The revolving door syndrome and crony capitalism

All economies are notorious for the links between politics and business. It is a symbiotic relationship, and one that cannot be broken. Businessmen will finance politicians and politicians will use their clout to return the favour. In authoritarian countries, politicians- or members of their families- double up as businessmen. This is a growing phenomenon in India too. Crony capitalism is an integral part of the capitalist system.

What about the links between the bureaucracy and business? As Howard Davies points out in the FT, the US is at one extreme, with people from the private sector moving into regulatory bodies or even mainstream bureaucracy for a short period and then reverting to the private sector. This is a revolving door that whirls at the maximum speed.

At the other extreme is France, where civil servants tend to stay as civil servants for the most part; if they choose to move into the private sector, there is a cooling off period of two years. Davies suggests that civil servants in France can afford this luxury because even when they step down from their regulatory roles, they continue to draw some sort of  a salary (and not just pension; I must confess I am not clear what the arrangement is).

The UK comes somewhere in between with civil servants choosing to encash their stay in the public sector towards the end of their careers. They take up advisory roles with consultants, banks, investment banks etc or become lobbyists or join boards as independent directors. Davies suggests that this is appropriate, given the low levels of pay in the public sector. You cannot attract talent into the public sector unless there is the prospect of compensating towards the end with a juicy assignment in the private sector.

In the UK, politicians themselves are not immune to this trend: former British PM Tony Blair collects a cool  2.5 million pounds as advisor to JP Morgan Chase. As John Gapper points out , nobody should be under any illusion that Blair is being paid for his banking expertise. He is paid to open doors and make phone calls as required.

What's wrong with people using their tenure in the public sector to make a little money towards the end, you might ask? The problem, as Gapper mentions, is with the incentives it creates when people are in government or in public sector. The prospect of getting a private sector assignment towards the end cannot but influence decisions taken by public servants. Civil servants would be less than human if they did not favour private companies in the knowledge that doing such favours would have significant pay-offs down the road. To put it bluntly, the revolving door can become a form of corruption.

What can we do about this? In India, civil servants have created a number of post-retirement jobs, including those in regulators, which they can conveniently latch on to once they retire from their jobs. This seems preferable to civil servants moving into the private sector. Except that there is a problem if the civil servants still take up private sector assignments after a stint in regulation. It seems to me that a greater menace is civil servants or other public sector officials ending up on boards as 'independent' directors when everybody knows that the directorship is a deferred reward for favours done while in service.This is a mockery of corporate governance.

I doubt that any society will be able to stop the revolving door syndrome. What is needed is comprehensive audit and scrutiny of decisions taken by government. If somebody in government seeks to favour a private party, then the decision must be caught out in time. Not all favours can be prevented even then but at least the blatant forms of crony capitalism can be checked. For this reason alone, performance audit, which Vinod Rai made common in his tenure as CAG, is necessary and welcome.

Narayana Murthy's comeback at Infosys

Infosys is, by general reckoning, in bad shape, losing ground-  to both arch-rival TCS and to newcomers such as Cognizant. One should not be surprised that NRN's comeback at Infosys as Executive Chairman has received a positive welcome. However, his return does raise troubling issues of governance.

First, it is an acknowledgement of top management failure- whether this is a failure of the strategy labelled Infosys 3.0, I am not in a position to judge. Good governance requires that those responsible step aside. This would include Chairman K V Kamath, executive co-Chairman K Gopalakrishnan and CEO S D Shibulal. There is no indication that this is happening in the immediate future.

Secondly, what does it say about succession planning if the fortunes of a company hinge principally on its preeminent founder? Both Kamath and Shubulal were appointed following a much-publicised search for the posts of Chairman and CEO. Kamath was credited with being able to take the tough decisions needed at the company, given his track record at ICICI Bank. If things could go wrong so quickly, it hardly reflects well on the succession process and the depth of management that Infosys was reputed to have. Are we to suppose that if something were to happen to NRN tomorrow, there is no hope for the company?

Thirdly, many observers are of the view that NRN was never completely out of the company, whether as non-executive Chairman or as emeritus Chairman. If this is true, he shares responsibility for the strategy, if not the execution. Schumpeter, writing in the Economist, has this to say about the company's strategy:

The firm has two problems, one easier to solve that the other. Its execution has become abysmal, with stop-start investment in new projects and wildly inaccurate financial planning. Mr Murthy, who was known for delivering consistent and smooth performance, will probably sort this out quickly. The firm’s strategic problem is that it has clung to its reputation as a “premium” provider of technology services. Competitors with lower prices and who are prepared to tolerate lower margins have stolen a lot of market share. Whether Mr Murthy can resolve this predicament easily is open to debate.

Lastly, there is the matter of NRN's son being pitchforked into the Chairman's office as executive assistant. This does not appear consistent with the company's stated policy of keeping the founders' family members out of the company.  Schumpeter voices this concern bluntly:

The second concern is that in a bizarre tangent, Mr Murthy’s son will be parachuted into the firm to become his assistant. In its prime Infosys was known for being a fierce meritocracy. Its problems have partly been because it morphed into a stage-managed dictatorship, in which each of the firm’s co-founders got a stint running the firm, even if they were not up to the task, as has been the case since 2011. Mr Murthy junior is a brainy man, with Ivy league credentials. But let’s hope his father does not now try to introduce a form of management which is sadly all too common in India—a dynasty.

Banking still lures bright grads

Banks and bankers have getting bad publicity since the financial crisis. Many bankers have lost jobs. Bonuses are down. One would think that bright young grads would want to steer clear of banks. Apparently not, according to Andrew Hill. management editor of the FT. He writes that in St Gallen in Switzerland, the lure of banking persists:

Many of the young students who run the St Gallen Symposium in Switzerland, where Mr Noonan spoke, still have their sights set on the peaks of high finance. Senior bankers are ready to welcome them. “I think it will still be cool for young people to join banks and financial institutions,” Urs Rohner, chairman of Credit Suisse, declared during the same conference. “I think there’s a lot of potential there.”

And the attraction is not confined to St Gallen:

Careers advisers at another business school specialising in finance told me recently they were in despair at the number of graduates who refused to consider joining industrial companies and retained rosy expectations of what high finance offered. 

Hill would want the new recruits to do their bit to change the culture in banking:

But today’s highly intelligent graduates will only realise their potential and render themselves socially useful if they aim higher than mere monetary reward. Having learnt the banker’s trade, they must refuse to mimic their Praetorian predecessors. 

