Sunday, November 13, 2005
Sunday, October 30, 2005
What Share Buy Backs do
The ABC of Share Buyback
Share buybacks are back in fashion. In 2004, globally, companies announced plans to repurchase $230 billion in stock, more than double the volume of the previous year. During the first three months of 2005, buyback announcements exceeded $50 billion. And with large global corporations holding $1.6 trillion in cash, there are signs that buybacks will gain momentum in the coming months. In India too, we can expect this trend to pick up, as corporate performance has been quite strong.
In general, a buyback can have a positive impact on the share price both due to change in the capital structure and the signals it sends. A buy back increases the debt component in the capital and reduces the amount of cash available with the company. The cost of capital is lower when a company uses some debt for financing, because interest payments in case of debt are tax deductible while dividends in case of equity are not. On the other hand, holding excess cash raises the cost of capital, as the interest earned on cash is taxable.
The impact on share prices due to the tax effect can be quantified. But academic research indicates that buyback announcements typically result in a much bigger rise in share price than this analysis would suggest. In the global context, research indicates that companies initiating small repurchase programs see an average increase in their share price of 2 to 3 percent on the day of the announcement. Those that undertake larger buybacks, involving around 15 percent or more of the shares, see prices increase by some 16 percent, on average. Clearly, there must be a better explanation for this larger positive reaction to share buybacks.
Logically, companies must repurchase shares when they have accumulated more cash than they can invest profitably. Buyback is not good news in itself, but shareholders are frequently relieved to see companies giving back the excess cash rather than wasting it on unprofitable investments. This signal can be further strengthened if the company’s managers declare that they will not sell any of their own stock to the company. Indeed, it is often the case that during stock repurchase programs, senior managers and directors announce they will hold onto their stock. So it is not surprising that announcements of offers to buy back shares above the market price have prompted a larger rise in the stock price, averaging about 11 percent in the US.
In many cases, a company seems to be undervalued just before it announces a buyback, reflecting an uncertainty among investors about what the management will do with the excess cash. The strength of the market's reaction also seems to indicate that shareholders often realize that a company has more cash than it can invest, long before the buyback announcement is made.
For cash-rich industries with insufficient investment opportunities, it makes sense for the management to pay out the excess cash sooner rather than later. But in industries with good investment opportunities, it is clearly wrong to buy back shares in order to achieve Earnings Per Share (EPS) targets. So care should be taken, especially because management compensation in many companies, is linked to EPS, that managers do not do buybacks at the risk of affecting the long-term health of the company.
Many market participants and executives believe that a repurchase by reducing the number of outstanding shares, also raises a company's share price. The argument is that the same earnings divided by fewer shares will lead to a higher EPS and consequently a higher share price. But this is not quite correct. The EPS goes up but the share price may not.
Say a company X has 100 shares outstanding. It earns Rs.1,000 a year, all of which is paid out as a dividend. The dividend per share is, therefore, Rs.1,000/100 = Rs.10. Suppose that investors expect the dividend to be maintained indefinitely and that they require a return of 10 percent. In this case, basic time value theory in financial management will tell us that the present value of each share = Rs.10/.10 = Rs.100. Since there are 100 shares outstanding, the total market value of the equity = 100 X Rs.100 = Rs.10,000.
Now suppose the company announces that instead of paying a cash dividend in year 1, it will spend the same money repurchasing its shares in the open market. The present value of the Rs.1,000 received from the stock repurchase in year 1 is (Rs.1,000/1.1) = Rs.909. The present value of the Rs. l,000-a-year dividend starting in year 2 is [(Rs.1,000/(.10 X 1.1)] = Rs. 9,091. Each share continues to be worth (909 + 9091)/100 = Rs.100 just as before.
We can redo the calculations in a different way. Those shareholders who sell their stock back to the company will not receive any dividend. So the price at which the firm buys back shares must be 10 percent higher than today's price, or Rs.110. If the company spends Rs.1,000 it can buy Rs.1,000/Rs.110 = 9.09 shares. The company starts with 100 shares and buys back 9.09. Therefore 90.91 shares remain outstanding. Each of these shares will be entitled to a future dividend stream of Rs.1,000/90.91 = Rs.11 per share. The value of each of these shares today is therefore 11/(.1 X 1.1) = Rs.100.
This example illustrates that other things being equal, company value is unaffected by the decision to repurchase stock instead of paying a cash dividend. In practice, because of the different signals they send, the impact of dividends and share buyback may be different. Dividends tend to be regular payouts whereas buybacks are usually one time events.
Share buybacks are back in fashion. In 2004, globally, companies announced plans to repurchase $230 billion in stock, more than double the volume of the previous year. During the first three months of 2005, buyback announcements exceeded $50 billion. And with large global corporations holding $1.6 trillion in cash, there are signs that buybacks will gain momentum in the coming months. In India too, we can expect this trend to pick up, as corporate performance has been quite strong.
In general, a buyback can have a positive impact on the share price both due to change in the capital structure and the signals it sends. A buy back increases the debt component in the capital and reduces the amount of cash available with the company. The cost of capital is lower when a company uses some debt for financing, because interest payments in case of debt are tax deductible while dividends in case of equity are not. On the other hand, holding excess cash raises the cost of capital, as the interest earned on cash is taxable.
The impact on share prices due to the tax effect can be quantified. But academic research indicates that buyback announcements typically result in a much bigger rise in share price than this analysis would suggest. In the global context, research indicates that companies initiating small repurchase programs see an average increase in their share price of 2 to 3 percent on the day of the announcement. Those that undertake larger buybacks, involving around 15 percent or more of the shares, see prices increase by some 16 percent, on average. Clearly, there must be a better explanation for this larger positive reaction to share buybacks.
Logically, companies must repurchase shares when they have accumulated more cash than they can invest profitably. Buyback is not good news in itself, but shareholders are frequently relieved to see companies giving back the excess cash rather than wasting it on unprofitable investments. This signal can be further strengthened if the company’s managers declare that they will not sell any of their own stock to the company. Indeed, it is often the case that during stock repurchase programs, senior managers and directors announce they will hold onto their stock. So it is not surprising that announcements of offers to buy back shares above the market price have prompted a larger rise in the stock price, averaging about 11 percent in the US.
In many cases, a company seems to be undervalued just before it announces a buyback, reflecting an uncertainty among investors about what the management will do with the excess cash. The strength of the market's reaction also seems to indicate that shareholders often realize that a company has more cash than it can invest, long before the buyback announcement is made.
For cash-rich industries with insufficient investment opportunities, it makes sense for the management to pay out the excess cash sooner rather than later. But in industries with good investment opportunities, it is clearly wrong to buy back shares in order to achieve Earnings Per Share (EPS) targets. So care should be taken, especially because management compensation in many companies, is linked to EPS, that managers do not do buybacks at the risk of affecting the long-term health of the company.
Many market participants and executives believe that a repurchase by reducing the number of outstanding shares, also raises a company's share price. The argument is that the same earnings divided by fewer shares will lead to a higher EPS and consequently a higher share price. But this is not quite correct. The EPS goes up but the share price may not.
Say a company X has 100 shares outstanding. It earns Rs.1,000 a year, all of which is paid out as a dividend. The dividend per share is, therefore, Rs.1,000/100 = Rs.10. Suppose that investors expect the dividend to be maintained indefinitely and that they require a return of 10 percent. In this case, basic time value theory in financial management will tell us that the present value of each share = Rs.10/.10 = Rs.100. Since there are 100 shares outstanding, the total market value of the equity = 100 X Rs.100 = Rs.10,000.
Now suppose the company announces that instead of paying a cash dividend in year 1, it will spend the same money repurchasing its shares in the open market. The present value of the Rs.1,000 received from the stock repurchase in year 1 is (Rs.1,000/1.1) = Rs.909. The present value of the Rs. l,000-a-year dividend starting in year 2 is [(Rs.1,000/(.10 X 1.1)] = Rs. 9,091. Each share continues to be worth (909 + 9091)/100 = Rs.100 just as before.
We can redo the calculations in a different way. Those shareholders who sell their stock back to the company will not receive any dividend. So the price at which the firm buys back shares must be 10 percent higher than today's price, or Rs.110. If the company spends Rs.1,000 it can buy Rs.1,000/Rs.110 = 9.09 shares. The company starts with 100 shares and buys back 9.09. Therefore 90.91 shares remain outstanding. Each of these shares will be entitled to a future dividend stream of Rs.1,000/90.91 = Rs.11 per share. The value of each of these shares today is therefore 11/(.1 X 1.1) = Rs.100.
This example illustrates that other things being equal, company value is unaffected by the decision to repurchase stock instead of paying a cash dividend. In practice, because of the different signals they send, the impact of dividends and share buyback may be different. Dividends tend to be regular payouts whereas buybacks are usually one time events.
Deal making in India hots up
M&A Scenario hots up
Business assets are being bought and sold like never before in the country. According to PricewaterhouseCoopers (PwC), the value of Mergers & Acquisitions (M&A) deals announced in the first six months of 2005 was $6.9 billion, compared to $2.9 billion in the first half of 2004, and more than the $5.2 billion in the whole of 2004. At this rate, the value of M&A activities in the country may touch $15 billion in 2005.
Last year, M&A activities were largely restricted to the IT and telecom sectors. They have now spread across the economy. This is the fourth wave of corporate deal-making in India. The first happened in the 1980s, led by corporate raiders like Swraj Paul, Manu Chhabria and R.P. Goenka. This was around the time that reforms began tentatively under Rajiv Gandhi. In view of the license raj prevailing then, buying a company was one of the best ways to generate growth, for ambitious corporates.
In the early 1990s, Indian business houses began to feel the heat of competition. Conglomerates that had lost focus were forced to sell non-core businesses that could not withstand competitive pressures. The Tatas, for example, sold their soaps business to Hindustan Lever. This marked the second wave of M&As, largely driven by corporate restructuring.
The third wave started at the dawn of the new millennium, driven by consolidation in key sectors like cement and telecommunications. Companies like Bharti Tele-Ventures and Hutch bought smaller competitors and built national networks.
What makes this fourth wave different from the three previous ones is the global flavour of many of the deals. Foreign private equity is coming into Indian companies, like Newbridge's recent investment in Shriram Holdings, Multinational corporations (MNCs) are also entering India. Swiss cement major Holcim’s investment in ACC and Oracle’s purchase of a 41 per cent stake in i-flex solutions (for $593 million) are good examples.
Indian companies are also going abroad. Tata Steel has bought Singapore-based NatSteel for $486 million. Videocon has bought the colour picture tubes business of Thomson for $290 million. Such global forays have become a possibility because foreign exchange is no longer a scarce commodity. India's official foreign exchange reserves at more than $140 billion, exceed the country's total foreign debt. So the government is not worried when companies spend dollars to buy assets abroad.
A paradigm shift is likely in the coming years. Friendly deals could give way to aggressive ones. In future, we may see hostile bids and leveraged buyouts. Most M&As so far have been cash deals. There have been very few stock swaps. As equity prices rise, we will see acquirers using their own stock as currency for acquisitions. As the appetite for deal making increases, the valuation is also bound to go up. In short, exciting times are ahead.
A study by Prashant Kale of University of Michigan, and Harbir Singh of Wharton, on M&As between 1992 and 2002 indicates that in the initial years of economic liberalisation, Indian companies failed to create sufficient value from acquisitions, as compared to MNCs. However, with the passage of time, Indian companies have begun developing the necessary capabilities to create more value from deals. But returns on acquisitions fell after 1998. Presumably, in the earlier period (1992-1997) there were many low-hanging fruits waiting to be plucked. The market for corporate control was not so well developed. Hence assets could be picked up cheap. But after 1998, acquisitions have become more expensive. So much more has to be done to squeeze value out of them.
Investment bankers too expect the price of acquisitions to rise further in the coming months, mirroring the rising prices of listed stocks. The higher the premium, the harder the company has to work to create value for shareholders. Which means M&A deals will have to selected and structured very carefully after studying carefully the potential for generating synergies.
Business assets are being bought and sold like never before in the country. According to PricewaterhouseCoopers (PwC), the value of Mergers & Acquisitions (M&A) deals announced in the first six months of 2005 was $6.9 billion, compared to $2.9 billion in the first half of 2004, and more than the $5.2 billion in the whole of 2004. At this rate, the value of M&A activities in the country may touch $15 billion in 2005.
Last year, M&A activities were largely restricted to the IT and telecom sectors. They have now spread across the economy. This is the fourth wave of corporate deal-making in India. The first happened in the 1980s, led by corporate raiders like Swraj Paul, Manu Chhabria and R.P. Goenka. This was around the time that reforms began tentatively under Rajiv Gandhi. In view of the license raj prevailing then, buying a company was one of the best ways to generate growth, for ambitious corporates.
