Friday, September 30, 2011

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.

Thursday, September 15, 2011

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.

Thursday, September 01, 2011

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.