The Big Picture

America's universities turn to the market

2012-02-02T15:17:00.000+05:30

In a recent book, Creating the Market University, Elizabeth Popp Berman argues that America's universities have move towards creating new products themselves instead of merely producing knowledge that helps create products. The move towards the market, she contends, is driven, not by the need for funds or even by ideology, but by the shared interest among university and political leaders to retain America's edge in innovation.

I read the book with interest but find that the case is not fully made. It does appear that there is more applied research than before. This helps augment university finances and it makes faculty richer, so it's win-win for both. But I doubt that this involves any shift in focus from theoretical to applied research- the book does not document such a shift with figures.

My guess is that younger faculty, on their way to tenure, would still be resolutely focused on publications. More senior faculty, with their reputations to back them, would get into commercial ventures. In other words, tenured faculty may have found new and more lucrative ways of making money but this would not compromise the universities' basic mission of producing knowledge.

More in my ET column, Universities as growth engines.

Larry Summers on remaking higher education

2012-02-01T16:07:00.000+05:30

Very little has changed in the pedagogy or contents of higher education for decades or even centuries. It's still the teacher facing students and trying to impart something. Larry Summers, former president of Harvard (among other things), proposes ways in which this might change. Here is a summary:

1. Education will be more about how to process and use information and less about imparting it.

2. An inevitable consequence of the knowledge explosion is that tasks will be carried out with far more collaboration.

3. New technologies will profoundly alter the way knowledge is conveyed.

4. More focus on active learning compared to passive learning.

5. Mastering a foreign language will be less important (for American students) since English is becoming more widely used.

6. Greater focus on data analysis.

(Thanks to colleague Shailendra Mehta for sending me the link).

Ex- RBS chief loses knighthood

2012-02-01T15:59:00.001+05:30

You could call it British PM David Cameron's concession to populism. Former RBS chief Fred Goodwin is to be stripped of his knighthood on account of the losses inflicted on it towards the end of his tenure. FT reports:

The man knighted in 2004 for his “services to banking” presided over a breakneck acquisition spree that ultimately led to the collapse of RBS in 2008; he then courted further controversy by initially refusing to give back any of his £16.9m pension pot.....his tenure ended with RBS recording a loss of £24bn – the largest in British corporate history – and being forced into the world’s biggest bank bail-out, with the injection of £45bn of government equity.

Goodwin has not been convicted for any wrongdoing nor has he invited any regulatory action. But he has become something of a lightning rod for anger against bankers, not least because of his failure to express any sort of regret in public.

Is the anger against bankers itself overdone? Schumpeter hints this might be so and points to the good things one associates with bankers:

Great financial centres have often been great artistic centres—from Florence in the Renaissance to Amsterdam in the 17th century to London and New York today. Countries that have chased away the moneylenders have been artistic deserts. Where would New York’s SoHo be without Wall Street? Or the great American universities without the flow of gold into their coffers?

Well, yes. But the man in the street does think that there is something wrong with bankers wrecking the world economy and walking away with huge bonuses. Banking needs drastic changes. If demonising bankers is the only way to get them to embrace change, it's hard to complain about the current rage against the likes of Goodwin.

Basel 3 and Indian banks

2012-01-19T15:18:00.000+05:30

Under Basel 2, international banks were said to be at an advantage: they could lower their capital requirements through the use of advanced models. This, it was feared, would widen the gap between rich country banks and emerging market banks. In my view, Basel 3 holds out the promise that some emerging market banks, including those in India, can turn the tables on their rich country counterparts.

Basel 3 requires banks to hold more capital. That won't be easy for rich country banks, given that growth prospects are dim in the medium term and markets are under stress. They will do what they are already doing, namely, meet capital norms by shrinking their balance sheets. In contrast, banks in India and some other emerging markets can hope to raise capital on the strength of high loan growth and attractive returns to assets. They should be able to marry higher capital adequacy with growth- and, in the process, narrow the difference in market capitalisation over the next five years or so. Thus, under Basel 3, capital promises to be a source of competitive advantage- for some emerging market banks.

More in my ET column, Indian banks' capital edge.

World Bank paints a grim picture

2012-01-18T15:41:00.000+05:30

The World Bank's latest Global Economic Prospects paints a grim picture of the world economy, FT reports. It rightly sees the Eurozone crisis as being contained, not resolved. It allows for the possibility of the crisis getting out of hand in 2012. And it makes clear that emerging markets will be hit hard by any financial crisis centred on the Eurozone.

Emerging markets growth is projected at 5.4% in 2012, down from 6% in 2011. If the Eurozone erupts, it could shave 4.2% of growth off emerging markets. One of the channels through which emerging markets will be impacted is deleveraging of banks in high-income countries. Emerging markets in which these banks operate in a big way could see foreign subsidiaries being sold off or a sharp reduction in wholesale funding. Indeed, this is one argument against an enlarged foreign bank presence in India.

Mercifully, India is not among the 30 emerging markets with large funding requirements that would be hit hard.

Businessmen are overdoing the gloom

2012-01-05T11:01:00.000+05:30

The prime minister and the finance minister did some plain-speaking with businessmen a few weeks ago about the economic climate in the country- how businessmen were creating a strong sense of negativity all round with their comments on 'policy paralysis' and its impact on the economy.

I thought even then that their plain-speaking was warranted. I am even more convinced after studying the figures on foreign capital flows. It is simply not true that foreign capital is shunning India. On the other hand, there is reason to believe that the long-term trends in flows are extremely positive, no matter that FIIs may have fled for the moment. I think the trends in FDI are particularly heartening, notably, the fact that FDI in the post-crisis period has been higher than in the India Shining period.

More in my ET column, Foreign money still pouring in.

How RBS failed

2011-12-24T12:14:00.001+05:30

Royal Bank of Scotland was among the notable failures in the sub-prime crisis. The UK's FSA has published a comprehensive report on the failure. The acquisition of ABN Amro was an important cause as was the bank's dependence on wholesale market funding, and its plunge into certain risky assets. The report lists other factors as well. I was drawn to the analysis of the governance issues in the report, whether there were any conspicuous failures on the part of the board.

It turns out that there were none for which legal action can be taken against the board. The acquisition of ABN Amro, being a hostile acquisition, was not done with the necessary diligence but it had the board's approval. I read the section on governance carefully, and I find that the only thing the FSA can pin on the board is that it did not question or challenge the CEO strongly enough on this and other issues.

If that is a failure, then the vast majority of boards would be guilty of it. Those who talk of the board challenging or opposing the CEO have no clue about the culture that permeates boardrooms. In this culture, any sort of serious questioning of the CEO is a no-no. It is a very cheery, backslapping culture in which nobody makes wrong noises. If we want bank boards or any board to be more active and more questioning, we need to revisit the issue of independent directors and bring in people who are not appointed by management. Then, we may get a vestige of independence on the board. Today's independent directors can only collect their fee and commission and enjoy their lunch and drinks. Bank boards can't prevent bank failure, only stringent regulation can. More in my ET column, Boards and bank failure.

The Telegraph carries an investigative report on the RBS failure.

India's growth outlook

2011-12-15T18:41:00.002+05:30

I present an optimistic view of growth prospects in my ET column, It can't be worse than 2009. This was before the latest figures showing a deceleration in IIP came out.

Why we need to retain AFSPA in Kashmir

2011-12-15T18:38:00.000+05:30

The Armed Forces Special Powers Act has come under fire from human rights groups in Kashmir. A letter to the editor in Business Standard has a hilarious take on why it is still required.

McKinsey introspects

2011-11-28T15:52:00.000+05:30

FT carries a detailed piece on the impact of the Rajat Gupta insider trading case on McKinsey, the firm that Gupta headed for three successive terms of three years each. The narrative is interesting but it does not enlighten us on what McKinsey might have done to prevent such a thing or whether there was anything at all in the way it functions that might give rise to such problems.

McKinsey executives ask,"Why didn't we pick up on it?" Well, is there any way you can? Is there any means of spotting potentially dangerous persons? Maybe one can keep an eye on traders in investment banks but very often these are the ones who actions get overlooked- they are stars, you see.

McKinsey has a rigorous process for screening people for higher levels of responsibility, it is not wanting in culture or training. Any firm is occasionally bound to have people who behave badly (and, most importantly, the allegations against Gupta relate to a period after he left McKinsey). The article suggests that values get compromised in times of runaway growth and it suggests that McKinsey would like to be careful in its pace of growth in the years to come. That would ensure that systems don't come under strain. But can firm policies really impact on the values and actions of individuals?

No systemic risk in Indian banking

2011-11-26T12:25:00.000+05:30

Bank stocks have been hammered quite a bit in recent weeks, with SBI leading the lot. This was preceded by Moody's downgrades of SBI and the banking sector as a whole. You might think Indian banking is in a bit of trouble. You couldn't be more wrong. Going through the RBI's latest Trend and Progress in Banking, I was struck by how sound most of the indicators are. I was especially by the rise in the Net Interest Margin, a key driver of profitability, in 2010-11 and the fact that overall return on assets has gone past 1%. Don't be carried away by talk of mounting NPAs. We should NPAs to rise in the present environment but there is nothing to indicate that the NPA level will become unmanageable.

More in my ET column, Indian banks in good shape.

Ratan Tata successor

2011-11-25T16:37:00.001+05:30

Just a few quick responses to the choice of Cyrus Mistry as Ratan Tata's successor. One, it is quite a surprise- I don't recall Mistry's name ever having been mentioned. Not the best advertisement for the Indian media's reporting skills. Two, the appointment has been welcomed widely and even applauded by a few. Not much is known about Mistry's managerial abilities although it has been noted that he has been on the board of Tata Sons for a few years now. But the fact that he is an insider and close to the Tata family, if not part of it, has gone down well.

This is most interesting since several professionals, including high-profile names from abroad, had been mentioned as possible successors. I believe the reception accorded to Mistry is a measure of how perceptions about family management and professional management have changed in India over the past couple of decades. No longer are family businesses seen as inferior to those run by professionals; if anything, a certain distrust of professionals has crept in.

Those are the positives. In the many reports on the succession, I see lack of experience, especially lack of international exposure, being cited as negatives. But much the same could have been said against Mr Tata when he took over. Mr Tata's own lack of international experience did not come in the way of his making huge bets in terms of the Rover and Corus acquisitions. His general lack of experience did not keep him from venturing into cars.

The most essential requirement for Mr Tata's successor is maintaining the Tata group's reputation for aligning business with social purpose (admittedly frayed in recent years) and the enormous goodwill it enjoys with the Indian public. A second requirement is consolidating diverse businesses. A third is keeping the group's competitive edge in what can only be more demanding times ahead. As an insider, Mr Mistry is well placed to take care of the first. Whether he is up to the second and third requirements only time will tell. All one can say he has that he has cut its teeth in his family business that ranges over real estate, construction, infrastructure and allied sector- not really a game for soft guys. Mr Tata has picked several able CEOs for his many businesses, so it would be fair to expect that his choice of successor would have been carefully thought through.

Mr Mistry is seen in the newspapers today in an unbuttoned shirt and rolled up sleeves and is reported as having showed up at Bombay House in a not very fancy car. It does appear the young man has made the right beginning.

HDFC Bank is no 1

2011-11-16T15:18:00.000+05:30

It's no 1 in market cap, not asset size, ET reports. That is quite an achievement considering that it is only one sixth the size of SBI. HDFC Bank's performance vindicates one of the themes I have consistently propounded over the years, namely, that asset size is not crucial to performance and, therefore, the quest for consolidation in India's commercial banks is misplaced (although there is a case for it in the cooperative banking sector). HDFC Bank did not turn into a stellar performer recently; it was among the best performers in Indian banking when it had an asset size of Rs 50,000 crore. It had one of the highest net interest margins in the business while having only around 300-400 branches. It has delivered profit growth of 30% every quarter for years now.

HDFC Bank is representative in many ways of what might be called the 'Indian banking model. In this model you stick to the basics: retail deposits, managing credit risk, staying away from fancy structured products and concentrating on the home market. Do a good job of this and you will be in the front rank of international banks as the Indian economy booms for another 10 years or so. If a bank is attempting something else, one needs to be wary. Why would you attempt something fancy when the simple works- as in the case of HDFC Bank?

Do we need to separate investment banking from banking?

2011-11-10T10:14:00.000+05:30

Is the era of the financial conglomerate coming to an end? In the US, the Volcker Rule will go into law soon. Under the rule, commercial banks cannot indulge in proprietary trading or hedge funds. In the UK, the Vickers Commission proposes a ring-fence around the core banking activities. The intention is to separate out the casino part of the bank from the essential banking activities.

Some recent events provide an impetus to such moves, the collapse of MF Global and, earlier, the $2 bn that UBS lost on account of a rogue trader. But there are significant costs to reducing the scope of banks- the Vickers Commission has tried to quantify these for the UK. I am not sure whether reducing banks to utilities is the right answer. We saw in the recent crisis that highly focused banks also went under- Northern Rock, for example. Banks have significant externalities on account of size. Between reducing the scope and reducing the size, I would plump for the latter.

More in my ET column, When banks turn casinos.

Investment bankers reign supreme

2011-11-09T10:35:00.000+05:30

The financial sector is always a work-in-progress- it is forever being remade. One big change is the disappearance of many merchant banks and brokerages- Warburg, Smith Newcourt, Morgan Grenfell, Kleinworth Benson- and, more recently, investment banks themselves. In the US, three of the top three investment banks disappeared in the 2007 crisis- Merrill Lynch, Bear Stearns and Lehman Brothers. The biggest, Goldman Sachs, had to convert itself into a bank.

Whatever the fate of investment banks, investment bankers today reign supreme, as John Kay points out in an article in the FT. The banks may have swallowed the investment bankers but it was the investment bankers who got the upper hand over commercial bankers:

In 2011, the chief executives of three of Britain’s four large banks, like their counterparts at Citigroup, Deutsche and UBS, are men who have built their careers in investment banking. When António Horta-Osório of Lloyds returns to health, it will be four out of four. When the titans of global finance today exchange reminiscences, only one man has different stories to tell: Brian Moynihan of Bank of America, who was in charge of consumer and small business banking before he assumed the post of chief executive.

Kay says that investment bankers had to grab control as they felt suffocated in the conservative culture of retail banks. This does not explain why this happened.Well, it was a matter of who brought in the moolah. Investment banking divisions contributed significantly to profits, often the biggest chunk, as at Deutsche. He who pays the piper calls the tune. If it is investment bankers who help keep shareholders happy, they are bound to be in the drivers' seat. What this has done to the culture of the traditional bank is worth exploring. The more interesting question now is what happens if regulation in the US and the UK goes through and investment banking activities are demarcated from core banking activities.

