Friday, January 30, 2015

Management: awaiting the new paradigm

We have heard a great deal about the shift from the top-down model to a more decentralised one, the dismantling of hierarchy and the importance of self-driven teams. But very little of this is happening on the ground, as a report in the FT highlights. The astonishing thing is that the old, centralised model persists in the corporate world despite evidence that it's not producing results:

Returns are diminishing, while the number of listed companies has shrunk by more than half in 15 years. In that sense the fears seem justified: despite bulging coffers, quoted companies are investing too little and distributing too much in dividends and share buybacks to survive in the long term, let alone create the new products, markets and jobs economies require for sustainable growth.

What could be the reason? One is, of course, inertia and the power of the unknown. The other is that companies apparently don't know how to put in place the measures needed to make the team-driven model happen. The second is rubbish.There are plenty of models available on the new paradigm. It simply doesn't suit top management to make the shift. People at the top are concerned only about how to make their pile in the five or six years they are at the helm.They lack the motivation to worry about the long-term future of their companies.

What make bring about change? Not investor pressure because most investors too are focused only on the short-term. Real change can come about only from the NextGen crowd. Younger people don't want to be ordered around, they want challenge and fulfilment in their jobs and they need a sense of purpose. They will gravitate towards companies that provide these. Some of it is already happening. When more of the older model companies find they are losing their ability to perform, we can expect to see the present model of management being dismantled.

Thursday, January 15, 2015

India set to overtake China?

Optimism about the Indian economy is alive despite 2014-15 being largely washed out. We have commentators again talking of India overtaking China in the second half of the decade. They were saying so at the beginning of the decade as well. At that time, however, China was growing at over 8 per cent. What commentators meant then was that India would inch towards 9 or 10 per cent and thus overtake China.

Today, the overtaking, if it happens, will be at a different level. And it will happen later than commentators had predicted. Chinese growth is poised to fall below 7 per cent. The World Bank sees the Indian economy growing at 7 per cent - in 2017, a good two years later than forecast at the beginning of the decade.

Still, becoming the fastest growing economy in the world is no mean prize. Is the prize within reach? Most commentators would say - yes, if the government could push through "big ticket reforms". An article in today's FT makes this point:
Reforms aimed at boosting manufacturing or encouraging capital investment may prove tougher to implement at national level than they did when he was running Gujarat. Besides, some reforms, such as relaxing the rules on foreign ownership of insurance companies, may not prove to be the magic bullets that industry lobbyists claim. Second, and perhaps more fundamental, democratic India is still caught in an ideological battle over where to strike the balance between pursuit of growth and protection of the environment and land rights.  

This is the sort of thing we have been hearing for two decades now. Reforms didn't happen in UPA-I and growth soared to 9 per cent for at least a three year period, thanks to the global boom. I don't believe India's growth is contingent on the familiar set of "reforms". I think the Indian economy can hit 7 per cent if two things happen. First, banks need to be recapitalised. This, as readers of this blog would know by now, doesn't mean "big ticket" reforms in banking. It means a few simple things like reducing the government's stake to say, 52%, getting the right people into top management, strengthening boards and improving risk management.

Secondly, the world economy needs to get better. Will it be by 2017? All bets are off at the moment. But if the improvement did happen in the world economy, we have a good chance of being the fastest growing economy in the world in 2017.

Friday, January 09, 2015

Kotak- Ing Bank Vysya merger

Shareholders have reportedly approved the Ing Bank Vysya merger. Ing Vysya Bank unions are still seeking assurance that no jobs will be lost.

There are important lessons to be drawn from the merger. One, new private banks, not foreign banks, are the big winners in the post-reform period. Public sector bank share will continue to decline but the loss will be to new private banks, not so much to foreign banks. Two, branches are crucial to cost competitiveness and growth in Indian banking- no new private bank would like less than a 1000 branches. Thirdly, for public sector banks, the branch network needs to be larger as they must rely mainly in interest income to grow profit- their ability to generate fee income is not as good as that of private banks.

It follows that PSBs with less than, say, 2000 branches are vulnerable. We are better off selling of such PSBs instead of merging them with other PSBs- mergers in today's context will weaken stronger banks. More in my EPW article, Merger they wrote.

