Posts Tagged Politics
Indian Social Values – Root of Corruption
Posted by Sonia Jaspal in Business Ethics, Corporate Social Responsibility, Ethics, Government & Corruption, Human Resource Risks, Management, Personal Ethics on May 26, 2012
Page three newspapers are full of celebrities’ rave parties, fist fights, sex scandals, botox treatments, etceteras. The not so rich idealize these celebrities and mimic all, to be the in-crowd. With these social values, can Indian’s consider it cool to be good?
The west puts India on the pulpit for its values. From Beatles to Julia Roberts, western celebrities talk about Indian culture of prayers, the land of discovering one’s spirit and sense of being. When majority of the middle class Indians themselves are lost, the crown of leader of spiritual world appears somewhat misplaced. Indians in the present world, from birth, get to understand that all human emotions come at a price. This may sound as a harsh statement, but is reality. Let us walk through the different phases of life of a middle class Indian to discover the spiritual compromises they make.
1. Indian Childhood
India post-independence from a land of leaders propagating good values has turned into a land people indulging in unscrupulous behavior in the name of social values. It starts with birth. From the 1960′s the desire to have a son grew among parents. Educated parents get female fetus aborted since the son has more value in the marriage market. The sex ratio is 109.4 males to 100 females in 2011. According to reports nearly 50,000 female fetus are aborted every month.
The reason for abortions is financial. According to the Indian system, a girl’s father in arranged marriages pays dowry for getting a husband for his daughter. Secondly, in the conservative families daughters aren’t allowed to work. Hence, the cost of raising a daughter, educating her, is lost while a son earns back the money for parents from working and getting a dowry. Therefore, sons get a better treatment from parents from birth. From food, clothes, education and hobbies the girl is forced to sacrifice for the brother. Basically, from the day a child is conceived, Indian parents put a value on the child. There is a profit and loss motive in child upbringing.
With these values apparent in the household from childhood, is it surprising that Indians ethical values are confused? Can a child raised on the basis of returns s/he will bring to the parents on becoming an adult, consider emotions and principles above money? Are parents raising kids or cattle for sale?
2. Indian Youth
Indian parents tom-tom about their love for their children and their dedication to keep the children with them. They look down on their western counterparts, who let the kids leave home between the age of 16-20 years to live on their own. In India, 30 year old unmarried sons and daughters can also be found living with their parents. It arises from an attempt to control who the youngster marries, specially for sons, so that a big fat dowry can be earned.
In respect to daughters, it is a need to keep their image unsullied. A daughter having an affair is a no-no among conservative families. Good girls don’t have relationship with boys. While the boys can have relationships with girls, and any girl who has a sexual relationship with a boy is of loose moral character. It it surprising that with this culture, Indian youth does not have normal relationships with the opposite gender.
India is the 4th most unsafe place in the world. Eve teasing or sexual harassment is rampant and young Indian women endure comments from men even when walking to office at 9 a.m. According to a survey of developing nations, Indian men are the most sexually violent, with 24% having committed a sexual crime. Another survey states 65% men believe sometimes a women deserves to be beaten. With these results and mindset, can one ensure gender equality at work?
An Indian’s professional mentor/buddy in the first job is the person who teaches them to fudge the reimbursement bills of their salary. For instance, employees are entitled to medical reimbursements. The friendly mentor will share information of a medical store from where fraudulent medical bills can be obtained by giving a cut.
After being raised in this culture, can Indian youth have independent thinking, proper adult relationships and professional values? Most lip sync their parents’ desires for them, rather than discovering and understanding their own being. Abnormal behavior – living with one’s parents in adulthood, harassing opposite gender – is socially considered normal. Normal behavior of having adult relationships, independent living and maintaining professional ethics, may make the youth a social outcast. After being raised in this social climate, can Indian youth make India the next superpower?
3. Indian Marriage
The biggest trade in India, is of arranged marriages. Marriages aren’t made in heaven, they are negotiated for the best deal. The sons are put up for sale and the daughters’ fathers attempts to purchase the best available husband for her, according to their financial position.
If one sees it from an economic angle, the husband to provide for the wife lifelong, takes upfront payment from his wife’s father. Looking from another angle, the woman gets a man to have sex with her for life after being paid by her father. Prostitution is illegal in India, and prostitutes are looked down upon. But sale and purchase of husband and wife is a socially accepted norm.
In rural areas, the situation is worse. If a couple belonging to different castes falls in love, the male members of the girl’s family do honor killing, they kill the couple. It is a crime to fall in love, and humiliating for the parents. From all this one can conclude that Indian rational of honor, esteem and self-respect is quite contrary to human race.
Even divorce involves social stigma. In reality, 90% of urban husbands have had extra marital affairs. Most of the urban wives are educated but don’t leave their marriages even after being aware of the affair, as their standard of living will become lower. India has one of the lowest divorce rates with just one in a hundred marriages collapsing. There are just around 10,000 or so divorce cases filed each year. Despite the fact that there were 8391 dowry deaths in 2010 and 90,000 cases of torture and cruelty towards women by their husbands. This is when most women don’t report to police due to sense of social shame. Aren’t the numbers ironical. Abusing women is considered a social privilege of the Indian male. Moreover, educated women prefer to take abuse rather than stand on their own two feet and earn their living.
Closing Thoughts
Can Indian marriages teach valuing human emotions when they are nothing more than a financial transaction? After parent-child relationship, the second most precious relationship is of husband-wife. In India, both have monetary values attached to it. When critical relationships are not based on ethics, what is the probability of the society respecting professional ethics?
Indian ideas of honor, respect, ethics and principles are bunkum. A thief steals a women’s purse, he is a criminal. A husband steals his wife’s dignity and her father’s retirement saving, he is respectable. It is a case of sacrificing rational thinking to camouflage social ills.
Last week, the government issued a “White paper on black money”. The paper describes ways and methods to curb corruption and reduce black money. However, with this social environment, the best efforts are likely to fail. Can an average Indian be considered as having a fully developed “Conscience”? Anywhere close to spiritual awakening? What do you think?
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Can Compensation Committees in India Decide Executive Pay?
Posted by Sonia Jaspal in Corporate Governance, Management on May 19, 2012
With great power comes great responsibility. However, with the recent protests in US and UK by investors on banks CEO’s pay (RBS, Citi, Barclays), this dictum can be altered to “with great power comes a great salary”. This debate again raised the discussion on role of compensation committees. Are the compensation committees empowered to decide salary of CEOs or is it just a theoretical eye-wash? Let us delve on this topic from an Indian perspective, as till now the investors haven’t raised a hue and cry about it.
1. A Look at the Highest Paid CEOs
Business Today jointly with INSEAD-HBR did a study to identify India’s best CEOs by evaluating their performance from 1995-2011. As per the study Mr. Naveen Jindal, CEO of Jindal Steel & Power ranked first, followed by Mr. A.M.Naik, CEO of Larsen & Turbo and Mr. Y.C. Deveshwar, CEO of ITC. By another study Mr. Jindal is also the highest paid CEO in India with a salary of Rs 69.7 crores. (USD 12.75 million ).
