Return of the prodigal

Over a 100,000 Indians will return from the US in the next 3-5 years, ET reports. The estimate comes from a study done by multi-university team headed by an Indian, Vivek Wadhwa.

With India Shining until recently, the urge to migrate had weakened somewhat. The downturn in the US will weaken it further and enhance the domestic pool of talent with returnees.

"With the economic downturn, my guess is that we'll have over 100,000 Indians and as many Chinese return home over the next three-five years," says Wadhwa. "This flood of western educated and skilled talent will greatly boost the economies of India and China and strengthen their competitiveness.

...... Until recently, America has been the prime destination for the world's best and brightest immigrants. "Immigrants have made tremendous personal sacrifices," said Wadhwa. "They would leave behind relatives and friends and accept second-tier status in American society.

"Now countries like India and China are providing equal career opportunities and a better quality of life. So the most highly educated and skilled are often returning home."

I recall with amusement the heated debates we used to have about the 'brain drain' and how to stop it. All sorts of prescriptions were given (eg compulsory home service before migrating, an exit fee for those departing from schools like the IITs, etc). None of this is required. When growth accelerates and creates opportunities, brain drain ceases to be an issue. Growth may not the complete answer to poverty but it is certainly an answer to brain drain.

Old wine in old bottle

Gary Hamel has an article in the HBR of January 2009 on how we need to reinvent management. The article came out of discussions among a group of scholars and practitioners. There is nothing wrong the ideas- some two dozen of them- but I wasn't bowled over because these aren't new. eg. management being more democratic, more transparent and, not least, being focused on nobler objectives than shareholder wealth maximization.

The last is not new at all because Peter Drucker wrote extensively about it. In one of his books, he said management could never win legitimacy as long as it focused on such a narrow objective. Management needed to focus on something loftier. He proposed making people productive as the declared goal of management. But Drucker was writing at a time when the market was far less efficient than it is today. Are we saying that the market cannot judge whether a company is doing enough with respect to, say, innovation and people development? Then, the right question, perhaps, is: how do increase the flow of information on these matters to the market?

My problem is: how do you operationalise such goals? How do we measure performance in ways other than shareholder value? Drcuker never answered this question. He left the definition and measurement of management performance as an important challenge for corporations.

True, shareholder value leads to distortions in managerial actions but at least the market is an impersonal judge. Are we to substitute the market's judgement with that of some independent personalities who will come up with appropriate measures? Well, I hope these personalities are not independent directors!

More thoughts on this in my last ET column, A new paradigm for management?

IIMC fee hike

IIM Calcutta has raised its fee to Rs 9 lakh from the present figure of Rs 5 lakh. The fee hike will apply from the batch of 2009-11. IIMA and IIMB had both effected steep increases last year. IIMC had not followed suit and, in fact, had claimed the high moral ground saying that its then fee structure was adequate to generate a surplus.

So, what's changed now? Maybe revenue from training programmes has declined steeply and this necessitated a fee hike? The least IIMC should have done was to explain why it resiled from its earlier stand. The explanation given, namely, that the revised fee merely helps the Institute recover costs is not adequate because last year the Institute had said that was not the line it would like to take.

IIMC's chairman, Ajit Balakrishnan, was a member of the IIMC review committee which submitted its report last year. The committee, while leaving it to IIM boards to decide the fee, had recommended that a particular formula be used for determining the fee. Has IIMC used that formula? Or does chairman Balakrishan differ with review committee member Balakrishnan?

IIMC has not covered itself with glory on the fee hike issue. Market-minded people would say it has merely ended up being behind the curve in raising its fee.

US diplomatic etiquette

I've been reading Jaswant Singh's memoirs, A call to honour. I am not ready to review it yet but I thought I'd share one or two tidbits about American diplomatic- if that's the right word- behaviour.

Singh writes about the build-up to the Pokhran II nuclear tests. The then US ambassador, Richard Celeste, is a bit uneasy about the BJP's intentions. He calls on Singh and tells him he's going away on a longish vacation. He hopes that nothing 'disagreeable' would happen during that time, which would mar his vacation. In other words, India's nuclear plans must be hostage to His Excellency's vacation!

Shows how American diplomats and members of government and also their army commanders are used to throwing their weight around. After the blasts, Secretary of state, Madeline Albright, tells Singh bluntly," You betrayed us".

Strobe Talbott has a slightly different version of the encounter in his Engaging India. He quotes Albright as telling Singh, "You lied to us and that's not what democracies do to each other". Singh has a way with words and was able to hold his own, telling Albright there is a difference between secrecy and deceit!

Singh is honest enough to say that the nuclear option had been kept open by all governments and it was only a matter of when India would test. Narasimha Rao, while demitting office, told Vajpayee that he couldn't do it and he hoped Vajpayee would.

