India’s Political Risks in 2014

A fortnight back Aam Admi Party’s (AAP) magnificent political debut in Delhi pulled the rug under the feet of seasoned politicians. Old established politicians with dynastic lineage are scanning the environment to see which young inexperienced common person will oust them from their plush leather chairs. The AAP victory is a game changer, injecting fresh blood in Indian democracy. The citizens, sick and tired of corruption are demanding good governance. With national elections coming up in May 2014, the political risks of the country are changing.

A.      AAP’s Applecart

Arvind Kejriwal - The New Hero

Arvind Kejriwal – The New Hero

Gen X arrived on the political arena and won the first battle. The victorious 28 AAP MLAs are 26-49 years old. They do not have a political background, family connections, or money. They are regular middle class people who took their first baby steps in activism in the Anna Hazare Anti-Corruption Movement.

AAPs symbol, the broom, stands for cleaning the corrupt system. In one stroke, it has swept the old political system and established rules. Within a week, anti-corruption Lok Pal Bill was passed with Congress spearheading the passage of the bill. The bill had been pending for over five decades. While Arvind Kejriwal and Prashant Bhushan were the brains behind the moment, Rahul Gandhi was quick to take the credit.

The AAP leader Arvind Kejriwal, by taking public referendum to form the government, out manoeuvred BJP and Congress. By announcing that AAP will participate in national elections, Kejriwal has become a national leader with mass appeal. With people demanding change and a corruption free government, AAPs is a significant threat to established parties.

From business perspective, in AAP governed states cronyism and corruption will decrease. However, the number of raids and investigations might increase. One is likely to see some high level prosecutions with the implementation of Lok Pal bill. Hence, it will pay to keep high business ethics, and reduce illicit money transactions and bribes.

B.     BJP’s Bandwagon

 BJP Prime Ministerial candidate, showed his leadership mettle in the state elections. BJP win in four of the five states clearly showed that the tide is in its favour.  Modi is riding on the propagated success of Gujarat Model, Hindu middle class and business support.

Narendra Modi - The Callenger

Narendra Modi – The Callenger

However, though Modi is projecting himself as an agent of change, Kejriwal is outshining him in that sphere. In addition, AAP voters come from all income groups, religions, and regions. Hence, Modi presently has a smaller pie of the vote bank.

BJP is also showing that it is unable to walk the talk of change. It is entering into alliances with candidates and parties with a criminal track record. Secondly, to connect the youth across India, it has started the project to build Sardar Patel statue by organizing runs and collecting iron pieces across India. It is trying to attack Kejriwal’s youth following obtained through social activism reputation by this initiative. The Gen Y does not connect with freedom fighters; it wants the current issues addressed.

Hence, it will be an interesting battle to watch. Businesses in BJP ruled states could expect some speedy action on pending proposals, a superficial reduction in corruption, and a significant focus on business growth. BJP isn’t positively aligned towards US; hence, some tensions are envisaged. Moreover, if it comes to power at national level it is expected to gun for Congress leaders and the corruption cases.

 C.      Congress’s Circus

COngress - In Better Times

Congress – In Better Times

In the state elections, the Congress politicians came out looking like a pack of jokers. The Congress hubris, corruption cases, and Rahul Gandhi’s ill preparedness to don the leadership mantle resulted in its downfall.

Suddenly, the Gandhis’ are putting on the activist’s cloak. In the Supreme Court ruling of LGBT cases, they were on the forefront fighting for LGBT rights. After letting US walk all over for last ten years, in Khobragade case, it is drawing blood. At the last moment, support to pass the bill for allowing politicians with criminal records to contest was withdrawn. An attempt to change image and control reputation damage in the last six months isn’t going to work.

The Congress Prime Ministerial candidate is still unknown. A feeler was sent out about Nandan Nilekani being the Prime Ministerial candidate. He might sail through with business tycoons, but will appear as a US supported candidate. The US governments attempt to play big brother’s role in Indian democracy doesn’t go down well with Indian voters. Rahul Gandhi isn’t a people’s magnet. He has not proved his leadership capabilities. Hence, Congress might be facing some dilemmas in selecting a candidate with national appeal. Finally, Prime Minister Manmohan Singh has called it a day and isn’t seeking a third term.

Congress most probably is going to take a beating. In the states it survives, corruption is going to continue and it is going to take a while for them to introduce good governance. Leaders are going to be scrambling for cover, as AAP and BJP are both interested in investigating them to get mileage. In the states it loses, a few projects permissions might be withdrawn or closed. These are the states where business sector will face maximum political risks.

Closing Thoughts

The ABC of Indian politics is changing. It will be enthralling and heart-warming to watch the 2014 elections. Indian democracy is finally coming of age and voters have tasted their power to overthrow established models. With multi-party environment and many more parties in the ring, the competition is going to be keen.

However, a few messages are clearly coming out. Those aligning with corrupt leaders or leaders with criminal records are going to lose the public backing. Political battle plans and strategies need to be redrawn, as the old isn’t going to work. Fighting on religion and caste won’t ensure victory. The parties manifesto focus must be on good governance, economic and business growth, corruption free environment and empowerment of the masses.  The economy is expected to pick up only after the elections near the last quarter of 2014. Hence, be prepared for a slow year in business.

Impact of Power Styles on Organization Risks

Power, we all want it. If we don’t have it, we associate with the powerful in the hope some of it rubs down to us. Being in the upper echelons of corporate world or the political corridors of the country’s parliamentary houses ensures that you are exempt from the rules applicable to the common person.

However, the way a person gets power and uses it reflects the person’s character, and its influence on others. In the corporate world, the power styles used by senior managers directly influence the risk levels of the organization. Unsurprisingly,  power and politics are undiscussable topics in the corporate world; hence, when risk managers do risk assessments, they ignore the two.

I personally recommend risk managers to understand the individual power styles of the senior managers and overall organization power style. To appreciate the connection between power and risk, let us first look at the power styles and their impact on the organization.

