California's dysfunctional budget

If California was an independent country, it would be the seventh largest economy in the world. With a Gross State product of $1.5 trillion, its a larger economy than India. Its head of state would certainly attend the G7 and G20 summits. For an economy of its size, the state budget is so dysfunctional, that it beggars belief. I would even trade India's budget, which I had commented upon here and here, for something as dysfunctional as California.

Firstly the numbers. Like all governments, California also follows a single entry system of accounting - there is no balance sheet and revenue and capital is mixed up. This year, they just passed the budget two days ago after the annual spectacle of brinkmanship. As presented originally, it has a $42 bn hole - expenditure higher than revenue by $42 bn. The approx numbers were $101bn in revenue and $ 143 billion in expenditure. Pause for a moment and consider this shortfall. The shortfall is higher than the entire expenditure of every other state in the US bar New York. The shortfall is higher than the GDP of 100 countries in the world. To the credit of the lawmakers, they at least tried to part plug this hole. They raised taxes by $ 15bn and cut expenses by $ 13 bn. There is still a huge gap.

Why did this come to this ?

On the revenue side, California depends largely on personal income tax and corporation tax for its revenues. As the financial crisis bit in 2008, revenues have plummeted.

On the expenditure side, California is an example of democracy sometimes gone wild. Citizen initiatives that are directly voted on by the electorate can decide what is to be spent, without any reference to the budget situation. Consider the following

• Proposition 98 in 1988, perhaps the most famous of the initiatives, has locked $30 bn for education. Nobody can touch that even if theoretically revenues fall below 30bn.
• Proposition 10 in 1988 has locked $ 522 m for childhood development
• Proposition 71 earmarks $ 3 bn over 10 years for stem cell research
• Proposition 12 of 2008 mandates a cost of $ 1.8 bn over 30 years to fund veterans to purchase farms and houses
• Proposition 1A of 2008 mandates $10bn in bonds to cover a high speed rail link mainly from San Francisco to Los Angeles (what has the world come to - a Los Angelite to travel by train instead of a car ?)

Each is a separate proposition where a voter says yes or no. What do you expect - you can't seriously vote no for veteran's welfare. Who's going to foot the bill is not the voter's problem.

One of the most famous Propositions is Proposition 13 in 1978 whereby property taxes are mandated to be no more than 1% of assessable value which cannot be increased by more than the rate of inflation (doesn't matter whether there is a property boom or not).

Californians should not allow this to go on. No "single entry" Proposition should be passed - if there is a proposition to spend more, included in it must be where the money will come from (not from borrowings). If there is a tax limiting proposition, included in it must be what expenditure will be cut.

And on the governance side, California requires that the budget is passed by a two thirds majority of the Legislature. Neither the Republicans nor the Democrats will have a two thirds majority. California now has a Republican governor and a Democrat majority in the legislature. Just in case nobody has noticed, bi partisanship has gone out of fashion . Hence the annual spectacle of brinkmanship - no compromise, governor threatens to sack all employees, some last minute compromise after sleepless nights is reached and the cycle starts all over again.

But its not for nothing, that California has some of the most dynamic people in he world. In 2008, they did pass Proposition 58, requiring a balanced budget - its why in the latest round taxes did go up and expenditure did get cut down. If not for this, I don't think there would have been any cuts at all.

In the Nov 2008 round of propositions, about $ 227m was spent on campaigns for the 12 Propositions that were on the ballot. I suggest to the Californians that they consider scrapping the citizen initiatives and put this money into the budget pot. That might help !

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E Mail Addiction

Try this today. Count how many times you look at your e mail , either on your PC or on your Blackberry. If you've looked into your mailbox more than at 15 different times, you're addicted !!

E Mail addiction is an under recognised problem. Yes E Mail has been an integral part of life for some time. But it has crept in slowly and virtually taken over the life of the addicts. There was indeed a time before E Mail. In a company that I worked for, the week closed on a Thursday. Nobody could really tell me why such an odd day was chosen. When I read the history of the company, I gathered that in the good old days, weekly reports had to be sent by ship to the headquarters in London. The weekly steamer sailed on a Tuesday or a Wednesday, I forget what. So in order to catch the ship, the week had to be closed on a Thursday for the sales to be collated and mailed from the field on a Friday and then the weekly report be ready in time before the ship sailed. Yes, there was a time before E Mails.

Back to E Mail addiction. You see symptoms of it everywhere.

Walk into any office and look around. You'll probably see rows of people peering into their computers. Granted that some of them may be playing games or browsing the Net. But a majority of them would be busily occupied with Microsoft Outlook. Clear evidence that the most often done activity in any company is reading and answering E Mail. Is that what a company is for ?

Take any meeting. More than 50% of the attendees are typing away on the laptop or on their Blackberry. Its impossible to hold a sensible meeting these days; people are busy E Mailing. Its amazing how people who are incredibly polite and sensitive in real life, turn into rude E Mail monsters in a meeting ; why come to the meeting and be rude to the meeting host, if all you are going to do is to watch your Inbox. Their excuse is that they are "multitasking", which I completely debunk, as its just jargon to say they are addicted to E Mail. For some tips on how to run "Topless Meetings" click here.

Worse are presentations to be made to the Board or Executive Committee or some senior executive. They are all E Mailing away and scarcely listening to you. Why travel 15 hours (in first class) to visit a country and review the business, if most of the time you are E Mailing ? The worst situation I have had was when I had to present to this guy who didn't listen to one word of what I was saying and was openly punching away at his Blackberry. I had half a mind to slip in a sentence in my presentation that he was a dumb idiot and I would have gotten away with it because he wasn't listening !

What is it about E mails that make them so addictive. Almost none of us can resist the sight of an unopened E Mail. Why ? There's almost nothing in business that's so incredibly urgent that it has to be seen in the next 20 seconds. If there was something really that urgent, we'll get a call. And yet we are hopelessly addicted. I think its got to do with a primordial instinct of wanting to know everything. And yet this seems to have been accentuated when mail became electronic. I have worked in the medieval ages before E Mail. The pile of unopened correspondence in the In Tray was a common business occurrence. Very few people were addicted to the In Tray !

The addiction is at the very least a threat to your effectiveness as a manager. At worst it can take over your life. I know of a manager who set alarms to wake up three times in the night to check on his Blackberry !

A detox programme for E Mail addiction would take the form of firstly disconnecting your Blackberry (horror of horrors). And then setting up a discipline that you'll open your inbox on the PC only once in an hour and deal with the mails that are pending in one go, after which you'll shut your mailbox and do something else. Use the time to uninterruptedly do your work for which you are paid for - set strategy, implement strategy, talk to people, read, analyse, whatever. In an 18 hour day when you are usually awake, don't open the mailbox more than 15 times. Join Emailaholics Anonymous.

A google search on E Mail addiction yields 18.2 million responses. There's lots of stuff out there on the dangers and how to kick the habit.

In the prehistoric days , when there was a whole generation of managers ,uncomfortable with E Mail, there was a venerable gentleman I knew, who was terrified of getting on to the computer. His routine was that his secretary would print all his emails, which he would take home in the evening. He would then scribble a response on them which his secretary would then type out and send as e mails the next morning. As young computer savvy kids, we used to mock at and deride this old fossil. Now I am not so sure if he was not the wiser man !

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Bank Nationalisation

The US is struggling to come to grips with the unpleasant choice of having to nationalise some of its banks. Citicorp looks set to become the first major bank in the US to become part nationalised, with the government likely to take up a 40% stake. Frannie Mae and Freddie Mac, while not being banks, are in effect nationalised, as is AIG. In the UK, Northern Rock was the first to be taken over and HBOS and RBS are already majority owned, with every likelihood of becoming fully government owned.

