Indian firms in world's 'most reputed' list

Rediff has a story on a list of the world's most reputed firms listed by the Reputation Institute of the US. (I must confess I have no clue who they are). The following are some of the Indian firms that figure (world rank in brackets):

1. Tata group (11)
2.SBI (29)
3. Infosys (39)
4.L&T (47)
5. Maruti (49)
6.HLL (69)
7. ITC (95)
8. Canara Bank (102)
9. Hindustan Petroleum (111)
10. Indian Oil (112)

Interesting omissions are the Ambanis and the Birlas. It's also interesting that Infosys, which has invested so much in building an international brand and HLL, which is a well known brand, rank below Tata and SBI. The top 10 includes four public sector firms.

Shantaram

I finally finished reading Shantaram. I say 'finally' because I am a slow reader and the novel runs into over 900 pages.

Shantaram, which came out in 2004, is penned by Gregory David Roberts, an Australian who was serving a jail sentence for armed robbery in his country. He escaped from jail, landed in Mumbai, spent several years there as part of the local underworld, was recaptured in Germany and, after serving the remaining sentence, got his novel published. He needed to write it thrice because his captors destroyed the first two versions when they found out. Roberts has since made Mumbai his home.

The novel is an epic, along the lines of,say, Gone With the Wind. And it's more than a novel, it's a soul-stirring experience. To think that a man could go through all that, retain his humanity and find the reserves to write a splendid novel! Roberts' mother taught him to appreciate literature and he spent his time in the Australian jail devouring first-rate fiction. It shows in his own writing.

It's impossible to capture the splendours of the novel in one short post. Roberts has said in interviews that the events are real, only the narrative is fictional. There is a charming account of Roberts' six month stay in a village in Maharashtra's interior where he is given his Indian name, Shantaram; a moving description of life in the slum near Cuffe Parade where the locals adopted him as one of their own; great encounters with Abdel Kader Khan, the underworld don, who combines a fine command of the English language with a fondness for philosophical speculation (every week, he and his comarades meet for lofty discussions); Roberts' embroilment in the war in Afghanistan when he accompanies Khan and others on a journey through Pakistan to arm the Taliban in their war against the Russians; and Roberts' falling in love with Karla Saaranen, a mysterious, beautiful and thoughtful American lady of European extraction... (you have to read the novel to know what the mystery is about).

Some of the scenes in the novel will stay with me for a lifetime. On one occasion, Roberts and a small boy (Khan's nephew entrusted to Roberts in order to experience slum life) find themselves attacked by a whole horde of dogs in the slum at night time. They try to fend off the pack with bamboo sticks but it's a losing battle. Then, Kader Khan's bodyguard materialises out nowhere, iron rod in hand. He's a trained martial arts specialist. He leaps into the air in true martial art fashion, swirls and strikes. Two dogs have their brains shattered. The entire pack, stunned at somebody taking the attack to them where Roberts was merely defending, flees.... Roberts is saved.

Then, there is the Colaba police station where Roberts is held for a few weeks. The lucky ones are those behind bars. The others are herded into a small corner leading to a toilet where shit is overflowing.... the weakest have to stand for days in a heap of shit until they drop dead....

One day, the detainees are led out and taken to Arthur Road jail (home to Sanjay Dutt for a while). Roberts is motioned to a corridor. There, the convict warders are waiting with lathis.... Roberts has to run the gauntlet but choses to walk in a gesture of defiance as the blows rain on him. He lands in his cell bloodied. The jail itself is hell with the warders showering blows on inmates at will. It makes your blood boil to think this is what the Indian system has been reduced to. One gets a sense of the daily brutality visited on the weak and the defenceless by the Indian law enforcement system.

What, one wonders, is the IPS brass doing? The only thing you could say in extenuation is that things are not much better in jails elsewhere. In his jail in Melbourne, Roberts was subject to the same kinds of senseless beating and cruelty. Recently, during the G-20 meet, the cops in UK, considered to be more civilised than the rest, were flailing their batons at harmless protesters. I guess it goes with the uniform, the sense of power it gives you. The power to ill-treat and also the power to extort huge sums of money.

The Afghan expedition is a story in itself. It takes weeks of trekking through the mountains to get there, with a maniac as escort. This man has only one mission in life and that is to catch hold of Russian soldiers and torture the life out of them. The return journey is a horror, with Roberts and a few survivors holed up in a snowy cave with no food or water for several days. Roberts makes it to a hospital in Pakistan and then finds his way back to Mumbai. With his heroic role in the Afghan expedition, he becomes a privileged member of the gang, specialising in counterfeit passports. He makes good money out of it.....

I won't narrate more. I will leave you to find out for yourself. Shantaram is being made into a film by Mara Nair. I can't wait to see it (I understand work on the film has stalled because of some problems in Hollywood). Let me just say that the book leaves you shaken and stirrred, to use a famous James Bond line.

I had a post some time back on another book on Mumbai, Suketu Mehta's Maximum City. That is also about the seamy side of Mumbai. But the philosophical approaches of the two books are very different. Mehta is appalled and outraged at the violence and corruption that lie beneath the surface in Mumbai.

Roberts writes with empathy and affection for those on the seamy side. There is understanding and love, an underlying humanity that comes from having experienced the worst of it. Roberts is now off smoking, drinks and drugs and leads the life of a celebrity in Mumbai. I doff my hat in humble salute to the man.

Unconvincing "stress" tests

The much awaited results of the "stress" tests on top US banks is out- the idea is to see how much extra capital these banks would need under fairly realistic economic scenarios over the next couple of years. The estimate: $75 bn in order to be well capitalised by the end of 2010. The biggest requirement is at BofA: $34 bn.Total losses at the banks are estimated at $600 bn. Of this, $363 bn would be recouped through earnings.

What do we make of these figures? Two points. One, these losses come after the accounting standards were tweaked on mark-to-market losses of toxic assets. Two, the IMF had estimated US bank losses at $1.6 trillion over the next couple of years and estimated the extra requirement of capital at around $500 bn. The market is, therefore, likely to perceived the US Treasury as under-estimating capital requirements in order to hide the gravity of the problems at banks. That, in turn, means the chances of raising additional capital from the market would be zero.

Even otherwise, chances of banks raising additional capital are bleak. FT estimates total capital requirements at $55 bn, assuming some banks want to repay capital given by the US government and also some asset sales. This amount is three times total US equity raisings in the last six months. There you are.

Since banks can't raise capital from the market and the US government is unwilling or unable to pump in more, Richardson and Roubini, writing in the FT, say that insolvent banks should be closed down, with creditors taking some of the hit (depositors alone should be fully protected). What about the Lehman effect? The authors argue that market discipline would force banks to change their behaviour in ways that would instil confidence in the market, so credit would become available.

Well, well. For this process to work out would probably take years. So implementing this solution would require some nerve. Academics have the license to prescribe theoretically neat solutions but the global crisis requires a solution here and now because there is real suffering all round. I doubt that there will be any takers for the Richardon-Roubini solution where large banks are concerned.

How real is the Taliban threat in Pakistan ?

I have been following with interest the scare stories about the Taliban being 60 kms from Islamabad and the dire prophesies about Pakistan's nuclear weapons falling into the hands of terrorists. Are things really as bad as that? I came across an article in Asia Times, which made a lot of sense to me:

Pakistan is not an ungovernable Somalia. The numbers tell the story. At least 55% of Pakistan's 170 million-strong population are Punjabis. There's no evidence they are about to embrace Talibanistan; they are essentially Shi'ites, Sufis or a mix of both. Around 50 million are Sindhis - faithful followers of the late Benazir Bhutto and her husband, now President Asif Ali Zardari's centrist and overwhelmingly secular Pakistan People's Party. Talibanistan fanatics in these two provinces - amounting to 85% of Pakistan's population, with a heavy concentration of the urban middle class - are an infinitesimal minority.