In the early 1990s, Indian business houses began to feel the heat of competition. Conglomerates that had lost focus were forced to sell non-core businesses that could not withstand competitive pressures. The Tatas, for example, sold their soaps business to Hindustan Lever. This marked the second wave of M&As, largely driven by corporate restructuring.
The third wave started at the dawn of the new millennium, driven by consolidation in key sectors like cement and telecommunications. Companies like Bharti Tele-Ventures and Hutch bought smaller competitors and built national networks.
What makes this fourth wave different from the three previous ones is the global flavour of many of the deals. Foreign private equity is coming into Indian companies, like Newbridge's recent investment in Shriram Holdings, Multinational corporations (MNCs) are also entering India. Swiss cement major Holcim’s investment in ACC and Oracle’s purchase of a 41 per cent stake in i-flex solutions (for $593 million) are good examples.
Indian companies are also going abroad. Tata Steel has bought Singapore-based NatSteel for $486 million. Videocon has bought the colour picture tubes business of Thomson for $290 million. Such global forays have become a possibility because foreign exchange is no longer a scarce commodity. India's official foreign exchange reserves at more than $140 billion, exceed the country's total foreign debt. So the government is not worried when companies spend dollars to buy assets abroad.
A paradigm shift is likely in the coming years. Friendly deals could give way to aggressive ones. In future, we may see hostile bids and leveraged buyouts. Most M&As so far have been cash deals. There have been very few stock swaps. As equity prices rise, we will see acquirers using their own stock as currency for acquisitions. As the appetite for deal making increases, the valuation is also bound to go up. In short, exciting times are ahead.
A study by Prashant Kale of University of Michigan, and Harbir Singh of Wharton, on M&As between 1992 and 2002 indicates that in the initial years of economic liberalisation, Indian companies failed to create sufficient value from acquisitions, as compared to MNCs. However, with the passage of time, Indian companies have begun developing the necessary capabilities to create more value from deals. But returns on acquisitions fell after 1998. Presumably, in the earlier period (1992-1997) there were many low-hanging fruits waiting to be plucked. The market for corporate control was not so well developed. Hence assets could be picked up cheap. But after 1998, acquisitions have become more expensive. So much more has to be done to squeeze value out of them.
Investment bankers too expect the price of acquisitions to rise further in the coming months, mirroring the rising prices of listed stocks. The higher the premium, the harder the company has to work to create value for shareholders. Which means M&A deals will have to selected and structured very carefully after studying carefully the potential for generating synergies.
India's incorrigible politicians
The Bangalore Airport Fiasco
The resignation of N R Narayana Murthy from Bangalore International Airport Ltd (BIAL) shows the deviousness and convoluted thinking that prevails among many of the country’s politicians.
Bangalore, long considered India’s Silicon Valley, has been suffering from acute infrastructure problems in recent years. The roads are clogged. The power supply is erratic. The existing airport is crowded and unable to cope with the increased number of flights. Once India’s most beautiful city, Bangalore is no longer the most attractive place for people to work and live. People in Bangalore today spend as much time traveling to their workplace and back, as in Mumbai.
Bangalore politicians and bureaucrats are squarely to blame for this scenario. While politicians in neighbouring states, Andhra Pradesh and Tamil Nadu are investing in infrastructure development, their counterparts in Karnataka have allowed the garden city’s beauty to fade away rapidly.
Bangalore’s IT chieftains have been airing their concerns in public for sometime now. Indeed, companies like Wipro and Infosys have been quietly expanding their development centres in other parts of the country, including Calcutta, once described by Rajiv Gandhi as a dying city. Current indications are that Chennai will rapidly overtake Bangalore both in terms of the size of development centres and the number of jobs generated. Tamil Nadu politicians may be eccentric in some respects, such as putting huge hoardings of their leaders on thoroughfares. But when it comes to providing a good investment climate, leaders of both the DMK and AIADMK show considerable maturity.
Under these circumstances, Janata Dal leader HD Deve Gowda’s irresponsible statements are nothing but fishing in troubled waters. Deva Gowda’s party did little for Bangalore when it was in power at the centre and the state. Now in trying to make out a case against Infosys, one of India’s most admired companies (especially where it comes to ethics and corporate governance), the Janata Dal leaders are clearly barking up the wrong tree.
Indian people have long given up on the country’s politicians. The least Indian politicians can do is to keep quiet when some people are trying to do good work. People like Narayana Murthy are busy leading and building their organizations. If at all they choose to sacrifice some of their time and associate themselves with projects like BIAL, it is purely out of a sense of social responsibility. In contrast to politicians who cling to power shamelessly, even after their incompetence and malafide intentions have been thoroughly exposed, Narayana Murthy has not hesitated to resign. If at all he withdraws his resignation, he must do so on his terms and after Deve Gowda tenders a public apology.
Meanwhile, the resignation of Narayana Murthy will send absolutely wrong signals to the international community. It will tell the world, that India is least concerned about infrastructure development. Slowly but surely, other cities like Shanghai will emerge as better places for software development. Infosys itself is strengthening its presence in China, recruiting a large number of software engineers in that country.
Meanwhile, the Congress is not exactly covering itself with glory. Instead of resolving the stalemate, Congress politicians are trying to gain political milage out of the episode. They are making weak, diplomatic noises but not really criticizing Deve Gowda directly.
The time has come to put in place suitable legislation to take politicians to task for making irresponsible statements. Politicians must be made to realize that they are accountable. If their thoughts, words and deeds impede economic development, they must be punished. In May 2004, the communists made irresponsible statements around the time a new government was being formed at the centre. The Sensex plunged, sending thousands of ordinary investors into despair.
Unlike corporate leaders who are punished by the markets quickly for poor financial performance even in one quarter, politicians have to face the electorate only once in five years. Many of the voters are gullible and vulnerable to the manipulation of politicians. Only strong legal safeguards can correct the situation. In recent times, the Supreme Court has got involved in various matters relating to public interest and dispensed justice promptly. It must also do so when politicians behave irresponsibly.
The resignation of N R Narayana Murthy from Bangalore International Airport Ltd (BIAL) shows the deviousness and convoluted thinking that prevails among many of the country’s politicians.
Bangalore, long considered India’s Silicon Valley, has been suffering from acute infrastructure problems in recent years. The roads are clogged. The power supply is erratic. The existing airport is crowded and unable to cope with the increased number of flights. Once India’s most beautiful city, Bangalore is no longer the most attractive place for people to work and live. People in Bangalore today spend as much time traveling to their workplace and back, as in Mumbai.
Bangalore politicians and bureaucrats are squarely to blame for this scenario. While politicians in neighbouring states, Andhra Pradesh and Tamil Nadu are investing in infrastructure development, their counterparts in Karnataka have allowed the garden city’s beauty to fade away rapidly.
Bangalore’s IT chieftains have been airing their concerns in public for sometime now. Indeed, companies like Wipro and Infosys have been quietly expanding their development centres in other parts of the country, including Calcutta, once described by Rajiv Gandhi as a dying city. Current indications are that Chennai will rapidly overtake Bangalore both in terms of the size of development centres and the number of jobs generated. Tamil Nadu politicians may be eccentric in some respects, such as putting huge hoardings of their leaders on thoroughfares. But when it comes to providing a good investment climate, leaders of both the DMK and AIADMK show considerable maturity.
Under these circumstances, Janata Dal leader HD Deve Gowda’s irresponsible statements are nothing but fishing in troubled waters. Deva Gowda’s party did little for Bangalore when it was in power at the centre and the state. Now in trying to make out a case against Infosys, one of India’s most admired companies (especially where it comes to ethics and corporate governance), the Janata Dal leaders are clearly barking up the wrong tree.
Indian people have long given up on the country’s politicians. The least Indian politicians can do is to keep quiet when some people are trying to do good work. People like Narayana Murthy are busy leading and building their organizations. If at all they choose to sacrifice some of their time and associate themselves with projects like BIAL, it is purely out of a sense of social responsibility. In contrast to politicians who cling to power shamelessly, even after their incompetence and malafide intentions have been thoroughly exposed, Narayana Murthy has not hesitated to resign. If at all he withdraws his resignation, he must do so on his terms and after Deve Gowda tenders a public apology.
Meanwhile, the resignation of Narayana Murthy will send absolutely wrong signals to the international community. It will tell the world, that India is least concerned about infrastructure development. Slowly but surely, other cities like Shanghai will emerge as better places for software development. Infosys itself is strengthening its presence in China, recruiting a large number of software engineers in that country.
Meanwhile, the Congress is not exactly covering itself with glory. Instead of resolving the stalemate, Congress politicians are trying to gain political milage out of the episode. They are making weak, diplomatic noises but not really criticizing Deve Gowda directly.
The time has come to put in place suitable legislation to take politicians to task for making irresponsible statements. Politicians must be made to realize that they are accountable. If their thoughts, words and deeds impede economic development, they must be punished. In May 2004, the communists made irresponsible statements around the time a new government was being formed at the centre. The Sensex plunged, sending thousands of ordinary investors into despair.
Unlike corporate leaders who are punished by the markets quickly for poor financial performance even in one quarter, politicians have to face the electorate only once in five years. Many of the voters are gullible and vulnerable to the manipulation of politicians. Only strong legal safeguards can correct the situation. In recent times, the Supreme Court has got involved in various matters relating to public interest and dispensed justice promptly. It must also do so when politicians behave irresponsibly.
Thursday, October 13, 2005
Leveraging the power of knowledge in B Schools
Knowledge Management in B Schools
Development and sharing of knowledge have been going on ever since man learnt to speak
and write. Indeed, the first turning point in knowledge sharing came when man learnt to
write, enabling future generations to have access to the knowledge of the earlier generation. The discovery of the printing press, which allowed copies of the same document to be made and distributed to people in a costeffective manner was another watershed event.
Few, however, thought it necessary to look at knowledge management (KM) as a separate
discipline till recently. Now, KM has clearly emerged as one of the most visible disciplines in
management education. And the main reason for this trend seems to be information technology in general and the Internet in particular.
When we think of knowledge, we instinctively tend to think of teachers, schools, colleges and
universities. Indeed, for most people, the primary source of knowledge is teachers and academic
institutions. Yet, how committed are our institutions of higher learning to KM? Very little,
especially if we look at what is happening globally.
Most of the leading B-schools in Europe and the US have strong KM initiatives, many of which are web-based. They have Web sites rich in content. Leading American B-schools also have powerful Intranets that allow information to be shared among faculty and students within the
campus.
Some of the KM initiatives undertaken by academics in the West are truly mind boggling.
Prof. Raj Reddy, (of Carnegie Mellon University), the world's leading expert in artificial intelligence is attempting to collect virtually all the information available in the world and host it free of cost, in an easily retrievable form on one Web site. www. ulib.org. Prof. Reddy is talking about going back hundreds of years in time. And his vision is to store information pertaining to at least 1,000 years and make it available free of cost to the general public.
Another laudable initiative is that of Prof. Werner Antweiler of University of British Columbia,
Vancouver, Canada. His Web site pacific.commerce.ubc.ca / xr allows us to access foreign exchange rates going back several years for almost all traded currencies. If you want to know how the rupee was trading against the dollar in 1993, don't go to the RBI! Prof. Antweiler's Web site will give you the figure in seconds.
With stray exceptions, such a commitment to compiling, documenting and sharing knowedge is
lacking among our academicians. How many of us have a home page? Do we document our
lecture notes and store them for posterity? We teach batch after batch of students. Do we
document the common mistakes which students make in the examination or the questions
typically asked by the students in the class? Imagine a scenario where such information is
provided to the students on the Net before the semester starts. Students would come well prepared and the quality of discussion in the class would improve by leaps and bounds. Not only that, if one of the regular instructors is not available for the semester, an alternative instructor can be quickly briefed and pressed into service, without in any way diluting the academic standards.
Most of our leading B-schools have Web sites today. Unfortunately, their quality leaves a lot to be desired. Except for a prospectus and a few photographs, there is nothing to excite a visitor. Unless the site is enriched with lecture notes, power point presentations made by faculty, research papers and useful links it will remain static and be of little utility. A bulletin board is also a must to accelerate the process of sharing insights.
In the medium to long run, our B- Schools should aim to develop knowledge portals like Insead. But in the short run, basic information like lecture schedules, course curriculum, lecture
notes and solutions to assignment problems can be made freely available on the Web.