As Singh makes clear, two events more or less clinched the issue in favour of a blast: the indefinite extension of the NPT in 1995; and the commencement of CTBT talks in 1996. Had the CTBT been signed by the US, India would have had to fall in line and that would have foreclosed our nuclear option.

The BJP's achievement was not so much going in for the nuclear tests as managing the fall-out. It was able to persuade the Clinton administration that a nuclear India was not a threat to the US but an asset and that the nuclear capability along with India's economic advancement made India an appropriate partner for the US in Asia. Of course, several other factors contributed to this changed equation, including the end of the Cold War and the rise of China. The Indo-US nuclear deal, negotiated by Manmohan Singh and George Bush, merely built on the formidable groundwork done by Vajyapee and Jaswant Singh.

Our sins, their sins

Today's papers showed Rahul Gandhi nodding off during the finance minister's budget speech. Apparently, he was not the only MP guilty of this. Take heart, my fellow Indians, politicians elsewhere are capable of worse.

Japan's finance minister is due to resign after having appeared drunk at a recent G-7 news conference. The minister denies he was drunk. He ascribes his performance- he slurred and appeared to fall asleep at one point- to cold medicine.

Well, even if the man had too much sake, you can't really blame him, can you? The Japanese economy turned its worst performance in 35 years, shrinking by 3%. Enough to make any finance minister hit the bottle.

'IT industry facing unprecedented crisis'

That was a headline in Indian Express today. The quote was acribed to Nandan Nilekani of Infosys. I read on to see what was meant. Nilkeani is quoted as saying:

....the compounded growth rate was 30 per cent and more and now it is reduced to 20 per cent due to economic slowdown.

Well, I guess that's the sort of 'crisis' most industries would love to have!

I do not, by the way, wish to understate the impact of a slowdown of this magnitude on the jobs market in India, especially the impact on the fresh crop of graduates from engineering colleges this year.

Tribunal for private educational institutions

The government plans a National Teachers Tribunal (NTT) to look into grievances of teachers and students at private educational institutions, Outlook reports.

The ministry has set up a committee headed by higher education secretary R.P. Agrawal to finalise the blueprint for the project that officials admit is likely to meet opposition from private educational institutions, who could see it as government intervention in what they consider their internal affairs. According to sources, the tribunal is expected to adjudicate in cases involving employment and selection of teachers and admission malpractices and unfair labour practices.

This is a welcome move. But much depends, as Prashant Bhushan points out, on the quality of people appointed to it. Malpractices abound in private educational institutions and teachers and students alike are at the receiving end. For instance, teachers are forced to sign pay slips for amounts in excess of what they get; they are often not paid on time; and capitation fee is a thriving cottage industry. Part of the reason these issues have not been addressed is that many of the institutions, especially professional colleges, are run by politicians themselves, so there is no serious interest in reform.

I am not sure, though, that such an authority should be only for private institutions. Public institutions too could be covered by them- it is not as if all is hunky-dory there and there are appropriate grievance redressal mechanisms. For the central educational institutions, such as IITs and IIMs, it may be a good idea to mandate the setting up of CAT (central administrative tribunal)- like bodies with a defined composition and clearly specified powers.

However, such an authority cannot mix teacher and student issues- that would be too much to handle. Let us have the NTT for teachers and a regulator for education as the NKC has recommended, which can look into admissions, fees and other issues.

How the mighty have fallen!

Guess whom IIT Bombay is looking towards to bail out placement? PSUs! Until last year, the top graduates there were targeting investment banks and private equity. The financial crisis has changed all that. ET reports:

Seeing the poor response by traditional recruiters in the first month of placement, public sector units such as IOC, ONGC, GAIL, BPCL, HPCL, BHEL, MTNL, NTPC and SAIL are being contacted by the student placement cell of IIT Bombay, inviting them to visit their campus for recruitments.

Placements on the IIT campuses across the country, which began in January, have suffered due to the economic slowdown, with even IIT Bombay, a much sought-after institute among most companies, seeing lukewarm response from the private corporate world so far. The trend is evident with placement dates being extended till April. Earlier, the placement process at the IIT Bombay used to get over within two to three days.

A reader comments that the report appears to apply to the Management school at IIT Bombay rather than the campus as a whole. But the situation for engineers cannot be a lot better. We are seeing similar problems at the IIMs where recruiters are asking that the placement fee be waived. Many FMCG and manufacturing companies long disdained by the IIM fraternity are taking their time responding- I guess they have a point to make. The IIM average salary, for long artificially inflated by the dollar-paying overseas segment, will now look a lot more modest.

I believe the corrections to the excesses that are now taking place are entirely welcome. Both the financial sector and the IT sector had created huge distortions in the graduate markets. Manufacturing companies and public sector companies were the big losers in the talent contest and we had the ridiculous spectacle of whole batches from engineering colleges veerring towards IT as though none of the other engineering disciplines mattered.