The Pakistan-based Taliban - subdivided in roughly three major groups, amounting to less than 10,000 fighters with no air force, no Predator drones, no tanks and no heavily weaponized vehicles - are concentrated in the Pashtun tribal areas, in some districts of North-West Frontier Province (NWFP), and some very localized, small parts of Punjab.

To believe this rag-tag band could rout the well-equipped, very professional 550,000-strong Pakistani army, the sixth-largest military in the world, which has already met the Indian colossus in battle, is a ludicrous proposition.

So, what's behind the hysteria being drummed up in Washington?

To start with, what Washington - now under Obama's "Af-Pak" strategy - simply cannot stomach is real democracy and a true civilian government in Islamabad; these would be much more than a threat to "US interests" than the Taliban, whom the Bill Clinton administration was happily wining and dining in the late 1990s. What Washington may certainly relish is yet another military coup - and sources tell Asia Times Online that former dictator General Pervez Musharraf (Busharraf as he was derisively referred to) is active behind the hysteria scene.

.........Moreover, there are canyons of the Pakistani military/security bureaucracy who would love nothing better than to extract even more US dollars from Washington to fight the Pashtun neo-Taliban that they are simultaneously arming to fight the Americans and NATO. It works. Washington is now under a counter-insurgency craze, with the Pentagon eager to teach such tactics to every Pakistani officer in sight.

There are wheels within twisted wheels. The only thing unexplained above is in what ways concretely the US stands to gain from a military regime in Pakistan. What are the larger designs of the US to which a civilian regime would be an obstacle? And, more importantly, where does India figure in the US plan for Af-Pak?

Global recovery will be slow

A quick economic recovery? Perish the thought. Recovery is going to be slow. The IMF thinks so. So does the RBI.

As the IMF's latest World Economic Outlook makes clear, there are recessions and recessions. The worst are the ones created by a financial crisis, especially a crisis rooted in the banking sector. When recession is globally synchronised, that makes things even more difficult because no country can export its way out of trouble (as the East Asian economies could in 1998). Today, we have a combination of a financial crisis and a globally synchronised recession. So, expect recovery to be a slow affair. Not until 2010, says the IMF, and even then it will be long drawn out.

When you have a crisis rooted in the banking sector, the way out is to fix the banking sector. Sadly, the US administration has been dragging its feet over this for more than a year now. Fixing the banking sector in the US, given the scale of losses, means nationalisation. There is just no other alternative. But nationalisation would wipe out shareholders and too many rich people, including those in the US administration, don't want that. They would like to look for alternatives that preserve shareholder wealth. But every one of these alternatives entails a slow and painful economic recovery.

It won't be a Great Depression for reasons I spell out in my ET column, Don't bank on an early recovery. But it won't be a mild and short recession either.

I wrote my ET piece and sent it off last week as I was due to travel. On my return, I was gratified to note that my assessment accords with that of both Martin Wolf of the FT and the Economist. Wolf writes:

For better or worse, the authorities have decided to bail out their financial systems with taxpayer money. Almost all the affected countries should be able to afford to do this, at least on the IMF’s numbers. So now, having made the fundamental decision to prevent bankruptcy, they must return their financial systems to health as swiftly as they possibly can.

Even so, that will prove to be a necessary, not a sufficient, condition for a return to robust economic health. The overhang of debt makes deleveraging inevitable. But it has hardly begun. Those who hope for a swift return to what they thought normal two years ago are deluded.

Says the Economist:

The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

Axis Bank theatrics

The curtain has finally been rung down on the succession issue at Axis Bank. P J Nayak staged an undignified walk-out after a stormy board meeting, paving the way for Shikha Sharma from the ICICI group to take over as CEO with board member Prithviraj taking over as interim chairman.

Nayak, going by reports, was completely isolated on the succession issue, with even those close to him for long deserting him in the final moments. Nayak wanted Kaul, an executive director, to succeed him. He has argued in an interview with BS that an organisation should bring in an outsider only if it is weak. Not true. It may need to bring in an outsider also if the insiders are weak (which can happen in an organisation that is strong but has been a one-man show).

Nayak had earlier successfully resisted the RBI's efforts to bifurcate the positions of chairman and MD, saying he needed time to groom a successor. It turns out that he failed to do so even when given adequate time. This is not uncommon- BS had an edit yesterday mentioning the cases of L&T and ITC where the present chairmen seem to think themselves immortal.

The right thing has happened at Axis Bank and this is, in large measure, due to the role played by the nominees of SUUTI who presented a united front on the issue and made the process of finding a successor rigorous. It appears that even in a private bank, it is the government that has to be around to ensure the right outcome. This will not come as a surprise in the present times where the same phenomenon is being seen on a bigger scale in the US banking system and elsewhere.

One last point. Nayak's quitting as chairman in a huff was inappropriate. One could have understood if some legal or ethical issue had been involved. There wasn't any. Nayak left in a fit of pique only because he couldn't have his way.

This isn't done. Banks run on confidence and for an executive chairman to walk away without ensuring a smooth hand over can be potentially harmful. It's a different matter that the Indian banking system is in good shape and that we need not fear such an outcome in the present instance.

Incidentally, I was told that AT Paneerselvam, board member at Axis and former chairman of IBA, collapsed in his car and passed away while on his way to the airport from the seven hour board meeting. Strange that no paper has reported this.

Return of good times for US banks?

Several top US banks including Citigroup and Goldman Sachs have reported impressive results in the first quarter. Some have interpreted this as a sign that the banks are finding their way back to good health and they also see this as good news for the world economy.

Sorry, it ain't all that great. Even if banks start making profits, it only reduces accumulated losses - or helps banks write off bad assets. it does not help increase the quantity of loans- and more credit is what is required to get the wheels of the economy going. The balance sheets of US banks will shrink this way until banks are restored to health. This slow process of recovery helps shareholders who would otherwise be wiped out at one stroke if the US government were to nationalise them- which is why the government, run by ex-bankers and investment bankers, doesn't want to take that step.

Moreover, US bank profits have been helped by regulatory forbearance in several ways as an article in the FT points out:

First was the decision by the Federal Accounting Standards Board on April 2 to modify what many bankers considered the FASB’s onerous mark-to-market rules forc­ing securities firms to write down the value of their assets as they lost value in the in­creasingly illiquid market. (Seems like a reasonable idea to value assets at what they are really worth, no?) The FASB had been reviewing this change and received much commentary from the financial community “that asserted that fair value is not as relevant when financial markets are inactive or ­distressed”.

.....The Federal Reserve has also been listening carefully to the banks’ pleas. It has lowered the cost of money it charges banks – and since all the big Wall Street securities firms are either gone or have become banks, this means virtually everyone – to close to zero.

Then there is the sleight of hand, at least in the case of Goldman Sachs, which, when it converted from a securities firm to a bank holding company last autumn, changed its fiscal year-end to December 31 from November 30. Its first-quarter numbers, for the three months ended March 31 2009, did not include its horrific December results – into which Goldman threw everything but the kitchen sink – of a loss of more than $1bn. During the past seven months – including December (there was Christmas, right?) – Goldman in fact lost $1.5bn.