Nationalisation is a dirty word in the more capitalist of economies. Through bitter experience, these countries have realised that government ownership of business does not work. Especially in the US, it would be political suicide to nationalise. And yet what can governments do in the crisis situation that we face today. It has doled out a large sum of money to Bank of America and Citibank just recently and now the market value of both these banks is lower than the amount the government gave each of them. How long can it keep shovelling money in ? Even Alan Greenspan , the doyen of laissez faire capitalism, now favours "temporary nationalisation" .

The prevailing view amongst most free market experts is that governments will have to nationalise the banks, restructure them by creating a "bad bank" to isolate the worthless assets, get credit moving again and then quickly get out once greater normalcy comes to markets. Nobody wants government involvement once the good times come again.

I am a die hard free markets man. To me, nationalisation, is a painful word. And yet, I think that the above prescription from the free market votaries is a bit rich, especially the "get out when the good times come" part.

Governments are, and will be, involved in the financial services industry for two reasons. One is that unlike any other industry, this industry carries a systemic risk which can bring down the whole economy, like what we are witnessing today. The second is that implicitly, there is a sovereign guarantee on bank deposits - no government can watch a run on a major bank and do nothing. If the government is therefore a guarantor of last resort, it is completely hypocritical for the industry to then argue that governments leave them alone, except when there is a crisis.

My humble two penny contribution to the debate. Governments have no option but to take part, or complete, ownership of the troubled banks. It is distasteful, but there does not appear to be any other alternative. Even the US Republicans are slowly coming around to this view. Post restructuring, at the right time in the future, governments divest their shareholding, making a profit for the tax payer. Its absolutely imperative that the existing shareholders of the banks lose their shirts, not the government. But even after divestment, governments retain a golden share, which will rest with an independent regulator, and not with the politicians. This golden share will ensure that extremely stringent regulations are brought to ensure that the probability of recent events recurring again are very remote.

Regulations have to make financials services a boring business. Capital adequacy ratios have to be massively increased and set in stone - unchangeable whatever be the circumstances. The nature of activities each type of financial institution can undertake, has to be severely limited. Anti trust measures should ensure that no institution becomes so big that "it cannot be allowed to fail". Very severe restrictions need to be placed on the types of instruments that can be created and traded - no more instruments of mass destruction. Perhaps an additional profit tax to create a fund for the day when another disaster will surely come - the history of the world is littered with painful bubbles. Innovation will, alas, be severely curtailed. Profitability of these institutions will become limited. Liquidity might become restricted as speculation, which provides the liquidity, will diminish if the opportunities for making extraordinary money are not there. Maybe every economic opportunity may not get the funding it deserves. But so be it.

Government should not run businesses, for sure. But they must be the schoolmaster, with cane in hand and corporal punishment freely allowed.

Financial services should become an utility industry. Dull and boring maybe. The best brains may not want to work there. Perhaps that might be to the good. We'll know we are safe when the banker is mentioned in the same breath as a train spotter.

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It ain't the same anymore

Accountants are, by nature, cautious and tradition bound. You wouldn't expect to see accounting in the forefront of change. And yet sweeping changes in accounting have happened in the 20 odd years that I have been acquainted with this profession. Here is a trip down memory lane.

When I first started working as an accountant in the early eighties, computers had still not come into common use. The more common contraption was something called a comptometer (with various clinks and bells), which anybody below the age of 40 would not have heard of. Calculators were there, but you needed a capital budget to buy one with detailed justification of cost benefit. Ledgers were manual , in loose leaf binders. Sounds prehistoric ? Read on.

Everything was manual. There was a role of a ledger keeper, whose only job was to post entries into the ledger, using double sided carbon - the proof sheet being a method to ensure that at the end of each day, at least the total of debits and total of credits matched. The ledger keeper could not go home until the proof sheet tallied.

There was no such thing as monthly or quarterly closing. Closing was only an annual activity. It was a major event - it took some 15 days to close the books of a factory or a branch and another 15 days to consolidate the accounts of all the units inside a country - god knows how long it took to add up globally. All other activity came to a halt in January - no payments, no routine transactions. The ledger keeper was a key man - he would post furiously during this period. The comptist was another key person. This was the expert on the comptometer who added up the ledger sheets. Both of them knew that this was their moment - so demands for higher wages, and threats to go on strike were usual (you could almost predict when exactly their tummies would begin to ache and when they would decide to go home in the middle of the day). Cosying up to these guys was an important part of the accountant's job. And the first time the trial balance was struck, it would not tally ! So every hand was called, to total and retotal the sheets until the trial balance tallied. I still remember the year when it stubbornly refused to tally for 3 full days and nights of non stop totalling and when it finally did, we all let out a war cry, which they say frightened all the cats and dogs in the town to run and take cover.

Closing was virtually over when the trial balance tallied - whether the numbers were all fully right and made sense was secondary ! As soon as the trial balance tallied, an army of typists would type out the trial balance in the forms that were mandated and a nice packet weighing in at 5 kg would be created. There was of course no email or internet, so somebody would be found to catch a plane, carry the accounting returns to headquarters, while everybody else left for home to sleep flat out for 24 hours.

And then would come the auditors, including one worthy who was their comptist (with his own "independent"comptometer), who would retotal all the ledger cards. Green pens would come out in their dozens for the auditors to tick - stories abound of how you could get the auditors to put their green ticks on any two sheets of paper as long as they carried the same numbers.

When you decided to qualify to becoming an accountant, you had to serve as an articled clerk (read bonded labour) in a Chartered Accounting firm. And a geriatric "senior" would start training you by making you add up each page in the telephone directory mentally for three months, to sharpen your adding skills.

All payments, were of course, made by cheques. Cheques would be typewritten by a dedicated typist using the old typewriter that made a racket.

Management accounting was the art of mastering the green sheet - for some reason, ruled sheets with columns came in green color in India in those days. The tool of choice was the pencil - sharpening 25 pencils was the first thing you did in the morning. The expert, who consolidated management reports was a sight to see - he would join together 2 or 3 desks and stick together some 10 of the dreaded green sheets to create a super sized sheet with 342 rows and 74 columns. Various underlings would then write numbers into the correct cell as he called them out. He would then run from one end of the sheet to the other, adding numbers along the way with lightning speed. His total was then the company's sales or profits or whatever else they were reporting !

It was a different world in those days. In a short span of 20 years, the accountant has changed beyond recognition. If somebody who was an accountant in the late seventies, was suddenly plucked into today's world, he would probably die of shock.

How did the boring conservative accountant change this way,. Especially as other functions have remained more or less the same (let me bait you guys) ? The sales guys still explains why he cannot sell because he does not have the right stocks. The marketing guy still can't quote a credible market share number and still makes lousy ads. The production guy still makes the product that is not needed and won't make the product that is. And the HR lady still can't get the increment letters or the payroll out in time.

Raise a glass to the super sexy accountant !!

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Is all this business travel really necessary ?

(photo courtesy Businessweek)

Every business executive these days travels like crazy. In the "flat" world of today, its usually long distances across countries. Is all this really necessary ?

I have myself been guilty of wild travel - one of the reasons I took my sabbatical. My badge of shame includes a gold card from Star Alliance, gold card from Oneworld alliance a Platinum card from Jet Airways, and assorted colour cards for various other independent airlines , all of which I am now delighted to throw into the waste bin. I am much experienced in this area !

Most of the travel is a waste. Any manager, who is honest with himself, will admit it.

The worst reason to travel is a conference. The ones where you have a large group of people listening to somebody lecturing. Two days of absolute torture - the fact that nobody attends every session of the conference and listens intently and fully, is enough to justify that the value of this is questionable. People fight with each other to get invited to conferences and be "seen" and pout if they aren't, for sometimes this is a badge of importance - why not just publish this list of importance and forget the conference ! The only justification for a conference is the socialising or networking that happens during the sidelines. There are now equally effective means of networking, that does not require physical presence - something that I justify lower down.

