Saturday, May 21, 2022

Gerhard Schroeder: How free is the Western world?

Just how much freedom is there today in the West? We know that after 9/11, many governments, including those in the US and the UK, armed themselves with sweeping powers to take away an individual's freedom on suspicion of links with terrorism. There is very little recourse in such cases.

But leaving aside restrictions linked to terrorism, just how much freedom of expression do people have even otherwise? You may not be jailed for certain things but the social and economic costs of veering from the mainstream or establishment line can be pretty steep.

A classic illustration is the hounding of Gerhard Schroeder, former Chancellor of Germany, no less. Schroeder is a friend of Putin's and he has refused to join the strident condemnation of Putin in his country from Russia's actions in Ukraine. Schroeder is certainly open to criticism for his position. But we are seeing is a lot worse. 

Schroeder was Chairman of the supervisory board of Rosneft, the Russian oil company, and Chairman of the shareholders' committee  of the Nord Stream gas pipeline projects. Schroeder came under pressure to quit these positions after the Russian operation in Ukraine. When he refused, he lost access to his office at the Bundestag. Next, the EU parliament drafted a resolution extending sanctions to individuals sitting on the boards of Russian companies. Schroeder has now decided to quit the two boards. 

Schroeder has also faced a storm of outrage consequent to the alleged atrocities in Bucha caused by Russia, he told an interviewer that the incident would have to be investigated, a perfectly reasonable stand to take! It is just not possible to have a legitimate disagreement on some matters in the supposedly free societies of the West. If this is the plight of a former Chancellor of Germany, just imagine what dissenters in, say, the media or academic would have to face.

India has come in for severe criticism in the Western media in recent years for displays of intolerance of dissent. Without in any way justifying acts of intolerance in India, it is time to tell the West: Physician, heal thyself.

Friday, May 20, 2022

Loophole in Places of Worship Act 1991?

The Places of Worship Act 1991 has been in the news. Very simply, it is Act of Parliament whereby the religious character of any place of worship, as it existed in 1947, cannot be disturbed. An exception made to the Act was the dispute site in Ayodhya.

If that is so, how could  the mosque in Varanasi (Gyanvapi) come under challenge? Meaning, how could any court entertain a challenge? That is the stand of prominent Muslim groups. Since the character of the place cannot be changed due to the Act, where is the question of any court entertaining any petition related to the mosque?

I can't pretend to be a legal expert. From what I have read in the papers, it appears the Act has another exemption. It exempts places of worship that qualify as ancient monuments. So, if there is a Shivalinga inside the Gyanvapi mosque, as the Hindu petitioners in the case content, does it become an ancient monument so that the Act does not apply to this site? And if it does not, does that mean access to the site will have to divided between Muslims and Hindus? Or can the Hindus claim the site itself/

In the Ayodhya case, the Supreme Court decided the matter looking at the case as one of a land dispute. The party that could establish that it had had greater access to the land over the centuries won, namely, the Hindus. How would the Gyanvapi dispute be resolved if the petition of the Hindus is considered maintainable?

I await the wisdom of legal experts.

Wednesday, May 18, 2022

Can boards ever keep executive pay in check?

My answer is a blunt 'No'. Boards cannot get executive pay within reasonable bounds- they will almost always tend to err on the excess. 

The latest case in point is JP Morgan. Shareholders at the bank have voted against the pay package recommended by the board for six top executives at the bank, including CEO Jamie Dimon. The package amount to -umm...- only $ 201.8 mn. Dimon stands to get $50 mn from a one-time award. The shareholder vote on exec pay is non-binding in the US. But it does send out a strong signal. Boards may pretend to notice the signal but it is unlikely to change board behaviour a great deal.

The board has conveyed that it is giving a large one-time award to Dimon because it wants him around for many more years. Dimon is 65 and has been at the helm since 2005, that is, for 17 years. If the board thinks nobody in the world can replace Dimon, then it is confessing to a major failure: it has failed to find a successor. It is also acknowledging that JP Morgan's business is unsustainable- there is only one person who can run it.

How absurd! It is not that Dimon is irreplaceable. It is just that the board finds it expedient not to disturb the status quo. And one good reason for that might be that disturbing the status quo could be that any change would be annoying to the CEO.

