Housing India's urban poor

India's urban poor live overwhelmingly in slums- this is true of half of Mumbai's population. How do we provide housing for them? One answer is low cost housing provided by government, as in Singapore, Hong Kong and other places. Not feasible, alas: government lacks the resources or the ability to get this done. Another answer: hand over slum land to developers on condition that they earmark a portion of low-cost housing. This was tried in Dharavi. The housing that got built is of poor quality. Besides, many of the projects are caught up in lawsuits.

A report in the FT suggests a third way. Allow the poor themselves to upgrade through innovative construction:

Some experts, dismayed at the slow progress and disappointing results of more grandiose government redevelopment plans, believe these informal slum upgrade schemes could form the basis for a longer-term plan to help India’s more than 170m slum dwellers.......   “The best option may be for the government to focus on providing the basic trunk infrastructure of water, sanitation and so on, and then let the people themselves invest in upgrading their own houses,” says Ashish Karamchandani, head of the Mumbai office for Monitor Inclusive Markets, a consultancy that has spent a number of years researching low-cost housing markets in India.

 Is this indeed the way to go? Well, it cannot be that individuals do whatever they like. There has to be a process of approval for any construction. That would immediately involve the municipal bureaucracy and the concomitant hurdles. Typically, what happens is that people build as they please and then pay up to legalise the construction. The trick may be to set up local associations comprising the community, one or two NGOs and municipal representatives. These associations can bring about upgradation in a planned manner. Whatever works is worth trying.

 

India's new growth paradigm

That's the title of my latest ET column. I sum up my thesis as follows:

This may sound wildly optimistic but it is possible that India is moving towards a new growth paradigm. The fiscal deficit will remain at a higher level on the average than in 2004-08. Inflation will be above the comfort zone of 4-5%. We will not have a global boom along the lines we saw earlier. And yet, growth of the order of 8-9% will be achievable thanks to a high investment rate.

Goodbye fiscal consolidation but is it a big deal?

To me, one of the most striking figures in the latest Budget is in in the medium term fiscal policy framework statement that accompanies the Budget. It shows the target for the fiscal deficit for 2014-15 at 3.9% compared with the Thirteenth Finance Commission target of 3%, which is the level prescribed by the FRBM Act. This means that the government will not meet the FRBM target even by 2014-15! And it will exceed the target by a full 100 basis points.

The debate on whether the target for 5.1% for 2012-12 is realisable is secondary. My guess is that it this is unlikely even if the revenue targets are met unless the Food Security Act is not going to happen in a hurry. I say this because no explicit provision has been made for the Act. We have to assume that the when the FM says that subsidies will be capped at under 2%, he is talking of the present subsidies, not new ones.

Since fiscal consolidation will not happen, we cannot expect inflation to come down below the RBI's 5% comfort zone of 5% in the near future. In other words, we are stuck with both high levels of fiscal deficit and inflation.

Is this a big deal? Not in terms of debt sustainability. The Finance Commission target of 45% for the centre's debt to GDP ratio by 2014-15 will be almost met in 2012-13. One of the big dangers with rising fiscal deficits is that it may lead to the government not being able to borrow any further. This is clearly not a danger for us.

Will it hurt growth? Well, I suppose so. But this does not mean that growth will not accelerate. Savings and investment will keep rising thanks to private saving, so growth will inch forward. It's just that we won't get back to 9% growth as quickly we might have otherwise.

The optimistic view before the sub-prime crisis was that, having touched 9% growth, we must aim for 10% by the end of the Five year Plan starting 2012-13. Now, it appears that we will move from 7% to 8-9% in the same time horizon. That doesn't strike me as a big disaster. So what are all the media pundits ranting about?

On quitting Goldman Sachs

A senior executive of Goldman Sachs has gone public with his decision to quit the firm by writing an article in the New York Times on the subject:

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

There is no end, it seems, to the public bashing of the investment bank. Wonder how Goldman will respond, if at all.

(Thanks to Sidharth Sinha for the pointer)

Fiscal correction will be slow in coming

All eyes are on the fiscal deficit number in the coming budget. There is a sense that we are on the brink of a fiscal crisis and the acid test for the FM is whether he can contain and reverse it. This is being unduly alarmistic. India's debt to GDP ratio for the centre and the states together of under 70% looks good in comparison with what we see in the advanced world today. Secondly, the states' record in improving the fiscal position has gone unheralded.

As for the centre, other things remaining constant, growth, the tax reforms on the cards (DRC, GST, extension of service tax) and disinvestment should by themselves push the deficit down close to the FRBM target of 3%. If this will not happen now (as it did in 2004-08) it is because the UPA has major spending schemes on its agenda, covering food, healthcare and education.

Most people say that if the fiscal deficit is brought down, it will release savings for investment and growth. Curb the deficit and you get on to a higher growth path. This is largely true. The government's decision to emphasise social sector schemes does entail a conscious decision to settle for a lower growth rate in order to promote equity. But that is a political decision- to settle for 8% rather than 9% growth in the medium term. If it is politically unacceptable, the people will say so in the next elections.