The largest reason for travel is an internal company meeting. This, in my book, ranks only a shade below a conference in the list of worst reasons to travel. The meeting is usually between people whom you know reasonably well and are your colleagues. Why do you need to see them and smell their breath to "meet". Witness, in any meeting, the number of people who are ducking out to take calls, the number of people who are fingering their Blackberries, the number of people who are punching away at their laptops ..... I rest my case. Again "networking" and "personal touch" is often touted as a reason for physical meetings, usually to justify the booze and the dinner in the evening. There are now equally effective ways to meet, without resorting to physical travel.

Another important reason to travel is meeting the customer. Here there is no alternative - this is one of the most important activities in any business. Physical presence is necessary. But I am often amazed at how many people tag along to "meet the customer". There is rarely one on one meetings - a retinue goes. Usually only one or two people are necessary. Instead a battalion travels. When the customer is met, two people talk 95% of the time and the others smile and take notes. My favourite anecdote is when 74 people (me included) went to meet the customer.

A fourth reason , especially among senior executives and directors, is to visit the market/country/company. And what do they do - they go and sit in a meeting room and worthies troop in one by one, to make presentations. Airport, hotel, office meeting room, hotel, airport, back. Do you really have to go in flesh and blood. Again the old argument - networking, getting to meet the people over dinner - amazing how booze is always the reason to go !

If you cut out all of the above, 95% of business travel is unnecessary. But what is the alternative. My solution is simple - embrace the internet.

Most executives have not appreciated the internet and the changes it has brought to life. Many embrace it in their personal lives, and yet, it has made very little inroads into business life. And for the record I exclude E Mail from what I mean.

Lets tackle networking and personal contact - which is often the reason touted for travel. The internet has revolutionised networking beyond imagination. And yet we rarely use it in business. Just think of the very close networks many have built on line in personal life. We have reestablished contacts with our classmates from school so effectively. With My Space we have networked with complete strangers and made new and often close friends whom we may never see in person. With Facebook, we have kept in touch with all our friends even more effectively than if we could visit them once a year. Tweeting is now another social networking phenomenon. Through blogs, we express ourselves much better than if we were only to engage in a conversation. As we all know, sometimes, we are freer and more open in communicating if we don't see the person face to face. And yet in the business world, none of the above phenomenon have really found their place. A sterile CEO blog is all that seems to happen. If you want to really network, set aside 3 hours (no calls, no fiddling with the blackberry), invite as many people as you want to a web chat and you'll find you have networked far better than when you went in person and got drunk.

Web conferencing must now replace meetings and conferences completely. Just because the old man (read CEO) is uncomfortable with this technology is no reason not to adopt it.

Why do managers still travel like this. Part of it is discomfort with technology - they are still not used to it and feel uncomfortable with it. This amazes me because many of them embrace it wholeheartedly in personal life. Part of it is the bragging - how can you be a manager of consequence if you can't complain about the travelling in a party. Part of it is wanting to be "seen" at events. Part of it is that you are scared of missing the action. Maybe a little bit of all of this.

Think of what you are doing to your body. The pounding it takes from the stress, the lack of sleep, the untimely and bad food. Think of what it does to your schedule and routine - your workouts, your time at the gym, your time at the sports field back home. Think of your family. Everybody knows that they miss their children's growing years and yet they do this to themselves.

Managers know all this and yet travelling has only become worse. They need a "business" reason to stop; so let me try this on you. Every time you travel, you are adding big time to carbon emissions. Just paying a carbon tax cannot absolve you of this sin. Your company is committed to being "green". You are producing a report of how your company is acutely aware of the climate change issue and how it is acting decisively. Add a line to the report. Stop travelling and declare yourself green.

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Why does anybody borrow on a credit card ?

I got a lovely comment from Aashish Sharma yesterday, complimenting my ranting. Got me very motivated to make another rant, instead of writing about the gloomy Indian budget.

Why does anybody borrow on a credit card ? This is a naive question as millions of people do borrow on a credit card. But why ? And what are the ethics of the credit card industry ?

Of course, credit cards are incredibly convenient. Without them life would be very difficult in today's world. I remember a time, not so long ago, when Indians could not get an international credit card - so when an Indian travelled abroad he had to pay cash. I remember whenever I had to check into a hotel overseas, a strange look that said "who is this strange barbarian who does not even have a credit card ?"

Sure, credit cards bring fabulous convenience. But why credit cards ? Why not just debit cards ?

In practice, I use credit cards as debit cards. Apparently a majority of credit card users do so that way. They pay off their credit card bills exactly on the due dates. But pure debit cards are inconvenient to use (for eg on line) and are not as widely accepted. Hence I use a credit card but have set up arrangements with my bank that the bill is automatically debited to my bank account on the due date. So what I really need is a universally accepted debit card, but since that is not popular, I have converted the credit card into a debit card for all practical purposes.

But therein lies the rub. I get free credit for 20 days or so. This carries no cost. I don't want this credit, but I have no choice. And the card issuers have to make money; they are hardly in this for charity. So what do they do ? They charge the idiots who don't repay on the due date and therefore borrow on their card, usurious interest rates. 20%+interest rates - even Shylock would take his hat off to that. They camouflage it in shamelessly misleading claims - Only 2% interest with a small asterisk which in a bottom footnote in font size of 2 is explained as 24% APR, as if any sane person can understand what an APR is.

The credit card industry is the only strange animal that hates people who pay back their dues and loves people who don't. This itself tells you about the ethics of this business.

Only an absolute fool would borrow on a credit card. But there are many people who deliberately, or inadvertently, are fools. They buy some nice goodie, on an impulse, using a credit card. When payment time comes, they don't have the money, for they have bought something they can't pay for. The lovely credit card company tells them, they need to pay only 10% - what wonderful chaps they are ! And so the spiral starts.

What sort of stuff would you buy on a credit card anyway that pulls you into debt ? If you buy a house, you can get a housing loan at sensible rates of interest. If you buy a car you can get financing sensibly. Ditto for most goods that you really need and aspire for. Its the vanity and the luxury for which you can't get sensible finance. Do you really want to pay 24% interest to own this rubbish. I cannot think of a single product (a house included) that can justify a 24% interest.

I hold credit card companies on roughly the same status as drug dealers. They aggressively market the stuff to people who should not be having one. They put out blatantly false and misleading ads. Besides the fraudulent positioning of the interest rate, they dangle promises of fantastic wealth and luxury before a dewy eyed vulnerable guy. They promise "instant" cards - all you to have to show is that you are a living human being. They pester you on the phone with unwanted sales calls. They even send you a card in the post without your asking for it (the number of times this has happened to me is not funny). They stand outside my office building in colourful booths with nice pamphlets and pretty young things, ready to ensnare some unwitting soul and lead him by the hand into doom. They make it easy to have the first fix. they even give you the second and third fixes before you have had to pay for the first one. And then when you are truly hooked, they come at you with knives and shotguns. The only difference I can see with a drug dealer is that he stands in the street corner, while this lot stands in the middle of the street.

Yeah, we live in a free world. People can do what they want and must take responsibility for it. Oh yeah - then why don't we legalise marijuana, cocaine, ecstasy ...

I unfortunately know of too many people who have been ruined by this drug. I know of a guy who 's credit card company had started to directly recover from his salary and his monthly take home income had come to Rs 400 ($ 10). I know of a guy who became bankrupt after 15 years of working. I know of a guy who was beaten by an over zealous recovery company while his scooter was being repossessed. I know of a girl who's family had to sell the mangalasutra (in Indian tradition this is the symbol of a married lady and something you would never never sell) to keep up with the monthly minimum payment on the card. I could go on and on.

Hopefully technology changes will render this industry obsolete. Payments through mobile phones will become more and more popular. Other online instruments will come into being. If the present financial crisis has any positive fallout, it might be that easy credit might not be there anymore.

