The Elite Institution Syndrome? Business World Book Review Sep 16, 2017

It is debatable whether a management degree is the be-all-and-end-all for success, but practically speaking it is a passport for entry into the big league. And when it is Harvard Business School, it is truly a golden passport.

Duff McDonald, who is well known for his book on McKinsey titled, The Firm, continues his crusade against the way capitalism functions and puts HBS in perspective in The Golden Passport. He traces the history of the School and its evolution, which became the fulcrum of capitalism even though it ideologically stood for making business work for society. This is where the conundrum lies.

Getting into Harvard is an end in itself as it places one at a superior level and what follows is predictable. You end up working with the best firms, with consulting being the biggest draw. The big three, McKinsey, Bain and BCG have their share of alumni from this prestigious school. A Harvard degree guarantees a position in western capitalism which ends on Wall Street. As it shapes the way the powerful graduates think, its influence stretches far and wide and becomes self-fulfilling. It affects the organisations they command, the economy they dominate and society as a whole.

It is not surprising that being associated with the School provides a golden passport in one’s trysts with success which hovers around money. McDonald is critical of the school, as it was founded to ‘make leaders who help to change society’, but ended up creating the wealth driven capitalist system with scant regard to social commitments. The best organisations come and hire students who, in turn, get to occupy the best positions over time and forge financially symbiotic relations with the School through sponsorship of Chairs, studies or even the catering (Marriot Hotel). Even the case studies are heavily biased as they refer to this chain of companies. This ‘loyalty’ is transparent and there is a chapter devoted to the school alumni.

The narrative is extremely engaging as it is based on intensive research. Harvard has been always spoken of highly for producing people who provide solutions. But the author believes that there is a lot of self-praise for implementing commonsensical measures to fight adversity. Here, he gives the example of Johnson & Johnson and its former CEO James Burke’s reaction to recall Tylenol when the tablet caused death. The stock was withdrawn and repackaged and pushed again by an enthusiastic sales force. McDonald argues that this would be done by anyone and there was no brilliance of Harvard based knowledge here which is what it was made out to be.

How About The Famous People From Harvard?
Yes, they dominate the billionaires list and also occupy important positions in leading companies. But the importance given to ethics can be gauged by Michael Porter, probably the biggest name, who had no qualms when playing consultant to dictators. He also takes a dig at Porter who tells people how to make money from ‘imperfections in the market’ under the garb of strategy when economists work hard trying to correct them.

Harvard has tried to incorporate ethics into the curriculum and students have demonstrated that profitability and CSR are not mutually exclusive. But people like Porter invariably take the stance that the best way to solve the problems of a nation is to give business more influence than it already has! According to the author, Harvard has abdicated any meaningful societal role and is a key player in the culture of optimisation, which is related to self-interest and profits.

McDonald, definitely no fan of Harvard, believes often they charge a fee to provide solutions to problems created by their own ideology. Here, he names all people involved in the financial crisis being products of Harvard: George Bush, Hank Paulson, John Thain, Jamie Dimon, etc. Quite ironically Jay Light, who was appointed as Dean in 2001, and other directors watched helplessly when the crisis struck as their endowment fund value taking a beating.

The author also points out that some of the biggest scams like that of Enron or Rajan Gupta of McKinsey were all products of Harvard. But can one really say that the school is responsible for the individual, as the majority have been well behaved and not gotten in to such controversies?

This book does spur some basic debate.  It is right because what are stated are facts. But it is wrong because what is said here holds for all top management schools which work to maximise profit of companies and individuals.

Can one reasonably blame Harvard for Enron or the financial crisis? The answer is no, because these systemic failures were not institute specific though to be sure most of the leaders were educated in this prestigious school.

Further, the qualities of ‘arrogance and cover- up’ that Harvard has created are not unique as such camaraderie resides among all alumni when it comes to protecting their institutions. This can be said about the Ivy league institutes in India. Last, on the issue of ethics and working for society, it would be expecting too much from any company or leader for all ‘mission and vision’ documents speak of this objective but is never followed and is meant to make the web sites look good. The reader, however, can decide on which side she is on.

