Letting go

When your child is born, it is probably the greatest moment of your life. It's your child. It is the creation of you and your partner. It's a new life created out of the blue. And only because of you.

You then slog your butt off to raise the child. You shower it with love and affection. In the first years of the child's life, you don't have a single night's sound sleep. You worry about your child every minute. You take joy in every smile and gurgle. You get terrified if the child were to as much sneeze.

As the child grows up, you continue to sweat over it. You work hard to earn money to provide for the child. You are willing to sacrifice anything to ensure a top quality education. You try and impart your values. You even discipline the child when she does something wrong. You have every possible aspiration for the child - she will be famous, she will be wealthy, she will excel; above all she will be happy. You even transfer your own aspirations, which you were not able to achieve, on to her.

All too soon, the child grows up. She is now a teenager. She has her own wishes. She does not want to ask your permission for everything. She perhaps listens to music that you cannot even understand how it could be called such. She wants to stay out late. You want to impose your will on her, because in your eyes, she's still the baby and you want to protect her. She rebels. You argue. 

And then, in the blink of an eye, she is an adult. She leaves home; first to study somewhere else and then to work and be independent. You have a lump in the throat. 

What do you do as a parent ? You have to let go.

What if she wants to marry somebody from a different world and the polar opposite of what you determine to be a "good man". You have to let her go and warmly and enthusiastically embrace both of them.

What if she takes up a profession (maybe singing in a night club). It's against all your values. But you have to let her go. Wish her every success.

What if she takes up something unpleasant. Like, say, smoking. You can certainly give her a hug and say quietly that this isn't good for her health. But is she going to listen ? No way. You have to let her be.  Yes, you can worry inside your heart. But that's all you should do.

You came from a very middle class family where you lived frugally and never bought anything for yourself. She decides to blow her first salary on 25 designer dresses. She flaunts bling. Yes, the neckline is too low. Do you chide her ? Of course not. You let her be.

The worst thing you can ever ever do, is to bitch about her to all and sundry and say what a disappointment she has turned out to be.  You will gain absolutely nothing from it. You will only demean yourself in the eyes of everybody else. And she is not going to be one inch different.

For you see, its her life. The values you tried to drill into her are all very much there. She just sees life very differently from you. That doesn't mean she doesn't love you. It doesn't mean that she is "bad". She is just she. The angel she always was, is, and will be. Let her be.

I know its not easy. But its a mark of your greatness, if you can let her go. It does not negate the immense effort and everything you have done for her.

Mr Murthy; I am talking to you.

For those readers who are not following Indian business news every day, this post was prompted by this news.

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No Tim, No

Caesar's wife must be above suspicion , as the saying goes. It is not just important to be right, you must also appear to be right. This is even more important for very public figures. That is why this post is titled No Tim, No .

Timothy Geithner, the former Treasury Secretary (in Indian parlance, Finance Minister) is going to become the President of Warburg Pincus, an investment banking firm. There is nothing legally wrong in what Geithner is doing. He was the Treasury Secretary during Obama's first term.  He left office in January 2013 and has been writing  a book since. Now comes the news that he is to become the head of Warburg. He is perfectly entitled to do whatever he wants once he steps out of pubic office.

The problem is the old one of Caesar's wife being above suspicion.The cosy nexus between businessmen and politicians is a significant problem today - especially in the US after Citizens United. The financial sector is in the eye of the storm of government attention and regulation , much of which Geithner himself started when he was Treasury Secretary. In his new role, he will have a considerable amount of interaction with the US government. While he may want to , and maybe even will, be prim and proper, it is inconceivable that he will apeear to be so in the eyes of the public. While we will be charitable to Warburg, it is not inconceivable that they hired him precisely for his political talents and connection.

This is the age old problem of government servants and regulators leaving their jobs, or retiring, and then joining the very corporates they regulated or oversaw.  In some countries there are statutory cooling off periods before they can do so. My belief is that it should never be done. It is impossible to ignore the conflicts of interest. Even if the individual concerned is meticulously honest, he will have to recuse himself from virtually any issue that has a bearing on his old job. That will make him completely ineffective. In effect, the very reason corporates hire them is to take advantage of their past connections. That is why it is wrong.

