On Friday, the world shook

Last Friday, the world shook. You can be forgiven for not noticing, for, it was the business world that shook. GE announced it was going to virtually sell all of GE Capital. 

GE is one of the, if not THE greatest company on earth. It is the old fashioned industrial conglomerate making everything from aircraft engines to medical equipment. It is known for its legendary business leaders, Reginald Jones, then Jack Welch and then Jeff Immelt. It is known for its excellence in management - it is really the business school where America's future CEOs are produced.  It is the leader of many management trends of the future - Six Sigma, Outsourcing to India ....... you name it and GE was probably the first mover.

All that is fine, but in reality, GE was what it was because of GE Capital. For a long time it contributed 50% of the group profits. Although technically not a bank, GE Capital is one of America's largest "banks". Just before the financial crisis, you would have had to question whether GE was really an industrial company - a full 60% of its profits came from GE Capital.

And then the financial crisis hit. GE, yes even GE, had to resort to a government "bailout" in form of $130 bn of loan guarantees. Suddenly, being a big financial institution was bad news. GE's share price tanked and it lost its coveted AAA rating which it had had for 40 years. The jewel in the crown was sudenly turned into a lump of coal.

GE Capital turned around. Of course it would, given the outstanding management talent at its disposal. It is back to being very profitable and last year contributed more than 40% to GE's profits.  But there are two lasting legacies - one is that GE became a SIFI" , the dreaded tag of a "Systematically Important Financial Institution" , which essentially is a sticker from the US government that it was too big to fail. SIFIs are subject to incredibly strict government requirements,  tight regulation and surveillance post the financial crisis. The second legacy was GE's share price. In 2007 it was $42. Today, despite the resurrection of GE Capital, it is $25 or so. The market is simply scared of large financial institutions and the risks they pose.

GE did what it does best - take a hard decision. It has been announcing its intention to trim down GE Capital for quite a while. It had started to spin off bits and pieces. But on Friday, it announced a virtual disposal of GE Capital. It would sell off almost everything over two years and hold only the parts of GE Capital that were intimately tied to its industrial business - like aircraft leasing. The mighty GE is shrinking. It will become a smaller conglomerate. And it will become an industrial group once again.

This is a big big move in the world of business and finance. But you may not have read about it at all in the papers. Its not as exciting as Justin Bieber's latest antics, or if you live in my country, Anushka Sharma !!

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Buy Property - Gangnam Style

Remember Psy and the megahit video Gangnam style ?  Yeah, I know, two years is the equivalent of a full Jurassic Age in pop music circles, but still ..... While you were trying to prance about like a horse, did you wonder what Gangnam style really meant ??

Gangnam is actually a suburb in Seoul, inhabited by the mighty and wealthy. The song was a parody of the lifestyles of those mighty men and women. Today Gangnam district came back into the news, with a property deal that raised my eyebrows so much that they vanished into my hairline (such as it is !). A 79,000 sq metre plot was up for sale. Thirteen bidders emerged, including two of Korea's biggest corporations , Hyundai and Samsung. Hyundai won it ; apparently they want to build their corporate headquarters there. The price tag ? A cool $ 10 bn. If you do the math , that is $126,000 per sq mtr. Or if you are an Indian, preferring ancient British metrics, Rs 7.6 lakhs per sq ft !!!

What sort of a crazy world do we live in where the price of a piece of land just enough to plant your two feet in and stand still, is more than the annual income of 99% of the population of the planet. Well, that is Gangnam style.

There is an ancillary question to be asked. What is Hyundai doing trying to build a corporate headquarters for $ 10 bn ? Investors are asking that question too. The shares of Hyundai were beaten down by 9% when news of this transaction broke out.  After all Hyundai didn't make a profit of $ 10bn last year. The pundits believe that Hyundai overpaid by about 3 times !  Hyundai defended it with typical corporatespeak - "Internally, we think we offered the appropriate price, considering various factors such as our global business plan and its future value ".