When this industry fades into oblivion, If I am around, I will write a long obituary. Unfortunately, I don't think this will permanently go away, just as drugs will never go away. Meanwhile I will contend myself with ranting.

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Even the rope is gone

A few days ago I posted twice on the Indian budget, ahead of the next year's budget that was presented a couple of days ago. Click here and here for these posts.

I argued that making a massive loss and therefore simply printing more money (officially called debt) was just unsustainable. Little did I realise that the Budget for 2008-09, on which I based my P&L account was stunningly way off the mark.

The Finance Minister's speech was 7500 words long. 7100 of them was blah blah. He patted himself on the back so often, that I am surprised he's still walking straight. In 400 words (I counted ), he threw a bomb.

He said expenditure would actually be 20% more than the budget. And revenues would be 8% lower. So the "loss" would be 437% higher. No problem - he would just print more notes - increase debt in politically correct terms.

And where did he spend all this money. The biggest spending was in fertiliser subsidy where he spent more than 100%. He spent more on food subsidy. He wrote off loans to "farmers" - standard tactics to buy votes in India.

This is after doing a virtual accounting fraud, by directly issuing bonds to oil companies (for petroleum subsidy) and believe it or not, even more bonds to fertiliser companies, and thereby not showing this as expenditure at all . In reality expenditure is over budget by 40%. Even Satyam Computers pales into insignificance in comparison to this accounting sleight of hand.

I am absolutely certain that these "Revised estimates" for 2008-09 are bunkum. When the actuals are totalled many months later, you'll see buried in the fine print, expenditure having overshot by another 20%. Oh sorry - actually that may not happen. Since government operates on a single entry cash accounting system; simply delay payments and push it to next year.

Elections to the parliament are coming in 3 months. If we are sensible, we should demand a law preventing government from borrowing and forcing balancing of budgets. But we know what we'll get - free colour TV, loan waivers, free power to farmers and god knows what more innovations.

The Indian rope trick involved a magician throwing a rope up, which would stand erect and climbing up the rope and disappearing. I think we should revise this trick to no rope, no magician, no nothing, just Pooh !

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Corporate Social Responsibility - What companies should do

Yesterday, I posted on what I believe companies should NOT do in the area of corporate social responsibility. I am a strong believer that companies must be very socially responsible. Today I write on what companies should do.

In my opinion, what companies can do, can be divided into three sequential levels. At the basic level, companies should first do what they are supposed to do - operate efficiently and reward all their stakeholders; shareholders, employees and customers. A company must follow the law of the land, in letter and spirit. It must not bend the law - its not OK to give bribes (called by whatever name and political donations and lobbying, come dangerously close to this), just because others are doing it. It must not be economical with the truth in what it says and reports - in accounting, in making product claims, etc. It must pay its taxes as per the law. Tax avoidance is fine; tax evasion is not. It should not take risks with safety - product safety and employee safety. These are the basics. They are black and white - there are no shades of gray. If a company does all this very well, I would term it being "adequately socially responsible". Unfortunately, in my view, very few companies would pass this test in its entirety. And therein lies the problem. Not doing well enough on the basics and instead doing an esoteric charitable act is actually being irresponsible, and falls into the category of washing away the sins, in my list of motives posted yesterday.

Once the basic level is assured, and only when the basic level is assured, a company could proceed to the intermediate level. Initiatives here ought to be linked to the business of the company in some manner. Only then would it be sustainable and effective.

A company could work with the community with whom its operates. This could be geographic - a company might wish to build infrastructure or invest in education in the locality it operates. This binds it to its employees and its neighbours. The Tata Group in Jamshedpur (actually called Tatanagar) is one example. Many American corporations had their roots in small towns, which were actually company towns in those days. Or it could be customer centric - if you are a medical company, you may want to be involved in disease prevention or health education activities. Or it could even be shareholder centric - a financial services company might want to be involved in educating on investing. In any form, this activity must be related to the business the company is in.

A second initiative is employee volunteering. Employees volunteer for activities they choose and the company assists in providing time off or in matching contributions they raise or in providing infrastructure. Activities could be anything the employees choose. Employees increasingly seek meaning in what they do and companies that encourage them to do more than just work on the job, become employers of choice. For a good post on volunteering by Chris Jarvis, click here.

A third initiative is helping disadvantaged sections of the society where they operate (minorities, physically challenged, whatever) to be educated, become skilled and get jobs. Also in this area is how companies handle layoffs, covered in one of my earlier posts - going beyond what is required legally and helping the affected employees to find employment. Jobs and job creation are one of the most socially responsible activities that companies can do and which is directly related to business.

The "advanced" level, in my view, would be companies that have weaved a social responsibility theme into their charter ; that's part of what they want to do. Only shareholders who are interested in the theme that this company propagates, become shareholders. Example of such companies that immediately come to mind are The Body Shop and Ben & Jerry. But its also true that such companies do not survive for very long - Body Shop got taken over by L'Oreal and Ben & Jerry by Unilever and despite claims by their new owners of protection of their social cause, this has inevitably got diluted. Maybe these were stepping stones. I believe there would come a time when such companies would flourish and thrive, independently.

More power to such companies. They would flourish if we as consumers prefer their products to others, other things being equal. Otherwise they will fail. As in all things in business, corporate social responsibility will succeed or fail, with the consumer.

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Corporate Social Responsibility - What companies should NOT do

A much researched and written about topic, where extreme views tend to sway with the season. My friend and ex colleague, Sandip Ghose wrote nicely about it a few days ago in his blog. I am posting here, a personal perspective, rather than a research paper !

That it is fundamental today for any business, large or small, is more or less a given. Motives differ. For some it’s the warm feeling of doing “good”. For some it’s a washing away of sins. For some it’s a risk avoidance measure, lest they be shot at by pressure groups. For some , its just the fancy thing to do – it seems to be a catching trend, so lets do it. For others its simply the way they want to do business. Whatever be the motive, it is here to stay and has to be given the most serious consideration just like any other part of the business.

The Economist argues that much of much of the initiatives in this area are often misguided and I agree. So my perspective begins with what a company should NOT do.

It should not simply donate money. The company’s money is its shareholder’s. If they want to make a donation, give them the money and let them donate. Its not the company’s business to donate, whatever be the cause, for its not its money. This is the Bill Gates approach – he donates; not Microsoft (at least not in any substantial way).

It should not undertake activity that is not somehow related to its business. Fighting AIDS in Africa is very laudable, but it has nothing to do with making and selling chewing gum in Japan. Activities which are completely unrelated are not sustainable.

It should not seek to impose a culture or expectations on the world – for example western companies seeking to influence matters such as free speech, right to unionisation, religious freedom or the Tibetan cause in China is completely unacceptable. Its none of their business. Equally enforcing work practices from one part of the world to everywhere else is inappropriate. Labour rights is fine, but do we want the French 35 hour working week everywhere ? What about the ease or difficulty of laying off people ? There cannot be global standards on these without reference to the local social, legal and practical considerations.

It should not embark upon initiatives without a full understanding of what its getting into. A classic case is bio fuels in the automobile industry. This seemed to be a good thing. Companies were pushed into promoting bio fuel usage. And what happened last year – price of food shot up and, at least, one of the reasons attributed to it was the amount of land being devoted to growing crops for bio fuels. These are ticklish issues, Society and governments should take calls on such tradeoffs and companies must follow. They must not lead. Its tempting for pressure groups to push companies because they are the easiest target,. This is wrong. It is governments, reflecting the society, who must decide, however messy that process might be.

And companies must not do it solely for the publicity. Unfortunately this is too often the case, prompted in part, by misguided regulations that require publication of work in this area. So if you have to say something, you have to do something, to say something. So do whatever is the easiest. Terrible way to "discharge" your social responsibility. Better not to do, rather than do something because it has got to be done.