Stocks to dominate derivatives market until anomalies corrected: Economic Times 24th Oct 2017

ll companies face various market risks: price, interest rate and currency. Ideally, the exhortation is to hedge the risk through various derivatives markets. Price risk hedging is almost axiomatic for companies as it is two sided — buy and sell; and with proxies available on comexes can be seamlessly done by benchmarking at a premium or discount.

Further, as money is always borrowed and interest rates tend to fluctuate, there is the option of hedging through the IRF market where the 10-years GSec offers a proxy. Last, the forex risk follows companies as there are always risks in terms of import, export or external borrowing. The question is how often are these markets accessed?

The derivatives market involving futures became important in the stock market where participants are normally those who trade in stocks while some treasury desks could get involved to book profits or offset their equity exposures. The next step was the commodity derivatives market, resurrected in 2003 and offered various contracts in commodities. Subsequently, IRFs were introduced in various forms with the market now stabilising. Currency futures became important as it was aimed to shift players from the forward market to an online platform.

Typically the volatility in the market should drive the level of activity for both the hedger and speculator. The formerrequires cover and is drawn to the fold, while the latter can profit from such price movements and hence leverage uncertainty. The progress of these markets has been uneven for the first half of FY18 with variable linkages to volatility.

The table shows that while stock futures dominate and are much higher than all the other markets put together, it is driven partly by volatility and also the investor/speculative element which is less emphasised in other markets. The agro market has been volatile with the second highest value. Yet, trading is subdued and is the second lowest. This can be attributed more to the restricted list of commodities available for trading as well as strict regulation on position limits and margins. While this has brought in discipline, the investing community has been deterred with the clause of delivery of open positions adding to apprehension.

The other commodities have fared better with lower volatility as can be seen in the volumes registered in energy and bullion on MCX. Here with fewer controls being in place as price discovery is a global phenomenon, the investor and speculative elements are prominent.

Currency futures on the other side have made rapid progress as this market opened much after the commodity segment but has made smart strides to touch Rs 11.5 lakh crore, which is the second highest segment in this space. Considering that the forwards market is buoyant, the progress here is even more remarkable. Volatility has been low, but given that the rupee has been moving in both directions due to various factors, activity has been robust.

The IRF market continues to underperform. Volatility is low and borrowers would typically be covered by new base rates and MCLR when RBI lowered the repo rate. This makes hedging quite unnecessary and also irrelevant for those affected by rates. In case of speculators, the low volatility does not offer enticing rewards.

The major challenge for these markets is to get in hedgers and speculators in all segments. With bilateral contracts or forward purchases being the order in commodities, moving over to the futures market is going to be difficult. In case of forex, dealing with ADs has become a habit and hence it would take a lot of effort to migrate such players. Companies buying dollars would go through banks as the currency futures market is settled in rupees. The cost becomes an issue given that the interest rate differential can higher than the possible cost of rupee depreciation. This holds for commodities, too.

Until these anomalies are corrected, the derivatives markets would be dominated by stocks and the others would play at best a peripheral role.

Recap bonds: The grand design-a solution, at last: Financial Express Oct 25, 2017

The idea of issuance of recapitalization bonds is alluring as it handles the problem of bank capital quite well with no risk attached. Typically in such a situation the government would issue bonds to the extent of Rs 1.35 lakh crore which will be subscribed to by banks with their surplus funds. Presently, they are investing in excess SLR securities to earn money on the excess deposits that have been kept with them post demonetization. Hence, it looks like a win-win situation.

It is a good solution that was used earlier too to recapitalize banks in the nineties when there was a pressing need to make them commercially viable in terms of enhancing their lending power when capital was scarce. Presently with high NPAs and provisioning, it is hard for them to raise funds on their own as the market would not give a good price given their situation. Also as the government is on it toes when it comes to direct budget allocation beyond what has been provided for, this route is a better option.

How does this work? The government raises these bonds which are then used to capitalize banks where the funds actually come from their own kitty. The bonds issued will add to the debt of the government which has to be serviced. And if the rates are determined by the market forces in a transparent manner, then automatically the cost will be about equal to that on GSecs of similar duration and hence banks would receive the same amount as before on SLR securities.