Power Sttyles

Depending on the situation, a leader needs to use various power styles. However, if a leader uses coercive style even when it is not required, then something is wrong. Leaders frequently use power styles of reward and punishment for fulfilling illegitimate requirements. Hence, the probability of followers being involved in unethical activities requiring compromise of personal values is higher. On the other hand, the expert style ensures that followers make informed judgments as the leader attempts to enhance their ethical values and knowledge level. The reward is not in the form of a bribe and is implicit; the leader is dedicated to improving the organization.

Another aspect that requires understanding is the need for creating perception of power. When a leader is undertaking illegitimate activities (watch any Hindi movie to see the underworld Don) he needs to create a strong perception of power by using threat and punishment. Else, his coercive tactics will be ineffective, as people will not cooperate. Therefore, he makes some sacrificial goats to demonstrate that he is above the law and normal rules don’t apply to him. Another tactic is to break the social norms, and not behave rationally and predictably. Both these methods focus on creating fear to ensure compliance. Without the perception of power and fear, the leader becomes vulnerable to revolt from the common person. The only way for him to retain his power is by increasing the number of sacrificial goats, threats, and punishments.

1.   Impact on Legal and Reputation Risks

A coercive leader is usually riding a tiger. The organization risks continue multiplying as more and more people become aware of the unethical practices. An elastic can be stretched up to a limit. Eventually, the concocted environment cocoon will burst and all hell will break loose. The leader cannot trust anyone after a point. Hence, his fear increases in direct proportion to his vulnerability. The leader takes more and more risks to protect his personal fiefdom. The organizations reputation risks and legal risks increase proportionately.

2.   Impact on Human Resource Risks

Overtime, the leader’s charisma wears off. As the layers peel off, disillusion sets in. Employees realize that the leader doesn’t behave with integrity and honesty. Even the loyalists recognize that whenever it suits the leader’s personal agenda, they can face the bullet without any fault of their own. This creates disquiet among employees, and employee disengagement increases. The human resource risks increase manifold with disengaged employees.

3.   Impact on Operational and Financial Risks

The disengagement starts effecting productivity and performance as everyone grasps that meritocracy has no links with rewards. This in turn impacts the bottom line as leader fails to deliver on targets. Failure to show profitability and results makes the leader’s position precarious. The leader starts feeling pressure from the top. As he is unable to improve productivity, he attempts to manipulate results and financial statements. In nutshell, leader’s power style influences operational risks and financial risks of the organization.

Closing Thoughts

No one can deny that success in life depends quite significantly on a person’s power and influence. The general opinion is that means to the end do not matter when we strive for power. On the contrary, how we get power and maintain power, is crucial for longevity in the powerful position. For a coercive leader, the end is tragic, as the hunter becomes the hunted. Moreover, if a leader gets power by paying bribes or giving rewards, his power ends when he stops doing so. His loyalists disappear with speed. Abusing power is no longer safe in the present world, as it increases the personal risks of the leader and the organization risks. Therefore, risk managers need to ensure for continued prosperity of the organization, that leaders get power by the rights means and use it for the right purposes.

Human Rights Risk Management Process

Bangladesh Building Collapse

The fire in a nine-story factory building in Bangladesh killed 400 people. More than 600 people remain unaccounted for. It housed five garment factories that supplied to international brands – J.C. Penny, The Children’s Place, Dress Barn, Primark, Wal-Mart etc. The workers were asked to come to work even when cracks appeared in the building the previous day.

Bangladesh is the second largest exporter of clothes and the workers get the lowest compensations. Just around USD 37-40 per month. The question arises why are the multinational organizations not following the UN Guiding Principles for Human Rights protection. The reason is simple; they want to show higher and higher profits to the investors.

In Delhi, in Munirka one will find numerous small factories full of workers making export garments. A friend of mine also ran one. I had bought a few shirts from her at cost price ranging from Rs 300-500 (USD 6-10). In one international visit, I found the same shirts selling in range of USD 15-30. The fivefold increase in price was because of the brand tag attached to the shirt.

The multinational buyers push the prices down and some supplier gives a rock bottom price. The others are forced to match that price to get the business. End result is that basic facilities are not provided to the workers and they work at really low wages. Unknown workers are paying with their lives in developing countries to satisfy the growth targets set by CEOs to earn their bonuses and keep investors happy.  It is the dark side of capitalism which organizations want to hide.

In most companies, human rights risk management is not a focus area. The 2013 Global Risk Management Survey conducted by RIMS identified seven risks related to human resources among the top fifty risks. Though worker injury and harassment were included there was no specific emphasis on human rights risk management.

The risk management team can conduct annually or bi-annually a human rights risk management assessment. It requires attention not only from human resources perspective but from operational, financial, legal and reputational risks perspective. Any breach can result in huge losses.

Here are some of the steps mentioned in the UN Guiding Principles on Human Rights and guide “Investing the Right Way” issued by Institute of Human Rights and Business.

1.     Review the Human Rights Policy Statement

Human rights risk management is emerging as an important issue, especially with multinationals entering emerging markets and developing countries. They are expected to protect and respect rights of workers, communities and society. Investors can play a crucial role by influencing companies to promote human rights relating to gender equality, child labor, rights of indigenous people, land acquisition, mineral processing etc.

Hence, companies need to publish Human Rights Policy Statement on their websites. The UN Guiding Principle 16 states –

 “As the basis for embedding their responsibility to respect human rights, business enterprises should express their commitment to meet this responsibility through a statement of policy that:

(a) Is approved at the most senior level of the business enterprise;

(b) Is informed by relevant internal and/or external expertise;

(c) Stipulates the enterprise’s human rights expectations of personnel, business partners and other parties directly linked to its operations, products or services;

(d) Is publicly available and communicated internally and externally to all personnel, business partners and other relevant parties;

(e) Is reflected in operational policies and procedures necessary to embed it throughout the business enterprise.”

As a first step risk managers need to check whether the organization has a human rights policy statement and the above mentioned steps have been adhered to.

