Ouster of BP Chairman: does anybody know how it happened?

I had a post yesterday on the ouster of the BP Chairman, Albert Manifold.

I repeat: it's an extraordinary event. No violation of the law. No violation of regulations. No financial misconduct. Removed only because his behaviour was too aggressive to be acceptable- the expression used is "bullying".

I say it's extraordinary because bullying by those at the top has almost become normalised in most places- and not just in the corporate world. But, remember, in Britain, a deputy PM (Dominic Raab), had to quit in 2023 on similar grounds. PM Rishi Sunak removed him after an investigation showed that, in an earlier avatar as Foreign Secretary, Raab had been abusive towards staff members. 

That does not mean that the UK is free from bullying. However, even if there is the odd instance of somebody being penalised for bullying, two cheers for the same! There is hope for civilisation.

I find the reporting on the event, while extensive, weak on detail. 

How exactly did the removal happen? Typically, it is the Chairman who convenes a board meeting and approves the agenda with the help of the Company Secretary. In this instance, the other directors seem to have met without the knowledge of the Chairman and passed a resolution for his removal. 

An FT report hints at the role of a Senior Independent Director in the whole affair:

For UK governance aficionados, the affair shows the power of the senior independent director when things go wrong in the boardroom.

I infer that the Senior Independent Director is empowered to convene a meeting of the board and act against the Chairman. Does the removal of a Chairman have to be ratified by shareholders? Doesn't look like it.

The board of BP seems to have acted on the basis of whistle-blower complaints about the Chairman. That too is extraordinary. The Chairman and the board receive board complaints about management. But complaints about the Chairman going to other board members is not something one has heard of.

I doubt that what happened at BP is possible in Indian board rooms. The Chairman very often is the promoter of the company even if he is in a non-executive position. It is inconceivable that the other board members can or will act against him. 

But what if the Chairman is not a promoter, just another independent director? Can he be removed by the rest of the board?  Again, I doubt very much.

I whole-heartedly welcome the idea of removing somebody at the top on grounds of bullying or aggressive behaviour. I also like the idea of removing a Chairman who behaves badly. 

Can we hope that Company Law will be suitably modified so that BP-like actions become possible here?

BP Chairman ouster: No bullying please, we are British

The board of oil major BP has removed its Chairman, Albert Manifold, reportedly because he was given to bullying and "shouty" behaviour.  

That is  not what the sanitised text of the board's statement said. The board said his removal, which was unanimous, "...follows serious concerns raised to the board related to important governance standards, oversight and conduct."

An FT report presented a more unsanitised version of what transpired:

Manifold, who was appointed BP chair less than a year ago, was viewed by other BP directors as too aggressive, according to other people familiar with discussions inside the company. Several colleagues saw the level of control he exerted as more akin to that of an executive chair, these people claimed. They alleged Manifold at times spoke down to senior members of staff, both in one-to-one encounters as well as in larger meetings. One person familiar with BP claimed that describing Manifold as “shouty” was “understating it”, adding: “They thought they were hiring a tough change agent, they didn’t think they were hiring a bully.”

It is a tribute to British corporate culture that a Chairman can be removed not for want of performance or for malfeasance but simply because he had behaved badly. 

If the BP board's criterion were to be applied in India, I suspect a significant chunk of corporate India would be decapitated.

 

Rupee slide: is there a case for a rate hike?

 The fall in the exchange rate of the rupee is the biggest concern at the moment. 

The current account deficit is expected to widen to around 2 per cent of gdp in the wake of the surge in oil prices. That is not a big deal by historical standards. We were comfortable with a CAD of at least up to 2.5 per cent of gdp, meaning we could find enough sources of foreign capital to finance the deficit.

Not so today. FII flows have been hugely negative and net FDI too has been negative. We could get public sector companies to raise foreign borrowings with a commitment from the government to cover exchange rate risk. We could resort to NRI foreign currency deposits. And the like.

But why not just raise the policy rate?

Former MPC member, Janak Raj, writing in BS, argues that we should not. He gives his reasons.

Empirical evidence suggests that defending an exchange rate with interest rates rarely works except in a full-blown panic, and even then, it requires very sharp hikes.

In theory, that's not true. Any rate hike, by raising the differential with respect to rates abroad, must cause the rupee to strengthen. Maybe not appreciably. But it should certainly help halt the relentless slide in the rupee. 

Further, he argues: 

The policy rate is an instrument for inflation control. Since exchange rate depreciation impacts inflation, the policy rate should be raised only if inflation breaches the target. That is, the MPC should only be concerned with exchange rate pass-through to inflation. 

