Horrors of world war II

I have read a fair bit about World War II and seen some excellent documentaries. Nevertheless, some of the facts and figures about the human costs of the war, mentioned in two books reviewed by the Economist, came as a revelation:

• 70 m deaths of which two-thirds were non-combatants
• 15 m Chinese deaths and 27 m Soviet deaths ( I was aware of the latter but not the former)
• Red army soldiers chopped of the legs of dead Germans. They wanted the boots which could be had only after the legs had been defrosted
• Outside Leningrad, scene of one of the epic battles of the war, amputated limbs were stolen from hospitals and corpses from mass graves to be used as sources of food
• In Leningrad city itself, 2000 people were arrested for cannibalism; children were at risk of being eaten by their parents
• The Japanese threw thousands of prisoners into burning papers and killed locals for meat
• The Soviet army, fighting its way to Berlin, raped an estimated 2 m women and girls.

In sheer scale of brutality, World War II has few parallels in history.

I liked the reviewer's criticism of one of the book's praise of the fighting qualities of Soviet, Japanese and German soldiers compared to those of the allies:

Mr Hastings’s repeated admiration for the fighting qualities of German, Japanese and Soviet soldiers compared with British and American forces is especially trying. Germany and Japan were militarised societies that glorified war and conquest, held human life to be cheap and regarded obedience to the state as the highest virtue. Russian soldiers were inured to the harsh brutalities of Soviet rule and driven on by the knowledge that they were fighting “a war of annihilation” against an implacable enemy. If they wavered, they knew they would be shot by NKVD enforcers. More than 300,000 were killed pour encourager les autres.

The majority of the civilian soldiers of the Western democracies, by contrast, just wanted to survive and return to normal life as soon as possible. That also meant that American and British generals had to eschew the dashing aggression of their Russian and German counterparts, who could squander lives with impunity.

Ferrari ki sawari

I am not much of a movie buff and certainly no fan of Bollywood. And yet I found myself at a theatre yesterday watching the newly released Ferrai Ki Sawari produced by Vidhu Vinod Chopra. It struck me as low-budget film: just two actors, Sherman Joshi and Boman Irani, and no actress (except for a guess appearance by Vidya Balan). No expensive locations or sets either.

I watched the film with some disbelief. I could not have imagined that, in this day and age, Bollywood was capable of producing such trash. The story is about a Parsi father (Joshi) trying to get his small son a break in cricket by enrolling for a training programme at Lord's. A lady promises him the fee for the programme if he can arrange to get Sachin Tendulkar's Ferrari for the wedding of the son of a municipal corporator. Joshi manages the feat in ways that would be credible only in Bollywood. He manages to have the Ferrari returned again in ways that would be plausible only to those mentally challenged.

Joshi plays the doting father. He seems to make the mistake of confusing simplicity or straightforwardness with appearing moronic- you can be straightforward without wearing an asinine smile all the time or rolling your eyes. Irani is his gifted self as a grandfather who never quite got the chance he deserved as a cricketer in his time. The politician/municipal corporator and his imbecilic son are horrors that only Bollywood can produce. The child artiste is the redeeming feature.

If there is a message in the movie- and it would take some effort to extract any from this movie- it is that politicians rank at the bottom in the esteem of the public. Bollywood, with its appalling stereotypes, is itself responsible for the complete lack of respect today not only for politicians but, alas, for the democratic process itself.

Presidential candidate

The UPA's choice of Pranab Mukherjee as its presidential candidate has been well received not only in political circles but in the country at large. It's hard to think of many people with credentials comparable to Mr Mukherjee's- or with such broad acceptability. If Mukherjee does make it to Rashtrapati Bhavan- and this looks highly probable now- it would show that, for all its contentiousness, the Indian political process is capable of throwing up the right choice.

Two other comments on this issue. One, the discussions in the political class highlighted the complete disconnect between the social media- the Internet and Twitter crowd- and the political class. The social media had been pushing for a non-political person. Some of the names one came across: N R Narayana Murthy, E Sreedharan, Ratan Tata and even Anna Hazare. In the last few weeks, as the race hotted up, not one of these names was mentioned even in passing in political circles. Whatever the differences amongst them, politicians are united in believing that the president should be somebody with a political background. (Kalam qualifies now as he has been president and I guess he qualified earlier as somebody who held a position in government for very long). In this, I believe the political class was entirely right. The havoc that a non-politician posing as a messiah can create is unimaginable.