2.     Human Rights Impact Assessment

The second aspect of UN Guiding Principles is for companies to establish human rights due diligence processes. Guiding Principle 17 states:

 “In order to identify, prevent, mitigate and account for how they address their adverse human rights impacts, business enterprises should carry out human rights due diligence. The process should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed. Human rights due diligence:

(a) Should cover adverse human rights impacts that the business enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships;

(b) Will vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations;

(c) Should be on going, recognizing that the human rights risks may change over time as the business enterprise’s operations and operating context evolves.”

Human rights risk management is complex and challenging. If ignored, they can increase political risks and deteriorate relationships of the organization with the government. For example, Tata Motors wished to establish Nano manufacturing plant in Singur, West Bengal. The government allocated agriculture land using 1894 land acquisition rule, meant for public improvement projects, to take over 997 acres farmland. The farmers protested with help of activists and the then opposition leader Mamta Banerjee. Tata Motors moved out of West Bengal and established the factory in Gujarat. Multinationals looking for large tracts of land to establish factories are facing similar challenges in India.

Another aspect to look into is that scrap, waste disposal, sewage, environment pollution etc. from factories can impact food, water and health of local communities.

Decision needs to be taken whether investments should be made in countries or states with poor human rights record. In India, the Naxalite area is extremely conflict prone and business operations can have severe human rights impact.

Risk managers should evaluate the strategy and operations of the company from human rights, environmental, social and governance factors. The companies can face operational risks (project delays or cancellation), legal and regulatory risks (lawsuits and fines) and reputational risks (negative press coverage and brand damage). The impact assessment should be done from investors, customers, employees, society and supplier perspective. Identify business owners for the risks and devise appropriate risk mitigation plans to address adverse impact.

3.   Grievance Mechanisms

UN Guiding Principles state that victims of corporate related human rights abuse should have access to judicial or non-judicial remedies. Companies should provide some remedies themselves and cooperate in the remediation process.

UN Guiding Principle 29 states –

“To make it possible for grievances to be addressed early and remediated directly, business enterprises should establish or participate in effective operational-level grievance mechanisms for individuals and communities who may be adversely impacted.”

However, this isn’t followed by the companies in true spirit. “A Vigieo analysis of human rights records of 1500 companies listed in North America, Europe and Asia revealed that, in the previous three years, almost one in five had faced at least one allegation that it had abused or failed to respect human rights.”

Ideally the investors in the company should ensure that grievance mechanisms exist and address human rights issues. The transparency and disclosure of the same in annual reports would highlight the financial, legal and reputational risks. However, the investors don’t seem to be bothered by it.

See the case of Apple. It reported  Gross Profit Margin – 42.5%, Net Profit Margin – 26.7%, Revenue Per Employee – $ 2,149,835 and Net Revenue Per Employee – $ 573,255. It has 43000 employees in US and 20,000 outside US. However, Apple contractors hire an additional 700,000 people to engineer, build and assemble iPads, iPhones and Apple’s other products.

An Apple supplier in Taiwan, Foxconn was recently in the news for its workers attempting suicide. As per reportsWorkers are required to stand at fast-moving assembly lines for eight hours without a break and without talking. Workers, sharing sleeping accommodations with nine other workmates, often do not know each other’s names. They do not have much time to get to know each other. The basic starting pay of 900 RMB($130) a month – barely enough to live on – can be augmented to a more respectable 2,000RMB ($295) only by working 30 hours overtime a week.”

See the difference the company earns per employee and the payment made to the supplier’s employees. Apple shows profits at the expense of lives of Taiwanese workers.  The workers don’t have much of a grievance mechanism in China as the government stated that the suicides are within the normal suicide rate. Can Apple investors sacrifice some profit margin for safety and security of the contractual workers?

Another old example is the class action suit since 2001 on Wal-Mart Stores that involved 1.5 million current and former Wal-Mart female employees. It is the largest workplace bias case in US history.

 4.    Human Rights Reporting

 The biggest challenge is that most of the human rights abuses are not reported. The victims of human rights exploitation hold little power in comparison to the exploiters. They can hardly take up the might of powerful businesses when they are struggling to get basic food and shelter. Secondly, in the developing and emerging countries, corruption levels are generally high. Hence, media, law enforcement agencies etc. are bribed by the power players to silence the victims. However, with internet and social media, things are gradually changing. People have a voice and collectively they can fight.

UN Guiding Principle 21 lays out the requirement for companies to communicate human rights impact externally. It states -

 “In order to account for how they address their human rights impacts, business enterprises should be prepared to communicate this externally, particularly when concerns are raised by or on behalf of affected stakeholders. Business enterprises whose operations or operating contexts pose risks of severe human rights impacts should report formally on how they address them. In all instances, communications should:

(a) Be of a form and frequency that reflect an enterprise’s human rights impacts and that are accessible to its intended audiences;

(b) Provide information that is sufficient to evaluate the adequacy of an enterprise’s response to the particular human rights impact involved;

(c) In turn not pose risks to affected stakeholders, personnel or to legitimate requirements of commercial confidentiality.”

 As per the UN principles, the reports must cover appropriate qualitative and quantitative indicators, feedback from internal and external sources including affected stakeholders.

Risk managers can evaluate the reports and the reporting process to ensure that all risks are properly addressed. They should evaluate whether cautionary steps are taken and nothing is being done to exacerbate the situation. They should highlight severe or irreversible risks to the management to ensure appropriate decisions are taken.

Closing Thoughts

 Inequalities in income are the main cause of human rights abuse. The rich want to get richer at the expense of blood and sweat of the poor, and sometimes life. The diamond manufacturers and sellers took the right step to publish that they do not source blood diamonds. Since 2003, the Kimberley Process Certification Scheme (KPCS), supported by national and international legislation, has sought to certify the legitimate origin of uncut diamonds. Trade organizations – International Diamond Manufacturers Association (IDMA) and the World Federation of Diamond Bourses (WFDB) – representing virtually all significant processors and traders – have established a regimen of self-regulation.