Sorry to sound cynical but his exhortation is unlikely to make much of a difference. Culture in a company is seldom created by new recruits. It is overwhelmingly the creation of people at the top. The best that new recruits can do is imbibe the culture as speedily as they can; if they attempt to change it, chances are they will be shown the door. As for the people at the top, their behaviour will not change because of moral exhortation or media criticism. It will change when regulators wield the big stick. Regulation and legislation alone can change the culture in banking in any meaningful way. 

Capital markets are no longer about capital

Apple has raised an enormous amount of capital- to hand back cash to shareholders. It is sitting on tonnes of cash, yet resorted to the capital market because repatriating cash to the US from other parts of the world would have been tax inefficient. This, says John Kay in an article in the  FT, "illustrates a paradox in the modern relationship between business and finance. Companies have never had so little need for capital nor so much engagement with capital markets.

The point about listing in the market is not to raise capital- knowledge-based businesses do not need to own a whole lot of assets and hence do not need large amounts of capital. Rather, listing on the exchange has to do with providing an exit route to investors or rewards to managers who own stock options: "corporate governance, not capital allocation, is the principal economic and social function of those capital markets.".

What does this mean for investment banks, one of whose main businesses, was raising capital for firms? It would mean loss of a significant stream of revenue. Another important stream, proprietary trading, is being whittled away by regulation. No wonder investment banks are losing their sheen, as reflected in market value to book value ratios.

Unusual appointment in the Indian media

Indians holding high positions in MNCs abroad no longer makes news. Foreigners holding similar positions in MNCs too does not make news. But foreigners holding high positions in Indian firms in India still makes news. The airline industry has opted for foreigners (for example, Jet Air) from time to time but I can't think of this being phenomenon being pervasive.

So it's interesting that Hindustan Times has appointed a South African as its Chief Editorial and Content Officer ( in itself a new designation in the Indian media). A foreigner determining editorial content- deciding how the news is to be played and, perhaps, what commentary is appropriate- would mean a completely new perspective on newspaper content. As somebody who welcomes newness, innovation and fresh perspective, I am inclined to believe that this is a positive development, no matter what the eventual outcome (in terms of commercial success) is. So, what do we expect next? A New York Times or Guardian journalist as editor of one of our English papers?

Judicial Accountability Bill

I was somehow under the impression that the proposed Judicial Standards and Accountability Bill would provide the necessary correctives to wrongdoing in the judiciary. I stand corrected after reading Pavan Varma's article in TOI recently. Varma highlights several infirmities in the proposed legislation:

First, the Oversight Committee proposed by it has no real powers except to pass on a complaint to another layer, namely the Complaints Scrutiny Panel. This scrutiny panel is to consist of three members, two of whom will be sitting judges of the same court as the judges against whom the complaints have been made, clearly an unfair and unworkable proposition.

Second, the composition or the modalities of the investigation team is undefined. Thirdly, the penalties are merely in the form of advisories or warnings or, at best, a recommendation of removal to the president. Fourthly, the Oversight Committee consists of the Attorney General (how can someone who regularly appears before judges, including possibly the one being investigated, take an objective stance on the accusations made). Fifthly, the Bill has no mention of a vital area of reform, viz, the procedure for the appointment of judges. Sixthly, the entire lower judiciary is kept out of the ambit of the Bill. And seventhly, the Bill evokes an atmosphere of total secrecy to proceedings, going so far as to exclude the operation of even the RTI.

There is, of course, the separate issue of appointment of judges. On this, a consensus seems to be emerging within the government and parliament that the matter cannot be left entirely to judges- nowhere in the world do judges appoint themselves.

More dissection of Rajat Gupta

Enough has been written about Rajat Gupta's quest for more wealth and how it brought about its downfall. (Gupta is now out on bail pending disposal of his appeal against his conviction). For those wanting  another blow by blow account of the events leading up to his conviction, here is one from the NYT:

http://nyti.ms/1095hqq

(Thanks to Rajive Chandra for the pointer)

Karnataka election verdict

A vote against corruption. A pro-Congress wave. An anti-BJP mandate. We have had much instant punditry since the Karnataka assembly election results came in. Much of it is not persuasive when one looks at the changes in share of the popular vote.The Congress vote share went up by just 1.8 percentage points over 2008. That of the BJP declined by 14 percentage points of which 10 percentage points went to the Yeddyurappa faction. This, of course, suggests that if the BJP can mend fences with Yeddyurappa, it can do better next time.

Also, as Vidya Subrahmanyam points out in the Hindu, the BJP's share of the vote in 2008 of 33.86% was less than the Congress' share of 34.76% but that did not prevent the BJP from getting the largest number of seats.

Splits and alliances, rather than issues of corruption and governance or even incumbency, appear to be the decisive factor, as in so many other elections.Who gets the alliance combination right may matter more ultimately in the general elections of 2014 than, say Raga versus Namo.

An independent CBI?

There is renewed clamour for an independent CBI in the wake of the Coalgate investigations and the government's attempts to vet reports submitted by the CBI to the Supreme Court. Every political party thinks the CBI is a handmaiden of the government of the day but days nothing to alter the situation when it is in power.

Many activists would like the CBI to be free from political supervision. Then, we will have professionals in the CBI bravely investigating the corrupt and prosecuting them. What a pathetic delusion ! Politicians are not a special breed in society. They are drawn from the same genetic pool as lawyers, doctors, chartered accountants, bureaucrats, policemen, corporate executives and academics. True, politics is a game at which one needs ruthlessness in order to succeed but the same is true of most other professions. Only, the stakes in politics may be higher.

Make the CBI independent and you will have a set of privileged officers with frightening powers and amenable to nobody in the executive. Absolute power, we know, corrupts absolutely.  The police force is apt to misuse its powers even when under the supervision of civilian and political authority.Think of what might be when it is totally freed from such supervision.

Prescriptions, such as those for an omnipotent Lok Pal or an independent CBI, fail to answer the crucial question: who will these bodies be accountable to? Parliament and political parties are accountable to the people. The bureaucracy and the police must be accountable to parliament and the political authority. Perhaps, it does not suffice to have political oversight, it must be supplemented by parliamentary oversight and independent external audits by a panel of eminent persons. But this is not the same as saying that agencies such as the CBI should be independent of the political authority.

Harish Khare, writing in the Hindu, underlines this point and also warns against judicial intervention in such matters:

Given the context of this political culture of suspicion and accusation, it would be tempting to judicially “liberate” the CBI. This can only produce an institutional disequilibrium of the most unhelpful kind. Any democratic society should be very suspicious of a policeman, however competent a professional he may be, with powers to determine political life and death. As it is, we have yet to evolve a code of conduct for an ever enlarging plethora of regulators and independent commissions. Everyone goes about hypocritically believing that we have found the magic formula to make honest appointments of honest individuals to such “institutions.” 