Two, am I the only one disappointed with Kalam not shooting down his candidature? By convention, nobody has held the office for more than one term. Kalam is 81. It would be have been appropriate for Kalam to have declared at the very outset that he would not like to be considered. Instead, I understand from media reports that he is still keeping his options open.

America's industrial might

When you say America is a $14 trillion economy (India is approaching $2 trillion), it doesn't quite give you a sense of America's industrial might. Reviewing a book on the crucial role of America's industrial might in World War II, the Economist mentions a couple of interesting facts. In 1944, the US produced a plane every five minutes, 50 merchant ships and eight aircraft carriers a month.  India commenced work on its first indigenous aircraft carrier in 2005 and it is to be commissioned in 2014! And how many fighter planes have we produced in the last 65 years?

Now, you know why talk of India becoming a superpower is poppycock. And why China is furious with American plans to move 60% of its naval strength to the Asia-Pacific region, from the current 50%

Do we really understand India's economic slowdown?

My post below on the Eurozone impact on India has drawn jeers from some readers consequent to the latest GDP data becoming available. I am asked whether I stick to my 7% forecast. Another reader warns me that I will have to swallow my words. I accept these comments in all humility.

But that is not to say that I feel the need to change my position. If anything, the low base of 2011-12 improves the chances of 7% growth in 2012-13. That apart, the depreciation of the rupee and the decline in oil prices are positive factors in the present environment.

What do we make of the sequential decline in growth over the last four quarters? I am still not persuaded that major errors of policy have contributed. Most people point to the fiscal situation and say that the government's basic orientation towards higher social spending and reluctance to rein in subsidies has led up to the present situation where a high fiscal deficit along with high inflation limit the scope for RBI to cut interest rates and stimulate investment.

A very basic conundrum remains, however. The overall investment level is close to 35%. Why is this level of investment not producing growth of 8% this year when it did so in the past eight years except for 2008-09, the worst year of the financial crisis? That tells me that the fundamental factor in 2011-12 that impinged on growth in 2011-12 must be similar to that in 2008-09, and that would be the Eurozone crisis. It cannot be any of the policy factors that most commentators point to. Add to this delays in approvals of projects at a time when the anti-corruption crusade has created a fear psychosis and supply bottlenecks in coal and power sectors, and you have an explanation for the slide this year.

It follows that if the supply bottlenecks are sorted out to some extent, and fiscal correction paves the way for a further cut in interest rates, the growth rate should be better in 2012-13, without any of the 'big bang' reforms people are talking about. Maybe the stock market has caught on to this possibility in recent days?

More in my ET column, Slowdown: do we know why?

Unreasonable bankers

Is it too much to expect a modicum of reasonableness in bankers?

FT has analysed the share of bankers' pay in relation to profits at the top 13 international banks. One would have thought that, in this adverse environment, banks would respond by reducing rewards to bankers so that shareholders' returns are protected? But no! Bankers' rewards have increased while that of shareholders has fallen.

Here are facts in the FT story:

• staff costs accounted for more than 81 per cent of the total (of staff costs and net profits), compared with a pre-crisis tally of 58 per cent
•  Dividends are came down to 4.5% of the pot compared to 15% earlier
• In the period under consideration, banks' share prices slumped nearly 60%

After the sub-prime crisis, the focus has been on the design of compensation, how to ensure that compensation schemes, such as stock options, do not increase firm- and systemic risks. It is becoming clear now that this will not suffice. The absolute levels of pay have to be tackled because bankers seem to think that banks exist for themselves first, next for shareholders. This would have been an egregious position to take at any time; it is more so when banks have had to be  helped out with taxpayers' money. (Caveat: One to examine whether some problems are distorting the overall results or whether the trends indicated above are common to most banks).

This is not a situation that can be remedied by market forces'. The fact that such distortions exist points to the absence of adequate competition and also to a failure of governance. Time for the regulators to step in and check pay excesses in banking.

JP Morgan risk management

JP Morgan has made a change in its risk management committee consequent to its trading loss that is now estimated at upwards of $2 bn, FT reports.

A lady, the president of the American Museum of Natural History, will make way for the former chairman of KPMG.  I don't see this as a reflection on risk management at JP Morgan but I certainly see it as a reflection on how seriously management takes its board. One should not be surprised. Lehman Brothers had a theatre impresario as member of its risk management committee prior to its failure; Citibank had a former spook from the CIA on its board. ( I say this from recollection).

Now, I do not subscribe to the view that merely because one is an expert in a subject, one is effective on the board. You can be the ultimately authority on risk management and still nod your head to whatever the management wants done. But for certain specialised roles, qualifications are a necessary, though not sufficient, condition.