The reverse flow also happens. Corporate honchos join the government too - in the US many past Treasury Secretaries have been CEOs of Goldman Sachs. I would not go so far as to ban corporate types from joining the government - the flow of talent from the private sector to the government is one to be encouraged. But I believe, they should not take up a position that is in the same field as where they came from. I have no problem with say Henk Paulson becoming the Secretary of Education , but as Treasury Secretary, where his job would be to supervise his former employer Goldman Sachs , ...... that fails the test of Caesar's wife. I know this would not utilise his talent in his field of expertise, but if public trust in government is to be maintained, fairness must be above board. Do you really think Paulson's decision not to rescue Lehman Brothers, a hated rival of Goldman Sachs, can ever be whiter than white, even though it may have actually been so ?

I am well aware that such a view will be met with derision in today's circles as old fashioned, romantic rubbish. Yes, old fashioned values have little support in today's environment. But that does not detract from the merits of them. Pompeia, Ceasar's wife held a festival for women only in which Cloudius gatecrashed dressed as a woman, ostensibly for seducing her.  He was caught, but in the trial that followed, he was acquitted. And yet, Caesar divorced Pompeia, leading to that famous expression. Can you imagine in today's world, such standards being set by those in power. Alas, that is why governance today is at such a low point.  When values come to the fore again, we shall be governed by honourable people.

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CEO for 20 minutes

How would you like to be CEO for 20 minutes ? No this is not one of those employee motivation exercises, nor is it a joke. This is all too real.  That's precisely what happened to Bill Johnson the CEO designate of Duke Energy.

All this arose from a merger between Duke and Progress, two giant utility companies in the US. It is now the largest electric utility in the US. As is typical in such merger of giants, the CEO of Duke was to become the Chairman of the combined entity and the CEO of Progress, Bill Johnson, was to become the CEO of the combined entity. Regulatory and shareholder permissions were sought , and received. All very good. On 27th June, Bill Johnson signed his new employment contract and  that was that.

The merger was consummated at 4.00 PM on Monday 2nd July. Immediately thereafter the new Board met and sacked Bill Johnson. At 4.20 PM Johnson resigned - he resigned rather than refusing to do so, as he was getting a $10m settlement that way. CEO for 20 minutes.

This is not a tin pot company, nor is the Board a bunch of jokers (although you have to rethink that now). Both the companies are giants in their own right and the combined entity is a behemoth. And yet, did they seriously believe that they would get away with this sort of behaviour? Did they expect the regulators and the shareholders to keep quiet. Even a moron can see that this is probably the worst move that you can make.

Mergers and acquisitions are notoriously difficult to implement. More go wrong than right. But if you start off like this, what chance do you have of any success ?

The future is all too predictable. The Board will defend for 3 days that all was right. Public and regulatory outcry will build up. Then the Chairman will resign. As will a few more Board members, if not all. A new CEO will be appointed. More turmoil. And the acquisition will steadily go downhill. Two years from now, Progress will be divested at one tenth the acquisition value.

It boggles the mind how corporations can monkey around like this. They seem to be their own worst enemies.

PS. Since all this drama is happening in Gils's current hometown,  perhaps, the esteemed blogger might pen a first hand account in the comments section :)

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Corporate Japan at its worst

In the good old days when I was in business school, Japan could do no wrong. A million books were written on the Japanese style of management. America was bust, Japan was everything. Case after case taught at business school was on how gloriously managed Japanese businesses were. At that time the two words we were thoroughly sick of was Japan and Walmart ! Time has since proved that there is a fair bit to admire about Japanese management, but a lot that is thoroughly rotten.

A great example is what happened at Olympus last week. This is the company that makes cameras.They just fired Michael Woodford, their CEO, and a 30 year company veteran, two weeks after elevating him. They were brave enough to appoint a non Japanese as their CEO, one of a handful of Japanese companies to do so and foolish enough to sack him immediately. His crime - he didn't listen to the Chairman Kikukawa san and started probing into the financial skulduggery that seems to have gone on.

The skulduggery relates to the acquisition of Gyrus, made in 2008. The acquisition was for $2 bn. Olympus then made payments for advisory fees of $687 m to two virtually unknown firms. Nobody can trace who the owners of these two companies are. One of them, registered in the Cayman islands has since disappeared off the registry 3 months after receiving the last payment from Olympus. These payments were not disclosed to shareholders - instead they were hidden in goodwill by adding to the acquisition price. Now, who on earth pays advisers fees of $687 million for a $2 bn acquisition ?? Not even Wall Street is that greedy.