In defence of Rajat Gupta

2011-11-04T11:52:00.005+05:30

ET carries an article asking that Rajat Gupta not be denigrated for whatever lapses he may have committed. The article carries the names of Analjit Singh, chairman of Max India group, Pramath Sinha, who was among those who ran ISB in the initial years, Savitha Mahajan, deputy dean of ISB, and Vijay Mahajan, the microfinance entrepreneur. They write:

Our intention is not to defend , or offer a view on charges levelled against him. But we find it unfair and unacceptable that as a people, we should negate all the past good that a man has done and suddenly discover that we always knew that he was a 'rogue' , and 'deserves' this fall from grace. We find it sad that wise, grown-up people should, in full public view, behave like five-year olds, who would clap their hands and mock one from among their group who has tripped and fallen......We all have our weaknesses, but, on balance, some people compensate for theirs and still make a huge impact on the world and people around them. Rajat is one such person.

It is for the court to judge whether Gupta committed any offences. And I agree with the authors that if he did commit some, that would not take away from his significant contributions, such as the founding of the ISB and the Public Health Foundation in India.

However, it would be incorrect to suggest that such contributions would somehow 'compensate' for misdemeanours. If one accepts that, one would have to excuse corporate and other misconduct because people at the level do make contributions to society at large; it would mean that if somebody indulged in philanthropy, for instance, that would excuse his breaking the laws of the land. One cannot grant that. All one can say is that that the misdemeanours, in Gupta's instance, may not by themselves warrant the sort of outrage that has been expressed.

Somehow, there is a suggestion in all this that Gupta's behaviour is something of an aberration, that people at the top have superior standards of conduct. It is possible to be sceptical on this account. It is not as if people make a few mistakes or mis-judgements along the line and then get it right once they reach the top. In most places, a certain disregard for scruple or ethical considerations is an integral part of the behaviour of those at the top; they do at the top exactly what they have done in order to get there. In other words, they survive and prosper precisely because of their disregard for values. Any excessive concern for values would be a burden and a disqualification. Thus, the sort of behaviour for which Gupta is being reviled now by many in his own class may well be the norm, except that others are lucky or smart enough not to be caught out. Once you grasp this truth, you arrive at a better appreciation of Gupta's own lapses.

By the way, please do not jump to the wrong conclusion from the title. I am not trying to defend Gupta, just referring to an article written in his defence.

'Every bloody Indian cooperated.....'

2011-10-31T15:17:00.001+05:30

Rajaratnam's bitter remark, given in a fascinating interview with Suketu Mehta (of Maximum City fame), will be remembered long after the present insider trading case concludes. Rajaratnam contrasts with his own sense of honour and loyalty with those of the Indians who were part of his group:

Anil Kumar’s son worked at Galleon one summer. I used to vacation with Rajiv Goel’s family. Their families knew my family. You don’t think this is going to haunt these guys? They wanted me to plea-bargain. They want to get Rajat. I am not going to do what people did to me. Rajat has four daughters.

In the interview, Rajaratnam contrasts the American justice system with that of his native land:

In Sri Lanka I would have given the judge 50,000 rupees and he’d be sitting having dinner at my house. Here, I got my shot. The American justice system is by and large fair.

Also notable is his reference to ola leaf readers in Sri Lanka, one of whom pulled out his leaf and gave a recording to a friend of Raj's after Raj got into trouble. Mehta describes what happened:

The astrologer chanted into a tape for 45 minutes. The recording said there was a government case against Raj, that he was in the stock business, that he was world-known. That he had to close his business down.

On now to the Rajat Gupta case. I read with disbelief news reports suggesting that Gupta could get up to 105 years in jail. America is notoriously tough on crime but 105 years for sharing confidential information or even for insider trading? Even 10 years would seem excessive. If I have understood the law incorrectly or if there is something more serious involved, I am happy to be corrected.

Wall Street protests

2011-10-28T10:35:00.001+05:30

These are not the French student protests of the sixties nor Tiananmen Square nor the Arab Spring. Occupy Wall Street if far too inchoate to make a lasting impact. I visited their website to see if they have an agenda that could capture the imagination of the public. I was disappointed. Another rant against capitalism is unlikely to make much of an impression. Or even talk of growing inequalities in the US and elsewhere. Martin Wolf, writing in the FT, says the protests have a message, that something is wrong with today's capitalist system, but fails to articulate any alternatives or solutions.

Occupy Wall Street needs a focus. It must focus on what it professes to be about, which is the problems posed by today's banks and the enormous influence they wield on public policy. The whole movement could gather momentum and amount to something if it focused on one item: the break-up of large banks in the US.

More in my ET column, Occupy Wall Street lacks focus.

Disintegrating Team Anna?

2011-10-25T11:31:00.003+05:30

Swami Agnivesh is out. Arvind Kejriwal is under fire reportedly for jumping the bond he signed for availing of leave from government service. Kiran Bedi faces flak for submitting travel bills that did not correctly reflect the expenses she had incurred. Prashant Bhushan also faces allegations and criticism for his comments on Kashmir. Santosh Hegde has said that he is part of Team Anna only for the purpose of fighting corruption, which could imply that if members of the Team take up other causes, he may not stay on.

At this rate, will anything be left of Team Anna by the time parliament is done with processing the Lok Pal Bill? If not, I suppose it will be left to parliament to decide by itself the content of the Bill. That may result in a Lok Pal that is not the omnipotent authority that Team Anna envisages but one that focuses on politicians and the upper bureaucracy. It may also result in some procedures being put in place for referral of corruption charges to the Lok Pal, instead of anybody having the right to file complaints.

These will be entirely desirable outcomes, in my view. It does not cease to amaze me that the Jan Lok Pal Bill, drafted by Team Anna, managed to garner so much support from the public and the media. That version is certain to result in a bureaucratic nightmare, an authority with staff running into thousands that will watch over the rest of the bureaucracy as well as politicians. This can only lead to paralysis of all decision making, signs of which we can see already. One of the most common complaints about the CVC is that it renders decisions in PSUs slow, that it comes in the way of risk-taking and commercial decisions. If the CVC could have this effect, what should one expect of the more fearsome Lok Pal?

Governance- or accountability- is desirable. But it should not come in the way of governing. Decision makers must be judged, in general, by the totality of decisions they take, not by putting every single decision of theirs under the scanner. With an omnipotent Lok Pal, the latter is what we must expect, with all its deleterious consequences.

MBA oath

2011-10-24T12:10:00.003+05:30

In 2009, in the wake of the financial crisis for which b-schools and MBAs were held substantially responsible, Harvard students decided to start the practice of an MBA oath, whereby MBA students would commit themselves to certain standards of integrity. Around 250 b-schools have since signed on and 6,272 graduates have taken the oath. Two years on, enthusiasm for the oath is fading, FT reports. Only 300 of the HBS class of 2011 has signed the oath compared to 600 in 2009.

This is not surprising. As the FT article notes, it makes little sense for individual MBAs to take the oath when organisations they work for are not willing to observe the necessary standards. That apart, the commitments made in the oath are hardly measurable - and are seldom measured- except for the ones on correct reporting (taken care of by listing and other regulations) and on corrupt practices (covered by the necessary laws). The other items in the oath have to do with being a good or responsible person and that is neither enforceable nor is it widely practised.

Not to sound too cynical but one could argue that the whole of one's education, with its competitive element, and the whole of corporate life often requires individuals to act in ways that are contrary to what are contained in the oath- that is, if one wishes to succeed, as all good MBAs do. Take at a look at the oath and judge for yourself:

THE MBA OATH
As a business leader I recognize my role in society.

• My purpose is to lead people and manage resources to create value that no single individual can create alone.

• My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.

Therefore, I promise that:

• I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.

• I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.

• I will refrain from corruption, unfair competition, or business practices harmful to society.

• I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.

• I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.

• I will report the performance and risks of my enterprise accurately and honestly.

• I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity.

In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards.

This oath I make freely, and upon my honor.

Selecting a director/dean

2011-10-17T15:08:00.003+05:30

In my post, Selecting a CEO (two posts below this one), I suggested that there was nothing to beat the systematic screening of insiders for the post of CEO. Some people have asked me how I square this with my known position on selection of directors of institutions of national importance, which is to have a transparent, competitive, global search. This obviously means not confining the search to insiders (but by no means excluding them).

Well, this could, perhaps, serve as a quiz question in courses on leadership. The answer, of course, is that, in a company, it is possible to study the leadership potential of an executive by putting him or her in charge of business units, subsidiaries, etc. In an academic institution, there is really only one leadership position, and that is the director's. How somebody fares as a professor may not offer clues to whether he or she can lead the institution; indeed, an outstanding academic may be singularly ill-suited for a leadership role. It becomes necessary, therefore, to look at outsides who have headed academic institutions or led initiatives elsewhere.

That said, what I have stated is not a comprehensive answer. It does not explain why Harvard Business School often chooses an insider for the job. The more difficult thing to explain is what Booth Business School (of Chicago) or Stern School have done in the recent past, which is to import an academic from another institution (both from Stanford) and both very young. Sudhir Kumar, who is dean at Booth, had served as Senior Associate Dean at Stanford.

These two appointments, I must confess, took my breath away. Neither Booth nor Stern lacks first-rate academics. Some of them would also be very good administrators and entrepreneurs. And yet the two schools reached out to outsiders for the dean's job. I take it as proof of greatness.

There are other schools that have brought in people from industry in the past- Insead and London. That fits more easily into what I have said. So does Insead's most recent appointment of Dipak Jain as dean- Jain has been Kellogg's dean in the past.

The key to the director's appointment is the same as the one for a CEO's. The board needs to be clear what the institution needs most at a given time- entrepreneurial skills, academic ability, managerial qualities or dealing with business and government? Once the profile is set, the choice becomes a little easier.

Reviews of my book on Ravi Matthai- IIMA: Update

2011-10-15T15:15:00.005+05:30

I reproduce links to the following reviews of my book on Ravi Matthai- IIMA (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad; Rupa Publications) that I have seen so far:

The Sunday Guardian
The Hindu
Anuradha Goyal's blog
Seminar
Edu Tech magazine, column by Rishikesha T Krishnan of IIM Bangalore
Vikapa (October, 2011)
The Smart Manager (Sept-October 2011- Interview and book excerpt)
Hindu Business Line
Business Standard
The Tribune
Review in Biblio magazine (July-August 2011)
My response to EPW review
MBA Universe.com
Financial Express
Economic and Political Weekly
Business India
Uday's Weekly

Selecting a CEO

2011-10-14T15:47:00.002+05:30

The man at the top looms large in the modern firm. Wherever you go in the firm, you can see his shadow. The CEO has the potential to do much good as well as much harm. Getting the selection of the CEO right is, therefore, one of the foremost functions of the board. Most boards, I am sorry to say, don't get it right; more importantly, they don't give it the attention it deserves.

It was a pleasant surprise, therefore, to read in the October issue of HBR about succession planning at P&G. I must confess I was impressed with the rigour of the process described, with the search starting within the company from the very day that A G Lafley took over as CEO. The distinctive aspect of the process is the involvement of the board. Because of its involvement in the search, the board gets to know several layers of management very well. It occurred to me that succession planning, if taken seriously, can transform the very functioning of the board.

More in my ET column, How to pick a CEO, where I also spell out lessons for Indian companies.

Take care of the banks, stupid

2011-10-12T15:41:00.002+05:30

Roger Altman urges a US-style Tarp for European banks. The key points for Europe's policy-makers is that banks need to be strengthened for the markets to shed their jitters. The markets are jittery because they think the banks will collapse under the weight of sovereign bonds. If they do so, they will take the Eurozone economies with them. Strengthen the banks- and you save the Eurozone.

Altman urges recapitalisation of banks through a common European facility. The governments must decide unilaterally which bank needs how much. It must back capital infusion with sovereign guarantees for bank borrowings. The taxpayer must have an upside on the infusions through warrants. It's quite likely that European governments end up making money by recapitalising banks, as the US Tarp did.

Once the banks are strengthened, the problem of sovereign debt can be addressed, with varying degrees of debt being written off for a range of countries. Then, we preserve Europe, avert a financial meltdown and also create the basis for economic recovery.

A Nobel for management?

2011-10-12T15:35:00.002+05:30

The Economics Nobel was an addition to Nobel's list. Andrew Hill, writing in FT, asks whether the time has come for a Nobel in management. He is not very sure. Breakthrough ideas in management are rare, so it would be difficult to confer an award for theory. The award would have to go to managers. Here, we face a serious problem. Managerial performance can be judged properly only over a very period. Many of the corporate heroes of yesteryear are no longer around- Enron and Lehman Brothers, for instance. But, conferring an award on a manager after, say, 40 years may take away much of its shine.

No, an award for management doesn't make sense. Let's stick to intellectual contributions and those that are truly original. That rules out management for now.

NRN on IITs

2011-10-05T11:30:00.005+05:30

N R Narayana Murthy has been quoted as saying that 80% of students at IITs are of poor quality. My first reaction is to ask: what would be the comparable figure for NITs and private engineering colleges? 95%? And what would that say about the quality of hires at Infosys, most of whom are drawn from second- and third-rung colleges?

Although an ex-IITian myself, I am not in a position to judge whether there has been any decline in standards in students at IITs as I have little contact these days with IITs or engineering. How do we test such a statement? We could use a number of indicators:

Acceptance of IIT students at foreign colleges and their performance there
Success rate of IIT students appearing for the IIM entrance test
Acceptability of IIT students to employers in India

Are fewer IIT students going to the US? Are companies now reluctant to visit IIT campuses for recruitment? I would like to know from readers.

NRN also comments on the poor English speaking skills of IITians:

The Infosys mentor also lamented the poor English speaking and social skills of a majority of IIT students, saying with Indian politicians "rooting against English", the task of getting good English speaking students at IITs gets more difficult.

I can readily respond to this comment. Some of the best performers in my time at the IITs were from vernacular schools. Their English was poor but this took nothing away from their brilliance- they were among the toppers at IITs and went on to make a mark in the US. I met some of them a few years ago at an IIT Bombay reunion and their English was now as good as anybody else's. The great change at IIT was not counting English marks in the entrance exam. This opened up IITs to some great brains in the interior of the country. To judge the calibre of IIT students by their English speaking skills makes no sense at all.

NRN, in his New York speech, has also advocated doing away with the tenure system at IITs; he wants faculty on five year contracts instead. If this is what is required for producing quality, how is it that US universities have a tenure system and produce great quality? The tenure system was created precisely to give academics the sense of security that is needed in order to produce high quality output over a long period.

I have a suggestion. Let NRN and a few other businessmen pool their resources and set up their own engineering college. They can set their own norms for admission, faculty, fees etc. They can then realise their dream of creating in India the equivalent of MIT and Stanford.

Corporate delusions

2011-09-30T16:58:00.002+05:30

I have often wondered how much of all the talk of 'empowerment' , 'democratisation', 'values' and the rest is actually practised by corporations, much as corporate bosses love to expatiate on these. My own sense is that most corporations (and most organisations, in general) are run despotically with the person at the top calling most of the shots.

I learn that my impression is not wide of the mark. The Economist quotes from a survey on corporate culture which says that what employees think of their organisations is at odds with the delusions their bosses harbour. The survey was commissioned by Dov Seidman, author of 'How', a book that emphasises that how businesses are run is as important at what they accomplish.