About the $2 bn trading loss itself, it is a lapse, a bad call but it cannot in itself become a condemnation of top management. JP Morgan made a profit of $19 bn last year; it can afford to take a $2 bn loss, especially on a balance sheet of over $2 trillion. JP Morgan's return on equity has been higher than average, so shareholders have little to complain about. If Jamie Dimon is attracting unusual flak, it is because he made the cardinal sin of taking on regulators and policy-makers, he sounded a little too cocky, which is a bad idea for the head of a bank.

You could say that a loss of $2 bn today could become a loss of $20 bn tomorrow, that is why banks should not combine traditional banking activities with trading. But, then,  a bank can run up a loss of $2 bn on credit risk as well. So the JP Morgan loss also does not in itself become an argument for the Volcker rule.  The British proposal to ring-fence deposit-taking activities with higher capital may be a better answer than asking banks to shed trading and other activities. Restricting the scope of banking is not the answer to bank failure; restricting the size is a better way to contain the costs to the tax payer.

Eurozone impact on India

There is more than element of panic in the reaction to the fall of the rupee this month, methinks. India Inc has been howling ''crisis'' and it blames it on ''policy paralysis". These concerns are misplaced. The fall in the rupee is a natural response to the widening of the current account deficit beyond 4%, exacerbated by the flight of FII capital in the wake of the Eurozone crisis. The decline in the rupee is a natural stabiliser and should cause the CAD to fall this year. Remember, an important reason for the large CAD we are seeing now is huge gold imports. The fall in the rupee should help address this issue.

It may well be that Rs 56 is a bit of an excess but that is to be expected given overshooting in the currency markets. Some intervention may be required whenever there is too steep a fall because FIIs can start pulling out in an even bigger way if they suspect a free fall. The RBI is doing its bit and can be counted upon to do more if required. The government, for its part, is trying to address the fiscal deficit by raising the prices of petroleum products.

It is not at all clear that the flight of FII capital is on account of "policy paralysis". There was little movement on reforms in 2011 but that did not come in the way of nearly $10 bn of FII flows in the first three months of 2012. The present flight of FII flows is a  reaction to the Eurozone crisis and represents the preference for the safe haven of US treasuries in times of crisis. Those who think government inaction has led to foreign investment sentiment must explain why FDI rose significantly in 2011-12 over 2010-11.

I don't see the decline in the rupee as a harbinger of bad times to come. The Eurozone crisis that we are now faced with is no different from what we faced in late 2011. Since we managed growth of 7% then, we can be optimistic about touching 7% this year as well. You think that's bad? Think again. If we touch 7%, we will be the second fastest growing economy in 2012 in the world after China.

More in my ET column, Global recovery is two years away.

Quotable quotes in Rajat Gupta trial

The trial of Rajat Gupta, which commenced this Monday, has already produced a couple of quotable quotes from the judge, Jed Rakoff:

"If Mother Teresa were charged with bank robbery, the jury would still have to determine whether or not she committed a bank robbery.".

Judge Rakoff also told Gupta's lawyer "I will not allow you to say that he is world renowned leader", adding that he would not approve of any reference to "Aids, malaria ... or the bubonic plague".

Storm over executive pay

A fresh storm has erupted on both sides of the Atlantic on the subject of executive pay. There has been a shareholder revolt at Citibank, Barclays and other places. Shareholder vote on pay is non-binding but negative votes do cause boards and managements to pause in their tracks.

Linking pay to performance has proved elusive despite the best of efforts. I am convinced that neither boards nor management will settle for moderation. If  you can loot and get away with it, why not?- this really is the sentiment in boardrooms.

What is to be done? I came across two off-beat suggestions in an article by Philip Stephens of the FT:

The effort should start with two simple measures to increase transparency and to frame pay levels in the context of wider society. The first, which should be included in Mr Cable’s legislation, would require chief executives to make a personal statement at the front of the company annual report.
The statement would set out in plain English the total in pay, bonuses, incentives and benefits in kind the CEO had received for the relevant year. It would measure these against short- and medium-term company performance – earnings per share, dividends, the share price and the like. The chief executive would then bring the two together to justify his or her pay. This would be countersigned by the head of the remuneration committee. The whole thing need not run to more than a single sheet of A4. 