Boards just can't get executive pay right any more than they can get succession planning right. There is a common reason for the two failings. Boards are in thrall to CEOs. Board members owe their appointments, in large measure, to the CEO and they owe their continuance in office to the CEO. (Forget the nonsense about the Nominations Committee of the board deciding board memberships. Few boards would induct a board member without a nod from the CEO. It would be rare for a board to turn down names proposed by the CEO himself.). And a board membership at the top firms in the world means something- the money is good and the prestige riding on a board position is not to be sniffed at.

I can only reiterate what I have said several times before: we need to change the way board members are appointed if we want serious board room reform. Board members must be appointed by multiple stakeholders- shareholders, banks, financial institutions, employees. Self-selecting boards are a recipe for dysfunction- and spiralling CEO pay, among other things. 

Monday, May 16, 2022

Narcisstic bosses: how does one deal with them?

An article in FT that uses Robert Maxwell, the newspaper baron (long deceased), as a model of a narcisstic boss has a short answer to the question pose above: find another job. But that, as it suggests, is easier said than done: we all have financial needs, so we can't chuck up a job at will.

Very true. But there is another problem as well. There is a high probability that the organisation you move to would also have its share of narcissistic bosses. And the higher you go, the greater the narcissism.

In a book I wrote in 2015, Rethinc: what's broke at today's corporations and how to fix it, I cited a study that showed that the proportion of psychopaths among CEOs was far above that in the general population. Psychopathic traits include things such as a lack of empathy, a tendency to manipulate others, etc. These are qualities one would also associate with narcissism. 

Success in the corporate world- and, perhaps, most walks of life (perhaps, with the exception of advanced research)- is won on the strength of such qualities. This may not sound very pleasant but the heights of success are not for the faint-hearted. It is through a certain disregard for scruple, ruthlessness and self-admiration that people rise. Narcissism breeds success which fuels more narcissim. At the very top, the individual begins to think he is infallible, so he has no patience for anything other than adulation and flattery. He certainly has no room for dissent.

When people go into meetings and stay silent, heartily endorse whatever the boss is saying or indulge in outright flattery, they recognise that these are the things that will help them survive and prosper. They understand they are dealing with a narcissist, if not a psychopath, and fall in line because the costs of not doing so are painfully high. There may be a few honourable exceptions but what I have described here is pretty much the norm.

What can we do about it? Get together will colleagues and take the matter to the board ? No way. There will not be any takers for the petition. And it's no use going to the board because the board too has its fair share of narcissists who will not be able to relate to things such as fairplay and justice.

In government, your job is protected and you can choose to forswear ambition and do your job in your little corner. Alas, in the private sector, there is little choice other than to grow a thick skin. Psychopathic bosses are the primary reason why organisations are so toxic and one reason those toiling in them nurse all kinds of ailments. 

If that sounds a trifle gloomy, please do let me know if you have better suggestions.



Friday, May 13, 2022

High inflation: could central banks have acted earlier?

Prices are surging everywhere. Central banks are being panned for not having acted early enough. In the US, the Fed is said to waited for too long before raising rates. In India, the RBI is being criticised for being dovish on inflation.

I beg to disagree. The sort of inflation that the Ukraine conflict has unleashed could not have been anticipated by central banks. 

The IMF has forecast inflation of  5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January, a month before Ukraine erupted. Nothing that central banks could have done would have altered the basic post-Ukraine inflation trajectory.  

In India, the RBI could have raised the policy rate in February, 2022. It could have signalled a less accommodative monetary policy. But these actions would not have made much of a difference to the inflation outlook.

I elaborate in my BS column, Blame Ukraine conflict, not central banks.

FINGER ON THE PULSE

T T RAM MOHAN

 

Blame Ukraine conflict, not central banks

The origins of the inflation shock the world is experiencing are primarily political, not economic or monetary

 

The global economy faces a combination of slowing growth and rising inflation in 2022. Many commentators ascribe it to the excesses, fiscal and monetary, of the past several years. They are wrong. The deceleration in growth and inflation of the magnitude we are seeing now are more on account of the conflict in Ukraine.  

 

To grasp this, you only need to look at forecasts before and after the Ukraine conflict that commenced in February 2022.

