Saturday, October 31, 2009

Management gurus

The Schumpeter column of the Economist mentions three irritating habits of management gurus (the number is a sarcastic reference to these gurus' penchant for reducing all topics to a given number of 'easy steps'):
The first is presenting stale ideas as breathtaking breakthroughs. In a recent speech in London Mr (Stephen) Covey declared capitalism to be in the middle of a “paradigm shift” from industrial management (which treats people as things) to knowledge-age management (which tries to unleash creativity)......But management gurus have been making this point for decades. William Ouchi announced it in 1981 in the guise of “Theory Z”. Elton Mayo and Mary Parker Follet had made much the same point 60 years before. It makes you long for some out-of-the-box thinker who will argue that the future belongs to companies that are unfit for human beings (which it may well do).

The second irritating habit is that of naming model firms. Mr Covey littered his speech in London with references to companies he thinks are outstandingly well managed, including, bizarrely, General Motors’ Saturn division, which is going out of business. Tom Peters launched his career with “In Search of Excellence” in 1982. ...............Five years after “In Search of Excellence” appeared, a third of its ballyhooed companies were in trouble.

The third irritating habit is the flogging of management tools off the back of numbered lists or facile principles. .............But most of these rules are nothing more than wet fingers in the wind. Gurus preach the virtues of “core competences”. But in the developing world many highly diversified companies are sweeping all before them.

Which points to the most irritating thing of all about management gurus: that their failures only serve to stoke demand for their services.
The article also points out that one of the gurus' fecundity is not confined to the literary realm:
Mr Covey is working on nine other books, including one on how to end crime. He also presides over a business empire that is even more sprawling than his ever-growing family (he had 51 grandchildren as The Economist went to press)
My own view on management gurus is that there is only one original in the business and that is Peter Drucker. He said whatever needed to be said on the subject. The rest is elaboration, refinement or just plain repetition.

New paradigm for lending rates

Banks don't seem to get their pricing of loans right- and not just banks in India. In India, the RBI has had in place norms for computation of the BPLR since 2003. But this has given risen to several distortion: sub-prime lending is rife (70% of all loans), borrowers grumble about lack of transparency and lending rates rise quickly when policy rates rise but are sticky in the downward direction.

The RBI constituted a working group on BPLR last June, of which I was a member. The group submitted its report on October 20. I have brief exposition of our approach in my ET column.

Tuesday, October 27, 2009

Corporate suicides

France Telecom has had a rash of suicides, the Economist reports, 24 suicides since 2008. The reason? It is making the transition from state monopoly to MNC and at least new recruits don't enjoy job security.

The Economist notes that corporate suicides are an extreme expression of a pervasive problem: unhappiness at work. It provides some reasons:
The most obvious reason for the rise in unhappiness is the recession, which is destroying jobs at a startling rate and spreading anxiety throughout the workforce. But the recession is also highlighting longer-term problems.....A second source of misery is the drive to improve productivity, which is typically accompanied by an obsession with measuring performance....A more subtle problem lies in the mixed messages that companies send about loyalty and commitment. Many firms—particularly successful ones—demand extraordinary dedication from their employees. (Microsoft, according to an old joke, offers flexitime: “You can work any 18-hour shift that you want.”)
So, what can be done? More rights for workers, better HR, better communication... well, yes. The article also suggests that Europe's demographics - falling birth rates and caps on immigration- will strengthen employees' bargaining powers.

All this is fine. But, there is a simple fact that the article seems to overlook. People are unhappy in their jobs because they are doing things they don't really like. This is true not just of managers but of lawyers, doctors and other professionals. Society trains people to survive and be successful, not to pursue one's true vocation. In the performing arts, one often finds people supremely satisfied even though people are not financially well off.

So, of course, we need to improve the work culture and HR. But, the secret of happiness in one's job lies ultimately in doing what one enjoys doing.