More in my ET column, UPA defines a new trade-off

Dysfunctional boards

Most people tend to think of corporate boards (including the executive team) as repositories of wisdom, maturity, balance, rational behaviour and what not. The people who sit on it are achievers, they understand business, they know how to take decisions. Shareholders must trust these wise men and women.

I have always been more than mildly sceptical about this elevated notion about people at the top. I am glad now to see it corroborated by FT columnist Luke Johnson. Johnson argues that boards are, in fact, riven by intrigue and manoeuvre - and concern for the company and its shareholders is often the last thing on the minds of people at the top:

Boardrooms are overwhelmingly populated by men aged 45 to 60. By this age, most of the players have worked out that more money doesn’t bring happiness; time is taking its toll; maybe the striving and sacrifices weren’t really worth it; and the participants tend to become more acutely aware of their mortality, shortcomings and missed opportunities. Regrets and anger can become the dominant emotions, as optimism and hope gradually diminish.Thus the boardroom can end up resembling a psychiatric ward. Motivations diverge violently, and maintaining a rational sense of purpose can become impossible.

Johnson suggests that the cure of boardroom dysfunction is to have adequate diversity on boards. I would go further. The answer, really, is wider dispersal of power. If you want companies to do better, undermine the role of boards and CEOs and spread power all across the company. Any takers?

China lowers growth target for 2012

China is targeting a growth rate of 7.5% for 2012, the lowest in eight years. This is an economy that had grown at 10% not long ago. So, it's not clear why there is so much breast-beating in India over the decline in our own growth rate from 9% to around 7%.

The international environment has turned adverse. This affects emerging markets in two ways: exports and financial flows.China gets more hit in respect of the former because it's an export-oriented economy. India is, perhaps, more severely impacted on the second  count. The short point is that the primary factor in the decline in the growth rate is the external environment and not what's going on within the country- or what commentators like to call 'policy paralysis'.

To my mind, talk of 'policy paralysis' or the absence of reforms limiting growth is overdone. As C Rangarajan, Chairman of the PM's Economic Advisoru Council, has pointed out, the present policy regime can support growth of 8-9%- provided the international environment is normal. How to achieve 9% in the face of adverse international conditions is the challenge now- and this can't be addressed in the short-run. It requires concerted action on several fronts over a longish period.

Wall Street Journal book review

The Wall Street Journal has just carried a review of my book on Ravi Matthai-IIMA.

Publishing in top journals

Indian academics are being exhorted these days to publish in top journals, many of them US-based. That's how you build knowledge, become thought leaders, we are told. Now, however true this may be for the pure sciences, one has always had reservations about applying this philosophy to b-schools. B-schools teach management, which is the application of knowledge, preferably, to the local context. How arcane research can contribute to this objective has always been an issue.

It is refreshing, therefore, to come across a different point of view being urged by Britain's universities minister, David Willetts. Andrew Hill, writing in his blog in the FT, quotes Willetts as saying that publishing in US peer-reviewed journals mostly involves analysing US data- and Willetts can't see how that will help the UK. He also faults the 'rarefied and recherche' nature of much management research. So, we come back to very basic - and still unanswered questions. What is meaningful research at b-schools? What relative weights do we accord to teaching and research in b-schools?

The sooner India's leading b-schools find answers to these questions, the better. It should not be that they recast incentives in favour of publishing abroad only to find themselves of diminishing relevance in their own environment.

Gloom on Indian economy overdone?

With GDP growth dropping to 6.1% in the last quarter, the chorus of doomsaying about the Indian economy has grown louder. Many commentators think that 2012-13 will be worse. I am not so sure. Among the sectors responsible for the slide are mining and electricity generation. Coal mining is poised to look up in the coming months thanks to initiatives in the public sector; electricity generation has suffered for want of coal and this too is likely to be remedied to a large extent. These two improvements alone should lift the industry growth index in the year ahead.

That apart, there are several positives that should impact positively on investor sentiment in the coming year. The biggest, perhaps, is the defusion of the Eurozone crisis - at least for now. Then, FII flows have returned, disinvestment is poised to get a boost, FDI is doing well, and the government is no longer preoccupied with the Anna Hazare movement. The PM's Economic Advisory Council has forecast growth of 7.5-8% in 2012-13. It does not appear unrealistic.

More in my ET column, No, it's not a downward spiral.

Companies without managers?

Can we have companies without managers, including top management? Sounds unthinkable. But one such company, Morning Star, is the subject of a cover story by Gary Hamel in a recent issue of HBR. The idea is not as crazy as it sounds. There has been a general movement toward flatter companies. Morning Star carries the process to its logical extreme. We have very flat organisations in academia; investment banks have a few layers; manufacturing tends to be more layered. Morning Star is a manufacturing company that has abolished layers. The company works entirely through self-directed mission statements and objectives and peer reviews.And it has delivered performance for several years now.