Once an appointment has been wangled, then it is entirely open to an incumbent to take a maximum or a minimal view of his or her brief. We are becoming wise to another aberration: the potential — and, in a few cases, the reality — of a corporate house suborning these so-called “independent” authorities. Before we succumb once again to the allurement of installing unelected gods as our saviours, let us just remember that it is easy to proclaim and grab “independence” but it is much more difficult a task to produce the requisite institutional culture, anchored in balance, fairness and rectitude. That balance can be produced and enforced only by democratic processes of accountability. This balance can neither be produced nor imposed by a court.

Excellence in professional firms

What is it that makes some professional firms stand out? The Economist reviews a book that has come out on the subject and highlights some of the points in the book. Firms covered include McKinsey, Goldman Sachs, Capital Asset Management, Mayo Clinic and Cravath, Swaine & Moore (a law firm).

Some of the factors identified ring true but are not terribly helpful as guides to action:

These (factors common to these firms) include leaders who devote their lives to serving their firm rather than enriching themselves (though that tended to follow naturally), a good sense of what motivates staff to get up early and work late and the ability to get individualistic professionals to function unusually well in teams.

Which is fine but what makes the leaders so devoted and how exactly do the firms get teams to be effective? Echo answers.

One point is striking. The firms are fanatical about recruiting the right person and spend enormous time in getting the recruitment process right with people all the way to partners getting involved:

Each McKinsey applicant can be interviewed eight times before being offered a job; at Goldman, twice that is not unheard of. At Capital a serious candidate is likely to be seen by 20 people, some more than once. Recruitment, these firms believe, is the start of a lifelong relationship. At the same time, Goldman and McKinsey also have a policy of helping their staff to find suitable work elsewhere, all in the expectation that they will eventually become loyal customers.

The point, however, is not just ensuring that recruits fit the firm's culture but having a certain culture in the first place and defining it explicitly. It all comes down to having the "right culture". And key elements in the culture are pride in the firm and ensuring that nothing short of excellence in performance (in terms of meeting the customer's requirements) will do.

Such a culture is invariably the work of a few dedicated founders and leaders. Their contribution lies not just in creating the culture but in disseminating it and ensuring that it is passed on- by getting the right recruits in .

Should governments spend even when debt is high?

We have been following the RR debate in these posts. The latest twist is a seeming softening in the RR position in a recent FT article.They suggest that a stimulus might still be worth it in the present situation of high debt provided it goes into infrastructure:

A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower.

Government of India, please note. Here, the concern is not so much the debt to gdp ratio but high inflation and a high current account deficit. But if these two indicators are showing signs of coming under control, a case for public spending in infrastructure could arise. Let's face it: in the run-up to elections, private investment simply won't revive, so any impetus to growth can come only from public spending. Absent growth, all debt indicators will rise and pose risks of a rating downgrade.

RR also make a case for higher inflation as a way to bring debt under control:

One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate.

This point is also worth pondering in India. Our debt to gdp ratio has declined, contrary to trends elsewhere, thanks to high inflation. We need to bring inflation down to 6% or so but leaving it at that level should be ok. RBI seems to have accepted this de facto, but is yet to accept it de jure. The reality is that we do have a 'new normal' for inflation; might as well acknowledge it.

Breaking up large banks

This is one item that has been on the academic agenda, if not the political agenda, ever since the sub-prime crisis erupted. It hasn't gathered momentum because the 'how to' issues are not easy to tackle. Which parts of the universal banks to break up? Where are the buyers? And so on.

And yet one shareholder did pose the question at Citibank's annual meeting last week. FT's Lex comments:

Meantime, the US universal banks trade at discounts to some smaller, more focused peers on a price to tangible book basis. And break-up values seem attractive. CLSA, for example, puts a sum-of-the-parts valuation of $73 a share on Citi versus a market price of $47. 

Citi counters that it continues to shed non-core assets and it is cutting 11,000 jobs. But chairman Michael O’Neill says “dismembering [the bank] in an uneconomic way” would not be in the best interest of its shareholders. The likes of Citi, JPMorgan and Deutsche Bank argue that there are still real benefits to universal global banking. For now, the too-big-to-fail legislation does not seem to have much traction. Lobbyists are out in force. Still, if politics does not break up banks, then investor greed might – unless banks can boost their returns.

As Lex points out, legislation being discussed in the US Congress could give a push to the break up of large banks. Congress wants to raise capital requirements for large banks to 15% against the 10.5% proposed by Basel III. The US Fed is weighing in with a higher leverage requirement. than the 3% contemplated under Basel III. A UK regulator Andy Haldane has proposed  4-7%. 

Mind you, these are minimum requirements. Banks generally hold capital above the regulatory minimum. In India, the regulatory minimum of 11.5% will translate into a market expectation of 15-16% of capital. Banks would be wise to plan their capital requirements accordingly.

Jet-Etihad deal at Air India's expense?

Etihad's acquiring a stake in Jet Airways is intended to improve the balance sheet of Jet, which, like most airlines in India, has been incurring losses. For a variety of reasons, the Indian aviation sector is in the doldrums.  It is understood that infusion of cash is a condition for recovery. In the case of Air India, the government is footing the bill. For private carriers, there seems little alternative to FDI.

Fair enough. However, as former ED of Air India Jitender Bhargava argues in a hard-hitting article in BS, the Jet- Etihad deal appears to have come at the expense of Air India:

Though there was unanimity that the two airlines would stand to benefit enormously, the bitterness came owing to the sweetener added by the ministry of civil aviation by way of granting over 40,000 additional seats per week on the India-Abu Dhabi sector over a three-year period. These seats were given away at a time when India was witnessing negative growth. Where was the need for additional capacity?
This has led to a question: was the grant of additional seats factored in for Jet Airways to obtain a higher valuation compared to what was being discussed in January 2013? Given that the two announcements - stake sale and grant of additional seats - came within hours of each other, was an assurance on additional seats demanded by the airlines and given by the government before the pronouncement of stake sale? These are serious questions because, if the link can be established, it is not only akin to insider trading but also demonstrates how decisions can be forced out of the government by powerful individuals.

 
These are very serious questions. Perhaps, we need the CAG to look into this while auditing the ministry of civil aviation? While Jet gains from the largesse, Air India is the loser. Bhargava adds with biting sarcasm:

With the survival of Air India made still more difficult, let us welcome Jet Airways as the national carrier because it enjoys the patronage of the Government of India and has been given a head start!