So much for the good news from the US.

Will banking become boring?

What world of banking can we expect to see once the dust settles down in the present crisis? Regulations will be more stringent and three elements will be central to the new world of banking- higher capital, constraints on financial innovation, restrictions on bankers' incentives. Higher capital requirement in itself spell lower returns and hence lesser rewards in banking. In other words, banks and "shadow banks" will have a presence in the economy that is more consistent with the requirements of the real economy instead of becoming a world unto itself.

This is greatly welcome when you consider the atrocious waste implied by the disproportionate flight of high quality talent towards finance in recent years. Finance and IT are two sectors that have completely distorted the labour market in India- and we should welcome the fact that both are being put in their places.

More on this in my ET article.

Academics in government

There has been much criticism about how the "dream team" of Manmohan Singh, Montek Ahluwallia and P Chidambaram did little or nothing on economic reforms. It's interesting that two of the three members have strong academic credentials. An article in FT echoes the criticism:

The whole reform programme relies on the prime minister himself. Mr Rao and A.B. Vajpayee proved their mettle, despite heavy political constraints. Mr Singh has failed; he should bear much of the blame. The Congress party does not deserve to be re-elected and the dream team does not deserve to continue in office.

It also has some strong things to say about academics in positions of authority:

........Mr Singh has proved a hopeless decision-maker as prime minister. Sadly, he proves the rule that academics should generally be “on tap” but not “on top”.

Lincoln and leadership

Leadership, as I have noted earlier, is, perhaps, the most written about topic in the Harvard Business Review - it's covered even more than that other perennial favourite of management gurus, strategy. I am inclined to believe that if all the literature on leadership has simply led on to more literature, then leadership must be pretty difficult to teach or learn- either you have it or you don't and the only real teacher can be life itself.

This feeling was reinforced by an interview in the latest HBR on Abraham Lincoln and leadership. The interview is with historian Doris Goodwin, whose book, Team of Rivals, is the one book that President Obama said he would take to the White House, apart from the Bible. Goodwin says of Lincoln's secret of leadership:

Lincoln surrounded himself with people, including his rivals, who had strong egos and high ambitions; who felt free to question his authority; and who were unafraid to argue with him.
.....Obama is obviously trying to do the same thing by choosing his chief rival, Hillary Clinton, to be secretary of state; by picking rival Joe Biden as his vice president; and by including powerful Republicans in his cabinet like Robert Gates and Ray LaHood.

But you have to remember, the idea is not just to put your rivals in power—the point is that you must choose the best and most able people in the country, for the good of the country. Lincoln came to power when the nation was in peril, and he had the intelligence, and the self-confidence, to know that he needed the best people by his side, people who were leaders in their own right and who were very aware of their own strengths. That’s an important insight whether you’re the leader of a country or the CEO of a company.

Hmm.... Let me see.... I have worked for several organisations, corporate and academic, served as consultant to and board member on quite a few. How many places can I think of where the person at the top did what Lincoln did- put strong people, including rivals, in key positions and let them fight it out with him? Only one !- and this was my immediate boss, not the CEO.

This was one boss who did not feel insecure about having people superior to him working for him, indeed he openly declared that he was inferior. Did he make it to the top? No way- he didn't last long in the corporate world and ended up as a small farmer in his village.

It may be well be that you need Lincoln's ability to surround yourself with strong people in order to be a super-achiever. But this ability, I am afraid, is rare and I can't see that it is something that people can be taught. That is why Lincoln is Lincoln, one of the towering figures of all time while many corporate and other leaders have ended in the dust-bin of history.

Satyam sale

The sale of Satyam to Tech Mahindra is a morale booster, never mind the ifs and buts as to whether the buyer can make a success of the acquisition. For once, the print and visual media were willing to acknowledge the role played by the government in preventing a debacle and arranging a rescue.

It's an amazing end when you think of how things would have ended in, say, the US. The moment the fraud came to light, the company would have gone into bankruptcy proceedings and it would have been embroiled in litigation. In a software company, value comes from intangible assets- the people and the brand- so there's little that investors can claim from liquidation and litigation.

The only hope is to turn the company around under new management and wait for the stock prices to revive. Those who filed class action suits in the US may well find that they may be better off waiting for the stock price to rise instead of trying to claim a settlement from the new management.

In making the decision that Satyam was too important to go under and that it could and should be revived, the Indian government was spot on. It also acted swiftly in putting in place a new board and the regulatory authorities helped by creating a fresh set of rules for takeovers in such exceptional cases. (This was wrongly derided by some as being anti-investor, overlooking the fact that we are talking of a company that was on the brink of a collapse that would have washed out investors altogether).

What can we learn from this episode? One is that government may need to intervene in the case of any systemically important institution, not just those in the financial sector. The second lesson- driven home already by the financial crisis- is that 'leave it to the market' can be sheer nonsense in such situations.

US gunmanship in Somalia

The US showed what it means to be a superpower when it effected a terrfic rescue of the captain of a ship, a US citizen, held hostage by pirates in the high seas off the coast of Somalia. The only detailed report of the rescue operation I came across was filed by Chidananda Rajghatta in TOI ( in the print edition, I can't trace it on the web, so I'm going to describe it in my own words).

The captain had been seized and held by four pirates after a failed piracy attempt in which the pirates were repelled by the ship's crew. They managed to escape on a motorised lifeboat with the ship's captain and were adrift for five full days. The US navy sent its warships into the area to hem them in and then ensured that other pirate vessels attempting to enter the area were shooed off.

The US navy then engaged the pirates in negotiations even as the pirates' rations and fuel ran out. One ship offered to tow the lifeboat away from choppy waters into calmer ones- this brought the lifeboat within firing range of the snipers on board the US ship. One pirate was taken aboard the US ship to help with the negotiations. President Obama, who was kept in the loop througout, gave the US navy the command to go ahead and shoot if the captain' s life was judged to be in imminent danger.

When the negotiations did not progress and the pirates came within the snipers' cross-hairs, all three pirates on the lifeboat were taken out with one bullet each. The pirate on board is in US custody and the captain is flying home.

The successful end saved President Obama an early security embarassment- Americans don't take kindly to botched military missions or the deaths of US citizens- but the head of the pirates has accused the Americans of treachery saying his colleagues had been ready to given up the captain without ranson when they were shot. Unfortunately, some 200 seamen from other nations and from various ships are being held hostage by various groups of pirates. The pirate chief has also warned of revenge against Americans seen in the waters again.

Reducing risk in the financial system

Naseem Taleb, former trader and something of a maverick in his views on the financial system, comes up with 10 rules for making the world "black swan free'- a black swan is that rare event which can end up destroying an institution or a system. His tenth rule I found particuarly drastic:

Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

His first two rules are also highly sensible but not easily enforceable:

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

Inflated claims at G-20

The headline grabbing item from G-20 was talk of $1.1 trillion in fresh funds to fight the recession. Most analysts were quick to point out that this included funds already committed. What was not noticed was that it includes amounts intended to be committed but which are unlikely to be committed. FT dissects the G-20 claim and finds that the correct figure is closer to $100 bn:

Almost half – $500bn – comes in the form of new money for the IMF so that it can guarantee it has enough money to lend to countries caught up in the financial crisis.

Japan unilaterally gave $100bn last November, while the EU pledged €75bn ($101bn) in March. There were no new commitments from the US, China or Saudi Arabia on Thursday, and instead a generalised pledge for a new financing scheme of $500bn into which all these existing commitments and new money would be placed.