 

Let us take the growth forecasts first. The year 2022 was to have been the year of recovery for the world economy from the ravages of Covid-2 in 2021. In October 2021, the IMF’s World Economic Outlook (WEO) saw the world economy growing at 4.9 per cent. In its April 2022 issue of WEO, the IMF projects world economic growth at 3.6 per cent in 2022 or 1.3 percentage points below the October 2021 forecast. Note that the April forecast is 0.8 percentage points below the forecast of January 2022, a month before the Ukraine conflict erupted.  

 

So, yes, the world economy was slowing even before the conflict in Ukraine. Prices of commodities had started rising due to the recovery in the world economy. Central banks had started responding with an increase in interest rates and this was impacting private consumption and investment.

 

But Ukraine has greatly amplified the deceleration in growth. The sanctions against Russia have no precedent and have disrupted long-standing supply chains and trade linkages. Inflation, as we shall see, has received an enormous boost. Capital flight from emerging economies is putting pressure on exchange rates, giving central banks another reason to raise interest rates.

 

Increases in interest rates threaten to undermine government finances across economies. Western banks are poised to take a hit of around $10 billion on their exposures to Russia. Western corporates retreating from Russia face huge write-offs. There is, above all, uncertainty about the course of the war and the possibility of secondary sanctions against nations found to be violating sanctions imposed on Russia. All this will tell on growth. One cannot compare the slowdown projected prior to February 2022 with what faces us post-Ukraine.

 

The comparison of trends in inflation pre- and post-Ukraine is even more compelling.

 The World Bank’s Commodity Markets Outlook (April 2022) shows that between January 2020 and December 2021, that is, over 24 months, energy prices rose at a compounded annual rate of 22.4 per cent. In 2022, in just three months from January to March, energy prices rose by an additional 34 per cent! Non-energy commodity prices rose by an annual rate of 18 per cent over the previous two years. In the first three months of 2022, these rose by an additional 13 per cent.

 

As a result, the World Bank’s forecast for energy prices in April 2022 is 92 per cent higher than in October 2021. For non-energy commodities, the forecast is 49 per cent higher. The forecast for food prices is a good 57 per cent higher. The Ukraine conflict has caused prices to soar in a way that central banks could not have anticipated earlier.

 

It makes no sense to criticise governments for having boosted spending, first after the global financial crisis (GFC) of 2007, and then after the Covid crisis. Nor can central banks be faulted for policies aimed at supporting growth. These policies saved the global economy from collapse after the GFC. They were also successful in containing the damage from the Covid crisis, in particular, to vulnerable groups, such as the poor and small enterprises. 

 

Proponents of Modern Monetary Theory (MMT) contend that the only limit to government spending is inflation, not government’s capacity to repay borrowings through future taxes. Critics of MMT say that its advocates have seriously under-estimated the inflation risk to government spending. This is by no means obvious. It is more plausible that the fault lies, not in the economic policies of well over a decade, but in the stars of NATO. The inflation shock we are seeing is political in origin. It is primarily on account of the NATO’s opting for a head-on confrontation with Russia over the eastward expansion of NATO.

 

Commentators say central banks have been late in reacting to inflation. This is strictly hindsight. Our analysis above suggests that prior to Ukraine, the US Federal Reserve was justified in waiting to see if the supply disruptions caused by Covid had played out. It had grounds to believe that a series of 25 basis points increases in the policy rate would suffice to head off inflation. No central bank can anticipate the sort of supply shock that has emanated from Ukraine.

 

Similarly, the Reserve Bank of India (RBI) may not have erred in forecasting an inflation rate of 4.5 per cent for India in 2022-23 last February. The revision in the inflation forecast to 5.7 per cent that happened in April is strictly a post-Ukraine event.

 

At a forecast inflation rate of 4.5 per cent, the RBI had grounds for prioritising growth over inflation. As long as inflation is within the band of 6 per cent, it is appropriate to prioritise growth especially at a time when the growth rate has been below the trend rate. When the inflation forecast moves closer to 6 per cent, it is appropriate to prioritise inflation.

 

Those who say that the RBI should be fixated at all time on an inflation rate of 4 per cent forget that there was a question mark over the continuance of the present band mandated for the MPC. The argument was made that, in the interest of facilitating a higher growth rate, the target rate for inflation could be raised to 5 per cent plus or minus two per cent.