I would like to think that our faculty, especially in the top 100 B-schools, are reasonably capable
people. Many of them are well-read and the increasingly demanding students are maintaining
the pressure on them to upgrade their knowledge.
So, more than knowledge development, it is knowledge sharing which is the key issue. In
general, we Indians are reluctant to share what we know with others. We feel worried, that all
the hard work put in by us will be meaningless if some one has easy access to our knowledge.
This is a wrong mindset. People will invariably learn what we know as no secret is permanent.
On the other hand, if we share our knowledge, reciprocity is quite likely. And as knowledge is
shared among academics, new knowledge will be created. This type of climbing spiral is what we
need to make our B-schools centres of excellence. Like in business, it is innovation which will create sustainable competitive advantages for a B-school. And knowledge sharing is a must to foster an innovation-driven culture.
The Net has thrown up possibilities which were not available earlier. While installing an intranet
such as Lotus Notes can be a very expensive process, the Internet is a very inexpensive medium to store and transmit files of data. Let us hope Indian B-schools will appreciate the
potential of the Web as a knowledge sharing tool.
Our legal system is just not working
India’s pathetic legal system
In modern society, speedy and efficient legal processes have a very important role to play. Without a sound legal system, it would be difficult to safeguard property rights, for businesses to function, for the innocent to defend themselves against false allegations and for the guilty to be taken to task.
Unfortunately, our outmoded legal system is a major stumbling block in the reform process. The guilty have a field day and can prolong cases for as long as they want. For the innocent, getting speedy justice is next to impossible. They have to tear their hair in frustration as they become victims of our highly inefficient and callous legal processes.
In our movies, we often see our heroes, who play the role of lawyers, staging high drama in the courts. The audience seated comfortably in the court room watches spellbound as examination and cross examination of witnesses take place. Wise, upright and knowledgeable judges thoughtfully nod their head when arguments are being made. Then we see justice being dispensed and the guilty being brought to the book.
Unfortunately, the reality in our country is quite different. In the past few months, I had to visit a court frequently in connection with a criminal case in which a close friend was falsely implicated. I had a first hand experience of how our legal system works. Most of the hearings are a farce. As a matter of fact, in most of the hearings, the only agenda is to fix the date of the next hearing. If at all they serve any purpose, it is to identify the hidden athletic talent in the country! As soon as one’s name is called out in the most disrespectful way imaginable, by the court clerk, one has to dash through the milling crowds which block the entrance and make a fifty metre dash to stand in front of the judge. Any delay would result in a severe reprimand! And having folded his or her hands in front of the magistrate, one is told when to come next. What an insult and disrespect to the time of our citizens, who have to travel long distances from the place of their residence to the court, in connection with their case. My friend must have spent at least 150 hours waiting at the court. The actual court room proceedings must not have taken more than one and a half hours in total!
When trials actually take place, one can make out very little of what is going on. Lawyers speak in hushed tones. The magistrate’s voice cannot be heard even at a distance of five feet. I doubt if 9 out of 10 magistrates in our country go carefully through the various records and petitions. They arrive in the court in great pomp and show, accompanied by orderlies. Their arrogance is unmistakable. But their knowledge of legal procedures and ability to conduct court proceedings are pathetic.
There are equally serious concerns about our lawyers. In countries like the US, law is a much sought after profession. Some of the best minds in USA go on to make careers in law. Indeed, many of the American CEOs are lawyers by training. But in our country, the situation is different. The most talented people in our country, barring a few exceptions, (like P Chidambaram, our Honorable Finance Minister) give the legal profession the go by. Most lawyers in our country have only a superficial understanding of our laws. They do not have a basic grasp over spoken or written English. Their attitude is also strange. They like to prolong cases as long as possible. Unlike in the US, where lawyers work on an incentive based system, here, they collect fees per document generated or per court hearing. The more the number of hearings, the more the fees they can collect. So they have no interest whatsoever in completing a case. If millions of cases are piling up in our courts today, it is as much due to our lawyers as due to our courts. Indeed, the lawyers in Tamil Nadu went on strike during the summer of 2002 to protest against government moves to dispose of cases speedily!
The time has come for the government to wake up. The ordinary citizens of the country should not be held to ransom. There must be incentives for judges to finish cases. Cases must be taken up a few at a time and dispensed with quickly. This is far better than taking up cases simultaneously in huge numbers and leaving them in a state of limbo for years together. Our court room proceedings must be far more transparent. The people concerned should know what goes on at each hearing. Our legal luminaries who practise at the Supreme Court must visit the lower courts and see with their own eyes, the pathetic state of affairs.
The legal system in the country was set up by our founding fathers to benefit the country’s citizens, not the lawyers and the judges. Making lawyers and judges more accountable is the need of the hour. Let us hope, with Chidambaram, a lawyer, in charge of liberalization and economic reforms, our legal system will be thoroughly overhauled.
In modern society, speedy and efficient legal processes have a very important role to play. Without a sound legal system, it would be difficult to safeguard property rights, for businesses to function, for the innocent to defend themselves against false allegations and for the guilty to be taken to task.
Unfortunately, our outmoded legal system is a major stumbling block in the reform process. The guilty have a field day and can prolong cases for as long as they want. For the innocent, getting speedy justice is next to impossible. They have to tear their hair in frustration as they become victims of our highly inefficient and callous legal processes.
In our movies, we often see our heroes, who play the role of lawyers, staging high drama in the courts. The audience seated comfortably in the court room watches spellbound as examination and cross examination of witnesses take place. Wise, upright and knowledgeable judges thoughtfully nod their head when arguments are being made. Then we see justice being dispensed and the guilty being brought to the book.
Unfortunately, the reality in our country is quite different. In the past few months, I had to visit a court frequently in connection with a criminal case in which a close friend was falsely implicated. I had a first hand experience of how our legal system works. Most of the hearings are a farce. As a matter of fact, in most of the hearings, the only agenda is to fix the date of the next hearing. If at all they serve any purpose, it is to identify the hidden athletic talent in the country! As soon as one’s name is called out in the most disrespectful way imaginable, by the court clerk, one has to dash through the milling crowds which block the entrance and make a fifty metre dash to stand in front of the judge. Any delay would result in a severe reprimand! And having folded his or her hands in front of the magistrate, one is told when to come next. What an insult and disrespect to the time of our citizens, who have to travel long distances from the place of their residence to the court, in connection with their case. My friend must have spent at least 150 hours waiting at the court. The actual court room proceedings must not have taken more than one and a half hours in total!
When trials actually take place, one can make out very little of what is going on. Lawyers speak in hushed tones. The magistrate’s voice cannot be heard even at a distance of five feet. I doubt if 9 out of 10 magistrates in our country go carefully through the various records and petitions. They arrive in the court in great pomp and show, accompanied by orderlies. Their arrogance is unmistakable. But their knowledge of legal procedures and ability to conduct court proceedings are pathetic.
There are equally serious concerns about our lawyers. In countries like the US, law is a much sought after profession. Some of the best minds in USA go on to make careers in law. Indeed, many of the American CEOs are lawyers by training. But in our country, the situation is different. The most talented people in our country, barring a few exceptions, (like P Chidambaram, our Honorable Finance Minister) give the legal profession the go by. Most lawyers in our country have only a superficial understanding of our laws. They do not have a basic grasp over spoken or written English. Their attitude is also strange. They like to prolong cases as long as possible. Unlike in the US, where lawyers work on an incentive based system, here, they collect fees per document generated or per court hearing. The more the number of hearings, the more the fees they can collect. So they have no interest whatsoever in completing a case. If millions of cases are piling up in our courts today, it is as much due to our lawyers as due to our courts. Indeed, the lawyers in Tamil Nadu went on strike during the summer of 2002 to protest against government moves to dispose of cases speedily!
The time has come for the government to wake up. The ordinary citizens of the country should not be held to ransom. There must be incentives for judges to finish cases. Cases must be taken up a few at a time and dispensed with quickly. This is far better than taking up cases simultaneously in huge numbers and leaving them in a state of limbo for years together. Our court room proceedings must be far more transparent. The people concerned should know what goes on at each hearing. Our legal luminaries who practise at the Supreme Court must visit the lower courts and see with their own eyes, the pathetic state of affairs.
The legal system in the country was set up by our founding fathers to benefit the country’s citizens, not the lawyers and the judges. Making lawyers and judges more accountable is the need of the hour. Let us hope, with Chidambaram, a lawyer, in charge of liberalization and economic reforms, our legal system will be thoroughly overhauled.
Chappell vs. Ganguly
Chappell, Ganguly and We Silly Indians
We Indians are silly. That is one of the main reasons our country is not developing as fast as it should. We are silly because of our wrong priorities. We waste our time over wrong things and spend little time over the right things. We debate unimportant things but find little time to discuss important issues. We do not ask the right questions when confronted with an issue. Instead, we get into pseudo intellectual arguments. We always miss the woods for the trees.
All the above is nothing new. But the hot debate of the day, Greg Chappell vs Saurav Ganguly, has again brought into sharp focus our silly behavior. Some have praised Chappell for the firmness he has shown in dealing with the Indian cricket players who are perceived by many to be spoilt brats. Others have chided him for being insensitive. Many feel it is unfair to sack Ganguly if only because of his wonderful track record as captain till recently. Others feel that Ganguly was never a good captain. He succeeded because he had a good team and plenty of luck. For some newspapers it is front page head line news. For many magazines, it is cover story material. Primetime television shows on a number of reputed channels are discussing the issue for several minutes every day.
The way we are discussing the whole episode only underscores how poor we are in critically examining issues. Whether Chappell or Ganguly is right is clearly not the right question to ask. A rational analysis will quickly reveal that both Chappell and Ganguly are irrelevant. Chappell is not worth the money he is being paid. However, great a cricketer he may have been, however, great his coaching skills, there is little he can do to change the situation. Ganguly may be more successful than most other Indian captains. But compared to Clive Lloyd, Ian Chappell or Steve Waugh, he pales into insignificance. His only real claim to uniqueness is throwing off his T Shirt, after India won a match against England!
Our cricketing fraternity has tried to distort the picture beyond imagination to make it look as if our cricket team is good. Which is why in recent times, we have been hearing statements like “This is one of the best teams in the history of Indian cricket,” “India has entered so many finals. But it is inexplicable why they are not winning most of them” and so on. The fact is our cricket team at no point in the history of the game has come close to being the world champions. At best, it has been a distant second. If three teams take part, to call the game between the two teams who are better than the third, the final, is nothing but a joke. Indeed, even in full fledged tournaments like the World cup, only seven teams with some standing take part – Australia, England, West Indies, South Africa, New Zealand, India, Pakistan and Sri Lanka. The other teams merely make up the numbers. So terms like final give a totally distorted picture. If terms like final do not make sense in a game played by so few countries, then terms like semi final deserve to be banished from the cricketing lexicon.
Compared to cricket, games like football and hockey involve several teams. Getting to the semi final of a football or hockey world cup is a true achievement. Indeed, qualifying for a place in these tournaments is itself a big challenge. These games are also a real test of fitness and stamina. Contrast this with cricket. Most of our players cannot run fast, forget about diving on the ground or throwing the ball to the wicket keeper from the boundary line.
Clearly the issue is not whether Ganguly or Chappell is right or whether Jagmohan Dalmia should be supporting Ganguly. The issue is not whether Yuvraj or Kaif should be playing. The real issue is whether we have the courage to ban cricket in view of the circumstances prevailing. Our cricketers have no accountability whatsoever. Whether they win or lose, they continue to earn pots of money. So do many of our former cricketers as commentators. Meanwhile, because of this game, valuable time is lost and work in offices comes to a standstill for several hours, before, during and after the game. Not only is the game not creating the right role models for our youngsters, but also it is diverting resources from more relevant games like football and hockey.
Instead of debating whether Ganguly or Chappell is right, why don’t we debate: “Is cricket good for India?”
We Indians are silly. That is one of the main reasons our country is not developing as fast as it should. We are silly because of our wrong priorities. We waste our time over wrong things and spend little time over the right things. We debate unimportant things but find little time to discuss important issues. We do not ask the right questions when confronted with an issue. Instead, we get into pseudo intellectual arguments. We always miss the woods for the trees.
All the above is nothing new. But the hot debate of the day, Greg Chappell vs Saurav Ganguly, has again brought into sharp focus our silly behavior. Some have praised Chappell for the firmness he has shown in dealing with the Indian cricket players who are perceived by many to be spoilt brats. Others have chided him for being insensitive. Many feel it is unfair to sack Ganguly if only because of his wonderful track record as captain till recently. Others feel that Ganguly was never a good captain. He succeeded because he had a good team and plenty of luck. For some newspapers it is front page head line news. For many magazines, it is cover story material. Primetime television shows on a number of reputed channels are discussing the issue for several minutes every day.