It(the survey) found that 43% of those surveyed described their company’s culture as based on command-and-control, top-down management or leadership by coercion—what Mr Seidman calls “blind obedience”. The largest category, 54%, saw their employer’s culture as top-down, but with skilled leadership, lots of rules and a mix of carrots and sticks, which Mr Seidman calls “informed acquiescence”. Only 3% fell into the category of “self-governance”, in which everyone is guided by a “set of core principles and values that inspire everyone to align around a company’s mission”

Does it matter how the company is run? Apparently, yes. A high proportion of people in the "self-governance" and "informed acquiescence" categories believe that their firms adopt good ideas; not so in other categories. Equally interesting, the perceptions of bosses are at variance of those of their employees:

Tragicomically, the study found that bosses often believe their own guff, even if their underlings do not. Bosses are eight times more likely than the average to believe that their organisation is self-governing. (The cheery folk in human resources are also much more optimistic than other employees.) Some 27% of bosses believe their employees are inspired by their firm. Alas, only 4% of employees agree. Likewise, 41% of bosses say their firm rewards performance based on values rather than merely on financial results. Only 14% of employees swallow this.

It would be interesting to see whether firms with a superior culture (as perceived by employees, not bosses) perform better. Then, we have a strong case for fostering an open, non-tyrannical culture. This may be achievable in a relatively small organisation. A large organisation that achieves this is truly worthy of praise. I invite readers to name a few.

My own impression is that the atmosphere is most corporations tends to be toxic, if not hellish, and they simply would not perform but for the fact that they are able to dole out large amounts of money. Bosses who think their companies are little paradises are living in one- meant for fools.

Europe can avert a Lehman

2011-09-30T16:26:00.002+05:30

Time is running out for the Eurozone economies. They have to show quickly that they have the will and the means to tackle the sovereign debt problem emanating from Greece and embracing several other countries, including large ones like Italy. It is possible to avert a 'Lehman moment', a cataclysm in the financial markets. But this requires deep pockets to recapitalise banks and to provide finance to distressed economies, including Greece. There is no escape from doing these two things. Either this is done in an orderly way, and possibly at a lower cost, or it is done in a chaotic way, and at a higher cost.

It's no use quoting stress tests that show only 8 banks are vulnerable. Or pointing to potential losses of €300 bn on sovereign debt. Once mayhem breaks out in the markets, losses will escalate and so will the number of failing banks. The key to understanding the banking problem is not to tot up losses on sovereign debt exposure as of today but to understand their dependence on short-term US money market mutual funds. It is is this dependence that creates the potential for another Lehman moment. More in my ET column, Europe's Lehman moment.

No more JEE- IITs/NITs to have aptitude test

2011-09-15T16:07:00.005+05:30

The IIT Council has decided in favour of a common aptitude test for IITs/NITs and all state government and private engineering colleges, TOI reports.

The exam will replace the current JEE. The Council favours giving due weightages to the aptitude test and standard XII marks. This is subject to the approval of the finance ministry and, in the case of state government colleges, to approval by the states. If it goes through, this will be a huge relief to thousands of engineering aspirants in the country and, of course, a massive blow to private tutorial colleges for the JEE.

The Council also decided to retain the IIT fee at Rs 50,000 per year but will require those with a family income of over Rs 4 lakh to cough up an additional amount totalling to about Rs 6 lakh for the course once they take up a job. There will be exemptions to those pursing M Tech or Ph D courses. The modalities of recovering the fee from salaries is to be worked out.

The change in the exam format and the idea of a common exam for all engineering colleges are both to be lauded. But I have to wonder: how is it that initiatives such as these emanate from the ministry and not the IITs themselves? Why do the IITs have to be prodded towards doing the sensible thing by students and the education system?

Basel III bounty for India

2011-09-15T14:27:00.002+05:30

Basel 3 may turn out to be a blessing for India- and other BRICS countries such as China and Brazil. Basel 3 will depress returns on equity in western banks by raising capital requirements. Indian banks's return on assets of 1% and return on equity of 12-18% is better than what western banks can produce and it's likely to stay at that level, thanks to financial inclusion.

Financial inclusion will force Indian banks to reach out to high-yielding small borrowers. This will entail a significant upfront cost but will yield payoffs in terms of an increase interest rate margin. Indian banks also have the potential to increase overall returns by raising fee income and by returning to credit cards and personal loans.

Thus, Basel 3 will have the effect of accelerating the process of catching up of emerging market banks with those in the west. More in my ET column, Stormy tide favours Indian banks.

Christian Lagarde steals the show at Jackson Hole

2011-09-01T16:49:00.002+05:30

No mistake who was the star at the central bankers' meet at Jackson Hole. It was neither Ben Bernanke, the Fed chief, nor Trichet, the president of the ECB. It was Christian Lagarde, the former French minister and now head of the IMF.

Most economists think that all policy bolts have been shot in the present crisis. They have become classical economists for now: sit back and watch while economies slowly get back to normal. Naturo-therapy for economies, if you like. But this may be just wishful thinking. Not doing anything could cause the bottom to fall from the global economy.

Lagarde alone had some concrete prescriptions to offer. Although a European, she didn't hesitate to call a spade a bloody shovel when it came to Europe's banking sector. More in my ET column, IMF's bold recipe for recovery.

Forget S &P downgrade, watch Eurozone

2011-08-18T16:09:00.003+05:30

The S&P downgrade is a non-event. It could be turn out to be an event for S&P and for other rating agencies, given that the Senate is to initiate hearings into the downgrade. This could eventually result in a major downgrade of the ratings business itself, but that's a different matter.

The downgrade signifies nothing of importance in the US economy itself. All the bad news is already in and there is nothing to suggest that a recession is imminent although recovery will remain sluggish. The danger to the world economy is posed by the Eurozone where bank exposure to government debt has the potential to trigger another financial crisis.This too is a low probability event as of now, since it appears that sense has dawned finally on the leaders in the Eurozone.

Comparisons of the S&P downgrade with the collapse of Lehman are completely misplaced. The Lehman collapse happened when banks were battered and it wrecked money market confidence in the banking system, making things worse for banks. Banks are today better capitalised and bank exposure to Eurozone debt is well documented although exposure to credit default swaps is a grey area. The S&P downgrade changes nothing on the ground and it could, in effect, be something of a wake-up call for leaders everywhere.

The prospects are for slow growth in the world economy and this will impact on India's growth prospects. Since, lower growth is what our policy makers are praying for in their bid to contain inflation, they will not lose much sleep on account of recent developments. More in today's ET column, A continuation, not a repeat, of 2008.

Anna Hazare's googly

2011-08-17T15:45:00.002+05:30

Am I the only one to be taken by surprise by the turn of events in L'affaire Anna Hazare? Yesterday, when I heard on TV that Hazare had been subjected to preventive detention, I cannot say I was outraged.

There is merit in the contention that the police, having availed of Sec 144, were within their rights to judge whether Hazare's proposed actions would disturb the peace or not. But I did feel that the politically astute course for the government would have been to allow Hazare and his fans in the visual media to spend themselves over a day or two.

That was not to be. The government sent Hazare to Tihar Jail only to reverse its decision and order his release by the end of the day. I am not in a position to judge how great was the groundswell of sentiment in favour of Hazare in Delhi and elsewhere. But the TV channels (one of which openly espouses his cause) certainly made one feel it was significant. They and sundry personalities kept clobbering the government through the day, perhaps giving the Congress bigwigs the sense that they were losing the PR battle.

What followed was even more astonishing. Hazare refused to accept the release order and leave the jail until assured that he could carry on his protest at a venue of his choosing. This was indeed a googly and the government was completely stumped. It could not, I suppose, have asked the cops to evict Hazare. The option of escorting Hazare out of Delhi must have been weighed and rejected. It appears now that Hazare will have his way.

It is certainly a blow to the government but that is not the point. We need to consider what the episode forebodes for the functioning of our democracy. What happens to the prerogative of parliament to make laws? Does this get suspended when parliament is seen to be not heeding the wishes of a large number of people? Who decides this in a given case and who is to be presumed to speak for the people? And if some of the clauses of the Janata Lokpal Bill are to be included in the government's draft, what purpose will be served by parliament debating them? Parliament can reject them only at the risk of facing another fast and trial by media!

This is not a referendum. It is not even mobocracy. It is mediacracy. Once the TV channels decide to root for a cause, an individual with a reasonable following may be able to foist his wishes on the elected government and parliament. Why have elections, let's settle for TV debates and online polls.

Ratan Tata succession

2011-08-05T11:59:00.003+05:30

There is word of a professional (instead of a member of the Tata family) succeeding Ratan Tata as head of the Tata group. Many people have been rooting for such a move. I am not so sure. There was the same talk when Mr Tata himself succeeded JRD. Not many gave Mr Tata a chance of succeeding. The sceptics have been proved wrong.

The number of businesses in the group has been pruned (although not enough, some would say). Controls have been tightened. The group is more international today (with the majority of revenues coming from overseas). The group has got into areas for which many had believed it unsuited (eg cars, communications). Mr Tata has put pep into many of the older businesses (steel, power, chemicals, tea).

True, the group's image has been dented by the 2 G affair and the Radia tapes. But, in commercial terms, Mr Tata has succeeded beyond all expectations. I see the Tata experience as part of a broader phenomenon of the reinvention of Indian family businesses. Reforms have not sunk India's family managed businesses but have brought out the best in many. It is no longer obvious that family-managed businesses must turn to professionals and not entrust their destinies to family members.

More in my ET column, It's okay to keep it in the family

Are sprawling IIM campuses justified?

2011-07-25T14:43:00.002+05:30

The IIMs have campuses that sprawl across 100 acres of more or land. They produce less than 3000 MBAs put together, says Nirmalya Kumar in an article in ET. He believes this is inefficient use of a scarce resource, land. Is this true?

There are two components to this point. One, the IIMs don't need sprawling campuses in order to meet their educational objectives. Two, given that they have so much, the IIMs can produce more postgraduates or doctorates.

To take the first point, Kumar argues that London Business School operates on less than 5 acres and graduated 1000 students this year. Why can't the IIMs do likewise? Maybe they should sell off most of the land they are sitting on?

I am not sure this is a valid argument. Both faculty and students in London (and other western cities) can easily rent apartments over a wide range of rentals. In Indian cities, it is rather more difficult, so there is a case for a campus that will obviate the need for people to look around for a place. Public transport in many places is nowhere as good as in London and there can be difficulties in commuting to work as well. Many cities may not be as safe those in Europe or North America. So, for the smooth functioning of the school, a campus may be required.

Secondly, the IITs and IIMs are governed by the Pay Commission framework and are restricted in the pay they can offer faculty. Campus accommodation is a valuable perk and we know from experience that for NRI faculty wanting to relocate to India, it's a big attraction. One would, therefore, make out a case for a campus on grounds of promoting academic excellence.

Having said that, there remains the question of whether the IIMs are producing enough graduates to justify the land on which they are sitting. One reason often trotted out is that the IIMs are unable to attract quality faculty. I do not entirely buy this argument. As Kumar points out, it should be possible to bring in visiting faculty from overseas. This does not happen, nor is recruitment of faculty vigorous enough, because it suits the IIMs to limit the intake. This enhances the scarcity value of an IIM product and hence the value of the IIM brand itself, and it limits competition to existing faculty. I have made a reference to this issue in my recent book, Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad.

It does appear to me that the IIMs work backward from a high average salary in determining what should be the intake of students. Whereas the need of the country is for a large number of MBAs. In recent years, the IIMs have had to increase their capacity by 54% consequent to the introduction of OBC quotas- this is the most significant scaling up in the IIM system since they were set up! So they could do it when they were driven to by law. Why can't they scale up on their own as well- and provide better justification for the land they are using?

How do we price higher education?

2011-07-21T16:06:00.002+05:30

I continue with the theme of pricing of higher education on which I had a couple of posts earlier. We need to ask ourselves: why do fees in higher education keep rising at a rate ahead of inflation in many countries? In b-schools in India, for instance, fees have doubled or tripled since 2007.

It turns out that the explanation is a straightforward one: institutions of higher education keep raising their fees because there are enough people out there willing to pay these. There is a mismatch between supply and demand and supply is not easily created because it takes years for a new institution to establish its reputation. In these conditions, universities and colleges get away with anything - if they are free to do so- and have no incentives to reduce costs or improve efficiency.

That must also explain why the production technology has not changed one bit in higher education for several centuries now- it's still the teacher using chalk and blackboard or, at best, slides and power point presentations. Quality is seen as a function of keeping the student-teacher ratio as low as possible.

The only way in which fees will be contained is if institutions are run by the state and are duly subsidised. If we leave it to the private sector, we must expect fees to escalate. We have to choose between the US model where private institutions are entirely free to set fees and the German model where the accent is on modest fees or free tuition and universal access. I argue in my recent ET column, Soaring costs of higher education, that the latter would be preferable in Indian conditions.

Britain struggles to price education correctly

2011-07-13T15:38:00.003+05:30

I wrote yesterday about the contrarian move in Germany to make university education free. The UK moved the other way in Tony Blair's time by opting for more market-driven fees. The new government opted to stay the course, last year allowing universities to raise the maximum fee from £ 3375 to£ 9000 with effect from September 12. To the dismay of the government, most universities have veered towards the maximum, according to the Economist.

How come? One would have thought fee would vary depending on quality. I suppose mediocre institutions get away with the same fee because of the scarcity value of higher education: there is isn't enough competition and entry and exit are not really free. We see in India as well. The moment the IIMs raised their fee, so did other b-schools including those that are not a patch on the top IIMs. They know that even at absurdly high fees, there will be enough takers in the Indian market.

Now, the British government wants to introduce differentiation in the market. It has come up with two ideas. One, higher quality institutions will be allowed to expand as much as they like (higher quality being defined by the number of applicants with a certain number of A grades). This, it is believed, will force mediocre institutions to drop their fees in order to attract clever students. Secondly, 5% of all places will be reserved for institutions that charge £ 7500 or less. This latter, of course, assumes that capacity is sufficiently elastic at the cheaper institutions.

Will these measures work? I doubt it. Leaving aside a handful of top institutions, quality for the rest is rather hard to define. Besides, students will opt for institutions that are closer to their place of residence, other things being broadly equal. In other words, the link between quality and fee will not be as strong as expected and the gap between supply and demand in higher education will remain acute given that more and more people aspire for university education.

Right now, it is the government that makes available loans to students, not banks. Higher university fees only spell higher bad debts for the government0- at the best of times, the government finds it difficult to collect repayments. In other ways, the government's subsidy burden will go up. Whether transferring more of the subsidy burden from the private sector to the government will improve quality is doubtful- quality is not a function of fees alone, it is a function of overall funding and the broad ecosystem as well.

Germany opts for free tuition

2011-07-12T17:18:00.003+05:30

Continental Europe can often surprise us in a big way. Most countries are going the way of increasing fees for university students. The model is market-based fee financed by loans (which may or not be subsidised by the state). Not so in Germany, according to a report in the Economist.