Will it add to the fiscal deficit? Yes, it has to add to the deficit because at the end of the day when bonds are issued it has to be borrowing on someone’s books. Therefore, the overall debt of the government would go up ti the extent of these issuances. To draw an analogy with the UDAY scheme where state governments took on the debt of DISCOMs, the 3% rule was allowed to be skipped for 2 years, which can be done here too. This is globally acceptable as it is not really fresh debt being issued which adds to the demand spiral which is normally the concern of very high fiscal deficits.

Also as this capital is coming from the government through these bonds, there is zero risk as the Government of India is always solvent. Hence, there is no catch in terms of accounting. But an interest cost has to be paid on these bonds which mean that at say 7% rate, an additional interest cost of around Rs 9500 cr will be added to the revenue expenditure and hence becomes a running cost until such time these bonds are extinguished or converted into equity at a later date, which is also an option for the government.

This approach appears to be fairly pragmatic for the government given that banks require money to be in position to lend in future and the PSBs, which account for around 70-75% of credit, in particular are constrained due to pressure on capital going ahead. Presently as demand for funds is low, there is no apparent problem as banks clean up their balance sheets by accelerated recognition of NPAs and making provisions thereof. However, once demand picks up when the economy actually moves into the high 8% GDP growth orbit, which is expected din the coming years, then there would be a capital cliff for PSBs which has to be addressed now. The conventional modes of finance are not feasible today. Why?

If the government has to infuse directly, then it will mean flouting the 3.2% mark fiscal deficit mark which is being held sacrosanct today (which it will also do through these backdoor recap bonds which are being floated). This will not be acceptable, but the route of recap bonds is palatable as it comes in a different form.

Alternatively selling stake is an option, but while it has been included to be a part of the balance Rs 0.76 lkh crore to be raised by these banks, valuation is always a challenge. With high levels of losses, the market cap of these banks is presently low and will be so until they turnaround thus making it circular in nature. Hence selling at this stage may not yield the best results and can ignite controversy at a later date. Therefore, thinking obliquely is required today and the recap bonds could be the answer.

What are the next steps? The government will have to decide the exact mode of issuance and how this will be spread over the years. This cannot be a onetime exercise and has to be spread over 1-2 years depending on how the PSBs shape up. Also it has to cherry pick the banks that should be capitalized through this route; and ideally it has to be those which are the weakest and are not in a position to command a good market value. Also such funding should be conditional for banks just like the UDAY Scheme with safeguards built in to ensure that the banks keep their side of the deal or else the scheme can go awry. It looks certain that the clinical way in which the government has approached the issue of bank capitalization that these tenets will not just be drawn up but also followed rigorously to get value from the process.

Fifty Things That Made the Modern Economy by Tim Harford: Financial Express Oct 22, 2017

When you pick up this book by Tim Harford, the first thing that strikes you is the comment by Malcom Gladwell on the cover, saying every Harford book is ‘cause for celebration’. With the reviewer here also being a fan of the author, there would be another endorsement. Harford became famous with his book The Undercover Economist, which explained everyday occurrences in economic terms. His brand of economics is real, where he explains human behaviour in the context of micro-economic theory. He doesn’t use the label of being a ‘psycho or behavioural economist’ or any other fancy term, but explains in simple words why the coffee shop that you visit when you leave a station charges more than the one across the road. In Fifty Things That Made the Modern Economy, he takes a detour and chooses 50 things that he considers as inventions that were quite singular and made a significant impact on humanity. You could have your own choices, but can’t dispute his list.

What he does here is that he gives a little background to the invention in question and provides some trivia on the ‘thing’ and then goes on to explain its usefulness. Interestingly, he states that when you pick up a book, there are several inventions involved—each very unique in itself—which, when combined end-to-end, give a wondrous insight. There is paper to begin with, followed by printing, publishing and, finally, the concept of copyright—which are all special ‘things’. Each of these 50 ‘things’ is explained in four-five pages, which makes the book eminently readable.