The way we are discussing the whole episode only underscores how poor we are in critically examining issues. Whether Chappell or Ganguly is right is clearly not the right question to ask. A rational analysis will quickly reveal that both Chappell and Ganguly are irrelevant. Chappell is not worth the money he is being paid. However, great a cricketer he may have been, however, great his coaching skills, there is little he can do to change the situation. Ganguly may be more successful than most other Indian captains. But compared to Clive Lloyd, Ian Chappell or Steve Waugh, he pales into insignificance. His only real claim to uniqueness is throwing off his T Shirt, after India won a match against England!
Our cricketing fraternity has tried to distort the picture beyond imagination to make it look as if our cricket team is good. Which is why in recent times, we have been hearing statements like “This is one of the best teams in the history of Indian cricket,” “India has entered so many finals. But it is inexplicable why they are not winning most of them” and so on. The fact is our cricket team at no point in the history of the game has come close to being the world champions. At best, it has been a distant second. If three teams take part, to call the game between the two teams who are better than the third, the final, is nothing but a joke. Indeed, even in full fledged tournaments like the World cup, only seven teams with some standing take part – Australia, England, West Indies, South Africa, New Zealand, India, Pakistan and Sri Lanka. The other teams merely make up the numbers. So terms like final give a totally distorted picture. If terms like final do not make sense in a game played by so few countries, then terms like semi final deserve to be banished from the cricketing lexicon.
Compared to cricket, games like football and hockey involve several teams. Getting to the semi final of a football or hockey world cup is a true achievement. Indeed, qualifying for a place in these tournaments is itself a big challenge. These games are also a real test of fitness and stamina. Contrast this with cricket. Most of our players cannot run fast, forget about diving on the ground or throwing the ball to the wicket keeper from the boundary line.
Clearly the issue is not whether Ganguly or Chappell is right or whether Jagmohan Dalmia should be supporting Ganguly. The issue is not whether Yuvraj or Kaif should be playing. The real issue is whether we have the courage to ban cricket in view of the circumstances prevailing. Our cricketers have no accountability whatsoever. Whether they win or lose, they continue to earn pots of money. So do many of our former cricketers as commentators. Meanwhile, because of this game, valuable time is lost and work in offices comes to a standstill for several hours, before, during and after the game. Not only is the game not creating the right role models for our youngsters, but also it is diverting resources from more relevant games like football and hockey.
Instead of debating whether Ganguly or Chappell is right, why don’t we debate: “Is cricket good for India?”
Is cricket good for our country?
Time to ban cricket
When the Pakistani cricket team arrived in India earlier this year, there was an air of palpable excitement throughout the country. Expectations soared after India dominated the proceedings during the Mohali test match and went on to win the next match at Eden Gardens, Calcutta. Convinced that here at last was an Indian team about to thrash its arch rival convincingly, millions of people watched the third test match played at Bangalore and the subsequent one dayers on television. Sadly these expectations were belied.
As is typical of our country, after the series, an intense debate started on what should be done, what was wrong with the team selection, who should be the next captain, who should be the next coach (how many crores of rupees he must be paid) and so on.
In Economics, we learn about negative externalities and market failures. The market economy sometimes tends to overproduce goods and services that have external costs. Cricket falls in this category. Work suffers in many offices while matches are being played and comes to a standstill in cities like Calcutta. And far too much time is wasted on doing post mortem after matches especially when the Indian team loses.
There are other fundamental drawbacks with cricket. To start with, cricket is not a global game. It is played mostly by developing countries where the game is some form of diversion from the more pressing problems of daily life. In the few developed countries which play the game like Australia, New Zealand and England, cricket is certainly not the most important game. So terms, like “world champions” are a total misnomer. Olympic medal winners are true world champions. They compete against the best athletes from virtually all around the world. At least, if our cricket team keeps winning consistently like the way Australia has done in the past five years, we would have something to talk about. We remain usually third or fourth or at best a distant second in the pecking order. In the history of cricket, we have never come close to being considered the best team in the world.
In general, sports must be encouraged as it promotes physical fitness. But cricket does not meet this criterion. The average fitness of youngsters who jog for about an hour in a day would be better than that of our test cricketers, many of whom just cannot run fast. They also do not have the strength to throw the ball from the boundary line to the wicket keeper.
Cricket is also an elitist game. The very fact that most of our test cricketers speak excellent English is a clear indication that having the right background is more important than having cricketing abilities. In this club atmosphere there is little chance for a cricketer from a rural area, without education in an English Medium school to make it to the top. Players like Kapil Dev will remain rare exceptions.
Our cricketers can hardly be considered the role model for the common man. They are a thoroughly spoilt lot. When the public cried after the recent defeat against Pakistan, our cricketers were laughing all the way to the bank.
Our cricketers know nothing much will change and they will come back to play in the next season and collect more money. Some of them are going on vacation claiming they need a break when the fact is they do not move around physically for more than 5% of the duration of a test match. Only the wicket keeper’s job is physically demanding. A wicket keeper has to be a true athlete. And it is not a coincidence that we have failed to produce a good wicket keeper in the last 15 years. Strangely enough, people responsible for cricket in India have decided that a specialist wicket keeper is not necessary!
If cricketers are enjoying themselves and making a pot of money, why grudge them? Unfortunately, when looked at from the larger societal point of view, there is a problem. Cricket is diverting scarce resources away from games which are more appropriate for our country. Hockey is a good example. Many developed countries play this game. Winning the world cup or the Olympic hockey tournament is a true achievement. Hockey is played for about one and a half hours in the evenings. So it does not disrupt office work. Hockey also demands tremendous physical fitness. And it would be a fair comment to make that hockey is a more exciting game than cricket. If marketed properly, hockey can generate much bigger revenues than cricket.
Till the mid-1970s, we were really good in this game. Since then our performance has shown a secular decline. A major reason is the lack of incentives. While our cricketers fly around the world with their wives and drive in imported sports cars (on which customs duty is waived off), our hockey players travel by rail in second class compartments. Recently, I saw a former Olympics hockey player who had come to inaugurate a sports function in my son’s school. I was pained to see the kind of respect given to him. If he had been a test cricketer, he would have been pampered beyond imagination.
When people do not know what is good for them, the government must intervene. We Indians have still not realized that cricket is bad for us. It is time the government stepped in and banned this game in the interest of society.
When the Pakistani cricket team arrived in India earlier this year, there was an air of palpable excitement throughout the country. Expectations soared after India dominated the proceedings during the Mohali test match and went on to win the next match at Eden Gardens, Calcutta. Convinced that here at last was an Indian team about to thrash its arch rival convincingly, millions of people watched the third test match played at Bangalore and the subsequent one dayers on television. Sadly these expectations were belied.
As is typical of our country, after the series, an intense debate started on what should be done, what was wrong with the team selection, who should be the next captain, who should be the next coach (how many crores of rupees he must be paid) and so on.
In Economics, we learn about negative externalities and market failures. The market economy sometimes tends to overproduce goods and services that have external costs. Cricket falls in this category. Work suffers in many offices while matches are being played and comes to a standstill in cities like Calcutta. And far too much time is wasted on doing post mortem after matches especially when the Indian team loses.
There are other fundamental drawbacks with cricket. To start with, cricket is not a global game. It is played mostly by developing countries where the game is some form of diversion from the more pressing problems of daily life. In the few developed countries which play the game like Australia, New Zealand and England, cricket is certainly not the most important game. So terms, like “world champions” are a total misnomer. Olympic medal winners are true world champions. They compete against the best athletes from virtually all around the world. At least, if our cricket team keeps winning consistently like the way Australia has done in the past five years, we would have something to talk about. We remain usually third or fourth or at best a distant second in the pecking order. In the history of cricket, we have never come close to being considered the best team in the world.
In general, sports must be encouraged as it promotes physical fitness. But cricket does not meet this criterion. The average fitness of youngsters who jog for about an hour in a day would be better than that of our test cricketers, many of whom just cannot run fast. They also do not have the strength to throw the ball from the boundary line to the wicket keeper.
Cricket is also an elitist game. The very fact that most of our test cricketers speak excellent English is a clear indication that having the right background is more important than having cricketing abilities. In this club atmosphere there is little chance for a cricketer from a rural area, without education in an English Medium school to make it to the top. Players like Kapil Dev will remain rare exceptions.
Our cricketers can hardly be considered the role model for the common man. They are a thoroughly spoilt lot. When the public cried after the recent defeat against Pakistan, our cricketers were laughing all the way to the bank.
Our cricketers know nothing much will change and they will come back to play in the next season and collect more money. Some of them are going on vacation claiming they need a break when the fact is they do not move around physically for more than 5% of the duration of a test match. Only the wicket keeper’s job is physically demanding. A wicket keeper has to be a true athlete. And it is not a coincidence that we have failed to produce a good wicket keeper in the last 15 years. Strangely enough, people responsible for cricket in India have decided that a specialist wicket keeper is not necessary!
If cricketers are enjoying themselves and making a pot of money, why grudge them? Unfortunately, when looked at from the larger societal point of view, there is a problem. Cricket is diverting scarce resources away from games which are more appropriate for our country. Hockey is a good example. Many developed countries play this game. Winning the world cup or the Olympic hockey tournament is a true achievement. Hockey is played for about one and a half hours in the evenings. So it does not disrupt office work. Hockey also demands tremendous physical fitness. And it would be a fair comment to make that hockey is a more exciting game than cricket. If marketed properly, hockey can generate much bigger revenues than cricket.
Till the mid-1970s, we were really good in this game. Since then our performance has shown a secular decline. A major reason is the lack of incentives. While our cricketers fly around the world with their wives and drive in imported sports cars (on which customs duty is waived off), our hockey players travel by rail in second class compartments. Recently, I saw a former Olympics hockey player who had come to inaugurate a sports function in my son’s school. I was pained to see the kind of respect given to him. If he had been a test cricketer, he would have been pampered beyond imagination.
When people do not know what is good for them, the government must intervene. We Indians have still not realized that cricket is bad for us. It is time the government stepped in and banned this game in the interest of society.
The growth mirage
Generating faster growth
Only economic growth can take India out of poverty. In recent times, there has been a lot of discussion on how to increase the GDP growth rate. Rightly so, as in the 1970s and the 1980s by growing at a snail's pace India lost a great opportunity and allowed many countries to get ahead of it.
Many economists are talking of a growth rate of 7-8 per cent, significantly more than the 4-5 per cent one used to hear till a few years ago. The Finance Minister is also betting on growth. Many of his deficit projections are crucially dependent on the fulfilment of these growth assumptions.
Optimism is needed in abundant measure while taking up a challenging task. But a misplaced sense of optimism can be dangerous and lead to wishful thinking. India's politicians and businessmen must realise that growth will not come just because we want to grow.
Growth needs vision backed by a lot of systematic, hard work. As The Economist (June 12,
2004) commented on the Common Minimum Programme: "But its (CMP's) admirable goals —
annual growth of 7-8 per cent, alleviating poverty, helping farmers, empowering women,
raising spending on health and education and so on are so vaguely presented that it is like a
child's letter to Santa Claus. Everybody can pick a desired outcome from the list and believe
that Christmas is coming."
Four factors drive economic growth — natural resources, human resource, capital formation
and technology. The first factor provides a platform but it is the other three that drive productivity. The history of developed nations tells us that it is productivity improvement
which frees resources that can be invested elsewhere. That creates a virtuous cycle of
growth. Indeed, the story of development is one of productivity growth. The only way per capita income can rise is through an increase in the marginal productivity of labour.
While natural resources can facilitate growth, they do not represent a sufficient condition.
They have to be exploited effectively through efficient value addition. That needs technology, capital and human resource. The quality of human resource — the skills, knowledge and discipline of the labour force — plays a critical role in generating economic growth. Improvements in literacy, health, discipline, ability to use computers, all have a significant impact on the productivity of labour. This calls for significant social sector spending. Unfortunately in India, this area continues to get inadequate attention.
Economic growth needs the accumulation of capital. Current consumption must be cut to
drive up the savings rate. The savings rate is still low compared to many Asian countries.
Also, the government must facilitate the creation of social overhead capital such as roads,
irrigation and water projects. The country's infrastructure remains pathetic. The kind of
investments envisaged, have just not materialised.