---

More on the Reinhart- Rogoff paper

Martin Wolf, writing in the FT, has an interesting take on the public debt- growth thesis. He contends that high public debt is often the consequence of an explosion in private debt, He cites RR's book in support:

Indeed, in their masterpiece, This Time is Different, professors Reinhart and Rogoff explained how soaring private debt can lead to financial crises that generate deep recessions, weak recoveries and rising public debt. This work is seminal. Its conclusion is clearly that rising public debt is the consequence of the low growth, itself explained by the crisis. This is not to rule out two-way causality. But the impulse goes from private financial excesses to crisis, slow growth and high public debt, not the other way round. Just ask the Irish or Spanish about their experience. 

Wolf makes the point that what caused public debt to rise, in the first place, is important. Following a financial bust, a rise in public  debt is inevitable and necessary because otherwise the economy will plunge into a recession.

Wolf also points to an interesting historical fact. The UK had debt to GDP ratio of 240% in 1816.  The "economic disaster" that followed was the industrial revolution! Thereafter growth accelerated and the ratio declined to below 90% by 1860s. The colossal debt that UK had run was not even for productive activities, it was to finance a war! So much for the correlation between public debt and growth.

Database on graduate schools

I have received a link to a most useful database b-schools. It provides a wealth of information on MBA as well as Ph D programs. Here it is:

http://graduate-school.phds.org

Indian judiciary's finest hour

More than one newspaper has thought fit to recall, on its fortieth anniversary, the historic Kesavananda Bharati judgement delivered by the honourable Supreme Court. An article in the Hindu gives the background:

The Kesavananda Bharati case was the culmination of a serious conflict between the judiciary and the government, then headed by Mrs Indira Gandhi. In 1967, the Supreme Court took an extreme view, in the Golak Nath case, that Parliament could not amend or alter any fundamental right. Two years later, Indira Gandhi nationalised 14 major banks and the paltry compensation was made payable in bonds that matured after 10 years! This was struck down by the Supreme Court, although it upheld the right of Parliament to nationalise banks and other industries. A year later, in 1970, Mrs Gandhi abolished the Privy Purses. This was a constitutional betrayal of the solemn assurance given by Sardar Patel to all the erstwhile rulers. This was also struck down by the Supreme Court. Ironically, the abolition of the Privy Purses was challenged by the late Madhavrao Scindia, who later joined the Congress Party.

Smarting under three successive adverse rulings, which had all been argued by N.A. Palkhivala, Indira Gandhi was determined to cut the Supreme Court and the High Courts to size and she introduced a series of constitutional amendments that nullified the Golak Nath, Bank Nationalisation and Privy Purses judgments. In a nutshell, these amendments gave Parliament uncontrolled power to alter or even abolish any fundamental right.

The judgement in the Kesavananda Bharati case put the brakes on the amendment spree that parliament had embarked on . The Court ruled, by a narrow 7-5 verdict,  that parliament's amending power was limited by the "basic structure" the constitution. Different judges articulated what they meant by the "basic structure". However, in the very nature of things, this cannot be exhaustively defined. It is left to the Supreme Court to judge whether, in a given instance, the "basic structure" is disturbed.

As several legal experts have noted, there is, in the Constitution, no explicit bar on parliament's amending power: Article 368, which deals with parliaments' powers on this subject, does not impose any limitation. What, then, is the rationale for imposing a limitation? As I recall, the essence of the argument is that parliament itself is a creature of the Constitution and hence subordinate to it. Parliament cannot, therefore, act in ways that erode or undermine the "basic structure" of the Constitution.

Despite this judgement, the Supreme Court, during the emergency, did not strike down the suspension of the right to habeas corpus, which many would regard as fundamental to basic liberties of the citizen. It required a Constitutional amendment by parliament later to ensure that this right is not taken away during an emergency. One shudders to think of what might have been had the "basic structure" doctrine not been propounded by the Supreme Court. The author of the Hindu article is right in saying that this judgement saved Indian democracy.

Economists' fads and fashions

I had a post yesterday on the controversy over the Reinhart-Rogoff paper. Such controversies wouldn't be troubling if they remained strictly in the academic realm. The difficulty arises when some findings or prescriptions of economists are accepted and acted upon by policy-makers. These prescriptions, mind you, are often over-simplified versions of theory When the findings come to be questioned later, as has  happened with the RR paper, the costs of wrong policy fall on the hapless citizens of economies where these policies have been practised.

There is little doubt that austerity in the Eurozone has hurt millions badly. This would have been acceptable had there been light at the end of the tunnel. It does appear, however, that economic recovery is going to stretch out as austerity causes economies to contract. You can't blame RR alone for this.

The IMF, which has pushed for austerity in the bailout packages for Greece and others, disclosed last October that its estimate of the fiscal multiplier (of around 0.5) was an under-estimate. The multiplier may be higher than 1. This means that cuts in government spending will cause a reduction in gdp that is greater than the cut, so that debt to gdp rises, it doesn't fall! Now, who is going to pay for the IMF's turnabout? The people of the Eurozone, of course.

One can think of other prescriptions that have turned out to be dubious- capital account convertibility, opening up to foreign banks, privatisation, efficient markets and 'light-touch' regulation.... it's a long list. Policy makers must be careful not to fall for passing fads and fashion amongst economists. They must allow policy always to be mediated by the democratic process, so that they have a better understanding of how policy impacts on the lives and aspirations of people.

More in Hindu article, Beware the nostrums of economists.

Public debt and growth

Many readers will be aware of the first class controversy that is raging in the economist fraternity over a paper written by Reinhart and Rogoff  (RR)on the relationship between public debt and growth. In a nutshell, the paper purported to show that growth falls off a cliff once the public debt to gdp ration crosses 90%. Three economists at Massachussets, Amherst have shown that the calculations underlying the paper were flawed: the impact on growth at that level of debt is far less lethal than RR made it out to be.

FT has several interesting posts on the subject. Here is a sample: One, two and three

Students of economists should know, from first principles, that there was more than an element of exaggeration in the RR thesis. Think of why higher debt should hurt growth. As governments raise borrowings, there is crowding out of private investment through higher interest rates. But in an open economy where savings from outside the economy can be tapped, this effect will be far less severe than in a closed economy.

Secondly, much depends on what your borrow for. If higher government borrowing goes into infrastructure or even human capital, it could "crowd in " private investment.