This blogger bought a Hyundai car a little while ago, for about the same price as would have fetched 1 sq ft of the land in Gangnam district. He is now unclear as to whether he should have opted to buy the land instead. You see, he is somewhat ( OK severely) dance challenged. However that has not deterred him from dreaming of some delectable dance moves that would make a dozen redheads swoon (Sriram please note !). So maybe, to get the right inspiration, he should have perhaps done the property deal and stood on his 1 sq ft plot of land in the middle of Gangnam district. And then practiced some intricate moves under the watchful tutelage of Psy. Trying to contort himself inside 1 sq ft may have perhaps cured his dance challenged status !

No use crying over spilt milk now. The car is there in the basement (for some hilarity on what this blogger is doing to it, read here). However he is intending to write to Chung Mong-koo, the patriarch of the Hyundai family offering to exchange his new car for the equivalent plot of real estate in Gangnam district. After all you see, its not very obvious which is overvalued more !!

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Corporations and human rights

This blogger was listening to his favourite programme From Our Own Correspondent on the BBC - easily one of the finest radio programmes the world has ever seen. One of my favourite correspondents, Humphrey Hawksley was filing from Hyderabad on the plight of those who work in brick kilns.  And then he casually hinted that British companies might somehow be held accountable for this ! This set me thinking on the thorny issue of global corporations (alright, the appropriate dirty word is multinationals ) and the issue of human rights.

What is a business corporation really responsible for ? - that it should not condone human rights abuses in its operations is indisputable. That is should likewise do so in its supply chain is also in principle correct, but in practice, where do you draw the line of its supply chain ?

Humphrey Hawksley was hinting at the following logic. Let us construct a hypothetical example. GlaxoSmithkline, a "British company", outsources its back office work to Genpact an Indian company. Genpact delivers this service from Hyderabad. They do so from a building that, let us say, they rent from one of the major builders. The builder, when he constructed the building, bought bricks from the local brick kiln. This brick kiln was abusing human rights - so Glaxo is responsible.

I can extend the logic further. The builder bought cement from L&T. L&T bought limestone , a raw material from a nearby quarrie. The transporter who moved the limestone, employed children as cleaners - so Glaxo is responsible.

There has to be some sanity and reasonableness in what you expect corporations to be responsible for. The issue has really arisen because nations, which are the prime guardians and  responsible for checking human rights violation in their territories, are abysmal in their jobs. This is  not just a third world problem only - American agriculture for example will come to a standstill if illegal Mexican workers paid less than minimum wage, working way beyond beyond an 8 hour working day and subject to sundry abuses were not in operation (Mr Preet Bharara -  please note ). Multinationals, the dirty word again, are soft targets. Therefore it is easy to go after them. In the case of the brick kiln workers, the Indian government and the Indian society is responsible - not Glaxo.

Equally, consumers are, largely unconcerned with anything else other than the price of their product. They want the cheapest price for a product, and if this was achieved by abusing the rights of a worker in a faraway land, tough luck . Why faraway land - every American who drinks milk has a greater than a 50% probability that he has condoned human rights abuse - somewhere in the milk producing chain in the US, an illegal immigrant was used and was exploited..

A test of reasonableness has to be applied when we hoist human rights responsibilities on corporations. Some principles are black and white - you will obey the law, you will not bribe, you will conduct your operation where safety of those working is accorded the highest priority, etc etc. You can also say that you will  demand your suppliers to conform to these and conduct periodic audits at major suppliers to verify that this is so.  But it s practically impossible to ensure that every supplier's supplier's supplier is adhering. Common sense has to prevail. For eg if Walmart is sourcing garments through an American agent, who in turn is sourcing through a Bangladeshi agent who in turn is buying from a garment manufacturer who has appalling conditions for his workers - you can reasonably say that Walmart should stop buying from them. It is the germane buyer even though intermediaries are involved, and it is a direct piece of Walmart's main business. But to say Glaxo should stop its operations with Genpact, because the building it is operating in was built using bricks whose supplier violated human rights  is carrying things too far.

Corporations have certainly been guilty of much evil in the past. They should rightfully be held to account. But when you forsake reasonableness in setting what you will hold them to be accountable for, you are violating their human rights ! After all, the learned wise men and women from the US Supreme Court have said that corporations are also people !!