However, the other two CEOs do not come in the top ten list of highest paid CEOs in India, as both are professional CEOs. Mr. Deveshwar’s salary plus perks excluding bonus was Rs 5.52 crores (USD 1.01 million) and he was entitled to a bonus limited to Rs.6.24 crore (USD 1.42 million) for 2011-2012 financial year. Mr. A.M.Naik’s salary including stock options was Rs 14.18 crores (USD 2.59 million) for the same period. Though market capitalization, net profits and growth have been on similar graphs for all the three companies.
Mr. Mukesh Ambai, CEO of Reliance Industries is ranked seventh on the list of best CEOs’. After being on the highest paid CEO list in 2008, he voluntarily decided to restrict his salary to Rs 15 crores ( USD 2.74 million) though he had shareholder approval for Rs 38.82 crores ( USD 7.10 million). However, the amount is peanuts considering his wealth. He is the richest man in India with a net-worth of USD 22.3 billion and he along with his family are entitled to dividends of Rs 1244.33 crores ( USD 227.73 million) in 2011-12 financial year from Reliance Industries alone.
Most of the highest paid CEOs in India, consist of promoter-owner CEOs, and not professional CEOs. There is a huge disparities in the pay structures.
2. Disparities in Pay Structure of Chairman, Managing Directors and Directors
Looking from the regulatory angle, as per the Companies Bill, a managing director ( CEO in American terms) pay cannot exceed 5% of the net profits of the company. The total remuneration to directors cannot exceed 11% of net profits of the company. However, if approval of higher salary is taken from the shareholders in a general meeting, the limit can be exceeded with the approval of Central Government. Now the question is, as the CEOs get the highest pay packet and promoter-owner CEOs have controlling stake, can the other directors really have much say, monitor the activities and decide on remuneration?
Coming back to Mr. Jindal’s case, he stated in the Business Today interview, that he spends 20-25% time on business, and most of his time is spent on his constituency as he is a Member of Parliament. Members of Parliament just earn around Rs 50,000/ per month. His mother, Savitri Jindal is the Chairperson of the Jindal group and 56th richest person in the world with the net-worth of USD 13.2 billion in 2011. Therefore, considering all this information, can the success of the company be attributed to him? Moreover, does he deserve this salary? Can the remuneration and compensation committee actually decide his salary independently and objectively?
Now let us look at the compensation of Chairman and Directors. Here are some details from the India Board Report 2011:
a) Non-executive director compensation ranged from Rs 1 to 10 lakhs (USD 18,000) in more than half of the companies surveyed. Average compensation rose 20% to Rs 9.9 lakhs in 2009-10 from Rs 8.2 lakhs in 2008-09.
b) The minimum compensation paid to non-executive directors was Rs 15,000 whereas the maximum
was Rs 54 lakhs (USD 100,000) for 2009-10 from among the companies surveyed.
c) The average compensation paid to non-executive chairmen rose from Rs 15.7 lakhs in 2008-09 to Rs 21.7 lakhs (USD 38,000) in 2009-10, an increase of 38%.
d) Among the companies surveyed, the minimum compensation offered to the non-executive
chairman was Rs 16,000 and the maximum was Rs 13 crores (USD 2.37 million).
Hence, if you see the CEOs pay usually far exceeds Chairperson and Directors pays. There is no parity in their earning capacities and value for time.
3. Questionable Independence of Compensation Committees
In such a scenario, are boards capable of judging remuneration of CEO or other key personnel objectively? Generally, the Nomination and Remuneration Committees are charged with job. As per the Companies Bill in India, the committee should “consist of three or more non-executive directors out of which not less than one half shall be independent directors.” Hence, the premise is that as there are independent directors, they will be fair. However, the question remains are these directors really independent ? Below are some information nuggets from the India Board Report 2011.
a) On an average in Indian boardrooms, 71% of directors are non-executive and 54% of the directors are independent. Just 16% of the directors are related to promoter or promoter’s spouse.
b) Just 10% of the board members were appointed through search firms. The rest were chosen through personal network of chairperson and managing director.
Therefore, in a way the independent directors appear superficially independent and there are deep relationships existing among them. More so, in family managed business. For instance, ITC has a diverse board room as public sector companies and banks have significant investments in the company. It is a 100 years old company and in last 15 years Mr. Deveshwar was the CEO. Therefore, the compensation committees can be transparent and objective only when they are not under the control of owner-promoter CEOs.
Closing Thoughts
In the western world, CEOs of banks and financial institutions are facing investment ire for unduly rewarding themselves at the expense of the shareholders. In India, the investors generally do not make any noise on pay structure of the owner-promoter CEOs as investors expect them to reward themselves. Although, the owner-promoter pay structures are 3-4 times higher than the professional CEOs. With such a mindset, can we really say corporate governance practices have a chance of succeeding in India? It is a controversial question, nonetheless, let me ask – What should the investors and regulators do to control promoter-owner CEO’s salaries?
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Recruitment in Dysfunctional Organizations
Posted by Sonia Jaspal in Business Ethics, Ethics, Human Resource Risks, Management, Organization Culture, Personal Ethics, Uncategorized on April 4, 2012
Six months back you landed your dream job, the pay was great with an incredible job profile and a company brand name to match. Now you are not sure what you have gotten yourself into. You are perpetually asking yourself – should you continue or quit? You are asked to compromise personal values on a daily basis for showing loyalty to your boss and company. The situation that you are in, is not out of the best practices of human resource management or ethical culture, you have joined a dysfunctional organization. Putting it another way, an organization with a deviant corporate culture.
Employees face incredible personal and professional risks on joining an organization with a deviant culture. On the face of it, initially, everything looks unbelievably good. As the layers are peeled off, the employees feel they are in a sinister environment and are swallowed in quicksand. The walls of silence maintained ensure that employees do not discuss these concerns openly and fear of retaliation forces them to comply. Employees deceive themselves into believing that these unethical activities they are doing are just for a short time, and the situation will improve in a short while. A cold hard look is required in such circumstances, to understand the symptoms and take a decision.
The paper “Organi-cultural Deviance: Socialization of Individuals into Deviant Culture”, describes the process of individual indoctrination into the culture. A new employee goes through five stages of socialization into the workplace according to Wanous research. These are:
a) confront the reality of the new job –newcomers adjust their expectations to the reality of the job;
b) achieve role clarity-newcomers learn and negotiate the expectations and requirements of their roles in the organization;
c) locate oneself in the organization-newcomers learn how their work contributes to the work of the organization;
d) assess success-newcomers assess the value of their contributions to the organization; and
e) during the stages of socialization, the individual learns the language of the organization.
The above mentioned process is adopted by employees in a regular organization in the probation period, that varies from 3-6 months in most companies. In a deviant organization culture, the employee starts feeling the social pressure to comply to unethical practices and lose individual identity in this period. The process of indoctrination describes how the individual “self” is socialized into a deviant organization culture. The stages are as follows:
1) Stage I - In normal course of action, an individual has various separate identities, that they maintain to lead a fulfilling life. For instance, the employee has a work identity, a social identity, a family identity etc. In a deviant organization, these identities are slowly stripped away, and the employee is completely dependent on the organization identity. The employee is lured by big rewards to compromise their individual identity for the organization.