Lastly, when the economy is way below full employment, government borrowing helps move output towards the equilibrium level; it is when an economy close to full employment that the deleterious effects of government borrowing are felt. When governments cut back on borrowings by cutting government spending at a time when economies are mired in recession, you get what we are seeing in the Eurozone today.

Women at work

How women can advance at the workplace is one of the recurrent themes in discussions on gender equality and management. Sheryl Sandberg, COO of Facebook, weighed into this debate with  a book that advised women to "lean in"- be more vocal and demanding at the workplace. The Economist reviews a clutch of three books that shed more light on this subject.

One point the review highlights is the differences in how men and women respond to situations at the workplace:

Women ask more questions, gather more people’s opinions and seek collaboration with co-workers more frequently than men. Men view these preferences as signs of weakness, and women, in turn, grow annoyed by how competitively men work, and how quickly and unilaterally they arrive at conclusions.

But this doesn't explain why women do not rise as much in the corporate world as men do. To put it all down to gender discrimination is a lazy explanation. Women opting out to look after children or opting for a certain career path in order to balance work and family are part of the explanation; it could also be that not enough women opt for professional degrees (such as engineering) that are required for rapid progression.

What we can say with a measure of confidence is that firms lose our when they do not have adequate gender diversity at various levels. And it may well be that to achieve a certain diversity along the line, you need to begin at the very top: representation for women on boards. European countries that have mandated minimum seats for women on boards seem to have got it right. The improvement in the lot of particular groups just does not happen in society unless there is a measure of affirmative action.

Modi's biographer on Narendra Modi

Nilanjan Mukopadhyay, author of a biography of Narendra Modi, interviewed by Rediff.com

Analytics and recruitment of employees

Analytics- or crunching of data on a large scale-is being widely used for a variety of purposes. The Economist has an interesting report on the use of analytics for hiring employees.

Some of the findings on employee performance, which helps in taking decisions on recruitment, are interesting:

• ....people who fill out online job applications using browsers that did not come with the computer (such as Microsoft’s Internet Explorer on a Windows PC) but had to be deliberately installed (like Firefox or Google’s Chrome) perform better and change jobs less often.
•  ....one of the best predictors that a customer-service employee will stick with a job is that he lives nearby and can get to work easily. These and other findings helped Xerox cut attrition by a fifth in a pilot programme that has since been extended. It also found that workers who had joined one or two social networks tended to stay in a job for longer. Those who belonged to four or more social networks did not.
• A study of 20,000 workers showed that more honest people tend to perform better and stay at the job longer. For some reason, however, they make less effective salespeople.

I don't suppose such findings can be a substitute for going through applications and interviewing candidates. But they can be an aid to good hiring, especially when backed by firm-specific data. 

And now China gets rating downgrade

China may be growing at 8% but that hasn't stopped Fitch from downgrading it from AA- to A+, FT reports.:

Fitch downgraded China’s long-term local currency rating from AA- to A+, citing a number of “underlying structural weaknesses” in the Chinese economy including low average incomes, lagging standards of governance, and a rapid expansion of credit. 

The agency also warned of the growing risks from the rise of shadow banking, and said that total credit in China may have reached 198 per cent of gross domestic product by the end of last year, up from 125 per cent in 2008. 

“Ultimately we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet. We don’t yet know what form this will take – central bailouts of local governments or of banks, perhaps”, said Andrew Colquhoun, head of Asia sovereign ratings at Fitch.  

The downgrade does not come entirely a surprise. There has long been a perception that China's public debt is understated, partly because debt raised by provincial and other agencies are not included, but mainly because China uses state-owned banks to lend in a big way to state-owned enterprises and public projects. In effect, this buries public debt in banks' balance sheets. When balance sheets are growing rapidly, the NPA/ asset  ratio stays low, again disguising the underlying problem.

The rapid expansion in credit as a percentage of GDP, however, is unlikely to leave Chinese banks unsinged. As Fitch points out correctly, this will ultimately require sovereign bail-outs and an increase in public debt.

China's high leverage coincides with signs that the chances of growth slowing down sharply are rising. Martin Wolf quotes a Chinese agency as forecasting a slowing down of growth to 6.5% between 2018 and 2022, compared to growth of 10% from 2000 to 2010.This again points to a rise in NPAs in banks. The big question is whether the transition to slower growth will be smooth or disorderly.

British banks under fire

Two British banks have come under renewed fire this week. A UK parliamentary had a scathing report on HBOS and an independent report on Barclays Bank targeted the flawed culture at the bank.

HBOS, which went to ruin in the financial crisis, was a case of colossal mismanagement: bad lending, excessive dependence on short-term funds, poor controls. Just to give one statistic, the bank's loan to deposit ratio at one point was 198%- here in India, we get nervous even if the figure approaches 100%.

All this was made possible by poor regulatory oversight. It is hard to believe that a bank can be so badly managed right under the nose of regulators. To add insult to injury, its CEO sat for two years on the board of the Financial Services Authority.

The whole problem is that bankers can get away with their behaviour without any cost to themselves. One interesting recommendation is that, in future, bankers should face sanctions for the costs they impose on their firms and on society:

Margaret Thatcher and Chandraswami

The Hindu carries a fascinating piece by K Natwar Singh on an encounter between the late Margaret Thatcher, former British PM, and godman Chandra Swami.

Apparently, the Godman predicted that Thatcher would go on to become PM and that she might remain PM for 9, 11 or 13 years. The circumstances in which this forecast was made are interesting. At the first meeting that Singh set up between the two of them in London, the godman floored Thatcher with his extra-sensory powers:

He gave Mrs. Thatcher five strips of paper and requested her to write a question on each. She obliged, but with scarcely camouflaged irritation. Chandraswamy asked her to open the first paper ball. She did. He gave the text of the question in Hindi. I translated. Correct. I watched Mrs Thatcher. The irritation gave way to curiosity. Next question. Again bull’s eye. Curiosity replaced by interest. By the fourth question the future iron lady’s demeanour changed. She began to look at Chandraswamy not as a fraud, but as a holy man indeed. My body language too altered. Last question. No problem. I heaved a sigh of relief. Mrs Thatcher was now perched on the edge of the sofa. Like Oliver Twist, she asked for more. Chandraswamy was like a triumphant Guru. He took off his chappals and sat on the sofa in the lotus pose. I was appalled. Mrs Thatcher seemed to approve.

Mrs Thatcher then requested a second meeting with Swami at which he made his prophesies about her becoming PM. 

Cyprus solution is band-aid, not cure

Another crisis, another half-solution, another sigh of relief. When will the Eurozone stop rattling financial markets? Not in the near future, I guess.