By implication, the MPC should react only if the inflation rate exceeds the upper band of 6 per cent. At present, inflation is projected to be around 5 per cent.

The problem is that, if the MPC were to wait until the upper band is breached, the fall in the rupee would have fallen far too far for comfort. The momentum of rupee depreciation may become irreversible. Every fall in the exchange rate of the rupee has its implications for the fiscal deficit, given the reluctance to pass on prices fully to the consumer. 

So, with inflation projected to be in the region of 5 per cent, a judgement has to be made. Given the current geo-political situation, is there a prospect of oil prices rising above, say, $110 per barrel? Even at the present level, are FII outflows likely to persisit?

If the answers are in the affirmative, then there is a heightened probability of inflation breaching the upper band of 6 per cent. That creates the case for a rate hike. No need to wait until the horse has bolted.

Raj argues that the main problem could that India has taxes on capital gains that competing markets do not have. But that is a new situation. It has always been the case. Nevertheless, foreign investors have come in droves because stock returns in India too are higher so that the post-tax returns compare well with those in other markets.

The depreciation in the rupee is not the entirely the result of rising oil prices. Earlier, investors bolted after India was subjected to punitive tariffs by the Trump administration. Not that the CAD was seriously impacted but investor sentiment turned negative. We were told that they did not view with favour a market towards which the US administration had a hostile stance.

The point about hiking the policy rate is that we can expect the effect to be immediate. All other instruments will take time in producing results. 

 

Moment of reckoning in oil markets is at hand

I wrote in an earlier post that the oil markets are under-pricing the risks inherent in the Iran conflict and that a spike in oil prices is not far off.

Even as President Trump weighs the option of another strike on Iran, it appears that the moment of reckoning in oil markets is not far off. Another two or three weeks of the stalemate could push oil prices to over $120 per barrel. And another strike by the US? Well, the bets are truly off.

If that sounds pessimistic, here are two pieces, one by Martin Wolf on the prospects for the oil markets and another by Amos Hochstein on how oil prices can soon impact the US. 

Martin Wolf gives three reasons why we should be worrying:

• The problem is not just the closure of the Strait of Hormuz but the destruction of physical infrastructure in the Gulf countries
• The shortages are not just of crude oil but refined products. The US is a net exporter but it has requirements of imported crude of specific varieties.
• So far the price impact has been muted by the drawdown of stock. But stocks are finite. Moreover, there is not much spare production capacity.

Hochstein presents an interesting fact. Gasoline price has shot up to $4.5 per gallon. The highest level reached so far in the US is $5.02 per barrel which happened in June 2022. Gas prices are poised to rise because, given that jet fuel prices have risen even further, production capacity is being used for jet fuel and not for gasoline! The implications are clear enough:

Energy prices feed into the core consumer price index with a lag of several weeks. The pump pain of May will translate into inflation figures in July and August. The 30-year Treasury yield has risen to the highest level since the financial crisis and the 10-year Treasury yield is already rising. Mortgage costs, corporate borrowing rates and the cost of financing national debt all move with it.

The oil markets are still banking on a swift resolution of the conflict. If that doesn't happen, 'the largest energy shock in history' will wreak havoc on the world economy. 

Vietnam war revisited: the architects knew it was a doomed expedition

Since the Iran conflict is getting branded as another Vietnam, an Economist article on the Vietnam war is worth reading.

In the war, 3 million Vietnamese were killed; over 50,000 American soldiers died. The US failed to overthrow the government of North Vietnam. Instead, it retreated ignominiously as North Vietnam overran South Vietnam and united the two parts.

Why did the US expend so much resources and lives over a decade on the war in Vietnam? The popular view is that the architects of the war- Kennedy, Johnson, McNamara and others- thought victory was attainable and were carried away by hubris.

Not at all, says the author of the article cited above:

America’s decision-makers were hardly experts on Vietnam and its history, but among themselves and behind closed doors they acknowledged that they were entering a deeply challenging environment, in which triumph was far from assured.

The extensive internal record is clear on this score. It shows the private misgivings of senior Washington officials throughout the years of heavy escalation. The sceptics included McNamara himself, and the two presidents he served: John F. Kennedy and Lyndon B. Johnson. From the time then-Congressman Kennedy visited Vietnam in 1951, during the height of the French-Indochina War, until his death in Dallas in 1963, he expressed doubts that Ho Chi Minh’s revolutionary nationalist cause could be subdued by military means. Johnson—who ordered the “Americanisation” of the conflict in 1965, involving the commitment of major ground forces and sustained air power in order to preserve a non-communist South Vietnam—regularly wondered if the struggle could be won, and indeed whether the outcome really mattered.