Since, the employee is still in probationary period, the fear of job loss makes them succumb to group think. The organization or group attempts to brain wash the individual by giving justification of the behavior for altruistic purposes. For instance, they will ask to humiliate or harass another person or employee, to improve the harassed person’s behavior. The justification given will be that it is for the betterment of the victim, rather than accepting that they are indulging in socially unacceptable behavior. Further on, they are asked to indulge in degrading activity for the sake of fun. In the book “The Wolf of Wall Street” Jordon Belfort describes activities at Stratton. He mentioned that seniors in the company had free for all sex discussion in the morning meetings and to boost morale arranged depraved acts. For example, in one case, they cut hair of female employee with her agreement in the conference room. Women employees especially have a tough time as they are mostly treated as sex objects.
2) Stage II - In this phase the employee becomes dependent on the organization and the psychological chains tighten. The idea initially sold to the individual is that the group has an altruistic purpose and is for the benefit of the society. The individual is forced into thinking that the rules of the group must be obeyed at all personal costs and no dissenting views are permitted. Employees are rewarded amply for complete compliance and punished severely for disagreement and disobedience. The individual is encouraged to share vulnerabilities and weaknesses with the group, and these are used to exact compliance to group. Simultaneously, fear and threat are used if an individual wishes to leave the group. The group follows its own code of conduct and uses loaded language and signs to communicate.
In this situation, the individual is indirectly commanded to put his/her personal and family needs over the group or organization. An article of Vanity Fair titled “Lehman’s Desperate Housewives” narrates the situation from Vicky Ward’s book -”The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers“ at Lehman before collapse. It says -
“Lehman Brothers C.E.O. Dick Fuld expected his top executives to get married, and stay married. For their wives, the firm was both fishbowl and shark tank, with unwritten rules about the clothes they wore, the charities they supported, and the hikes they took at the company’s Sun Valley retreats.
One of the senior executives wife described her child delivery with these words -
“I was in labor with our daughter and had to lie there without him … but I wouldn’t get mad at him—he had called the entire Hong Kong office in for a meeting. We knew that it would have been used against him. If you made a personal choice that hurt Lehman, it was over for you.”
Stage III – In the last stage, the indoctrination is complete. The individual’s motivation, judgments and perceptions are transformed as the person becomes a member. The individual derives his identity from the group or organization and opinions from outside the group are completely discarded. Any information that contradicts the groups perception is considered harmful for group unity and the sender/ giver of the information is attacked. The individual has no freedom of action and blindly obeys instructions of the group. Unfortunately, the leaders and existing members of the group have so ingrained the thought pattern of socially and psychologically harmful behavior that they lose insight of right versus wrong.
For instance, as in the case of Enron or the more recent “News of the World” phone hacking scandal, seniors knew of the unethical and fraudulent activities being conducted in the organization. Some even know the details but will not take any concrete action to bring change.
Whether this culture sets in large organizations or small social groups, the psychological pattern is established for deviant behavior. The longer the person is a member of the group, the less probability exists of the person being able to see a true reflection of themselves. All inputs from group outsiders of logical, rational and socially acceptable behavior are disregarded and members adopt a posture of willful blindness. The members continue to compromise their morals for financial, physical and social security.
Closing Thoughts
Deviant cultures are set up by leaders in powerful positions with derailment attributes. However, once the culture is established in a social or corporate organization, it is hard to re-establish normal behavior patterns. People have a choice to either comply or be isolated. To avoid the social, physical and financial threats most compromise their morals and show unquestioning alliance to the more powerful people. Either an internal revolution by the members or intervention from external parties can break the psychic trap established in such organizations. An individual’s best option is not to join such a group or organization, and if they have mistakenly joined it, leave at the earliest possible point. Else, the life course for unethical and criminal behavior is established without a return ticket.
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A Debate – Profitability Versus Human Life
Posted by Sonia Jaspal in Business Ethics, Ethics, Financial Risks, Fraud Risks, Organization Culture, Personal Ethics on March 24, 2012
Everybody uses everybody else for their own benefit. That is the justification we give for most of our negative actions. Some follow use and discard policy; others follow use, abuse and discard policy. The complexity arises as it hard to differentiate when it is right to use. Isn’t a wife being used by her family when she is doing house work, looking after the kids and sacrificing her pleasures? Isn’t a husband being used by the family when he is putting ten hours in office to earn a living so that his family has food on the table and leads a comfortable life? What about the hired help in-house, who works twelve hours for minimum wages just because they are poor and uneducated, isn’t that exploitation? Hence, can the public really blame corporate world for perusing profitability at the expense of human life.
1. Scenario – Non-profit Social Organization
A couple of days back in Bangalore, a young footballer collapsed on the practicing field in Banglaore. There was no medical aid or ambulance available on the field and the young player died. Karanataka State Footballer Association is getting the flak and offered Rs 100,000 to the grieving parents. Is the money sufficient compensation for death? If a million was offered, will the negligence of the association be more tolerable to parents? What is the right value of use or exploitation of human life?
2. Scenario – Corporate World
The old 1960′s Ford Pinto case is an example where organizations put dollar value to human life. The Pinto had a gas tank in the rear, and it burst into flames on collision. A number of car users lost their lives or were severely burnt during accidents, but the company continued to lobby for lower safety standards. The engineers knew about the defects, however, the senior management advised them to continue manufacturing. In a judicial hearing, Ford management justified their actions claiming that they had done a cost-benefit analysis for the same. The cost of removing defects was higher to the benefit of saving a human life, hence it didn’t make business sense to improve safety measures. In the analysis, the price of human life was US$ 200,000.
The case is relevant, as Tata Nano in India, has in a few occasions burst into flames without an accident. The car just becomes a fireball. Although Tata Motors management has claimed that the defect was removed, customers are still wary . Therefore, the question is – is it justified for organizations to risk the life of customers for profitability?
3. Scenario – Crime Scene
With increasing crime, the question becomes more complex. Let us take a hypothetical case. A man was hired by group A to conduct a crime on X, to ensure X does something for group A. The same man was hired by group B to conduct a different crime on X, to ensure X agrees to the demands of group B. Now the man double crossed group A and didn’t inform them he was working for group B. He double crossed group B and informed them that he will be successful even when he knew his plan isn’t working. He involved a number of friends and associates to help him with his plans. He double crossed his friends and didn’t inform them about the risks of the crime and how they are jeopardizing their life.
In nutshell, he used everyone to his own advantage for sake of monetary gain and safeguarding his own life. He assumed safety in numbers; involvement of other people will bullet proof him against the negative repercussions of group A, B and X. Now in this case, would you say, since all involved except X were undertaking unethical behavior, the use and exploitation of everyone else is justified? If we remove the legal aspect, how should this person be judged on moral aspects of his action? If one is risking another’s life, does loyalty to his own group has value?