The debacle among banks and investment banks has taken the fluff out of the financial sector. The slowdown on the American economy and the Satyam episode is causing a reassessment of the IT sector. After the Sixth Pay Commission, government and public sector jobs, with their combination of decent pay, housing, job security and post-retirement benefits are beginning to look attractive. Whatever the problems it may have created, we should thank the financial crisis for restoring balance to the Indian job market and to aspiring young Indians.

Banks under pressure to lend more

I just don't get this. Credit has grown by 24% over the year. This is also the target for credit growth the RBI has set for the coming year. Yet, there are complaints that banks' aren't doing enough.

For the coming year, let's assume GDP growth of 6%. Add an inflation rate of 4%. That gives us nominal GDP growth of 10%. Is credit growth of 24% not adequate to support nominal GDP growth of 10%? Alright, I understand that various other sources of funds have dried up- the capital market, overseas borrowings etc. But RBI data show that in the year to date, total flow of resources to the commercial sector is only 3% lower than in the same period last year. I'm not sure that qualifies as a 'credit squeeze'.

The RBI's credit policy statement shows that credit growth has been high only for public sector banks. Credit growth in PSBs has risen from 20% last year to 29%. Private banks and foreign banks show an appreciable deceleration in credit growth- from 24% to 12% at private banks and 31% to 17% at foreign banks.

Either the private players are market-savvy and are right in slowing down credit - as many have always claimed they are- or they are more risk-averse than public sector banks. Which statement is true? Again, there has meaningful decline in lending rates only among PSBs. Rates remain rigid for private and foreign banks. This again underlines the fact that, in a crisis, even if you want to stimulate credit growth, it helps to have government ownership. Governments in the US and Europe are rediscovering this truth.

Government and industry want banks to lend more and reduce rates (which in itself is a bit of a contradiction). There are structural limitations to both credit expansion and rate reduction. I elaborate on this in my latest column, Should banks be lending more?

RTI, RIP?

The Right to Information Act was a revolutionary step towards strengthening Indian democracy. There is a lot of good that has come out of it and it does carry a great deal of promise. But, I have always wondered how long the system would put up with it. Some recent developments do give cause for concern as to whether the spirit of the RTI will be observed in all instances:

• The Supreme Court contends that information on assets provided by judges to the Chief Justice need to be made available to the public and also it need not be disclosed whether all judges have disclosed their assets to the CJI.
• The PMO now contends that declarations by ministers are held by the PMO in a fiduciary capacity and need not be made public.
• The CIC itself holds that information commissioners are not obliged to declare their assets- this is, perhaps, the unkindest cut of all.

RTI, RIP? Let's hope and pray.......

Independent directors and consulting fees

Krishna Palepu, HBS professor who served on Satyam's board, was characterised as 'non-executive' director in 2007-08. Presumably, he could not be called 'independent' director because, in addition to hefty sitting fees and stock options, he collected a huge fee for running training programs for Satyam staff. His total fee came to Rs 92 lakh- not bad even for a HBS prof, eh?

What I would like to know was whether Palepu was inducted originally as 'independent' director. If yes, then he should not have accepted any consulting assignment from Satyam. An 'independent' director is defined as somebody who has not had a pecuniary relationship with the company in the recent past. It would be absurd to construe this to mean that a pecuniary relationship in the present is somehow acceptable.

In the Enron and other scandals, independent directors collecting fees (other than sitting fees) was found to be part of the problem, exactly as auditors doubling as consultants was. I do not know if this practice was outlawed thereafter but certainly there was agreement that this was not consistent with good governance.

Perhaps, the time has come to make the legal position clear: if you are independent director, you cannot collect consulting fees from the company whose board you serve on. For a start, let Sebi write to all companies asking them to disclose if any of their independent directors have had a consulting relationship with them and the fees paid. The list of independent directors involved should be made public.

Satyam's ex-independent directors

The plight of Satyam's ex-independent directors must cause other independent directors to shiver in their shoes. They face a show-cause notice from the Company Law Board, probes by SEBI and law-suits in the US. The damage to their reputations has been immense. Let's see..

• M Rammohan Rao has had to quit as director of the Indian School of Business. He has also withdrawn from the panel to select the Dy Governor of the RBI.
• Krishna Palepu, it is reported, is under pressure to quit the board of Dr Reddy's Labs.
• T R Prasad, former cabinet secretary, stuck to his directorship even after all the revelations. He has suffered the ignominy of being booted by the government of India, the very government he had served all his life.

At this point, one needs to distinguish between the aborted investment in the two Maytas companies (which the independent directors approved) and the accounting fraud. So far as the latter is concerned, we have to await the outcome of the investigations to establish if there were any failures on the part of independent directors.