There are seven sections under different headings, with around seven ‘things’ included under each heading. The first one is called ‘winners and losers’, a section that will catch your eye instantaneously. Among the seven on the list is ‘Googlesearch’. Now normally, one would talk of physical things, but we all know that this search engine is quite amazing and has transformed the way in which information is sought. He includes passports also in this list, which is again quite different, as it addresses issues of how people are identified across countries.

The second group is called ‘reinventing’ how we live and includes infant formula and the pill, besides interesting things like video games and market research that have added new dimensions to the way in which we plan, as well as do business. The same holds for the department store, where Selfridges was motivated to have a physical structure that has now caught on across the world. In fact, the store brought in the largest glass window to create a unique shopping experience, something that is today replicated in all shopping malls.

The third on ‘new systems’ has ‘things’ like dynamo, shipping container, cold chain, bookcase, elevator and, interestingly, the bar code and tradable debt. The bar code simplifies billing and also identifies products for the same. Tradable debt is a remarkable innovation in finance that has led to large-scale use of negotiable instruments and credit multiplication. The commonplace elevator is a physical thing that finds mention in the book and is pertinent, as it has actually made possible the construction of high-rise buildings, which would otherwise be inaccessible.

The book gets more innovative when he talks of ‘ideas about ideas’. Here, he includes things like double-entry book keeping that revolutionised the way we maintain accounts and how they can now be made uniform across companies and countries, which would not have been possible in the past. The same holds for limited-liability companies, which is a unique idea on how one does not have to own the business to run it and risk can be shared among a multitude of owners. Intellectual property is another amazing development that provides protection to those who invest in thinking and have the idea fructify. We all know that in the absence of such protection, there would be less incentive to come up with new things. The author also has space for management consultants who dominate the consultancy space, even though they often tell you what you want them to say, as it becomes easier to sell the idea to stakeholders. The example of McKinsey is described in some detail here.

Harford then gets into the ‘physical innovations’ space under the title ‘where do inventions come from?’ The iPhone, diesel engine, clocks, radar, batteries, etc, all find place here. These innovations are fairly straightforward and identifiable. Harford moves on to what he calls the ‘visible hand’ and gets in tax havens, bank and property registers, among others. This is interesting, as he traces the origins of banking and later takes us through

M-PESA, the revolutionary mobile-based banking system used in Afghanistan and Kenya. Similarly, the idea of property registers, which looks very obvious, was a major innovation. Even today in India, we lament property disputes due to absence of land records, which also comes in the way of any kind of land reforms. This can be avoided by having these registers in place. Similarly, different tax rates have given rise to the innovative tax havens concept, where people use all kinds of fronts to avoid tax, which is perfectly legal.

His last section is on inventing the wheel, where he includes things like paper, index funds, paper money, concrete and insurance. The Lloyds register is well-known, but the impact of concrete on health has some interesting trivia. Pouring concrete into houses in Mexico allowed homes to have cleaner floors and reduced the incidence of pests and insects, as homes could now be cleaned, which helped to better the health of children, in particular. The S-bend is another interesting innovation for the disposal of sewage and Harford talks about how this came about in England.

Reading along, one can’t possibly not find this book engaging, as it’s simple to read and easy to identify the ‘thing’. At times, the reader may feel like talking to the author just to ask why something was not put in. It is this kind of mental conversation that the reader would have with the author as she reads along.

Richard Thaler wins Economics Nobel; he showed how irrationality makes economies tick: Financial Express Oct 10, 2017

From conventional macroeconomic theory which dominated the discourse for several decades after the Great Depression, the field of behavioural economics has caught on as it sounds more real and less theoretical. More important, its tenets are used by businesses to further their interests. It is, hence, not surprising that the Nobel Prize in Economics for this year recognises this branch of economics—Richard Thaler, this year’s winner,  is one of the protagonists of the field. Influenced by the work of the likes of Daniel Kahneman, Dan Ariely, Robert Lucas, etc, Thaler’s own work has been quite epochal and has broken many barriers. The catchy part of behavioural economics is that we can relate to it quite easily.