....The second measure would further extend accountability by giving an oversight role to MPs. Each year, the Treasury committee, or perhaps the business, innovation and skills committee, would schedule hearings with chief executives to discuss the level of boardroom remuneration.
Invitations would be sent to a cross-section of the richly rewarded but “bureaucratic” performers as well at those at the very top of the pay tree. The focus would be exploring the spread of the something-for-nothing culture more commonly associated with benefit cheats.

The second proposal is especially radical. It seeks parliamentary oversight over executive pay- and in free market Britain, of all places. I can't see the corporate world accepting it. Not in the UK, lesser still in India. But this could well be the answer.

Incidentally, you will surprised how little discussion there is of top management pay in board meetings. The matter of pay is left to a sub-committee of the board and the full board really has little say. Perhaps, the RBI must mandate that pay for the top 10 executives must be discussed and approved by the full board. 

Backlash against austerity in Eurozone

France, Greece, the Netherlands- and now in a provincial election in Germany. Voters are telling their masters: to hell with austerity. Does this mean governments can or should spend their way out of trouble? No way. Where is the money going to come from? Not from private investors: any escalation in spending will get a thumbs down from the financial markets. Official flows, from within or outside the EU, will also not be forthcoming. (Germany is not willing to bankroll deficits elsewhere without tough conditions and, indeed, that is the trigger for the current backlash).

So, the idea that new governments can repudiate the fiscal compact signed in March is sheer delusion. Some of the austerity targets can be moved back; there could funding for select projects. Otherwise, the substance of the austerity conditions will stay. This means that Greece will have to leave the Euro because it is one place where austerity has no chance of producing results even over ten years. What then? Spain, Portugal, Italy all will find the going rough weather. And if Greece finds its feet after default, they too would be sorely tempted to exit the Euro.

So, Germany and other pro-Europe countries in the EU face a stark choice. Either they are willing to back austerity with a measure of debt forgiveness, which alone will make the austerity conditions viable. Or it''s The End for the Euro.

More in my ET column, Markets can trump voters. 

Let me add a footnote. What would be the implications of a Greek exit? There would be chaotic conditions in the markets but, on balance, the crisis can be contained using the financial muscle of the EU and the IMF. However, it does mean that in 2012, uncertainty in the financial markets will continue as in 2011. That's bad news for investment in general and in India in particular. Unless the ongoing crisis is quickly contained, our hopes of a modest acceleration in growth will take a beating.

Economic affairs secretary on S&P warning

R Gopalan mounts a spirited defence of India's economic position in the face of the recent S&P warning in an  interview to ET. The points he makes are very similar to what I have said in my post below: India's debt to GDP ratio has come down and there has been substantive improvement in the fiscal position of the states.

IITs set to improve transparency in JEE

IITs will post the evaluated answer sheets of JEE candidates online, TOI reports:
  

If a candidate finds any discrepancy, he or she can lodge a complaint online. These evaluated answer sheets will be available online from May 5 to May 10. The facility to submit requests for revision will close at 5pm on May 10 after which representatives of all IITs will meet to consider the requests. If found correct, the responses will be updated by May 14. According to IITD director, R Shevgaonkar, it may happen that the scanner does not pick up correct responses if a candidate has not filled the response bubble completely.

 

Naturally, the answer sheet will have to be provided for candidates to be able to compare. This is a huge step forward in improving transparency in the JEE and it will reinforce public confidence in the exam, which has stood the test of time. One wonders why such a simple step was not taken earlier- and why others in the business (such as IIMs) have not done likewise.

The big reform in the JEE, which is assigning a suitable weight to the 12th standard exam, has been stymied by concerns amongst IIT faculty about being able to normalise across various boards. This is a legitimate concern but it's worth mentioning that the IIMs have already gone ahead with giving a 30% weight to earlier exams. The underlying principle is unexceptionable: one cannot judge a candidate's merit on the basis of a single test where the difference in scores between one candidate and another is   miniscule.
 

India's inflation rate will stay at 6-7%

There is little chance of India's inflation rate going down in the medium term. If anything, the rate may go up. A rate of 6-7% need not be feared. It is only a very high rate of inflation (at least above 10%) that imposes significant efficiency costs.

The social consequences are not very disruptive, as it appears rural and urban workers, both in the organised and unorganised sectors, are having wage increases that are above the inflation rate. The losers would be pensioners, the unemployed and foreign purchasers of Indian goods (to the extent that rupee depreciation does not offset price increases). Trying to reduce the inflation rate at this point would mean a growth rate of below 7%- and that would be psychologically damaging to Indian and foreign investors. So the RBI was right to cut its reference rate earlier this month.

More in my ET column, Higher inflation is here to stay. 