Can we extend this to larger organisations? Will it work for complex operations such as aircraft manufacturing? Hamel answers in the affirmative. My point would be that it is not necessary to replicate Morning Star in full. It is the underlying principle that is important: abandon the notion that decision-making is the privilege of a few at the top and involve more people in decision-making. A Brazilian firm, Semco, has done that. It does have managers but the managers are evaluated by their subordinates!

I have long wondered how it is that while  more and more societies have tended to embrace democracy, the most democratic societies have corporations where a few people call the shots. Is there anything more to it that managerial vested interest?

More in my ET column, Managing without managers.

America's universities turn to the market

In a recent book, Creating the Market University, Elizabeth Popp Berman argues that America's universities have move towards creating new products themselves instead of merely producing knowledge that helps create products. The move towards the market, she contends, is driven, not by the need for funds or even by ideology, but by the shared interest among university and political leaders to retain America's edge in innovation.

I read the book with interest but find that the case is not fully made. It does appear that there is more applied research than before. This helps augment university finances and it makes faculty richer, so it's win-win for both. But I doubt that this involves any shift in focus from theoretical to applied research- the book does not document such a shift with figures.

My guess is that younger faculty, on their way to tenure, would still be resolutely focused on publications. More senior faculty, with their reputations to back them, would get into commercial ventures. In other words, tenured faculty may have found new and more lucrative ways of making money but this would not compromise the universities' basic mission of producing knowledge.

More in my ET column, Universities as growth engines.

Larry Summers on remaking higher education

Very little has changed in the pedagogy or contents of higher education for decades or even centuries. It's still the teacher facing students and trying to impart something. Larry Summers, former president of Harvard (among other things), proposes ways in which this might change. Here is a summary:

1. Education will be more about how to process and use information and less about imparting it.

2. An inevitable consequence of the knowledge explosion is that tasks will be carried out with far more collaboration.
 
3. New technologies will profoundly alter the way knowledge is conveyed.

 4. More focus on active learning compared to passive learning.

5. Mastering  a foreign language  will be less important (for American students) since English is becoming more widely used.

6. Greater focus on data analysis.

(Thanks to colleague Shailendra Mehta for sending me the link).

Ex- RBS chief loses knighthood

You could call it British PM David Cameron's concession to populism. Former RBS chief Fred Goodwin is to be stripped of his knighthood on account of the losses inflicted on it towards the end of his tenure. FT reports:

The man knighted in 2004 for his “services to banking” presided over a breakneck acquisition spree that ultimately led to the collapse of RBS in 2008; he then courted further controversy by initially refusing to give back any of his £16.9m pension pot.....his tenure ended with RBS recording a loss of £24bn – the largest in British corporate history – and being forced into the world’s biggest bank bail-out, with the injection of £45bn of government equity.

 Goodwin has not been convicted for any wrongdoing nor has he invited any regulatory action. But he has become something of a lightning rod for anger against bankers, not least because of his failure to express any sort of regret in public. 

Is the anger against bankers itself overdone? Schumpeter hints this might be so and points to the good things one associates with bankers:

Great financial centres have often been great artistic centres—from Florence in the Renaissance to Amsterdam in the 17th century to London and New York today. Countries that have chased away the moneylenders have been artistic deserts. Where would New York’s SoHo be without Wall Street? Or the great American universities without the flow of gold into their coffers?

 Well, yes. But the man in the street does think that there is something wrong with bankers wrecking the world economy and walking away with huge bonuses. Banking needs drastic changes. If demonising bankers is the only way to get them to embrace change, it's hard to complain about the current rage against the likes of Goodwin. 

Basel 3 and Indian banks

Under Basel 2, international banks were said to be at an advantage: they could lower their capital requirements through the use of advanced models. This, it was feared, would widen the gap between rich country banks and emerging market banks. In my view, Basel 3 holds out the promise that some emerging market banks, including those in India, can turn the tables on their rich country counterparts.

Basel 3 requires banks to hold more capital. That won't be easy for rich country banks, given that growth prospects are dim in the medium term and markets are under stress. They will do what they are already doing, namely, meet capital norms by shrinking their balance sheets. In contrast, banks in India and some other emerging markets can hope to raise capital on the strength of high loan growth and attractive returns to assets. They should be able to marry higher capital adequacy with growth- and, in the process, narrow the difference in market capitalisation over the next five years or so. Thus, under Basel 3, capital promises to be a source of competitive advantage- for some emerging market banks.

More in my ET column, Indian banks' capital edge.

World Bank paints a grim picture

The World Bank's latest Global Economic Prospects paints a grim picture of the world economy, FT reports.  It rightly sees the Eurozone crisis as being contained, not resolved. It allows for the possibility of the crisis getting out of hand in 2012. And it makes clear that emerging markets will be hit hard by any financial crisis centred on the Eurozone.