Many German states are opting for free university education. Fees in Germany generate revenues of only € 1.2 bn compared to total expenditure of € 36 bn. Private sources account for only 15% of revenues in German universities compared to two-thirds in the US. It could well be that not getting students to pay may be affecting the quality of universities- it's difficult to finance research and other activities of top quality without better funding. But education is inclusive.

Which model is better - the American model which imposes an enormous loan burden students but can produce very high quality or the German model which results in universities of lower quality but provides the widest access? The German economy is doing fine. Even though research in Germany may not be cutting edge, German manufacturing is known for quality. I leave it to you to judge.

India's services-led growth

2011-07-06T15:57:00.002+05:30

Two aspects of India's services-led growth are striking. One, modern services, comprising IT, financial services and communications have taken off at lower per capita levels than in the OECD economies. Two, there has been rapid growth in traditional services, most of which have been untouched by reforms.

Modern services in India should continue to grow thanks to tradability of these service: India's great good fortune that these services started developing in India precisely at a time when many of them became exportable. Traditional services, such as railways, hotels, trade too have plenty of potential. Hence, services can continue to be an engine of growth in India.

Can they absorb enough of India's labour force? Quite possibly, yes. When you say 'services', most people think IT and programming. They believe services require high levels of training. This is not entirely true. There are plenty of jobs opening up at call centres and data entry centres, jobs that don't require very high levels of training. Financial services and communications also are throwing up jobs in large numbers (on the sales side, for instance) where training required is not very high. So services-led growth can boost employment as well, although it cannot completely substitute jobs created by manufacturing.

More in my ET column, Can services-led growth continue?

IIM Indore five year programme

2011-07-03T10:30:00.003+05:30

IIM-I's five year programme in management has drawn a response from the AICTE. The regulator believes that IIM-I can't offer a degree at the end of the third year, as promised, because it does not have the power to grant degrees. IIM I has clarified that it will grant a diploma as all the IIMs do with their post-graduate programme. (The IIMs are not covered by any Act of parliament, unlike the IITs, and hence do not have the power to grant degrees).

IIM-I's 3+2 offering (undergrad courses plus MBA), after the 12th standard, will be watched with interest. It is the first ever attempt by an IIM to move into the undergrad space. It also offers students an entry into the MBA programme without facing the huge odds of CAT. The undergrad courses will cover, not just business management, but several elements of liberal arts, history, literature etc, as also IT.

There has long been talk, endorsed by the Yash Pal committee, of the IIMs becoming full-fledged universities. The issue has been one of scale as well as scope. If IIM-I can show that it can deliver quality in a broad-based undergrad programme, it will be a feather in its cap and it could be the forerunner of similar programmes from others, including the IIMs.

Regulatory overkill in banking?

2011-06-29T10:47:00.005+05:30

That's the title of my last ET column.

At least some bankers think so. They see the proposed capital requirements for banks as too onerous. They are against any restrictions on investment banking or on size. Alan Greenspan takes a different tack. He thinks policy-makers and regulators simply do not enough to intervene, that the international financial system is far too complex for the sort of regulation proposed under the Dodd-Frank Act.

Greenspan is in a minority today at least among policy-makers. Both in the US and in Europe (and especially in UK), the tide is firmly in favour of tighter regulation. It's difficult to resist the proposition that inadequate regulation was a factor in the sub-prime crisis, if not the most important factor. My biggest concern is that regulatory reform will be late in coming. The biggest nightmare facing us is a macroeconomic crisis triggered by the problems in the Eurozone hitting the world before banks are shored up with more capital.

Bankers and psycopaths

2011-06-26T11:11:00.003+05:30

The characteristics that make for good traders and investment bankers are pretty much the same as those that define psychopaths, according to Michael Price, co-director of the Centre for Culture and Evolutionary Psychology at Brunel University in London. Indeed, Wall Street’s Gordon Gekko has clear psychopathic tendencies, he says.

“The banking industry is an ideal target for psychopaths,” Prof Hare (a specialist on psycopaths) told me recently. The ructions of the past few years will only have helped their rise. “These areas are tailor-made for the psychopath. Where things become chaotic and the normal rules don’t apply, enter stage right the psychopath.”

That's from an article in the FT. Even more interesting is this tidbit on high flyers in the corporate world in general:

A small-sample study by Prof Babiak, Prof Hare and a colleague found that while the average result in a common psychopathy test was the same for executive high-flyers and the wider population, 3 per cent of high-flyers scored highly enough to be classed as psychopaths.

Maybe it's time ask: how come these lunatics are making big bucks and calling the shots?

Launch of book on Ravi Matthai-IIMA

2011-06-25T10:59:00.015+05:30

We had a launch function for my book on Ravi Matthai-IIMA (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad;Rupa Publications) on June 20. Dr C Rangarajan, Chairman, Economic Advisory Council to the PM, released the book.

Dr Rangarajan was a professor at IIMA in Matthai's time. He had been recruited from the US by Matthai and became a close associate of his here. Among those present were IIMA director Samir Barua, faculty and staff of the Institute, former faculty members of IIMA, people from the corporate world and the government of Gujarat and members of the media. The event was well covered in the Ahmedabad editions.

Zhou Enlai was misquoted?

2011-06-11T18:08:00.003+05:30

Talk about revisionism. This bit on Zhou Enlai, the former Chinese PM, is going to cause a bit of history to be rewritten. Zhou is famous for having said of the French Revolution and its impact, 'Too early to say'.

This has been famously interpreted as a sign of the far-sightedness of the Chinese, their ability to do serious long-term thinking. A news item in the FT now says that Zhou was misquoted. He was talking of the 1968 student riots in Paris, which had happened three years earlier, not of the storming of the Bastille.

At a seminar in Washington to mark the publication of Henry Kissinger’s book, On China, Chas Freeman, a retired foreign service officer, sought to correct the long-standing error.

“I distinctly remember the exchange. There was a misunderstanding that was too delicious to invite correction,” said Mr Freeman.
He said Zhou had been confused when asked about the French Revolution and the Paris Commune. “But these were exactly the kinds of terms used by the students to describe what they were up to in 1968 and that is how Zhou understood them.”

Apparently, this is not the lone instance of a Chinese leader being misquoted. Deng Xiaoping's, 'To get rich is glorious' is said to be fictional.

Are margins too high in Indian banking?

2011-06-09T18:23:00.002+05:30

The RBI seems to think so; one RBI official was even quoted as saying that Indian banks' margins are 'usurious'. It's hard to draw conclusions from the aggregate level of NIM because a bank's NIM is a function of a number of factors; for the same reason, comparing with other countries may not be useful.

The regulator must simply ensure that there is adequate competition- and live with the margin that results. There is a case for tolerating higher NIMs given that banks' capital requirements are poised to rise due to Basel 3 and stiffer regulation in the years to come. That will put banks' return on equity under pressure and make it a little difficult for Indian banks to finance their huge requirements of capital from abroad.

More in my ET column, RBI mustn't dicate bank margins.

How much equity does a bank need?

2011-06-08T15:45:00.003+05:30

15-20%, says Sebastian Mallaby in an article in the FT. The Basel 3 norm of 7% core equity is not enough, he says. His argument is as follows:

Three factors drive this estimate. First, recall how much equity can be destroyed in a crisis. The International Monetary Fund calculates that credit losses at US banks between 2007 and 2010 amounted to 7 per cent of assets, so banks must be in a position to lose that much again and survive. Second, consider how much residual equity banks must have left after a large hit. Here the answer is about 8 per cent of assets – that is the amount that the top four US banks felt it necessary to hold in early 2010 in order to retain market confidence. Third, remember that capital is held against risk-weighted assets, and that the calculation of risk weights is notoriously treacherous, so banks should hold a further buffer against “model error”, aka geeks who screw up. Adding these factors together, a 20 per cent equity capital ratio seems reasonable, even if some of this may take the form of “coco” bonds that convert to equity in a crisis.

Mallaby dismisses the argument that more equity will mean a higher cost of capital for banks. He says as more equity is raised, the cost will fall because banks will be perceived as becoming safer. Swiss regulators have already imposed a requirement of around 20% on UBS and Credit Suisse if one includes convertible debt. Mallaby argues that, in order to prevent regulatory arbitrage, shadow banks too must be subject to minimum capital and other requirements.

Book on Ravi Matthai - IIM Ahmedabad

2011-06-07T12:27:00.008+05:30

My book on Ravi Matthai- IIM Ahmedabad, published by Rupa Publications, is out (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad). ET carried a story on it a couple of weeks ago.

The book is timed to coincide with IIMA's golden jubilee and is meant to celebrate the remarkable effort at institution-building in the Institute's formative years. IIMA stands out in the Indian education landscape for one reason: it is that rare institution that has been at the top for most of the five decades for which it has been around. There is an Iron Law that operates in Indian education and that dictates that institutions of higher education, started with great fanfare, must go to seed in about thirty or forty years' time. IIMA is a noteworthy exception.

My book attempts to explain IIMA's success and to answer the questions: what sets IIMA apart in the IIM fraternity? why does it enjoy a premium rating? I also devote a chapter to the governance issues in the IIM system today and make suggestions on how to inject greater accountability into the system.

The answer to the above questions, which I came to grasp only after I had spent some five years at IIMA, lies in the culture and processes that Vikram Sarabhai, its founder, and Ravi Matthai, its first full-time director, put in place. That something, which is intangible but which makes all the difference to an academic institution, has been solid enough to sustain IIMA for five decades now.

When IIMA was founded, Ahmedabad was a small town. The infrastructure at the Institute was very basic, they did not have today's IT and the connectivity it provides, communications were poor. And yet IIMA quickly made an impact on the nation as a centre of excellence. Can you imagine an IIT or IIM being set up in Tirunelveli or Patiala making a similar impact today? That is a measure of the achievement of IIMA's founding fathers.

Matthai was all of 38 years old when Sarabhai and others chose him as the first full-time director. He was not an academic by training, he had been a corporate executive. He achieved what he did in just seven years' time. His appointment as director was not a contractual appointment, and yet at the age of 45, he chose to step down. He spurned numerous lucrative offers and turned his energies towards a novel experiment in rural education in Jawaja, a small block in Rajasthan. It was a story waiting to be told. I am privileged to have had the opportunity to tell it.

PS: The book is expected to reach the market in about a week's time but it can be ordered from flipkart. com or from Rupa's website.

America's moon mission and the public sector

2011-06-07T12:09:00.004+05:30

John F Kennedy's moon mission was meant to make a point about US supremacy in science after the jolt delivered by the Soviet Union's putting a man in orbit. It cost an enormous sum- $150 bn in 2010 dollars, according to an article in the Economist, "five times as much as the Manhattan Project and 18 times the cost of digging the Panama Canal." The Economist points to an irony at the heart of the moon mission:

The Apollo programme, which was summoned into being in order to demonstrate the superiority of the free-market system, succeeded by mobilising vast public resources within a centralised bureaucracy under government direction. In other words, it mimicked aspects of the very command economy it was designed to repudiate.

However, attempts to mobilise the public sector for other large projects failed, for example, Lyndon Johnson's attempt at social engineering on a huge scale. The Economist believes that Obama's calls for a leap in technology and infrastructure will fail for the same reason.

The Economist oversimplifies, methinks. The Apollo mission succeeded, not just because it invoked national pride. It was a case where expense was no consideration because a matter of national prestige was involved. Other giant public sector projects do not come with a blank cheque, expenditures are subjected to scrutiny and are pruned at the first opportunity.

Here in India, we have seen that several projects in the public sector have delivered for the same reason- ISRO, BARC, DRDO, IITs and IIMs. It is only when people start demanding results commensurate with expenditure that we have a problem- and indeed that is what is happening today. No longer are people willing to back the pursuit of excellence with an open purse.

In short, it is not the nature of the project that matters or the fact that is in the public sector, it is a matter of the resources with which it is backed.

IITs say no to greater autonomy!

2011-06-02T10:21:00.007+05:30

Going by a report carried by BS, the IITs don't really want greater autonomy, at least as envisaged by the Anil Kakodkar committee report on IITs.

The Kakodkar committee has favoured devolving greater powers to the IIT boards, with decisions on salaries, recruitment etc being largely left to them. Towards giving IITs greater operational freedom, it has suggested a substantial increase in fee from Rs 50,000 to Rs 2-2.5 lakh per annum. The IIT directors that BS spoke to had a different point of view from that expressed by the Kakodkar committee.

IIT Madras director MS Ananth is quoted as saying, "“In my personal opinion IITs have adequate autonomy. As an institution funded by tax-payers, I do not expect to be handed more on a platter." The IIT directors and also some faculty see any government withdrawal as coming in the way of the IITs' future growth:

“While the whole idea of the Kakodkar Panel is rooted in providing us more autonomy, I am not so sure that this will provide us with the prospects of growth that we need in the immediate future and in the long run,” said an IIT-Kharagpur professor on the condition of anonymity.

Gautam Barua, director, IIT Guwahati, expresses the view that key decisions should be taken by the IIT Council, which includes all IIT directors, rather than being left to the individual boards; leaving it to the boards would mean the absence of uniformity across IITs and the dilution of the IIM brand.

The attitude of the IIT directors is in refreshing contrast to that of some IIMs. The IITs have less autonomy on paper than the IIMs as the former are governed by an Act of Parliament whereas the latter are not. And yet the IITs believe they have all the autonomy they need while some of the IIMs keep bleating about lack of autonomy.

The older IIMs have been saying just the opposite of what the IITs are saying. They say they need to be financially independent of the government; they want more power be given to the boards; they have resisted moves to evolve a common policy across the IIMs through a pan-IIM board and other means; and they would rather have individual IIMs promoting their own brand.

So who has got it right on autonomy? The IITs, whose brand is better known worldwide than the IIMs, or the IIMs? I leave it to you to judge.

Barca reigns supreme

2011-05-30T16:32:00.006+05:30

Barcelona's majestic win over Manchester United in the Champions League underlined its status as the best team in the game today and, arguably, the best in the history of the game. Schumpeter, writing in the Economist, believes that Barca's success contains the answers to important questions of management. What is the right balance between stars and the rest of mankind? Should you buy talent or grow your own? How can you harness the enthusiasm of consumers to promote your own brand? He sees the answers as follows:

Barça puts more emphasis than any other major team on growing its own players. Other football teams often resemble the United Nations—the Arsenal first eleven, for example, frequently includes just two native-born Britons. Barça, by contrast, is still dominated by local players, and Catalan is often spoken in the dressing room....It is a boarding school that puts as much emphasis on character-training as on footballing skills. The students are relentlessly instructed in the importance of team spirit, self-sacrifice and perseverance. ...It is owned by its members (socis in Catalan), who now number 150,000, rather than by shareholders or foreign tycoons. ...so far nobody has gone as far as Barça in giving customers a direct say in big decisions.

I have great regard for Schumpeter but, as readers of this blog would know, I am wary of drawing management lessons from anecdotal evidence. True, it's unwise to depend too much on stars and there is much to be said for home-grown talent. But would you say 'never' to stars? There are surely instances of other clubs that have done the opposite of what Barca has done and been at the top in their own time. If home-grown talent were all that mattered, the teams in the IPL would not bidding for foreign players and having them.