The reason these guys are being pilloried is that they did not oppose the Maytas investments- and there is a presumption that if they could be so supine in that instance, they could not have been effective generally. Had any of the independent directors opposed that move, it is possible that they would have been given the benefit of the doubt in respect of the accounting fraud.

I notice also that most of the fire is focused on the two b-school academics, Rammohan Rao of ISB and Krishna Palepu of HBS. The two other academics (Dr M Srinivasan, former faculty in American universities and V S Raju, director of IIT Delhi) are not facing the heat to the same extent. I guess there is a feeling that b-school academics, who preach good management and governance to the rest of the world, must be held to higher standards. B-school profs on other boards had better watch out!

Incidentally, on the Net, what we are seeing is not just criticism of the independent directors, but abuse, plain galis. Liar, cheat, rascal- these are among the kinder expressions being used. I will refrain from reproducing the harsher ones.

In yesterday's Indian Express, Sandipan Deb has a comment that captures the sheer depth of sentiment against the independent directors and particularly the b-school profs:

His official CV states that “in the area of corporate governance, Professor Palepu’s work focuses on how to make corporate boards more effective, and on improving corporate disclosure”. Among the executive programmes he teaches is “Audit Committees in a New Era of Governance”. “He also co-led Harvard’s Corporate Governance, Leadership, and Values initiative, launched in response to the recent wave of corporate scandals and governance failures.”
A friend of mine wrote to Palepu. “Evidently,” he wrote, “you are guiding US-based global corporations in such matters. However, in your ‘home’ country, you are helping organisations like Satyam steal shareholders money. My question is simple—does this make you a traitorous hypocrite, or merely a greedy criminal? I’m inclined to the latter, but as an eminent Harvard professor, perhaps you can guide me on the correct terminology? Look forward to your response.”

Guess what? Palepu has not replied. “Greedy criminal”, I would think.

Satyam fall out

There is the possible collapse of the firm and its impact on over 50,000 employees; then, the possible folding up of PricewaterhouseCoopers if anything is proved against them. The loss to shareholders of Satyam. There is the impact on brand India and the IT sector, the impact on capital flows into the country especially if any other scandal erupts. All this has been talked about. What else? Well, a few things:

• The future of Hyderabad Metro: this deal was won by Maytas Infrastructure in the face of strong criticism from Delhi Metro chief E Sreedharan, who indicated it had all the makings of a land scam. The project is meant to be a feather in the CM's cap, so he's going to have some sleepless nights over this.
• The Byrraju foundation: this is not your run-of-the-mill NGO. It's a huge thing involving 200 villages and covering one million people, according to some reports. The foundation's CEO recently sent out a letter that says that Raju has thus far contributed Rs 300 crore from his own funds to the foundation.
  
• The 108 emergency project: Raju had signed contracts for PPPs with several state governments to provide emergency services. I heard these are running well. The state governments invest in ambulances and other hardware. Raju takes care of the operations including software, back office and control rooms.

Incidentally, Forbes.com has a nice backgrounder on the rise and fall of Raju.

Satyam fraud: how do we overhaul governance?

In my ET column, I list some governance reforms that we could think of in the wake of the Satyam fraud.

This is not a collapse triggered by the sub-prime crisis but the disclosure of the fraud may not be entirely unnconnected with the crisis. There is pressure on volume growth and margins in the current environment. That would have caused Ramalinga Raju to give up hopes of closing the gap of Rs 7000 crore on the balance sheet.

But this is very different from the collapses of financial firms that we have seen. In those cases, you could argue that they were all highly leveraged institutions intrinsically prone to failure, that they dealt with complex products that neither management nor the board could fully comprehend. This is a collapse that has occurrred in the IT sector and entirely on account of internal fraud.

One of the regulatory lessons being drawn from the financial sector crisis is that large institutions need to be regulated, whether they are banks or non-banks. I think the basic principle may have to be applied to all large firms, irrespective of the whether they are in the financial sector or not.

If you are large, you are systemically important. Not that we have will have the entire panoply of regulations that we have in the financial sector. But a second layer of audit that I propose in my column is essential. For banks, there is regulatory audit in addition to statutory audit.

One fall-out of the Satyam affair, as indeed of the ongoing financial crisis, is that we are beginning to see the virtues of public sector companies. You can be more sure of accounts in a PSU than in a private firm- there are fairly elaborate checks and balances on fudging of accounts. Being an independent director on a PSU is less tension-ridden than being one on a private company- and you can also be more independent because independent directors are appointed by the ministry, not PSU management.

Above all, in a PSU, you have the one thing that Indians still prize above everything else at the workplace- job security. Think of the 50,000 employees of Satyam and the worthless stocks and stock options many must be holding. Do not be surprised if, on a long view, there is a re-rating among investors and employees alike of the relative merits of the private sector and PSUs.