There is a nice discussion with Daniel Franklin, the executive editor of The Economist who says “even well-intentioned activities of businesses can end up not doing any good at all in ways that might surprise". Click here to listen to the discussion (unfortunately requires a subscription).

Make no mistake – I am a passionate believer that companies must be very socially responsible. But I deliberately started with a post on what they should not do; simply to illustrate my point of view that everything that is good to do, is not necessarily good for companies to do.

Tomorrow, I’ll post on what I believe corporations should do.

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The greatest salesman in the world

This weekend's light reading (or viewing I should say) is something that my good friend, Subroto Bagchi, sent me some 8 years ago. Thanks Subroto for sharing something very inspirational.

This is the story of Bill Porter. Born in the US in 1932, Bill moved to Portland at an early age where he lives now. He was born with cerebral palsy and lost his father early. They told him he would never work and nobody would employ him. He refused to go on disability and convinced Watkins Inc. to give him a job as a door to door salesman.

He needed help to dress. He could not drive. His speech was slurred. He was often in pain. And what did he do - he became the top selling salesman in Watkins. He was hit by a car in 1998 and broke his hip. He could no longer do door to door - Instead he has turned into an online salesman. (visit his online shop here). Some 50 years after they told him nobody would give him a job, he's selling fine, thank you. And when asked how he overcame all his obstacles, he says I don't have any obstacles.

Shelly Brady first met Bill as a teenager when she worked for him to help him deliver his products. Since then she has become a close friend and now she is a motivational speaker. She has written a book - Ten Things I learned from Bill Porter. You can read an extract from the book here.

In 1995, The Oregonian, wrote a story on Bill Porter in the newspaper. that brought Bill into the public limelight. He was featured in The Readers Digest and ABC's 20/20. He was the subject of a made for TV film on TNT called Door to Door. The film won six Emmy awards.

There's a film on Bill Porter in Shelly's website. Its 30 minutes long, but a fascinating watch. Grab a cup of coffee, make yourself comfortable and watch it. Trust me; you will be inspired, for Bill Porter is a remarkable man. Click here to watch it

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The Great Indian Rope Trick II

Continuing the previous post on the Indian budget - this time I'm focusing on the revenue side of the P&L.

In true single entry bookkeeping fashion, the government combines revenue and capital receipts into one - if a company did this, its Board would be thrown into jail. Stripping out capital receipts, the revenue profile of the government in the P&L looks like this , again as per Definitely Not Acceptable Accounting Practices !

Corporation Tax - 29%
Individual Income Tax - 18%
Excise Duty - 18%
Customs Duty - 15%
Service Tax & Others - 8%
Non Tax Revenues - 12%

This is the central P&L ; states have their own right to levy sales tax, octroi, etc etc which is over and above these revenues.

Given the deficit and the need to trim borrowings, increasing revenues must be the second priority after curtailing expenditure, covered in the last post.

Here are some thoughts.

• Only 3% of the Indian population pays individual income tax; about 30-35m people. Most of this is the salaried class where taxes are deducted at source. Granted there is enormous poverty in India and granted that there is a huge non working class (children, aged, many women, etc), the number of tax payers is still far too low. Roughly the basic annual income above which you have to pay taxes in India is Rs 100,000 (US$ 2500). Are there only 30m Indians who earn more than Rs 100,000 per annum. Of course not. Income from agriculture is not taxed, a complete travesty in today's world. Concealment of income and black money is rampant. So a low number of taxpayers. Target to double this in 3 years.


• There is still a large category of income that is not taxed - long term capital gains, under the logic that this would stimulate capital formation and investment. Laudable objective, but the need for tax revenues is higher. Tax all capital gains. In fact tax all income above the minimum limit, wherever the income may be from.


• Corporation Tax has been growing rapidly in recent years with the growth of industry. The tax code has been simplified and rates of taxes have been brought down. Hence the surge in collections. There are still some anomalies - the IT industry does not pay tax. This is illogical - they pay taxes in every country they operate, bar India !


• Demand performance of companies that the government owns and, like any other shareholder, demand dividends. Sack managements who don't maximise dividends for the government. Get rid of non performing companies.


• That's it; don't do anything more. Economic growth will automatically bring increase in tax collections.

One of the redeeming features of the past 10 years or so is the amount of reform that has happened on the revenue side. Tax rates have been brought down to sensible levels. Procedures have been simplified. That's why tax revenues have boomed. Don't fiddle with it too much. Leave it be, enforce it rigorously and count the rupees coming in.

None of this, is hugely difficult to do, even politically. There will be howls about taxing income from agriculture, but there isn't much of a moral argument for the protesters - earning millions from agriculture won't garner public sympathy in any big way.

Which goes back to my central argument - the problem is on the expenditure side and not on revenue.

The Indian housewife is legendary in her ability to make ends meet for the family. However small the income, she knows how to stretch it to last the month, live within the means and run a household on a budget. She controls the keys to the family purse. She does a stupendous job in millions of households.

Will Mrs Patel step forward please.

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The Great Indian Rope Trick - I

Imagine an organization that does not produce a Profit & Loss Account and a Balance Sheet. It adopts a single entry system of bookkeeping. It only publishes what cash came in and what went out. The accounts are not audited (at least for a year, maybe more). It makes a whopping loss year after year. There’s lots of waste. There are plenty of “off balance sheet” items hidden away. You’d think the company would be on its last legs, if not dead. Wrong. This is the government of India.

On Monday, next week, we will see the annual ritual of the Indian budget being presented. It goes something like this – the finance minister reads a speech in the parliament, a zillion corporate honchos hang on to every word, reams and reams of stuff is posted on to the government website, and lots of underlings pore over the fine print. Self appointed experts then “analyse” the budget, TV channels run non stop coverage, next days papers are full of minutae and analysis and what it means to you and me, the ruling party says this is the second coming of Christ and the opposition says this is the first coming of Satan. Over the next few days, “experts” fall over themselves to give speeches on the budget, the opposition stalls the parliamentary debate on the budget and shout themselves hoarse until 30 seconds before the deadline for passing the budget. The Speaker applies the guillotine and takes the budget as approved. End of story until the next year around.

Most of the attention is focused on taxes – what goes up, what comes down and how it affects you and me. I am writing this piece, before the budget to focus the Indian reader’s attention on the expenditure side of the budget.

I’ve tried to construct a simplistic P&L account of the 2008 budget (the balance sheet is impossible to construct as the government does not publish its assets !). Here’s my attempt in % terms - stripping out capital items and showing only revenue items, as per Definitely Not Acceptable Accounting Practices.

Revenues - 100%

Interest on Public Debt - 32%
Subsidies (Food and Fertiliser) - 12%
Defence - 10%
Grants to States - 7%
Pensions - 4%
“Plan Expenditure” - 35% (Objective is development, but is riddled with waste)
Others 10%

Loss 10%

Capital Expenditure is 15% of revenue and the loss + capex has to be funded from borrowings every year. So borrowings added each year is 25% of revenue. And this has been going on for decades.

Let me submit some thoughts for your consideration. If this was run as a company and I was the leader, this is what I would do.

• The killer is interest on debt. And we keep borrowing a whopping amount each year. This is insanity. No more debt ; by law we must be required to balance the budget. And keep paying down debt as much as we can and get rid of it within a finite period.


• Kill subsidies, please…. How can we spend 6% of our revenues on fertilizer subsidy ??


• Put a massive cost reduction programme on “plan expenditure” and “others”. Minimum 10% savings each year without impacting effectiveness. Easy; just the leakages would be many times this target.


• Sell assets and raise money (read public sector disinvestment)


• This is of course only the central P&L. In a federal structure such as India, states run their own P&L and the story is worse there. If you add all of them, the P&L will be too horrific to even contemplate. Why not completely remove the power to issue debt from the states and tell them to spend only what they can earn . Hopefully then free colour TVs, free power to farmers and such nonsense will stop.