Moreover, what applies in football or some other sport may not be applicable to firms. As firms globalise, there is merit in hiring talent from overseas, at all levels, indeed in internationalising top management as well as the board. In sports, the nationality of the player does not matter- football is football, whether one is playing at home or abroad. Not so with firms, where knowledgeable of the local culture and the local economy and the ability to deal with policy-makers and regulators in the host country are important requirements for success.

Star CEOs do deliver dramatic improvements in performance, although there is an issue of whether these improvements are always sustainable. You can't deny that Lou Gerstner produced a lasting transformation at IBM.

Perhaps what is required is combination of home-grown values and diversity of talent. The values must be so deep-rooted that foreign talent also comes to imbibe it. But this is, perhaps, asking for the impossible. If Barca continues its reign for a longer period than anybody else, we may be able to draw conclusions. Until then, we must reserve judgement on what Barca represents- and its managerial implications.

Greece can derail the world economy

2011-05-28T10:32:00.002+05:30

Last May, after the IMF-EU rescue of Greece, I confidently forecast that the rescue would not work. There was no way Greece could service its then level of debt. A year later, it's being generally accepted that restructuring is necessary although the EU appears to favour 'soft restructuring', which is extending the maturities of debt instead of debt forgiveness or lowering of interest rates. This, of course, merely postpones the day of reckoning.

My forecast may have come true but I am not celebrating. The Greek debt problem is a lot worse than thought earlier. It appears now that even restructuring will not return Greece to insolvency. That leaves only two options: a fiscal union for the EU (with fiscal transfers from a 'centre' to the states, as in India) or the exit of Greece from the currency union. The first is politically distasteful; the second will create turmoil all round. Greece will be quite a nut for the new head of the IMF to crack.

More in my ET column, Greek jolt to world economy.

World class or not?

2011-05-27T08:18:00.004+05:30

One of the pleasures of writing this blog is the high quality of responses it evokes. One anonymous reader talks of lack of ethical standards and even corruption at the IIMs. I cannot, for obvious reasons, comment on that. Most comments fault me for not addressing the core issue of whether the IITs and IIMs produce world-class research or not. They are right- I did not address this issue because it's difficult to deal with in a short post. Let me take a stab at it.

Perhaps, I should begin by posing some counter-questions. Is Infosys in the same league as Microsoft? Is ISRO equivalent to NASA? Are the IB and RAW comparable to MI5 and Mossad? Are our business dailies as good as Financial Times and Wall Street Journal?

There's no end to these comparisons and they will take us nowhere. No non-commercial institution in India needs to justify itself by comparing itself with somebody else who is regarded as best in class and then coming to conclusions as to its worth or utility. If that is the yard-stick, we will see mass hara-kiri.

The key issue is the impact the institution makes on its environment. Is it adding substantial value in the environment in which it operates? When the question is posed in these terms, the dimensions on which performance is measured change. You would not judge an IIT or IIM only on one dimension, namely, publication in international journals but on several dimensions: quality of students, interface with industry, impact on important sectors of the economy, inputs for policy-making, etc. The founding fathers of IIMA never talked about becoming 'world-class'. They spoke about two things: striving for excellence and striving for relevance. I guess I am talking about the same things.

The top American university is a marvel that has evolved over some three hundred years. It is supported by enormous private funding and it has put in place culture and processes that are not easy to replicate. Not just India but the rest of the world lags behind considerably: even the top European universities cannot hope to rival Stanford, Harvard, MIT and Princeton. In higher education, as in defence, the US stands alone.

The quest for improvement and reform must be eternal and the IITs and IIMs must be held to account for higher and higher levels of performance. But to condemn them by comparison with the icons of American education, which is what "world class" is all about, can only demoralise faculty and undermine whatever good can come out of our system.

Do IITs, IIMs add value ?

2011-05-26T07:57:00.005+05:30

When it is said that the IITs, IIMs owe their eminence entirely to students, not to faculty, it is implied that they do not add value. True or false?

Well, an IIMB director answered this effectively a few years ago when some in the corporate world had made similar statements. He made an offer: he would make public the admissions list the moment it was finalised. Corporates could come and recruit anybody on the list right away. If the IIMs did not add value, neither the students nor the corporates should have a problem doing this. There were no takers. The companies' bluff had been called.

There is another way of responding to the contention that faculty do not contribute. The IITs and the IIMs admit a small fraction of applicants. An IIM would call for interview around 1000 students. Anybody familiar with the admissions process would know that there is very little difference in terms of the CAT score between a student ranked 800 and a student ranked 2500 in CAT. The former may make it to an IIM; the latter is left out and goes to some other B-School. If the difference in student quality, that is, the input is negligible, how come there is such a huge difference in output or outcome? How is it that the IIM student is hugely sought after while the non-IIM student is not? Ditto for the IITs. QED.

Jairam Ramesh on IITs and IIMs

2011-05-25T09:37:00.003+05:30

The astonishing part of Jairam Ramesh's criticism of IITs and IIMs is his contention that a governmental research set-up can never attract young people. Ramesh presumably said this in order to justify his decision to set up a Maritime Research Centre in collaboration with the Mukesh Ambani group. The statement flies in the face of facts.

If a private institution in higher education were inherently more attractive, how is it that there are no private engineering colleges comparable to the IITs, no private B-schools comparable to the IIMs (with the exception of ISB), no medical college of the stature of AIIMS? A private institution in education can achieve quality only if it is private and non-profit. We know that is emphatically not the case in India, that the whole point about private institutions coming up in education is to make money, whether over the table or under it.

Indeed, when you look other places- France, Germany, Russia, China- the premier educational institutions are all in the public sector. The lone exception to state domination of quality institutions of education is the US. That is because of the tradition of private philanthropy supporting higher education, a tradition that is almost unique to the US. No other culture has it or has it in the same measure. That is why it is futile to expect private institutions elsewhere to produce anything comparable.

Even in the US, it is not as if quality education is the monopoly of the private sector. There are several distinguished universities that are part of government - the magnificent institutions of California university, University of Texas (Austin), Ohio State University, to name a few. Government presence in higher education need not be inimical to the pursuit of excellence and can indeed conduce to it- provided the governance structures are right. Several countries in the world have shown that it is possible to achieve this, and here in India, the success of the IITs and IIMs illustrates the same principle.

Criminality or stupidity?

2011-05-19T11:17:00.002+05:30

The question that is being asked for Pakistan's security agencies in the wake of the Osama bin Laden killing could also be asked of bankers and investment bankers in the sub-prime crisis. Hedge fund manager Raj Rajaratnam, has been convicted on charges of insider trading but no banker of stature has even faced charges for the turmoil caused by banks in the crisis.

It's plausible that poor judgement, rather than mala fide intent, underlay most of the problems at the banks, combined with such factors as poor regulation, lax monetary policy and current account imbalances. But can the bankers entirely escape blame, including the ones at the top at Bear Stearns and Lehman Brothers? John Gapper, writing in the FT, feels that investigations must continue in the hope of pinning blame on at least some people:

What is clear is that, both on the way up and in the panic on the way down, many banks valued and traded such assets for their own purposes and did their best to hunt out gullible buyers. The Senate inquiry report quotes a Goldman executive exulting that “I think I found a white elephant, flying pig and unicorn all at once” on finding an investor that would buy one of its collateralised debt obligations.
It beggars belief that somewhere on Wall Street, in the last days of the mortgage bubble, crimes were not committed. They are still worth finding.

Sure they are, but it's gonna be tough. Not only are some of these crimes difficult to prove but one has to reckon with the clout of Wall Street in these matters and the old boy's network among finance honchos that extends to the highest levels of goernment.

Curbing inflation in India

2011-05-12T09:36:00.000+05:30

The RBI signalled last week that it would tackle inflation head-on. The 50 bps hike in the repo rate was meant to send a strong signal to the market.

When inflation has been in the double digit range for two years running, the central bank has little choice. But, then, we need to be clear that high inflation in the recent past has been driven primarily by supply-side factors, fuel and food prices. Both these will stay at elevated levels in the coming months. Further, there is evidence that variations in demand in the period 2006-10 had little bearing on the inflation rate, particularly variations in non-agricultural GDP.

What role can demand management by the RBI play in such a scenario? It may not be able to influence demand but it can still influence the inflation rate by anchoring inflation expectations. That is what the RBI is seeking to do. If that is so, what expectations of inflation should the RBI target? In other words, what rate of inflation should we tolerate in the present scenario? It cannot be the previous comfort rate of 3-4%. It has to be something higher. The RBI needs to indicate what that is. Compressing demand to reduce the growth rate can otherwise end up inflicting costs on the economy that are greater than the costs imposed by high inflation.

More in my ET column, A 'new normal' for inflation?

Comment from the Dawn newspaper

2011-05-07T15:48:00.009+05:30

One of the most forthright and hard-hitting comments on the death of Osama bin Laden I have seen comes from a column in the Dawn newspaper of Pakistan. Cyril Almeida writes:

Did the 1965 war make any sense? It was hard to find any sense to it then, even less so today.
Did Kargil make any sense? Not then, not today.
Did hawking nuclear paraphernalia on the international market make any sense? Buying did perhaps, but selling? And now we
have the world’s most-wanted terrorist recovered from the bosom of the Pakistani security establishment.
So maybe it does make sense after all. The establishment has flirted with irrationality in the past. Now it appears to have
perfected it.
Where do we go from here as a country?
As long as national security and foreign policy remain in the hands of a cabal of generals — unaccountable and untouchable, a lay unto themselves, and in thrall to their own irrational logic — what future can this country have? Surely, not much of a future.

You cannot help admiring the courage and objectivity of the writer. This is why I find it difficult to buy the idea of Pakistan as a failed state. There must be something very right about a country where a leading newspaper can produce such a column.

Disapproving noises on bin Laden....

2011-05-07T15:37:00.003+05:30

The Archbishop of Canterbury has incurred the wrath of Americans with his reaction to the killing of Osama bin Laden. The Archbishop was quoted as saying, "I think the killing of an unarmed man is always going to leave an uncomfortable feeling because it doesn't look as if justice is seen to be done". This led to the Europeans promptly being branded by their cousins across the Atlantic as "cheese-eating surrender monkeys".

Meanwhile, UN Human Rights Commissioner Navi Pillay wants the facts of the operation to be made available to the UN. She is quoted as saying,"The United Nations' top human rights official called on the United States Tuesday to give the U.N. details about Osama bin Laden's killing, saying all counter-terrorism operations must respect international law. It will be interesting to see whether the US complies with the request.

NRN's retort to Mohandas Pai

2011-05-02T12:11:00.002+05:30

It doesn't pay to annoy the founder of Infosys. N R Narayana Murthy has responded to Pai's comments on succession at Infosys in an interview to BS. He contends that the preference for seniority was part of a policy that Pai himself had put in place:

We have a programme, iRace, which is an HR module for promotions and growth. In that, we have clearly said that with other things remaining equal, the person who has had a longer tenure will be promoted. This system was championed by the director-in-charge of HR (Pai). So, I am not saying anything that is different.

About Pai's questioning his own policy, NRN has this scathing put-down:

We must be very kind to him (Pai) because at times we all lose our rational thinking and make an emotional statement. After all, we have to be very kind and forgiving.

NRN also points out that Pai had told the media he was not interested in the CEO's past and then harped on the company making a distinction between founders and non-founders.

New chairman at Infosys

2011-05-01T11:33:00.003+05:30

Excuse me, but I am at a loss to comprehend the hoopla over the appointment of a new chairman at Infosys.

Media analysts asks whether this will make Infosys more aggressive, raise the bar at the company, etc. These questions are somewhat inappropriate once you grasp the following:

K V Kamath is supposed to be a non-executive chairman
There is also an executive co-chairman in Kris Gopalakrishnan.
NRN does not exit the firm, he stays on as Emeritus Chairman

It is not for a non-executive chairman to make a company more aggressive or even to define its direction. That is the CEO's role. The chairman is responsible only for governance: he has to ensure that the CEO is held accountable for objectives that he proposes and that the board agrees to. For Kamath to attempt anything more would amount to overstepping his role. Kamath himself was candid on this subject in response to questions posed to him yesterday after the board meeting. He said he thought Infosys was quite aggressive at it was and he would be happy to keep pace with it. That is the right spirit.

All the excitement over the appointment of a new chairman would have been merited only if governance was an issue at Infosys; that is hardly the case. So the appointment of a new chairman should have been a non-event. Companies appoint search committees to locate a CEO. Have you heard of committees making the effort for finding a chairman? For that matter, has the appointment of a chairman at any company generated such publicity?

If the CEO is to be given any direction, the primary responsibility will be that of executive co-chairman. Note also that NRN is very much around. One of the papers (BS) reported a few days ago that even as non-executive chairman, NRN had the last word on most matters, that all cheques of over Rs 5 lakh had to be signed by him and that he made it a point to meet heads of businesses regularly as non-executive chairman. It remains to be see whether he completely distances himself from the firm as emeritus chairman. It is fair to suggest that, had he wanted to do so, NRN would have exited the firm.

Royal wedding and security

2011-04-30T10:07:00.003+05:30

Oxymoronic as it may sound, one of the things that struck me about the Williams- Kate wedding yesterday was the unobtrusive security. I didn't spot any gun-toting guards either at the palace or at Westminster Abbey. In the church itself, security personnel were almost unnoticeable.

After the wedding, the couple drove through the streets in an open carriage, flanked only by horsemen. There were so many buildings along the route and I am sure security must have been tight but you only saw unarmed bobbies.

Contrast all this with our public functions these days that teem with gun-toting security personnel. It's a sign of efficiency when security is not apparent. One sees the same thing when the British PM steps outside 10, Downing Street to interact with press. You see the lone policeman outside the door and little else. That's a measure of self-confidence in the security team. They have it all covered, as they say. There is first-rate intelligence backed by minute surveillance. I am sure there are armed personnel around, waiting to spring in should the situation demand it, but you won't see them.

The more advanced the country and its security system, the less intrusive security is. By the same token, armed men swarming all over - and menacing the general public- are the hallmark of a banana republic.

IMF on capital controls

2011-04-28T09:48:00.005+05:30

The IMF has, over the years, changed its line on capital controls- from opposing these outright to now admitting these may be required in some situations. This, of course, vindicates India's position on gradual movement towards capital account convertibility and also that of emerging markets that have imposed capital controls as required.

It's good to see the IMF changing its position in the face of facts or evidence but its learning may be proving costly to its member countries. How many countries have ended up paying a steep price for rushing into full convertibility? And can we now expect to hear a different tune on other things, such as privatisation, subsidies or food security?

More on how the IMF's position on capital controls has evolved in my ET column, IMF lessons and other tales.

A globalised world?