.....If the new commitments to the IMF were conspicuous by their absence, the $250bn of new money in Special Drawing Rights – the Fund’s own currency – was new but not all it seems.

....The policy is significant because it represents new money that poor countries can turn into dollars, euros, yen and sterling but rich countries will get most of this new foreign exchange reserve. The group of seven largest and most advanced world economies will get 44 per cent alone. March.

On trade finance, ........ the $250bn figure fails to stand up to minimal testing. An annex to the communiqué says that the new money committed is only $3bn-$4bn and the $250bn figure is an aspiration for the amount of trade that will be financed over the next two years rather than the amount of new trade finance.

In contrast, the new $100bn of lending by multilateral development banks is much closer to reality.

When all the sums are added together, rather than $1,100bn, the new commitments appear to be below $100bn and most of those were in train without the G20 summit.

Turner Review

A number of committees in several countries are working on proposals for financial sector reform. In the UK, a committee headed by the chairman of the FSA, Adair Turner, has submitted a report, the Turner Review, backed by a Discussion Paper. It has 28 recommendations for regulatory reform along and another four issues thrown open for discussion.

What is striking about the Review is the pronounced swing of the pendulum in favour of tighter regulation and away from reliance on market discipline. The Review does not mince words:

“The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets. Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective.”

I have a critique of the Review in my ET column, One hell of a page turner. I seriously doubt that any future government can proceed with the substance of the recommendations of the Percy Mistry and Raghuram Rajan reports.

Let me highlight one important point made in the Review. It does not believe that separating commercial banking from investment banking will make the banking system any safer and it also believes that not having complex banks catering to multiple needs across the globe would entail forgoing significant benefits. Some of the arguments it makes in favour of not distinguishing between 'utility banking' and 'investment banking' are:<>

• while it is clear that the securitised credit model evolved in a fashion whichundermined the initial proposition that it would prove lower cost and lower risk, it is important to recognise that, if more effectively regulated and supervised, it could have thosenarrow banking, whose severity might have been reduced if an appropriate form of securitised credit trading and credit insurance had been in place.
• Furthermore, any idea that risky trading activities in institutions outside the utility banks, can be allowed to grow in an unregulated fashion, subject only to the market discipline that they will not receive LOLR or fiscal support in crisis, is not credible in a world of interconnected markets. Bear Stearns was not involved in any significant way in utility banking activities; but when it was on the verge of failure, the US authorities rightly identified it as systemically important.
• Finally, it is important to recognize that ‘narrow banks’ focusing almost entirely on classic commercial and retail banking activities can be extremely risky. NorthernRock,WashingtonMutual and IndyMac were all ‘narrow banks’.

G-20 protests focus on bankers

The G-20 meeting in London is attracting protests in the City of London. The target of the protesters' ire this time is not globalisation or climate change but banks. Entirely understandable given that banks are perceived to be at the root of the present chaos in the world economy and that several bankers have had no qualms about pocketing bonuses even when their banks were being bailed out by tax payer money. Sir Fred Goodwin, the erstwhile CEO of RBS, has had his home in Scotland vandalised.

FT carries a story on the protests:

Four marches, led by representations of horsemen of the apocalypse, converged on the Bank in the Financial Fools’ Day protest as demonstrators chanted “storm the banks”.

...Some of the banners read: “Balls to the Bankers”, “Eat the Bankers”, “Capitalism Isn’t Working” and “What a Load of Bankers”. One group of protesters urged people watching from the top of Santander bank to “jump”.....Olivier Dale, a 28 year old attending the demonstration said: ”I am sick of these bankers and this greed. It has got to stop. We have to make a stand. But we want it to be peaceful.”

...Most big employers – including the global investment banks and law firms – told employees they were expected to come into work as usual. But those near locations where demonstrations were held told staff to dress inconspicuously and avoid drawing attention to themselves.

Financial sector assessment programme

The RBI has finally unveiled its document arising from the financial sector assessment programme. Here is the link to the PPT and the report. It is, on the whole, an upbeat assessment of the state of Indian banking. Commercial banks are in good shape. Cooperative banks, regional rural banks and NBFCs constitute the problem areas.

There are clear signals in the document that the RBI will tread warily when it comes to financial sector reform- and especially in areas such as capital account convertibility, foreign banks and securitisation. No serious student of Indian banking afford to miss this report of the RBI.

A less profitable banking sector

Banking in the industrial world will be less profitable in the years to come than in the past. This is even after those economies recover- whenever that happens. One reason is that capital requirements will go up as regulators push banks towards lower leverage. Another is that high-risk products will come under the scanner and banks won't find it easy to hawk these.

Of course, there will be a shakeout and capacity will shrink. But that doesn't mean survivors will have easy pickings. Demand too will shrink - a whole range of securitised products and derivatives will find very little demand. An article in FT notes:

According to analysts at Citigroup, European banks earned a return on equity of 18-23 per cent between 2003 and 2007 compared with 12-15 per cent in the mid-1990s.This shift mainly reflected more borrowing: European banks’ leverage – the value of their assets as a proportion of their equity – rose from 24 times on average in 1995 to 39 times in 2007.

What about the banking sector in India? Here too, expect banks to be operating at a capital adequacy of around at least 15%. But volume growth will be strong- 20% or so- and margins are still higher than those elsewhere. Besides, the massive churn in thinking occasioned by the present crisis will mean continued caution in opening up to foreign banks, which are potentially the most potent threat to the profitability of domestic banks.

In short, over the next five years, expect the banking sector in India to be almost as profitable as in the recent past- and an outperformer in the Indian economy.

CIA chief's visit to India

The new head of the CIA, Leon Panetta, was in India in the period March 18-20 and then went to Pakistan. During the course of his visit, he met home minister P Chidambaram. This has come in for some comment because the heads of US security agencies had, until recently, confined their contacts to their counterparts in India. In Pakistan, they have access to everybody including the President and the Prime Minister. But, then, India is not Pakistan- or so one would have thought.

B Raman, writing in Rediff, notes the changed equations:

The Indian intelligence has been having a liaison relationship with the CIA since the days of Jawaharlal Nehru. This was handled by the IB till September, 1968, and thereafter by the R&AW. Many CIA chiefs had visited India in the past. Their visits used to be graded as top secret. Their programme in New Delhi used to be restricted to professional discussions with the heads of the IB and the R&AW and a courtesy call on the prime minister.

This was for security and political reasons. Before international terrorism became a major source of concern, the security reasons mainly related to possible threats to the physical security of the visiting CIA chief from the intelligence agencies of the Communist countries. After the collapse of the USSR and other communist regimes in East Europe and after the normalisation of the US relations with China, this concern is no longer there.

But, since the late 1980s, terrorism has become a major source of concern. CIA officials responsible for the security of their director and their officials posted in India for liaison purposes used to prefer that the visits be kept secret. Indian agencies too preferred secrecy because they were rightly concerned that if the visits were open, jihadi terrorist threats to India and to US nationals and interests in India, including to the US diplomatic and consular missions in India, might increase.

This position started changing when Atal Bihari Vajpayee was the prime minister. The visit of George Tenet, the then Director of the CIA, to India was kept a secret, but the visits of the No.2 to Tenet were publicised. L K Advani, the then home minister, came to be associated with the visits of CIA officials to New Delhi. Their programmes included a courtesy call on the home minister. Not only that, Advani too, during his visit to the US in 2002, reportedly called on Tenet in his office.

A new job for Montek?