Boards of banks

It is news to me that UK's Financial Services Authority actively monitors the effectiveness of bank boards and also interviews candidates proposed by financial firms for their boards. I got to know this when I read a speech delivered by Hector Sants, the outgoing chief of FSA, to which my attention had been drawn by a blog in the FT.

Here's what Sants had to say about how the FSA judges the effectiveness of bank boards:

The regulator assesses this effectiveness on a continuous basis.  It does this through many tools such as board effectiveness reviews, regular supervisory discussions with the Chair, senior independent director, and key executives.  Enforcement will also be used when absolutely necessary.  However, the principal and earliest intervention the regulator can make is through the SIF authorisation process and it is this I would like to turn to now.

Sants has some caustic remarks to make about candidates proposed for boards:

Too frequently we still see applicants who:

• don't understand what the job entails and have no job description;
• have done no due diligence into the firm they are proposing to join;
• are unable to discuss the risks/ issues facing the sector in a proportionate way to the role they are applying for; and
• often significantly underestimate the commitment required to perform the role effectively.

 Of the 653 applicants interviewed by the FSA, 43 were withdrawn.

What Sants says about bank directors would apply equally to directors at non-financial firms. Most directors would not bother to brush up on basic facts before getting on to a board- and they would not bother to know the basics even while serving on the boards. Here's a suggestion: let the RBI and SEBI run a surprise quiz for directors. They should be asked just two numbers: the sales and profit of the boards they sit on. I would be surprised if even 50% got it right. If you want to really fox the directors, ask them a third question: how much is the CEO paid?

S&P warning

S&P's changing the outlook from stable to negative is seen as a 'warning'. What sort of 'warning'? Well, if things get worse about a year down the road- if the fiscal deficit remains as high or if growth goes down to 5.3%-, India will face a downgrade.

Some warning, that! Any sophomore could tell you that if things worsen, the rating goes down; if things get better, there is an upgrade. Mind you, S&P does not say that things will get worse or that they are likely to get worse.

What do we make of this warning? I know of nobody else who thinks growth could be down to 5.3%. As for the fiscal situation, S&P might have made some mention of the fact that India must be among the very few countries whose public debt to GDP ratio has gone down in recent years; for a whole range of countries, the debt to GDP ratio has shot down. Moreover, while the centre's finances have worsened, state finances are showing an improving trend.

The threat of a downgrade of some Indian companies, including HDFC Bank, means even less. These ratings are partly linked to the sovereign rating, so if there is a sovereign downgrade, it will be reflected in the firm's downgrade. Let me say one thing, however: anybody who suggests that conditions at HDFC Bank warrant a re-look at its rating needs to have his head examined

Right to Education Act

The RTE Act coming into force is an important landmark in the evolution of this country. From long years of neglect of primary education to providing access to superior schooling to the underprivileged is indeed an astonishing transformation. As an unabashed champion of inclusiveness, I cannot help feeling a wave of exultation.

Alas, as a hard-nosed observer of the Indian system and a cold-blooded student of management, I cannot help having reservations. The idea is laudable. The poor should be able to walk into any school in their neighbourhood, not just into a municipal school. But will reserving 25% of seats in private schools (leaving aside exceptions) work? First, the central and state governments will bear some of the cost, not all of it. The rest of the cost will presumably be passed on to the 75% well-off children through higher fees. (The government will pay as per the fee in the central Kendriya Vidyalaya schools).One can expect private schools to face the usual hassles in settlement of dues on account of the reserved category.

Alright, suppose the financial part is taken care of. What then? We will have children from the disadvantaged category sitting next to well-heeled children. The differences in status will be glaring and is bound to tell on morale and confidence in the reserved category. One can expect discrimination from the teaching staff. The reserved category may face a high failure rate, which could itself prompt drop-outs.

Most importantly, the reserved category will find the going difficult beyond a certain class- say, seven or eight- for the simple reason that, even in so-called good quality private schools, the overwhelming burden of teaching- or preparing for the exam- rests with private tutors and coaching classes. In many schools, in the tenth grade, even the pretence of teaching disappears. There is mass absenteeism for much of the year as the children are busy preparing on their own by attending classes outside. You could argue that poor children suffer from this disadvantage - of not being able to afford coaching classes- even when they attend public schools. True, but now they will find themselves in the CBSE and other schools where the handicap could prove more crippling than in the state boards.

In a municipal or public school, the poor child is less likely to feel socially handicapped, whatever the other problems. Can poor children do well in schools where they face enormous hostility and serious handicaps in coping? These are the issues one has to reckon with. I would imagine that the government will have to step in with cash vouchers that enable the children to attend coaching classes as well.