2011-04-27T12:04:00.004+05:30

Schumpeter has an interesting column based on Pankaj Ghemawat's latest book on globalisation. Ghemawat contends that the statistics don't bear out contentions about the world becoming flat- or flatter:

Mr Ghemawat points out that many indicators of global integration are surprisingly low. Only 2% of students are at universities outside their home countries; and only 3% of people live outside their country of birth. Only 7% of rice is traded across borders. Only 7% of directors of S&P 500 companies are foreigners—and, according to a study a few years ago, less than 1% of all American companies have any foreign operations. Exports are equivalent to only 20% of global GDP. Some of the most vital arteries of globalisation are badly clogged: air travel is restricted by bilateral treaties and ocean shipping is dominated by cartels.

...Foreign direct investment (FDI) accounts for only 9% of all fixed investment. Less than 20% of venture capital is deployed outside the fund’s home country. Only 20% of shares traded on stockmarkets are owned by foreign investors. Less than 20% of internet traffic crosses national borders.....today’s levels of emigration pale beside those of a century ago, when 14% of Irish-born people and 10% of native Norwegians had emigrated. Back then you did not need visas.

Companies that operated on the 'flat earth' premise have actually burnt their fingers badly; the ones that were quick to adapt to local realities have done well.... The key question is whether globalisation will accelerate in one key respect: emigration. Demographics requires it should- Europe, Japan and the US all require foreign hands in a big way. But security considerations and xenophobia militate against it. Outsourcing is one way of dealing with the challenge of lower costs: instead of bringing in low cost labour, simply shift production to where costs are low.

Corruption in India- does it affect growth?

2011-04-27T11:50:00.004+05:30

Arvind Subramaniam poses the question in today's BS. His answer is equivocal, as is to be expected (of any economist, on the subject of corruption). Contrary to what the popular press would have us believe, the evidence from economic analysis does not suggest that corruption- or bad governance- necessarily derails growth. It's not just India's example that is telling; there is China's and, before that, of numerous other countries, such as Indonesia.

Subramaniam argues that India has managed to sustain growth by intense use of skilled labour, while not making the most of unskilled labour. Since skilled labour is drying up fast, he says, land will become an important factor. Since corruption will push up land costs, it will impact adversely on growth.

I am not so sure. Land is already mired in corruption and its costs have already shot up in many parts without affecting growth. I suspect that the contention that the 'governance deficit' will undermine growth is fated to go the same way as the contention about the 'infrastructure deficit', especially the shortage of power in the nineties. Remember the figures put out as required for investment in infrastructure? Investment, especially FDI, did not come anywhere near the projection but that did not prevent the Indian economy from taking off in the last decade.

Indian business found ways around the infrastructure shortage. They will do the same with shortage of labour or land. The Economist, in another article, talks about the 'Hindu rate of self-deprecation'. It suggests that grumbling about approvals required or corruption has not stopped India from growing so far. I would venture to suggest it won't do so in the future either.

Indian growth overtakes China's?

2011-04-27T11:45:00.002+05:30

Commentators project India overtaking China's in the near future. The IMF reckons this has already happened, the Economist reports.

The explanation runs as follows. India reports GDP by factor cost; China by expenditure. Look at India's GDP by expenditure and you find Indian GDP was a shade ahead of China's in 2010 (calendar year)- 10.4% and 10.3%. The Indian growth rate is at constant prices, so it has nothing to do with the high rate of inflation.

Bhargava-II report on the IIMs

2011-04-22T17:41:00.008+05:30

Amit Gupta and Ganesh Prabhu, faculty members at IIMB, offer a detailed critique in EPW of the second Bhargava report on governance at the IIMs. This report, along with other reports and decisions taken by the ministry recently in consultation with IIM directors, has evoked a strong response from a section of the IIM faculty.

The authors argue that it is wrong to vest governance exclusively in the board of the IIMs, as faculty are important stakeholders. They point out that the IIMs have had a decentralised model of governance where faculty also have responsibility for governance. True, but is it appropriate to persist with a self-regulatory model? The board should certainly not review the performance of individual faculty, as the Bhargava report recommends. But some authority needs to take a look at the aggregate performance, whether it is in line with agreed objectives.

I agree with the authors that the boards, having been ineffective all these years, cannot be expected to spring to life all of a sudden. But, then, the question remains: who is to be the monitoring authority? Well, I think the question has been answered to some extent with the ministry constituting what is, in effect, a pan-IIM Council where the minister sits down with IIM directors every six months and reviews performance. Better to stay with this, I feel, than to rely on boards. Vesting more power in the boards will only mean vesting even more power in the directors of IIMs- and this is best avoided since there is already a heavy concentration of power in the office of the director.

The authors refer to the Bhargava report's recommendation that directors be paid amounts in addition to their income and calling it 'self-serving' since three IIM directors sat on the committee. The rationale for making extra payments itself needs to be questioned. The report claims that "the director of an IIM earns less than the faculty who are involved in training programmes."

What is the basis for this statement? Did the committee obtain data on directors' earnings from consulting? It is certainly not true of IIMA that the director loses out on consulting income because he does not participate in it. The government needs to look at the ratio of directors' consulting income to average faculty income at the different IIMs.

Meanwhile, R C Bhargava has given an interview to Business Standard where he defends the decision to sell seats in IIM societies to corporate donors on the ground that this will augment the corpus of the IIMs, which, in turn, will enable them to compensate faculty better. This argument is flawed. Corporates are free to make endowments to the IIMs but they must not expect a seat on the Society in return. There are huge corporate endowments in the US but the corporations don't get to running the educational institutions. At best, they have a hall or a centre named after them (and not always).

However, Bhargava may have a point when he says that, in attempting to augment the Institute's and faculty's income, the IIMs may be spending too much time on executive training to the detriment of long-duration programmes and research. At least at some IIMs, an imbalance may have crept in. For this, the IIMs have only themselves to blame: the older IIMs decided they did not want revenue grants from the government, which leaves them with little choice but to augment income through training.

Mohandas Pai begins to speak up

2011-04-19T17:34:00.005+05:30

Mohandas Pai's resignation from Infosys was a huge news item in the media. Pai's departure will not make a difference to Infosys, certainly not the sort of difference that would cause a sharp drop in the stock price- he's neither a marketing person nor a software person, he was in charge of HRD. I suppose his departure caused news because it was seen as signalling a difference with the board and especially Narayana Murthy over succession planning and it also raised the question whether a company, which is said to be a model of governance, had got its succession planning right.

In his initial remarks, Pai sought to refute any suggestion of differences with the board and insisted he was merely making way for younger people. He also disclaimed any intention of wanting to become CEO himself. The company spokesmen themselves made statements that suggested that Infosys is not your run-of-the mill- company where people at the top have differences over such petty matters as who should be become CEO.

A couple of days later, Pai seems to have thought it necessary to give vent to his feelings. Here's an excerpt from a report in Indian Express:

“What goes against me? Seniority. You are discriminated against because the founders have spent longer years,” Pai told The Indian Express from Bengaluru. “I know the law, so long as the founders are there, professionals who are late entrants will not get a chance.”

....According to Pai, Murthy had, in an interview to a business newspaper, said if there are two very capable people, both fit to take on leadership roles, the one who has served for longer, would be the choice. “I don’t agree... you have to go by the person best suited for leadership over the next five years,” he said.

So, there you have it. The remarks appear to confirm speculation in the media that Pai was not too happy with the choice of S D Shubulal, one of the founders, for the post. In a separate interview with NDTV, Pai also hits out at what he calls the 'conservatism' of the company which, he thinks, has led to others overtaking in the recent past. He also suggests that Infosys might have done a better job of choosing its next CEO:

"When you choose a CEO, you should have a very transparent process and you choose the best person for the job," Pai said, adding, "In corporate India, the whole idea of CEO succession requires more transparency."

--"If left to me I would have drawn a list of people and I would have interviewed them and invited them to come and present to the board what their vision for the future is and I would have looked at their capability and decided for the next 5-10 years who are the people we should back and what they are going to do," he said.

Pai implies that what he has in mind did not happen at Infosys- and he has a point. It's hard to defend a system whereby the founders take turns at becoming CEO; this betrays too much of a closed shop mentality. It could be argued that it turns out that, in a competitive process, one of the founders was the best suited. However, this strains one's credulity- it cannot be that, after NRN, three successive CEOs who were best suited all happened, by a coincidence, to be founders.

Infosys has a board committee looking into CEO selection. Pai's remarks do raise a question mark over how effective this process has been, whether the board has exercised the necessary independence in the matter and made its choice based on a truly global and competitive search.

Anna Hazare and the political class

2011-04-14T16:36:00.005+05:30

Round One to Anna Hazare, no two ways about that. His fast in Delhi, played up by the visual media ( as only it can play up such things), brought the government scurrying to the table with a compromise proposal on the Lokpal Bill. There was joy unconfined in the media and the chattering classes.

Where do we go from here? Not very far, I fear. With every respect to Hazare and his well-meaning supporters, particularly young people, it's a serious mistake to suppose that non-political actors can provide solutions to political problems.They can act as pressure groups from outside and that's a valuable contribution. But anything beyond that would be unrealistic to expect.

This will not be the first campaign against corruption. In 1974, the JP movement aimed at bringing about a Total Revolution. It ushered in a non- Congress government. Thereafter, it was indeed a revolution- back to where it started from. In the 1980s, we had the Bofors scandal which swept V P Singh to power on the promise of a clean government. We know what happened.

We need to streamline various processes in government and to take purposeful action where corruption is detected. The Lokpal would be one instrument in tackling corruption but it cannot be the answer to the problem. And an all-powerful Lokpal, envisaged by the social activists, is a dangerous idea. Why must we suppose that a set of professionals would be above and beyond corruption?

There is one strand to the present outrage against corruption that is particularly dangerous. This is the vilification of the political class. In the course of a chequered career, I have come across not only politicians but professionals in various walks of life- corporate executives, doctors, lawyers, chartered accountants, and, yes, academics. I am unable to testify that any of these groups has standards of conduct superior to those of politicians.

The middle class is complicit in corruption in many ways, and it happily applauds neo-liberal policies that impoverish millions of people. Businessmen and companies are amongst the biggest beneficiaries of corruption. For these people to single out politicians for blame is absurd.

There is a Bollywood stereotype of the politician- as a venal nincompoop and part-time rapist- that unfortunately has wide currency. With all their venality and ruthlessness, politicians bring to their jobs a certain degree of competence or knowledgeability that is not generally appreciated. And the democratic process works miracles in its own ways. Condemn individual politicians by all means but, please, do not devalue the democratic process. More in my ET column, Don't demonise the politician.

Another IIM- MHRD confrontation?

2011-04-13T10:24:00.002+05:30

Outlook magazine has several pieces on what appears to be another looming confrontation between the IIMs and the ministry of HRD. The main story focuses on a couple of items that figured in the last meeting between the ministry and the IIM directors: selling seats in IIM societies to corporates and individuals and raising the teaching hours at IIM from the current 100 hours or so to 160 hours. The first remains a proposal; the second is minuted as a decision.

The story presents these and other proposals as an imposition on IIMs.This ignores the fact, pointed out by the minister in an interview, that both the proposals emanated from committees that comprised IIM directors (three in the case of the Bhargava committee that recommended sale of seats) and one IIM director ( in the case of the Balakrishnan committee that recommended an increase in teaching hours). The IIM directors do not seem to have seen anything wrong in taking decisions on these matters without consulting their own faculty first.

Mohanty of IIM Calcutta has a telling commentary in the same issue:

The committee does not contend with research that has established that bicameral governance has served the long-term interests of both academic institutions and society. It also disregards evidence that results of unicameral academic governance have been less than satisfactory. In short, the report is bad in theory and bad in practice. That is not to say that IIM governance should not be revisited. But any restructuring must retain its bicameral character and the public nature of the IIMs. The less said about boards that perpetuate themselves in perpetuity the better

The current proposals give rise to several questions. The IIM Societies have been moribund all these years. How is it supposed that they will become effective when seats are sold at high prices to corporates or individuals? Are these people expected to invest large amounts without expectation of return? If the intention is to raise funds, why not seek straight endowments (on which corporate India's record has been miserable) instead of selling seats? Should the workload for IIMs be decided at the Institute level or at the level of the ministry? What is the appropriate form of governance for an academic institution- does it make sense to replicate the corporate command- and-control system in an academic context?

Michael Atherton on India's World Cup win

2011-04-05T16:52:00.002+05:30

The hysterical coverage of India's recent World Cup cricket win is redeemed by former England cricketer Michael Atherton's lyrical account. Some excerpts:

The greatest innings ever played by a captain in a World Cup final was Clive Lloyd's monumental hundred against Australia at Lord's in the inaugural tournament in 1975 and if this was not its equal then it was not far behind.

Lloyd was in Mumbai in his role as chairman of the ICC's Cricket Committee and as Dhoni past him on the stage to collect his man of the match award, the West Indian would have recognised a fellow traveller.
Nobody, except Sachin Tendulkar, has been under more scrutiny. Every decision, every move, every statement has been pored over by an army of writers and pundits. After the defeat against South Africa, Dhoni criticised his batsmen for playing to the gallery rather than for the team and it was as if he had tossed a meaty bone to the most voracious pack of jackals imaginable ... they gnawed on this juicy offering for days to come.
The question throughout was not whether India had the talent to win the World Cup but whether they had the men to do it. Could they cope with the round-the-clock scrutiny, the suffocating, all encompassing demands of public for whom anything other than the ultimate victory would have been unacceptable. In short, did they have the bottle?
They had it all right _ whole jeroboams of it _ and, on a magnificent and moving night in Mumbai which sealed the glorious career of one modern master whilst bringing down the curtain on another, nobody embodied this strength of mind and character more than their captain Dhoni. His calmness throughout has been a key factor in enabling this team to reach its potential.

Management experts on Dhoni

2011-04-05T07:26:00.006+05:30

I wrote yesterday that I lived in fear of management experts wanting to derive mileage from Dhoni's success. Alas, my fears have come true. TOI today carries a story on Management lessons from Dhoni. All of it is just hindsight. Here is a selection:

Adi Godrej: "He sets stretch goals and works determinedly to achieve them by getting the best out of his team." By "stretch goals", Godrej presumably means winning the World Cup. Is he implying that other captains did not have such "stretch goals", that they took part in the World Cup in order to lose?

Harsh Goenka: "He led the attack from the front and was not afraid to make this change" (promoting himself in the batting order). Yes, and if it had not worked out, I am sure Dhoni would have been faulted with tampering with the batting order and not letting in the best player, Yuvraj Singh.

Santrupt Misra (HR head, Aditya Birla group): "A leader should maintain his calm. He should know his business well and take appropriate decisions in changing contexts". Can't quarrel with that, I suppose. Except that we know whether the decisions were "appropriate" only after the outcome.

There is more in this vein. I would have bought all this if even if one them had said prior to the final, "Dhoni is somebody who observes the following principles of management. These principles lead to success. I expect Dhoni to succeed". They didn't. Instead, I heard people say that Dhoni was flouting the one management principle necessary for success: leading by example. Had Dhoni failed with the bat in the final, I am sure this management principle would have been tom-tommed to death.

What is it about management theory that it reduces so quickly to the level of drivel?