 

The government decided to stay with the present mandate, perhaps, because it thought that relaxing the monetary policy target at the same time as the fiscal deficit target was being continuously deferred would unsettle foreign investors. Against this background, the RBI cannot be faulted for its interpretation of the inflation mandate.

 

The outlook for both growth and inflation has changed dramatically as a result of a force majeure event, Ukraine. It makes little sense to fault demand management for the effects of an unprecedented supply shock.




 

Thursday, May 12, 2022

Credit Suisse woes: can banks be cured at all?

Can banks be cured of their penchant for taking excessive risk? Or is banking an ailment for which there is no cure?

The question is prompted by the astonishing confession of the Chairman of Credit Suisse, Axel Lehmann:

It has become clear that the challenges of the past were not solely attributable to isolated poor decisions or to individual decision makers,” he (Lehmann) told the Swiss lender’s shareholders. “Within the organisation as a whole, we have failed too often to anticipate material risks in good time in order to counter them proactively and to prevent them.

Well, if a bank can't anticipate material risks, what are its executives getting paid for? The problem, I suspect, is not lack of awareness of material risks. It is the way incentives operate in banking: heads I ( the bank manager) win, tails you (the shareholder) lose. If a banking bet goes hugely wrong, the shareholders and bondholders are left holding the can. The manager, at worse, will lose his job. He won't starve as a result: he will enough millions to live off for the rest of his life. As long as there are no penalties, including criminal penalties, for irresponsible decision-making and as long as banks are leveraged the way they are, it seems futile to expect bankers to behave. 

Credit Suisse has got singed on account of exposures to high-profile collapses. It lost $5.5 bn on account of its exposure to the disgraced fund, Archegos. And its clients have  $10 bn of their money trapped at a failed fund, Greensill Capital. 

An investigation carried out by law firm Paul, Weiss at the instance of Credit Suisse remarked that the bank's losses that the losses were the result of a "fundamental failure of management and controls" at the bank and a "lackadaisical approach to risk".

Makes you wonder. If this is the quality of risk management at the one of the best known names in the world of banking, what does it say about the efficiency of foreign banks? What does it tell us about the functioning of the boards of top institutions? Is corporate governance an illusion? Does it make sense at all to talk of foreign banks coming in and acquiring underperforming public sector banks in India? 

I leave it to you to ponder.

Saturday, April 09, 2022

IIMA logo controversy-II: autonomy and the IIM Act

IIMA and the two other leading IIMs have enjoyed considerable autonomy ever since they were set up. Nevertheless,  starting in the early 2000s, faculty and the director set up a clamour for more autonomy, especially financial autonomy. I have never been able to quite figure out what they wanted. I guess they wanted full freedom of pricing in respect of the various programmes. They may also have been keen to come out of the Pay Commission straitjacket for faculty pay.

In 2008, freedom of pricing was granted: the fee for PGP  was increased by more than 150 per cent (and without any consultation with faculty whatsoever). Yet, the clamour for autonomy did not die down. The community wanted to be free from any sort of government control.

I was a little sceptical about this demand myself. My suspicion was that more autonomy meant freedom for the director to do as he pleased without any checks on the part of the government. It would not translate into more faculty autonomy. I sensed that the faculty's position would worsen if we came out of the government fold in practice, even if legally we we remained a public institution.

Some time in 2015, Smriti Irani introduced a draft IIM Bill that introduced better checks into the IIM system - or at least that was my view. The then director, Ashish Nanda, and several faculty decided to oppose it.

I saw nothing wrong with the Bill and wrote an article in the Hindu saying so. I pointed out that the IITs had done quite well for themselves while being under government control and that the IIMs need not fear any undue government intrusion. To my surprise, my article drew a torrent of favourable responses on the faculty notice board. As I mentioned earlier, faculty had long demanded more autonomy. However, over the years they (a large section of faculty) had seen the drift of power away from themselves to the  director and the board over the past decade and had come around to my view !

The Ministry of Human Resources Development (MHRD) invited responses to the draft Bill. Nanda circulated a note that was highly critical of the draft Bill. It was  to be sent to the Ministry via the online link provided. I wrote to him saying that I disagreed with him. The question of greater autonomy, I said, had not been properly debated by faculty. I suggested that the matter be debated and a vote taken on the draft Bill. Only if the vote was in favour should his note be sent as the Institute's response, otherwise it should go strictly as his personal response. 