Closing Thoughts
In all the above cases, we will say it is wrong thing to do even if we ignore legal aspects of each case. Human beings code of conduct and morality states that use of another for fulfilling duty or a greater cause is justified. However, use of another for personal benefit without compensating them appropriately for labor amounts to immoral behavior. There is a saying that even in the mob world, loyalty counts. There also, using your colleagues or clients which might harm them is not acceptable. Human life has value and all human beings are expected to respect it. A code of conduct is followed as it keeps all human beings safe and secure. Breaking those always results in negative repercussions.
References:
1. Ford Pinto
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The Battlefield – Pleasure Versus Morality
Posted by Sonia Jaspal in Business Ethics, Ethics, Fraud Risks, Organization Culture, Personal Ethics on March 20, 2012
People madly pursue materialism to lead a happy life. A person’s main belief is that expensive products give pleasure; hence more the money, more the pleasure, more happiness. In leading a pleasurable life, if some ethics need to be compromised, so be it. When the ultimate goal is happiness, some sacrifices are worth it. It is better to subdue the conscience, than listen to the voice within when hurting someone or breaking laws. It is a dog eat dog world, and the toughest will reach the top of the food chain. Therefore, morality be damned; either ways everyone is doing it, so why not me? Morals won’t pay the medical bill, money will.
To live a happy life, does one has to choose between pleasure and ethics? If so, what is pleasure? As per Oxford dictionary – a) feeling of satisfaction or contentment; b) source of enjoyment and delight; c) sensual gratification or indulgence. Materialism focuses on b and c parts of the definition, it doesn’t give contentment. Simply put, a content person sleeps when his/her head touches a pillow. Money gained from an illegal means cannot provide contentment. The insidious fear of being caught generally erodes all feelings of peace and contentment.
To illustrate, let us say that a person has acquired US$ 50 million through fraudulent means. To protect himself from being caught by intelligence agencies, he has involved 50 other people in the fraudulent activities. He has ensured that those 50 others also earn US$ 50 million each. He has cleverly used 20 different countries with 20 different methods of frauds over a period of 10 years to remain undetected. He lives in the lap of luxury and so do the other 50. Do you think, any of them can say they are happy? Most probably, they need sleeping pills, alcohol and drugs to have eight hours of sleep at night.
The misconception about morality arose from Utilitarian or Happiness theory by philosopher Jeremy Bentham. The theory differentiates between right and wrong on the basis of happiness obtained by the majority. It holds that actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness. By happiness is intended pleasure, and the absence of pain; by unhappiness, pain, and the privation of pleasure. Hence, people misconstrued that doing immoral things is okay if it makes the majority of the people happy.
However, J.S. Mill pointed out a fundamental misinterpretation by most, of the term pleasure and morality. He said it is incorrect to assume that pursuit of pleasure equals an immoral sub-human behavior “worthy of a swine.” Human beings have faculties higher than animals hence degrading themselves to pursue perverse desires isn’t suggested by the Happiness theory.
The theory on the other hand mentions the higher order of pleasures. Michael Sandel in his lecture gave a simple example of the same. He asked a question to his students - if given a choice, would you watch Shakespeare’s play, Simpsons or Fear Factor. Though most would watch Simpsons, Shakespeare’s plays offers better mental enlightenment and higher satisfaction. The difference is that most human beings need to be taught to appreciate higher pleasures of life, while lower ones come naturally.
Therefore, does the confusion between pleasure and morality prevail because most humans are not taught the higher pleasures of life. As per Maslow’s “Hierarchy of Needs Theory”, self- actualization needs are at the top of the pyramid. People primarily focus on meeting physiological, safety and social needs. Most follow lower road to morality even when they are aware. For example, in India in social events, song numbers by heroines (example Chhammak Challo, Sheila Ki Jawani) though absolutely crass, are enacted by 4-10 year old girls publicly in the presence of their parents and various adults. This of course raises the questions – are we teaching kids the wrong things to get pleasures in life?
Closing Thoughts
The battle between pleasure and morality appears more of a case of lack of education in higher orders of pleasure. Maybe something as simple as educational institutions inculcating the desire for self-actualization in students would transform the society. The focus would shift from materialism to morality. As the saying goes, money may pay the medical bill, but one cannot buy good health. Will continue my meanderings on the subject. What do you say?
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Lessons from Rahul Gandhi’s Failure in Uttar Pradesh Elections
Posted by Sonia Jaspal in Government & Corruption, Management, Organization Culture, Risk Management on March 7, 2012
Congress parties dismal failure in Uttar Pradesh (UP) state elections has raised questions on Rahul Gandhi’s leadership skills. He had the mandate to restructure Congress party in UP, lead from the front and failed to convert the fan following into votes. Although projected by Congress as prime minister-in-waiting, he failed the litmus test.
What are the lessons business leaders can learn from this episode? If we see UP as a market territory for Congress, where it was attempting to gain lost ground, there are many common aspects organizations should consider when devising and executing strategies. Given below are four points relevant to all business enterprises.
1. Local Leadership Matters
Samajwadi Party led by Mulayam Singh Yadav and his son Akhilesh swept the UP polls. They were fighting on their home turf, understood the local dynamics and built from grassroots after their last defeat.
Rahul Gandhi wasn’t contesting the elections, though he was the most visible leader from Congress party. The local Congress UP leaders names were hardly mentioned by the media. There was no clarity on Congress party’s proposed Chief Minister candidate/s of the state and the prominent roles other local leaders will play in the state government. In contrast, Samajwadi Party and other parties local leaders were leading the state elections.
The same rule applies in business. Having a well-known global or national CEO isn’t sufficient. Local leadership at the offices matters. Customers build their loyalties with the local leaders they see . To have a strong customer relationships, ensure that local management is visible and accessible to customers.
Local leaders understand the market dynamics, customer preferences and competitors. Their insight and feedback helps in forming strategy and mitigating strategic risks. Rolling out a strategy from corporate office without understanding details of local market will result in failure.
2. Flamboyance Just Gets Visibility
Congress has often banked on Gandhi name to get votes. Rahul Gandhi and his sister Priyanka held many meetings in UP and their speeches were well attended. Media covered a few stage-managed events projecting Rahul Gandhi as a common man’s leader, eating and sleeping with villagers in their cottages. However, the results show that having a name does get attention, not success.
Recently in the business world, Kingfisher Airlines grabbed headlines due to its liquidity crunch. Vijay Mallya a few years back launched Kingfisher Airlines as a premium brand in India, a country where most can’t afford to travel by train. The launch and subsequent media interactions were flamboyant with Mr. Mallya making tall claims of beating Jet Airways, the market leader. Since launch, the airlines hasn’t made profits in a single quarter and has invested heavily in high-end planes.
On the other hand, Richard Branson has demonstrated that flamboyance can work to business advantage. He used his personal charisma to add brand value to Virgin group, while being astute to go into the details of business. He projects flamboyance as marketing tool, and relies on delivering good products and services to achieve success.