Emerging markets growth is projected at 5.4% in 2012, down from 6% in 2011. If the Eurozone erupts, it could shave 4.2% of growth off emerging markets. One of the channels through which emerging markets will be impacted is deleveraging of banks in high-income countries. Emerging markets in which these banks operate in a big way could see foreign subsidiaries being sold off or a sharp reduction in wholesale funding. Indeed, this is one argument against an enlarged foreign bank presence in India.

Mercifully, India is not among the 30 emerging markets with large funding requirements that would be hit hard.

Businessmen are overdoing the gloom

The prime minister and the finance minister did some plain-speaking with businessmen a few weeks ago about the economic climate in the country- how businessmen were creating a strong sense of negativity all round with their comments on 'policy paralysis' and its impact on the economy.

I thought even then that their plain-speaking was warranted. I am even more convinced after studying the figures on foreign capital flows. It is simply not true that foreign capital is shunning India. On the other hand, there is reason to believe that the long-term trends in flows are extremely positive, no matter that FIIs may have fled for the moment. I think the trends in FDI are particularly heartening, notably, the fact that FDI in the post-crisis period has been higher than in the India Shining period.

More in my ET column, Foreign money still pouring in.

How RBS failed

Royal Bank of Scotland was among the notable failures in the sub-prime crisis. The UK's FSA has published a comprehensive report on the failure. The acquisition of ABN Amro was an important cause as was the bank's dependence on wholesale market funding, and its plunge into certain risky assets. The report lists other factors as well. I was drawn to the analysis of the governance issues in the report, whether there were any conspicuous failures on the part of the board.

It turns out that there were none for which legal action can be taken against the board. The acquisition of ABN Amro, being a hostile acquisition, was not done with the necessary diligence but it had the board's approval. I read the section on governance carefully, and I find that the only thing the FSA can pin on the board is that it did not question or challenge the CEO strongly enough on this and other issues.

If that is a failure, then the vast majority of boards would be guilty of it. Those who talk of the board challenging or opposing the CEO have no clue about the culture that permeates boardrooms. In this culture, any sort of serious questioning of the CEO is a no-no. It is a very cheery, backslapping culture in which nobody makes wrong noises. If we want bank boards or any board to be more active and more questioning, we need to revisit the issue of independent directors and bring in people who are not appointed by management. Then, we may get a vestige of independence on the board. Today's independent directors can only collect their fee and commission and enjoy their lunch and drinks. Bank boards can't prevent bank failure, only stringent regulation can. More in my ET column, Boards and bank failure. 

The Telegraph carries an investigative report on the RBS failure. 

India's growth outlook

I present an optimistic view of growth prospects in my ET column, It can't be worse than 2009. This was before the latest figures showing a deceleration in IIP came out.

Why we need to retain AFSPA in Kashmir

The Armed Forces Special Powers Act has come under fire from human rights groups in Kashmir. A letter to the editor in Business Standard has a hilarious take on why it is still required.

McKinsey introspects

FT carries a detailed piece on the impact of the Rajat Gupta insider trading case on McKinsey, the firm that Gupta headed for three successive terms of three years each. The narrative is interesting but it does not enlighten us on what McKinsey might have done to prevent such a thing or whether there was anything at all in the way it functions that might give rise to such problems.

McKinsey executives ask,"Why didn't we pick up on it?" Well, is there any way you can? Is there any means of spotting potentially dangerous persons? Maybe one can keep an eye on traders in investment banks but very often these are the ones who actions get overlooked- they are stars, you see.

McKinsey has a rigorous process for screening people for higher levels of responsibility, it is not wanting in culture or training. Any firm is occasionally bound to have people who behave badly (and, most importantly, the allegations against Gupta relate to a period after he left McKinsey). The article suggests that values get compromised in times of runaway growth and it suggests that McKinsey would like to be careful in its pace of growth in the years to come. That would ensure that systems don't come under strain. But can firm policies really impact on the values and actions of individuals?

No systemic risk in Indian banking

Bank stocks have been hammered quite a bit in recent weeks, with SBI leading the lot. This was preceded by Moody's downgrades of SBI and the banking sector as a whole. You might think Indian banking is in a bit of trouble. You couldn't be more wrong. Going through the RBI's latest Trend and Progress in Banking, I was struck by how sound most of the indicators are. I was especially by the rise in the Net Interest Margin, a key driver of profitability, in 2010-11 and the fact that overall return on assets has gone past 1%. Don't be carried away by talk of mounting NPAs. We should NPAs to rise in the present environment but there is nothing to indicate that the NPA level will become unmanageable.

More in my ET column, Indian banks in good shape.

Ratan Tata successor

Just a few quick responses to the choice of Cyrus Mistry as Ratan Tata's successor. One, it is quite a surprise- I don't recall Mistry's name ever having been mentioned. Not the best advertisement for the Indian media's reporting skills. Two, the appointment has been welcomed widely and even applauded by a few. Not much is known about Mistry's managerial abilities although it has been noted that he has been on the board of Tata Sons for a few years now. But the fact that he is an insider and close to the Tata family, if not part of it, has gone down well.