Nicholas Stern, former Chief Economist of the World Bank, suggests a new institution for warning against sources of instability in the world economy. He says the existing institutions- WB, IMF, BIS- are unsuited for the purpose because there is interference all the time from representatives on the board of various countries. (How very interesting!- so treat the next IMF country review with the utmost scepticism).

Stern thinks such an institution could be created without huge costs:

With 100 high-quality staff and outstanding leadership, such an institution could be very effective. A budget of $20m (€15m, £14m) per annum would be sufficient. An endowment of $500m would give it the independence it needs for 30 years or more. Its board would be advisory, non-resident and meet not more than twice a year. The board would have the power to appoint the head (for, say, a seven-year term) and ensure its finances are well managed. It would have no power to interfere with, or comment on, its assessments.

Stern says that a requirement for independence of such an institution is that it should preferably be headed by somebody outside the G-8. He lists several candidates. One is our own Montek Ahluwalia. So, if the Congress/UPA does not return to power, there is still hope for Montek.

'Stocks are best for the long term'

That's how stocks are sold to the public. In the long-term, it is said, stocks outperform other assets. The trouble with this statement is that the long-term can be much too long- longer than one's life span. Secondly, in the active period of one's life, one can find that stocks have done worse or no better than other assets. I have written about this, citing various sources of data. An article in the FT revisits this theme:

Anyone who started saving 40 years ago, when the postwar “baby boom” generation was just joining the workforce, has found that stocks have performed no better than 20-year government bonds since then, a forthcoming article by Robert Arnott for the Journal of Indexes shows......To find a period that does produce an outperformance requires a span reaching back a lot further. The 2009 Credit Suisse Global Investment Returns Yearbook shows that since 1900 US stocks have averaged an annual real return of 6 per cent, compared with 2.1 per cent for bonds – while in the UK, equities have beaten gilts with a return of 5.1 per cent against 1.4 per cent. The problem is that they can perform worse than bonds for periods longer than a human working lifetime.

..Last year, most equity mutual funds failed to beat their benchmark indices, even though their managers had the freedom to move into cash and to pick stocks. Mr Malkiel points out that of the 14 funds that had beaten the market in the nine years to 2008, only one did so last year. Both efficient-markets and behavioural economists say it is better just to match the index, with a tracking fund, and avoid the fees incurred in unsuccessful attempts to beat the market.

International Criminal Court

The ICC has issued its first arrest warrant against a ruling head of state. Sudanese president Omar Hassan al Bashir faces charges war crimes and crimes against humanity. The ICC is one of those noble ideas that have been subverted by powerful vested interests. The idea of the ICC is to ensure that tyrannical regimes do not get away with visiting crimes on their people by claiming national sovereignty.

Unfortunately, the ICC is likely to remain a paper tiger because it has not been ratified by and cannot operate against several countries including the US. Indeed, the US allowed the ICC to come into being on the understanding that its own forces operating abroad would be exempt fro the purview of the ICC.

In an article in TOI, Ramesh Thakur places the ICC's verdict against the Sudanese head of state in perspective (the four verdicts given so far are all against Africans). One cannot but conclude that the ICC merely reinforces what we already know about the rule of law: one set for the rules for the powerful and another set for the powerless:

Yet, no senior US general or cabinet member is likely to face international criminal prosecution for Abu Ghraib, Guantanamo or other abuses. Does the world not eserve an honest accounting of what happened in Fallujah in April 2004 how many were killed, and whether any criminality was involved, including the use of chemical weapons prohibited under international humanitarian law? Nuremberg was supposedly about who started the war, not who lost; we know who started the Iraq war and we know they have not been called to account for the crime. What of charges of war crimes by Hamas and Israelis in Gaza earlier this year?

Unlike Bashir or any of the other Africans in the dock, whose alleged atrocities were limited to national jurisdictions, the George W Bush administration asserted and exercised the right to kidnap suspected enemies in the war on terror anywhere in the world and take them anywhere else, including countries known to torture suspects. Many western allies colluded in this distasteful practice of rendition. No westerner has faced criminal trial for it. In a surreal twist worthy of Kafka, western governments send terror suspects to be tortured to countries which they then brand as human rights abusers. Consider the ad hoc International Criminal Tribunal for former Yugoslavia. It has tried several Serbs, but no NATO national. Might it have something to do with the tribunal being located in a NATO country, its budget being paid mostly by NATO countries and its reliance on NATO for collection of evidence and enforcement of warrants.

Siachen Glacier

We approach the silver jubilee of the Indo-Pak confrontation over the Siachen glacier. EPW carries a detailed analysis of the background to the conflict by Col Pavan Nair, a retired army man.

As the Colonel points out, the war is not so much over the glacier as over the Saltoro ridges that dominate the glacier. India did in Siachen exactly what Pakistan attempted in Kargil- occupy positions that give a commanding view of the movements of the opposite side. The difference is that the Pak intrusion into Kargil clearly violated the LoC. In Siachen, the Indian violation is not as clear, although Nair himself believes the decision to occupy the Saltoro ridges was a blatant violation on India's part of the Shimla Accord.

The demarcation point in the map in the agreements signed between India in Karachi in July 1949 and Suchetgarh in December 1972 ends at a place call Khor, with the remark that the line would run "thence north to the glaciers." According to Nair, "The last part of the line, that is Khor and beyond was not made inclusiveto either party.....The Indian claim is based on the watershed principle. Since the last demarcated point NJ9842 lies on or near the Saltoro
watershed, the line should follow the watershed that is the Saltoro Ridge line which runs in a north-westerly direction.".

Whatever the rival claims to the Saltoro ridges, Nair argues that no strategic interest is served on either side by controlling the area. It is in the interest of both to withdraw. Staying on the Siachen costs India Rs 1000 crore every year. Over a 1000 Indian soldiers have died, mostly on account of the hostile weather conditions. Nair says the Indian military leadership had intended the occupation of Siachen as a temporary show of force and did not imagine that the Indian army would be stuck there. Some army generals have even urged unilateral Indian withdrawal, saying that Pakistan would not gain anything by occupying the ridges.

What do we laymen make of the situation? Money is precious and so is every human life. But Rs 1000 crore and 40 lives lost per year do not appear prohibitive in the national scheme of things. Unilateral withdrawal is politically unthinkable especially after Kargil. No government could survive if it withdrew from Siachen only to find that Pakistan had moved in.

As for Nair's contention that there are no strategic gains to be had, you have to remember that military technology and thinking keep evolving. It may not be possible to use the heights to any purpose today. But, with a higher level of technology and if we are under pressure on other fronts with Pakistan in a future war, who knows? That's perhaps why the army balks at the idea of even demilitarising the zone.

The gloomy inference must be that Siachen by itself is unsolvable. It can only be part of a larger Indo-Pak settlement. And that, alas, is hardly in sight.

Rethinking financial sector deregulation

Writing in BS, Jaimini Bhagwati observes:

Further, in the last few years some commentators have called upon policymakers and regulators in India to push for the following: (a) the central bank to adopt inflation targeting as its principal objective; (b) move speedily towards capital account convertibility; (c) raise foreign direct investment ceilings in the Indian banking sector; (d) move from defined benefit pensions schemes to defined contributions and favour larger investments in equity markets; and (e) establish Mumbai as an International Financial Centre (MIFC).

We need to pause and reconsider all of the above propositions

Readers of this blog will have no difficulty in appreciating that I share Bhagwati's scepticism about the proposals listed above. My guess is that the sub-prime crisis effectively ensure that a big chunk of the report on the MIFC and the Raghuram Rajan report on financial sector reforms will remain in limbo in the near future.