Congress and Kingfisher placed maximum reliance on personal charisma of their leaders without investing in processes, procedures, delivery models and service quality. Focusing on personal brands for success can result in downward spiral for the organization. The risks of failure are high in this scenario.
3. In Ethics Walk The Talk
Mayawati lost her position due to excessive corruption and narcissism. Though she projected herself as the leader of the underprivileged, she spent millions of government funds in installing her own statues in public places. Moreover, her regime became known for corruption, kickbacks and poor governance.
Rahul Gandhi in the election campaign targeted the mis-governance under Mayawati’s tenure. With theatrical flourish, he tore rival parties manifestos on stage while making corruption allegations. However, Congress’s reputation itself is tainted with various scams and frauds at the center. It is not good to throw stones when one is living in a glass house.
In contrast, Yadav’s party that was previously known for indulging in crime, attempted to clean up its act. Known party loyalists with a criminal record were denied tickets. Though not squeaky clean, people believed that Samajwadi Party attempted to walk the talk.
The same principles apply in business. Indian business leaders previously considered ethics insignificant. However, in the telecom scam reputed business leaders spent considerable time in judicial custody. Even the court verdicts aren’t supporting their pleas of innocence.
This clearly demonstrates that in the long-term to retain followers and customers, ethics matter. Socially irresponsible behavior doesn’t garner customer loyalty or support. Once the trust is broken, customers are skeptical about further promises, regulators are on your back and legal battles have to be fought for survival.
4. Organization Culture Affects Performance
The tone at the top spells the difference between success and failure. Mayawati’s leadership became synonymous to corruption and megalomania. It is said that she enclosed herself as a princess in an ivory tower, and was inaccessible to her party leaders and workers. She opened her doors only to business tycoons offering bribes.
In Congress, the culture is marked with yes-men to the Gandhi clan. Dynastic politics rules and control is with Gandhi family members. An example of negative impact of yes-men culture can be seen in the polls disconnect in projections and results. Prior to elections, Congress estimated winning over 120 seats and just won 28 seats. A clear case where no one wanted to be bearer of bad news before the elections or give honest feedback to the Gandhi family.
In organizations with authoritative and bureaucratic cultures, similar problems persist. Employees roll problems under the carpet, hide bad news and senior managers realize the true picture after the disaster. To understand operational risks timely, leaders need to set a consultative and benevolent culture. Self interest and egoism impacts performance and operations negatively.
Closing Thoughts
While the political dynamics in the country is changing, business leaders can learn a lot of lessons to manage political and business risks. Key imperatives to focus on are – strategy, leadership, ethics, organization culture, customer relationship and risk management. Without these, as seen in UP elections rock stars will become flop stars.
Women in Indian Boardrooms
Posted by Sonia Jaspal in Corporate Governance, Management, Organization Culture on February 8, 2012
You might be saying, “Oh, not again about women”. But this is one piece of news I wanted to share and discuss with you. Believe it or not, the New Companies Bill 2011 has a provision making it mandatory for companies to have one woman director on the board. One can look forward to more corporate women becoming rock stars. Female gender was mostly invisible in Indian boardrooms, may now gain some significant visibility.
Though personally I am against the idea of reservations and believe women should succeed on merit. I go by Charlotte Whitton’s quote – “For a woman to get half as much credit as a man, she has to work twice as hard, and be twice as smart. Fortunately, that isn’t difficult.” However, in India’s case I think reservation may really be beneficial. I am discussing two biases that are restricting the growth of women in corporate sector.
1. The Indian Bias
As mentioned in an earlier post, India has over 500 million women however just 335 held directorship positions in listed companies, that is less than 5% of total board of directors. Across the world women face a concrete ceiling (not glass ceilings, these are easier to break) in getting senior positions. In US, for the last few years the percentage of women in senior management positions is 13-15% with no significant growth. Norway shows the highest percentage with around 30% women holding board positions. These countries have such low percentages of women at senior level although their social culture supports equality of genders.
In India, only the constitution recognizes equality of genders. The social structure is biased against girls from the day they are born. This is because of the age old dowry custom in India. On marriage, the brides father has to give a big fat amount to the grooms family to get his daughter married off. In most families, if the money is not given, either the girl will not get a suitable match in arranged marriage or if she does, she is be harassed in her husband’s family. Women are not considered earning partners and in conventional families are not allowed to work. Hence, they don’t have economic power.
Just to emphasize the negative conditions of women living in India, including in urban areas, here is some shocking statistics :
1. The Gender Gap Report 2011 of World Economic Report ranks India 113 out of the total 135 countries measured.
2. An article on domestic violence mentions that “according to United Nation Population Fund Report, around two-third of married Indian women are victims of domestic violence and as many as 70 per cent of married women in India between the age of 15 and 49 are victims of beating, rape or forced sex.”
3. According to National Crime Bureau 2010 report on Crime Against Women – “A total of 2,13,585 incidents of crime against women (both under IPC and SLL) were reported in the country during 2010 as compared to 2,03,804 during 2009″. India is amongst the most unsafe countries in the world. In 2010 there were over 22,000 rape cases and over 8000 dowry death cases reported.
Seeing the cultural and social bias against women a whole lot depends on their economic power. Hopefully, with this law, with more women in boardrooms the social mindset will change somewhat. When more visible stories of successful females are reported by the media, the Gen Y women might get a better deal and opportunities to gain financial independence. They might have more support from their families to hold a job and earn a living. Hence, this law gives Indian women a lot of hope and an opportunity to dream big.
2. The Global Bias
Before I discuss this point, here is a quiz, check out which of the words apply to your working style:
Aggression, Empowerment, Autocracy, Communication, Management, Collaboration, Rules, Consultative, Win-Lose, Social-sharing, Boss-hierarchy, Win-Win, Competition, Emotional Intelligence, Procedures, Teamwork, Control, Relationships, Toughness, Networking, Command and Empathy.
This may surprise you, the words above in red describe mostly a male working style and those in blue relate to female working style. The present global economy the female traits are in demand. As Tom Peters had mentioned in his presentation on gender diversity, women lead in 18 of the 20 attributes required in the present work environment. If companies wish to change their organization culture to meet the challenges of current economic environment, then doesn’t it make sense to hire more women as they naturally have these traits.
Here is another twist on strengths analysis. Traditional thinking is that competitiveness and command traits ensure success. On the contrary, there are numerous traits required in employees for an organization to be successful. For instance, too many planners and judgement oriented employees in a team will delay action, flexibility and innovation. Interestingly, the book Strengths Finders 2.0 authored by Tom Rath mentions 34 strengths. People have a group of these strengths that can be leveraged to be successful in the business environment. I am listing the strengths here. Read below and find out which strengths you have and are they really appreciated in your organization.