Economic policies will also have to focus on the improvement of technological capabilities through product and process innovations. Product innovations refer to the development of
new products or services. Process innovations involve the development of new processes
that facilitate dramatic increases in productivity. Rapid innovation requires the fostering of
an entrepreneurial spirit, which is usually found in start-ups. This is facilitated by well
functioning markets for both products and capital.
Entrepreneurship has to be fostered by encouraging people to take risks, open new plants,
embrace new technologies and find new ways of doing business. The failure of the Small and
Medium Enterprises (SME) sector to take off reflects the lack of entrepreneurship.
This is a system failure not an individual one. When talented engineers migrate, the kind of
support they receive, such as venture capital, greatly increases the chances of success in
entrepreneurial ventures. With the government's deficit already very high, private
investments, especially foreign direct investments, will have to be attracted in a big way.
Unfortunately, nothing much has changed on the ground. Foreign investors look for flexible
labour laws, faster roads, better ports and reliable power.
Countries such as Malaysia, China and Taiwan are far more attractive in this regard. Also,
especially when compared to China, India's economic policies lack stability. The country's
politicians are capable of sending wrong signals. Without understanding the implications,
they make all kinds of noises that confuse investors and create uncertainty.
To understand how good policies can boost growth, recall the days of President Ronald
Reagan, who succeeded Mr Jimmy Carter. Inflation had climbed to 13.5 per cent in Carter's
last year while the economy remained stagnant. First, Reagan fought inflation by
reappointing Paul Volcker as chairman of the Federal Reserve and giving him full support.
But Regan did not stop there. He was a great believer in supply side economics, a school of
thought which believes in providing incentives that boost both output and productivity.
On August 13, 1981, Reagan introduced his Economic Recovery Tax Act (Kemp-Roth Bill),
which slashed taxes heavily. His message of competitive markets, entrepreneurial vigour and
minimal regulation gave a massive impetus to innovation.
Deregulation had started tentatively under Carter in the airline industry, but Reagan
extended it to energy and broadcasting and supported it with a dismantling of antitrust laws.
Under pressure from foreign competition, and with the anti-trust authorities looking the other
way, mergers, leveraged buyouts, massive restructurings and corporate raids took off in the
US.
It was painful, chaotic and hurt a lot of workers, both blue and white collar. But in the end it
produced a more competitive economy, with more innovative, nimble, and customer
responsive companies. That is how the US left Europe far behind in the productivity race.
The proof of the pudding lies in the eating. Good policies must produce results. If one were
to go by results, Reagan can rightly claim to have led the American renaissance. Reagan's
first term saw the creation of such companies as Sun Microsystems, Compaq, Dell and Cisco
Systems which went on to become giants in the Information Technology (IT) industry.
(Microsoft and Oracle had been formed a few years earlier.)
For the US, this marked the greatest entrepreneurial burst of new companies, since the early
20th century. Following the 1986 Tax Reform Act, the marginal tax on top earners came
down from about 70 per cent to 30 per cent. Oracle's average tax rate declined sharply from
44 per cent in 1986 to 32 per cent. There was a similar gain for Microsoft. The loss in revenue due to lower tax rates was substantially made up by eliminating most of the exemptions and special tax breaks and shelters. Effectively, the government stopped trying to micromanage the economy and control investment behaviour.
The new policies supported knowledge based industries while cutting or eliminating tax
benefits for traditional industries such as utilities. That is how Silicon Valley became a hot
bed of innovation, creating hundreds of millionaires (many of them Indians) in the process.
True, Reagan cannot be given all the credit for America's economic boom. Some of the seeds
of growth were sown earlier and some later. Neverheless, Reagan's contribution cannot be forgotten.
In India, there are only tentative half-hearted measures. What the country needs are
leaders who can stick their neck out and boldly champion the reform process.
Only economic growth can take India out of poverty. In recent times, there has been a lot of discussion on how to increase the GDP growth rate. Rightly so, as in the 1970s and the 1980s by growing at a snail's pace India lost a great opportunity and allowed many countries to get ahead of it.
Many economists are talking of a growth rate of 7-8 per cent, significantly more than the 4-5 per cent one used to hear till a few years ago. The Finance Minister is also betting on growth. Many of his deficit projections are crucially dependent on the fulfilment of these growth assumptions.
Optimism is needed in abundant measure while taking up a challenging task. But a misplaced sense of optimism can be dangerous and lead to wishful thinking. India's politicians and businessmen must realise that growth will not come just because we want to grow.
Growth needs vision backed by a lot of systematic, hard work. As The Economist (June 12,
2004) commented on the Common Minimum Programme: "But its (CMP's) admirable goals —
annual growth of 7-8 per cent, alleviating poverty, helping farmers, empowering women,
raising spending on health and education and so on are so vaguely presented that it is like a
child's letter to Santa Claus. Everybody can pick a desired outcome from the list and believe
that Christmas is coming."
Four factors drive economic growth — natural resources, human resource, capital formation
and technology. The first factor provides a platform but it is the other three that drive productivity. The history of developed nations tells us that it is productivity improvement
which frees resources that can be invested elsewhere. That creates a virtuous cycle of
growth. Indeed, the story of development is one of productivity growth. The only way per capita income can rise is through an increase in the marginal productivity of labour.
While natural resources can facilitate growth, they do not represent a sufficient condition.
They have to be exploited effectively through efficient value addition. That needs technology, capital and human resource. The quality of human resource — the skills, knowledge and discipline of the labour force — plays a critical role in generating economic growth. Improvements in literacy, health, discipline, ability to use computers, all have a significant impact on the productivity of labour. This calls for significant social sector spending. Unfortunately in India, this area continues to get inadequate attention.
Economic growth needs the accumulation of capital. Current consumption must be cut to
drive up the savings rate. The savings rate is still low compared to many Asian countries.
Also, the government must facilitate the creation of social overhead capital such as roads,
irrigation and water projects. The country's infrastructure remains pathetic. The kind of
investments envisaged, have just not materialised.
Economic policies will also have to focus on the improvement of technological capabilities through product and process innovations. Product innovations refer to the development of
new products or services. Process innovations involve the development of new processes
that facilitate dramatic increases in productivity. Rapid innovation requires the fostering of
an entrepreneurial spirit, which is usually found in start-ups. This is facilitated by well
functioning markets for both products and capital.
Entrepreneurship has to be fostered by encouraging people to take risks, open new plants,
embrace new technologies and find new ways of doing business. The failure of the Small and
Medium Enterprises (SME) sector to take off reflects the lack of entrepreneurship.
This is a system failure not an individual one. When talented engineers migrate, the kind of
support they receive, such as venture capital, greatly increases the chances of success in
entrepreneurial ventures. With the government's deficit already very high, private
investments, especially foreign direct investments, will have to be attracted in a big way.
Unfortunately, nothing much has changed on the ground. Foreign investors look for flexible
labour laws, faster roads, better ports and reliable power.
Countries such as Malaysia, China and Taiwan are far more attractive in this regard. Also,
especially when compared to China, India's economic policies lack stability. The country's
politicians are capable of sending wrong signals. Without understanding the implications,
they make all kinds of noises that confuse investors and create uncertainty.
To understand how good policies can boost growth, recall the days of President Ronald
Reagan, who succeeded Mr Jimmy Carter. Inflation had climbed to 13.5 per cent in Carter's
last year while the economy remained stagnant. First, Reagan fought inflation by
reappointing Paul Volcker as chairman of the Federal Reserve and giving him full support.
But Regan did not stop there. He was a great believer in supply side economics, a school of
thought which believes in providing incentives that boost both output and productivity.
On August 13, 1981, Reagan introduced his Economic Recovery Tax Act (Kemp-Roth Bill),
which slashed taxes heavily. His message of competitive markets, entrepreneurial vigour and
minimal regulation gave a massive impetus to innovation.
Deregulation had started tentatively under Carter in the airline industry, but Reagan
extended it to energy and broadcasting and supported it with a dismantling of antitrust laws.
Under pressure from foreign competition, and with the anti-trust authorities looking the other
way, mergers, leveraged buyouts, massive restructurings and corporate raids took off in the
US.
It was painful, chaotic and hurt a lot of workers, both blue and white collar. But in the end it
produced a more competitive economy, with more innovative, nimble, and customer
responsive companies. That is how the US left Europe far behind in the productivity race.
The proof of the pudding lies in the eating. Good policies must produce results. If one were
to go by results, Reagan can rightly claim to have led the American renaissance. Reagan's
first term saw the creation of such companies as Sun Microsystems, Compaq, Dell and Cisco
Systems which went on to become giants in the Information Technology (IT) industry.
(Microsoft and Oracle had been formed a few years earlier.)
For the US, this marked the greatest entrepreneurial burst of new companies, since the early
20th century. Following the 1986 Tax Reform Act, the marginal tax on top earners came
down from about 70 per cent to 30 per cent. Oracle's average tax rate declined sharply from
44 per cent in 1986 to 32 per cent. There was a similar gain for Microsoft. The loss in revenue due to lower tax rates was substantially made up by eliminating most of the exemptions and special tax breaks and shelters. Effectively, the government stopped trying to micromanage the economy and control investment behaviour.
The new policies supported knowledge based industries while cutting or eliminating tax
benefits for traditional industries such as utilities. That is how Silicon Valley became a hot
bed of innovation, creating hundreds of millionaires (many of them Indians) in the process.
True, Reagan cannot be given all the credit for America's economic boom. Some of the seeds
of growth were sown earlier and some later. Neverheless, Reagan's contribution cannot be forgotten.
In India, there are only tentative half-hearted measures. What the country needs are
leaders who can stick their neck out and boldly champion the reform process.
Indian Financial System : Why it is goofing up
Indian financial system: challenges ahead
THE INDIAN banking system is failing to discharge its basic responsibilities. Banks are simply not playing the role expected of them in a developing country, which is to channelise savings of individuals intoproductive wealth creating activities such as industrial projects. The Finance Minister and senior RBI officials keep reminding the banks that it is their `dharma' to lend to industrial borrowers, especially the small & medium enterprises (SMEs), for whom a special package has been recently announced.
At the recent annual general meeting of the Indian Banks Association (IBA), the Finance Minister lamented that credit off take is not picking up despite the strong economic growth. But bankers think that dharma lies not in doing what the government is telling them but in doing what gives them a decent profit! Small scale units and the poor people are clearly not on their radar screen. Because banks are not lending to them, the poor are not sitting idle. Vegetable vendors in some parts of the country are known to borrow from moneylenders at an interest rate of 10-15 per cent a day. That works out to 3500-5000 per cent per annum. Similarly, fishermen in West Bengal depend heavily on informal sources of finance available at very high interest rates. The traditional methods of credit appraisal, which attach a lot of importance to documentation, collateral and regularity of cash flows, are clearly preventing banks from exploiting the exciting opportunities which the rural poor offer.
Our formal banking system can learn many a lesson from moneylenders. Though they have earned a bad name for the way they fleece the poor villagers, these moneylenders show a remarkable flexibility in the way they operate. They do not insist on any documentation but their understanding of borrowers is thorough. They have a pretty good idea of a borrower's ability to repay a loan.
Some banks in India are claiming that they are giving a new thrust to lending to the poor. That is why there is so much hype about microfinance these days. But the progress made so far is limited. And there is considerable exaggeration and unwarranted media publicity about this limited progress. One foreign bank has prepared a CD on how it is going about discharging its responsibilities in the area of microfinance. The bank has lent less than Rs. 2 crores but is circulating the CD at virtually every forum available to generate wide publicity.
Another high profile Indian private sector bank has announced various initiatives to serve the rural poor. But all that it has done is clever manipulation of the system. For example, it finances the purchase of luxury cars in rural areas. It also transfers loan portfolios from urban branches to rural branches to make it look as if rural lending is picking up.
It is in this context that the much maligned public sector banks should be given a round of applause. State Bank of India (SBI) has built a fairly big portfolio in the area of micro finance. SBI officials seem to be discharging their duties in rural areas of the country with a missionary zeal. The bank has even started a housing loan scheme for some self help groups. These are not politically directed loans, but commercially viable ones given to people who are serious about using the money productively and repaying the loan.We need to encourage the public sector banks to continue the good work they are doing.
For lending to the poor to pick up, we need simple innovations. Take the case of cows, on which manyvillagers depend for their livelihood. Many banks give loans to villagers for purchase of only milch cows. But milch cows are expensive. They are like blue chip stocks. On the other hand, non milch cows are like start ups with low valuation, but have tremendous future potential. The only problem with these cows is that the repayment of loan cannot start immediately. If only banks would give a moratorium on loan repayment, it would be a win-win situation. Not only that, the chances of loan recovery would also improve significantly as the returns on the investment would be quite good. The major challenge the country's financial system faces today is to bring informal loans into the formal financial system. That would not only provide a huge business opportunity but also serve a social purpose by significantly reducing the interest rate the poor have to pay. That calls for genuineness of intent,
flexibility and hard work.