His contribution has centred on the issue of rationality in decision-making. Economics always starts with the assumption that we make rational decisions. Are we really rational in taking decisions when alternatives are placed before us? The answer is not really as we do tend to behave like human beings, and not like programmed robots—that is, in many cases, the laws of demand-and-supply may not hold for us in a textbook fashion. This is what Thaler reiterates in his seminal works.

Three deviations are normally noticed when such decisions are taken, either at the individual level or as a policy stance. The first is what is called ‘bounded or limited rationality’. Here, the concept is that we tend to compartmentalise everything in our minds, a tendency termed ‘mental accounting’ by Thaler. Hence, when we purchase a particular product, we compare the prices between two, or even multiple, outlets, and choose to buy the one that is cheaper irrespective of the amount involved. A `10 -difference in the price—irrespective of whether the product costs Rs 1,000 or Rs 10,000—is valued the same. Similarly, we are quite happy to buy a holiday using our credit card and pay 30% interest on an annual basis rather than remove money from our savings account which would give us a loss of just 3.5%. This goes against the grain of rationality. This is what is also exploited by business. The various ‘sales’ offered by different online e-commerce sites and retail outlets bear testimony to this. Just notice the advertisements on Wednesday in newspapers where these retailers offer Rs 5 discount on both a kilo of potatoes as well as washing powder (which has an MRP of `390). They appear similar to the human mind.

The second deviation is called ‘social preferences’, where we look at being fair in pricing and wage fixation. The concept of a government-determined minimum support price is based on this tenet of fairness though it distorts the market. Hence, we have this situation where prices increase even when supplies are high which goes against the dictates of market economics. While this may be termed as being politically motivated, the basic aim is to be fair to farmers so that their incomes are protected. This is also one reason as to why it becomes difficult to forecast prices of farm products.

Related to this subject is the issue of sticky wages, where employers are not in a position to normally lower the salaries of their staff even when business is low. One can recollect here that all theories from Keynes and Friedman talk of wages being flexible and wages adjusting to changing demand conditions. But this does not always happen. This has been eschewed in the private sector where a variable component enters the compensation package which depends on how the firm performs. Also, annual increments are no longer fixed but become variable. This is one of the reasons as to why spending power in the country has been low in the last three years as companies have not been giving the normal increments. But when it comes to the government or public sector, salaries cannot be reduced and very often the increments are also fixed by statute. It is again the idea of fairness which motivates such a measure.

The third deviation spoken of by Thaler was the lack of self-control. Marketers exploit this through impulse buying and know very well that people cease to be rational when other aspects like the ‘snob’ or ‘Veblen’ effects are highlighted. Lower prices on products which we do not require become our first choice when the pricing is attractive. The Café Coffee Day employee tempts you with a layer of ice cream or flavouring which pushes up the cost of the cup of coffee, which we would not normally have.

At another level, Thaler spoke of the trade-off between today and tomorrow. People always prefer the present and hence the concept of interest rate and savings develops from this motivation of migrating people from the present to the future. Therefore, he speaks of a ‘planner and doer’ model where we need to plan for the future rather than ‘do’ today which is what the concept of pension is all about.
The solution here is to ‘nudge’ the individual to the future and this can be through an incentive like a return on savings or even a tax on consumption and exemption on savings which helps the individual to transition from the present to the future.

It is true that economies, to begin with, work on the basis of rational economic behaviour as it seems feasible. But as economies advance and become more sophisticated and people become more diverse based on income and exposure, it becomes possible to leverage the “not-so-rational” behaviour of human beings. This is well exploited by the corporates which keep raining new products with some differentiation to capture a greater share of the wallet. This is what keeps innovation growing. If people were to seriously stop and think before opting for a new car or pair of shoes and work on the basis of value being attained then they could behave differently. Even governments are not immune to such behaviour either, in the guise of being fair or counting on political accolades. This is why we need to look at behavioural economics more closely to understand why conventional economic theory breaks down more than often.

Why bitcoin should not be allowed: Business Line October 10, 2017

Compelling arguments have been made to justify the existence and use of bitcoin. The currency has caught on in a number of countries to the extent that there are indicative exchange rates for bitcoin in almost all currencies in the market.