Cricket pundits

2011-04-04T17:08:00.002+05:30

They said it would all depend on whether Sachin and Sehwag fired. It would be a titanic contest between two greats, Sachin and Muralitharan. Whoever won the toss and elected to bat would have a decisive advantage. The wicket would favour spin as it wore on, so spinners would have the upper end when the second team was batting. India, playing to a home crowd, would be under greater psychological pressure. And, of course, the first ten overs would be crucial- as would the middle ten and the last ten.

Well, well, as we know now, the outcome has made fools of the pundits. I have never been able to make up mind which category is worse: stock market pundits or cricket pundits.

The thing I now dread is the management experts jumping in with 'Lessons in leadership from Dhoni'. It could have easily gone the other way, you know, not only in the final but also in the semi-final. Then, I suppose, we would have had 'Leadership lessons that Dhoni forgot'.

Quotas for women on corporate boards

2011-04-01T09:37:00.003+05:30

The ministry of company affairs proposes to mandate at least one seat for women on boards of companies with five or more independent directors. I think this is a great idea but not for the reason put forward, namely, gender equality or social justice. I would argue in favour of the move from the point of view of introducing diversity on boards.

Boards suffer from group-think because their members are drawn from a small club- businessmen, corporate executives, retired bureaucrats. Anything that broadens the membership and introduces diversity should be welcome. Are there enough qualified women? Will it compromise the quality of the board? Well, you don't need extraordinary qualifications to serve on boards. Any reasonably educated person can contribute on a board if he or she wants to- and to improve on the present set of people, who shuffle in and out of board meetings without making any contribution, will not take great effort.

Critics are right in saying this won't do much for empowerment of women. For that it is important to have more women executives. But having women on boards should not be seen as a favour that companies do to women. It is more a favour to their own shareholders. It is important, of course, to get more women on board, but it's also important to have them on the board.

More on this in my ET column, Say yes to board seats for women.

Privatisation of IIMs?

2011-03-25T16:41:00.004+05:30

I had flagged this issue in an earlier post. Today, P K Sett of IIM Calcutta comments on the proposed changes in the governance structure of the IIMs. One proposal, made by a committee constituted by the HRD ministry, is for IIMs to sell seats in their Societies for Rs 20 crore (corporate) and Rs 5 crore (individual). This is intended to create 'ownership' in the IIMs. Sett rightly points out that this would mean a fundamental change in the character of the IIMs. I have two observations to make.

First, it's not clear yet that the ministry favours this proposal. Indeed, at a meeting between the minister and the IIM directors, it appears that the ministry had reservations about it. Two, it's not correct to blame the minister for this proposal or another proposal that would have faculty plans approved by the Board of Governors.

Both the proposals have emanated from committees on which the IIMs were represented. The Bhargava committee, which came up with the obtuse suggestion to sell seats to private donors, had the directors of IIM Bangalore, Calcutta (Sett's own boss) and Kozhikode as members. The Balakrishnan committee, which wanted the Board to approve faculty plans, had the director of IIMA as a member. All IIM directors were present at the meeting last October with the minister where the two reports were discussed.

Sett writes,'The public at large only has to stand and watch the demise of a great icon of modern India - if the HRD minister has his way.' Well, if the proposals go through, you can't blame the minister for that- the IIM directors are very much party to it. Why is it that we always end up making the government out to be the villain?

Arab revolt

2011-03-21T12:35:00.002+05:30

When George Bush first talk of promoting democracy in the Arab world, it seemed like another neo-con justification for intervention, as hypocritical as talk of "human rights" in the erstwhile communist countries. But, after reading Bush's memoirs and seeing the tumult in the Arab world, I am having to change my views. It does appear that the basic conviction underlying Bush's decision to intervene in Afghanistan and Iraq is being borne out, namely, that only the creation of democracies in the region would be in America's long-term interest. More on this in my ET column.

It is interesting that Obama has intervened decisively in favour of popular sentiment in both Tunisia and Egypt and so has Western Europe. I am not very sure of the situation developing in Libya, though, whether it reflects majority sentiment or a minority revolt that the west wants to shore up for its own reasons.

Bush's memoirs reveal a president more thoughtful than made out to be in the media, a man capable of thinking for himself and willing, on more than one occasion, to overrule his advisors. His questioning of his military advisors is interesting. In various situations, he does not get into the details of military planning but asks questions that a leader should and that military men don't necessarily worry about.

The book ends with Bush walking his dog around near his home and having to clean up after him- not what you would expect the typical hot-shot politician in India to do.

Deutsche Bank succession

2011-03-12T11:55:00.002+05:30

BS ran an interesting Reuters story yesterday on Deutsche Bank planning for a future without its rainmaker, Anshu Jain. I must say that my respect for the institution went up enormously after I read the story.

Anshu Jain heads the investment banking division which accounts for 70-80% of the bank's profit in recent years. But the supervisory board is inclined to believe, so the story goes, that Jain is not the right person to succeed Josef Ackermann as CEO because the bank needs to cut back its dependence on investment banking and invest more in stable businesses such as retail banking and wealth management. That's a brave decision to take, even if justified by the experience in the recent crisis.

The board is also not in favour of Jain because it believes that the next CEO must enjoy the confidence of the German political and corporate establishment, which criterion, apparently, Jain does not meet.

What if Jain decides to leave? The board is keen to retain him but is not fazed by the prospect of his departure because "everybody is replaceable" and "You cannot be held to ransom". Well said, indeed.

Government rejects IIMB proposals on autonomy

2011-03-12T11:33:00.003+05:30

I resume blogging after a fairly long lay-off occasioned by various preoccupations.

Let me start with the news about the government rejecting IIMB's proposals for amending its MOA. (I must thank an anonymous reader for the tip-off). The proposals rejected are:

Ending the government's power to take over the administration and assets of the Institute if it is not satisfied with their functioning.
Making it mandatory for govt to seek Board approval for probing irregularities
Not allowing the government a role in setting the mandate for IIMB
Ending govt's role in deciding the fate of assets bought from govt money
Ending IIMB's responsibility for management education in the south
Selecting the director without approval of government

On the selection of a director, the ministry has indicated that it would like this to be done by a national collegium of experts. This, I think, is a good idea. A sub-committee of the Board to select the director because it allows insiders, including the Chairman and the Director, a decisive say in the selection process. Distancing the selection of the director from the institution is more conducive to a transparent and competitive search.

The ministry has also said it does not favour proposals to delink IIMB salaries from the government framework and end to reservations for specified groups in the BoG.

What do we make of this news? Well, it's no surprise at all because similar proposals from autonomy, made by IIMA in the past, have not found favour with the ministry. The surprise, if any, is that IIMB even submitted these proposals because the ministry had earlier informed the IIMs exactly what amendments it was willing to entertain.

It is clear that IIMB, like IIMA, has arrived at an interpretation of autonomy that it can hardly expect the government to entertain, namely, independence from government. I have always found it strange that institutions that owe their success to the fact of their being public institutions should now want to shed their public character. Especially so when there is nothing to suggest that it is the public character of these institutions that is coming in the way of their advancement.

'Small ticket' reform is key to India's success

2011-02-18T16:28:00.002+05:30

There is a continuous clamour for 'big ticket' reform. This will be heightened in the week of the coming budget. I never ceased to be surprised about this. The success of the Indian economy, I argue in my ET column, is all about 'small ticket' reform.

'Big ticket' reform in a democracy can spell popular unrest. One example of such reform that has remained in abeyance is 'reform' of labour laws ( a euphemism for hire-and-fire in the organised sector.) 'Small ticket' reform is all about gradualism, of waiting and judging the results before proceeding further.

The best example of 'small ticket' reform is disinvestment of PSUs. Thanks to phased disinvestment, the government is sitting on a gold mine in listed PSUs and PSBs. Had they been sold off at one go, the exchequer would have lost heavily. The 'presumptive losses' from 'strategic sale' of PSUs, which Arun Shourie attempted, would have been far higher than in the sale of 2G spectrum.

Had this gone through, Shourie would today be facing the CBI not just for his actions as minister of telecom but as minister of disinvestment as well!

Western dean for Chinese B-school

2011-02-05T14:21:00.003+05:30

John Quelch, a former dean of the London Business School, is set to take over as dean of the China Europe International Business School (CEIBS), the Economist reports. Quelch is a former faculty of HBS, where he was a 'star professor' of marketing. CEIBS is said to be a partnership between the European Commission and the Shanghai Jiao Tong University.

The news is interesting for several reasons. For one thing, China appears to have opened its higher education doors to foreigners, even if it requires a partnership with a local entity. Secondly, it is willing to import a dean for one of its top institutions. This is not just a matter of paying top dollar. It is a matter of being open to a foreigner as a leader. Is there a single institution in India that has a foreigner as dean or director? For that matter, is it possible even for an NRI to become the director of any of the IIMs?

The IIMs preach the virtues of an open economy and globalisation to their students but they operate a closed shop when it comes to manning leadership positions. For the older IIMs, it is inconceivable that there can be a director from outside the IIM system. At IIMA, it is inconceivable that the director can be anybody from outside IIMA itself!

Until recently, IIM directors were chosen by their boards and through a process of nomination by eminent persons, a process that restricted the pool of talent to choose from. Lately, the ministry has required the positions to be advertised but even the top IIMs do not advertise internationally.

Education in China, like other spheres, is still controlled. Business schools are still in their infancy. Yet, when it comes to getting talent for leadership positions, China seems capable of greater boldness than an open society such as India. Makes you wonder whether democracy necessarily scores on every count. You can have a democratic society with some of the most closed minds.

No fee hike for IITs

2011-02-04T16:11:00.005+05:30

The decision of the IIT Council to reject the Anil Kakodkar committee's recommendation for a fee hike has not received the attention it deserves. The Kakodkar committee wanted the IITs to raise the annual fee from Rs 50,000 to Rs 2.5 lakh so that they could generate more funds on their own. The IIT Council, headed by HRD minister, Kapil Sibal, has shot down the proposal, India Today reports:

HRD minister Kapil Sibal, who chaired the IIT council meeting to discuss the report on Friday, said: "This fee hike would act as a deterrent to IIT aspirants." The IIT council also left the decision on increasing hostel fees to the respective board of governors in each institute. An HRD ministry official said: "The mathematical model proposed by the committee has to be reworked. The committee will now take a month to submit its report after considering the feedback and the response of the IIT council, which comprises the directors of all IITs."

The IIT Council's stand is commendable. It clearly does not accept the position that because IIT students can get loans and they can get jobs that can enable them to service those loans, students must pay a higher fee. A high fee and large loans are a deterrent to aspiring students. But how come this logic has not be applied to the IIMs and the IIMs have raise their fee at will in recent years? The HRD ministry needs to be consistent in its approach to commercialisation of education.

More on Malegam committee

2011-02-04T16:06:00.003+05:30

I commented yesterday on the Malegam report on microfinance. A couple of other observations.
The RBI needs to bestow greater thought to the composition of its committees. The Malegam committee, with due respect to the eminence of some of its members, does not have much expertise either on the rural economy or on banking. True, the RBI committees have the benefit of RBI's expertise but simply having people of eminence on such committees does not suffice.

A more serious problem is the presence of two members of the RBI Board, Y H Malegam and Kumaramangalam Birla. It is not a good idea for Board members to take on operational roles. It cannot be that, as members of a committee, they make recommendations and, then, as members of the Board, they sit in judgement on those very recommendations or the actions taken based on these. There is a clear conflict of interest. Surely, this country has enough expertise for committees outside the Board of RBI.

Malegam committee on microfinance

2011-02-03T14:14:00.002+05:30

The Malegam committee's report on MFIs came out a while ago. The intention is good: they want to rein in MFIs and subject micro-credit to norms and disciplines. But micro-management of the microcredit by the RBI, which is what the recommendations amount to, is not the right approach. It will be difficult for the regulator to ensure that not more than two MFIs lend to one borrower, that the total sum borrowed does not exceed Rs 25,000 or that the cap on interest rate is always observed.

My solution: put the onus of credit discipline by banks. The way to do this is to subject all lending by banks to MFIs to a consortium. Then, it will be up to the banks to see what limits they want to impose on borrowers, what the interest rate caps should be, etc. The banks will also be obliged to monitor the end-use of funds and they will be able to ensure that runaway lending by MFIs does not happen. More on this in my ET column, MFIs: Malegam misses the point.

Incidentally, on the very day the Malegam report came out, the RBI decided to allow banks to restructure loans made to MFIs. This display of regulatory forbearance was uncalled for. Clearly, the attempt is to sweep under the carpet the losses to banks on account of loans to MFIs. But does the RBI believe that, after restructuring loans made to MFIs, banks will be in a mood to resume lending in a big way? There is not the ghost of a chance.

Debt restructuring the only option for EU

2011-01-20T16:07:00.002+05:30

The EU is planning to top up its rescue fund and improve the quality of funding by way of reassuring the markets. These are cosmetics. They just won't work. The EU has to act collectively to get investors (creditors) to restructure. Either that or you will have serial defaults down the road.

Sovereign default is regarded as taboo, as something that countries must avoid at all costs. But countries that have defaulted haven't done badly at all. More on this in in ET column, Who says it doesn't pay to default?

Forecast for India in 2011

2011-01-13T17:09:00.002+05:30

Growth will match or exceed 8.5-9% projected in 2010; the EU will hold together despite crises, so we need not fear disruption of financial flows; inflation rate will stay high, perhaps 7-8%; the UPA government will survive and very little of the mud flung at it on account of 2 G sales will stick.

More in ET column, What lies in store for India in 2011?

Three golden jubilees

2010-12-23T11:16:00.002+05:30

Three well-known institutions, IIMA, IIMC and The Economic Times are currently celebrating their golden jubilees. I happen to have been a bit player in all three. I record my impressions of these institutions in my ET column, A tale of three jubilees.

Great Lakes stake sale

2010-12-13T11:38:00.004+05:30

Bala Balachandran, founder of Great Lakes School of Management, is in talks to sell 51% of his stake to Tata Foundation and Pirosha Godrej Foundation, BS reports.

“I have 90 per cent stake in my institute. I have decided to give the ownership to somebody who can give me some money to expand. I may offload as much as 51 per cent. The valuation of the institute would be around Rs 220 crore,” Balachandran told Business Standard on the sidelines of an event in Mumbai.

Balachandran would make a cool over Rs 110 crore on his stake sale. Not bad for an investor in a school that has been around for less than 10 years. What was his original investment, I wonder. The money that Balachandran makes would go into his pocket because it arises from sale of his equity, not through additional issue of equity. Presumably, for the expansion, the new investors will provide the additional funding.

Is the original promoter in an educational institution allowed to exit this way, possibly at a profit? I would like to know. The BS report states:

Great Lakes was formed in 2002 as a Section-25 company. Section-25 companies are those formed for the purpose of promoting commerce, art, science, religion, charity or any other deemed “useful object” and whose profits are used solely to further its stated objectives.

Balachandran will be taking over the Mumbai Business School, which will be named Great Lakes, Mumbai. Great Lakes is also venturing into Gurgaon and Orissa. In Gurgaon, it has bought land. In Orissa, the government has given it 100 acres of land on a 99 year lease. I have said this before: we need to review the policy on making government land available to private parties at less than market prices.