This is most interesting since several professionals, including high-profile names from abroad, had been mentioned as possible successors. I believe the reception accorded to Mistry is a measure of how perceptions about family management and professional management have changed in India over the past couple of decades. No longer are family businesses seen as inferior to those run by professionals; if anything, a certain distrust of professionals has crept in.

Those are the positives. In the many reports on the succession, I see lack of experience, especially lack of international exposure, being cited as negatives. But much the same could have been said against Mr Tata when he took over. Mr Tata's own lack of international experience did not come in the way of his making huge bets in terms of the Rover and Corus acquisitions. His general lack of experience did not keep him from venturing into cars.

The most essential requirement for Mr Tata's successor is maintaining the Tata group's reputation for aligning business with social purpose (admittedly frayed in recent years) and the enormous goodwill it enjoys with the Indian public.  A second requirement is consolidating diverse businesses. A third is keeping the group's competitive edge in what can only be more demanding times ahead. As an insider, Mr Mistry is well placed to take care of the first. Whether he is up to the second and third requirements only time will tell. All one can say he has that he has cut its teeth in his family business that ranges over real estate, construction, infrastructure and allied sector- not really a game for soft guys. Mr Tata has picked several able CEOs for his many businesses, so it would be fair to expect that his choice of successor would have been carefully thought through.

Mr Mistry is seen in the newspapers today in an unbuttoned shirt and rolled up sleeves and is reported as having showed up at Bombay House in a not very fancy car. It does appear the young man has made the right beginning.

HDFC Bank is no 1

It's no 1 in market cap, not asset size, ET reports.  That is quite an achievement considering that it is only one sixth the size of SBI. HDFC Bank's performance vindicates one of the themes I have consistently propounded over the years, namely, that asset size is not crucial to performance and, therefore, the quest for consolidation in India's commercial banks is misplaced (although there is a case for it in the cooperative banking sector). HDFC Bank did not turn into a stellar performer recently; it was among the best performers in Indian banking when it had an asset size of Rs 50,000 crore. It had one of the highest net interest margins in the business while having only around 300-400 branches. It has delivered profit growth of 30% every quarter for years now.

HDFC Bank is representative in many ways of what might be called the 'Indian banking model. In this model you stick to the basics: retail deposits, managing credit risk, staying away from fancy structured products and concentrating on the home market. Do a good job of this and you will be in the front rank of international banks as the Indian economy booms for another 10 years or so. If a bank is attempting something else, one needs to be wary. Why would you attempt something fancy when the simple works- as in the case of HDFC Bank?

Do we need to separate investment banking from banking?

Is the era of the financial conglomerate coming to an end? In the US, the Volcker Rule will go into law soon. Under the rule, commercial banks cannot indulge in proprietary trading or hedge funds. In the UK, the Vickers Commission proposes a ring-fence around the core banking activities. The intention is to separate out the casino part of the bank from the essential banking activities.

Some recent events provide an impetus to such moves, the collapse of MF Global and, earlier, the $2 bn that UBS lost on account of a rogue trader. But there are significant costs to reducing the scope of banks- the Vickers Commission has tried to quantify these for the UK. I am not sure whether reducing banks to utilities is the right answer. We saw in the recent crisis that highly focused banks also went under- Northern Rock, for example. Banks have significant externalities on account of size. Between reducing the scope and reducing the size, I would plump for the latter.

More in my ET column, When banks turn casinos.

Investment bankers reign supreme

The financial sector is always a work-in-progress- it is forever being remade. One big change is the disappearance of many merchant banks and brokerages- Warburg, Smith Newcourt, Morgan Grenfell, Kleinworth Benson- and, more recently, investment banks themselves. In the US, three of the top three investment banks disappeared in the 2007 crisis- Merrill Lynch, Bear Stearns and Lehman Brothers. The biggest, Goldman Sachs, had to convert itself into a bank.

Whatever the fate of investment banks, investment bankers today reign supreme, as John Kay points out in an article in the FT. The banks may have swallowed the investment bankers but it was the investment bankers who got the upper hand over commercial bankers:

In 2011, the chief executives of three of Britain’s four large banks, like their counterparts at Citigroup, Deutsche and UBS, are men who have built their careers in investment banking. When António Horta-Osório of Lloyds returns to health, it will be four out of four. When the titans of global finance today exchange reminiscences, only one man has different stories to tell: Brian Moynihan of Bank of America, who was in charge of consumer and small business banking before he assumed the post of chief executive. 

Kay says that investment bankers had to grab control as they felt suffocated in the conservative culture of retail banks. This does not explain why this happened.Well, it was a matter of who brought in the moolah. Investment banking divisions contributed significantly to profits, often the biggest chunk, as at Deutsche. He who pays the piper calls the tune. If it is investment bankers who help keep shareholders happy, they are bound to be in the drivers' seat. What this has done to the culture of the traditional bank is worth exploring. The more interesting question now is what happens if regulation in the US and the UK goes through and investment banking activities are demarcated from core banking activities.