In Cyprus, those concerned- the EU, the ECB, the IMF and the government of Cyprus- had the sense to rework a badly flawed proposal and come up with something that seemed to pass muster. But this does not mean the Eurozone problems have gone away. Indeed, the approach in Cyprus raises serious questions about what would happen if problems in Spain, Italy or Portugal reared their head again.

The total cost of the bail-out is € 17 bn. The absolute amount is so small that the EU could easily have underwritten all of this. But voters in Germany won't stand for it- they want to see citizens in the distressed economies suffer for their past sins. So, Cyprus had to bear some of the pain. The issue was what form it should take.

Mercifully, the insane proposal to penalise insured depositors- which mean a straight flouting of the EU-wide guarantee- was given up. Instead, Cyprus agreed that their share of the burden-
€ 5.8 bn- would fall on large deposits (those over € 100,000). In return, the EU would hand Cyprus 
€ 10bn. 

What are the implications? First, Cyprus has imposed capital controls, which goes against the principle of an economic union.  These controls are supposed to be "temporary" but we all know what that means. Secondly, and more importantly, the principle of bailing in creditors has been carried farther than in the case of Greece. In Greece, bond-holders suffered a hair-cut; here, uninsured depositors have been included. 

You might say this is fair: creditors should suffer in any bankruptcy (after shareholders), not tax payers. Not accepting this principle gives rise to moral hazard, which has been the bane of banking. But there are costs to this approach. First, Cyprus' banking system will shrink. Make no mistake, this means that GDP will shrink. What happens to the debt to GDP ratio then? How does the Cyprus solution solve the basic problem of sovereign indebtedness?

Secondly, how would depositors in other troubled economies, such as Italy and Spain, respond? Can we expect a flight of deposits to safer economies? What does this mean for recovery in Italy and Spain? Lastly, in the case of Greece, bond-holders were told that the losses they had to take were an exceptional case. It now turns out that this is to be the norm. What does this mean for the cost of raising subordinated debt for banks in Europe? Debt is going to become more expensive and this will translate into higher costs for borrowers. Also, at the first hint of trouble, bondholders will flee. Again, growth will be a casualty.

Granted, all stakeholders in banks will have to suffer the burden of adjustment in what is fundamentally a banking crisis. But the burden has to be distributed not just among bank shareholders, creditors, taxpayers and the citizens of distressed economies. Taxpayers elsewhere in Europe - and indeed the rest of the world- have to chip in if stability and recovery in the Eurozone are to be facilitated. Banks in Europe have to be recapitalised and the costs of recapitalisation must be universally shared, albeit in differing degrees. 

FT has a good article on the balance to be struck between moral hazard and systemic risk and resolving banks.  

Monetary policy: the case for an interest rate cut

Industry as well some members of the fraternity of economists are clamouring for a rate cut on the ground that it will stimulate growth. Those oppose to it say the RBI can't afford a rate cut when consumer inflation is in the double digits (and has risen lately) and the current account deficit is alarming. I think there is a case for a rate cut but not because it will stimulate growth. The case I would make is a different one.

Let me address the reasons given for not having a rate cut. Inflation is now driven by food inflation and demand management can't do much about that. As for the impact of a rate cut on the CAD, the RBI governor addressed the issue in his recent I G Patel memorial lecture at Oxford:

The risk of the CAD widening further because of the stimulus offered by the rate cut is much less than apprehended for a host of reasons. First, when growth is sluggish as is the case now, the rate cut is unlikely to translate into import demand. Second, the rate cut was a response to softening inflation. Lower inflation will improve the competitiveness of our exports. Third, the rate cut was effected during a phase of easing commodity prices - particularly of oil - which will reduce the pressure on the CAD. Finally, empirical evidence shows that in emerging economies such as India, import demand is less a function of lower interest rate than of increased income. In other words, the marginal propensity to import by borrowing money is small.

However, the case for a rate cut is not that it will stimulate growth by boosting investment. Real interest rates today are way below the real interest rate of 7.8% in the 2004-08 boom period, so high interest rates are not why growth is being held back. The villains are policy and regulatory uncertainty and a weak global environment. There is not a damned thing fiscal policy can do to stimulate growth because if the fiscal deficit is not brought down as promised, the rating agencies will downgrade us.

The finance minister has said his principal worry is the CAD. His budget was driven by his concern that any fiscal deterioration would cause a downgrade and result in a flight of FII flows. We need, as he said, $75 bn to finance our CAD. An interest rate cut  would improve corporate profits and valuations and hence keep FII interest in India alive. It would also help banks access capital needed to meet Basel 3 norms and ease credit constraints in growth which seem to have emerged. (Proof: SLR holdings are 30% instead of the mandatory 23%). A cut in interest rate, as the RBI governor points out in his lecture, might cause FII flows into debt to slow down but it would still have a positive effect on equities. Monetary policy would thus reinforce fiscal policy in sustaining the financing the our large CAD.

More in ET column, Will Mint Street and Dalal Street unit to sustain FII flows?

  

Infosys surge: another miss for analysts

Infosys surged past Rs 3000 yesterday and has fallen back a bit today. I have no expertise on the IT sector. However, having been in investment banking, I do note with interest- though not with surprise- that analysts completely missed the turnaround in the stock's fortunes.

The big shocker to the analyst community was the favourable revenue guidance given by the company during the last quarter results. That caused analysts, who were predicting a stock price of around Rs 2200 or below in the months ahead, to revise the stock price target upwards. Even then, the higher targets were only around Rs 2850. Some analysts insisted they would wait for another quarter to see if the improvement was sustainable. Then, there was a whole tribe of analysts and media commentators who were telling us that the problem lay with the wrong choice of CEO to succeed Kris Gopalakrishnan, that the exit of most of the founders had changed the company culture completely, etc. So, the stock surging past Rs 3000 is quite a miss for the analyst community.

Of course, in these situations, hindsight is always available. ET, quoting various experts, gives reasons for the stock's improved performance. But the question is worth asking: if analysts can't get it right with a company so visible and so closely tracked as Infosys, what are they there for?

Narendra Modi's bid for prime ministership

Speculation about Narendra Modi emerging as a contender for the PM's job has been rising and has reached fever pitch. Most of the analyses tend to be partisan. Those against say the nation will never allow it, given what happened in Godhra. Those for Modi say that the time has come for a leader in the mould of Indira Gandhi. Sheela Bhat provides a more insightful and detailed analysis in Rediff.