• Cut, cut, cut costs….. Publish a cost effectiveness plan. No Pay Commission salary hikes without cost reductions. …..And keep on cutting costs. And increase revenue. Make a profit.

Of course this is simplistic and naive. Actually, Indian finance officials are some of the best in the world. They know the exact situation and what needs to be done. But they can’t. Politically none of this is possible to implement, for after all India is a democracy. Just for the record, China runs a surplus budget. Items number 1 and 2 on our expenditure line does not feature there in any significant amount.

I’ll follow this post with one on the revenue side tomorrow.

But Indians, when you read the budget on Monday, spend a little time looking at the expenditure side of the budget.

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Subprime Crisis in Plain English

(cartoon courtesy www.blackcommentator.com)

The financial crisis currently sweeping the world, was triggered by the collapse of the “sub prime” lending in the United States. What is sub prime? This post is a semi rant saying it is just gobbledygook invented by the industry to clothe “we screwed up big time” in some sort of mystical term which gives some false respectability.

In plain English, here’s my take on what happened over the last many years (obviously a rant)

• We (the bank/financial institution/fund/whatever) have to double profits every 3 years (or some such wildly unattainable goal). Only if we do that we’ll be the darlings of the stock market.


• How the heck do we do that ?


• We have to triple lending and charge high interest rates.


• But the bloody central banks are reducing interest rates everywhere.


• Lets do a massive campaign to lend more.


• F@#$ – last month we didn’t grow our lending at all . Nobody seems to be wanting money. All the guys we can sensibly lend to have already gone to the others and don't need money anymore.


• God , our inflow of funds is massive. The Chinese and Arabs seem to be printing money, the way they are coming and depositing it with us.


• What do we do with all this money – we can’t be storing it in the bank’s vault.


• Right guys – lets give some money to that idiot Joe Bloggs who’s been pestering us for a loan to buy that fancy car he simply has to have.


• But he has a terrible credit history – he didn’t pay back his previous loan to the bank down the street; that’s why nobody will give him the money.


• Well; we’ll charge him a penal interest rate for his loan for covering this risk.


• Wow our loans grew 20% because we lent to Joe Bloggs and our income grew by 30% because we charged him higher interest rates.


• Our share price jumped 10% on our results announcement.


• We met all our targets for the year, thanks to Joe Bloggs. We got a fat bonus and all of us were promoted.


• This is fantastic. We grow our loans, we exponentially grow our interest income, the stock market is happy, we get a nice bonus – life is great thanks to Joe Bloggs.


• Wait a minute – wouldn’t the shit hit the ceiling if that bloke doesn’t pay back.


• Yeah, but maybe he will pay back – he seems to be doing well these days. And in any case, that’s a problem 3 years from now. Who the heck cares. By then we’ll be somewhere else.


• But the f&^%$#@ bean counters are saying that its still a risk and you have to provide for it and therefore you can’t show all the income (and can’t get all the bonus)


• Lets get rid of the risk thing – that smart MBA who joined us yesterday has invented something called a credit default swap. Can’t figure out what he means, but apparently if Joe Bloggs doesn’t pay, some punter down the street has to carry the shit, not us. Fantastic; now the bean counters will let us carry on with the party.


• This is super – we charge high interest, lend a lot and pass the shit on to a punter. Lets give that young MBA a raise; he’s a genius.


• We’re starting a campaign to find all the Joe Bloggs of the world. There are a lot of such guys around. They may be called Smith, Patel, Chen or Watanabe, but they are all Joe Bloggs you know.


• We just announced our next year results. Profits up 200%, share price has gone through the roof. Our bonus is in the stratosphere. Everybody is happy. This is life.


• The Board is reviewing our outstanding performance today. Have to work hard to get the charts right.


• That was a piece of cake. They all nodded their heads wisely and said we were doing a terrific job. Only that old fool, who’s chairman of some old world industry, kept on saying that this was too good to be true and that Joe Bloggs was going to haunt us. But when we told him that we had “hedged against the risk using credit default swaps” he shut up. I bet he didn’t know what a credit default swap was.


• Just passed the Audit Committee review yesterday. This is the lot who carefully examine whether we are taking some huge unfathomable risk. You know what – the old geezers never even went into what we have done. You see they go by the last year’s audit programme. In that, credit default swaps did not exist – how could it, it was only invented by our bright MBA this year. So they didn’t even check it (not that they would have made much of it anyway). So they wrote some words to the effect that the risk reward equation was appropriate, which meant we are OK.


• The regulators just left yesterday. They were a pain – asked a million questions and stayed for 1 whole month. But the bright MBA explained to them how the credit derivative swaps made it all very safe. He’s a genius. They swallowed it like a dog. You know, that pretty young thing in their team even wrote that credit default swabs were a great innovation. She couldn’t even spell the thing right.


• We had a stunning year this year. We found 10 million Joe Bloggs. Our ERP collapsed because it couldn’t count the number of zeroes in our profit line.


• By the way, did you know that the original Joe Bloggs who started our boom those years ago – apparently he didn’t pay the money back. The punter down the street didn’t get hurt either because he passed it on to somebody else. We heard that finally two Chinese, five Arabs, four Japanese and one Eritrean (now where’s that) were left holding the shit. Serves them right.


• Oh my god – apparently many of the frigging Joe Bloggs are not paying back. That punter down the street has shot himself. Now we can’t even give the what’s it called swaps to anybody else.


• This place stinks. We are drowning in the shit.


• The fireman is coming tomorrow to bail out the shit and extricate us. He’s asking what caused the mess. We have to find something that doesn’t look like shit and smell like it.


• That bright MBA is a genius – he says it was all down the to the collapse of the sub prime market. Not our fault.

PS – you know we didn’t even have to pay the fireman for coming to clean all the mess. All the neighbours got together and paid because they couldn’t stand the smell. We still have some dollars in the till. Lets pay ourselves a bonus for our hard work.

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Bailout for Charities – Right or Wrong ?

Yesterday, the British government announced a bailout for charities of about £40m. Every group is now clamouring for a bailout. Where will this end ?

The argument of the charities is simple. If the government can give £500bn to the bad boys in the banks, they can give something to us. The charities asked for £500m, were prepared to settle for £100m, and got £40m. They have promised to come back and ask for more.

The justification for asking for the bailout was that donations had come down by 13% consequent to the financial crisis. If they did not get the money, they would have to lay off staff. Hence bailout.

Am I missing something here ? Charities are supposed to be funded by voluntary donations. The operating word – voluntary. Does a 13% decline warrant a bailout when most industries routinely handle declines of this nature ? Have the charities really explored all avenues of cost reduction and revenue increase ? For example, Oxfam is reporting that sales of its products is increasing as consumers downtrade. And are layoffs in not for profit organizations somehow worse than layoffs in for profit ones ?

The charities say that lack of funds precisely at a time when the public needs more of their services is disastrous. Charities associated with counseling people who have lost jobs and those that deal with the elderly are at the forefront of this argument.

I think the queue of industries and sectors that are lining up for the dole is because governments lost the PR debate in the case of the assistance to banks. In fact it was a gross PR debacle to allow the assistance to the financial sector to be called a bail out. It was not a bailout and governments should have explained better what they have done. They has provided assistance either as loans (with high interest rates) or picked up shares in banks or even outright nationalized them. Even where they will pick up the dead assets of banks ( (the “bad bank”), they are writing off loans to individuals who can’t pay; not giving cash to banks. When things settle, governments will offload all these investments at a profit. The tax payer is not likely to lose a penny. No free money is being given to evil bankers for them to pocket as bonuses. Governments should not have allowed the media to get away with terming this as a bailout . Economics is never an easy subject and governments failed in explaining to the people what exactly they are doing.