In defence of Rajat Gupta

ET carries an article asking that Rajat Gupta not be denigrated for whatever lapses he may have committed. The article carries the names of Analjit Singh, chairman of Max India group, Pramath Sinha, who was among those who ran ISB in the initial years, Savitha Mahajan, deputy dean of ISB, and Vijay Mahajan, the microfinance entrepreneur. They write:

Our intention is not to defend , or offer a view on charges levelled against him. But we find it unfair and unacceptable that as a people, we should negate all the past good that a man has done and suddenly discover that we always knew that he was a 'rogue' , and 'deserves' this fall from grace. We find it sad that wise, grown-up people should, in full public view, behave like five-year olds, who would clap their hands and mock one from among their group who has tripped and fallen......We all have our weaknesses, but, on balance, some people compensate for theirs and still make a huge impact on the world and people around them. Rajat is one such person.

It is for the court to judge whether Gupta committed any offences. And I agree with the authors that if he did commit some, that would not take away from his significant contributions, such as the founding of the ISB and the Public Health Foundation in India.

However, it would be incorrect to suggest that such contributions would somehow 'compensate' for misdemeanours. If one accepts that, one would have to excuse corporate and other misconduct because people at the level do make contributions to society at large; it would mean that if somebody indulged in philanthropy, for instance, that would excuse his breaking the laws of the land. One cannot grant that. All one can say is that that the misdemeanours, in Gupta's instance, may not by themselves warrant the sort of outrage that has been expressed.

Somehow, there is a suggestion in all this that Gupta's behaviour is something of an aberration, that people at the top have superior standards of conduct. It is possible to be sceptical on this account. It is not as if people make a few mistakes or mis-judgements along the line and then get it right once they reach the top. In  most places, a certain disregard for scruple or ethical considerations is an integral part of the behaviour of those at the top; they do at the top exactly what they have done in order to get there. In other words, they survive and prosper precisely because of their disregard for values. Any excessive concern for values would be a burden and a disqualification. Thus, the sort of behaviour for which Gupta is being reviled now by many in his own class may well be the norm, except that others are lucky or smart enough not to be caught out. Once you grasp this truth, you arrive at a better appreciation of Gupta's own lapses.  

By the way, please do not jump to the wrong conclusion from the title. I am not trying to defend Gupta, just referring to an article written in his defence.

'Every bloody Indian cooperated.....'

Rajaratnam's bitter remark, given in a fascinating interview with Suketu Mehta (of Maximum City fame), will be remembered long after the present insider trading case concludes. Rajaratnam contrasts with his own sense of honour and loyalty with those of the Indians who were part of his group:

Anil Kumar’s son worked at Galleon one summer. I used to vacation with Rajiv Goel’s family. Their families knew my family. You don’t think this is going to haunt these guys? They wanted me to plea-bargain. They want to get Rajat. I am not going to do what people did to me. Rajat has four daughters.

 In the interview, Rajaratnam contrasts the American justice system with that of his native land:

In Sri Lanka I would have given the judge 50,000 rupees and he’d be sitting having dinner at my house. Here, I got my shot. The American justice system is by and large fair.

Also notable is his reference to ola leaf readers in Sri Lanka, one of whom pulled out his leaf and gave a recording to a friend of Raj's after Raj got into trouble.  Mehta describes what happened:

The astrologer chanted into a tape for 45 minutes. The recording said there was a government case against Raj, that he was in the stock business, that he was world-known. That he had to close his business down.

On now to the Rajat Gupta case. I read with disbelief news reports suggesting that Gupta could get up to 105 years in jail. America is notoriously tough on crime but 105 years for sharing confidential information or even for insider trading? Even 10 years would seem excessive. If I have understood the law incorrectly or  if there is something more serious involved, I am happy to be corrected.

Wall Street protests

These are not the French student protests of the sixties nor Tiananmen Square nor the Arab Spring. Occupy Wall Street if far too inchoate to make a lasting impact. I visited their website to see if they have an agenda that could capture the imagination of the public. I was disappointed. Another rant against capitalism is unlikely to make much of an impression. Or even talk of growing inequalities in the US and elsewhere. Martin Wolf, writing in the FT, says the protests have a message, that something is wrong with today's capitalist system, but fails to articulate any alternatives or solutions.

Occupy Wall Street needs a focus. It must focus on what it professes to be about, which is the problems posed by today's banks and the enormous influence they wield on public policy. The whole movement could gather momentum and amount to something if it focused on one item: the break-up of large banks in the US.

More in my ET column, Occupy Wall Street lacks focus.

Disintegrating Team Anna?

Swami Agnivesh is out. Arvind Kejriwal is under fire reportedly for jumping the bond he signed for availing of leave from government service. Kiran Bedi faces flak for submitting travel bills that did not correctly reflect the expenses she had incurred. Prashant Bhushan also faces allegations and criticism for his comments on Kashmir. Santosh Hegde has said that he is part of Team Anna only for the purpose of fighting corruption, which could imply that if members of the Team take up other causes, he may not stay on.