The key point she makes is that the BJP is unlikely to get more than 150-170 seats. How does Modi become PM in that situation? She argues that the regional parties will probably strike a suitable deal with Modi. The author is clear about one thing: the BJP cadres are all for Modi and there is support amongst voters not given to watching the talk shows on the English TV channels. She believes Modi's campaign will rest on the dynasty, corruption and inflation. But what if Chidambaram delivers and the economy turns around by 2014?

Management lessons from a spy

This might sound tiresome but it appears, from a book written by a spy (a lady), that there might be a lesson or two in management that spies -of all people- have to offer. Or so Lucy Kellaway suggests in her review in the FT. And, no, the lesson is not that you gun down bad guys using a silencer.

What can spy teach us? One thing seems obvious: observe people carefully. They have to do this for a living (and sometimes to save their own lives); most of us couldn't care less.

Ok, what else? Here a couple of points that Kellaway highlights that might be useful:

Less obvious but no less valuable is her tip for job candidates: get the interviewer to do most of the talking and then hang on their every word. As hard­ly anyone can resist talking about themselves to a rapt audience, a job offer is almost bound to follow.

To the public speaker and the salesman, Carleson has further good advice: never rely on a script and never learn what you are going to say off by heart. When you do this you use a different tone of voice, go on to autopilot and all trust is lost in an instant. Carleson is right. I have done this, but never again.

But the main lesson is the one mentioned at the outset, namely, watch people carefully to catch their weaknesses:

....and for this there are some common denominators: “ . . . ego, money, ego, ego . . . ego, ego, ego.”

UK's 'cash for access' affair

I had to pinch myself in disbelief when I read this. UK's fund managers pay brokers for getting access to the latter's CEO clients. The payment rate is as much as $20,000 an hour and total spending on this account in the sector runs into millions, FT reports.

Ed Harley, head of asset management supervision at the FSA, raised the prospect of multimillion-pound fines for fund managers found to be in breach of its rules......Mr Harley said analysis by the FSA of the use of client commissions by 15 asset managers found large payments that were “hard to justify”. The bulk of them covered payments for corporate access, alongside smaller sums for access to market data.

Why would fund managers pay for access to CEOs? Presumably, they glean information that is not otherwise available? There is public disclosure of information and CEOs take conference calls from analysts and fund managers after results are disclosed. So, what exactly is to be gained by meeting the CEOs in person? And if there is something to be gained, does not that not qualify as insider information?

Incidentally, ending cash payments for access may not solve the problem. There are so many other ways in which fund managers can take care of cooperative brokers and CEOs. 

IT sector: a case of successful government intervention

It's fashionable to say that India's IT sector has been a terrific success precisely because it doesn't need support from government- it was never subject to the licensing regime, for instance. We know this is not true because the sector has been supported through tax concessions and because it was state-subsidised education that made possible the initial supply of trained personnel.

In a thought-provoking article in EPW, Jyoti Saraswati elaborates on the theme of state intervention and shows how the sector's success is, in fact, a case study in successful intervention, contrary to the nonsense that is spouted by advocates of neo-liberalism or the leading figures in the sector.

The author mentions two big forms of support in the initial period. One, the 1972 Software Export Scheme which provided 100% loans for computers meant for export use. Secondly, investment in telecom infrastructure that made possible off-shore delivery of services. The state has continued to support the sector in the post-liberalisation phase as well- the Software Technology Parks of India was one such significant initiative. Another point worth noting is that India's IT firms were able to move up the value chain by gaining experience in the domestic market which, by then, had begun to find use for their services. (eg CMC's experience in computerising the Indian railways' ticketing system helped it win the London Underground contract).

The author's  conclusion is worth quoting:

The experience of the Indian software industry over the past 20 years supports the argument that the Indian state should not be seen as pro-market but be understood as pro-business (Kohli 2010), i e, it is able and willing to intervene in support of selected sectors and industries regardless of the neo-liberal rhetoric it may espouse and the international diktats it claims to adhere to. Indeed, the state can continue to play a significant supporting role for firms, industries and sectors.

The broader point I would add is that private entrepreneurship in most countries flourishes on the back of covert or overt government support. The idea that the state should back off  and 'leave it to the market' is a myth that is perpetuated by private sector interests when it suits them. 

Kumbh Mela managerial marvel

FT joins others (including a  team from Harvard) in marvelling at the managerial capabilities that underlie the successful organisation of the Kumbh Mela festival this year.

On the sandbanks of the river Ganges at Allahabad, bureaucrats and workers from Uttar Pradesh, India's most populous state and one of its poorest, took less than three months to build a tent city for 2m residents complete with hard roads, toilets, running water, electricity, food shops, garbage collection and well-manned police stations.....

.....Devesh Chaturvedi, a senior official who is divisional commissioner of Allahabad, is proud of the “huge task” that he and perhaps 100,000 workers have completed in organising this year’s festival.
He mentions 165km of roads on the sand made of steel plates, 18 pontoon bridges, 560km of water supply lines, 670km of electricity lines, 22,500 street lights and 200,000 electricity connections, as well as 275 food shops for essential supplies such as flour, rice, milk and cooking gas.

The obvious question that is being asked is if such a feat of organisation can be accomplished for this purpose, why not elsewhere? Why can't India's villages and towns be similarly transformed. Well, motivation apparently is everything: the people involved in the project think they are actuated by a sense of mission, given the religious significance of the event. In principle, however, India should be able to replicate it in other places: neither talent nor resources is the real constraint:

First, the authorities ensure that all those working on the project are accountable for their actions and the money they spend. Second, those involved are highly motivated.
“They feel it’s a real service to all these pilgrims who have come here, the sadhus [holy men] and the seers, so it’s a sort of mission which motivates them to work extra, despite difficult working conditions.” 

Good organisation and efficient infrastructure, in short, are no more impossible in India than anywhere else. “The lesson is, it can be done,” says Bhagawati Saraswati, a Californian-born Hindu devotee camped on the river bank with other members of an ashram based on the upper Ganges.

 

Capping bankers' bonuses

The European parliament has grasped the nettle when it comes to bankers' bonuses. They have passed a law that mandates a 1:1 limit on the salary to bonus ratio. This can be go up to 2:1 with shareholder approval. The move has raised a storm in London where bankers and politicians believe that the proposal will undermine the City's importance as a financial centre, perhaps by causing banks to move key personnel to locations where the caps would not apply. FT has a primer on the new regulations.

One obvious response on the part of banks would be to increase base pay so that the overall compensation is not affected. But this has its own problems: it raises a banks' fixed cost and leaves it vulnerable in times when revenues and profits shrink. The EU banks fear that the proposal would confer American banks, operating in the US, with an advantage. (Presumably, the rules would apply to American banks' subsidiaries in the EU). Andrew Hill has a critique in the FT, but I am not convinced by his arguments.