However, for a nation that has launched an outright war against black money, which could also have meant compromising growth in the short run through demonetisation, allowing cryptocurrency (CC) would be a contradictory act. The concept of bitcoin has caught on in the world and there is evidence of its use in India, too. Also, the start of a new currency of a similar variety cannot be ruled out; hence, it is necessary to take a stance on the same.

CC is a currency created from nowhere through intricate software which is foolproof. A certain sum is created independent of any central bank which is then allotted based on demand for a price which is fixed externally. A bitcoin trades at around ₹2.5 lakh and would be equal to around $3,800 or €3,200.

The advantage is that it works on algorithms and is not connected to how central banks and countries function and the ownership is anonymous. The fact that it is accepted by sellers is critical here and hence can be used seamlessly independent of monetary policies being pursued. Defenders claim it is some kind of an alternative asset like land or stocks and is legitimate (can be taxed in some jurisdictions as capital gains).

Many reasons to say ‘no’

The reasons that were given in support of demonetisation can be extended to not allowing CC in the country. Black money can proliferate easily with the use of a CC. People can automatically convert all earnings in dollars outside the country into a CC which can be used within the country or even outside where it is accepted. Drug money would get the biggest boost as it would be impossible to capture these transactions.

Second, terror funding becomes easy once it is accepted as medium of exchange and the entire exercise of demonetisation would be defeated by allowing such parallel currencies to run. Third, counterfeiting was another strong reason put forward for removing high denomination notes from the financial system. If CC is permitted it is akin to the use of counterfeit currency, as transactions would take place in currency which is not recognised by the central bank. Therefore, in the context of the attack on black money, CC definitely not find space in the financial architecture of any country.

From the economic standpoint, CC makes no sense. A currency carries value because it is issued by a central bank on behalf of the government and the latter promises to pay the bearer the sum written on the currency. The moment one moves into the realm of CC there is no guarantor. In fact, given that no one has seen the face of the creator of bitcoin it is hard to even trace the same to the source. In a system of barter, which is still in force in some rural areas where payment is made in kind especially with respect to farm products, there is a physical back-up for the transaction. In the case of CC, it runs on the basis of mutual acceptance and trust.

RBI becomes ineffective

More importantly, monetary policy loses meaning once a CC comes into the frame. Economies run on the basis of a currency which serves as a medium of exchange. Hence the rupee is used for making transactions and the RBI through various measures attempts to control the supply of the same. This ensures macroeconomic stability. Hence if there is excess demand due to credit creation, then the RBI’s interest rate or open market operations can influence the overall demand conditions. Once a CC comes in, demand is unhinged from monetary conditions as long as CC is accepted by both the parties. Hence, it would make monetary policy weak and as a corollary, government policies would become ineffective as CC gains importance.

It may be recollected that in the 1980s there was an acute shortage of coins of low denomination in Mumbai. This had led to the use of BEST (Mumbai’s bus transport run by the state) tickets as change. Hence, tickets for 10 (it did exist at that time!), 25, 50 paise and ₹1 were used as a mode of transaction even in restaurants. This did raise considerable controversy. The RBI was unhappy with this substitute as it violated the principle of the central bank being the only authority to issue currency.

Today, regulation ensures that there are limits to which one has access to foreign exchange and all transactions carried out by the people have an audit trail. Using CC will be destabilising. Further, with the government working towards extracting money from Swiss accounts, creating another window for CC would be self-defeating.

Curiously, the exchange rates that can be viewed for the bitcoin roughly translate to the existing exchange rates prevalent in the market with a deviation of (+) (-)2.5 per cent (such as $3800 to ₹2.5 lakh). If this were so, then given that the government and RBI have put structures in place to foster electronic mode of transactions, for the country it would make such a currency irrelevant. If one can deal in CC, then the same could be done through the existing electronic mode.

Hence on all counts, allowing CC cannot be justified. It should not be considered, and should also be made illegal. If one wants ease of electronic payments, this has been accomplished by the government/RBI. Allowing such a currency will generate black money. And most importantly, the central bank will lose its control over the medium of exchange in the country as well as monetary policy formulation, which is the clinching argument against allowing cryptocurrency.