Making a career out of board memberships

2010-12-09T10:47:00.002+05:30

An article in the latest HBR proposes a solution today's corporate governance problems: have professional boards. That is, board memberships become something of a career. No professional director will serve on more than two boards. He will be required to spend time at the company other than for board meetings. He will have to be knowledgeable about the sector or products in which the company operates. And, of course, he will be paid more for his exertions.

I doubt that this will work. No matter how knowledgeable about a sector or how much time you spend on it, you can never become as knowledgeable as management. They can always withhold information or pass on information in ways that suit them.

Boards are ineffective not because of lack of knowledge or ability but because independent directors don't have it in them to question and challenge management. It is more rewarding to go along with management than to do otherwise. Remember, directors are beholden to management for giving them lucrative directorships. You can hope to get independence only when other interest groups find a place on the board- institutional investors, employees, minority shareholders.

More in ET column, Board membership as career?

Guru of microfinance under fire

2010-12-09T10:40:00.003+05:30

Mohammed Yunus, the Nobel prize winning founder of Grameen Bank and originator of the idea of microfinance, is facing an investigation over alleged diversion of funds given by a European donor from the Bank to an affiliated organisation. He has now come under fire from his PM, Sheikh Hasina Wajed, FT reports.

Wajed is quoted as saying, "Micro-lenders make the people of this country their guinea pig ... They are sucking blood from the poor in the name of poverty alleviation.”

More ammunition for critics of microfinance in this country. Don't expect anything to move until the RBI's Malegam committee submits its report, expected in mid-January.

Does corporate governance matter?

2010-12-03T16:11:00.002+05:30

It is assumed that corporate governance defines the health and performance of a company. How true is this? In the Economist, Schumpeter cites a recent study that casts doubt on this view;

The authors conducted a comprehensive study of the performance in 2007-08 of 296 financial institutions with assets of more than $10 billion. They found that none of the tenets of good corporate governance stood up to close examination. Directors who were well informed about finance performed no better than know-nothings. Companies that separated CEOs and chairmen did no better. Far from helping companies to weather the crisis, powerful institutional shareholders and independent directors did worse in terms of shareholder value. Indeed, the proportion of independent directors on the boards was inversely related to companies’ stock returns.

The authors of the study are quick to also point out that in East Asia, external monitoring has led
to better performance. So, maybe, one cannot generalise from banks?

Well, a good way to address the question of whether corporate governance matters is to ask whether management will do without boards at all? Is this desirable? Most people would think not. Some checks, however imperfect, are better than none.

Secondly, we have to look closely into the role and motivation of independent directors. In most cases,' independent' directors are selected by management. Management also pays them well in some cases. It's hard to see these directors taking their role seriously and challenging management. We need to find a different way to select independent directors. Even then, they may be co-opted by management. But it's worth trying something different.

When Ireland rocks the world

2010-11-26T16:48:00.003+05:30

Ireland, which accounts for 0.3% of the world GDP, has been sending shock waves through the world economy. Earlier, it was Ireland and Greece. How do contain disruptions of this sort emanating from relatively small economies? I touch upon this in my ET column, Small economies, big headaches.

Ratan Tata is angry

2010-11-23T15:20:00.004+05:30

About a week ago, I may have been forgiven for getting the impression that the Tatas could not start an airline some years ago because they didn't want to bribe the minister concerned. That is the impression I got from newspaper headlines.

I now learn that it wasn't anything like that. A businessman told Tata that he would be stupid to pass up an chance to start an airline just because it meant paying some minister R 15 crore. Here are the details that I came across at a site on the Internet (and I hope they have reproduced Tata's clarification correctly):

I ( Ratan Tata) happened to be on a flight once, a fellow industrialist sitting on a seat next to me & he said you know I don’t understand, you people are very stupid. You know that the minister wants 15 crore of rupees, why don’t you just pay, you want the airlines. I said you will never understand this; I just want to go to bed at night knowing that I haven’t got the airline by paying for it.”

The company then included a clarification on the following three points, which India Real Time is reproducing verbatim:

–No minister ever asked Mr. Tata for a bribe

–The fellow industrialist expressed his personal view point that some minister (sic) were asking for a bribe
–Mr. Tata in no way was in agreement to the fact that he was asked for bribe by any minister

Business Standard wrote an edit saying that instead of 'whining' about the issue, Tata should name and shame the minister. Tata has written an angry letter to the paper roughly making the same points as above.

Which raises the question: how did so many papers report the news inaccurately?

Vedanta university - and land grabs of private colleges

2010-11-18T11:06:00.005+05:30

The Vedanta group's ambitious plans for a world-class university has suffered a huge setback - and perhaps won't happen now- with the Orissa High Court's adverse ruling in the case related to acquisition of land for the project. FT reports:

The Orissa High Court has ruled that the Orissa government’s acquisition of about 6,500 acres of land – including 500 acres from Puri’s famous Jagannath temple – and the land’s subsequent transfer to Mr Agarwal’s eponymous foundation to build Vedanta University was illegal.

The court has ordered that the land be returned to its original owners. The judgment – in response to a clutch of public interest lawsuits challenging the land acquisition – will bring a formal end to the long-stalled plans for the university, which Vedanta had already concluded was unlikely to ever get off the ground in Orissa.

The ruling has brought to the fore the question of land being acquired for setting up of private universities and colleges. BS has an interesting feature on the subject today. The article notes that the Anil Ambani group has recently been alloted 110 acres by the MP government for its foray into education while ISB got 70 acres of land in Mohali. The land allotment is disproportionate to the requirement in many cases. Where it is made over to private parties, the suspicion of a land grab is bound to be there.

BS notes that a good engineering institute can be set up on 10 acres and a management institute on 5. So why are private institutions asking for and getting so much land? It also notes that Infosys' Mysore training facility is on a 337 acre campus. This is not even a degree-granting facility, it is strictly for a private company. Interestingly, Shiv Nadar and Aziz Premji are acquiring and pay for the land they need for their educational ventures instead of seeking concessional land from the government.

Microfinance myths

2010-11-11T11:28:00.002+05:30

Now that recoveries of microfinance institutions in AP have virtually ground to a halt, what happens to bank exposure to MFIs of some Rs 27,000 crore? I am surprised that the question has not been posed thus far. Under the agreement between the financial services secretary and MFIs, not only MFIs cap their interest rate at 24%, they will now only have monthly repayment with repayments to be made at an approved panchayat council office. The slightest hint of harassment means the recovery agent could end up in jail.

What sort of recovery is possible in these conditions? Certainly not the 100% claimed by MFIs thus far. I would be very surprised if banks did not end up taking a substantial hit. This should prompt some introspection among banks. How did they fall over each other to lend to entitities that were mostly one-person affairs and whose governance left much to be desired? Did they keep track of cumulative bank exposure to a given MFI?

On a broader note, the MFI model itself will have to be revisited. MFIs should now be brought under stringent regulation, of course, but also on-lending of bank funds through MFIs cannot continue as before. Let MFIs garner their own funds either as equity or as deposits (with deposits being linked to net worth). More on this in my ET column, Five myths about microfinance.

G 20: putting the pressure on China won't help

2010-11-02T11:31:00.002+05:30

The US seems to believe that a revaluation of the yuan holds the key to global imbalances. Of course, the Chinese need to revalue. But they will be more willing to do so when the see the US economy picking up smartly and continuing to generate demand for their exports. That means US has to pep up domestic demand. It's fast becoming apparent that monetary policy alone won't do the trick for the US.

Quantitative easing-II has led to funds flooding into emerging markets and triggering competitive devaluations. It hasn't done much to revive the US economy. Fiscal policy, discredited since the Greek crisis, may have to play its role. More in my ET column, G 20 accord needs US policy shift.

Financing higher education

2010-10-27T10:04:00.004+05:30

Government universities cannot afford to continue large subsidies to students. They have to raise fees. This is true not just for India but for other countries as well. How to increase fees without undermining accountability? In today's ET, Arvind Panagriya cites the recommendations of a panel on higher education in the UK.

The panel suggests that students not be asked to pay fees upfront. The government should foot the expenditure of 6000 pounds per student. Students should start repaying the fees to the government once their income crosses a certain threshold- say, 21,000 pounds.

I don't know whether such a scheme is enforceable. It means keeping tabs on every graduating student and the income he or she is earning after graduation. But the underlying principle is interesting. The panel has not asked that students simply finance their education costs through loans. It apparently sees education loans as impeding access. It is one thing to repay fees as and when able. It is another to be committed to huge outflows at the point of graduation.

The panel's approach is in refreshing contrast to the approach in India where education loans are seen as the answer to rising fees especially in the professional courses. The IIMs, for instance, have taken this line to justify huge increases in fee in recent years. As HRD minister, Murli Manohar Joshi had opposed high fees at IIMs and other places during the tenure precisely on the ground that it would impede access.

The problem with the IIMs' increasing their fees is that it has led to an across the board increase in fee in business management course. While IIM graduates may be able to repay their loans, students at other b-schools are finding the going rough. Commercialisation of education comes in the way of inclusion. The answer to universities' or schools' need for higher fees has to be some combination of government subsidy, private endownment and loans or, if feasible, pay-as you- earn schemes.

Backdoor privatisation of IIMs?

2010-10-25T16:52:00.003+05:30

The report of the second Bhargava committee on governance at the IIMs was made available to the government a few weeks ago. It was discussed at a meeting that Kapil Sibal had with IIM directors recently. (The first Bhargava committee report came out in 2008 and was shelved following objections from the IIM establishment).

I read the report with some dismay. Let me just react to one or two proposals for now. The committee wants the ownership of the IIMs to vest with the Society in which ownership is nominally vested today. It suggests that corporate entities be allowed to become members at a price of Rs 20 crore. For individuals, the price could be Rs 5 crore; for alumni Rs 3 crore. These numbers may be lowered if the IIMs think that is necessary.

What does this mean? That any businessman and his family are associates can garner three or four memberships of the Society for Rs 20 crore or so? Or that any industrial group can pick up two or three seats for Rs 60 crore? And then proceed to call the shots? This strikes me as backdoor privatisation of the IIMs. The worst part of it is that businessmen or affluent individuals would be able to run the IIMs without having to invest a great deal.

At the same time, the committee wants the government to continue to meet capital expenditure for the older IIMs, revenue expenditure as well of the newer IIMs and make contributions towards pension liabilities at the IIMs. Call it PPP if you like- a public private partnership in which the government bears the costs, the private sector calls the shots. It is astonishing that three IIM directors should have been party to this proposal. (The fifth member was an alumnus of IIM-B).

The report says somewhere that ownership should vest in the Society, not in the faculty. That will be news to faculty at least at IIMA where the concept of a 'faculty-governed institute' is sacrosanct and ownership or decision-making is divided amongst the Board, faculty and government.

Microfinance bubble burst?

2010-10-18T11:49:00.003+05:30

Many have been warning that the runaway growth in microfinance assets is not sustainable. is the bubble about to burst? Well, the AP government's ordinance is certainly ominous as it requires microfinance institutions to suspend collections until they have registered with local authorities. (see FT report). Banks cannot escape the fall-out as they as the primary funders of MFIs mainly in order to meet priority sector obligations.

A number of practices of MFIs are now coming to light: multiple lending, aggressive marketing of loans to the unwary (much like the sale of credit cards and consumer loans done by foreign and private banks), dubious HR practices (hiring 18 year olds and not issuing any appointment letters), weekly repayments, harsh recovery methods, forming liability groups out of self-help groups created by NABARD and other government agencies.

Some of the arguments for high interest rates charged by MFIs are downright absurd. Eg. The interest rate of 30% if ok as money-lenders charge over 100%. Says who? Besides, money-lenders don't market their loans. They make loans to people who come to them- and strictly against collateral.

It has taken the SKS IPO and a spurt in suicides in AP for people to wake up to what's going on. One thing is certain: microfinance will not be the same again.

Rumblings in NIT system

2010-10-18T09:36:00.003+05:30

Directors of two NITs, Warangal and Trichy, have been suspended following various charges against them, IE reported a while ago. The ministry of HRD has sought the approval of the President for the dismissal of the chairman of the board of NIT, Kurukshetra. Apparently in a sign that it is not happy with the state of affairs of NITs, the ministry has commenced the search for various NIT directors a full year before the completion of tenures of the present ones.

I can't comment on the specific cases above. But if the system is acting at all, it is a good sign. One of the sorriest things about our elite institutions is the complete lack of accountability of directors and the boards. If people are being called to account, that is a healthy sign. I also approve of the search process commencing well in advance. Typically, the search starts so late that the incumbent hangs of for several months after his tenure.

Here's a suggestion towards ensuring accountability of directors: there should be a mid-term appraisal of all directors. The appraisal should document what has been accomplished during the director's tenure up to that point and what is proposed to be accomplished in the remaining period of his tenure. This appraisal should be placed in the public domain by being posted at the Institute's website.

US bail out cost less than 0.5% of GDP!

2010-10-14T16:59:00.002+05:30

The US government faced fire for its $700 bn rescue of the financial sector in 2008 which was called Tarp. Surprise, surprise. The final cost is now estimated at less than $50 bn. My latest ET column explains how.

The losses in the financial sector across the world too were exaggerated by estimates made in a time of panic. Financial institutions hold mark to market securities whose prices are heavily depressed in times of panic. No point in estimating losses at these prices and the costs of a rescue. Governments will be frozen when they see the numbers. Just go out and save the large banks. Markets will bounce back and the costs will be far less than thought earlier. That's the lesson from the Tarp experience.

Khandelwal report on HR in banks

2010-09-30T17:35:00.003+05:30

The report on HR in banks, prepared by a committee headed by A K Khandelwal, former Chairman of Bank of Baroda, came out in June. It wasn't made public. I happened to get a copy of it last week. I am concerned about the focus on variable pay in the report. As I argue in my ET column, HRD in banks is more than just pay, I have serious concerns about whether such schemes can work in the public sector.

There is much talk about the public sector losing talent because of poor pay relative to the private sector. The IAS wanted a huge job in salary to make jobs comparable to the private sector. The army, as I recall, wanted the Chief of staff, to paid Rs 1 crore. IIT faculty agitated for pay superior to what the Pay Commission wanted. The IIMs grumble about pay. And, of course, all PSUs would like pay to be benchmarked to the private sector.

In many ways, pay in academics is a lot better than it has ever been before - and there is no indication that it is drawing in superior talent. Nor are there signs of the opposite kind, that the talent coming into IAS, for example, is poorer than in the past. Senior IAS officers have told me that the composition of probationary officers is changing- more come from lower middle class and rural families and they may lack polish but they are very bright and committted. Competition for the administrative services remains fierce- as fierce as that for IITs and IIMs.

So, we should not make the mistake of seeking parity in pay across the public and private sectors. The two offer different career choices and different lifestyles. This goes for public sector banks as well. They need to improve pay but not catch up with private sector either in what they pay or how they pay (fixed pay or variable pay).