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The pressures of being a business leader

On hindsight, the surprise is that it hasn't happened more often. Last week Pierre Wauthier, the Chief Financial Officer of Zurich Insurance, tragically committed suicide. This starkly illustrates the unbelievable pressures top business executives function under.

Zurich Insurance is one of the top insurance companies in the world. Recently, it has been going through a bad patch, although by no means disastrous. The CFO is often the one required to stand up before investors to explain results and is invariably the target of criticism and calls to be sacked. The circumstances behind Mr Wauthier's unfortunate demise are not fully clear, but it is inconceivable that work pressures did not play a part. His widow has certainly hinted that Josef Ackermann, the Chairman of Zurich bore some responsibility. Ackermann denied any such thing but promptly resigned as Chairman.

Only a certain breed of individuals reach the top of the business world. A masochist streak, politely termed as "the killer instinct" is one of the pre requisite qualities. Perhaps such individuals also possess tremendous resilience - maybe one of the reasons why we don't witness such unfortunate events more often. Otherwise the tremendous pressures exerted on those  who have a Chief prefixed to their title can drive more normal human beings around the bend.

Take the case of a CFO. He has some (maybe even a lot) of influence on the company, but doesn't really run it. The CEO and the heads of the component businesses are the ones who really run the company and whose actions determine the financial results. And yet it is the CFO who is the public face of the company to the financial community - investors, lenders, markets and the like. Every quarter he has to forecast and deliver results - for which I would argue that he has only limited influence. The average tenure of a CFO has come down to between 4 and 5 years.

You may argue that he (it is rarely a she) is paid handsomely for all this, but trust me, after a point money s not the chief motivator. Despite the greed, many of this lot do this for the fame , prestige, power and the like. We must remember that they are also human beings like you and me. Sometimes you have to wonder if the pressure is worth it.

The issue of pressure is , of course, applicable at all levels in an organisation. The insane hours, the 24 hours work day demanded by globalisation, the physical exhaustion of travel all contribute to a different work spot than what it was even 20 years ago.  In this forum , we have talked often of the social contract of organisations with society. There is also the familial contract and the personal contract which is under immense strain. Something for sociologists to ponder about.

Meanwhile a moment in mourning for Wauthier and words of condolence to the family would be appropriate.

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Reorganisations - the last refuge of the incompetent

There is one ritual that happens in all companies periodically without fail - an organisation restructuring. Old structures and divisions are thrown out of the window and new structures are announced. HR types take great pleasure in redrawing organisation charts, rewriting job descriptions and the like. Communication types have an orgasm designing communication packs and writing words like "restructuring to stimulate growth", "bringing the organisation closer to consumers" and such other waffle. CEOs like to stand up to the press and announce the change , to make up for lack of anything else to say about their companies. MIcrosoft did just that today, the trigger for this post. Steve Ballmer's version of the blah blah is "We are ready to take Microsoft in bold new directions". Balderdash. I have never seen a more futile activity than an organisation rejig. And yet companies do it all the time.

The pattern is all too predictable. If the current organisation is based on product lines, it will be made regional to "get closer to the consumers". If it is regional, it will be made based on product lines to globalise and take advantage of scale. People will be moved around in boxes on organisation charts. The new guys have to go on a round the world trip to familiarise themselves with their new responsibilities. Lots of presentations and power point charts. Every four years or so the charade is repeated.  None of this matters one iota to consumers and shareholders. The only gainers are probably the management consultants who make lots of money.

What a thorough waste of time and effort. Structures are important in organisations, but they matter less than you think. The primal instinct of marking territories and defending against invaders, is what structures are. Structures are boundaries where defences are erected , by petty minded egoistic manages who need to feel important. Much effort is actually expended in organisations in crossing structural boundaries. Seasoned operators build alliances and have informal channels through which they get things done.Formal structures matter little to the determined go getter.

The root of the problem is man's territorial instinct. Man likes to draw boundaries and defend everybody inside the boundary from everybody outside. Alpha males who inhabit the business world suffer from an acute affliction of this instinct. Chief Executives and Boards struggle to overcome this and get the entire organisation to operate seamlessly. Fat chance of that happening. In this quest, organisational restructuring is the placebo. The placebo is particularly touted by the HR function, as a magic cure, which gullible CEOs swallow all to easily.

