Lessons from Rajat Gupta’s Downfall

When I started my career, Rajat Gupta was an icon. Indian Gen X wanted to achieve his heights. He made us realize that Indian professionals can compete in the global arena and win. Now with his name tarnished with insider trading charges, every professional would be thinking – we don’t want to follow his path. The fall is always the hardest from the top floor of the building, not the ground floor. Whatever he built in his lifetime, today lies in shambles. His family is going to pay a heavy price for his wrong-doing. He has from being a case study on “what to do to fulfill your career dream” has become a study for “what not to do in your career”. I feel sad to say this, but here are some lessons all of us can learn from his downfall.

1. Poverty is in the mind and not in the bank balance – JP Morgan Chase estimated Gupta’s net-worth as US $ 130 million but as Rajaratnam joked – “Gupta wanted to be in the billionaires club“. Gupta’s greed got him down as he was unable to draw the line for his wants.

2. Don’t break the rules to get ahead – Gupta as ex-head of McKinsey knew he was duty bound to maintain confidentiality of boardroom information. He traded confidential information to meet his own personal targets. A McKinsey executive said – “It is mind-blowing that the guy who ran the firm for so many years could be going to jail for violating that principle.”

3. Choose friends carefully – That’s what parents say to kids but we forget it in our adult life. Gupta befriended  Rajaratnam, and though one cannot say he lacked judgment, he did manage to rationalize wrong-doing to keep the friendship alive. He got enamored by the Rajaratnam’s lifestyle. Relationship with  Rajaratnam, who had a dubious reputation, led him astray.

4. Keep feet firmly on the groundIdeas of invincibility and grandiosity lead to delusional thinking. Rajat Gupta was fined by SEC for insider trading. Instead of paying the fine, he chose to pursue the case legally. With the indictment, he is facing over 10 years of prison sentence. He took the decision to challenge SEC due to over-confidence and arrogance.

5.  Correct wrong-doing immediately – A person walking an unethical path rationalizes that s/he will get away with it, if they aren’t caught the first time. Gupta after doing insider trading for a few times got comfortable in his role. Mr. Naftalis said -“Having lived a lifetime of honesty and integrity, he didn’t turn into a criminal in the seventh decade of an otherwise praiseworthy life.” Gupta lost his principles over a time. He didn’t stop when he should have and didn’t take any corrective actions.

6. No one is above law – With the well-known figures in India and international arena facing trails and convictions, it is apparent that no one can escape the hands of justice. Sooner or later, the path will lead to a prison sentence. Being ethical pays in the long-run by keeping a person safe.

7. Protect your legacy – Rajat Gupta had an impeccable reputation of a world-class professional and a great humanitarian. His list of good deeds is long and was known as an exemplary citizen of the world. With these charges, he leaves a legacy of a criminal. A journey from  the boardrooms to a prison cell. There can’t be a greater tragedy on the professional field.

Closing thoughts

It is heartbreaking to find that our heroes have feet of clay. Gupta traded a comfortable old age with a prison cell for satisfying his insatiable hunger for power and money. An extremely intelligent man, an alumni of IIT and Harvard, failed to make the right ethical choices.  In the end, Robert Gilbert’s quote comes to mind –

“Conquer your bad habits or they will conquer you.” 

References:

Rajat Gupta Convicted of Insider Trading

Culture and Communication Risks

The two things bringing a cultural revolution globally are – recession and social media. Both nations and organizations are struggling to adapt to the changes required in mindset and behavior. Recession has ensured that the fittest corporate citizens are those who can operate globally, work where the demand is, and compete at a global level with the cheapest resources. Social media has connected everybody and everyone is accessible on the same platform. A CEO  is just a tweet away from Gen Y fresh graduate. The layers of authority and distance are diminishing. The organizations and employees that adapt to the cultural change quickly will thrive in the next few years.

Therefore, the need of the hour is to become a global employee with a capability to understand cultures of at least a few of the countries with high Gross Domestic Product – US, France, UK, Japan, Germany from the developed countries and Brazil, China, India, Mexico, South Africa and Russia from the emerging markets. Multinationals are trading with these countries and/or have offices in these countries.This cannot be taken lightly. The graph below from the Economist Intelligence report “Competing Across Borders” will help you understand the impact of cross-cultural communication.

About one-third of the respondents stated that profits, revenue and market share improved significantly with better communication. To counter the cross border communication challenges, organizations are focusing on providing cultural, linguistic and conflict resolution training. However, there is no simple solution. Though training might help, it gives a current scenario. Psychologists Dov Cohen and Richard Nisbett, conducted experiments to assess the probability of entering into disputes depending on the cultural background. They realized that current behavior of a person is influenced by history of couple of centuries. Where the person is coming from matters. Typically, a warrior class, such as Sikhs and Gorkhas in India, are going to be more aggressive in organizations. As leaders and employees both bring their personal values while at work, the corporate culture changes on the basis on the position and number of people  of a community.