Other industries, be it technology, electronics or textile manufacturers,  need to come out with similar steps to stop human rights abuse. The risk managers have a vital role to play in it. If we do not do anything, we are cheating this and the next generation of their right to live happily.

References:

  1.  Investing the Right Way – A Guide for Investors on Business and Human Rights – By Institute of Human Rights and Business
  2. Singur farmland-  Tata Motors conflict
  3. Apple financial ratios
  4. Foxconn Case Study
  5. Diamond industry sales clauses
  6. 2013 RIMS Global Risk Management Survey

 

Indian Banks Give Customer Service for Money Laundering

money laundering

Recently a string operation exposed money laundering services provided by some Indian private banks. The employees and bank managers were caught on camera advising the disguised reporter on ways and means he can convert his illicit money into legal money.

1. Caught in the act

Some of the helpful advice given by bankers included:

  1. Open multiple accounts so that the amount remains below the reporting limits. Do not deposit over Rs 10 lakhs (Rs 1 million) in a single instance.
  2. Obtain a demand draft from a Cooperative Bank and deposit the draft with us. Cooperative Banks do not require an account hence it will be easy to obtain a draft. Since cash would not be directly deposited and private banks do not have to check the source of funds, the deposit will not raise any alerts.
  3. Route the cash money through another bank to avoid detection.
  4. The Income Tax act prohibits keeping cash in bank lockers. However, if you do not inform the bank staff, they can look the other way.
  5. Open an NRI account and slowly transferring the money offshore. We need a passport and visa for opening an NRI account. No pan card required.  Deposit Rs 25 lakhs per month. Better still start by opening a NRO account.

The bankers offered to visit the client’s residence to open an account and collect the money. One has to watch the video clippings to see the level of customer service provided by the bankers. No one can say they were not being helpful.

2. Standard response from senior management

As expected the senior management of the banks denied all knowledge, claimed they maintained highest ethical standards, suspended the branch managers and the staff, and commenced an internal investigation. But this is an open secret. Every business person in India knows that the banks will help them convert black money into white and transfer illegal money. If it was not so, how can a parallel black money economy exist in India for so long. Did the expose really shock anyone?

3. Lip service by regulators

Of course Reserve Bank of India has given detailed guidelines on Know Your Customer and submission of suspicious transaction reporting. There is only theoretical application of guidelines of Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). The Financial Intelligence Unit of India received just over 30,000 suspicious transaction reports in 2011-2012. It received 100,00,000 cash transaction reports. If you read these numbers in reference to the size of banking business in India, it would not be even .01% of the total yearly transactions.

In February 2012, the director of the Central Bureau of Investigation had said that Indians have $500 billion of illegal funds in foreign tax havens, more than any other country. Some reports estimate the amount over a trillion.

Hence, can we actually believe that regulators and bankers are serious about preventing money laundering in India? The annual report 2011-2012 of Financial Intelligence Unit doesn’t really mention any investigations done that would make the bankers uncomfortable. In India the detection and investigation capabilities of financial regulators is still in nascent stages.  Unlike US which has full-fledged organizations and systems to check money laundering.

Closing Thoughts

In the pursuit of growth numbers bankers are willing to compromise ethics and legal requirements. However, in Indian society because of the high level corruption, most businesses are doing the same. In such a scenario, it amounts to pot calling the kettle black. Unless we really get serious about removing corruption, as a society we can’t succeed. Some things required are – public to withdraw support from companies using unethical practices to succeed, regulators take organizations to task, and government prosecutes politicians and other individuals for dealing with illicit money. Till this happens only media will benefit by doing exposes to improve their ratings.

References:

  1. Cobra Post Expose
  2. Financial Intelligence Unit India
  3. Black Money Market in India

Barclays War on Culture Change

Barclays is again in the limelight due to a damaging report on the deviant culture existing in the Investment division. After LIBOR rate fixing scandal and quick departures of senior managers, trouble is again brewing in Barclays. The COO of Investment banking division, Andrew Tinney quit when it was discovered that he shredded the only copy of a report that clearly stated the bullying culture of the organization. Then the new CEO, Anthony Jenkins discovered when an internal whistle blower mentioned it to him. He sent out a message to staff on culture change. Here are some insights into the story.

1. The Damaging Report on Dysfunctional Culture

Daily Mail story states that the report prepared by Genesis Ventures - “paints a devastating picture of incompetence and arrogance at the bank, showing that executives:

  • Pursued a ‘revenue at all costs’ strategy.
  • Fostered a culture of fear and intimidation.
  • Were ‘actively hostile’ to the idea of compliance with banking rules.
  • Presided over a ‘broken culture’ where problems were ignored or buried.
  • Allowed the business to spin ‘out of control.”

The senior management intentionally understaffed support functions, was hostile to compliance and attacked those who spoke contrary to senior management views. A senior manager threw the risk management report publically saying – “this is a piece of s***” showing utter contempt and disregard for the same.

The summarization of the report states – ‘The senior team portray themselves as all-powerful and all-knowing… and people chose to disagree with them at their own peril. It is a mentality of superiority which, when combined with other deficiencies, stops the team from tackling their blind spots. When those deficiencies are in compliance, this results in serious issues that no one else has the power to address.

The bank’s culture has become completely deviant, and it will be a long road ahead for significant change to occur. The problem is that this issue is prevailing in other banks also. They depict the same culture and attitude. Unless we understand why it is occurring and senior managers take sincere steps, nothing positive will happen.

 2. The Psychological Explanation

Western banks are known for their arrogant and aggressive culture. Some view arrogance as a positive trait and humility as a negative trait, while the opposite is true. Stanley Silverman developed Workplace Arrogance Scale to measure arrogance level in the organizations. He stated the arrogant people demean others to prove superiority and competence. However, as per his results arrogant people showed lower intelligence and self-esteem in comparison to their peers. He identified four red flags to identify arrogant behaviour:

  • Does your boss put his/her personal agenda ahead of the organization’s agenda?
  • Does the boss discredit others’ ideas during meetings and often make them look bad?
  • Does your boss reject constructive feedback?
  • Does the boss exaggerate his/her superiority and make others feel inferior?