THE INDIAN banking system is failing to discharge its basic responsibilities. Banks are simply not playing the role expected of them in a developing country, which is to channelise savings of individuals intoproductive wealth creating activities such as industrial projects. The Finance Minister and senior RBI officials keep reminding the banks that it is their `dharma' to lend to industrial borrowers, especially the small & medium enterprises (SMEs), for whom a special package has been recently announced.
At the recent annual general meeting of the Indian Banks Association (IBA), the Finance Minister lamented that credit off take is not picking up despite the strong economic growth. But bankers think that dharma lies not in doing what the government is telling them but in doing what gives them a decent profit! Small scale units and the poor people are clearly not on their radar screen. Because banks are not lending to them, the poor are not sitting idle. Vegetable vendors in some parts of the country are known to borrow from moneylenders at an interest rate of 10-15 per cent a day. That works out to 3500-5000 per cent per annum. Similarly, fishermen in West Bengal depend heavily on informal sources of finance available at very high interest rates. The traditional methods of credit appraisal, which attach a lot of importance to documentation, collateral and regularity of cash flows, are clearly preventing banks from exploiting the exciting opportunities which the rural poor offer.
Our formal banking system can learn many a lesson from moneylenders. Though they have earned a bad name for the way they fleece the poor villagers, these moneylenders show a remarkable flexibility in the way they operate. They do not insist on any documentation but their understanding of borrowers is thorough. They have a pretty good idea of a borrower's ability to repay a loan.
Some banks in India are claiming that they are giving a new thrust to lending to the poor. That is why there is so much hype about microfinance these days. But the progress made so far is limited. And there is considerable exaggeration and unwarranted media publicity about this limited progress. One foreign bank has prepared a CD on how it is going about discharging its responsibilities in the area of microfinance. The bank has lent less than Rs. 2 crores but is circulating the CD at virtually every forum available to generate wide publicity.
Another high profile Indian private sector bank has announced various initiatives to serve the rural poor. But all that it has done is clever manipulation of the system. For example, it finances the purchase of luxury cars in rural areas. It also transfers loan portfolios from urban branches to rural branches to make it look as if rural lending is picking up.
It is in this context that the much maligned public sector banks should be given a round of applause. State Bank of India (SBI) has built a fairly big portfolio in the area of micro finance. SBI officials seem to be discharging their duties in rural areas of the country with a missionary zeal. The bank has even started a housing loan scheme for some self help groups. These are not politically directed loans, but commercially viable ones given to people who are serious about using the money productively and repaying the loan.We need to encourage the public sector banks to continue the good work they are doing.
For lending to the poor to pick up, we need simple innovations. Take the case of cows, on which manyvillagers depend for their livelihood. Many banks give loans to villagers for purchase of only milch cows. But milch cows are expensive. They are like blue chip stocks. On the other hand, non milch cows are like start ups with low valuation, but have tremendous future potential. The only problem with these cows is that the repayment of loan cannot start immediately. If only banks would give a moratorium on loan repayment, it would be a win-win situation. Not only that, the chances of loan recovery would also improve significantly as the returns on the investment would be quite good. The major challenge the country's financial system faces today is to bring informal loans into the formal financial system. That would not only provide a huge business opportunity but also serve a social purpose by significantly reducing the interest rate the poor have to pay. That calls for genuineness of intent,
flexibility and hard work.
Wednesday, October 12, 2005
Corporate Governance: The real challenges
Sarbanes-Oxley`s not the solution
Independent directors, audit committees or ethical guidelines hardly improve performance or prevent failures. As the subject of corporate governance becomes more relevant and important than ever before, we must not miss the woods for the trees. We must remember that many of the companies in the US which ran into big trouble,had all the corporate governance echanisms in place, at least on paper.
For example, Enron had a model board. When Enron declared bankruptcy, it was in full compliance with the governance provisions of the much publicised Sarbanes -Oxley Act, with the exception of loans to some corporate officers. Enron also had a truly independent board. Only Ken Lay and Jeff Skilling were insiders in a board of 14 directors. Many of the directors were highly qualified. Some were heads of major corporate or non-profit organisations. Others had significant governmental and regulatory experience. All the audit committee members were independent. In 2002, the Enron board was judged one of the five best boards in the country by the Chief Executive magazine.
Over the past 20 years, many studies have tested this relationship and have reached that common conclusion. Audit committees, compensation committees and codes of ethics, have been of little use in preventing corporate governance failures. There is also not much evidence that multiple board memberships affect firm performance.
In our country, several committees have been set up to improve corporate governance. But talk to people who sit on several boards and they will admit in private conversation that nothing uch has changed. More high profile people may have been added to the board. Sitting fees might have gone up. But the real challenges in corporate governance are far from addressed.
As Jeffrey A Sonnenfield, has pointed out in an influential article, "It’s time for some fundamentally new thinking about how corporate boards should operateand be evaluated… we’ll be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing need — to be strong, high-functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations."
Improving corporate governance requires important steps that are not covered by the growing number of rules and guidelines for corporate governance. The most important is to create a climate of trust and candour. CEOs must share important information with directors in time for them to read and digest it. Most board meetings spend a lot of time on trivial issues and gloss over the important ones. A culture of open dissent must be encouraged.
Directors must not get trapped in rigid, typecast positions. They should be encouraged to develop alternative scenarios to evaluate strategic decisions, and question their own roles and assumptions. Directors must be involved in the management of the company ’s affairs. They must be given specific tasks and ask to be informed about the strategic and operational issues involved. This may involve collecting external data, meeting customers, anonymously visiting plants and stores in the field, and developing relationships with external stakeholders. These steps will go a long way in imposing individual accountability on the directors.
In the 1980s and 1990s, shareholder activists, accountants, lawyers, and analysts highlighted the importance of independent directors, audit committees, ethical guidelines, and other structural elements that can help ensure that a board does its job. Undoubtedly, these guidelines have helped companies avoid problems, big and small. They are necessary but not sufficient conditions for good corporate governance.
If a board is to truly fulfill its mission to monitor performance, advise the CEO, and facilitate effective stakeholder management, it must become a robust team whose members speak the truth and challenge one another in a constructive manner and allow hidden assumptions to come to the surface.
All companies talk about the importance of teamwork. The right place to start is the board. For good governance, the board should be a team where members have complete trust in each other.
BSchools : Are they getting outpriced?
Too much of a good thing
The steady increase in tuition fees suggests that B-schools are offering students more than they need.
For the second year in a row, applications for admission to the top American B-schools have fallen. According to a report in BusinessWeek, applications to the top 30 MBA programmes in the US have dropped almost 30 per cent since 1998, with some B-schools seeing declines of 50 per cent or more. The booming job market, high tuition fees and the quality of training are some of the reasons given to explain the decline. Reports say companies like Goldman Sachs no longer consider MBA essential for promoting people to the senior management cadre.
?
As Harvard Business School professor Clatyon Christensen has pointed out, B-schools must understand why people want to do an MBA. If they do so, they will be better tuned to market needs.
Many people want to get an MBA to move ahead in life. They see education as a way to get a job, make them better placed to get the next promotion, or be better equipped to solve problems they face in the workplace.
But they are not able to study because of shortage of time, financial resources, or skills. Many people already in business or in high-pressure jobs would find it difficult to clear the CAT exam conducted by the Indian Institutes of Management (IIMs). Or they may not have the time to attend a full-time MBA programme.
Christensen’s core argument is that opportunities for disruption emerge when something becomes too good vis-Ã -vis the needs of customers and in the process becomes over-priced. What most students want out of an MBA programme has not really changed over time.
So the steady increases in tuition fee over the years imply that B-schools are offering students more than they need. Sports, recreation and medical facilities, libraries full of academic journals, landscaped gardens and imposing buildings are examples of such features.
Many leading B-schools strongly believe that the job of a general manager is comprehensive and inter-dependent. They assume future managers can’t understand marketing unless they study product development, which they can’t unless they study manufacturing, which they can’t unless they study cost accounting and so on.
But many working executives only want to learn just what is required. The leading B-schools are probably trying to teach students too much.
If one were to go by Christensen’s argument, the business model used by top B-schools has become vulnerable to disruptive attack. Although most leading B-schools are not-for-profit organisations, they have to generate substantial surpluses.
Top schools try to provide the best education to the best students and attract the best faculty to do the best research. So they have to pay faculty decent salaries, give them minimal teaching loads so that they can pursue consultancies, maintain their infrastructure and support research activities.
With government funding progressively drying up, the B-schools must charge relatively high tuition fees to cover these costs. At the same time, much of the research work done by the faculty is far removed from the needs of MBA students.
B-schools face a real threat from disruptive innovators who may target students who are unattractive to the leading B-schools. They can adopt a different, no-frills business model, without a large campus or high-priced faculty or air-conditioned classrooms.
Consequently, they can be viable at fee levels that would be simply unacceptable to leading private institutions. Also, they can provide short, special-purpose courses and can master new ways of teaching.
Instead of delivering two-year, multi-disciplinary programmes, they can develop shorter, highly specialised offerings. They can use information technology to facilitate the learning process, allow students to learn at the time and place they find it convenient, and manage the administrative transactions involved in a far more cost effective way.
One big threat to the leading B-schools comes from corporate training centres. As MBA programmes become increasingly expensive, more and more companies may begin recruiting their management talent directly from bachelor’s degree programmes and train the recruits at their own training centres. Indeed, after the CAT fiasco in 2003, there was a writer who argued that the IIMs should only conduct the CAT and leave it to companies to train the successful students!
Corporate training centres like those at Infosys, Larsen & Toubro, TCS and Dr Reddy’s may today not be as well equipped as the IIMs for imparting management education. These centres act as coordinating agencies and are mostly dependent on visiting faculty from the top B-schools. But as they become better at doing whatever is necessary to help employees improve problem-solving skills, they will be motivated to get the best materials from the best instructors. Often this will be done through video, CD, or the Internet.
Disruptive models emerge when value migrates across the value chain. This is something the leading B-schools seem to have completely forgotten. In case of management education, there is a good chance that value may migrate from the assembler, the B-school, to the course instructor. A course on business strategy from Michael Porter, for instance, would make eminent sense. But whether the candidate took the course at a B-school, at the employer’s learning centre, or through an e-learning program would be irrelevant.
Indeed, the kind of business model which the Indian School of Business at Hyderabad follows, is based on this principle. Most of the ISB faculty are not full-time employees of ISB, but come from various American and European management institutions. Still, it makes sense for ISB students to attend classes by such reputed professors, not those conducted by full time faculty of an average or mediocre quality.
What options do leading B-schools have? Given their high cost structure, they will find it difficult to cut costs. Instead, as the basis of competition changes to convenience, the real opportunity may lie in working together with the corporate sector and creating learning modules that are customised exactly to suit each learner’s needs. Today’s leading schools are well positioned to create such modules. If they do so, they will capture value. Christensen refers to this as becoming the “Intel inside” of corporate education.
In short, the leading B-schools across the world are likely to face major risks in the years to come. Faculty in these schools keep teaching students how to cope with change. It remains to be seen how well they themselves will cope with change.
The pitfalls of rote learning
Reforming our education system
OUR EDUCATION system suffers from serious problems. We may be producing professionals such as softwareengineers and doctors in large numbers. But they are an oasis in an otherwise barren desert. Indeed, if a small percentage of our scholars are a match for the best in the world, it is in spite of the education system, not because of it. This is really sad, because many of the reforms urgently needed in our education system will cost little money. What is needed is creative thinking and a new mindset that is willing to embrace exchange.
Before we understand how to reform our education system, we must first be clear about what we want to achieve. Education must make our people wise and equipped to understand and solve the problems of the world. That calls for conceptual clarity and depth of knowledge.
I recall the highly insightful remarks made by the principal of the school where I got my son admitted, three years back. She felt that she would be extremely happy if students responded correctly when someone asked them a question. The principal felt a student must confidently answer the question or frankly admit he does not know the answer or seek a clarification if he does not understand the question.
Being a teacher myself at a leading B School, I see a disturbing trend in the current crop of students. They do not fall in any of the three categories I just mentioned. They answer questions without seeking to understand them. They confidently reply even when they do not know the answer. They rarely ask for a clarification or admit they do not know the answer. The thinking here seems to be that when a teacher asks a question, giving some answer is better than admitting ignorance! Indeed, some of the answers are so vague and general that
they can be given with minor modifications for a range of questions!