Though this experiment raises questions on whether any individual can truly become a global citizen, it is a critical requirement. Disputes are caused due to cultural and linguistic differences as shown in the adjoining graph. Insufficient clarity in communication can cause major disasters, especially when bounded by cultural protocol. Malcolm Gladwell in his book “Outliers – The Story of Success” gave example of Korean Air. The airiline, Korean Air, during 1988 to 1998, had a loss rate of 4.79 per million departures. In comparison, American carrier United Airlines, for the same period had a loss rate of o.27 per million departures. That is, Korean Air was having 17 times higher loss rate than the American airline. It had 8 airplane crashes in the period.

The reason attributed for most of plane crashes was “unclear communication” and not plane defects or pilot inexperience. The Korean culture has high power distance index and the flight officers were unable to plainly tell their captains that they were flying on the wrong route, were out of fuel or weather was bad. Can you believe it, due to the respect and deference flight officers showed to their captains and officers in air traffic control rooms, over a thousand passengers lost their lives? Instead of taking control of the plane they chose to show reverence!

Another amazing fact mentioned in the book is that more planes crash when the captain is the pilot, rather than when flight officers are flying. Simply because when flight officers are doing something wrong, the captains due to their position of authority, do not hesitate to call out the mistake. On the other hand, flight officers chose diplomatic responses which have a higher probability of misinterpretation as severity of the situation is not conveyed clearly. Korean Air recovered and became a safe airline, after they trained all captains and flight officers on speaking clearly and plainly in English while flying, among themselves and the air traffic control rooms.

Looking from another lens, employees are less likely to highlight risks to seniors in countries and organizations with authoritarian cultures. Juniors may hesitate to paint the full picture explicitly for senior managers to understand high risk situations, and crises would occur without proper risk mitigation. Risk managers and crises managers need to be taught the art of clearly communicating concerns and issues.

Closing thoughts

English has become a global language, but without taking the cultural context it doesn’t make sense to a reader from another country. For instance, take a look at the blogs of  Americans, British, Australians and Indians, all are writing English but very differently. Just by reading the blog post, one can identify the country of the blogger. Hence, with increasing complexity in business, the nuances of communication become more important. Communication failure can cause disastrous consequences. When I am flying, I would prefer that the flight officer says to the captain – “Buddy, we are flying on the wrong course.”

Reference:

  1. Competing Across Borders – Economist Intelligence Unit
  2. Outliers – The Story of Success – Malcolm Gladwell

Performance of Indian Boards

The board of directors have the responsibility for steering the organization in the right direction and guiding the CEO and senior management. However, worldwide they are lambasted for catering to the manifested interest of CEO and senior management at the expense of shareholder interest. The criticism is that boards’ failure to maintain independence results in  under-performance.

A prime example is the decision of Satyam board to acquire Matyas. The board approved a deal of USD 1.6 billion to acquire Maytas Infra for USD 300 million and Maytas Properties for USD 1.3 billion. Ramilanga Raju after admitting the Satyam fraud stated that deal was to fill Satyam with real assets instead of fictitious assets. The scandal came out as shareholders refused to approve the deal and Raju didn’t have a way to cover the fraud. The recent case of  Kingfisher Airlines debacle clearly shows that the board was not asking the right questions.

Mr. N. R. Narayan Murthy, founder of Infosys, in his book “A Better India, a Better World” succinctly describes the prevailing trends. He wrote – “A a result, the 1990s was the era of the stock-option-fattened, superman-superwoman CEOs who could do no wrong in the eyes of their admiration-heavy boards, and who were seen as demigods. Lax oversight by the boards made these CEOS more or less omnipotent.” He has lead corporate governance in India by walking the talk and his scathing comments are right on target. He has given a number of suggestions to improve corporate governance and board performance.

Let us see, whether Indian boards are up to the task. To analyse the performance of the boards, I have taken the best practices of the board from the report of Trinity Group and Mr. Narayan Murthy’s book. The statistics are from  India Board Governance report 2011 and the relevant laws are from the New Companies Bill 2011.

1. Constitution of the board

Corporate governance practices mention ideal board size of 8-12 members with around one-third to half the members being non-executive and independent directors.  Indian boards on an average had 9.6 directors of which 5.2 were independent directors in 2010 and 60% of the boards have separate roles for CEO and Chairpersons. On the whole, this sounds good, however, in light of the additional information given below, the perspective changes.

a)    In 2010 in India, board chairpersons were members of 9.5 external boards though majority of the memberships were of private companies. According to the survey “the maximum public board memberships held by an individual was 12, and the maximum private board memberships a whopping 37″.

b)   The CEOs & managing directors were on an average board members of 7 external boards. “The highest number of public company board memberships held by a CEO was 10, whereas it was 32 for private company boards.”

c) Non-executive directors, on an average held a total of 6.7 total board memberships, with 2.1 public and 4.6 private memberships.

d) 56% of the directors surveyed identified the limited talent pool as an impediment, with 38% perceiving it as a major hindrance. Yet, less than 10% used search firms or other 3rd party sources to locate suitable talent.