Thursday, October 22, 2009

Regulating Goldman Sachs

John Gapper, writing in FT, makes three suggestions for regulating Goldman. One, hive off private equity and hedge fund from Goldman but allow market-making and investment banking activities to continue. Two, allow it to fail in future. Three, revert to the compensation structure Goldman had when it was a partnership- that is, 90% of all bonuses to be retained until retirement. Then, top managers cannot cash out even while placing the firm in jeopardy.

I think one and three are good suggestions although the difficulty with three is that it cannot be applied only to Goldman- you would need an industry-wide norm. It's the second that poses a problem. How do you regulate Goldman so that it is allowed to fail? I can't see any easy solution.

It's interesting, though, that Goldman today makes little money from proprietary trading- only 10% of revenues. The biggest money-spinner is market-making and, there, Goldman is not betting its own money. The basic principle that Gapper espouses is a sound one: there has to be some restriction on the scope of activities of firms that have the backing of taxpayer money in principle.

Wednesday, October 21, 2009

Mervyn King favours narrow banking

Bank of England Governor Mervyn King has added fuel to the debate on bank regulation by favouring the break up of banks so that deposit taking and payments are clearly separated from riskier trading and other activities, FT reports.

In doing so, King has taken a position opposite to that of the UK Treasury on the subject. One corollary of limiting the scope of banks' activities is that it will automatically make banks smaller and more manageable. My own view is that, since this approach may not be practical, it would be better to limit the size of banks.

The current thinking, especially in the US, is to focus on more stringent capital requirements for large banks so that there are disincentives for getting too big. I have argued this won't work- and King appears to be of the same view.

Thursday, October 15, 2009

More Goldman bashing

One rival Wall Street executive describes Goldman (with rueful admiration) as “a bunch of clever thugs”. He means that Goldman has been tough about seizing profitable opportunities even if that involves, for example, bidding for an asset against a former client.
The above from an FT article, the latest in Goldman-bashing. Goldman thinks it's free to do what it likes because it has returned the government capital of $10 bn infused last year. Not true, as the article points out. When it got capital, Goldman was an investment bank. Today, it is a bank. Goldman today is a high-risk institution gambling with people's money. That is not an internal problem of Goldman, it is a systemic issue.

Dealing with asset bubbles

Everybody now talks of 'macroprudential surveillance', which is monitoring systemic risks in order to prevent a major crisis. Is this feasible? Is it possible for central banks to meangingfully use financial stability as a goal in addition to price stability? The IMF's World Economic Outlook (October 2009) has an analytical survey. I comment on it in ET column, How to respond to asset bubbles.

The IMF's analysis suggests that having financial stability as an additional goal is not easy to implement. But the RBI has long had it as an objective. How come? Well, if you do have financial stability as a goal, then you are liable to intervene in a high growth phase even if that means sacrificing some growth. In other words, not intervening carries the risk of financial instability but intervening could mean losing out on growth. Advanced countries will tend towards the former because they can take occasional setbacks in their stride. Not so less developed countries- they don't mind sacrificing some growth but they just cannot afford financial instabilty.

In the near future, because nobody wants another major crisis, expect policy makers to intervene even while economists struggle to refine their understanding of what constitutes an asset bubble.

Wednesday, October 07, 2009

Significance of Kaminey

I haven't seen Kaminey (although I have seen the other film with which it is compared, Satya) but did the next best thing, which is to read a critique of it in EPW. Reading reviews is a very sensible way of sounding knowledgeable about movies without having to take the trouble of seeing them- I practise this technique very effectively with books as well.

The author sees Kaminey as marking a new trend in Bollywood- the celebration or even glorification of criminality:
Urban criminals, until the mid-1990s, were not glamorous figures in Hindi popular cinema, and only people led astray (as in Deewar 1975) became criminals. The film that changed this was perhaps Ram Gopal Varma’s Satya (1999). Satya appeared “realistic” but had a discourse interpretable in the context of the economic liberalisation initiated by P V Narasimha Rao and Manmohan Singh in 1991-92, which also marked the end of Nehruvian socialism. Law enforcement has been treated in different ways by Hindi cinema but Satya was the first film to treat the police as though they were no different from a private agency, made stronger by their indifference to the law.