If you link back to the damaging report, the senior management at Barclays showed these traits in abundance. Even during the financial crises, the bankers didn’t feel apologetic and showed no humility. Now, being in such senior positions one cannot say they lack intelligence, however, questioning their self-esteem is definitely a valid path.

In another psychological study conducted by Angela Y. Lee, a professor of marketing at the Kellogg School of Management, it was determined that people with low self-esteem defend the brands more when their favourite brands are attacked. This explains why bankers refused to change and continued their behaviour when under attack during the financial crises.

3. The CEO Message for Culture Change

Deal Book reported that Anthony Jenkins, the CEO of Barclays sent a mail out to the staff with a clear message – “change or leave”. He categorically stated the values – Respect, Integrity, Service, Excellence and Stewardship – to be adopted by Barclays employees. He further added that those who do not change their behavior are free to leave. His words were – “My message to those people is simple: Barclays is not the place for you. The rules have changed. You won’t feel comfortable at Barclays and, to be frank, we won’t feel comfortable with you as colleagues.

He highlighted that in the last two decades financial institutions pursued profits and compromised integrity and reputation of the organization. He said there is no choice between values and profits. Employees must pursue profits while maintaining values. Evaluation of ethical behaviour will be incorporated in performance appraisal process.

That is a very strong message from the CEO of the organization to transform the culture of the organization. Two questions in everyone’s minds are – will they succeed and how long will it take.

Closing thoughts

Bill Gates had famously said – “The world won’t care about your self-esteem. The world will expect you to accomplish something BEFORE you feel good about yourself.” Maybe organizations should care about the self-esteem of their employees and their senior management team. Studies have shown that people with higher self-esteem show more ethical behaviour and are less likely to get involved in wrongful acts. The present trend of pursuing material gains at the expense of personal values destroys self-esteem in the long run. Bankers have shown extreme tendencies to flaunt expensive toys to feel good and build a superior image. In all probability, they are caught in a catch-22 situation at a psychological level. It might not be possible to change the culture without addressing the core issues faced by the staff.

References:

  1. Exposed: The regime of fear inside Barclays – and how the boss lied and shredded the evidence
  2. Identifying the arrogant boss
  3. Leave My Brand Alone – Kellogg School of Management
  4. New Barclays Chief Tells Staff to Accept Changes or Leave

 

 

5 Things CFOs Should Do In Planning Process

In December, senior management focuses on formulating strategies. Department heads prepare business plans and budgets. Risk management departments define the next year’s agenda and plans. Everyone works hard at planning and preparing for the coming year. However, most of the efforts are in vain and result in failure. The problem is that generally people do these activities independently and make no attempt to align them. The ideal integrated sequence is below.

strategy

However, this does not happen. For instance, department heads do capital expenditures while ignoring the strategy. Business teams define performance indicators and risk managers establish risk indicators, without syncing the two indicators. Situations occur where desired performance is achieved at very high-risk levels. Business teams ignore the risk levels until disaster occurs. With the multitude of unsynchronized management information, boards make incorrect decisions with information overload. Hence, at the end of the year only a few organizations can claim that they achieved the strategy and targets.

The Chief Financial Officers (CFOs) can play a pivotal role in bringing the different facets together. CFOs sit on the board and participate in the strategy formation process. Department heads submit their plans and budgets to CFOs for review and consolidation. Generally, Chief Audit Executives (CAE) administrative reporting is to the CFO. Quite frequently, CFOs act as defacto Chief Risk Officers (CRO). Hence, CFOs can put the jigsaw puzzle together. The key things they need to look into to revamp the process are as follows:

 1.     Strategy Formulation

 The common misperception is that organizations have a proper strategy formation process. In reality, the ideas supported by the CEO and politically strong CXOs are adopted without much constructive discussion since no one wishes to rock the boat. Secondly, a formal strategy process is not in place in most organizations. Moreover, at the time of strategy formation upside and downside risks remain unidentified, as CXOs do not invite CRO to the discussion. The CFOs can influence the other CXOs to implement a formal strategy development process and conduct a strategic risk assessment in each phase of strategy formation.

2.     Business Plans

While strategies are for 3-5 year period, business plans are drawn annually. However, the changing business landscape makes business plans redundant on formation. Reason being that business plans are prepared on a set of assumptions on customer behavior  engagement and market situation. Real interaction with customers and entry into the market prove most of the assumptions incorrect. Additionally, department heads make independent business plans to show one up man ship. Hence, performance objectives are missed and risks remain unidentified. The need of the hour is for businesses to react fast and give cohesive messages in response to market changes. Therefore, CFOs must make the business planning process dynamic and integrated.

3.     Budgets

More than 60% of the organizations are unsatisfied with their ability to link strategy to operating budgets. Additionally, organizations spend 4 to 6 months in preparing budgets with numerous iterations back and forth between departments. Meanwhile the business plans change due to the volatility in the market. Hence, organizations are feeling the need of speed in the budgeting and forecasting process. CFOs must adopt rolling forecasts rather than static budgets to improve planning and control. Rather than doing post facto variance analysis they can collaborate with business teams to give real-time analysis.

4.     Performance Indicators

Performance indicators measure the reward side of the strategy. Without the risk indicators, they give an incomplete picture of business status. Another aspect is that performance indicators and risk indicators for the same strategy or plan are not aligned together and are reported at different periods. Organizations sometimes continue to measure redundant parts and do not update the indicators with change in strategy and objectives. A prime example is the financial crises. A few banks achieved performance targets without understanding the risk levels. Hence, CFOs must use technology to create relevant dashboards to monitor indicators to keep a firm grasp on the business.

5.     Risk Indicators

 Risk managers fail to address the twin shortcomings in process of identifying key risk indicators. Firstly, risk managers do not ascertain strategic risk indicators. Secondly, a lot of meaningless indicators are created which do not really find out the overall business risks. Hence, CXOs fail to separate the noise from the inflection points. Moreover, Nassim Taleb’s point of view that most significant risks are unpredictable needs to be thought over. There might be too much data available and organizations might look at risk indicators they are comfortable with, until the bubble bursts. CFOs can identify key risk indicators for strategy and business plans, and synchronize them to performance indicators. That will close the loop and move the business in the right direction.