Having lost the PR debate, it is but natural that everybody is claiming a bailout. After all it is easy to make the case that any sector is more deserving than the fat cats at banks. The auto industry in the US claimed it on the grounds that they employ many more people. The charities in the UK are demanding it on the grounds that they perform a more noble task.

There are nearly 170,000 charities registered with the Charity Commission in the UK. Most of them do great work in helping those they have taken up as their cause. They deserve every support. Those who can, should continue to support them as much as possible. But there should be no bailout.

And governments should tell every other sector that wants to knock on its doors. No bailouts. Loans yes, support yes, bailouts NO.

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China – Spend More and Save Less – Ha Ha

Many views have been expressed in recent months that one of the causes of the present crisis is that the Asians (read Chinese) save more and spend less. Because they save more, the world is awash with capital and the poor Americans have been forced to consume more to absorb all this stuff sloshing around. No less a person than Hank Paulson said something like this. I’ve read a lot of articles where the Chinese are urged to save less and spend more. Even the Chinese are picking up this refrain – Zhou Xiaochuan, the governor of the People's Bank of China, has implied that the Chinese should save less.

The wisdom is that if the Chinese save less, they will spend more and drive up demand for products and services, which can help the world come out of recession. I find this an alarming advice.

Put yourself in the shoes of an average Chinese citizen. There have been 20m jobs lost in the recent few months (yes the number is right and not a typo – twenty million). You have no guarantee that your job will be safe. Property prices have plunged. Social security, while pretty good by developing country standards, is still a cause for concern. The society is aging, caused in part, by the single child policy. The bitter taste of high inflation has been experienced just 4 quarters ago. In these circumstances what would you do – withdraw your savings and splurge on consumption ? Only a complete idiot would do that.

In any case, who says the Chinese aren’t spending. Domestic retail growth grew by 21.8% in 2008, up from 16.8% in 2007. Even in December, when the chill winds of recession were blowing, retail sales grew by 19%. Walk down Tianhe Lu, the computer market in Guangzhou on a Saturday – there’s no standing space and you are likely to get trampled on. Its a similar story down any shopping street in China. Recession; What Recession ?

The “problem” is that the Chinese savings rate is “high”. In China, the percentage of savings in a person’s disposable income, has hovered between 30% and 40%. In America this is 0%. Debt levels in Chinese households is very low. This is being viewed as a scope to increase Chinese domestic consumption.

The breathtaking economic growth in China actually enables the Chinese to save more and spend more. Its not one or the other – prosperity can ensure that both rise and to hell with the percentages between the two.

But what do the Chinese do with these savings. They invest. China’s massive investments over the years have come from the high savings rates of its citizens. Isn’t that a good thing ? Where will the capital for the world’s investments come from – it will come from surpluses created somewhere. As different nations have different characteristics and different competitive advantages, there would be some countries that will generate capital and some that will consume capital. Capital flows are ubiquitous around the world – so capital easily flows from where it is created to where it is consumed. There is the issue of whether exchange rates truly reflect the demand and supply of the currency, but that’s a different argument to saying spend more and save less.

The only argument against high savings would be if the Chinese did not invest. If they dug a hole in their backyard and buried their renminbis. There's no evidence of that happening !

Health Warning : I am not an economist and have no pretension to being an expert on this subject. All opinions in this post will be childishly naive to an economist and perhaps more relevant to an average reader !

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Independent Directors – Not good enough

Try this one. Ask any independent director of any company, the following 5 questions.

1. What was the exact turnover and profits of your company for the last quarter ?
2. What is the annual turnover of your five largest brands/geographies/service lines – whatever ?
3. Who is the Financial Controller of your company ?
4. How many employees, to the nearest thousand, does your company have ?
5. What is your market share in your most important market and what is the share of your most important competitor ?

I am willing to bet that most of them would fail in this test.

This post argues that independence of a director is necessary, but not sufficient, to ensure good corporate governance. A more important criteria is left out, or mistakenly applied – effectiveness.

What sort of people become independent directors these days. Four broad categories of people – chairmen or senior executives of other companies, retired business leaders, academicians and former politicians or bureaucrats. All four, in my opinion are not automatically suited to perform the role of an independent director.

What is the role of an independent director anyway ? My submission is that they are NOT there to contribute to, or drive, the strategy of the company (that’s the job of the full time management of the company). They are there to ensure good corporate governance and to ensure that the rights of all the stakeholders are protected. Period.

The first group – chairmen or senior executives of other companies have no time. Running a company is more than a full time job. They cannot do justice to the intensity of what is required from an independent director. They come for board meetings, certainly contribute to strategy with their vast knowledge and experience, but cannot give the attention and time required for corporate governance.

For retired business leaders, the position is a perquisite rather than a job. Isn’t this what business leaders normally do after retirement ; to be able to say that they serve on the boards of 10 companies. They can devote the time, but usually don’t. They also don’t want confrontation. They would rather have peace and quiet, attend board meetings, make a point or two and go away.

Academicians suffer from a similar problem as serving business leaders. Lack of time. Add to that , all too frequently, incompetence in applying theory to practice. To many, corporate directorships are a big ego trip and a way of ensuring consultancy assignments. They also have not had practical exposure to the running of a business to smell and detect lacunae in governance.

I won’t even comment on the suitability of retired politicians or bureaucrats to do the job.

I’m pretty sure that most independent directors skim through the board papers on their flight to the board meeting. Few have applied their mind to the issues at hand, unless a crisis hits the company. They sit in Board meetings and react to what is presented. No wonder they are ineffective.

What, I believe is needed, are professional independent directors. That should be all they do for a living. Perhaps even organizations in the business of independent directorships. Perhaps even a professional body, a la, CPAs. They would need to spend at least one day in a week with the company. They should travel to company operations. They should build direct lines of communication with key people in the organization. They should have sufficient accounting training to detect frauds or impropriety. They should be able to ensure adequate whistle blowing mechanisms. They should devote their attention fully to governance – not business strategy. They should be paid virtually executive salaries. And, of course, they should be independent. Perhaps then, they will be truly effective .

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A Violonist at the Metro

This is a business blog primarily to highlight and discuss issues in business. However, once in a while, I'll post something not directly connected to business, but might be of general interest. This is one such post.

This was sent to me by my good friend Prince Asirvatham. Thanks Prince for an interesting story. This E Mail is doing the rounds; so you may have seen it already.

A man sat at a metro station in Washington DC and started to play the violin; it was a cold January morning. He played six Bach pieces for about 45 minutes. During that time, since it was rush hour, it was calculated that thousands of people went through the station, most of them on their way to work. Three minutes went by and a middle aged man noticed there was a musician playing. He slowed his pace, stopped for a few seconds and then hurried up to meet his schedule. A minute later, the violinist received his first dollar tip: a woman threw the money in the till and without stopping continued to walk. A few minutes later, someone leaned against the wall to listen to him, but the man looked at his watch and started to walk again. Clearly he was late for work.

The one who paid the most attention was a 3 year old boy. His mother tagged him along, hurried but the kid stopped to look at the violinist. Finally the mother pushed hard and the child continued to walk turning his head all the time. This action was repeated by several other children. All the parents, without exception, forced them to move on.

In the 45 minutes the musician played, only 6 people stopped and stayed for a while. About 20 gave him money but continued to walk their normal pace. He collected $32. When he finished playing and silence took over, no one noticed it. No one applauded, nor was there any recognition.

No one knew this but the violinist was Joshua Bell, one of the best musicians in the world. He played one of the most intricate pieces ever written - "Chaconne" from Johann Sebastian Bach's Partita No. 2 in D Minor, written for a solo violin. The violin he played with was his usual Gibson ex Huberman handcrafted in 1713 by Antonio Stradivari and worth $ 3.5 million. Two days before his playing in the subway, Joshua Bell sold out at a theatre in Boston and the seats averaged $100. Two weeks later, at the Music Center at Strathmore, in North Bethesda, he would play to a standing-room-only audience so respectful of his artistry that they stifled their coughs until the silence between movements.

