Monday, June 29, 2009

Of awards and encomiums

Trying to work out which banks are the world's best is a bit like awarding the prize for the prettiest war-torn village. It is a title that carries little kudos. It is also likey to prompt further shelling. Winners of industry awards in the past three years include Ken Lewis, the chief executive of Bank of America for banker of the year (2008); Societe Generale for its risk management; and Angelo Mozilo of Countrywide, a failed mortage lender, for a "life-time of achievement"
- The Economist (May 23)

I am reminded of a terrific quote from Martin Wolf, FT''s economic pundit, "Those whom the gods wish to destroy, they first put on the covers of business magazines".

But why blame business chambers and the media alone for idolising the wrong guys? Remember the best-selling book by McKinsey gurus, Peters and Waterman, In search of Excellence, that identified companies that had got it all right? Within a few years of the book's coming out, many of the famous names in the book that had been held up as role models were in trouble.

Alan Greenspan was hailed as the ultimate central banker and was the subject of more than one gushing biography. Today, he's among those held primarily responsible for the global crisis.

Moral: Be careful whom you lavish praise on, be it a company or an individual.

Saturday, June 27, 2009

Slavery- fresh links

Rothschild, the British investment bank, and Freshfields, a top law firm in the UK, are the latest prominent names to be linked to slavery through archival research, FT reports.

Determining Britain's links to slavery is important because it's not entirely true that innovation and the industrial revolution drove British and western growth and caused them to surge ahead of the rest of the world, including China and India. Slavery, with all its underlying brutality, was a factor although how much of a factor it was is contentious.

FT quotes a Britsh academic as saying, "“We need to fill the gaps between those who deny slavery’s role and those who believe Britain was built entirely on the blood of slaves. "

A book based on updated research is required methinks.

Wednesday, June 24, 2009

Conflicts of interest in academia

I wrote earlier about b-schools and their alleged role in the crisis. One complaint about b-schools is that they don't inculcate the right values in their wards- I have made it clear this is not something I take seriously. Another is that the ideas that came out b-schools are flawed- the glamourisation of financial innovation, the myth of market efficiency and so on. But these ideas didn't emanate from b-schools alone, you might fault the economics profession at large, including the famous Chicago school.

Devesh Kapur, writing in FT, has a more interesting view. He says that academics have developed a vested interest in pushing certain ideas- and suppressing others- because they stand to gain financially in the process. In other words, academic research is susceptible to considerations of pecuniary gain, just as doctors' prescriptions in the US and elsewhere are driven by gifts of various kinds, including stock options in pharma companies.

Many academics, particularly those from institutions that enjoy high prestige and reputation, now have serious business interests and an array of financial ties to the very institutions that their studies address. These interests range from lucrative speaking fees, advisory roles at financial institutions, managerial roles and stakes in private equity and hedge funds to corporate non-executive directorships.

.....There would be little chance of being invited to give a lucrative talk at Citicorp if one were in favour of sovereign debt forgiveness in the 1980s, against capital account liberalisation in the 1990s or against stock options in the 2000s..

...In recent years, the biological sciences have moved considerably to ensure greater transparency where there are potential conflicts of interest between research and financial remuneration, providing mechanisms for whistle-blowers to report conflicts of interest. Regrettably, these requirements are extremely weak in the social sciences and business schools.
There is something to what Kapur is saying. I am not sure, though, that industry and other links influence academic research in economics and business but they certainly seem to influence academics' positions on various issues of public policy, especially in so far as they impact on business.

For instance, there has been much comment about the huge fees earned from financial institutions by Larry Summers, an influential figure in the present Obama administration, and whether these are impacting on the administration's approach to solving the crisis. Academics who take positions that threaten the interests of corporates certainly stand to lose out on consulting and other sources of income and may even be denied visibility in TV and other media.

There is a more serious problem with academics sitting on boards and this has to do with governance more than research. As we saw in the Satyam episode, academics are not above using their board positions to earn consulting fees. There are other instances where academics sitting on boards have wheedled training programs out of the companies. This introduces serious conflicts of interest. Sebi must impose a ban on independent board members earning any kind of consulting income from companies with which they are associated.

Friday, June 19, 2009

Addressing the too big to fail problem

In my last post, I highlighted that central banks and regulators have begun to focus on this issue with renewed interest.