If Microsoft's leaders think they can solve their fundamental problems and compete better with the likes of Google, by an organisational revamp, well, perhaps its time to write their obituary.

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Tax evasion is a crime. Tax avoidance is a .... ?

In the good old days, this was an easy cliche. Tax evasion (breaking the law) was a crime. Tax avoidance (minimising paying the tax within the law) was something you were duty bound to do. Whether you are an individual, company, whatever. Period. Now it isn't so clear cut an answer.  And that says something about our times.

Witness the case of Apple. It does aggressive tax planning (all within the law). It has a big subsidiary in Ireland and has done a deal with the government there for a low tax rate. It does not bring overseas profits into the US, because it is double taxed then; so it leaves all its overseas profits overseas. All very legitimate. And yet there has been a huge outcry and a Congressional hearing where Apple is accused of not paying "its fair share of taxes".

Similar accusations are levied on Amazon, Google and Starbucks in the UK and indeed in many other countries. Nowhere are the authorities claiming they broke the law. They are just angry that these companies pay a low or zero tax despite large businesses in those countries.

From a public's point of view, there is no difference between evasion and avoidance. The expectation is that all companies must pay lots of taxes irrespective of the law and facts. Equally all rich people must pay big amounts of tax even if the law does not require them to do so. But for each individual himself, it is perfectly OK to evade tax (breaking the law). Queer set of values.

Almost everybody in India breaks the law when it comes to taxes. And before you protest too much, please answer if you have disclosed your savings bank interest as income in your tax return and if you have done no cash transactions above Rs 10,000. The less said about professions like lawyers, doctors and the like, the better. The salaried class is one of the worst offenders - their salaries are caught by the taxman under the withholding tax regime. Everything else, in the eyes of the salaried man or woman is not to be disclosed as after all they are paying "lots of tax" on their salaries.

Why does this work like that. Why is it OK for us to evade tax, but not for others even to avoid it. Is it just pure jealousy against the rich ? Is it just one law for everybody else and one law for us ? What is going on ?

For corporates and rich individuals, there is an expectation of  social responsibility at play here. It is not enough to follow the law. It is now required to be seen as "being fair to society" everywhere. This is a woolly concept ; after all what is the concept of fair.  But each company has to make its own "contract" with society. The more successful you are, the more demanding the contract.

Social responsibility has gotten an altogether new meaning, A far more challenging meaning. Companies have to be seen as "good citizens, whatever that means. Notice that the public's definition of a good citizen is "I break the law, but you shall do over and above the law". "

Its a tough world out there.

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Alibaba and the Fourteen Years

Which is the biggest ecommerce company in the world ? Take a guess. Amazon ? E Bay ? You would be wrong if you guessed either of them. The biggest e commerce company in the world is Alibaba. Its portals handled a sales volume of some $ 170 bn. That is more than the volumes handled by Amazon and E Bay combined.

No, this is not some elaborate hoax dreamed up from 1001 Nights. Alibaba is indeed the largest e commerce company in the world. The reason you may have never heard about it is that it operates almost exclusively in China. It started life as simply Alibaba.com , a business to business portal. It then added Taobao - a consumer to consumer portal, whose similarity to E Bay is, of course, entirely coincidental. Now it has started Tmall, a business to consumer portal, which again, bears a completely coincidental similarity to Amazon. All this in just fourteen years. The last two, if you click on the link, you will see are entirely in Chinese. And therein lies the issue. Can Alibaba really be a global major, while being largely only in China.

One of the trends you may have not noticed is that China has overtaken the US as the largest ecommerce market in the world. Chinese love to shop. And they are merrily shopping online. There is terrific internet penetration in China. And Alibaba, thanks to its visionary founder, Jack Ma, is reaping the rewards.