1) Achiever, 2) Activator, 3) Adaptability, 4) Analytical, 5) Arranger, 6) Belief, 7) Command, 8) Communication, 9) Competition, 10) Connectedness, 11) Consistency, 12) Context, 13) Deliberative, 14) Developer, 15) Discipline, 16) Empathy, 17) Focus, 18) Futuristic, 19) Harmony, 20) Ideation, 21) Includer, 22) Individualization, 23) Input, 24) Intellection, 25) Learner, 26) Maximizer, 27) Positivity, 28) Relator, 29) Responsibility, 30) Restorative, 31) Self-Assurance, 32) Significance, 33) Strategic and 34) Woo (winning others over)
On reading this list, irrespective of gender the question comes up – if as an employee you have attributes or strengths that are not valued in the organization, then what do you do? .
In my view, the crux of the problem is that organizations are biased towards certain strengths. For example, Apple, Google and other technology companies may be are more focused on intellection, learner and strategic traits whereas in military the focus is on command, discipline and belief. The employees with different strengths are not encouraged, though balance makes organizations more successful. Hence, if one delves deeper the issue is not about gender, it is about the traits that are valued in the organization. Usually gender equality is facing hurdles as macho traits are more appreciated in organizations. Hence, where boards are all male, women are not welcome. Organizations where non-macho traits are valued, generally have more women at all levels including the top.
Closing Thoughts
In India, without economic power women are unlikely to be respected. Though Indian mythology talks a lot of women equality, respect and honor, the reality is different. Hence to break the vicious circle, this law will help. The benefits will be the same as reservations of seats for women in panchayats in rural India.
On the global front, organizations need to develop an appreciation of non-masculine traits. As evident from advertising and branding of some successful companies, women consumer power matters. Without having women at the top, an all male bastion cannot understand the softer requirements of female consumers. It makes sense to have women deciding for women.
If you don’t agree with me, take this instance. Ask any hubby to buy a gift for his wife, he will sound as if he has to do a torturous task rather than a happy shopping expedition. Husbands complain they don’t know what their wife wants, and male board of directors decide on female consumers preferences. Then men say women are illogical. Couldn’t resist that one.
References:
Strategy to Execution – A Risky Path
Posted by Sonia Jaspal in Financial Risks, Human Resource Risks, Management, Organization Culture, Process Re-engineering, Process Risks, Risk Management, Strategic Risk Management on January 22, 2012
Some companies fail and some succeed spectacularly in the same market conditions. The question for successful companies is – what did they do differently? On the other hand, failure is attributed to either poor strategy or pathetic operations. A popular notion among managers is that if company is not achieving targets, then review the strategy, something must be wrong with it. If the strategy is found reliable, review the operations and focus on it to be successful. Is the explanation for failure that simple?
In my view failures occur because complexities of the situation are either ignored or misunderstood. The third-fourth-fifth dimensions are normally missed and must be looked into. The overall strategy might be right, the execution flawless, and the company may still be staring in the face of failure. According to me the path from strategy to execution is very risky. Below are my views on the same, do you agree with them?
1. The Human Dimension
Let me give you an example, that most employees are familiar with:
Objective of the company : Make the organization a “Great place to work”.
Strategy to achieve the objective : Focus on diversity, work-life balance and good leadership pipeline.
Execution plans : Hire 25% women, promote 10% women to senior levels, issue policy of work life balance , introduce 360 degree feedback and balance score card system.
All the execution plans were implemented, however employees are still cribbing and consider the organization one of the worst places to work. So what went wrong?
Now let me give you a few situations that occurred in the organization :
a) A gorgeous looking woman was placed in a senior management position who was rumored to be having an affair with a CXO. Employees down the line didn’t like her personally as she did not have a reputation of high professional caliber or ethics.
b) A few employees in the 360 degree feedback, gave honest negative feedback about their bosses. In less than a quarter the bosses with help of human resource department terminated or demoted the employees.
c) Bosses allowed the employees to leave office premises by 6 pm. However, they asked employees to work at home and deliver reports the next morning at 9 am.
The missing component – the human dimension – was overlooked. The culture of the organization didn’t change with the strategies and plans. The messages that employees received were – ”One gets promoted if one sucks up to the boss, merit doesn’t count, honesty has a huge downside and bosses will harass. Nothing has changed.” The tone at the top remained the same and no one was seen walking the talk. Hence, though everything looked good on paper, and all execution deliverables were achieved, the execution team met the key performance indicators, the objective wasn’t accomplished. People make the difference, hence analyzing culture, messages and in some situations even the grapevine is helpful.
2. The Organization History
The often ignored impediment in failure of strategy is the organization history. History – good and bad - makes a difference in success and failure of strategy as it directly impacts commitment levels. If the organization has had bad incidents or history, a host of issues become undiscussable. These undiscussable issues make communication superficial, hide negatives in the wood work and portray a picture that management wants to hear. In a globally connected world, even a small incident can become a historical landmark. To bring clarity to my point, I am narrating an incident that I experienced.
I was working in an organization in which one of the core values was “respect for everyone’s time”. The offices were open plan, with no difference between a CEO desk and an admin desk. All meetings were conducted in various conference rooms and room bookings were done through an intranet application. The cultural guideline was – do not overstay in a room as it may be booked by another group/individual. There were no reserved conference rooms for senior managers.
One day a new employee with his group saw that the people in the conference room he had booked for a meeting continued in the room after their meeting time elapsed. He knocked on the room, and asked the team inside to leave. The other employees outside were horrified. After 5 minutes, when he saw no action, he again knocked. The team inside walked out and all employees were red-faced. The poor chap had just evicted the Global CEO and his executive team out from the conference room.
News traveled globally within a few hours of the incident. The mathematical geniuses developed statistical models on probability of the new employee being asked to leave. Others like me, indulged in simple betting. Within a week the CEO sent a global message appreciating the employee for adhering to the organization values. He said that he felt good that induction training was effective, HR was doing a good job in recruitment & selection, and employees were fearless in confronting seniors on core organization values. All employees were absolutely jubilant on losing their bets. The incident became part of organization history and employees were inspired by the leadership. Commitment to a strategy comes from the heart and not by the numbers given in a Powerpoint presentation. In some situations analyzing the past history of the organization and failure rate of strategies might be helpful.
3. Reliance on Performance Management Systems
Norman Marks in his post – “The inter-relationships of risk, objectives, strategy and performance“ rightly said that “performance management without considering risk is flying blind.” I agree with this statement. However, my question is – are organizations really measuring the right stuff ? If not, are organizations deluding themselves into believing that they are monitoring and as all performance indicators show green status, everything is great.
Let me narrate here my pet peeve on risk management performance indicators. Tell me, how many of us have filled a balance score card or prepared an annual plan stating the number of risk management reports issued during the year. Additionally, recall numerous times assurance has been given to senior management based on the reports issued and their findings.
According to me, these performance indicators for a risk management department make limited sense. Better indicators would be :
a) To calculate the amount of loss averted from timely risk mitigation. Or,
b) Counting the number of days organization risk was higher than the established risk appetite of the company.