KPMG, their auditors disagreed with all this accounting wizardy and were promptly sacked for their endeavours.

Woodford started to enquire into this and was told to shut up and look elsewhere. His crime was that he did not listen.

Woodford was summoned to a Board meeting were he was told to zip his mouth and not speak. The solemn directors then proceeded to fire him. The function of the board, alas all too often in Japan, is to bow one inch lower than the Chairman. So much for corporate governance.

The rigidity of hierarchy in Japanese corporate life survives to this day, Grovel and obey without question. I am still amazed how they managed innovation with that culture. I am sometimes inclined to credit some divine providence for all the wonderful innovation in product and quality systems that came out of Japan. How else can you explain  that coming out of a Stalinist corporate culture.

The only lot who are thoroughly unimpressed by all this is the Japanese investor. He has cheerily driven down Olympus' share price by 24%. Kikukawa san and his deputy Mori san may still have to fall on their sword soon.

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The curious case of Ben & Jerry's

Do you like Ben & Jerry's ice cream? Most probably a resounding yes.  But this post is not about its ice cream. Its about what it has done on Tuesday.

What it did on Tuesday was to go to New York's Zuccotti Park where the Occupy Wall Street protesters are camped and dole out free ice cream to all of them. Nothing spectacular about that, except that it went on to publicly declare its support for the protesters. It also published a statement from its Board of Directors that the company has the deepest admiration for the protesters and is standing with them. You can read what the Board said here.

Ben & Jerry's has long been a left leaning company promoting a variety of causes. Its founders Ben Cohen and Jerry Greenfield started the company with a clear social and sometimes political agenda. So should this latest action be surprising. Yes, because, Ben & Jerry's is no longer an independent company. It's a subsidiary of Unilever, a global multinational company, perhaps the very sort that the Occupy Wall Street protesters are agitated against (that is, if somebody can decipher what exactly they are protesting about).

Was Unilever ambushed by the act of Ben & Jerry's ? Tough to believe so - for the Board of Ben & Jerry's has Unilever representatives, including an ex Director of Unilever itself. Unilever has issued a statement that it is neutral to social campaigns and has no comment to make, but that is a blithe remark considering that  its subsidiary is indeed making a very loud statement.

How far do you let your subsidiary act on its own ? Usually subsidairies are simply legal shells and the parent runs them as one corporate whole, unless there are external shareholders. But Ben & Jerry's is different. Perhaps because of its historical brand image. Perhaps because of covenants agreed with the founders at the time of acquisition to allow the company to have a social agenda. But still, the latest action seems a step too far. I won't be surprised if the upstart is reined in.

What of the protestors ? They are objecting to evil corporations; right ? Do they want the support of one ? Some of them expressed mixed feelings. They said they were uneasy about corporations muscling in on their patch. But they also said, they could not turn down a free ice cream !

Very curious.

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Minorities be damned

A curious side show to the Alcon deal that I blogged about in my previous post is the treatment of minority shareholders. You may recall that Novartis bought 52% of the shareholding in Alcon, from Nestle, at $180 per share in cash. It had already held 25% bought from Nestle earlier. So it now has 77%. The balance 23% is held by minority shareholders as Alcon is listed in the US.

Novartis has now offered $153 dollars to the minority shareholders, in its own shares (not cash as was paid to Nestle). The minority shareholders are crying foul.

Alcon is a Swiss based company and dictated by Swiss Corporate law. Swiss law does not require minority shareholders to be paid the same amount as the majority shareholders in an acquisition. Most other countries in the world have this provision. Switzerland does not. That’s why Novartis can do what its trying to do.

On first glance this would seem to be an abuse of minority shareholder rights. But wait a moment. Its not so black and white.

The “minority” shareholders” who are making all the noise are hedge funds who bought into Alcon shares recently on the hope of making a quick profit when the acquisition happened (betting that the acquisition price has to be above the market price). Do they deserve any sympathy if they have got the Swiss corporate law wrong. The independent directors in Alcon are trying to protect minority shareholder interests (no doubt fearing law suits), but do speculators like the hedge funds deserve either sympathy or protection ??

Secondly if you were truly a small minority shareholder who subscribed to the Alcon shares when Nestle took it public in 2002, you bought it at $ 33 per share. In 8 years that’s becoming $153. Do you have a problem with that ?