Tuesday, January 06, 2015

Gyan Sangam

I return to my blog after a long lay-off, thanks to a rather hectic schedule. I'm hoping I will be more regular in the New Year and hoping also that this does not go the way of most New Year resolutions.

Well, I was over in Pune for the Gyan Sangam, a conclave of bankers organised by the finance ministry. I was there as an external expert on one of the six working groups. McKinsey was the 'knowledge partner' for the event. They made a presentation to kick off the proceedings and there was a director who coordinated our group's discussions.

We met at around 4:00 pm and carried on till nearly 8:30 pm. After a break for dinner, the bankers in our group re-assembled to arrive at a consensus on the recommendations. This went on for another two hours. So, you see, this was not the usual talk shop.

Indeed, I was pleasantly surprised at how constructive and intense the discussions were. My group dealt with Risk Profiling and Recovery. After a few rounds of discussions, we were asked to put down on a sheet of paper actions that we wanted of bankers and actions we wanted of policy makers. The final recommendations emerged from the points written on these sheets. Even if a few of our recommendations get implemented, I believe they would make a sea change to risk management in public sector banks.

That said, I am awaiting clarity from the government on a couple of issues. First, does the government wish to retain the " public sector character" of banks (that is, a stake of 51 per cent or more) as the FM promised in his budget last year? Two, does the government expect PSBs to perform a social role or is it happy for them to pursue profit?

The second point is especially important as there was a lot of talk at the Sangam on the gap in performance that had opened up between private banks and PSBs. If PSBs could steer clear of, say, infrastructure and SMEs, the gap would begin to close. But will the government allow it? I doubt very much. In his speech, the PM exhorted banks to shun lazy banking and take more risks in lending. That doesn't sound like a focus on profit alone.

Leaving aside the details on a host of matters including risk management, the government needs to do two things: fix management and fix governance. Fixing management means getting the right people at the top through a rigorous selection process. It's a scandal that this has been neglected for decades now. One CMD mentioned at the meeting that his interview had last all of 12 minutes. It took a 12 minute interview to put a man in charge of some Rs 500,000 crore worth of assets. It's not just the politicians and bureaucrats who are to blame but also the RBI. The RBI governor is represented on the committee to appoint CMDs and EDs of PSBs.

We also need to end the game of musical chairs at PSBs. An ED at a middle size or big bank hops on to a small bank as CMD. He whiles away a couple of years with his eyes focused on a CMD position at a bigger bank. From Indian Overseas Bank, he might leap across to Bank of Baroda. What commitment can we expect of EDs and CMDs who don't expect to be in their jobs for more than a couple of years? What risk management is possible in such a dispensation? Enough of this. If the government is serious, it must insist on succession planning from within for the posts of ED and CMD except in rare cases. It's hard to see how a CMD can deliver performance without having gained an understanding of the culture, systems and processes of  bank over a period of time.

The next thing to do is to fix governance. The government's idea is to split the post of chairman and MD. This has the potential to create two power centres in a PSB. The chairman will exercise power without having any responsibility. The MD will have to get things done with a chairman who may engage in back-seat driving. We have to see how this goes- I have my doubts.

It's true the CMD is all-powerful in the present scheme of things. But the answer is not to split the post but to strengthen the boards with independent directors and also with well-training government and RBI directors. We need a proper selection process for independent directors- perhaps, these appointments are best done by an independent Appointments Committee.

The RBI needs to do its best for both management and governance. It must specify fixed terms for the CMD. And it must lay down stringent 'fit and proper' criteria for independent directors with the right to reject nominations that fail to meet these criteria.

I don't see thinking along these lines. At the Gyan Sangam, there was much talk about a Bank Investment Company, a holding company for all PSBs which was proposed by the P J Nayak committee. Such a holding company would be the ultimate nightmare. It would be unwise to entrust the entire set of 26 PSBs to any set of professionals, however eminent.

The government needs to make up its mind on PSB autonomy. If it wants PSBs to run autonomously, it can ensure that within the existing framework. By the same token, setting up a holding company does not ensure autonomy. Alas, there is no set of professionals, however eminent, that is not amenable to government influence. That's the reality of India today.