Saturday, May 21, 2022

Gerhard Schroeder: How free is the Western world?

Just how much freedom is there today in the West? We know that after 9/11, many governments, including those in the US and the UK, armed themselves with sweeping powers to take away an individual's freedom on suspicion of links with terrorism. There is very little recourse in such cases.

But leaving aside restrictions linked to terrorism, just how much freedom of expression do people have even otherwise? You may not be jailed for certain things but the social and economic costs of veering from the mainstream or establishment line can be pretty steep.

A classic illustration is the hounding of Gerhard Schroeder, former Chancellor of Germany, no less. Schroeder is a friend of Putin's and he has refused to join the strident condemnation of Putin in his country from Russia's actions in Ukraine. Schroeder is certainly open to criticism for his position. But we are seeing is a lot worse. 

Schroeder was Chairman of the supervisory board of Rosneft, the Russian oil company, and Chairman of the shareholders' committee  of the Nord Stream gas pipeline projects. Schroeder came under pressure to quit these positions after the Russian operation in Ukraine. When he refused, he lost access to his office at the Bundestag. Next, the EU parliament drafted a resolution extending sanctions to individuals sitting on the boards of Russian companies. Schroeder has now decided to quit the two boards. 

Schroeder has also faced a storm of outrage consequent to the alleged atrocities in Bucha caused by Russia, he told an interviewer that the incident would have to be investigated, a perfectly reasonable stand to take! It is just not possible to have a legitimate disagreement on some matters in the supposedly free societies of the West. If this is the plight of a former Chancellor of Germany, just imagine what dissenters in, say, the media or academic would have to face.

India has come in for severe criticism in the Western media in recent years for displays of intolerance of dissent. Without in any way justifying acts of intolerance in India, it is time to tell the West: Physician, heal thyself.

Friday, May 20, 2022

Loophole in Places of Worship Act 1991?

The Places of Worship Act 1991 has been in the news. Very simply, it is Act of Parliament whereby the religious character of any place of worship, as it existed in 1947, cannot be disturbed. An exception made to the Act was the dispute site in Ayodhya.

If that is so, how could  the mosque in Varanasi (Gyanvapi) come under challenge? Meaning, how could any court entertain a challenge? That is the stand of prominent Muslim groups. Since the character of the place cannot be changed due to the Act, where is the question of any court entertaining any petition related to the mosque?

I can't pretend to be a legal expert. From what I have read in the papers, it appears the Act has another exemption. It exempts places of worship that qualify as ancient monuments. So, if there is a Shivalinga inside the Gyanvapi mosque, as the Hindu petitioners in the case content, does it become an ancient monument so that the Act does not apply to this site? And if it does not, does that mean access to the site will have to divided between Muslims and Hindus? Or can the Hindus claim the site itself/

In the Ayodhya case, the Supreme Court decided the matter looking at the case as one of a land dispute. The party that could establish that it had had greater access to the land over the centuries won, namely, the Hindus. How would the Gyanvapi dispute be resolved if the petition of the Hindus is considered maintainable?

I await the wisdom of legal experts.

Wednesday, May 18, 2022

Can boards ever keep executive pay in check?

My answer is a blunt 'No'. Boards cannot get executive pay within reasonable bounds- they will almost always tend to err on the excess. 

The latest case in point is JP Morgan. Shareholders at the bank have voted against the pay package recommended by the board for six top executives at the bank, including CEO Jamie Dimon. The package amount to -umm...- only $ 201.8 mn. Dimon stands to get $50 mn from a one-time award. The shareholder vote on exec pay is non-binding in the US. But it does send out a strong signal. Boards may pretend to notice the signal but it is unlikely to change board behaviour a great deal.

The board has conveyed that it is giving a large one-time award to Dimon because it wants him around for many more years. Dimon is 65 and has been at the helm since 2005, that is, for 17 years. If the board thinks nobody in the world can replace Dimon, then it is confessing to a major failure: it has failed to find a successor. It is also acknowledging that JP Morgan's business is unsustainable- there is only one person who can run it.

How absurd! It is not that Dimon is irreplaceable. It is just that the board finds it expedient not to disturb the status quo. And one good reason for that might be that disturbing the status quo could be that any change would be annoying to the CEO.

Boards just can't get executive pay right any more than they can get succession planning right. There is a common reason for the two failings. Boards are in thrall to CEOs. Board members owe their appointments, in large measure, to the CEO and they owe their continuance in office to the CEO. (Forget the nonsense about the Nominations Committee of the board deciding board memberships. Few boards would induct a board member without a nod from the CEO. It would be rare for a board to turn down names proposed by the CEO himself.). And a board membership at the top firms in the world means something- the money is good and the prestige riding on a board position is not to be sniffed at.

I can only reiterate what I have said several times before: we need to change the way board members are appointed if we want serious board room reform. Board members must be appointed by multiple stakeholders- shareholders, banks, financial institutions, employees. Self-selecting boards are a recipe for dysfunction- and spiralling CEO pay, among other things. 