Bhagwati, now India's ambassador to the EU, Belgium and Luxembourg, was part of the liberalisation brigade earlier. So he surprises me when he says that, "....no amount of overhauling of the regulatory and credit rating processes can reduce systemic risk in the financial sector unless it is accompanied by a clipping of compensation packages to make these comparable to other sectors.".

I have highlighted here the link between top management pay and sytemic risk in the financial sector. But I have refrained from advocating absolute limits on pay. I am more concerned about the design of incentives. It could well be that once we accept the principle that variable pay must be based on return on risk-adjusted capital, levels of compensation in the financial sector will automatically fall from the present levels. But, I would not start out with the notion of caps on pay.

More on shareholder value

I had a post earlier on shareholder value maximisation and how Welch's criticism of this principle was unfounded. Those who criticise shareholder value maxisation say that it allows managers to focus on short-term value at the expense of the firm's long-term interests. But this reflects market inefficiencies. We should redouble efforts to increase market efficiency- through regulation, governance, better microstructure, etc.

Secondly, managers can get away with short-term results only as long as their incentives or rewards are linked to such results. The way to get them to focus on the long-term is to design incentives accordingly. There is growing consensus now that stock options should vest only over a long period- say, 10 years.

It's not the focus on shareholder value that needs to be remedied. The things that need remedying are the effectiveness of boards, executive pay and, above all, the concentration of powers in the CEO. If corporations are to create sustainable value, we must end corporate dictatorships. More on this in my ET column, Shareholder value's not the issue.

Asia's conservative capitalists

Kishore Mahbubani crows over the relative solidity of Asian economies in the present crisis in a recent FT article. He ascribes it to their refusal to blindly imitate Anglo-Saxon capitalism and to a deeply ingrained caution among Asian policy makers. It is notable that China has been as wary of financial deregulation and innovation as India:

The desire for an orderly society is deeply ingrained in the psyche of all Asians, which helps explain why virtually all Asian states hesitated to copy America in deregulating their financial markets. Instinctively, they felt government supervision remained critical. This was equally true in India’s democratic system and in China’s Communist party system.

It is telling that, while Y.V. Reddy, India’s former central bank governor, was occasionally vilified by his country’s media for holding back on deregulation, he has now become a national hero. His stance saved India from the worst effects of this crisis. China was equally wary of deregulation. Indeed the Chinese leaders may have understood earlier than most that America was building a house of cards with its reckless creation of derivatives. Gao Xiqing, an adviser to Zhu Rongji, then Chinese premier, said in 2000 that “if you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people.” Mr Gao said all this while Alan Greenspan, as chairman of the US Federal Reserve, was waxing eloquent about the economic value of derivatives.

Regulatory lessons from sub-prime crisis

I list 10 early lessons from the sub-prime crisis in an article in the latest issue of Economic and Political Weekly.

US largesse for foreign banks

There is outrage in the US over bonus payments at insurer AIG, a company that has received billions in tax payer money. AIG paid nearly $165 mn in bonuses and New York's attorney general has launched an investigation into these.

But the more significant revelation is about how bail-out funds went into the coffers of foreign banks that happened to be counter-parties to derivatives and other contracts with AIG. Total payments to foreign banks were a staggering $50 bn. More than 20 foreign banks were beneficiaries. FT reports:

The biggest winners were French banks, with Société Générale receiving $11.9bn and BNP Paribas $4.9bn. Deutsche Bank of Germany received $11.8bn and Barclays of the UK $8.5bn....UBS, the Swiss bank, received $5bn from US taxpayers via AIG – dwarfing the $780m it agreed to pay the US government last month after admitting to helping US clients avoid taxes.

Goldman Sachs received nearly $13 bn. The pay outs to foreign banks were unavoidable because it would have been difficult to honour commitments to local parties and not to foreign ones. Besides, the impact on global banks of not honouring commitments would have been significant and would have inflicted huge costs on the world economy. This highlights an important regulatory issue: monitoring of cross-border transactions of domestic entities that are considered too big to fail.

Subsidies for newspapers?

No, I'm not talking about Indian papers, many of which survive on government ads. The failure of several newspapers in the US and elsewhere in the present crisis has prompted a debate on whether newspapers need to switch to a different business model from the present one that relies overwhelmingly on ads, says an FT report.

In the alternative model, newspapers would be subsidised either by private endowments or by the state. If you regard them as a form of public service, like educational institutions, then such an argument could be made. According to estimates, the New York Times would require an endowment of $5 bn to cover its newsroom costs. The total endowment required for all US papers would be $114 bn.In France, the government is stepping in to support papers by doubling government expenditure on ads- no doubt, a unique form of fiscal stimulus.

Government subsidies for the press are always an uncomfortable matter. As for private endowments, that could create an uneven playing field between papers supported by endowments and those that operate commercially. Besides, as the FT report notes, papers supported by endowments are not insulated from commercial papers- the Christian Science Monitor has closed its print edition.

Another option is charging for the online editions. But other than a few papers such as the Wall Street Journal and the Financial Times, not many papers have met with success in charging for their online versions. Part of the solution, as the FT notes, must be attacking the cost structures. Newspapers are still not disciplined enough in terms of weighing expenditures on coverage of news stories- Rupert Murdoch must be an exception in the game.

Pakistan a 'failed state' ?

For me, the big item in today's news about the turmoil in Pakistan was the resignation of Sherry Rehman, the information and broadcasting minister in the government.

Given the sketchy reporting that, alas, has been all too common in the Indian print media, I had some difficulty making out what precisely had prompted the resignation. One paper said it was in protest against the ban on Geo TV. That is absurd because the channel continues to broadcast. Another paper said it was in protest against restrictions placed by President Zardari on the channel's coverage of anti-government protests. That sounds more plausible. Remember, Geo TV is the channel that lost a courageous correspondent to terrorists in the Swat region.

Rehman's resignation is an act of great courage and conviction. It is not that she herself is responsible for any lapse. She has resigned in the cause of freedom of the media. When was the last time any minister in India resigned on an issue of principle?

To me, Rehman's resignation shows how passionate the elite in Pakistan's civil society is about democracy. In the recent past, several sections of civil society have displayed such passion- the media of course, but also lawyers, the judiciary and various political parties. As I have noted earlier in my blog, Pakistan's media remains remarkably vibrant and varied in its expression of views. I used to marvel at the courage that columnist-turned- politician Ayaz Amir displayed in his writings in the Dawn in the regime of General Musharraf. To his credit, Musharraf gave plenty of latitude to the media although he brought about his downfall by showing an inability to tolerate similar independence in the judiciary.

I am also impressed by the vibrant literature that Pakistan has produced recently in the English language - Mohammed Hanif, Kamila Shamsie and Daniyal Moenuddin are some of the names that figure prominently.

All of which makes me wonder how much substance there is to the talk of Pakistan being a 'failed state'? Can a country with such a committed civil society be possibly regarded as a failed state? The international community would like to think so because Pakistan is a breeding ground for terrorists. Many in India would like to subscribe to this thesis because they find in it a refutation of the 'two nation' theory.

I am not persuaded. We do not regard India as a failed state on account of insurgencies in Kashmir and the North-East and the Naxalite problem in about a quarter of all districts. The key difference between the two countries is that India has managed to keep the army in its place whereas in Pakistan, the army calls the shots whether it is running the country or not. Another difference is that the Indian judiciary has come in the way of any attempts at amending the Constitution that change the character of the Constitution.