However, only a few companies keep these performance parameters because these are difficult to calculate and require robust management systems. So we rely on parameters that are actually not telling us anything more than the fact that some work is being done. Therefore, my contention is that even if a the risk of not issuing 12 risk management reports (a performance measure) during the year would be available, it may be irrelevant risk identification. A good idea when doing management by objectives, is to check what the company is measuring.
4. The Organization Structure & Systems
The focus is not developing the strategy and operation plans, however the point that is missed is – whether the organization structure and systems are conducive towards accomplishing the envisaged operations efficiency.
The prime example of this is establishing backoffice operations in emerging markets or outsourcing processes. Most organizations initially off shored to save on costs. The cost-benefit analysis was done considering the explicit cost of labor and other costs in mind. However, the implicit cost of managing the operations remotely, variance in customer service quality, breakdown of services and increased risk of fraud were not considered. Quite frequently, the same process was outsourced without much re-engineering for outsourcing the process. This resulted in cumbersome and long processes, higher management time and more risks. In rare cases only the organization structure was aligned to outsourcing activities and managing the complex relationships.
In this case, the strategy was fine, effort was put in setting up back office operations properly. However, the interlinked impact on various functions and activities was ignored. Basically the problems arose due to structure and systems, as these were not considered at the strategy formation stage.
5. Strategic Risk Management
Finally, the concept of strategic risk management is gaining popularity, though it still has a long way to go. Problems sometimes arise in implementing a strategy, because at the time of formulation the strategic risks were not identified and assessed. Hence, the organization has a rosy picture of the strategy.
The additional challenge is when strategic risks are identified though not properly. Some hold the opinion that strategic risks are best identified by the top management or chief risk manager. The frontline operations teams do not have a role to play. My view is that while strategy may be developed at the top, the risks need to be captured at all levels and rolled up to the strategy development team.
To illustrate, let me share with you the venture of international fast food joints in India. KFC, McDonalds etc. made losses in the Indian market initially. The reason for entering the Indian market was clear – a huge educated middle class provided a good customer base. They replicated their operations model in India. However, they really didn’t understand Indian tastes. Indians preferred spicy food and didn’t appreciate the American bland taste. Secondly, Indians initially took these meals as snacks and not for lunch or dinner. Hence, were willing to spend much less than they would in an Indian restaurant. It took the companies 3-4 years to understand the difference in customer tastes and expenditure patterns, and change the menu accordingly. Customer risk was local whereas the strategy was formed globally. Strategy failed due to lack of understanding of local market.
Hence, in my view strategic risk management is not a simple exercise undertaken at the top of the company pyramid. A robust enterprise risk management system aligning objectives, strategies and risks is definitely beneficial. If an organization is not meeting its key performance indicators, even when their are no obvious problems with operations, a through analysis of risks at all levels sheds light on quite a few issues.
6. Impact of Systemic Risks
Another aspect that is least understood in organizations is systemic risks. Organizations adopting enterprise risk management assume that since the key risk indicators are showing low risk, everything is running smoothly. However, as seen in the financial crises, the impact of systemic risks is huge. Underestimating it or ignoring it can nearly wipe out the organization.
Turner report highlighted the impact of systemic risks in the banking sector with the following lines:
“Five key features of this new model played a crucial role in increasing systemic risks, contributing to the credit boom in the upswing and exacerbating the self-reinforcing nature of the subsequent downswing:
(i) The growing size of the financial sector.
(ii) Increasing leverage – in many forms.
(iii) Changing forms of maturity transformation.
(iv) A misplaced reliance on sophisticated maths.
(v) Hard-wired procyclicality.”
Although, in the blame game the investment bankers are being labeled as culprits for playing in the CDO market, the interconnections between retail and investment banking resulted in the crises. The retail bankers gave home loans to individuals with doubtful repayment capacity to leverage the boom in real estate market. Simple explanation is that the collapse of real estate market negatively impacted recovery of loans which resulted in making the CDOs worthless. The key lesson to learn here is that strategies can fail majorly if they are not protected against the impact of systemic risks.
7. Leadership Quality
The quality of leaders makes the largest difference to an organization’s success. Can one imagine GE’s tremendous success without Jack Welch? He accomplished a lot as a leader, though he portrays himself modestly in his book “Straight From The Gut” . He narrates -
“I came to the job without any external CEO skills. I had rarely dealt with anyone in Washington, even though the government was more into business than ever. I had little experience dealing with the media. My only press conference was scripted session with Reg on the day GE announced I would the the next chairman. I had only one or two brief outings before the Wall Street analysts who followed GE. And out 500,000-plus shareholders had no idea who Jack Welch was and whether he would be able to fill the shoes of the most admired businessman in America.”
Jim Collins in his book “Good to Great” analysed the impact on companies that had level 5 leaders. Organizations with level 5 leaders showed consistent performance and a far better share holder return than their industry counterparts. Hence, if either strategy or operations are failing, the quality of leadership should be looked into.
8. Assessment of Strategy Formation Process
Last but not the least is a discussion on strategy itself. Two thoughts come into mind – how should a strategy be assessed for effectiveness and when should the strategy be modified or changed? The quality of strategy itself is in doubt sometimes.
The key reasons for adopting a wrong or misguided strategy relate to some of the points I had mentioned in my earlier posts on strategic risk management :
a) Very few organizations have a proper process for strategy formation. For most it is an end of the year data accumulation practice from different business units. An organization level strategy considering all interconnected aspects of business may not have been devised.
b) Board and CXOs generally do not negate a strategy given by the CEO or fellow colleague. The political repercussions of challenging a CEO/CXOs strategy can be huge, hence most keep their opposing opinions to themselves.
c) If the organization culture is not focused on creativity, ideas and learning, new strategies will not be presented for fear of being mocked or run over. Hence, contrary to popular perceptions the strategy pipeline is quite dry.
d) Moreover, the choices of strategy selection with CEO/CXO are limited. They receive ideas which people down the line have collectively agreed to. These might not be the best ideas as the popular ones generally do not shake people out of their comfort zones.
Understanding these circumstances for assessing the quality of strategy can be difficult. Senior management in such situations has to start from scratch to develop a strategy formation process. If the formation process is full of loopholes or ineffective, the probability of having a good strategy is low.
Closing Thoughts
In nutshell, getting the strategy and operations right is critical for organization success. However, these two components itself do not guarantee success, they are just the building blocks. Other management and organization parts need to be aligned properly to the objectives and strategy of the organization. A holistic picture is required to accomplish objectives. In case of failure in achieving objectives, a review of strategy and operations is definitely beneficial. However, aspects underlining these should be delved into deeply to do a proper root cause analysis. Looking beyond the obvious helps.
References:
- Turner report – A regulatory response to global financial crises – Financial Serivices Authority, UK
- Straight from the gut- Jack Welch with Johm A. Byrne
- Good to Great – Jim Collins
- Norman Marks Blog
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India Country Risks in 2012
Posted by Sonia Jaspal in Financial Risks, Government & Corruption, Management, Strategic Risk Management on December 20, 2011
Indian organizations are in for a rocky ride in 2012 as darkening clouds hang over India growth story. In some ways it is a make or break year for India’s continuing successful journey for economic growth and power. The world is watching and India cannot afford to flounder. However, the risks in the economic environment are acting as tsunamis and volcanoes, wiping out past efforts swiftly. This year Indian organizations need to watch out for external risks and triggers carefully, as they can have huge impact on the bottom line of the company.
