasons for these trends? One, of course, is that pay in banking is no longer as attractive as before. Earlier, you put in long hours in the hope that you could quickly cash out and enjoy life. Now, this seems less possible. But there are other reasons.

Investment banks expect long-term loyalty. Consultants are happy to see people leave after five years or so- and give them business from the other side of the table. Moreover, consulting opens up a variety of opportunities whereas in banking, you are stuck in one sector.

Thirdly, there is an odour of disrepute about banks now. What young graduates hear about these places and the adverse publicity they attract because of their tangles with regulators does little for their reputation.

Fourthly, consulting firms and tech firms are seen as good training grounds for those wanting to become entrepreneurs. The tech firms' casual culture is appealing. And they too promise big bucks:
Tech firms and consultants both appeal to the growing number of students who want to gain the right experience to start their own business. A survey by the Graduate Management Admission Council, an association of business schools, found that although only 4% of MBAs have entrepreneurial experience when they enter their course, 26% say they want to start companies after they graduate.
How are banks responding? In several ways. By targeting undergrads instead of grads, by using social media and competition games to attract candidates, encouraging a better work-life balance, etc. Some are even heroically attempting an image make over:
Some are running campaigns urging graduates not to believe media stories portraying them as greedy or evil. Others are trying to lure recruits by persuading them they will help make the world a better place. Goldman Sachs’s job portal advertises opportunities to work on community projects alongside positions for analysts: “That’s why you come and work at Goldman Sachs, because you can make a difference in the world,” trills its recruitment video.
A few banks are trying to change their culture, taking a tougher line on sexual harassment of female staff and advocating a healthier work-life balance, perhaps even allowing the odd work-free Saturday. For the business schools’ brightest and best, though, all this may not be enough.

Friday, November 07, 2014

A contrarian view on Sachin Tendular

An Australian commentator launches a scathing attack on Sachin Tendular following the publication of his memoirs recently. (I must thank for the pointer). He writes:
With a sweet, handsome face and smile that would melt a concrete slab, he always looked more lamb than lion as a man despite his great batting feats.

Align that to his boyish, high-pitched voice that always sounded so inoffensive and the fact that he barely expressed a strong opinion about any cricket matter in his 25-year career you might have Sachin neatly categorised as the choir boy who wandered on to a cricket field and decided to stay.

But when his autobiography was released worldwide on Thursday the choir boy ripped open his robes and pulled a loaded gun from a holster.
I am not in any way endorsing the commentator's views- my interest in cricket is pretty mild these days. Just highlighting a different viewpoint. 

Wednesday, November 05, 2014

MNREGA must be reformed, not scrapped.

The government wants to limit MNREGA to the 200 most backward districts; Bhagwati and Panagariya suggest that, perhaps, such schemes are best scrapped. The more sensible view, which Mihir Shah puts forward, is that MNREGA needs to be reformed and made more effective.

Bhagwati and Panagariya bring up the familiar argument about leakages and corruption in government schemes. They suggest that Rs 50 reaches the worker in wages out of an estimated Rs 250 of expenditure incurred by the government. Are we not better off, they say, in simply giving Rs 50 to the poor by way of cash transfers?

There are several flaws in this argument. Let me mention two. The first is their contention that, in opting for work under MNREGA, the worker forgoes alternative income. The economists assume this income forgone is Rs 80. They assume MNREGA wages to be Rs 130 (not always the case). Hence, a net transfer of Rs 50. Now, this is simply not true. The data suggests that most MNREGA employment is of the off-season variety, that is, people queue up for MNREGA work only when they do not have other avenues of work and income.

The other flaw in the argument is that the amount spent (which the authors estimate at Rs 250 after factoring in leakages of 25%) is current expenditure because no assets are created anywhere. This, again, is not true. The experience varies across states. In some places, empirical research shows assets of good quality have been created.