Thirdly, what about the famous “control premium”. There is usually a premium to be paid to the controlling shareholder in a private M&A transaction. This is supposed to be “compensation” for the active role played by the shareholder in managing the company and increasing its value (as distinct from the sleeping shareholder who did nothing ). I know it is dangerous territory and contrary to conventional wisdom to argue shades of colour in capital. But then, this is the principle why Swiss law allows different prices to be paid for different classes of shareholders.

I think Novartis will ultimately be forced to pay the same price to minority shareholders, as they will be forced to by public opinion. For “public” read “market”. Despite being a strong votary of good corporate governance (a key component of which is protection of minority shareholders), I think in this case that would be wrong. The loudly yelling hedge funds deserve no better !

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When shareholders’ and company’s interests don’t coincide

What happens when the interests of the shareholders do not coincide with what’s good for the company ? Ordinarily there should not be any conflict – the company should have no interests of its own other than the interests of its shareholders. In the capitalist model, the interests of management or the employees – doesn’t matter; they operate solely to safeguard and promote the interest of the shareholders. But once in a while a situation crops up where its not so clear cut. That’s the position with Carrefour today.

Carrefour is the second largest retailer in the world after Walmart. It is the most international of the retail chains – Walmart for all its successes in the US has not really shone outside. Tesco, another giant retailer is a relative newcomer to the international arena. Carrefour has been the truly successful international retailer – it came to Brazil in 1975 and to China in 1995.

In the peak of the boom, a little while ago, a couple of investors, including some famous names, bought a 13% stake in Carrefour at around Є 50 a share. With the recession, Carrefour’s shares are now at Є 30 a share. They don’t like this , of course, but there’s nothing to suggest that any of this is due to Carrefours’ performance. On the contrary the company is doing OK. Its share price has just been a victim of the global circumstances.

So what do these shareholders want to do ? They want Carrefour to sell off its Latin American and Asian businesses and then pay them a special dividend. They then want Carrefour to withdraw into becoming a European (mainly French) retailer.

Here’s the conflict with the company’s interests. Clearly the strength of Carrefour is its international leadership. In its home markets in Europe, it is plagued by low growth (in France) and poor profitability (most other countries). If it withdraws from Asia and Latin America, then it doesn’t have a real future. In any case, who would want to withdraw from China, if you already have a strong presence there.

There’s an argument to say that however rosy the future may be, if you get a full price for the business, you should sell. In this case, its far from clear how Carrefour would get its full value. The more obvious buyer is Walmart, but its highly unlikely that the Chinese are going to allow this on anti trust grounds. Who’s going to pay the full price ? And is it OK for a bunch of shareholders with an extremely short term motive to cut losses and run, and perhaps harm the company’s future ?

So, is the shareholder always right ? I am not so sure. Perhaps the question should be posed differently. Is it OK for the shareholder to have a sub optimal short term motive, when an alternate long term view is demonstrably superior ? And who should be the judge of this ?

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The Chinalco Rio Tinto affair

The proposed acquisition of a 18% stake in Rio Tinto by Chinalco is starting to get more and more messy. The deal raises a number of issues and hence this post.

First the facts. Rio Tinto is an Anglo Australian mining giant. It is listed in the UK and in Australia (as separate companies, but managed and run as one). Its mines are mostly in Australia. Through acquisitions made at the top of the commodity cycle, it is saddled with $ 38bn debt in its balance sheet. Now with the financial crisis, it is in trouble. Cash is needed to repay tranches of the debt that fall due in October.

Step forward Chinalco. A Chinese state owned metals company. It has offered $ 19.5 bn dollars for minority stakes in iron ore, copper, and aluminium mines and a 18% stake in Rio Tinto itself. Rio's Board unanimously passed the proposal.

The deal has raised howls of protest form all sorts of people.

The UK shareholders are howling because it dilutes their stake in the company. While the price Chinalco is paying per share is higher than current prices, it is lower than what it was in the boom days. They want a rights issue. But there is no certainty that the rights issue will raise the cash that Rio requires. In fact it is very likely that it won't. Then what ?

The Australian shareholders are crying foul over the valuation. But then in today's market that's all they will get. No point in crying over what might have been in the boom days. They want asset sales. But that's what Rio is trying to do and there's no evidence that it can raise any better with anybody else.