The prophets of gloom and doom predict that India’s GDP in 2012-2013 financial year will be between 6-7%. In light of prevailing political and economic environment this statement is a conservative realistic assessment. Hence, organizations to sustain and grow in 2012 need to conduct strategic risk assessment of India country risks. I am giving below my top four.
1. Political Paralysis
In 2011, Prime Minster Manmohan Singh’s reputation has nose-dived as the country was engulfed in corruption scandals. His continuance as Prime Minster till the end of term is widely debated in political circles. The Congress party is facing another crises due to Sonia Gandhi’s ill-health. Public is speculating that she has undergone surgery to treat cancer in USA. Hence, rumors are rife about Rahul Gandhi taking over the reigns of the party. Moreover, senior Congress party leaders are having spats in public.
On the hand, Bhartiya Janta Party (BJP), the main party in opposition, is suffering from lack of strong leadership at national level. The ex-chief minister of Karnataka, Mr. B. S. Yeddyruppa, openly contravened orders of BJP leadership team when named in Illegal Mining Report. At state level, local parties are gaining prominence and strength.
Last but not the least, Anna Hazare’s fight against corruption has awakened the middle class. Finally, they have lost their apathy and are demanding better governance.
Considering all aspects, there is little likelihood of a strong national party leading India in 2012. Moreover, political commentators are hinting about mid-term polls due to fishers in Congress party and it’s deteriorating credibility. Therefore, large organizations must manage political risks at national and local state level. Keep in mind sensitivities of various political parties otherwise their is a probability of getting caught in a tug of war. Also, adjust the growth plans for government ineffectiveness.
2. Financial Market Turmoil
Indian markets in 2011 have done badly on financial indicators. There is slowdown in growth and in October 2011 industrial output contracted by 5.1%. Fiscal and current deficit are expected to cross 3% and 5% of the GDP respectively in 2011-2012. The GDP growth forecast for the year was reduced to 7.5% on 10 Dec 2011.
Sensex on 16 December 2011 closed at 15,491, a 25 month low. Stock brokers predict that the market is not going to rise in a hurry.
Business Standard reported in its weekly report on 16 December that “The WPI inflation for the month of November came in at 9.11 per cent compared to 9.73 per cent in October. The market was looking at an inflation of below 9 per cent for November. Inflation for November 2010 stood at 8.2%. India’s food inflation eased to 4.35% in the year to December 3 — its lowest reading since late February 2008 — from an annual 6.60% rise in the previous week, government data showed today.
Further, On Thursday, the Indian rupee touched a record low of 54.30 to the US dollar on the back of sustained foreign fund capital outflows in view of the fall in the equity markets, coupled with a stronger dollar in global markets.”
The Finance Minister Pranab Mukherjee recently commented in a meeting – “The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift our focus back to near term issues.“
Moreover, Moody’s in November 2011, “downgraded the entire Indian banking system’s rating outlook from “stable” to “negative,” citing the likely deterioration in asset quality in the months ahead.” Additionally, aviation, telecom, commercial real estate and power utilities industries collectively owe banks Rs 5 lakh crore. These industries are most affected by the slow down.
The financial market situation is unlikely to improve in the short run. India will most probably not see a double-digit growth in GDP in 2012-2013. Companies need to risk adjust the financial growth numbers keeping in mind the prevailing situation. . Conservative estimates and cost control will steer the organizations in safe waters. Maintain good liquidity throughout the year as banks are not going to save organizations in a crunch.
3. Future Regulatory Reforms
The regulatory reforms came to a standstill in 2011. The political deadlock between UPA government and BJP opposition party pushed all reforms on the back burner. The business leaders came out strongly criticizing the political parties for hampering economic growth. The unhappiness of corporate world is evident that investments – domestic and foreign – are at an all time low.
The government in December 2011 parliament session had a list of 50 Bills for approval. Some of the Bills presented were Companies Bill 2011, Banking Laws Amendment Bill 2011,Prevention of Money Laundering (Amendment) Bill, Direct Taxes Code Bill, 2010, Forward Contracts (Regulation) Amendment Bill, 2010; Pension Fund Regulatory and Development Authority Bill, 2011, Securities and Exchange Board of India (Amendment) Bill 2009; Insurance Laws (Amendment) Bill, 2008 and Regulation of Factor (Assignment of Receivables) Bill, 2011, among others.
This shows the pending backlog of bills requiring approval in the parliament. Business leaders are likely to lobby for approval of these bills in 2012. Hence, risk managers need to be geared to manage numerous regulatory changes in 2012.
4. Skyrocketing Corruption & Bribery
In light of various scams - telecom, mining, land, etc, – the corruption perception index in 2011 has fallen to 3.1 from 2010′s 3.3. India’s world ranking in corruption has gone lower to 95 from a total of 183 countries assessed. This is not surprising as Indian’s in 2011 saw well known politicians and business owners implicated in scam cases.
The recently released report of Global Financial Integrity - Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 – states that trade mis-pricing accounts over 80% of the illicit financial flows in Asia. India in the last decade lost US $104 billions in illicit flows and is ranked 15th highest among developing countries with China topping at US $ 2467 billion. Though in comparison to China, India doesn’t appear to be doing badly, but that is distorted reality. A couple of activists and whistle blowers lost their lives during the year for uncovering corruption cases.
In 2011, Anna Hazare initiated public rallies to force government to pass Lok Pal Bill. Although, parliament is expected to pass it in December 2011 winter session, the implementation will take some time. The government’s sincerity in eradicating corruption is questionable as the various anti-graft bills are being used to play political football. The UPA government to counteract Hazare’s war cry has presented three additional anti-graft namely – Judicial Accountability Bill, Public Interest Disclosure Bill (Protection to Whistleblowers Bill) and the Citizens’ Charter – in the parliament in December 2011. A step in the right direction but the road ahead is tough. Passing bills and implementing them are different ball games.
In light of the fraud cases, high-level prosecutions and political games, the Indian corporate world has become vary. In 2012, organizations must focus on implementing a code of conduct for employees and provide training to them on business ethics. The legal and reputation risks will be extremely high if these aspects are ignored. The situation becomes more tricky for US and UK multinationals as they are governed by FCPA of their respective countries.
Closing Thoughts
Political deadlock, inflation and corruption have taken the air out of India’s growth story. 2012 will be the decisive year in assessing whether India can surmount these obstacles and accelerate economic growth or go on a downward spiral. Organizations must maintain a balance between growth and risks. The downside risks can cost heavily and there may be no quick ways to turn around numbers. Hence, doing proper planning, implementation and cost effective operational execution are key for success.
References:
- Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 – By Global Financial Integrity
- Corruption Perception Index
- Weekly Report: Sensex, Nifty hit 2-yr lows on growth woes - Business Standard
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