The answer, therefore, is not scrapping MNREGA and replacing it with cash transfer. It is making it more efficient- that is, reducing leakages and ensuring that asset creation happens everywhere and not just in select areas. How do we do this? One starting point surely is studying the success stories and the factors that make for success. Mihir Shah writes:
The best way to do so is to study where the programme has been able to deliver. I have in mind the thousands of villages where water harvesting structures have been created, agriculture has improved, nearly 100 days of work has been provided, distress migration has reduced and women have been empowered. MGNREGA is one programme where all this has been rigorously documented by scholars from all over the world. This research also throws up insights on the features that characterise locations where success has become possible: one, availability of strong technical support to the main implementing agency, the gram panchayat; two, capacities to undertake decentralised planning exercises and creation of a robust shelf of works; three, awareness among MGNREGA work-seekers of their entitlements and procedures under the programme; four, active and vibrant gram sabhas, which debate and decide the works to be undertaken and all procedures related to the programme; five, open and effective social audits that check corruption; six, accountable gram panchayats, where the leadership responds to the legitimate demands and grievances of the people; and seven, a system that ensures timely payment of wages.
Shah supports the NDA government's plan to focus on 2500 most backward sub-districts but warns that this should not be mean denying work to those seeking employment elsewhere. That, he points out, undermines the basic principle of MNREGA which is to guarantee work to all.

And, of course, we need flexibility - in respect of what schemes to finance and also the ratio of 60:40 for wages to materials. Perhaps, the ratio need not apply to every single scheme but may be applied at a district or block level. Perhaps in some areas, a different ratio needs to be worked, depending on whether more materials are needed or more labour is needed.

Replacing MNREGA with cash transfers is quite the wrong way to go. First, there remains the problem of identifying the needy (whereas MNREGA's great strength is self-selection by those in need). Then, we need to wait for bank accounts to spread and be seeded with Aadhar, a process that will take time and that must be tested before we start using it.

Moreover, cash transfers will perpetuate precisely what the Modi government is against, namely, a dole culture. Even the poor like gainful work, the respect that goes with it and the satisfaction of having created something worthwhile. Bhagwati and Pangariya forget that MNREGA was passed by parliament and has the support of all political parties. If they thought that Modi was pro-market and would be impressed by their proposal, they may well be proved to have been sorely mistaken.

Sunday, November 02, 2014

Are limits on free ATM transactions justified?

Banks will be free from today onwards to charge Rs 20 per ATM transaction once the number of transactions exceeds five per month. They will also be allowed to charge for more than three non-home transactions (that is, transactions through ATMs other than those of the bank of which one is a customer). See this news report.

Mind you, the norms don't make it mandatory for banks to charge for excess ATM use. They are free not to charge for over five transactions and they can set a higher free limit as well.

The rationale for levying charges on home and non-home transactions is that there is a cost involved for banks. If banks do not recover the cost of ATM transactions, they will recover it elsewhere. When charges are related to ATM use, then the more frequent users and people with more use for cash are penalised. When a general fee is imposed on all customers, the less frequent users of ATMs end up subsidising more frequent (and, possibly, richer) users.

The argument sounds plausible but it is somewhat flawed. First, ATMs are a means to move customers away from branches into a less expensive channel. The cost per transaction in a branch is much higher than in an ATM. So, banks save on costs by getting customers to use ATMs. This saving is large enough to cover frequent use of ATMs. Hence, the question of recovering the cost of ATM use should not arise. Indeed, banks may find that charging for ATM use is not in their interest as it may drive customers bank into branches.

Secondly, it is important to ascertain which are banks are complaining about the cost of ATM use. Are public sector banks complaining or are the complaints coming mostly from private sector banks? If the latter, the chances are that charging for ATM use is simply another way to augment revenues through fee charges which is a favourite ploy of private sector banks. (Indiscriminate and often hidden charges for various services are one reason for higher fee income at private banks and hence for higher profitability. By their very orientation, public sector banks do not follow this practice- and we criticise them for not matching private sector performance!). If it is the case that it is mostly private banks that want to levy charges for ATM transactions, then it is best that the RBI withdraws its guideline. Private banks make sufficient profit without having to levy an extra charge for ATM use.

Thirdly, charging for ATM use may come in the way of financial inclusion unless ATM use is made completely free for financial inclusion customers. If inclusion is to be pursued using technology and by avoiding costly branches, then it is important that transactions through channels other than branches not invite penal charges.

Friday, October 24, 2014

Is China's political system an obstacle to its rise?