In its Financial Stability Report, the Swiss National Bank suggests three ways in which this problem can be addressed:

There are three basic strategies for resolving, or at least alleviating, the ‘too big to fail’ problem. First, one can impose very strict capital and liquidity regulations on systemically important financial institutions. This can reduce both the likelihood of government assistance being required and the cost of such an intervention. Moreover, strict capital requirements reduce moral hazard, by forcing banks to themselves bear more of the risk of losses, and also reduce the banks’ incentive to inflate their balance sheets. ...

Second, one can adapt the legal framework and the financial market infrastructure to simplify, or make possible,an orderly wind-down of large financial institutions during periods of severe crisis.
Third, one can directly tackle the cause of the ‘toobig to fail’ problem by limiting the size of financial institutions. One could consider direct size restrictions, forinstance by imposing a maximum market share or balancesheet-to-GDP ratio, or indirect incentives – as mentioned
above – such as increasingly strict capital requirements for big banks.

Banks- too big to manage?

Governments the world over have rescued banks that are too big to fail- Citibank and Bank of America in the US, RBS and Lloyd's in UK. One fall out is that regulators and central banks are actively contemplating measures to prevent banks from growing beyond a certain size, FT reports.

This is what the incoming head of the Swiss National Bank has to say:
“A size restriction would of course be a major intervention in an institution’s corporate strategy,” Hildebrand, the central bank’s current vice-chairman, observed with masterful understatement. “Naturally the SNB is aware that there are advantages to size. [But] in the case of the large international banks, the empirical evidence would seem to suggest that these institutions have long exceeded the size needed to make full use of these advantages.”
But what would be that size? How do you operrationalise this concept? I haven't seen any concrete ideas on this. I guess one parameter could be the recapitalisation cost as a percentage of GDP in the event the bank fails. But this only leads on to another question: what percentage of GDP? There cannot be an absolute limit across all countries. Much would depend on an economy's fiscal situation. An economy where the fiscal situation is good could afford a failure that costs, say, 15% of GDP. Another- like India's- may not be able to afford even 5% of GDP.

But this creates a piquant situation. Larger economies can afford bigger banks. So can well managed economies. In other words, the size of the economy and the fiscal situation become determinants of competitive advantage based on size.

Should we worry? I don't think so. Because beyond a point, size ceases to confer any big advantage and, in fact, becomes a problem. In India, I would say that any bank with a balance sheet of around Rs 150-200,000 crore has the requisite size to take on competition. For the regulator, the problem is: too big to fail. For bank managers, the focus should be: too big to manage.

That's why I am not enthused by talk of SBI merging with all its associate banks. Is SBI getting the most out of its current size? Does it have the necessary depth and breadth of management at its current size? If not, HRD and systems should be focus, not simply getting bigger.

Thursday, June 11, 2009

B schools and the global crisis

This may seem a bit surprising but B-schools have emerged, in popular perception, as among the culprits in the present economic crisis. People think managers are to blame. Some of the high-profile managers in the crisis- Hank Paulson, former US Treasury Secretary, Christopher Cox, former Chairman of the SEC, John Thain and Stan O'Neal- are all HBS products. The conclusion drawn is that B-schools bear some responsibility for the crisis. Whether this is true and what needs to be done is the subject of my ET column, Crisis:are B-schools to blame?

Surprisingly, this view finds acceptance among b-school academics themselves. FT is running a debate on the subject and so is the Harvard Business Review. I must confess I find much of the discussion lacking in substance.

Let us grant that irresponsible managers have had a role to play in the crisis. Partly, this was a matter of bad judgement; partly, it was greed or lack of regard for the stakeholders in a business. Where do B-schools come in? You could say B-school research failed to pick up the warning signs of the crisis. But so did economic research outside B-schools. As for the greed factor, it is not confined to managers but is rampant in every walk of life- law, medicine, accounting, etc. Amongst greedy or corrupt managers, managers with MBAs are a tiny subset.

So, what can B-schools do in terms of revising their curricula? Well, there is a huge debate going on about the relative roles of state and market and, no doubt, B-school research will focus on this and weave findings from this research into revamped curricula. This is fine. The thing that disturbs me is the suggestion that B-schools also have a role in inculcating superior attitudes or ethical values in their students. HBS's contribution is to get their graduating MBAs to take a pledge or oath of ethics!