......There are key dissimilarities between Satya and Kaminey and the chief among these is that while in Satya there was still a world outside the underworld, in Kaminey the underworld is the world and it would appear that everyone is somehow implicated in criminality.
In other words, the film takes the line that not only do you get away with flouting the law, it is almost a condition for success in the world. To do otherwise is to be pretty dumb. Only a complete disregard for law and scruple can produce success. It's painful, I guess, to see this portrayed but is the reality very different?

The author highlights the fact that the movie has been more successful in urban areas than elsewhere and that it has been better received in theEnglish media than in the language press. He interprets this to mean that its values are more reflective of those of the middle and upper classes than the lower classes. He links the decline in values to the way economic reforms have been pursued:
Even if one concedes that freeing the economy from the shackles of control was a good thing, it would have been appropriate at that point to strengthen enforcement in areas where intervention was still necessary. This, unfortunately, did not happen and India today is an enforcement nightmare. But it is apparently a nightmare that allows certain classes to dream.
What gets the author's goat is the portrayal of the law enforcement agencies:
The portrayal of the law in Kaminey is unprecedented in Indian cinema. The anti-narcotics squad functions as the handmaiden of drug-runners and when the police arrive at the final exchange, the criminals due to be “arrested” announce on the street their open offers to the men in khaki – 25% of the take increasing gradually to 33% – and thereby make the police waver. This is far more extreme than even Satya because policemen in Kaminey are only acting for themselves, and not even nominally engaged in enforcing the law.
Again, just a case of cinema mirroring life, uh? To those who think Bollywood is being a trifle too cynical, I would say this: Bollywood caught up with gangster politicians and the nexus between politics and crime long before the rest of the media did. It does seem to me that Vishal Bharadwaj, the director, has his finger on the pulse of reality.

Saturday, October 03, 2009

Backlash from bankers

I wrote in my ET column, cited in yesterday's post, that it would be difficult to push through regulation because of the power of banking lobbies.

Josef Ackermann, the Deutsche Bank head, has fired the first salvo, reports FT:

A deluge of financial regulations threatens to harm economic growth, one of the world’s top bankers said on Friday, in what appeared to be the start of a concerted fightback by the industry against feared regulatory overkill.

........There is a trade-off between maximising stability of banks and optimising growth of the real economy. That balance [should] not be forgotten,” Mr Ackermann told the Financial Times. He warned that the entire economy would “pay a high price” if regulation went too far.

.....He cited proposals to raise the quantity and quality of capital banks have to hold, alter the definitions of capital, add capital buffers for systemic firms, rainy-day provisions, liquidity requirements and “living wills” to apply in case of failure.

Mr Ackermann's main contention is that regulators must harmonise rules across the globe, otherwise the global financial system could fragment. True. But, national regulators cannot wait until agreement is reached on all matters. In some cases, they are bound to press ahead, depending on how pressing local needs are. We must hope that if some nations give the lead, that will force others to follow suit. Otherwise, we may have to wait forever for meangingful changes to emerge.

I am not very hopeful that there will be radical changes in regulation. As I have said before, we need a bigger crisis and wider social unrest for that to happen.

Friday, October 02, 2009

G-20 meet and proposed solutions

The G-20 has promised to get tough with banks. And the proposals are stronger than the ones talked about earlier. So far, so good. But is it good enough? No. Because higher capital, executive pay linked to risk and stiffer regulatory requirements for large banks will not stave off the next crisis, if only because the solutions that finally get implemented will not be tough enough.

We need better macroeconomic mangement. In other words, regulation must be supplemented by "macro-prudential" surveillance. More on this in my ET column, Tame the economy, not the banks