Closing Thoughts

Synchronizing multiple factors between strategy and indicators influences a company’s capacity to achieve goals. With predictions of recession and volatile business environment, dropping the ball is highly probable. Understanding which economic predictions to rely on, which market trends will impact long-term and what are the strategic inflection points, spells the difference between success and failure. Hence, CFOs must play the vital role of coordinating and aligning various steps between strategy formation and identifying indicators.

Kingfisher Airlines – Ethical Dilemmas of Mr. Vijay Mallya

Kingfisher Airlines was grounded last month. The agitating employees refused to come to work from 1 October 2012. Employees had been peacefully protesting earlier for payment of their salaries from February 2012. Management ignored the pleas and the plight of the employees increased. On 4 October 2012, Kingfisher’s store manager Manas Chakravarti’s wife Sushmita Chakravarti committed suicide. In her suicide note she stated – “My husband works with Kingfisher where they have not paid him salary for the last six months. We are in acute financial crisis and so I am committing suicide”.

The employees led a candlelight vigil in support of the grieving family. However, there was not even a word spoken about it by Vijay Mallya, the chairperson of the company on such a tragic incident. He did not mention anything on his twitter account until 23 October, and most of the month he was not available in India. Media reported that he flew out of the country in his personal Airbus. Check out the following tweets.

Vijay Mallya ‏@TheVijayMallya – 23 October 2012.

I travel 24×7 where my multiple work responsibilities take me. Sections of media call me an absconder because I don’t talk to them.

His Formula One team reportedly participated in Korea and he attended the race. He then attended the Indian Grand Prix and his twitter comments are below. They caused a storm in the twitter world.

Vijay Mallya ‏@TheVijayMallya – 26 October 2012.

 I have learnt the hard way that in India wealth should not be displayed. Better to be a multi billionaire politician dressed in Khadi

 Vijay Mallya ‏@TheVijayMallya – 27 October 2012.

Kingfisher is probably the most written about Airline in the World thanks to Indian media. Top of mind brand recall must be at its highest.

The comments don’t show true leadership qualities. He appears to be completely disengaged from the situation his employees are facing. A little bit of humility and sharing of pain would have gone a long way in appeasing the hurt feelings of his employees. Though he is not legally liable to pay salaries to employees from his personal wealth, he has to take moral responsibility for his actions that have caused so much tragedy in the lives of his employees. Some personal austerity would have sent a different message to the world. However, in an interview Vijay Mallya made the following statement and refused to take responsibility for the financial mess.

“In a Plc where is one man, who might be the chairman, responsible for the finances of the entire Plc? And what has it got to do with all my other businesses? I have built up and run the largest spirits company in the world in this country.”

Kingfisher’s net-worth was eroded last year. The banks have refused to grant further loans since the outstanding amount is Rs. 7000 crore (USD 1299 million). Accumulated losses amount to Rs. 6000 crore (USD 1114 million). You can read the details in my earlier post (link here).  Since March 2012, Directorate General of Civil Aviation has been asking for a revival plan to resolve the crises. However, Kingfisher management took no concrete actions. On 20 October 2012, the Directorate General suspended the license of Kingfisher Airlines.

The situation is that the bank, investors and employees are the biggest losers. Vijay Mallya’s personal shareholdings in the company is just 1.87%.  His group companies – United Breweries (Holdings) Limited, Kingfisher Finvest India Limited and UB Overseas Limited – hold 33.97%. Individual investors hold around 33%. Banks and other institutions hold the balance shares. Hence, Mr. Mallya will personally not be liable and may not suffer extensive damage to his personal wealth.

Though, recently Forbes has dropped him from Billionaire list and stated that now he is only worth USD 800 million now. He made a satirical comment on it

Vijay Mallya ‏@TheVijayMallya -26 October

Thanks to the Almighty that Forbes has removed me from the so called Billionaires list. Less jealousy, less frenzy and wrongful attacks.

 Closing thoughts

Mr. Mallya is blaming the media for inaccurately bashing Kingfisher Airlines. It is a strange reaction considering the dire state of the company. He has abdicated his professional responsibilities as leader of the group. He is also not taking any moral responsibility for the situation and the damage. I am amazed at his brand management team. The Kingfisher brand was worth a whole lot. Due to his personal negative reactions and his son’s Siddharth Mallya being oblivious to the churning controversies, the public is completely outraged. Besides the moral disconnection, there doesn’t appear to be any control on communications and brand management.

According to you what should be the appropriate reaction for the Chairman of a company in such a situation?

References

Vijay Mallya flies in to attend Indian GP, blasts media for Kingfisher coverage – Economic Times

 

IBM CEO Survey Insights On Customer Focus

The 2012 CEO survey conducted by IBM gives some interesting insights. Seventy-three per cent CEOs are gearing their organizations to gain meaningful insights from customer data. This is the area of highest investment.  The traditional approach to segment customer data to calculate statistical averages has been replaced with understanding the attitudes and tastes of individual customers.

The main aim of gathering holistic customer information is to devise services and products targeted at the customers and improve the response time. As stated in the report – “The challenge for organizations is two-fold: can they pick up on these cues, especially if the information comes from outside? And can the appropriate parts of the organization act on the insights discovered?” The graph depicts the main reasons for capturing customer information.

Further, the report mentions, that though most of the CEOs focus on capturing information, out-performers excel at acting on insights. The difference is innovation and execution. A quarter of the CEOs reported that their organizations are unable to derive value from the data. Speed of action is required to capture data, analyse, prepare strategies and respond to customers. As one CEO stated the most crucial characteristic is to “organize a major wake-up call.” The customer obsessed CEOs are driving the organizations to more contextual customer insights.  The graph below highlights the marked difference in under-performers and out-performers.


Risk managers can play a pivotal role in helping CEO’s achieve these objectives. They can focus on the following.