This is a bold experiment that deserves a try. The results should be closely monitored and correctives introduced from time to time. I doubt, however, whether it can be an alternative to adding to and improving the quality of public schools.

China's military expenditure

The Economist issue of April 7 carries a story on China's military rise. It has a tell-tale table on the top 10 nations by military expenditure.China is no 2 with $90bn, more than 2.5 times India's $37bn. The US is no1, with military expenditure of - hold your breath- $739bn. The total military expenditure of the other nine nations is less than $500bn. Now, you understand what underlies Pax Americana.

The numbers help place the so-called Chinese threat in perspective. China does not even remotely threaten American hegemony- a Chinese general is quoted as saying that the gap between US and Chinese defence forces is 30 or even 50 years. But China can clearly defend itself against American attack. And it can also pose a threat to its neighbours, keeping the US out of its vicinity if necessary. That raises the chances of an all-out offensive to take over Taiwan.

What could contain China's attempt to dominate the region? One, China's interest in the global economic system and its preoccupation with increasing the prosperity of its citizens. Two, its focus on maintaining internal stability. Three, the relative obsolescence of its military equipment following sanctions imposed after Tiananmen Square. Four, America's decision to focus its military efforts more on the Asia-Pacific region. One might add a fifth factor, namely, the question mark over China's ability to sustain its high growth rate and the possibility that India might forge ahead and emerge as an active counterweight.

TCI takes on Coal India

TCI's battle with Coal India Limited (CIL) is giving India a bad press abroad. TCI is known to be an activist shareholder. Just before the financial crisis, it was amongst those who pressure ABN Amro to split up and sell the pieces to various parties, including RBS. The deal eventually sunk RBS- so much for TCI's activism.

TCI's demands on CIL are downright unreasonable- they certainly cannot dictate pricing policy or, for that matter, personnel policy or any other policy. Shareholders must focus overwhelmingly on outcomes- are they getting their target returns or not? Judged by this test, TCI has no business to get worked up over CIL. CIL's return on equity in the past couple of years were 37% and 33%. It seems to me that it is customers who are getting ripped (or maybe suppliers, including the supplier of land, the government), not shareholders.

The bottomline is this: the PSU business model is very different from the private sector model. If you don't like this model, stay out of PSUs. It can't be that you invest in a PSU and expect it to behave like a private company. I am sorry to note that the independent directors on the board of Coal India do not seem to have applied their mind to the problem; they seem to think that independence is best displayed by not toeing the government line.

More in my ET column, CIL: TCI's Misplaced Zeal

India Inc rules the world?

India's outward FDI has increased in recent years. It was $16.5 bn in 2010-11. Before the global crisis erupted, we had a number of high-profile takeovers by Indian firms. This gave rise to the view that India Inc was all set to conquer the world. India's low-cost advantage, the high growth rate of the Indian economy and the flood of liquidity, which translated into easy access to finance for Indian firms- these seemed to make an Indian onslaught on the west inevitable.

Much of this euphoria has faded since. When the crisis erupted, international finance evaporated for Indian firms leaving many an incomplete takeover in the lurch. Even otherwise, it hasn't been smooth sailing for a large number of takeovers. Students of finance will not be surprised: we know that the majority of acquisitions fail to enhance shareholder value. Making a success of an acquisition requires formidable managerial ability, a favourable economic environment and a reasonable acquisition price. Indian firms are running into limitations on all counts.

The Economist ran an interesting analysis of a four high-profile acquisitions a few weeks ago: Tata Steel- Corus, Tata Motors- JLR, Hindalo-Novelis and Bharti Airtel-Zain.  Only two, Tata Motors and Hindalco, have seen an improvement in profit. The other two are struggling. In terms of return on capital, only Tata Motors scores.  At the rest, return on capital is likely to be lacklustre for several years.

These four acquisitions accounted for a quarter of India's cross-border activity in the past decade. The smaller deals have not done uniformly well either. The Economist notes that Indian companies have a fundamental problem in doing jumbo deals: they don't want to raise much equity for fear of diluting controlling shareholders.

India Inc ruling the world? Not a chance. Corporate domination is a function of the importance of the economy in the world, as the Economist rightly notes. British firms dominated when the UK was a powerful player on the world stage; ditto for American firms. India still has a long way to go. The sensible thing for Indian firms to do is to attain world class parameters in India, then think of overseas ventures.

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.