Monday, May 16, 2022

Narcisstic bosses: how does one deal with them?

An article in FT that uses Robert Maxwell, the newspaper baron (long deceased), as a model of a narcisstic boss has a short answer to the question pose above: find another job. But that, as it suggests, is easier said than done: we all have financial needs, so we can't chuck up a job at will.

Very true. But there is another problem as well. There is a high probability that the organisation you move to would also have its share of narcissistic bosses. And the higher you go, the greater the narcissism.

In a book I wrote in 2015, Rethinc: what's broke at today's corporations and how to fix it, I cited a study that showed that the proportion of psychopaths among CEOs was far above that in the general population. Psychopathic traits include things such as a lack of empathy, a tendency to manipulate others, etc. These are qualities one would also associate with narcissism. 

Success in the corporate world- and, perhaps, most walks of life (perhaps, with the exception of advanced research)- is won on the strength of such qualities. This may not sound very pleasant but the heights of success are not for the faint-hearted. It is through a certain disregard for scruple, ruthlessness and self-admiration that people rise. Narcissism breeds success which fuels more narcissim. At the very top, the individual begins to think he is infallible, so he has no patience for anything other than adulation and flattery. He certainly has no room for dissent.

When people go into meetings and stay silent, heartily endorse whatever the boss is saying or indulge in outright flattery, they recognise that these are the things that will help them survive and prosper. They understand they are dealing with a narcissist, if not a psychopath, and fall in line because the costs of not doing so are painfully high. There may be a few honourable exceptions but what I have described here is pretty much the norm.

What can we do about it? Get together will colleagues and take the matter to the board ? No way. There will not be any takers for the petition. And it's no use going to the board because the board too has its fair share of narcissists who will not be able to relate to things such as fairplay and justice.

In government, your job is protected and you can choose to forswear ambition and do your job in your little corner. Alas, in the private sector, there is little choice other than to grow a thick skin. Psychopathic bosses are the primary reason why organisations are so toxic and one reason those toiling in them nurse all kinds of ailments. 

If that sounds a trifle gloomy, please do let me know if you have better suggestions.

Friday, May 13, 2022

High inflation: could central banks have acted earlier?

Prices are surging everywhere. Central banks are being panned for not having acted early enough. In the US, the Fed is said to waited for too long before raising rates. In India, the RBI is being criticised for being dovish on inflation.

I beg to disagree. The sort of inflation that the Ukraine conflict has unleashed could not have been anticipated by central banks. 

The IMF has forecast inflation of  5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January, a month before Ukraine erupted. Nothing that central banks could have done would have altered the basic post-Ukraine inflation trajectory.  

In India, the RBI could have raised the policy rate in February, 2022. It could have signalled a less accommodative monetary policy. But these actions would not have made much of a difference to the inflation outlook.

I elaborate in my BS column, Blame Ukraine conflict, not central banks.




Blame Ukraine conflict, not central banks

The origins of the inflation shock the world is experiencing are primarily political, not economic or monetary


The global economy faces a combination of slowing growth and rising inflation in 2022. Many commentators ascribe it to the excesses, fiscal and monetary, of the past several years. They are wrong. The deceleration in growth and inflation of the magnitude we are seeing now are more on account of the conflict in Ukraine.  


To grasp this, you only need to look at forecasts before and after the Ukraine conflict that commenced in February 2022.


Let us take the growth forecasts first. The year 2022 was to have been the year of recovery for the world economy from the ravages of Covid-2 in 2021. In October 2021, the IMF’s World Economic Outlook (WEO) saw the world economy growing at 4.9 per cent. In its April 2022 issue of WEO, the IMF projects world economic growth at 3.6 per cent in 2022 or 1.3 percentage points below the October 2021 forecast. Note that the April forecast is 0.8 percentage points below the forecast of January 2022, a month before the Ukraine conflict erupted.  


So, yes, the world economy was slowing even before the conflict in Ukraine. Prices of commodities had started rising due to the recovery in the world economy. Central banks had started responding with an increase in interest rates and this was impacting private consumption and investment.


But Ukraine has greatly amplified the deceleration in growth. The sanctions against Russia have no precedent and have disrupted long-standing supply chains and trade linkages. Inflation, as we shall see, has received an enormous boost. Capital flight from emerging economies is putting pressure on exchange rates, giving central banks another reason to raise interest rates.


Increases in interest rates threaten to undermine government finances across economies. Western banks are poised to take a hit of around $10 billion on their exposures to Russia. Western corporates retreating from Russia face huge write-offs. There is, above all, uncertainty about the course of the war and the possibility of secondary sanctions against nations found to be violating sanctions imposed on Russia. All this will tell on growth. One cannot compare the slowdown projected prior to February 2022 with what faces us post-Ukraine.


The comparison of trends in inflation pre- and post-Ukraine is even more compelling.