At this rate, will anything be left of Team Anna by the time parliament is done with processing the Lok Pal Bill? If not, I suppose it will be left to parliament to decide by itself the content of the Bill. That may result in a Lok Pal that is not the omnipotent authority that Team Anna envisages but one that focuses on politicians and the upper bureaucracy. It may also result in some procedures being put in place for referral of corruption charges to the Lok Pal, instead of anybody having the right to file complaints.

These will be entirely desirable outcomes, in my view. It does not cease to amaze me that the Jan Lok Pal Bill, drafted by Team Anna, managed to garner so much support from the public and the media. That version is certain to result in a bureaucratic nightmare, an authority with staff running into thousands that will watch over the rest of the bureaucracy as well as politicians. This can only lead to paralysis of all decision making, signs of which we can see already. One of the most common complaints about the CVC is that it renders decisions in PSUs slow, that it comes in the way of risk-taking and commercial decisions. If the CVC could have this effect, what should one expect of the more fearsome Lok Pal?

Governance- or accountability- is desirable. But it should not come in the way of governing. Decision makers must be judged, in general, by the totality of decisions they take, not by putting every single decision of theirs under the scanner. With an omnipotent Lok Pal, the latter is what we must expect, with all its deleterious consequences.

MBA oath

In 2009, in the wake of the financial crisis for which b-schools and MBAs were held substantially responsible, Harvard students decided to start the practice of an MBA oath, whereby MBA students would commit themselves to certain standards of integrity. Around 250 b-schools have since signed on and 6,272 graduates have taken the oath. Two years on, enthusiasm for the oath is fading, FT reports. Only 300 of the HBS class of 2011 has signed the oath compared to 600 in 2009.

This is not surprising. As the FT article notes, it makes little sense for individual MBAs to take the oath when organisations they work for are not willing to observe the necessary standards. That apart, the commitments made in the oath are hardly measurable - and are seldom measured- except for the ones on correct reporting (taken care of by listing and other regulations) and on corrupt practices (covered by the necessary laws). The other items in the oath have to do with being a good or responsible person and that is neither enforceable nor is it widely practised.

Not to sound too cynical but one could argue that the whole of one's education, with its competitive element, and the whole of corporate life often requires individuals to act in ways that are contrary to what are contained in the oath- that is, if one wishes to succeed, as all good MBAs do. Take at a look at the oath and judge for yourself:

THE MBA OATH

As a business leader I recognize my role in society.

• My purpose is to lead people and manage resources to create value that no single individual can create alone.

• My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.

Therefore, I promise that:

• I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.

• I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.

• I will refrain from corruption, unfair competition, or business practices harmful to society.

• I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.

• I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.

• I will report the performance and risks of my enterprise accurately and honestly.

• I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity.

In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards.

This oath I make freely, and upon my honor.

Selecting a director/dean

In my post, Selecting a CEO (two posts below this one), I suggested that there was nothing to beat the systematic screening of insiders for the post of CEO. Some people have asked me how I square this with my known position on selection of directors of institutions of national importance, which is to have a transparent, competitive, global search. This obviously means not confining the search to insiders (but by no means excluding them).

Well, this could, perhaps, serve as a quiz question in courses on leadership. The answer, of course, is that, in a company, it is possible to study the leadership potential of an executive by putting him or her in charge of business units, subsidiaries, etc. In an academic institution, there is really only one leadership position, and that is the director's. How somebody fares as a professor may not offer clues to whether he or she can lead the institution; indeed, an outstanding academic may be singularly ill-suited for a leadership role. It becomes necessary, therefore, to look at outsides who have headed academic institutions or led initiatives elsewhere.

That said, what I have stated is not a comprehensive answer. It does not explain why Harvard Business School often chooses an insider for the job. The more difficult thing to explain is what Booth Business School (of Chicago) or Stern School have done in the recent past, which is to import an academic from another institution (both from Stanford) and both very young. Sudhir Kumar, who is dean at Booth, had served as Senior Associate Dean at Stanford.

These two appointments, I must confess, took my breath away. Neither Booth nor Stern lacks first-rate academics. Some of them would also be very good administrators and entrepreneurs. And yet the two schools reached out to outsiders for the dean's job. I take it as proof of greatness.

There are other schools that have brought in people from industry in the past- Insead and London. That fits more easily into what I have said. So does Insead's most recent appointment of Dipak Jain as dean- Jain has been Kellogg's dean in the past.

The key to the director's appointment is the same as the one for a CEO's. The board needs to be clear what the institution needs most at a given time- entrepreneurial skills, academic ability, managerial qualities or dealing with business and government? Once the profile is set, the choice becomes a little easier.