But then, can it be really the dominant player in the world ? I can't see shoppers of virtually any other country migrating to Taobao or TMall, even if it is in English.  "Open Sesame" worked for the fictional Alibaba, but its hard to see the doors opening that easily for the real Alibaba. There is a huge brand image problem to be overcome, not just of Alibaba, but even of China. As Huawei and a clutch of Chinese companies have discovered, it is not easy going global.

Even in the home market, Alibaba's position will surely be under threat from competition. However big the Chinese market may grow into, its hard to see any company being the world's dominant major, being exclusively in China. As Britain discovered a century ago and the US is discovering now, the sun does set on everybody who thinks he alone can dominate the world.

What of the supposedly more tech savvy India. India does not even have a pipsqueak of an ecommerce company. Why ? The blame for that is squarely on Ramamritham. He has made internet connectivity one of the most difficult things in India to obtain. He has virtually made impossible an Internet Cafe industry. He does not allow easy payment systems to emerge. He goes after those who try, like Flipkart,  and brings his full attention on them by lodging all sorts of cases. And he does not allow the global majors to come in.

And therein also lies the risk for Alibaba. Thus far, the Chinese equivalent of Ramamritham , Li Xiao has left them alone. But then Li Xiao is not a bureaucrat. Li Xiao is from the Party. Ramamritham is completely predictable - he will create every obstacle possible, but do nothing else. Li Xiao is entirely unpredictable. If Alibaba attracts political attention, then its fate is sealed.That's probably why the wily Jack Ma is stepping down as CEO. And he is planning an IPO. An IPO that might even best the Facebook IPO.

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Why do smart people do stupid things

There's something about the corporate world that makes smart and decent people do incredibly stupid things. Maybe its the anonymity of being part of a company. Maybe its the pressure generated to perform. Maybe its the brutal focus on the ends and not the means. Don't know what .

Why else would some British honcho in Sony decide to raise the price of Whitney Houston's albums on her tragic death. There was surely going to be a memorial upsurge in sales of her records. But what sort of a decision is that to raise the prices then ? Predictably there was a huge outcry; Sony had to back down and I'm sure the guy who did it has egg on his face.

Similar is the decision by some Starbucks Manager near the World Trade Centre to raise the prices of water on that fateful day in 2001. Or the decision by the Chairmen of the auto giants to fly by private jet to Washington to plead with Congress for a bailout. Or the insistence by Jack Welch to award himself retirement benefits that included an apartment in New York and free food and wine - chicken&^%$ in comparison to his personal wealth.

Why does this happen. Unfortunately  corporate environments seem to be dangerous grounds where a decent person's normal human values have every risk of being left at the door. Perhaps there is something dehumanising about the seemingly dog eat dog environment. Perhaps people are blinkered, or even blinded, by the single minded focus on the rat race.

There is a lesson for us all here. Every action we take must be viewed through the prism of two criteria - will we squirm with embarassment if the decision were to be dissected on Breakfast TV or come in the front page of the newspaper. And secondly would we squirm if we have to explain it in the barest detail to our mothers.

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In defence of business

The word business is nowadays accompanied by a metaphorical holding of the nose. Post the financial crisis, businessmen would probably rank just above bankers and below more traditional last placers like real estate agents, in the list of reputable professions. Readers of this blog would know that the author is a staunch defender of business and advocates the view that the profession is unfairly maligned. An earlier post had touched on this subject.

It was gratifying to read The Economist’s Schumpeter column, The Silence of Mammon, which argues that business people should stand up for themselves. The article recounts the two arguments it says proponents have put forth in defence of business – that many firms are devoted to good works and that businessmen have done more than any other institution to advance prosperity. It opines that these are not enough and puts forth three more arguments to counter the critics of business who have dominated the discussion on corporate morality – that business is a remarkable exercise in cooperation, that business is an exercise in creativity and that business helps maintain political pluralism. All excellent arguments, in an eminently readable article.

I wade into this debate with unbridled enthusiasm. I have little sympathy for those who taint businesses as immoral with a broad brush. At the cost of oversimplifying a complex matter, I set out a central theme in defence of business and industry.