Recently, I had a very amusing experience with a fresh MBA who had applied for a job with us. She had done a project on corporate governance. To test her knowledge I started off with a basic question: What is corporate governance? She did not take much time to get off the starting block: "It is about managing a company well so that shareholders' wealth is maximised." Then I asked her to define corporate finance. After a bit of meandering, she repeated the first answer. I then asked her to explain the difference between corporate finance and corporate governance. She gave up.
I cannot really blame this student for what happened. Our education system lays a premium on rote learning. We attach greater importance to remembering isolated facts instead of trying to understand why they happened. Our examiners are happy if a student writes a long answer even if most of the answer is irrelevant to the question at hand. A student daring to write a short, smart, clear answer is taking a big risk. Indeed, our whole emphasis seems to be on helping students fall into a set pattern, not on improving the learning process.
In the above incident, the student had heard the term shareholders' wealth maximisation being repeated by different teachers in different classes. She must also have seen the term being mentioned repeatedly in newspapers, magazines and books. So she must have thought, it is a safe answer to give for most questions inthe area of finance.
duty of managers? What is the role of the board? What is financial management? What is corporate governance? What is the function of corporate strategy? For all these questions, a student can say "It deals with maximisation of shareholders' wealth." Yet, there is a different answer to each question. The CEO, the board and managers have different roles to play. Financial management, corporate governance and corporate strategyhave different meanings, even if there are some overlapping areas.
To correct the state of affairs, what we need is not huge investment but a new approach. For example, we need to use more imagination while setting examination papers. We must include questions which provoke students and force them to think. We must move from what and when to why and how. Suppose, we were to ask a question, Why do we need a separate subject called corporate governance? That would really test the students' understanding. Or we could ask another simple question. Why do firms exist? Or we could ask: When is vertical integration advisable? That would again force the students to think and reflect.
In short, the need of the hour is to shift from remembering to understanding, accepting to questioning and reading to reflecting. We must make the students understand the basic concepts. We must encourage students to think, reflect and get into an inquiry mode. Unless we do something quickly about this, I am afraid, even the quality of the top 5 per cent of our students might deteriorate.
The problems of a spendthrift society
Consumer credit boom and its pitfalls
Borrowing against future income has become a widespread phenomenon. Both consumers and banks have joined the financing boom with unfettered enthusiasm. This is leading to the rising indebtedness of households, hardly a desirable phenomenon for a poor country like ours. There is also a pronounced bias on the part of banks for retail lending. This means a shift away from more traditional industrial lending activities that create productive assets, especially infrastructure,which is vital for a country like ours.
A fundamental principle of economics, which is beyond debate, is that poorcountries need to save as much as they can. Such countries also need a wellfunctioning financial system which can channel these savings into meaningfulinvestments to create assets of lasting value. What the consumer financing boom is doing is to decrease, not increase, savings. The boom is also undermining the ability of the financial system to perform its main duty. Savings are simply not
being channelled into investments.
All of us have aspirations as consumers. If we are confident about our future earning capabilities, there is nothing wrong in borrowing and buying something which we can consume from a relatively young age. The key assumption here is that our future financial circumstances will be more favourable than the present. If the assumption holds, the loan can be repaid with little difficulty. Unfortunately, this assumption is unrealistic in most cases.
Many of the people taking loans today are relatively young professionals in sectorswhich look glamorous today but where there is considerable uncertainty in the medium to long term. Take the software engineers. They work in an industry where much depends on the growth of developed countries. If economic growth stalls in the U.S. or Europe and if the Information Technology (IT) industry slows down as it happened in 2001, IT companies will retrench. Earlier these companies could afford to keep people "on the bench." But now with intensifying competition and thinning margins, there will be no option but to fire surplus engineers.
Similarly, consider the Business Process Outsourcing (BPO) boom. People have already started concluding that India has become the outsourcing hub of the world.The feeling is that more and more work will be outsourced to India and the boomwill never stop. Again, this is a surprisingly simplistic and optimistic assessment. Even if outsourcing picks up momentum in the western countries, all the work may not come to India. And even if the boom continues in India, not all companies will do well. We can expect some industry consolidation to take place. Moreover, as
technology becomes more sophisticated, many back end jobs will get automated. In short, there is likely to be rationalisation and job losses.
The bigger concern is the possibility of banks becoming full-fledged consumer financiers as opposed to project lenders. Indeed, terms like Universal Banks are nothing but a euphemism for this phenomenon. In a country like ours, where the capital markets are still very shallow, the primary role of banks is to appraise industrial projects and finance them accordingly. While big companies can raise money from the capital markets, small businesses have no option but to turn to the banks. And these businesses are just not getting the funds they need from banks.
No wonder, our small scale sector is failing to take off. The world over, it is small and medium enterprises (SMEs) which drive economic growth.
But let us not blame banks for behaving like this. At the current low level of interestrates, giving consumer loans is more attractive than lending to industrial projects. Interest paid by banks on most deposits is less than 6 per cent and if a consumer loan is given at 8 per cent, the spread is very attractive considering that the risk is diversified across many customers. But lending at even 11-12 per cent to an industrial project is not attractive as the risk is much higher and difficult to quantify.
The larger issues associated with the consumer financing boom also need to be debated thoroughly, especially the priorities of our youngsters on whom the future of our country heavily depends. Youngsters are aspiring for all the goodies of life without realising they have to be earned the hard way. Thus it is common to see MBA students walking into the classroom carrying cell phones but not calculators. These students spend thousands of rupees at weekend get-togethers in swank. restaurants. But if professors tell them to buy a couple of good books and read them, there is a lot of resistance. A decade back, people hesitated to get married till they had finished their studies and worked for at least 3-4 years. Today youngsters want to get married even before their studies are over. All this shows that the tendency for early gratification is on the rise.
I am not arguing that people should live like hermits. Indeed, we must enjoy life, for life is short. But we must enjoy life in a meaningful and sustainable way. Till we become a rich developed country, we need to be more circumspect. Living on borrowed money is fine as long as things keep going the way we expect them. But if something goes wrong down the line, it would be a real catastrophe. Major social upheavals would result.
Risk Management
Put on a safety belt
The high-profile bankruptcies of companies like Enron have underscored the importance of risk management. But as the new millennium gets under way, how much do we really know about risk and what tools are available to manage it?
To cut a long story short, significant progress has been made in the past three decades in managing risks, which can be easily quantified. Under this category come risks with which any
corporate treasurer would be familiar. Examples include commodity price risk, equity price risk, interest rate risk and foreign currency risk. Most Fortune 500 companies report at least a
sensitivity analysis for these risks in their annual reports, ie, they quantify the impact of say a
10% change in foreign exchange rates or a 1% change in interest rates. Some of the more
progressive report value-at-risk (VAR). This is the maximum loss that the company will suffer
on the portfolio of assets it holds, at a given confidence level for a specified time horizon under
normal market conditions.
The high-profile bankruptcies of companies like Enron have underscored the importance of risk management. But as the new millennium gets under way, how much do we really know about risk and what tools are available to manage it?
To cut a long story short, significant progress has been made in the past three decades in managing risks, which can be easily quantified. Under this category come risks with which any
corporate treasurer would be familiar. Examples include commodity price risk, equity price risk, interest rate risk and foreign currency risk. Most Fortune 500 companies report at least a
sensitivity analysis for these risks in their annual reports, ie, they quantify the impact of say a
10% change in foreign exchange rates or a 1% change in interest rates. Some of the more
progressive report value-at-risk (VAR). This is the maximum loss that the company will suffer
on the portfolio of assets it holds, at a given confidence level for a specified time horizon under
normal market conditions.
For worst-case scenarios, most financial institutions use stress testing. They examine the possible impact of things going really bad, as in Q3 of 1998 with the Asian crisis. Most global banks report extensively in their annual reports the type of stress testing they carry out. Some even have online stress testing processes.
When it comes to other risks, the progress remains unsatisfactory. These include the risks
associated with brands, new products, distribution channels and human resources. Most
companies appro- ach these risks with an air of helplessness and do not even attempt to identify, let alone measure and manage such risks. That is a great pity because for many companies outside the financial services industry, the impact on the bottom line due to financial risks like interest rates, stock prices, commodity prices and exchange rates is minimal compared to the risks listed above, which are more core.
Corporate execs need to pursue a more systematic approach while dealing with such risks. After all, risk management is not about eliminating risk. It is about holding the risks which the
company knows and can handle well and transferring those which the company is not confident
of managing. Thus, for an FMCG company, branding is an activity that cannot be avoided. The
risk associated with branding is one that the company "cannot afford not to take" in the words of Peter Drucker, the celebrated management philosopher. So, an FMCG company should manage
branding risks by asking the following questions.
What are the factors which affect the brand's sales?
For each of these factors, can we develop best case, worst case and most likely scenarios?
For each of the scenarios, can we examine the impact on sales?
By asking these questions, a figure quite similar to VAR can be computed. That is, the company
will be able to state, for a given probability, the maximum loss due to a decline in the performance of the brand. A similar approach can be extended to other risks: product
development, supply chain, plant expansion or human resources.
Companies must also understand that several innovative risk management instruments are
available today. Many of these have been driven by the convergence of the two fields traditionally described as corporate finance and insurance. For example, earnings per share (EPS)insurance is provided by companies like AIG Risk Finance and Swiss Re. EPS insurance
functions as a very close substitute for an infusion of equity. Any time EPS falls below a trigger,
the firm obtains capital to cover that shortfall. Instruments are also now available that can directly mitigate a company?s core business risks. Winnipeg-based United Grain Growers (UGG) has entered into a three-year deal with Swiss Re that effectively covers credit, counter party, weather, environmental, inventory, property/casualty, and grain price risks. UGG is compensated by Swiss Re whenever UGG's grain shipments fall below a certain level.
Despite the availability of innovative instruments like this, few companies are satisfied with their current approach to risk management. A survey of major American companies, conducted by CFO magazine in late 2001 revealed that in three years 39% of companies intend to integrate their risk management processes across the organisation. Many believe that risk management can be a competitive weapon.
When it comes to other risks, the progress remains unsatisfactory. These include the risks
associated with brands, new products, distribution channels and human resources. Most
companies appro- ach these risks with an air of helplessness and do not even attempt to identify, let alone measure and manage such risks. That is a great pity because for many companies outside the financial services industry, the impact on the bottom line due to financial risks like interest rates, stock prices, commodity prices and exchange rates is minimal compared to the risks listed above, which are more core.
Corporate execs need to pursue a more systematic approach while dealing with such risks. After all, risk management is not about eliminating risk. It is about holding the risks which the
company knows and can handle well and transferring those which the company is not confident
of managing. Thus, for an FMCG company, branding is an activity that cannot be avoided. The
risk associated with branding is one that the company "cannot afford not to take" in the words of Peter Drucker, the celebrated management philosopher. So, an FMCG company should manage
branding risks by asking the following questions.
What are the factors which affect the brand's sales?
For each of these factors, can we develop best case, worst case and most likely scenarios?
For each of the scenarios, can we examine the impact on sales?
By asking these questions, a figure quite similar to VAR can be computed. That is, the company
will be able to state, for a given probability, the maximum loss due to a decline in the performance of the brand. A similar approach can be extended to other risks: product
development, supply chain, plant expansion or human resources.
Companies must also understand that several innovative risk management instruments are
available today. Many of these have been driven by the convergence of the two fields traditionally described as corporate finance and insurance. For example, earnings per share (EPS)insurance is provided by companies like AIG Risk Finance and Swiss Re. EPS insurance
functions as a very close substitute for an infusion of equity. Any time EPS falls below a trigger,
the firm obtains capital to cover that shortfall. Instruments are also now available that can directly mitigate a company?s core business risks. Winnipeg-based United Grain Growers (UGG) has entered into a three-year deal with Swiss Re that effectively covers credit, counter party, weather, environmental, inventory, property/casualty, and grain price risks. UGG is compensated by Swiss Re whenever UGG's grain shipments fall below a certain level.
Despite the availability of innovative instruments like this, few companies are satisfied with their current approach to risk management. A survey of major American companies, conducted by CFO magazine in late 2001 revealed that in three years 39% of companies intend to integrate their risk management processes across the organisation. Many believe that risk management can be a competitive weapon.
Clearly, risk management is still an evolving subject. CEOs and CFOs would do well to pursue a flexible approach that takes full advantage of the latest instruments and processes in risk management.
Is China diverting FDIs?
Is China’s FDI Coming at the Expense of Other Countries?