The cap on bonuses follows regulations that require banks to defer the vesting of stock options over a longish period. Increasing the requirement of bank capital, which will reduce returns to equity in banking, should also help address the issue of systemic risk posed by large bank bonuses.

Incidentally, we are seeing the first major attempt at clawing back bonuses. Barclays is clawing back 300 million pounds paid to its bankers. The claw back follows huge fines the bank has incurred for Libor rigging and mis-selling various products.

Where does all this leave banking? The outcome, one imagines, would be to reduce incentives for taking excessive risk. Will it curb innovation? Perhaps, but, then, there is the perception that much of the innovation we have seen in recent years is of dubious value. A certain imbalance has crept in between the financial sector and the real economy. There is such a thing as excessive 'f'inancialisation' of the economy. Tackling compensation in banking is one element in addressing the larger problem of systemic risk in banking.

At the mercy of the rating agencies

The FM has kept his pledge. He has contained the fiscal deficit for 2012-13 at 5.2%. All of us know that this is at the cost of a cut in Plan Expenditure of nearly Rs 90,000 crore. He pegs the deficit for the 2013-14 at 4.8%. Since he sees no choice but to appease the rating agencies, chances are he will stick to this target as well. The question is: how?

Many analysts have pointed out that the revenue estimates are optimistic even if we grant that growth revives to 6%- the figures non-tax revenues, including divestment proceeds, certainly are ambitious. Subsidies in the coming year are to decline by Rs 25,000 crore, which means fuel subsidies will be axed even further, which would be a tall order as elections approach. It is more likely that the FM will meet the fiscal deficit target the same way he did this year- by pruning Plan expenditure and capital expenditure. The increase in 29% in Plan expenditure is clearly iffy.

Growth has sagged in the current year because of an investment famine and cuts in government capital expenditure have clearly contributed. If the government resorts to the same in 2013-14, that is bound to tell on growth. The betting is that private investment will somehow revive strongly, helped by lower interest rates. As fuel subsidies are pruned, inflation will stay in the region of 7%, so there is little the RBI can do to help. More importantly, it is not at all clear that high interest rates are the deterrent to private investment- real interest rates today are way below they were doing the boom period of 2004-08.

Private investment will revive if investors see demand looking up. Either export demand must pick up with an improvement in the global situation. Or domestic demand must revive- and, in the present situation, this requires a strong push from the government. Think of the what the highways project did during the NDA regime. But, if the government is fixated on a fiscal deficit number, there is no way this can happen.

For me, the big puzzle is why rating agencies are so obsessed with the fiscal deficit number. India's total debt to GDP ratio of less than 70% looks good in the present environment; India is among the few countries to have seen the ratio declining post-crisis. States have got their acts together on the fiscal front. External borrowings are low. If only the rating agencies would allow elbow room in respect of the fiscal deficit, it will be easier to get into a virtuous cycle of higher growth, higher revenues, and lower fiscal deficit. Historical experience shows that nations grow their way out of a high debt situation. The G-20 is veering towards reducing austerity. But here the rating agencies won't allow it. And we can't annoy the agencies thanks to our yawning current deficit.

Just hope and pray that gold prices collapse. Then, the current account deficit will narrow. That will give us greater freedom in respect of fiscal policy. Also, pray that the global environment improves. t's hard to see how the present fiscal approach can lead to any early revival in growth.

Some related thoughts in my ET column, Budget must cheer the markets.

Sebi paper on corporate governance

Sebi has just come out with a consultative paper on corporate governance. I know most people can't help yawning- so much has been said about corporate governance and yet we have so little to show.

Still, I would recommend the Sebi paper because it not only gives the background to the situation in India but also documents some undramatic but useful initiatives Sebi has taken of later. The consultative paper itself contains some useful proposals, some of which I will mention:

• Giving minority shareholders in large companies the right to nominate at least one director: This is a useful step towards broad-basing the board, which today consists entirely of  nominees of  promoters.
• Requiring independent directors to give reasons when they resign: True, they can always cite "personal reasons" in order to avoid unpleasantness. But if things blow up later, they can't say they were aware of what was going and that is why they resigned; if they knew, they should have said so in their letter of resignation.
• A maximum tenure for independent directors: Two terms of five each. I am not sure I favour the same directors returning after a hiatus of three years. Surely, there is enough talent available in the country, notwithstanding claims to the contrary made by companies?
• Restricting the number of independent directorships: This should not be more than six or seven in my view. It is shameful that many people don't think it necessary to impose limits on their own when  they know you can't do justice otherwise.
• Performance evaluation of independent directors: This is to be done by peers, which could lead to back-scratching. But even a few adverse evaluations should have some effect,
• Making a whistle-blower mechanism compulsory: This is long overdue. It should be possible for employees to disclose wrong doing to a designated independent director. It should be mandatory for the said director to bring the matter to the board for discussion.
• Mandatory succession planning and disclosure of these plans to shareholders
• Mandatory e-voting

These are some of the more important proposals. The disappointment is that we are not seeing a wider participation of shareholders in the appointment of independent directors. I would like to see institutions nominate their directors who would be regarded as independent. Strangely, the Sebi paper thinks institutional nominees should not be regarded as independent presumably because they represent the interests of one groups. But institutional interests are also, in general, aligned with those of the broader shareholder body, aren't they?

You cannot have an effective board as long as management or promoters appoint independent directors and reward them lavishly. The appointment of independent directors should be done by different stakeholders, including minority shareholders. I believe not insisting on this is the big lacuna in an otherwise interesting paper put out by Sebi.

More in my column, Sebi dodges the central issue.

Corruption- India isn't unique

Spain's PM Mariano Rajoy has been implicated in a growing corruption scandal in Spain, which is already under pressure in the Eurozone crisis, FT reports:

Spain’s prime minister has become embroiled in a growing scandal over secret cash payments to ruling party politicians after a newspaper published that it claimed to be accounts showing payments reaching as high as Mariano Rajoy himself..... 

“The level of trust in politicians in Spain is very, very low, and corruption is one of the main problems,” said Antonio Argandoña, professor of Business Ethics and Economics at IESE business school. “Politicians must tackle this problem before any more damage is done.”

A recent poll for El País suggested that 96 per cent of Spaniards believed that political corruption was “very high”.

 

I know this is poor consolation but it helps to know that political corruption isn't unique to India.  It is alive and kicking in rich economies as well.