The lack of experienced and trained directors is the key reason for a few directors available in the talent pool holding multiple memberships. When most independent directors are selected from the social circle of the CEO or Chairperson, there are very few who would not toe the line stated by the CEO. With the multiple holdings, a conflict in one board may impact the relationship in another board. Hence, instead of independence, diplomacy and self-interest prevails.

Mr. Murthy candidly mentions that “board independence from management continues to be affected by directors who have limited accountability to shareholders and are ill-equipped in exercising management oversight.” He stated that in Infosys, directors are given training and a job charter to ensure that they fulfill there responsibilities appropriately.

2) Strategy review by the board

According to the best practices given in the Trinity report, “the board’s primary responsibilities include : (a) reaching agreement on a strategy and risk appetite with management, (b) choosing a CEO capable of  executing the strategy, (c) ensuring a high-quality leadership team is in place, (d) obtaining reasonable assurance of compliance with regulatory, legal, and ethical rules and guidelines and that appropriate and necessary risk control processes are in place, (e) ensuring all stakeholder interests are appropriately represented and considered, and (f) providing advice and support to management based on experience, expertise, and relationships.”

On the other hand, the Companies Bill mentions the board’s power as: “ (a) to make calls on shareholders in respect of money unpaid on their shares; (b) to authorise buy-back of securities under section 68; (c) to issue securities, including debentures, whether in or outside India; (d) to borrow monies; (e) to invest the funds of the company; (f) to grant loans or give guarantee or provide security in respect of loans; (g) to approve financial statement and the Board’s report; (h) to diversify the business of the company; (i) to approve amalgamation, merger or reconstruction; (j) to take over a company or acquire a controlling or substantial stake in another company; (k) any other matter which may be prescribed

The theoretical legal powers given are quite different from the actual working of an effective board. On an average in India in 2010, board members met 6.5 times during the year. The minimum number of meetings were four, that is a statutory requirement and maximum were 19 board meetings by a company. The boards met on an average three times during the year for strategic and business review.

Considering the number of meetings conducted by the board, with the legal responsibilities and practical requirements, it is not feasible for the boards to do a constructive strategic review of the business or provide regulatory oversight. Too big a mandate has been given, while the time spent on it is relatively small. It is not surprising that most boards are acting as rubber stamps to the senior management plans. It is a case of imbalance between power, responsibility and time commitment.

3. Focus on risks

After the Satyam scandal and financial crises, the board focus on risk management has increased. The boards ideally need to determine the risk appetite, review internal audit reports and external auditors reports, understand various strategic, financial and operational risks, and maintain compliance oversight.  In India, the Company Bill mandates an audit committee for listed companies, with majority being financially literate independent directors.

In 2010, in India, 69% of the board members respondents stated that boards are considering risks as top priority. However, 31% mentioned that boards are not involved in systematically addressing corporate risk management.

My view is that the focus on Indian boards is more on risk of misreporting financial statements rather than others. Risk management field as such is still in young stage in India, and board members are ill-geared or untrained on the various aspects.

4. Information availability

The decision-making of the board is subject to the information available with it. As per law, board members are ideally required to receive all relevant information about board resolutions and decisions, seven days before the meeting. However, board members responded that most of the documents are given prior to the meeting or just a couple of days in advance.

Moreover, “a vast majority of boards depend largely on management reports (90%) and informal management discussions (79%) for business information. Third party reports and stakeholder views are used as tools only by 23% of the companies.”

With such limited information, and high dependability on company sources, the directors may not be in a position to make informed decisions. The directors don’t even have sufficient time to study the presented information to make independent decisions and cross question the senior managers. Hence, this could be a key reason for poor performance.

5. Performance Review of CEO & senior management

The compensation committees recommend the CEO and other senior managers. In India, around 80% the respondent companies had a compensation or remuneration committee. The issue of CEO compensation isn’t as big as the western world, however, it is fast gaining prominence. Some high earning CEOs in the top 100 list are being evaluated on the basis of returns to investors.

The board as such has to evaluate  CEOs performance. In the west, the “star” CEOs are in the limelight and are paid high salaries in relationship long-term company performance. However, India scenario is different. Most of the critical positions in family organizations are held by family members and relatives. In such a scenario, the board or compensation committee are hardly in a position to evaluate the performance or recommend salary.

6. Performance review of board

As per law, the nomination committee reviews directors performance , and recommends removal. However, two-thirds of the independent directors stated the roles and responsibilities of non-executive directors are not defined clearly. Hence, without the clarity in role, the evaluations can hardly be constructive.