B-schools have responded to talk of their role in the present economic crisis with courses on ethics and leadership. No problem with that. But, one has to be sceptical about what to expect. To those who wish to create the New Man, I wish luck. I doubt that B-schools can contribute much. There are primary and secondary schools that were set up by saintly figures and began with similar, lofty goals but whose products are indistinguishable from those produced by ordinary schools.

Don't get me wrong.There is a hell of lot that B-schools need to do by way of updating their curricula and make it more relevant. But improving the ethics of their wards is not something that falls within B-schools' core competence. At the risk of offending people, I would suggest that there is a certain presumptousness involved in setting such goals. I mean, who's going to impart ethics to B-school faculty?

Sunday, June 07, 2009

TN medical college expose

A TV channel catches the Deputy Registrar of a medical college in Tamil Nadu asking for capitation fee on camera. The HRD ministry, duly outraged, sets up an enquiry. The UGC also jumps in with its own probe. The minister, who is said to be chairman of the board of trustees of the college, dissociates himself from the medical college.

I don't know how one is supposed to react. It's good to have this sort of thing exposed but is it news to anybody? Two facts have been public knowledge for quite some time- and thousands of families who have paid through their nose can testify to these.

i. Hundreds of private engineering and medical colleges in TN, Karnataka, Maharashtra and other places offer admission on the basis of large capitation fees.
ii. Many of these institutions have been promoted by politicians.

I recall a secretary at our Institute telling me how her husband had to fly down to Chennai with around Rs 3 lakh in a suitcase in order to secure admission for her child in an engineering college there. I wondered how the suitcase had passed scrutiny at the airport- didn't the security people ask about such a large amount of currency being transported around?

Capitation fee flourishes despite the Supreme Court ban on it. The government and the quasi-regulatory bodies in education have been mute spectators thus far. (It was interesting to read in the papers that a court actually described the Medical Council of India as "den of thieves". Former minister Anbumani Ramadoss confessed that he had failed to clean up the MCI inspite of trying).
The new UPA government has education reforms high on its agenda. Tackling the menace of capitation fee and donations in various forms must be a priority in education. They render education inaccessible, of course, but they also breed corruption, with doctors and engineers coming out of these places focused on getting the quickest return on the huge investment they have made.

Saturday, June 06, 2009

Downgrade in Indo US relations

President Obama's unequivocal endorsement of the two-state solution of the Palestinian problem and his criticism of continued Israeli settlements in the occupied region were undoubtedly high points of his speech and they have rightly attracted attention. For us in India, another point is equally compelling: his suggestion that Israel must be drawn into the NPT before long. If the US is unwilling to make an exception in the case of its staunchest ally, we must wonder where that leaves the Indo-US nuclear deal and the special dispensation it creates for India.

Expect Obama to focus on the NPT as well as the fissile material cut-off treaty. The signs are clear enough: the Obama administration does not attach quite the same importance to India as a 'strategic partner' as President Bush did. Chances are we will be pushed back into sub-continental status with a possible re-hyphenation with Pakistan. Earlier, Hilary Clinton's visit to China signalled that the US sees China as its principal partner in the conduct of international affairs, a view that appears to be getting reinforced with Treasury secretary Tim Geithner's recent visit to China.

The signals coming out from US moves in Pakistan reinforce this view. Relative silence on the release of Saeez Hafeez; a massive aid package for Pakistan in order to reinforce its war against the Taliban; Pakistan upping the ante on Kashmir. The unkindest cut of all: the US state department advisory to American nationals against travelling to India.

In his election speeches, Obama had made references to Kashmir that were not exactly music to our ears. It does appear that he sees the resolution of the Kashmir issue as an important item in his agenda, next only to the Palestinian problem, although he chose to omit any reference to Kashmir in his Cairo speech. The signs are that the US is willing to allow Pakistan to bring Kashmir to the top of the table in return on Pakistani cooperation on Afghanistan and the Taliban.

This must inevitably mean more firing across the LOC and greater infiltration into Kashmir and into India generally in the coming months. This may sound terribly grim but the US advisory does seem to point to an increase in terrorist activity in India in the months ahead. We have been patting ourselves on the back on the improved domestic outlook with the installation of the a stable government at the centre. Not to spoil the party, but it appears the domestic pluses may come to be outweighed by the minuses on the external front.