1.     Organization Culture and Process Change

A customer oriented organization culture is required to leverage the opportunities. Secondly, the organization needs to align the processes towards customer relationship management. Risk managers can conduct organization culture survey to assess customer orientation. Moreover, they can review processes to determine risks and controls to mitigate risks.

2.     Security of Data

The activity requires accumulation of extensive customer personal information. Generally, companies use separate data centres to collect and analyse the data. However, the risks of loss and theft of data is huge. As in the recent case of Facebook 1.1 million users’ data was sold for US $5. Therefore, it is a good idea to review security polices and test data centre security.

3.     Return on Investment

Data collection requires huge investments in technology and resources. As the CEOs are saying the failure rate is quite high. A review of projects, plans and strategy would identify the pain points and misdirected activity. Calculating return on investment on various programs might steer the investments in the right direction. Timely identifying failing projects and reasons for failure is critical to maintain cost effectiveness.

Closing thoughts

Technology and social media has brought customers closure to companies. The face-to-face customer interaction is gradually shifting towards social media. The companies that are able to navigate this transition successfully will outperform their peers in the industry. Hence, risk managers should support this CEO initiative to enable the organization to leverage upside risks.

What is your organization doing in this respect? How do you think risk managers should facilitate CEOs in this initiative?

References:

Leading Through Connections – IBM CEO Survey

Misunderstanding of Risks Between Business Teams and Auditors

PWC Internal Audit survey highlighted one critical shortcoming of Chief Audit Executives and Internal Audit Department. The risks that business teams consider critical are being ignored. I have been covering some of the risks on the blog, namely – people risks, competitive advantage, innovation and creativity, marketing, country risks, etc. According to the survey, more than 20% of the stakeholders reported that internal audit paid too little attention on these risks. Hence, the question is why are internal auditors and risk managers not looking at them. Take a look at this chart first.

PWC Internal Audit Survey 2012

From the survey results, two assumptions can be made. First, the internal audit function is still focused on auditing the processes that link to the financial numbers. Second, they are not understanding the business aspects of the organization. As given below, three things need to be done.

1. Understand business requirements

The situation reminds me of an Archie-Veronica joke. Veronica is trying out a new pair of jeans in a store. She looks in the mirror and says – “The jeans are tight, I wonder what could be the problem.” Archie promptly replies – “You might have gained a few pounds”. Veronica gives one whack on Archie’s head and again makes the same statement. This time Archie replies – “The store may have marked a wrong size on the jeans”. If the internal audit reports were hard hitting, business teams may give the internal auditors a rosy picture. They may not be sharing the true concerns in respect to various business risks. Hence, internal auditors would focus their energies on some unsubstantial risks.  Improve the communication with business teams to understand the risk environment. Create an environment where truthful interactions occur.

2. Add in next year business plan

Last quarter of the year has started today, and most of the organizations will prepare 2013 plans in this quarter. This is a good time to understand the business risks and prepare the 2013 annual audit plan and budgets accordingly. Coordinate with the business teams to understand their annual plans. Identify the risks relating to the plans. Discuss with the teams on how internal audit function can help them. Attempt using collective intelligence and crowd sourcing techniques to develop your plan. Where required, take a call to provide advisory services rather than assurance services. Business managers expect much more from the internal audit function. Hence, gear yourself to meet if not exceed those expectations.

3. Develop talent and skills

In the 20th century internal auditors audited the same financial numbers as external auditors. In the 21st century, the function requires revamping. In my previous article – “New Risks and Uncertainties in 21st Century” – I had conducted a poll. I had asked respondents whether they thought present day risk managers were equipped to deal with 21st century risks. Out of 17 total votes, 15 had responded that less than 50% of the risk managers can manage the new business risks. The verdict was by the risk managers about risk managers. Don’t be a dinosaur and learn new skills to survive in the market. In another 5 years when Gen Y become middle managers, Gen X may become redundant.

Closing Thoughts

With the turmoil in various economies, the 2013 risk landscape will be drastically different. Organizations that are well geared in risk management, have a higher probability of sailing through. Internal auditors and risk managers need to incorporate the impact of globalization, technology and social media in their annual plans. There is no purpose in serving stale bread and expecting business teams to swallow it. Rejuvenate in the new business age.

Wishing all my readers a Happy Gandhi Jayanti. Let us pray that each person believes a little more in non-violence and work towards a peaceful world.

References: 

PWC Internal Audit Survey 2012

Impact of Roubini’s Perfect Storm Predictions on India

Indian economy is not doing well. It grew at just 5.5 percent in the June quarter. The slow growth continues from last quarter, and the rapid economic growth of the last decade can no longer be taken for granted. The political paralysis, frequent corruption and scam charges, and inability to pursue  reforms has all led to this sorry state of affairs. This week with much fanfare reform guidelines for foreign direct investment in retail and aviation were released. Let us see whether they make a difference in the long run.

The area of concern is that economist Nouriel Roubini dubbed ‘Dr Doom” for predicting 2008 financial crises, recently predicted a global perfect storm in 2013. He highlighted five factors that will derail the global economy.

If India’s internal problems continue and Roubini’s predictions become real, the dream of India becoming a super power by 2020, may just remain wishful thinking.  As there are divergent views on India’s growth story, let us take a look on the impact of these factors on Indian economy and growth.

1) Worsening debt crises in Europe

The European crises is more than a spanner in the wheels, it has the capacity to bring the global economy to its knees. With Greece, Ireland and Spain in doldrums and economist predicting a breakdown of Eurozone in near future, things couldn’t be worse. London and other euro cities are home to the biggest financial institutions and extensively interconnected with the rest of the world. The combined economies of Eurozone is the second largest in the world, hence anything going wrong here will impact the rest of the world.