The judiciary in Pakistan is capable of asserting itself, as events in Musharraf's time showed. So the fundamental challenge in Pakistan is rolling back the pervasive hold of the army. Given the support of the international community, Pakistan's elite may be capable yet of putting democracy on a solid foundation.

Bankers, watch your lifestyle

This is a time when bankers are apt to be lynched ( no pun on the now-defunct investment bank). So, bankers had better watch their lifestyle- the slightest sign of lavishness will be pounced upon. There's a telling anecdote from FT:

In different times, the offer from the check-in attendant would have been accepted with alacrity. But in the midst of the worst economic downturn since the Great Depression, with an angry public, populist politicians and an aggressive press baying for a crackdown on Wall Street’s “excesses”, the senior banker paused for thought when he heard those usually welcome airline words: “Sir, you have been upgraded to first class. Please follow me.”

Finally replying, “I am fine in coach, thank you”, he gave up the better seat and opened another chink in the armour of beliefs and practices that corporate America had built and spread around the world over decades.

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Flawed b-school ideas

It's interesting that there has been much finger-pointing towards b-schools in the massive debate on capitalism prompted by the present crisis. In the Satyam episode, some of the outrage stemmed from the realisation that two b-school dons were on the board.

As I have pointed out in earlier blogs, I don't really buy the stuff about 'excessive' focus on shareholder value and how b-schools have gone wrong in overemphasising this aspect of capitalism. For a change, I came across something more sensible in this article by Richard Layard of the LSE's Centre for economic performance. Lord Layard points out three b-school ideas that need to be questioned:

Three ideas taught in business schools have much to answer for. One is the theory of “efficient capital markets”, now clearly discredited. The second is “principal agent” theory, which says the agents will perform best under high-powered financial incentives to align their interests with those of the principal. This has led to excessive performance-related pay, which has often undermined the motive to work well for the sake of doing a good job and introduced unnecessary tension among colleagues. Finally, there is the macho philosophy of “continuous change”, promoted by self-interested consulting companies, which disregards the fundamental human need for stability – in the name of efficiency gains that are often not realised.

Corporate reforms

Leave aside the big talk of 'reforming capitalism'. That means all things to all people. Concretely, what can one expect by way of reforms in the corporate world? From a recent story in the FT, I flagged the following:

• The US Congress has voted to give shareholders an annual vote on executive pay, although this will be a non-binding vote
• Shareholders may get the right to nominate candidates to the board- and to remove non-performing directors. These have been management's prerogative so far
• Redesign of executive compensation with less liberal stock options for people at the top.
  
• An improvement in the composition of corporate boards- board members will need to demonstrate better expertise than playing golf.

Is that good enough? Well, it's a good start. But I am a bit of a radical when it comes to corporate reform. I happen to think there is a fundamental problem with the modern corporation: excessive concentration of powers in the CEO.

The world over, democracy has gained ground at the level of nations. But the corporate world remains the last bastion of dictatorship. Greater diffusion of powers and more participative decision-making are what companies lack - and which is why they are prone to disaster. Serious reform is making these things happen.

Jack Welch lashes out at focus on 'shareholder value'

'Capitalism in crisis' is the lament of the day. Heaven knows there's a great deal of reconstruction that needs to be done now, most importantly in the realm of financial regulation. But we have to be careful to sift out populist rhetoric and plain inanity from serious proposals for reform. To put it bluntly, in today's distressed situation, there's a lot of rubbish that is sought to be palmed off as great wisdom by the high and mighty.

When I read in the FT that former GE CEO Jack Welch had condemned the focus on share price, I nearly fell off my chair. This is the father of the 'shareholder value' movement, the man who ruthlessly downsized and restructured in order to enhance shareholder value. Now, safely and comfortably ensconced in retirement- Welch had helped himself to some post-retirement perks that later proved controversial-, the man now pontificates about the evils of shareholder value maximization.

I wouldn't have minded if he had put forth sound arguments for his contention. I can't see any. Welch says:

On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.

Tell me, does that sound terribly original? Has any worthwhile CEO claimed that shareholder value creation was a strategy? Not at all. CEOs merely focus on it as the objective. Now I know that lots of academics and practitioners think there is something terribly wrong with this objective- I wrote about this in an earlier post. But none has come up with a worthwhile substitute for it.

Of course, management must focus on employees, customers and products. Of course, they must focus on innovation. And, sure, they must behave in socially responsible ways. But if the share price does not capture these dimensions, if the stock market is not efficient enough, then what would be the measure of performance and who is to do the measuring?

Let Welch tell us how we are to know whether management is adequately focused on employees, customers and products- other than by watching the share price. I will then take back what I have said here.

PSUs a hit at IIMs

Well, well, well. Who would have thought this was possible? The top recruiters at the IIMs have turned out to be PSUs. I had to pinch myself in disbelief when I read that Union Bank of India had made 18 offers at IIMA, followed by Bank of Baroda, IOC and BPCL. PSUs hired a total of 41 students out of 235 candidates at IIMA. The public sector banks have substituted for the high-profile investment banks with their fancy offers.

What does this mean? Well, it's clearly not a trend. Those who were set on banking and finance careers would not have had other options. And public sector banks do provide a good training ground. So, most of the grads will take up these jobs and wait for the glamorous part of the market to open up. Mind you, at the kind of levels of which PSUs are willing to take IIM grads, the starting packages would not be unattractive.

The challenge for PSUs is not getting IIM grads in. It's keeping them for a while. Maybe they cannot keep them for a lifetime. But there should be a clearly thought strategy to get the best out of them in, say, three to five years. One way is, of course, putting them in positions where skills in PSUs are most lacking. The other is using them as change agents to bring about a cultural change in the organisation- to give public sector employees a sense of how young execs from the best schools think and act.
PSUs need not have a huge complex about attrition among IIM recruits. It happens to the best of institutions these days. Firm loyalty is passe. The trick is to make sure that such attrition is consistent with the business model- IIM recruits should not be money down the drain.

Consultant, heal thyself

Business Standard carries a front page story on how the top consulting firms are yet to get into the black after years of operating out of here. They really can't say they are in it for the long haul or that they are investing for the long term because they have been around for much too long now. McKinsey had a loss of around Rs 2 crore in2007-08, Accenture netted a minus of Rs 18.6 crore in 2006-07 and Bain showed a loss of Rs 16 crore in 2007-08. BCG is marginally in the black as is Deloitte.

There is little doubt that foreign consulting firms are unable to shed the high cost baggage of all foreign firms. Everything about them is expensive- their staff costs, the places they rent (five star hotel rooms often operating as offices for months on end), their travel, flying in experts from overseas offices at huge cost.... All this is passed on to the clients and yet the firms make no money.

Makes you wonder: how do they justify year-end bonuses? And if consultants can't mind their businesses properly, how can we expect them to advise others to mind theirs?

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?

Management guru

The Economist carries a profile of Ram Charan, a management guru who may not have a high profile in India but who is pretty well known internationally. He has authored books on leadership and board room governance and combines lecturing and writing with consulting. At 69, Charan has an enviable capacity for travel:

Another thing that makes Mr Charan unusual is that few people would want to sign up for the punishing life associated with being both a sage-on-stage and a confidant of many chief executives. A one-man band, Mr Charan is constantly on the move, notching up some 500,000 miles (800,000km) on aircraft last year and spending most of his nights in hotel rooms. To minimise the amount of baggage he lugs around, assistants at his office in Dallas send fresh clothes to him via courier and his laundry is returned via the same route. Until a couple of years ago, the peripatetic Mr Charan did not even own a home. He has since bought an apartment in Dallas, he says, but he has barely stayed there since he bought it.