Friday, June 05, 2009

Anniversary of Tiananmen

The twentieth anniversary of the Tiananmen massacre- and massacre it was, of that there is little doubt- has been marked by ritual on both the western and Chinese sides. Western commentators want Beijing to allow more democracy and they also want the communist regime to come clean on what happened. China has responded with a clampdown- on BBC yesterday, I saw their Beijing correspondent being politely but firmly being shooed away from the Square by Chinese cops.

What has been the outcome of Tiananmen? China is incomparably stronger and more powerful today than it was 20 years ago. But has the communist party maintained its brutal ways and refused to learn? Not really, suggests the newly started Banyan column in the Economist (which is devoted to matters Asian). It responded to the movement in appropriate ways:

It is a commonplace that the party’s legitimacy is built on economic growth. Yet China’s leaders have long considered that to be merely the (simplistic) half of it. After the massacre, the Communist Party set about transforming itself. It launched a vast historical investigation into how political parties fall, and how they stay in power. Everyone was scrutinised, from Saddam Hussein to Scandinavian social democrats. The conclusion: adapt or die.

The outcome is a wholesale reinvention of the party, a process accelerated after Mr Hu stepped up as paramount leader in 2004. Shortcomings that were identified included corruption (a chief complaint of the Tiananmen students), lack of accountability in decision-making, no convincing ideology, and an ossified structure.

..Bright technocrats and entrepreneurs have been recruited. Retirement rules have been revamped (the Soviet Union’s gerontocracy was noted). Party members have gone back to school: three weeks a year and three months for every three years of mid-career training. More appointments are open to peer scrutiny before they are filled. The Communist Party is vastly more able to govern

......This is little comfort to Westerners projecting their hopes for democratic change on to China. Nor is there any sign that Chinese intellectuals identify with the myriad grievances of their poor countrymen, as they did during the Tiananmen protests. And the growing middle class appears more fearful of the great unwashed than of the depredations of a party that once was at war with the bourgeoisie.
FT's China expert, James Kynge provides a slightly different perspective. He questions the very characterisation of the Tiananmen protests as being "pro-democracy". The reality, as always, was more nuanced, more complicated, he suggests:

Almost everything fell within its (the movement's) scope: campaigns against corruption, nepotism, inflation, police brutality, bureaucracy, official privilege, media censorship, human rights abuses, cramped student dormitories and the smothering of democratic urges. But to say the demonstrations were to “demand democracy” is an oversimplification.

The truth is that the students in the square had only the haziest understanding of western-style democracy. To the extent that the protests were directed at abuses of an existing system by an emerging elite, they were motivated more by outrage at the betrayal of socialist ideals than by aspirations for a new system.
In other words, the protesters were asking for reform, better governance, an improvement in the quality of their lives. They were not necessarily asking for more democracy. It appears from the Economist's interpretation that the communist party got the message and responded appropriately.

When the western world pushes for democracy, what it means is the right to vote in a multi-party system. But, if a monolithic party can make itself responsive to people's needs, it can contain disaffection. It appears the communist party has managed this. The world's understanding of Tiananmen and what followed, its continued focus on "human rights" in China and prognostications about the inevitable collapse of communism there, may thus be badly flawed

Wednesday, June 03, 2009

Agony of Afghanistan

Khaled Hosseini's novel, A thousand splendid suns, richly deserves the accolades it has received. Hosseini is an Afghan, now settled in the US. He gives us a glimpse of the grim struggle for existence that is the stuff of daily life in Afghanistan - or was at the time when the mujahideen were trying to drive out the Russians, when the mujahideen fought amonst themselves for control and, later, when the country came under the control of the Taliban.

The novel' s special contribution is its focus on the plight of women. It deals with the lives of two women, Miriam and Laila, thrown together by reason of having got married to an ageing (in Miriam's case) and aged (in Laila's case) tailor, Rasheed. Miriam is the illegitimate child of a wealthy businessman in the city of Herat. Her father keeps her mother, a cook, and Miriam at a distance. When Miriam's mother dies, her stepmothers get her married off to Rasheed who is from Kabul. Miriam is in her teens and Rasheed in his forties.