Reviews of my book on Ravi Matthai- IIMA: Update

I reproduce links to the following reviews of my book on Ravi Matthai- IIMA (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad; Rupa Publications) that I have seen so far:

• Wall Street Journal
• The Sunday Guardian
• The Hindu
• Anuradha Goyal's blog
• Seminar
  
• Edu Tech magazine, column by Rishikesha T Krishnan of IIM Bangalore
  
• Vikapa (October, 2011)
  
• The Smart Manager (Sept-October 2011- Interview and book excerpt)
  
• Hindu Business Line
  
• Business Standard
• The Tribune
• Review in Biblio magazine (July-August 2011)
  
• My response to EPW review
• MBA Universe.com
• Financial Express
• Economic and Political Weekly
  
• Business India
• Uday's Weekly
  

Selecting a CEO

The man at the top looms large in the modern firm. Wherever you go in the firm, you can see his shadow. The CEO has the potential to do much good as well as much harm. Getting the selection of the CEO right is, therefore, one of the foremost functions of the board. Most boards, I am sorry to say, don't get it right; more importantly, they don't give it the attention it deserves.

It was a pleasant surprise, therefore, to read in the October issue of HBR about succession planning at P&G. I must confess I was impressed with the rigour of the process described, with the search starting within the company from the very day that A G Lafley took over as CEO. The distinctive aspect of the process is the involvement of the board. Because of its involvement in the search, the board gets to know several layers of management very well. It occurred to me that succession planning, if taken seriously, can transform the very functioning of the board.

More in my ET column, How to pick a CEO, where I also spell out lessons for Indian companies.

Take care of the banks, stupid

Roger Altman urges a US-style Tarp for European banks. The key points for Europe's policy-makers is that banks need to be strengthened for the markets to shed their jitters. The markets are jittery because they think the banks will collapse under the weight of sovereign bonds. If they do so, they will take the Eurozone economies with them. Strengthen the banks- and you save the Eurozone.

Altman urges recapitalisation of banks through a common European facility. The governments must decide unilaterally which bank needs how much. It must back capital infusion with sovereign guarantees for bank borrowings. The taxpayer must have an upside on the infusions through warrants. It's quite likely that European governments end up making money by recapitalising banks, as the US Tarp did.

Once the banks are strengthened, the problem of sovereign debt can be addressed, with varying degrees of debt being written off for a range of countries. Then, we preserve Europe, avert a financial meltdown and also create the basis for economic recovery.

A Nobel for management?

The Economics Nobel was an addition to Nobel's list. Andrew Hill, writing in FT, asks whether the time has come for a Nobel in management. He is not very sure. Breakthrough ideas in management are rare, so it would be difficult to confer an award for theory. The award would have to go to managers. Here, we face a serious problem. Managerial performance can be judged properly only over a very period. Many of the corporate heroes of yesteryear are no longer around- Enron and Lehman Brothers, for instance. But, conferring an award on a manager after, say, 40 years may take away much of its shine.

No, an award for management doesn't make sense. Let's stick to intellectual contributions and those that are truly original. That rules out management for now.

NRN on IITs

N R Narayana Murthy has been quoted as saying that 80% of students at IITs are of poor quality. My first reaction is to ask: what would be the comparable figure for NITs and private engineering colleges? 95%? And what would that say about the quality of hires at Infosys, most of whom are drawn from second- and third-rung colleges?

Although an ex-IITian myself, I am not in a position to judge whether there has been any decline in standards in students at IITs as I have little contact these days with IITs or engineering. How do we test such a statement? We could use a number of indicators:

• Acceptance of IIT students at foreign colleges and their performance there
• Success rate of IIT students appearing for the IIM entrance test
• Acceptability of IIT students to employers in India

Are fewer IIT students going to the US? Are companies now reluctant to visit IIT campuses for recruitment? I would like to know from readers.

NRN also comments on the poor English speaking skills of IITians:

The Infosys mentor also lamented the poor English speaking and social skills of a majority of IIT students, saying with Indian politicians "rooting against English", the task of getting good English speaking students at IITs gets more difficult.

I can readily respond to this comment. Some of the best performers in my time at the IITs were from vernacular schools. Their English was poor but this took nothing away from their brilliance- they were among the toppers at IITs and went on to make a mark in the US. I met some of them a few years ago at an IIT Bombay reunion and their English was now as good as anybody else's. The great change at IIT was not counting English marks in the entrance exam. This opened up IITs to some great brains in the interior of the country. To judge the calibre of IIT students by their English speaking skills makes no sense at all.

NRN, in his New York speech, has also advocated doing away with the tenure system at IITs; he wants faculty on five year contracts instead. If this is what is required for producing quality, how is it that US universities have a tenure system and produce great quality? The tenure system was created precisely to give academics the sense of security that is needed in order to produce high quality output over a long period.

I have a suggestion. Let NRN and a few other businessmen pool their resources and set up their own engineering college. They can set their own norms for admission, faculty, fees etc. They can then realise their dream of creating in India the equivalent of MIT and Stanford.

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.