The Australian public and the politicians are howling over an entirely different issue. They are scared of "China taking over Australia". This is plain nonsense. I can bet that if it was an American company or a British company, there would have been no protest. Just because Chinalco is state owned in China, there is yelling. This smacks of jingoism and many posts can be devoted just to trashing this fear. The Australian Competition authorities cleared the deal yesterday, but it is stuck with the Foreign Investment Review Board who will decide whether it is in Australia's "national interest".

End result , complete uncertainty. If the deal falls through, there will be serious trouble for Rio come October when a major debt repayment is due. In the process, their Chairman is going away and the man they announced as his successor also went away. They have now announced a new successor. No prizes for guessing where Rio's management attention is now. All this after the soap opera of last year of BHP Billiton's proposal to acquire Rio Tinto, which finally fell through as the stock market tanked.

Methinks that the deal would not have had anywhere near this chorus of objections, if the suitor was not Chinese. That's the real pity.

Neither the shareholders, nor the authorities have covered themselves with glory on this matter.

For more reading on this deal

Chinalco deal raises questions for Rio Tinto - Financial Times

Rio Tinto shareholders continue to oppose Chinalco deal - Domain-b.com

Controversy Swirls Around Rio Tinto-Chinalco Deal - Businessweek

Pressure grows on Rio Tinto-Chinalco Deal - Daily Telegraph

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Are these the guys we work for ?

We all work for our shareholders. That's what capitalism is all about, isn't it ? All employees are there to maximise returns for the shareholders. If we all work for them, shouldn't we get to know better who these guys are ?

Amongst all stakeholders, the shareholder is the guy we know the least about. If you are an average employee, you'll get to meet customers once in a while. You'll get to meet consumers fairly often. You'll meet employees every day. Ditto, with the community around you. But the shareholder ? Probably never. The Investor Relations guy meets them often and the Chairman and the CFO once every quarter or so, but the others ? Maybe never?

You are an employee in a fairly large global company that's listed in a couple of places in the world. Lets say widely held. Its very probable that the company last issued share capital many decades ago and the original investors of the company are long gone. So the shares are held by all sorts of individuals and institutions who have given nothing directly to the company.

So who are these shareholders. There are all types of them. Lets see some of the usual suspects.

There are the sovereign wealth funds. Rich countries investing their surpluses in companies. Maybe the sovereign wealth funds of Dubai or Singapore. Do you want to work for these governments ? Especially when they create such incredible trouble in granting you a visa even to visit them for business !

Then there are the pension funds. These seem to be good guys - after all they may be paying your pension too when you retire. Along with them come mutual funds,insurance companies, banks, funds, etc etc. These are the aggregators of private savings. Its difficult to love this lot. Just consider the mess they have created globally and we can rest our case. They care two hoots about your company, unless you make them tons of money. They invest in all your competitors as well. They don't care much for the products you make - they might very well be consuming the products of your competitor. They cheer when lots of employees are sacked. They put enormous pressure on you every quarter. They are fair weather friends - they abandon you in a second when the slightest ill wind blows. Do you want to work for them ?

Then there are the speculators. They don't hold your shares really - they come in and out, often many times a day. They absolutely don't care who you are - you might as well be the fly on the window. The only thing they are doing is betting whether you'll open your left eye or the right eye. Do you want to work for them ?

Then there are the old geezers. They have held your shares for 50 years and very probably their fathers were direct investors in your company. Half of them have lost their shares , or whatever slip of paper needed to claim their ownership. The other half have meticulously kept their certificates and come diligently to every AGM - to grab the eats that you lay out and to make a boring, irrelevant, soporific speech under the guise of asking a question. Do you want to work for them ?

Sometimes your shareholder might be a corporate raider. He's wanting to steal your company, break it up into bits , sell them off, get fabulously rich and screw you. Surely you can't want to work for them ?

Or you might be working for yourself. After all employees are shareholders too. But wait. You hold a few measly shares that you invested your hard earned savings in. But the %$@#s who sit on the top floor, rewarded themselves with options, grants and the like and they are the employees who hold the most shares. You already work your backside off for those insensitive %$#@s. You don't want to work "more" for them surely !

Oh yes - I know all the economics. You work for whoever gives you the capital and its none of your business as to whether he is a likeable fellow or not. All very true. The world cannot run if this is not so.

But then, surely something is not exactly right. You can't give your whole life (and most of us do indeed give our whole life to the companies we work for), to make some faceless lot, that you have never seen, and don't very much like, rich. Did somebody say capitalism doesn't have a heart ? Maybe that's why, despite all the good it has done to the world, its not liked very much.

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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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