That bit about the laundry had me foxed. How much does it cost to courier laundry across the world? Maybe it makes sense to courier suits instead of buying these but I wonder whether it makes sense for other apparel. Is it cheaper to use the courier than to use the laundry services of five star hotels where, presumably, Charan would stay?

The downfall of RBS

FT carries a gripping account of the rise and fall of Royal Bank of Scotland under its former CEO, Fred Goodwin. After grabbing Natwest and some lesser financial institutions, RBS launched and won a bid for ABN Amro, deciding to plough ahead even after the onset of the global financial crisis in 2007. That one deal finished RBS. It is now virtually under UK government ownership after having received huge dollops of capital. I just heard on TV that the bank has declared $34 bn in losses in 2008- that's Rs 150,000 crore.

The one lesson from failures such as RBS and Lehman seems to be: when CEOs begin to show clear signs of megalamonia, investors had better watch. Such megalamonia manifests itself not just in a hunger for asset growth but in many other ways:

Within the bank, he fostered an intense management culture that prized discipline and attention to detail. Senior executives were set annual income and profit targets and challenged on whether they were meeting them. The chief executive exercised control through a daily 9.30am meeting where he would quiz managers about their divisions and openly question their competence. One morning he reduced a senior executive to tears. “It wasn’t a positive or healthy atmosphere,” says a former executive. “You have to wonder about the decisions people make in that environment.” ......

The chief’s attention to detail extended to attire and furniture. When RBS presented its results, Sir Fred and team would wear white shirts and matching ties with an RBS logo. The bank shipped chairs and carpets around the world so that each of its offices would have the same interior.

Shortly after the Natwest deal, he started planning a new group headquarters near Edinburgh airport and, former colleagues say, was involved in every aspect of the construction. Modelled on Santander City, the Spanish bank’s head office outside Madrid, the £335m building was opened in September 2005 by Queen Elizabeth in a ceremony that included a fly-past of four Tornado jets from a nearby RAF base.

How do companies and their boards indulge such CEOs?

Nassim Taleb on bank bonuses

Taleb, writing in FT, highlights a point familiar to readers of this blog: the heads-I-win- tails- shareholders-lose syndrome among bank managers taking risks with other people's money. Taleb says even the Obama administration's proposal for caps on pay not be enough:

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.

First, those who are taking risks even outside Tarp or society’s protection can still be gaming the system – since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.

Second, Vikram Pandit, Citigroup’s chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.

Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.

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.

Nationalising US banks

Nouriel Roubini of Stern School believes nationalisation is the best of all options open in the present crisis. That's exactly what I have been saying. Roubini argues in a Business Standard piece that other options- such as recapitalisation, creation of a "bad bank" to house toxic assets, guarantees for private purchase of toxic assets- all face the problem of government or the tax payer overpaying the private sector and subsidising shareholders of insolvent or distressed banks.

With bank nationalisation, shareholder and bondholder losses can be immediately recognised and any upside on revival belongs to the tax payer. What about the cost? Roubini estimates losses at $3.6 trillion about half of which is in the American banking system. That means the US governemnt having to fork out $2 trillion.

It's still worth it because of the time factor. Any involvement of the private sector will be long drawn out, its outcome uncertain and losses will mount. Had the government stepped in earlier, it would have probably written a smaller cheque. It all boils down on how long we want the crisis to stretch out.

Responses to readers' comments

1. Subiksha- The question is asked: if it's an unlisted company, why should directors owe anybody an explanation for quitting? Well, I believe directors' responsibility should be viewed in broader terms- they have obligations towards all stakeholders, not just shareholders of the company. Investors in ICICI Venture might want to know what went awry; lenders in Subiksha too would be interested. When directors quit, especially when they do so en masse, citing reasons is a good idea.

2. First Global- My limited concern was about the linkage between the Tehelka exposure and the crackdown on First Global. If First Global or Shankar Sharma violated any securities laws, that is a different matter which I, for one, am not competent to judge. I also hold no brief for any political party and I accept that misuse of investigative and law-enforcement agencies has not been confined to any one party or coalition.

And now Subiksha

Subiksha, the Chennai-based retailer, is in bad shape. That's not a big deal in itself. The retail story has gone awry with the downturn and also because of firms having overextended themselves when real estate prices were sky high.

The big deal, if any, is about the accounts of Subiksha. Business Standard reported yesterday that ICICI Venture, which has a 23% stake in Subiksha, has written to the RoC asking for an independent audit of the company's accounts.

Subiksha MD R Subramaniam holds 59% of equity but he apparently contends that the company is actually controlled by ICICI Venture because the latter has the right to appoint a majority of directors. This is an interesting twist because it would imply that if there were accounts or audit issues at Subiksha, ICICI Venture would be responsible.

Incidentally, four of the high-profile directors resigned last week- Renuka Ramnath and Rajiv Bakshi of ICICI Venture, Rama Bijapurkar and Kannan Srinivasan (a Carnegie Mellon prof). What do these resignations imply? We do not know. That is why I have argued that when independent directors quit, they should be asked to furnish reasons.

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.

Anatomy of a witchhunt

In March 2001, the BJP government presented what many regarded as the real "dream" budget- I remember one industry spokesman ecstatically giving it a perfect score of 10. Unfortunately, the stock market did not think so. It tanked.

Hell hath no fury like finance ministry scorned. It was convinced that the market fall was engineered and it was determined to find out who was behind it. Ten days later the Tehelka corruption expose emerged and it turned out that one of the journal's promoters, Shankar Sharma of First Global Stockbroking, had short positions in the stock market.

The law enforcement agencies descended on Sharma. He was arrested and jailed for a long period without any charges being established against him. In September 2002, Sebi cancelled Sharma's stockbroking license. Eventually, Sharma was acquitted of all charges. Sebi's order was set aside by the Securities Appellate Tribunal in 2004.

There was much scepticism about the charges against Sharma even then. Sharma recently used the RTI to obtain the trading data for the relevant period. It turns out that First Global was not even among the top 50 short sellers ! Business Standard has strong words on the way the Sebi conducted itself:

It has long been suspected that the cases against Mr Sharma and his company were not a result of wrongdoing on their part, but as punishment for having been involved with Tehelka. The fact that the cases were dismissed (one on technical grounds) supports this view of what happened. Further evidence to buttress this view has now been produced by Mr Sharma, suggesting that the stock market regulator had no reason to suspect the activities of First Global in the first place. Using the Right to Information law, Mr Sharma has obtained the trading data maintained by Sebi for the period in question. These data show that First Global does not even figure in the list of 50 largest sellers, from the middle of February to the middle of March 2001. That raises the question as to why this data was ignored by Sebi before it passed orders against First Global. Indeed, the prosecution lawyer was so unhappy with the case being made out that he withdrew from the case, in itself a telling comment.

If so, several questions arise. On what grounds did Sebi take action against First Global? Why do the concerned people show reluctance to address the issues that have been raised? Sebi’s continued silence on this matter will only undermine its standing as an independent regulator that acts without being influenced by the government’s political motives. Cases of state vendetta against individuals are not unknown, but this is the first case where the political authority seems to have influenced stock market regulators. Is it coincidental that First Global received Sebi’s adverse verdict during the tenure of the Vajpayee government? And that the appellate tribunal set aside that Sebi order a few months after the Vajpayee government completed its tenure?

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.