Laila's misfortune is even worse. Her family is killed in the shelling of Kabul and she's badly wounded herself. She's nursed back to health by Rasheed and Miriam until Miriam understands the motivation behind Rasheed's concern- he wants to acquire Laila as a second wife. Rasheed is in his sixties then and Laila in her teens.

The novel deals with the humdrum existence of the trio and the two children they have (one is Laila's through her teenaged lover before her life fell apart). It's a grim struggle for existence, unrelieved by anything joyful (except the two children). There is nothing the two women can expect by way of caring from Rasheed. The only reason they have to stay with him- and endure his taunts and his endless beatings- is that there is no way they can survive otherwise. What awaits them outside Rasheed's humble house is even worse. It is a tribute to Hosseini's craftsmanship that he's able to sustain the reader's interest in this colourless existence.

As you read through the novel, you begin to wonder whether there is anything left but despair and wretchedness, whether there is any salvation at all for these two helpless, yet cheerful women, whether such a life is worth living at all. Finally, salvation arrives in the only way it possibly could......the reader is left at once happy and saddened at the outcomes.

Hosseini gives us an idea of what life under the Taliban is like- no music, no TV, no education or jobs for women, women can't even go out unescorted, nothing to life other than what purports to be the pure Islamic way of life. Taliban rule is a return to some barbaric past, except that even in that past, one would like to believe, things were not as bad.

You may have your reservations about America's posture towards Islam in general, its attitude towards Palestinians and Iran, about the so-called clash of civilisations. But, when it comes to the Taliban, there is no room for doubt as to the rationale for the US and its allies waging war against them. A Taliban take over of Pakistan is the ultimate nightmare for that unfortunate country, for India and for the rest of the world.

Tuesday, June 02, 2009

Indian bashing in Australia

Is the Indian media overdoing the incidence of racial attacks in Australia? There is something about the sheer power of repetition on TV, the same visuals being played by different channels throughout the day and for days together. I tell you, the effect can be inflammatory.

I have no means of knowing what the situation on the ground is. Most cities, including New York and London, have their share of lumpen elements who will bash up or rob anybody who looks vulnerable. Indians must appear as soft targets because of their build but that doesn't quite explain why the Chinese are not similar targets. Colour must be a factor.

The question is how big is the racial issue in Australia. I was there in 2007, visiting Sydney and Canberra. I came back and declared that if there was one white country that was not hostile to brownies, it was Australia. It was friendliness all the way. Of course, these fleeting impressions can be deceptive and it's only when you live somewhere that you get a feel for the place.

But, I have found that the acid test is the immigration counter. There you can sense the hostility or the lack of it. For the first time in my visit to a white country, I encountered a very warm welcome. Very different from what you would experience in, say, New York where, at immigration, every South Asian is presumed to be a terrorist unless proved otherwise.

Another test is the country's airlines. Both on Quantas and the domestic airlines, I experienced a total lack of hostility. Again, these could be misleading. Or it may be well be that the changed economic environment has caused a certain souring of moods.

Budget and reforms

Another budget will be upon us in a month or so. One of my secret fantasies is to flee town and head for some place that lacks TV around budget day. Then, I will be spared the cacophony that erupts at budget time.

Budget time is big money for the media. They create the hoopla around the budget and profit immensely from it. Live budgetary analysis is not terribly educative. You can't react to any of the numbers put out by the FM until you have had a chance to put them on a spread sheet and compare like with like in the previous year. But before people have had a chance to do that, instant wisdom will have been delivered on TV. So heavy is the overkill that informed analysis that comes a few days later in newspapers or journals is lost on the public.

Well, anyway, now that another budget is on its way, the clamour for "reforms" has begun. The argument is that the government could not push ahead with "reforms" the last time thanks to the benighted Left but now there are "no more excuses". Sorry to play spoilsport, but it appears those who clamour thus haven't read the Congress manifesto. It is reformist to my mind but the reforms it talks about are not the ones that pro-market enthusiasts have in mind- cuts in subsidies, labour market reforms, privatisation, financial sector reforms, FDI etc.

The Congress appears to have learnt from the defeat of the BJP and the lesson will have been reinforced by its own performance this time- "reforms" that the media and the business community clamour for are not vote-catching propositions. My guess is that those who are talking up the stock markets in anticipation of "big bang" reforms are in for a disappointment.

More on this in my last column, Redefining the reform agenda.