As such, the boards in India have the following three priorities: “ensuring overall corporate and statutory compliance (90%), monitoring business and operating performance (87%), and establishing and monitoring financial standards and internal controls (82%). Leadership development, succession planning, CSR and risk management continue to be low on the board priority list.”

The professionally run organization do claim for independent evaluation. For instance, Tata  and Infosys succession, the nomination committees were said to be doing independent evaluation. However, in both cases, questions were raised on the final selection. Though Mr. Murthy in his book mentioned that – “At Infosys, the chairman of the board sits with each board member, discusses his/her evaluation, and suggests remedies and course-corrections. The chairman’s performance review is handled by the lead independent director.

In my opinion, the practice of evaluating board performance only exists in some companies in India.

Closing thoughts

Unless the mindset changes to compassionate capitalism where business is done with integrity, decency and in a principled manner, boards will continue to be tutorial heads without much power and say. To ensure boards perform better, shareholders and investors need to become more active. The regulators need to ensure governance codes are followed in spirit and not just tick box mentality. A more elaborate role can be defined by regulators with mandatory requirement of time commitment and reporting requirements.

References:


Celebration Time -100K Views in 2 Years

On the day of Venus transit, this blog crossed 100,000 page views, a couple of weeks before the second anniversary. For a subject as dry as risk management, that is an achievement. My sincere thanks to all the subscribers and readers whose smallest click on the post motivates me to write more. I didn’t start of as a writer, but the slow and steady growth in readership has made me one. With an average of 8000 page views per month, it is time to celebrate.

Since I started this blog with the aim to build awareness and  change perceptions about risk management, specially in India, the song “Winds of Change” is dedicated to all my readers. For the next generation, we definitely need to bring changes in practices of business ethics, corporate governance and risk management.

In the last two years, I learnt a few personal lessons from blogging. These lessons are not about how to blog better, but life in general. So here goes.

1. Don’t give up your hobbies

Sounds simple, but with age we generally give up our hobbies due to various constraints. However, the hobbies of our childhood in some ways define us and one never knows how the dots connect in future.

My mother encouraged me to write from childhood. In my teens I wrote poems and essays. Most were deeply tragic, outrageously wicked or completely radical thoughts. My father got perturbed on reading them, since he believed I was going to implement my creative ideas. I was that mischievous! Over time, as the focus on career increased, I stopped writing. I picked up writing again with this blog after a 20 years break. It was an absolute challenge. My writing is still not as decent as I wrote during my teens. It is an art one forgets with time without practice.

Now blogging is the in-thing and being able to communicate well is the key to success. No one told us that during our school days, the focus was on qualifications. In the present environment technical skills have become secondary. Times change. The best way forward is to integrate hobbies with career aspirations.

2. In adversity, persevere

Blogging is a humbling experience. There is a lot of sales talk about how good and easy it is, but it takes a lot of persistence.

I think most bloggers start for two reasons – either they love writing and sharing ideas or they wish to build a name for themselves in their chosen field. The initial idea is we have got it made and can crack it easily. Nobody tells a new blogger that they will be publicly making a fool of themselves,  consistently, till they get the hang of it. Moreover, with all the competition, most readers will ignore you. In real life, we target a deal with at least 60:40 odds in our favor. In blogging world, less than 1% read the post, let alone appreciate it.

It taught me one big lesson. In adversity, I must not count what I don’t have. I must focus on the goals I wish to pursue and doggedly work on it. Every time I failed, I attempted to understand the reasons for failure and restarted. Hard work makes one luckier.

3. Be authentic

Blogging is about personal branding, hence be authentic. What I write is what I am. There is a lot of advise given on building a personal brand and developing a social persona to get an audience. The problem with that approach is that my personal brand is not different from another’s image. Hence, how will the readers differentiate and respect me?

For instance, my thoughts are uniquely mine, if I try to mimic someone’s writing style or thoughts, then it isn’t me. If I like to be someone else, who is going to be like me? It takes courage, because putting radical thoughts in open forums is sometimes equal to begging to be killed.

However, my authenticity determines my credibility. For example, if I value honesty as a trait, then not only my friends but my worst enemies should vouch me as honest. The measure of my success on personal branding is when I stand for certain values and traits, my competitors and enemies acknowledge those traits. A well packaged public persona goes only so far as most readers see through the game plan sooner or later.

Closing thoughts

I started writing this blog on my parents marriage anniversary. As I have lost them, this was my way of thanking them. I wanted to share some of the ethical values they inculcated in me. It gives me a sense of satisfaction that there are still some takers for it. I hope in the years to come, I can learn something more from blogging, career and life, and be able to share it with you.

Thank you once again for your continued support and faith.

Best wishes,

Sonia