I come from a poor country, India, and now live in another one, China . I have seen how degrading poverty is to humanity. And it is China that I want to present in defence of business. In 1981, 84% of China’s population of a billion plus was below the poverty line of $1.25 a day. In 2005, in the same China, the percentage of population below the same poverty line had decline to just 16% (source : World Bank working paper 5090). Yes SIXTEEN per cent. That equals to 700 million people who have climbed above the poverty line. We all know how this was done.

Show me any other way of pulling 700 million people out of poverty and I’ll abandon all defence of business.

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About wealth in China & India

The ten most valuable companies (in terms of market capitalization) are
(see my separate post on this here)

1. PetroChina (China)
2. Exxon Mobil (US)
3. Ind & Comm Bank of China (China)
4. China Mobile (China)
5. Microsoft (US)
6. Wal-Mart (US)
7. China Constr Bank (China)
8. Johnson & Johnson (US)
9. Proctor & Gamble (US)
10. Royal Dutch Shell (UK/NL)

Now look at the list of the ten wealthiest persons in the world (Source Wikipedia)

1. Bill Gates (US)
2. Warren Buffett (US)
3. Carlos Slim (Mexico)
4. Larry Ellison (US)
5. Ingvar Kamprad (Sweden)
6. Karl Albrecht (Germany)
7. Mukesh Ambani (India)
8. Lakshmi Mittal (India)
9. Theo Albrecht (Germany)
10. Amancio Ortega (Spain)

These two lists say something about China, and India.

China dominates the first list; a sign of the times. However it is completely absent from the second list , upto the Top 100 ! India does not figure in the first list anywhere, even in the top 100. But a number of Indians are on the second 100 list. Some readings from this

- Most of China’s business remain predominantly state owned. Conventional wisdom states that state ownership of business rarely succeeds. China has proved over the last 20 years that it is a shining exception

- In China its OK to be rich. But its not OK to be stinkingly rich ! For being super rich means accumulating power, which is a no no in China

- In India its not OK to be rich. But its OK to be stunningly rich. It’s a paradox, which is hard to understand

- India is growing largely by individual initiative. China is growing largely by state intervention. A sweeping statement that is riddled with holes, but broadly true

- Disparity of wealth, while existing is both countries, is less in China than in India. Average is higher, but extremes are lower in China

- There are, of course, very wealthy people in China. But they tend to hide their wealth; not flaunt it.

As a complete aside, I am amazed to see only 2 Japanese in the top 100 wealthy people. Even more than the rise of China, what amazes me is the decline of Japan. For those who predict endless growth of China, perhaps this is a sobering thought. In the 70s and 80s, Japan could do no wrong. Look where it is now.

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The world's largest companies

Which is the world’s largest company by market capitalisation now ? No don’t look – just guess.

Lists of the worlds most valuable companies, largest by sales, etc etc are always dodgy – they rarely represent the truest picture as there are simply too many factors that aren’t common around the world for such comparisons. And they change all the time. But the latest list does produce some telling commentary on the way the world is headed.

This is the top 10 in terms of market capitalization as of last week (Source : Bloomberg)

1. PetroChina (China)
2. Exxon Mobil (US)
3. Ind & Comm Bank of China (China)
4. China Mobile (China)
5. Microsoft (US)
6. Wal-Mart (US)
7. China Constr Bank (China)
8. Johnson &Johnson (US)
9. Proctor & Gamble (US)
10. Royal Dutch Shell (UK/NL)

The obvious thing that stares in the face is the appearance of China at the top half of the table. Granted, the stock exchanges there have gone wildly up, with every indication of another bubble, that the government still owns most of the shareholdings in these companies with the free floating stock only a small percentage. But still ….. Did I hear somebody say G2 ?

The other obvious stunner is the disappearance of the Japanese companies. The first Japanese entry is Toyota at 25. There was a period when the majority in the Top 10 was Japanese.

But this list hides the truly biggest company in the world. By any yardstick it will be way ahead of the others. It doesn’t feature on any list because it publishes no numbers - doesn’t have to, because its state owned. But in terms of size, it’s a giant that will make the others in this list look like pygmies. It is estimated to be some 20 times the size of Exxon Mobil, number 2 in the list above, in terms of output.

The largest company in the world, on most measures, has to be Saudi Aramco.

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