There is one refrain that is comment to forecasts on China: the Chinese political system is incompatible with growing standards of living. There is a corollary to this: as soon as China's growth rate slows perceptibly, the strains on the political system will begin to show. Turbulence will set in. Some even forecast that the Chinese system will implode.

One thing that strikes me is that this hasn't happened in the last two decades of China's rise. Okay, you could say, that's because the Chinese people were bought off with goodies. However, that's only part of the story. What's missed, as an article in FT points out, is that the Chinese state has shown itself highly competent, able to adapt and responsive to popular aspirations. In short, it does everything that a democratic government is expected to do- except that many democracies, including the US, are showing themselves to be increasingly dysfunctional.The author writes:
There is a tendency to see Chinese government as unchanging. This is because in the west the only reforms that we really count are those that appear to move the country towards the western model. In fact, government has been through huge and constant reform since 1978, far greater than anything that has taken place in the US or the UK. It is inconceivable that the Chinese state could have masterminded such a huge economic transformation if it too had not been the subject of profound reform. This process will continue, probably even more dramatically.
The Chinese communist party is seen as monolithic and intolerant. In fact, it contains within itself diversity of views and there is no reason to suppose that tolerance of dissent is a great deal less than in western democracies (where views outside a certain mainstream can be filtered out quickly or even actively suppressed). Voters in the US may have a theoretical choice between two parties but, on a wide range of issues, you have to think very hard to tell the difference between George Bush and Barrack Obama. This applies to the UK and many other democracies as well. The choices open to voters are within a rather narrow bandwidth.

The odds are that, instead of China going into decline because of its one-party system, it is the west that may suffer decline the years to come:
The west is in decline, Europe rampantly so. Some estimates suggest that by 2030 China could account for a third of global output and be twice the size of the US economy. American power would then be a pale shadow of what it is today. This is bound to affect how the American people regard their political elite and political system. Furthermore, with strong evidence that living standards have been static for many people in the US and western Europe, the outlook is uncertain.
Gloomy views of China go hand in hand with western attempts to undermine the Chinese system in many ways, as an article in Atimes points out. These attempts take various forms: support for separatist groups, talk of the high level of corruption in China, criticism of crackdown on dissidents and a constant glorification of western cultural and political values:
The hierarchy of China experts is this: At the top we find the philosophers and statesmen who set the stage and agenda for the universal ideology - exclusively serving Western interests. They always reside in the West, know little or nothing about China, and discuss China solely on Western terms......Next we have the journalists and editors, most of them white or accessory white, in key positions at the New York Times, Wall Street Journal, Economist, and so on. Thanks to the Western planetary media monopoly, they have become the new global fascist elite.....They also prominently decide who - Chinese or foreigner- gets praised and who gets defamed, and - most importantly- what gets omitted in their China reports. Their own corrupt ways get omitted. Ask yourself, when was the last time you read a piece by a prominent Chinese (other than a dissident) in your nation's newspaper? You haven't. It is a tight Orwellian grip. 
It's not just China that is at the receiving end of western propaganda. Today, even greater venom is directed at Russia. 

Friday, October 17, 2014

RBI autonomy

What exactly is RBI autonomy in monetary policy? Does it set the policy objective (say, primary focus on inflation), the inflation target as well as the means to achieve the target? Are all these the province of the RBI? Or does the government have a say in these matters?

I would think that the government has the right to decide the primary objective and also the inflation target. When it comes to the means of achieving the objective, the decision is primarily that of the RBI but the government should be involved in decision-making.

That is how RBI governors have viewed matters all these years. They have ensured that the government is duly consulted on monetary policy matters and then taken the final call on interest rates. Over the past year, however, the RBI has sought to change the situation somewhat. The Urjit Patel committee recommended that inflation targeting would be the primary objective and it also set the inflation targets to be met. The interest rate policy to meet the targets has also been decided by the RBI. It does seem that there is over-reach on the part of RBI.

Now, moves are afoot in  government to get the balance right between itself and the RBI. The government wants to set the inflation target. Monetary policy will be decided by a committee dominated by outsiders. This amounts to a dilution of the RBI's autonomy as it takes away the RBI governor's right to be the final authority on interest rates. I guess the government's moves were inevitable given the attempt on the part of the RBI to be the sole decision-maker in monetary policy matters.

More in my article in the Hindu, The limits to autonomy.