If that was indeed so, why did these gentlemen embark on the war and pursue it against all odds? The author provides a possible answer:

A key part of the answer is that for both men, maintaining the course, through escalation if necessary, offered the path of least immediate resistance. They and their advisers had offered repeated public affirmations of South Vietnam’s importance to American security, and of the certainty of ultimate success. It made sense that they would be tempted to hang on, in the hope that the new military measures would work. It was about credibility—their nation’s, their party’s, their own. 

Once you sell a story to the public, your best bet is to make the story happen.

We have to wonder: is the same mistake playing out in the Iran conflict now?

India's new private universities: how much of a game changer?

The Economist has an upbeat story  about India's new crop of private universities. But its title - India's pricey universities want to take on the Ivy League- suggests it is getting carried away. The new private universities could, at bestm become India's Ivy League but that's hardly the same as taking on America's.

The new universities- Ashoka, Shiv Nadar, Krea, Jindal, Ahmedabad, to name a few- are funded by businessmen. The Economist writes:

The new crop of private universities set themselves apart in several ways. From the beginning they have sought to excel in research, not just in teaching. Many emphasise humanities and social sciences, says Eldho Mathews, an education researcher in Kerala—which in other Indian institutions are often considered secondary to science-based subjects and also to training for the professions.

Well, the new private universities have distinguished themselves from the general run of public universities. However, other than Ashoka, which has an outstanding undergraduate programme, none remotely approaches the Ivy League in quality. Perhaps they do not even match the rigour and class of the best IITs and IIMs. They have a long way to go.

The Economist sees the new universities as having to deal with sensitivity to research on controversial issues:

A big worry is the Indian government’s intolerance for research or opinion that it finds irksome. Self-censorship is rife in the social sciences in particular, says one academic. Publishing an inconvenient finding can easily “blow up in your face”. Sensitive topics include religious freedom and the state of India’s democracy.

It's not clear that is the biggest problem. One problem certainly is attracting quality faculty. Not many have established a tenure system, whereby security is tenure is assured after a probationary period of the first few years. Nor is the faculty pay particularly attractive except in a few places. The IITs and the IIMs offer not just pay but quality accommodation, job security and substantial funds for research and travel. The new private universities do not uniformly measure up on these counts. The new universities also tend to have a centralised model of leadership, more akin to that of ordinary Indian universities than the IIT and the IIMs.

That the new universities are backed by businessmen does not  a blank cheque. The institutions are expected to meet a substantial portion of their funding requirements through fees and executive training. After the initial bout of funding, the business backers are often reluctant to provide substantial support. The formula for IITs and IIMs has proved unbeatable: 100 acres or so of land, Rs 150 to 200 crore for initial capital expenditure and recurring revenue grants of upwards of Rs 100 crore - for at least ten years.

The new universities will be preferred to the typical Indian college. But Ivy League is miles away.

US has lost the war in Iran- Robert Kagan

Robert Kagan, US columnist and neoconservative, joins the chorus of voices that say that the US has lost the war in Iran.

The US cannot bring about the collapse of the Iran regime without extremely high costs. Kagan spells out these costs and argues that simply walking away seems the best option for Trump:

Unless the U.S. is prepared to engage in a full-scale ground and naval war to remove the current Iranian regime, and then to occupy Iran until a new government can take hold; unless it is prepared to risk the loss of warships convoying tankers through a contested strait; unless it is prepared to accept the devastating long-term damage to the region’s productive capacities likely to result from Iranian retaliation—walking away now could seem like the least bad option.

And walking away from the present situation is certainly defeat:

There will be no return to the status quo ante, no ultimate American triumph that will undo or overcome the harm done. The Strait of Hormuz will not be “open,” as it once was. With control of the strait, Iran emerges as the key player in the region and one of the key players in the world. The roles of China and Russia, as Iran’s allies, are strengthened; the role of the United States, substantially diminished

Far from being toppled or even weakened, the government in Iran is poised to emerge stronger and Iran will be a greater force in the world than in the past:

The power to close or control the flow of ships through the strait is greater and more immediate than the theoretical power of Iran’s nuclear program. This leverage will allow the leaders in Tehran to force nations to lift sanctions and normalize relations or face penalties. Israel will find itself more isolated than ever, as Iran grows richer, rearms, and preserves its options to go nuclear in the future. 

The question is how soon will President Trump bow to the reality and walk away. The longer the wait, the greater is the cost to the world economy.