This is a real story. Joshua Bell playing incognito in the metro station was organized by the Washington Post as part of a social experiment about perception, taste and priorities of people. The outlines were: in a commonplace environment at an inappropriate hour, do we perceive beauty? Do we stop to appreciate it? Do we recognize the talent in an unexpected context? One of the possible conclusions from this experience could be: If we do not have a moment to stop and listen to one of the best musicians in the world playing the best music ever written, how many other things are we missing?

You can watch the video and the audio of this at the Washington Post website.

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No Layoffs --- Ever !

I came across an interesting article today, from which I stole the title of this post. Click here to read the article.

The article listed 9 American companies that have never had layoffs, ever. They range from $ 11bn turnover Devon Energy to smaller enterprises. One of them has been in business for 81 years. Reading through the list, I noticed some trends.

Many of them are privately owned and do not have to bear the tyranny of quarterly results. Most of them are extremely conservative – neither flashy growth nor steep falls; just steady chugging on. All of them are supremely devoted to their employees. The phrase that caught my eye was “If you a do a good job, you’ll always have a job”. All of them communicate very openly and share the pain during bad times. One employee’s statement summed it all ; “It's an honor and pleasure to work for a company that considers you a valuable individual." Wouldn’t you die to have a workforce like that ?

These days, unfortunately, people losing jobs is all too common news. In China it is estimated that a staggering 20m workers lost their jobs. Half a million Americans have lost their jobs each of the last 2 months. The story is being repeated in most countries.

This lead to me to muse as to whether such scale of job losses are really warranted. Its seems almost a macho thing these days to announce huge job losses – somehow the market interprets this as real action being taken to cut costs. Sure costs have to be shed to stay afloat in choppy waters, but I argue that layoffs should be near the bottom of the cost cutting measures rather than at the top.

The mere threat of job losses is enough to send employee performance spiraling downwards. At a time, when you need dedicated concerted action to ride the downturn, a distracted , fearful workforce is hardly likely to rally together. In other walks of life, disasters bring people together. In business, that rarely seems to happen – you get thrown overboard or you desert the ship. Company cultures are lost in an instant when massive layoffs happen. When the upturn happens again, you emerge a weaker , anaemic organization.

It is one of the most degrading of events to an individual to be laid off for no fault of his. If you are a poor performer, sure, you deserve the boot. But if you were a star performer yesterday, and suddenly you are redundant, that’s a sickening blow in the stomach.

This post simply raises the issue – its too complex an issue to analyse in one post. Perhaps, in a later post, I’ll muse on what might be alternatives.

Most companies, if not all, claim that employees are their most important and precious assets. Really ?

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Are you an idiot if you are loyal to your company ?

A couple of months ago, I had the honour to be associated with a very special event ; one of my colleagues was completing 40 years in the company. Pause for a moment and let this sink in. 40 years in the company. I myself had completed more than two decades in the company, but I am a positive chicken in front of this legend.

I am willing to bet that this is the last time in this company (or for that matter in most companies), that this will happen. The days of jobs for life are long gone. Gone is also the practice of a person starting and ending his career with the same company. Average tenures in an organization are now down to lean single digits. I know of a friend who was in tears because she was going to get a long service award from the company for having spent 5 years and would be classified by her peers as “an old foggy”.

I believe this trend has gone too far in the business world. Loyalty, at least in terms of long service, has become a four letter word.

Is company loyalty a bad thing ? 40 years may be unusual, but is it naïve to stay with a company for a long time ? What can loyal employees bring that job hoppers cannot ?

Firstly company and domain knowledge. Stayers know the company and the industry inside out. They know what works and what doesn’t. They have deeply imbibed the culture of the company; in many cases they have helped shape it. It’s a complete myth that the longer you stay the more resistant you are to change. It may happen that way, but there is no cause and effect.

Secondly history. They know what happened in the past. In business, as in every other sphere, history has an uncanny knack of repeating itself. I have personally seen innumerable times when corporations have made the same mistake again and again, just because somebody new decided it must be so. People with long tenure and experience tend not to fall into the same trap.

Thirdly reliability. If you have spent a long time with a company, you have probably seen good times and the bad. And stayed on and fought the bad times. In moments of crisis any organization needs people it can depend upon and who wouldn’t desert. Witness the ongoings in Satyam Computers, an Indian IT company in grave crisis. On the day the crisis broke, the entire operating management, who had grown with the company, vowed to stay on and fight. If they hadn’t, the company would have sunk by now.

Fourthly the company knows them well – their strengths and weaknesses. Only in business is the popular saying twisted – an unknown angel is better than the known devil ! Business syllogism is strange : something on the lines of "Change is necessary; bringing a new guy is change; hence bringing a new guy is necessary (and to hell with whether that is good or bad !)".

And finally, and most important of all, passion. Long stayers are intensely passionate about their company. Typically they would not even use a competitor's product in their homes. This is the indefinable quality that separates an also ran company from a great company. Business success requires the passion of its employees. You can’t be passionate if you are applying for the next job.

No company was built without the deep passion of its people. Think Thomas Watson, Jack Welch, Rob Goizueta, Helmut Maucher… the list can go on and on. All professional managers who spent their entire working life in their company and built them into the great institutions they are today. They weren’t idiots.

Do companies deserve their long staying employees ? That’s of course another matter altogether. Subject of a forthcoming post.

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What is “American goods” anyway ?

Barack Obama’s $825bn stimulus package seems to have raised howls of protests, especially in Europe for the “Buy American” clause. Dangers to free trade have been espoused. Similar concepts are being propagated in other countries as well – the other day Alan Sugar was waxing eloquently on “Buy British” (presumably from his company).

Without commenting on the implication on free trade, I am asking the question, What does “Buy American” or “Buy British” really mean ?

Does it mean buy from an American company ? If so what is an American company ? A company headquartered in the US ? A company that is listed in a US Stock exchange ? A company that has a majority of its shareholders as US entities or citizens ? A company that pays taxes in the US ? Its quite easy to construct a corporate structure that satisfies all of the above criteria without it being really viewed by the public as "American”.

A more common definition is “Manufactured in America”. But is it OK for all components to be manufactured elsewhere and simply assembled in America ? These days supply chains are global. Its very unlikely that every raw material or component is manufactured in the same country as the finished product is. What about industries like pharmaceuticals, where the mere manufacture of the drug is a small component of the value chain – the bigger component is the Research . Is it OK for all the research to be done in say Japan, and the drug formulation alone to be mixed in the US to be considered ‘American” ? Why is manufacturing sacred anyway? Its presumably because of the jobs it creates. But in the value chain of a product, jobs are created elsewhere too ; in research, in design, in management, in finance, in HR, etc etc. In many industries jobs created in these areas are more than the jobs created in manufacturing – the relentless onslaught of automation is probably the highest in manufacturing. So can just the act of manufacturing define the “citizenship” of the product or the company ?

Or is an “American” company one that has a majority of its workforce as American , a definition that would be more politically acceptable because of the focus on jobs. But this would again be conky – it would simply be a disincentive to American companies to go global. IBM has more than 70,000 employees in India . Does that make it any less “American” ? What about the composition of the Board or management ? Alcatel Lucent is a French-American company headquartered in Paris with a Dutch CEO. Does this make the legendary Bell Labs “un American” ? Or is it history - where the company was founded ?

This just goes to show that in business , there are no nationalities. All businesses are global. Economics has gone much farther down the road to create a world citizen than politics has. America does indeed have a “Buy American Act”. It was passed in 1933. In today’s business world, its an oxymoron.

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