Reorg: How to get it right; a book describing how to execute plans in company: Financial Express Oct 8, 2017

The word ‘reorganisation’ in any company means different things for various people. If you are a part of the management, it’s exciting because one can make things happen. If you are the consultant, which is a necessary component of this transformation process these days, then it’s good business and income, as the contracts can run into large sums, depending on the status of the company. And if you are just another employee, you are scared, becasue  reorganisation affects the entire staff, giving rise to uncertainty and discomfort. If you are lucky not to be asked to leave as part of the reorganisation process, your job profile can change for better or worse, depending on your luck. In short, any kind of reorganisation is a deviation from equilibrium.

Stephen Heidari-Robinson and Suzanne Heywood, who have worked as consultants on this aspect with various companies, have inside knowledge on how such schemes are drawn up and implemented and, hence, understand the nuances and emotions involved. In their book Reorg, they point out that the clan of consultants is the object of scorn of all employees, as it’s believed that they are responsible for job losses or relocation, which, in a way, is true. In fact, reducing the flab can always be a takeaway from the reorganisation process.

Based on their experiences, the authors draw up a template that should be followed in five steps to have successful reorganisations. Their view is that most of these attempts fail because managements are not clear about what they want and are often in a hurry. The authors believe that when any such action is being planned, the most important part is communication and this has to be with all stakeholders, starting from employees to customers, suppliers, regulators and so on to ensure that everyone is in the loop. While often one looks just at employees, any change in the structure also affects the supply chain players involved with the company.

Let us look at the five steps. The first move that has to be made is that the management has to construct the reorg’s (the new structure’s) profit and loss account, so that you are sure what it’s expected to look at after it’s done. The amounts have to be quantified and a timeline provided for achieving it. Often, the benefits aren’t calculated nor are the HR costs, as several people are involved, which includes ‘management time’. Therefore, a cost-benefit analysis is absolutely necessary before embarking on implementation.

The second step is to understand the present strengths and weaknesses. Often, one focuses only on weaknesses and not the strengths, which should be avoided. Also, one has to talk to the employees and not just the leaders to get a broader view, as the diverse set of views obtained will avoid the pitfalls of relying on hearsay. This sounds quite commonsensical, but is not practised by most companies that go in for such transformations.

Third, the management needs to consider various options that are available in the areas of people, processes and structures. This has to be done after the first two steps are completed and involves dealing with a large number of people and mindsets, systems, businesses and

management processes and, above all, defining new reporting lines, job profiles and governance. Tackling leadership is important and difficult because there are tradeoffs involved that are hard to resolve, given the complexity.

Fourth, the authors say the ‘plumbing and wiring’ should be right, which essentially involves the ‘nuts and bolts’. Detailed plans are needed, including the defined future roles of every member of the company, as well as communication with all stakeholders. The major pitfall is that we could end up confusing people or trying to change everything. One must remember that leaders in old positions would resist change and, hence, should be involved in this transformation.

The last step is self-explanatory, where the ‘reorg’ is launched and then the company meanders along the way before correcting the course when required.

The template sounds very good and logical to attempt, but very often these steps are missed. While the book tells one what to do, often to get acceptance from the board, it’s almost imperative to hire a management consultant. The reviewer of this book has been involved in several such exercises in the companies he has worked with and rarely have companies been able to plan and implement well. There is a distinct loss of commitment along the way or one may need to course-correct more often, as the planning may not have been right or the outcomes different from what was expected. This is one reason why most of them fail or don’t succeed.

Reorganisations invariably end up upsetting the morale of the employees, which can be a major disturbance for any company. This happens more so when leaders are egotistic and refuse to look at the human aspect and tend to carry on as if it didn’t matter. And to cover up this

failing, such reorganisations are attempted with greater frequency, which makes one forget the earlier failed plans. Also, it has been observed that every time a new leader takes over and comes from outside the organisation, a reorg is almost mandatory, as it’s believed that this is the best way to make an impact, which is quite unfortunate.

