Corporate delusions

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

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

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

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

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

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

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

Europe can avert a Lehman

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

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

No more JEE- IITs/NITs to have aptitude test

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

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

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

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

Basel III bounty for India

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

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

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

Christian Lagarde steals the show at Jackson Hole

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

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

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

Forget S &P downgrade, watch Eurozone

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

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

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

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

Anna Hazare's googly

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

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

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

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

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

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

Ratan Tata succession

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

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

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

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

Are sprawling IIM campuses justified?

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

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

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

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

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

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

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

How do we price higher education?

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

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

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

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

Britain struggles to price education correctly

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

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

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

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

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

Germany opts for free tuition

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

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

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

India's services-led growth

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

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

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

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

IIM Indore five year programme

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

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

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

Regulatory overkill in banking?

That's the title of my last ET column.

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

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