China’s emergence has been perhaps the single most important new development affecting the world economy in recent times. By some estimates the country has contributed more than a quarter of the growth of global GDP in recent years.
Since the early 1990s, China has become a major destination for foreign direct investment. The country now has the third largest stock of FDI, after only the United States and United Kingdom. Although the country first opened its doors to FDI in 1979, the momentum picked up when Deng Xiaoping reaffirmed China’s commitment to market-friendly reforms during a tour of the southern provinces in 1992. Inflows first exceeded $30 billion in 1993 and ranged from $35 billion to $45 billion from 1994 through 2000, reaching $47 billion in 2001.
With China attracting foreign investment in a big way, there is an argument that the country has allegedly made it more difficult for other emerging markets to attract FDI. Thus, when FDI inflows into Mexico dropped from $3 billion in 2000 to $2 billion in 2003, it was attributed to China. When foreign direct investment in Malaysia fell from RM 19 billion in 2001 to RM 2 billion in the first half of 2002, Prime Minister Mahathir blamed China. Has China’s emergence as a low-cost production and export platform and its growing attraction as a destination for FDI made life tougher for other countries?
The increase in FDI into China must be seen in the context of the global growth of FDI. Net FDI flows to developing countries rose steadily over the 1990s, from $21 billion in 1989 to $179 billion in 1999. The bulk of these flows went to a handful of countries, notably China, Brazil, Argentina and Mexico. The economies of Central and Eastern Europe also attracted growing amounts of FDI over the course of the decade. But FDI in developing countries accounted for only a minority of the world total. In the second half of the 1990s, some 68 per cent of global FDI inflows were received by the advanced economies, a share that rose to 79 per cent in 1999-2000.
The FDI receipts of other Asian countries held up well through 1996, and their subsequent slump was presumably a consequence of the financial crisis of 1997-98. But flows of FDI to developing countries then declined by 26 per cent between 1999 and 2003, while those to China rose sharply. This created worries that China was diverting FDI away from East Asia and Latin America.
The main sources of China’s FDI have been Hong Kong, Taiwan, Singapore and Japan. Together these four countries have accounted for more than 50 per cent of China’s FDI receipts in the typical year. Japan is widely seen as an economy that may be redirecting its foreign direct investment from other potential destinations towards China.
Research on the subject by Barry Eichengreen a noted scholar does not indicate FDI diversion by China from other Asian countries. If anything, there is some evidence that the emergence of China as a more attractive destination for FDI has also made other Asian countries more attractive destinations for FDI. In many cases, China and these other economies are part of the same global production networks. Japanese firms are among the leaders in attempting to exploit these complementarities. Many, Japanese firms seem to be downsizing their operations in Singapore and ASEAN while relocating to China in response to both lower costs of production and the attractions of a large domestic market.
On the other hand there is some evidence of FDI diversion from OECD countries. This could be because FDI is often motivated by the desire to produce close to the market where the final sale takes place. Future growth potential clearly lies in China and other countries in East Asia. Again, Japanese firms seem to be among the leaders in redirecting their foreign investment in this way. Japanese FDI flows to China and other Asian countries tend to be positively, not negatively, correlated. The main exceptions are food processing and chemicals, where global supply-chain linkages are plausibly less prominent than in, say, consumer electronics.
China’s rise is thus good news for Asia, except for food processing and chemicals industries, which are receiving less foreign investment as a result of Chinese competition. On the other hand, China’s rise may be bad news for OECD countries in general and their manufacturing sectors in particular. In short, globalisation only seems to be creating a level playing ground.
China’s emergence has been perhaps the single most important new development affecting the world economy in recent times. By some estimates the country has contributed more than a quarter of the growth of global GDP in recent years.
Since the early 1990s, China has become a major destination for foreign direct investment. The country now has the third largest stock of FDI, after only the United States and United Kingdom. Although the country first opened its doors to FDI in 1979, the momentum picked up when Deng Xiaoping reaffirmed China’s commitment to market-friendly reforms during a tour of the southern provinces in 1992. Inflows first exceeded $30 billion in 1993 and ranged from $35 billion to $45 billion from 1994 through 2000, reaching $47 billion in 2001.
With China attracting foreign investment in a big way, there is an argument that the country has allegedly made it more difficult for other emerging markets to attract FDI. Thus, when FDI inflows into Mexico dropped from $3 billion in 2000 to $2 billion in 2003, it was attributed to China. When foreign direct investment in Malaysia fell from RM 19 billion in 2001 to RM 2 billion in the first half of 2002, Prime Minister Mahathir blamed China. Has China’s emergence as a low-cost production and export platform and its growing attraction as a destination for FDI made life tougher for other countries?
The increase in FDI into China must be seen in the context of the global growth of FDI. Net FDI flows to developing countries rose steadily over the 1990s, from $21 billion in 1989 to $179 billion in 1999. The bulk of these flows went to a handful of countries, notably China, Brazil, Argentina and Mexico. The economies of Central and Eastern Europe also attracted growing amounts of FDI over the course of the decade. But FDI in developing countries accounted for only a minority of the world total. In the second half of the 1990s, some 68 per cent of global FDI inflows were received by the advanced economies, a share that rose to 79 per cent in 1999-2000.
The FDI receipts of other Asian countries held up well through 1996, and their subsequent slump was presumably a consequence of the financial crisis of 1997-98. But flows of FDI to developing countries then declined by 26 per cent between 1999 and 2003, while those to China rose sharply. This created worries that China was diverting FDI away from East Asia and Latin America.
The main sources of China’s FDI have been Hong Kong, Taiwan, Singapore and Japan. Together these four countries have accounted for more than 50 per cent of China’s FDI receipts in the typical year. Japan is widely seen as an economy that may be redirecting its foreign direct investment from other potential destinations towards China.
Research on the subject by Barry Eichengreen a noted scholar does not indicate FDI diversion by China from other Asian countries. If anything, there is some evidence that the emergence of China as a more attractive destination for FDI has also made other Asian countries more attractive destinations for FDI. In many cases, China and these other economies are part of the same global production networks. Japanese firms are among the leaders in attempting to exploit these complementarities. Many, Japanese firms seem to be downsizing their operations in Singapore and ASEAN while relocating to China in response to both lower costs of production and the attractions of a large domestic market.
On the other hand there is some evidence of FDI diversion from OECD countries. This could be because FDI is often motivated by the desire to produce close to the market where the final sale takes place. Future growth potential clearly lies in China and other countries in East Asia. Again, Japanese firms seem to be among the leaders in redirecting their foreign investment in this way. Japanese FDI flows to China and other Asian countries tend to be positively, not negatively, correlated. The main exceptions are food processing and chemicals, where global supply-chain linkages are plausibly less prominent than in, say, consumer electronics.
China’s rise is thus good news for Asia, except for food processing and chemicals industries, which are receiving less foreign investment as a result of Chinese competition. On the other hand, China’s rise may be bad news for OECD countries in general and their manufacturing sectors in particular. In short, globalisation only seems to be creating a level playing ground.
Moving up the software value chain
Moving up the Software Value Chain
Will Indian software companies succeed in moving up the value chain ? The question has become particularly important as their bread and butter application development activities are becoming increasingly commoditised.
Business strategy is all about creating value for customers and more importantly capturing that value. The value chain is the set of activities that together add value. Moving up the value chain means doing those activities where there is scope to capture greater value. Typically, these are the activities where there is scope to collect a premium from customers by differentiating the product or service offered.
What exactly is involved in moving up the software value chain? To answer this question we need to understand that the value of any technology does not lie in its intellectual wizardry behind it but in the uses to which it can be put. The value of software is judged not by its technical elegance but by the contribution it makes to cutting costs, adding value and improving the overall quality of management in the company, especially decision making.
Google has become the most popular search engine in the world because of its user friendliness and ability to understand the mind of the person looking for a specific piece of information. Undoubtedly, Google has great technology backing it. But the main reason for its popularity is that its technology helps customers accomplish their tasks efficiently. It is those software services companies which can take a customer’s business problem, structure it and then explore how information technology can be used to solve it, that will command a premium in the market place.
Customers feel confident about discussing their core business problems with IBM, whereas they give Indian software companies clearly defined outsourcing tasks. This is the hard reality, even if Indian IT companies pretend otherwise and claim that they have developed deep domain expertise in some verticals. Even the major outsourcing contract which ABN Amro announced recently, featured essentially applications development.
The very fact, that Indian IT companies keep talking about process maturity, quality and SEI CMM V clearly reflects their mindset. These concepts are relevant in case of clearly defined tasks, which can be measured and controlled. Consulting tasks which demand a high degree of creativity and critical thinking cannot be managed within this framework. These are the activities where there is real scope to differentiate and add value, not in the structured coding tasks. Which is why many of the leading American software companies are not particularly worried about getting to SEI CMM V level.
If Indian companies truly want to move up the value chain, they must first work with Indian customers, especially the Small and Medium Enterprises and work like true consultants by developing solutions from the business problem definition stage. Once they succeed in running a few pilots, like these, they can scale up and target larger Indian companies. Only then will the global clients trust our software companies with these high end jobs. Some of our larger software companies like TCS and Infosys have been doing this but they must expand the scale of their domestic operations. And the smaller ones who have been content to milk their foreign clients must display a more visionary approach.
Many Indian software companies are trying to move up the value chain by hiring functional experts and by giving techies management inputs. But these measures have not succeeded in a big way. The best way to marry functional and technical expertise is to give people practical exposure to real life problems. Techies should understand what happens when a real time application in a bank collapses. Similarly they must spend time at retail outlets to understand the unique business problems faced by the industry. Only then the kind of expertise needed to move the value chain will be developed.
Instead of waiting for that big consulting contract from global clients, Indian software companies must immediately start working with small companies in the country even if the rates are not remunerative. Otherwise, all this talk of moving up the value chain might remain unconvincing.
Will Indian software companies succeed in moving up the value chain ? The question has become particularly important as their bread and butter application development activities are becoming increasingly commoditised.
Business strategy is all about creating value for customers and more importantly capturing that value. The value chain is the set of activities that together add value. Moving up the value chain means doing those activities where there is scope to capture greater value. Typically, these are the activities where there is scope to collect a premium from customers by differentiating the product or service offered.
What exactly is involved in moving up the software value chain? To answer this question we need to understand that the value of any technology does not lie in its intellectual wizardry behind it but in the uses to which it can be put. The value of software is judged not by its technical elegance but by the contribution it makes to cutting costs, adding value and improving the overall quality of management in the company, especially decision making.
Google has become the most popular search engine in the world because of its user friendliness and ability to understand the mind of the person looking for a specific piece of information. Undoubtedly, Google has great technology backing it. But the main reason for its popularity is that its technology helps customers accomplish their tasks efficiently. It is those software services companies which can take a customer’s business problem, structure it and then explore how information technology can be used to solve it, that will command a premium in the market place.
Customers feel confident about discussing their core business problems with IBM, whereas they give Indian software companies clearly defined outsourcing tasks. This is the hard reality, even if Indian IT companies pretend otherwise and claim that they have developed deep domain expertise in some verticals. Even the major outsourcing contract which ABN Amro announced recently, featured essentially applications development.
The very fact, that Indian IT companies keep talking about process maturity, quality and SEI CMM V clearly reflects their mindset. These concepts are relevant in case of clearly defined tasks, which can be measured and controlled. Consulting tasks which demand a high degree of creativity and critical thinking cannot be managed within this framework. These are the activities where there is real scope to differentiate and add value, not in the structured coding tasks. Which is why many of the leading American software companies are not particularly worried about getting to SEI CMM V level.
If Indian companies truly want to move up the value chain, they must first work with Indian customers, especially the Small and Medium Enterprises and work like true consultants by developing solutions from the business problem definition stage. Once they succeed in running a few pilots, like these, they can scale up and target larger Indian companies. Only then will the global clients trust our software companies with these high end jobs. Some of our larger software companies like TCS and Infosys have been doing this but they must expand the scale of their domestic operations. And the smaller ones who have been content to milk their foreign clients must display a more visionary approach.
Many Indian software companies are trying to move up the value chain by hiring functional experts and by giving techies management inputs. But these measures have not succeeded in a big way. The best way to marry functional and technical expertise is to give people practical exposure to real life problems. Techies should understand what happens when a real time application in a bank collapses. Similarly they must spend time at retail outlets to understand the unique business problems faced by the industry. Only then the kind of expertise needed to move the value chain will be developed.
Instead of waiting for that big consulting contract from global clients, Indian software companies must immediately start working with small companies in the country even if the rates are not remunerative. Otherwise, all this talk of moving up the value chain might remain unconvincing.
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