How valuable is the CEO in monetary terms? The answer will make you blink: Financial Express Oct 5, 2017

The CEO is always considered to be the most important person in an organisation as this position is responsible to the Board of Directors, and hence shareholders, for delivering superior results. In a way, the CEO owns the balance sheet and profit and loss of the company as, at the end of the day, the responsibility for performance stops here. It is not surprising that the CEO would always be receiving the highest remuneration in any organisation. However, the compensation will vary across industries and companies depending on their size, scale and performance. Is it possible to gauge how valued CEOs are on a relative scale across companies and industries?

of late, it is mandatory for all companies to disclose the multiple of CEO compensation to the median salary in the company. This is a useful indicator, as absolute compensation would not reflect the relative importance within the organisation even if the number is high. The IT sector, for example, would tend to have higher compensations across the grades relative to manufacturing where there is a distinction between blue collar and white collar workers. By juxtaposing the same with the median value, one can get a sense of how valued is the CEO relative to the rest in the organisation.

The ideal set of firms to look at would be the Sensex companies, as they represent the top firms in terms of market capitalisation. The annual reports of these 30 companies have been used for making this comparison. Of these companies, public sector companies SBI, NTPC, Coal India, Power Grid Corporation, ONGC and Maruti Suzuki do not provide this information, while the same was not available for Reliance Industries.

The balance 23 companies can be broadly classified into the following sectors—banking and finance, IT, metals and engineering, automobiles, infra, consumer products, and pharmaceuticals for the sake of comparison. The ratios mentioned here are for FY17, and data on percentage growth in the median salary as well as average increase in non-key managerial salary is provided to give an idea on how salaries have behaved this year. In fact, these two indicators would also show the basis on which the average salary moves compared with the median if the top officials are excluded. The accompanying table provides some interesting insights.

The first observation is that there is no clear norm of this multiple and ranges from around 47 in Kotak Bank to above 1,000 for L&T and Lupin. Second, there does not appear to be any relation of the multiple to the ownership pattern and hence is more dependent on the sector and individual performance of the company. At times, it is felt that owner-driven companies would tend to have higher or lower multiples, but this is not validated here. Third, within the broad sectors used here, there is considerable variation. For instance, in banking (excluding finance), two have a multiple of less than 100, while the other two are above this mark. The IT sector also displays variation, with TCS being almost double of Wipro. In case of automobiles, the highest multiple could go up to almost seven times the lowest multiple, and for consumer-oriented industries it is about four. Hence, various companies have different ways of providing such remuneration, and given that these companies are the crème de la crème, there is no uniform pattern.

The second bit of information is also interesting and relates to the increase in median salary for the company. The banking and finance sector has an almost uniform increase of 10-12%, while for IT it is more company-specific. In fact, in almost all the other broad sectors, there is variation across companies, with Asian Paints (16%) and Adani Ports (14.1%) having the best growth rate, while Wipro and M&M have the lowest percentage increase. The two other companies with double-digit growth in median pay were Tata Steel and Lupin. Hence, as a pattern it looks like that the financial sector tends to give better salary increases at this level.

Third, this pattern is also replicated when the average percentage increase in the non-managerial staff is concerned, i.e. average of all except those who are key managerial personnel. Banks have maintained the range of 10-12% for FY17, which looks more even relative to the median. Interestingly, for IT, the percentage increase is higher for this category relative to the median increase, while for metals and engineering it is lower. This may be explained by the fact that there would be several blue collared workers in this sector who are valued lower than the median level which would have more of the white collar personnel. In case of IT, all would tend to be with technical qualifications and this distinction would get blurred. In case of auto, it appears to be fairly balanced, while for consumer goods, infra and pharma, the median increase tends to be lower than the general increase.

Data on these 23 companies show that corporates place different values for their CEOs and they do command a higher pay relative to the median, which could be substantially different from other companies and industries. But with the median multiple of 233, it is definitely the case of CEOs commanding a lot of value. Also, the sector does not really matter and there is no clear pattern and appears to be company-specific. There is no clear view on the increase provided at the median level compared with the general level, though most would have a higher rate for staff in the pecking order. This pattern may be assumed to hold for other companies too.