Nanda did not reply. He and the then Chairman, AM Naik, went on to hold a press conference where the Chairman denounced Irani for trying to reduce the IIMs to a post office of the government. Irani took umbrage and gave vent to her feelings in a TV interview.

The debate I had asked for never happened. Nanda (and a few other IIM directors) kept meeting with the government. In the meantime, it turned out that the PMO itself favoured much greater autonomy than Irani had contemplated. Irani was moved to another ministry and Prakash Javadekar took her place. Thereafter, in 2017, the IIM Act was enacted which took the autonomy of the IIMs to a higher level.

The point is that the views of IIM faculty were not factored into the drafting of the Act. The dialogue was between the government and a few IIM directors.

Once the Act was passed, the number of government nominees on the Board of Governors was reduced from four to two. These two nominees (one each of the central and state government) ceased to take interest in the proceedings, leaving it to the rest of the board to take all decisions. The other members on the board are representatives of industry, alumni and two faculty of the Institute. 

Everybody knows what the 'board' anywhere is, even in the corporate world. It is basically the CEO. The CEO comes up with proposals which boards duly approve, except where there is a serious crisis in an organisation. Now, this is the case even in the corporate world where boards are subject to company law, securities regulations, exchange regulations, investor scrutiny, etc. The majority of boards are dysfunctional and ineffectual, which is why we keep going on and on about corporate governance.

In the IIM context, boards are not subject to any of the checks mentioned above. Nor is the government now acting as a check. The result is that autonomy has, in effect, become untrammelled freedom for the director. This is the case even at the leading IIMs. One can well imagine the situation at the lesser IIMs.   

This has been going on for some five years now since the IIM Act was passed.  Within six months of taking over as director, Nanda proposed that the iconic Louis Kahn structures (including faculty and staff residences) be demolished. He wanted faculty and staff to move into multi-storied structures to be built for them at one corner of the campus near the Azad Society gate. An exception would be made for the director himself- he would he housed in a newly constructed bungalow.

Faculty asked what would happen to the entire stretch between the Azad gate and the main building. Nanda said it would be a "green area'. We heard unofficially that the entire construction project would cost more than Rs 200 crore. Fortunately, the board did not favour the idea. Many of us wondered why the construction of new buildings would be a priority for a director who was said to have come on a two year sabbatical from Harvard. We had supposed that institution-building was more about institution than building. 

In 2020, the present director and the board revived the proposal. The staff residences near Azad gate were demolished. Two ugly, multi-storied structures are under construction. The director wanted to do away with the student dorms as well except for a few outer ones. The main building structures would remain. There was an outcry not just in India but abroad. Several petitions were sent to the Chairman.  That stopped the board in its tracks. 

The point is not that existing structures can never be replaced by new ones. But the case for doing so has to be properly made. Can the existing structures not be renovated using current technology? What are the relative costs of renovation and new construction? Alas, such a case was not made. The project was sought to be rushed through under a cloak of secrecy.  

Now, we have the logo controversy. I have written about it in my earlier post.  The issue is the same: why are these decisions being taken without proper consultation with all stakeholders?

The answer is that greater autonomy has meant poor oversight and no checks on the director. That is why we are now seeing a faculty revolt at IIMA. The government needs to understand this. The situation cannot be rectified by merely arriving at a compromise on this issue. We need to step back and examine where the IIM Act went wrong. 

I am afraid the situation cannot be set right without government intervention and a re-look at key provisions of the IIM Act. 

I have written about it in my column, Time to revisit the IIM Act,  in BS. The article is reproduced below for those who don't have access to the website.

Time to revisit the IIM Act

The government must jettison its hands-off attitude towards the IIMs and address the governance deficit

T T Ram Mohan

There has been turbulence at IIM Ahmedabad (IIMA) in recent weeks. Almost half the faculty are upset with changes in the logo announced by the director and have written to the chairman of the Board of Governors. Faculty members have also raised issues of governance, including violations of long-established norms.  

Other IIMs have not been free from trouble. At IIM Calcutta, there was a breakdown in communications between the previous director and the faculty in 2021. The matter was resolved only by the departure of the director before her term ended. At IIM Rohtak, the board gave a second term to the present director even as a controversy attending his first term remains unresolved. One could go on. There is a case for reviewing the experience with the IIM Act of 2017, and making the necessary course corrections.

