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.


Friday, April 08, 2022

IIMA logo controversy-I : symptom of a deeper malaise

IIMA announced a change in its over sixty-year logo recently. The director had told the faculty that the board had approved two logos, one that retained the original Sanskrit quote and another that did not retain it (and was intended for an international audience).

Faculty protested against the changes that had been made without consulting them. Here is one of the many media stories on the subject. The Institute then came out with an announcement. Here is a part of it:

The proposed logo continues the legacy of the original logo, retains the status line in Sanskrit (VidyaViniyogadVikasa) as in the original, the colour rendition has been improved, the fonts modernized, the 'jaali' inspired brand mark has been made more amenable to communication in digital media, and the brand name made more distinct. The proposed logo is to be released in June of this year after the annual vacation.

But the controversy has not died down. Current and retired faculty and alumni have mounted a campaign against any change in the logo. Some point out that leading universities in the world have retained their logos for centuries.

Like many of my colleagues, I find the new logos distasteful. But that's not the point. The point is that faculty are miffed over the fact that they were not consulted.

Those who know about IIMA would know that it what conceived as a 'faculty-governed' institution, that is, key decisions would be taken by the faculty. Legally, all powers vest with the board. The board delegates powers to the director. Successive directors have chosen to be guided by the faculty, in effect, sharing powers with faculty. This beautiful construct was the work of Vikram Sarabhai, the scientist, and Ravi Matthai, the first full-time director of IIMA. 

The idea that something as important as a change in the Institute logo can happen without any faculty input is revolting to anybody associated with IIMA.

The erosion in faculty governance is not sudden, it has happened over time and over the tenures of several directors. To me, a turning point was the fee increase of over 150 per cent in 2008. Faculty were told about the increase via email on Convocation day after the increase had been approved by the board. Some of us who had not checked our email got to know from the newspapers the next morning! No explanation was given for the stupendous increase in fee.

There is an interesting post-script to that episode. After the fee was announced to the public, it came up for 'approval' at a subsequent faculty meeting. Somebody asked what was there to approved since the board had already taken a decision on the matter and announced it to the world. One of the lackeys of the director chimed in to say that the approval sought was not for the fee itself but the components thereof- how much for the academic programme, how much for the hostel, mess, etc! So much for faculty governance.

Over time, the lack of consultation has extended to various matters. Centres have sprung up without faculty approval or discussion. Important appointments have happened in arbitrary ways. IIMA has, for years, followed the 'Nominations' process for appointments to administrative positions, such as Dean. The director would invite nominations from faculty. The idea was that the leadership would emerge from within instead of being imposed from above.

I have no idea how well it worked in the initial years. What I do know that, in recent years, it has been  nothing but a fraud perpetrated on faculty by successive directors. Faculty put in their nominations and the director sticks to his pre-meditated choices. In some cases, we came to know that the director had sounded out individuals for positions even before nominations were sought.

On one occasion, the director appointed a contemporary of his from IIMA at Visting Faculty for one year. A year later, the concerned area found the individual unsuitable for a permanent position. The Director then gave him a five year appointment as VF and proceeded to elevate him to the post of Dean (alumni), a  post just one rung below the Director. Evidently, none of the permanent and senior faculty qualified for the position.

There are three Deans at IIMA. Prior to the IIM Act, one of the Deans was eligible to officiate as Director when the incumbent stepped down and until a new director was appointed. So we could, in principle, have had someone who did not qualify or a permanent position presiding over the faculty of the Institute in his capacity as Officiating or Acting Director!

There is also a complete absence of norms for other appointments such as membership of the Faculty Development and Evaluation Committee and faculty membership of the Board of Governors. Earlier, many of these positions went by seniority- you had to be a full professor and one of the senior-most faculty would be chosen. All that has fallen by the wayside. Directors have made these appointments according to their whims and fancies.

The current turmoil at IIMA thus has deep roots. The logo issue is a symptom of a deeper malaise, the steady erosion of faculty governance and the shift in decision-making from the faculty to the board (in effect, the director). 

The sad part is that things have become worse after the IIM Act that has conferred greater autonomy on the IIMs. I will post separately on that subject. 

HDFC Bank-HDFC merger: euphoria is misplaced

After the initial spurt in stock prices after the announcement of the merger of the HDFC duo, prices have fallen back. There is a better appreciation of the realities.

Yes, the merger was required, more so by HDFC because of the obvious difficulties in sustaining earnings growth. But that doesn't mean that the new entity is going to produce fabulous returns. The chances are that returns of the merged entity will be lower than that of either entity before the merger. 

The issues are:

  • The statutory requirements that will apply to the liabilities of HDFC
  •  The difficulty in cross-selling deposits to HDFC customers
  •  The managerial challenges of merger, including managing a more complex entity than before
  • The problems with growing earnings on a larger base
  • The prospect that the competitive landscape will have changed by 2025 when the presumed benefits of the merger will start kicking in

I elaborate in my article in Bloomberg Quint.

For those who can't access it, here it is:

HDFC Bank-HDFC merger signals goodbye to the halcyon days

T T Ram Mohan

HDFC Bank reported a return on assets (RoA) of 2.3 per cent last quarter and earnings growth of over 18 per cent. These are numbers that should make analysts and investors salivate- internationally, even an RoA of 1.25 per cent is considered very good.

Yet, the price to book value ratio of HDFC Bank was just 2.3 before the recently announced merger with HDFC, way below the multiples that the bank commanded at lower returns. The stock has underperformed the index over the past year.

Why so? Clearly, investors did not think that HDFC Bank could sustain high earnings growth.  