 The World Bank’s Commodity Markets Outlook (April 2022) shows that between January 2020 and December 2021, that is, over 24 months, energy prices rose at a compounded annual rate of 22.4 per cent. In 2022, in just three months from January to March, energy prices rose by an additional 34 per cent! Non-energy commodity prices rose by an annual rate of 18 per cent over the previous two years. In the first three months of 2022, these rose by an additional 13 per cent.


As a result, the World Bank’s forecast for energy prices in April 2022 is 92 per cent higher than in October 2021. For non-energy commodities, the forecast is 49 per cent higher. The forecast for food prices is a good 57 per cent higher. The Ukraine conflict has caused prices to soar in a way that central banks could not have anticipated earlier.


It makes no sense to criticise governments for having boosted spending, first after the global financial crisis (GFC) of 2007, and then after the Covid crisis. Nor can central banks be faulted for policies aimed at supporting growth. These policies saved the global economy from collapse after the GFC. They were also successful in containing the damage from the Covid crisis, in particular, to vulnerable groups, such as the poor and small enterprises. 


Proponents of Modern Monetary Theory (MMT) contend that the only limit to government spending is inflation, not government’s capacity to repay borrowings through future taxes. Critics of MMT say that its advocates have seriously under-estimated the inflation risk to government spending. This is by no means obvious. It is more plausible that the fault lies, not in the economic policies of well over a decade, but in the stars of NATO. The inflation shock we are seeing is political in origin. It is primarily on account of the NATO’s opting for a head-on confrontation with Russia over the eastward expansion of NATO.


Commentators say central banks have been late in reacting to inflation. This is strictly hindsight. Our analysis above suggests that prior to Ukraine, the US Federal Reserve was justified in waiting to see if the supply disruptions caused by Covid had played out. It had grounds to believe that a series of 25 basis points increases in the policy rate would suffice to head off inflation. No central bank can anticipate the sort of supply shock that has emanated from Ukraine.


Similarly, the Reserve Bank of India (RBI) may not have erred in forecasting an inflation rate of 4.5 per cent for India in 2022-23 last February. The revision in the inflation forecast to 5.7 per cent that happened in April is strictly a post-Ukraine event.


At a forecast inflation rate of 4.5 per cent, the RBI had grounds for prioritising growth over inflation. As long as inflation is within the band of 6 per cent, it is appropriate to prioritise growth especially at a time when the growth rate has been below the trend rate. When the inflation forecast moves closer to 6 per cent, it is appropriate to prioritise inflation.


Those who say that the RBI should be fixated at all time on an inflation rate of 4 per cent forget that there was a question mark over the continuance of the present band mandated for the MPC. The argument was made that, in the interest of facilitating a higher growth rate, the target rate for inflation could be raised to 5 per cent plus or minus two per cent.


The government decided to stay with the present mandate, perhaps, because it thought that relaxing the monetary policy target at the same time as the fiscal deficit target was being continuously deferred would unsettle foreign investors. Against this background, the RBI cannot be faulted for its interpretation of the inflation mandate.


The outlook for both growth and inflation has changed dramatically as a result of a force majeure event, Ukraine. It makes little sense to fault demand management for the effects of an unprecedented supply shock.


Thursday, May 12, 2022

Credit Suisse woes: can banks be cured at all?

Can banks be cured of their penchant for taking excessive risk? Or is banking an ailment for which there is no cure?

The question is prompted by the astonishing confession of the Chairman of Credit Suisse, Axel Lehmann:

It has become clear that the challenges of the past were not solely attributable to isolated poor decisions or to individual decision makers,” he (Lehmann) told the Swiss lender’s shareholders. “Within the organisation as a whole, we have failed too often to anticipate material risks in good time in order to counter them proactively and to prevent them.

Well, if a bank can't anticipate material risks, what are its executives getting paid for? The problem, I suspect, is not lack of awareness of material risks. It is the way incentives operate in banking: heads I ( the bank manager) win, tails you (the shareholder) lose. If a banking bet goes hugely wrong, the shareholders and bondholders are left holding the can. The manager, at worse, will lose his job. He won't starve as a result: he will enough millions to live off for the rest of his life. As long as there are no penalties, including criminal penalties, for irresponsible decision-making and as long as banks are leveraged the way they are, it seems futile to expect bankers to behave. 

Credit Suisse has got singed on account of exposures to high-profile collapses. It lost $5.5 bn on account of its exposure to the disgraced fund, Archegos. And its clients have  $10 bn of their money trapped at a failed fund, Greensill Capital. 

An investigation carried out by law firm Paul, Weiss at the instance of Credit Suisse remarked that the bank's losses that the losses were the result of a "fundamental failure of management and controls" at the bank and a "lackadaisical approach to risk".

Makes you wonder. If this is the quality of risk management at the one of the best known names in the world of banking, what does it say about the efficiency of foreign banks? What does it tell us about the functioning of the boards of top institutions? Is corporate governance an illusion? Does it make sense at all to talk of foreign banks coming in and acquiring underperforming public sector banks in India? 

I leave it to you to ponder.