IIMA is the premier management institution and has historically had the best governance amongst the IIMs. It is worth taking a closer look at IIMA following the IIM Act and deriving the necessary lessons for governance in the IIM system.

The issue at IIMA is not merely the changes to the logo. It is also the process followed in doing so. The director got two logos approved by the board and then informed the faculty about the change. It doesn’t seem to have occurred to the board to ask: What does the faculty think?

That hurts. IIMA has long prided itself on being a faculty-governed institution where key decisions — admissions, placement, course syllabi, recruitment of faculty, etc. — are taken by the faculty. That is its uniqueness and the secret of its success.

Over the years, faculty governance has got eroded and decision-making has moved from the faculty to the board. A pivotal moment came in 2008 when the institute announced a more than 100 per cent increase in the fee for its post-graduate programme. The faculty were informed about about the biggest increase in fee in IIMA’s history after the board had approved it.

Several issues agitating the faculty have remained unresolved. One that has figured in the current controversy is the appointment of two faculty members to the board. The noble intent was that the two members would act as a bridge between the faculty and the board. At IIMC and IIMB, the faculty elects its representatives to the board. At IIMA, the director selects them.  As a result, faculty members on the board at IIMA are not spokespersons for the faculty body.  Another contentious issue is the absence of norms for the appointment of Dean, a post one rung below the director. 

The IIM Act has given a fillip to the erosion of faculty governance at IIMA.  The leading IIMs had enjoyed considerable autonomy even before the IIM Act. The Act gave formal shape to such autonomy and enhanced it by leaving the appointment of the chairman and the director to the board. 

The crucial change that has come about after the IIM Act is that the government decided not to influence the working of the IIMs. The central government and the state government have one representative each on the boards. These nominees play a passive role where they used to be active. Earlier, faculty could expect the government to intervene if the chairman was unresponsive. Now, they have little recourse. 

The IIM Act says that the board is accountable to the government. It requires IIM boards to evaluate the performance of the institute once every three years through an independent agency, submit an action taken report to the government and place the report in the public domain. A visit to the websites of IIMA and IIMC fails to elicit any such report.  At IIMB, an external review is said to be nearing completion. The Ministry of Education must immediately ascertain how many IIM boards are compliant with the relevant provisions of the IIM Act.   

In the US, the boards of higher education institutions are filled with large donors who have enormous stakes in those institutions. Competition among the leading schools is fierce. Both these factors make for accountability. If a school’s ranking drops sharply, heads will roll because the boards care. 

In India, the leading IIMs do not have meaningful competition. Board members come and go and have virtually no stake in the IIMs. It is futile to expect IIM boards, as they are constituted today, to enforce accountability or provide redress.  

We thus have a serious governance deficit in the IIM system. There is no meaningful accountability of the director or the board. The governance deficit needs to be addressed. 

First, the government must jettison its hands-off attitude towards the IIMs. Until such time as a regulator for higher education is created, the government will be required to play the role of umpire at the IIMs. 

The IIM Act must be amended to revert to the earlier position of four government nominees, two each from the central and state government. These nominees need not be from the Ministry of Education. The government may appoint qualified persons to represent it in the same way it appoints independent directors at public sector enterprises.  Once the government nominees start playing an active role, comatose boards will spring to life.

Secondly, the government must constitute an IIM Advisory Board (IAB) that is tasked with commissioning an independent performance audit of each IIM every three years as required under the Act. It makes no sense to ask the boards to commission the audit because the boards themselves need to be evaluated.  The IAB may also be asked to propose chairmen and directors for the lesser IIMs and, if thought necessary, for the leading IIMs as well. Its role would be similar to that of the Banks Board Bureau for public sector banks. 

Thirdly, the IIM Act must be amended to ensure that faculty members on the board are chosen by the faculty and not by the director.

Fourthly, the government nominees on the board must insist on clearly defined criteria for important posts such as those of Dean, membership of the board and membership of the Committee that evaluates faculty. 

The IIMs are public institutions that owe their autonomous status to the generosity of the government. It would be tragic if the formidable brand equity of the IIMs were to be squandered for want of accountability in the system.