A recently released FICCI report states that – “Indian companies doing business or which have invested in Europe have been adversely impacted. About 75% respondents said they have reported decline in their business prospects and also a loss of over 20% in business generation from the European region.” If a full-blown breakdown occurs, then Indian economy will definitely suffer. Though, a lot has been said about European institutions working together to bring financial stability and governments having the political will to take corrective measures, it seems doubtful. Good economies, Germany for one, may back out as its citizens may not wish to carry the burden of other countries.  Hence, Indian companies are spreading their business in Africa and Middle-East to counter the downturn of Europe.

2) Tax increases and spending cuts in US that may push the country in recession

Barack Obama inherited an economy in crises. Though the financial crises is over, the economy will take a few years to recover. Last six months economic indicators show progress . The annualized growth rate is ranging between 1-2% in 2012, a major improvement from -7% in 2009. The unemployment rate is around 8%, and property prices have risen in the last six months after 5 years.

As neither Barack Obama nor Mitt Romney has a magic wand, the possibility of US going in recession is high, specially as it is highly linked and dependent on Europe. For India, a US recession is firstly bad news for the outsourcing industry. Obama and Romney, both in their election campaigns have targeted Indian outsourcing business as the source of all problems prevailing in US job market.

Though Indian software industry exports were US $ 101 billion in revenues in the year ended March 2012, NASSCOM has stated difficulty in predicting Indian software exports for more than two quarters in uncertain conditions. India exported  merchandise goods to US for $57.8 billion in 2011 and is growing. Since majority contributions are of textiles, stones etc., the impact of recession  isn’t significant.

In respect to FDI’s, receives investments through Mauritius, Singapore etc and “According to the latest data released by the Department of Industrial Policy and Promotion (DIPP), India received foreign direct investment (FDI) worth US$ 1.33 billion in May 2012 while cumulative inflows for April-May 2012-13 stood at US$ 3.18 billion”. Hence, the impact of US recession on Indian FDI will not be significant.

India in all likelihood can survive a US recession without much impact on a stand alone basis. With Europe also spinning out of control, the scenario changes.

3) A hard landing for China’s economy

Chinese economy over the last two decades flourished with high investment in infrastructure projects and low manufacturing costs. It imported capital goods, though not consumer goods, and domestic consumption didn’t increase much. Now growth forecasts are in single digits, and focus has to shift internally due to the Eurozone crises and US recession.

As Satyajit Das mentioned in a recent blog post, the world is divided into two groups with respect to China – Sino-philia and Sino-phobia. Some pro-China model believers think China is set to become a super power. On the other hand Sino-phobic believe China is out to control the world. Hence, the perpetual predictions of China succeeding and failing. However, Das has pointed out rightly in the following words -

Nothing illustrates this better than Chinese income levels. Despite its status as the world’s second largest economy, China ranks 98 out of 181 nations in the World Bank’s ranking of GDP per capita. Based on forecasts, wealth per capita in 2016 will be only equivalent to US$13,700 against $57,300 for the US and US$48,000 for Germany. This does not take into account the massive income inequalities in China, where a large portion of the population lives on less than US$1.25 a day.

China and India suffer from the same problems of huge income disparity, over-population and poverty. The corruption in the government further distorts the situation. If Chinese economy slows down, the disparities will continue and China will have to focus internally. It does give an opportunity for India to takeover but it depends on India straightening out its internal act.

4) Further slowing down of emerging markets

The BRICS – Brazil, Russia, India, China and lately South Africa – in the last decade showed tremendous growth. They were the torch bearers of developing world. However, now it is envisaged that BRICS will be growing in single figures. With it competition from other emerging markets is heightening - Indonesia, Philippines  Vietnam etc. . On both sides India is in trouble.

Firstly, with the slower growth in emerging countries, India will lose its advantageous position. As business heads start looking at other countries for investment, the FDI will slow down. Moroever, the emerging markets provide a good cost arbitrage. For example, Philippines have taken over the call center market specially that of US, as the cultures are similar and it is cheaper than India.

As each emerging country comes up with its own unique selling proposition, the Indian industries will be impacted unless they position themselves differently. As in the BPO business, India is now attempting to position itself as knowledge managers.

Emerging markets will increase competition for India, hence gazing at the crystal ball is not going to help. India will have to tackle its poor reputation on governance, public finances, scams and democratic setup.

 5) A military confrontation with Iran.

Political pundits predict that Israel to maintain its supremacy in Middle East will bomb Iran soon. Another view is that Iran will misuse its nuclear power to foster radical Islamic activities. Iran is rapidly building stronger ties with Russia, China and Latin America. In this situation, the target is US and Europe. The crucial question is, what does a war or attack by Iran means to India.

Besides ancient cultural ties, presently Iran is the major supplier of oil to India.  India has invested in the Oil & Gas industry in Iran to ensure its export. India imports 80% of crude oil to meet its energy needs from around 30 countries. Iran caters to 11% of the total requirement.

Hence, from cultural, political and trade perspective, India is not in Iran’s first list of country targets. However, if war does break out,  India is located between Pakistan and China. China would support Iran. On the other hand, Pakistan will face the tough choice of supporting the Islamic group or US. India is far to near the epicenter of the problem to avoid the war, as it has tense relationships with both its neighbors – Pakistan and China. On the whole, India loses out if there is a war in the Middle East. Tensions in Middle East will spell trouble for Indian companies having high energy consumption as crude oil price may increase.

Closing thoughts

Risk managers need to re-evaluate country risk of India and the rest of the countries they are doing business with. Credit rating agencies are threatening to further downgrade India’s rating. With the political risks of various countries changing, some impact on import-export, supply chain, customer relationships and investor participation can be expected. Even in the recent risk reports respondents have rated geo-political risks among the highest. This is a good time to take a close look at the risk scorecard to assess changes in strategic, financial and operational risks. Strategies should be developed for the country risks identified during the country risk assessment.

References:

  1. A Global Perfect Storm – By Nouriel Roubini 
  2. Roubini sticks to 2013 ‘perfect storm’ prediction
  3. 7 economic indicators that could decide the election - By Market Watch
  4. Foreign Direct Investment
  5. Indian companies facing losses in Europe: Ficci
  6. BRIC Countries Hit A Wall – Forbes India