One reason surely was the bank’s low exposure to home loans: these constitute only 11 per cent of HDFC Bank’s portfolio.  A reasonable share of home loans in the overall portfolio of a private bank would be 25 per cent. Post the merger, management expects home loans will constitute 33 per cent of the overall book.

Right since the bank’s inception, not being able to have adequate home loans in its book has been an issue for HDFC Bank. The bank had the distribution capability but could not have its own home loan book because that would mean competing with its parent.  This did not matter much in the initial years because there was enough scope to grow through other products.

A few years down the road, HDFC Bank entered into an arrangement whereby the bank would sell HDFC’s home loans for a fee. It would also have the right to acquire 70 per cent of the home loans it had distributed as mortgage-backed securities. These securities would have the yield of home loans minus a servicing charge for HDFC. This gave the bank a product with a decent margin. But it wasn’t quite the same thing as being able to finance home loans on its own.

Analysts could see this clearly. So they would keep asking Aditya Puri, the former CEO of HDFC Bank, when the bank would do the obvious thing, namely, merging with HDFC. If memory serves correctly, Mr Puri had to tell analysts that that was the one question he didn’t want to hear any more! Mr Puri told analysts that the merger would happen when the timing was right.

The timing was never right in Mr Puri’s time because there was no way that Mr Puri would settle for a position that was less than that of the CEO. It would have been difficult for the parent’s top brass to settle for less either. There is little doubt, therefore, that the personality issue came in the way of the logical thing for HDFC Bank, namely, merger. The argument that interest rates have declined, so the cost for HDFC of complying with statutory liquidity ratio requirements is less onerous is correct. But high interest rates were not the principal hurdle to the merger.

Now, Mr Puri is no longer at the helm at HDFC Bank. Keki Mistry, Vice Chairman of HDFC Renu Karnad, Managing Director are both in their late sixties. There is no difficulty in their making way for the relatively youthful CEO of HDFC Bank, Sashi Jagadishan.

Without its own home loans, growth in recent years at HDFC Bank has come from MSMEs and the unsecured book. These are high-yield products but risky. Home loans have a lower yield but serve the purpose of lowering overall portfolio risk. Investors would prefer a bank whose growth was driven by the latter.

For HDFC, the parent, there was no problem in sustaining growth in the loan book because the potential for home loan growth remains huge in India’s under-penetrated market. The problem was being able to sustain its current margins in the face of tighter regulations.

Non-banking finance companies (NBFCs) have the disadvantage of not having access to low cost savings and current accounts. They had advantages. A big one was not being encumbered by the liquidity and priority sector obligations that banks face.   This is what is called ‘regulatory arbitrage’.

In October 2021, the RBI moved towards bringing regulatory norms for the larger NBFCs broadly in line with those for banks. In particular, the liquidity requirements for larger NBFCs were made the same as for banks with effect from 2025. The RBI’s intent is clear: the larger NBFCs must convert into banks.

The larger the NBFC, the greater its dependence on bank borrowings. Large NBFCs are thus a source of systemic risk. Better, then, that they submit themselves to the tighter regulation that applies to banks. There was no way that HDFC could have kept growing without considerable pressure on its margins. The answer was to access the low-cost funds available to HDFC Bank.

Mergers are touted as great strategic coups. Markets fall for this line and respond by boosting the stock prices of the two entities involved after  a merger  announcement. This has happened with the HDFC Bank- HDFC merger. For that reason, CEOs love mergers.

The prosaic truth is that mergers are confessions of failure: the failure to grow earnings on an organic basis. As our analysis shows, the HDFC Bank- HDFC merger is no exception.

Mergers are expected to reward investors through synergies and cost savings.  Alas, a large proportion of mergers- in some sectors and economies, the majority- fail, that is they failed to enhance the combined shareholder value of the two erstwhile entities. That is because the supposed benefits are overwhelmed by the complexity of the  larger entity. Every merger thus represents the triumph of hope over experience- every CEO hopes that his adventure will belong to the successful minority.

What of the HDFC Bank-HDFC merger? The two entities belong to the same family. HDFC’s employees are a small fraction of that of the bank but there is still the task of integrating the senior management of HDFC and resolving issues of who reports to whom.

Analysts talk of the benefits of scale. But these economies kick in at a much lower scale than that of the behemoth that will be created in the present merger. Beyond a certain scale, there is little to be gained.

Then, there is the potential for cross-sell. HDFC Bank can certainly push home loans in a bigger way to its customer base than before. Selling deposits of HDFC Bank to HDFC’s customer base is a more challenging proposition. HDFC’s customers would have their own banking relationships and switching from one bank to another is not easy. Had it been easy, HDFC could have  sold the bank’s deposit products all these years and collected a fee from the bank.

The merger is to be completed in 2024. The presumed benefits will happen in the years thereafter. The banking landscape then is unlikely to be the same. The newly consolidated public sector banks will have got to their acts together by then and may pose stiffer competition on both the liabilities and the asset side. Some of the NBFCs promoted by industrial houses may get the nod to convert into banks. Who knows what other changes are in store? The gains of the merger are thus subject to considerable uncertainty.

What is certain is the negative impact, post-merger, of the SLR and priority lending requirements against HDFC’s deposits. The returns of the enlarged HDFC Bank will fall as a result.  It Is not clear whether the RBI will allow HDFC Bank to directly hold the numerous subsidiaries of the merged entity. If the RBI insists on a holding company structure, that again will impose costs and returns will fall.

In sum, the merger is the answer to slower earnings growth faced by the two entities. We will have a giant that can be expected to do better than either entity would have done sans the merger. However, it is unlikely that the glorious past of either entity can be recaptured on a much larger base.  It does appear that the halcyon days of the HDFC duo  are over.

(Disclosure: The author is on the board of directors of IndusInd Bank Ltd.