Like IAS, IES, IFS etc., Needed : Indian Directorial Service (IDS)

Corporate frauds wherever and whenever they occur, from Enron in US to Satyam in India, bring focus on the role of independent directors in the boards of companies. In India, Clause 49 of the Listing Agreement with the Stock Exchanges specifies the role and requirements of independent directors on the boards of listed companies. Clause 49 is positive and comprehensive. Unfortunately however, neither the Clause in its scope nor the concept of independent directors in practice has the teeth or enablement to deal with the detection, prevention and correction of deliberate, systematic corporate frauds undertaken by the managements of the companies and the systemic deficiencies that are perpetuated in organizations to facilitate such frauds, as exemplified by the Satyam episode.

Several white papers on the collapse of Enron pointed out that lax regulatory environment in the US and poor oversight by the Enron board contributed to the collapse of the company. Regulations have since been tightened up significantly; reporting requirements enhanced substantially and oversight expectations on boards escalated notably in the major economies of the world. In all this effort, major emphasis has been placed on having a higher proportion of independent directors in the boards. This focus on independent directors has not helped matters as evidenced by the successive corporate failures in the US and the shocking Satyam imbroglio in India.

Satyam, for example, had some of the most talented and respected names as the independent directors on its board, prior to the recent events. The list includes Mr V P Rama Rao, former Chief Secretary to the Government of Andhra Pradesh, Dr (Mrs) Mangalam Srinivasan, Adviser to Kennedy School of Government, Harvard, Professor Krishna Palepu of Harvard Business School, Mr Vinod Dham, the famous Intel chip discoverer, Professor M Rammohan Rao of Indian School of Business, Mr T R Prasad, a former cabinet secretary, Government of India and Professor V S Raju of Indian Institute of Technology. The number of independent directors at 7 is larger than the number of whole-time directors at 3. The company was listed on NYSE and therefore was subject to the most rigorous reporting requirements of Sarbanes-Oxley Act of the USA.

From an analysis of Satyam’s corporate governance report, the independent directors participated in the board meetings as well as in the governance committees such as audit committee in full compliance of corporate governance norms. The directors represented proven, distilled administrative, technological, management, governance and academic experience. The company had a full-fledged Code of Conduct and Ethics for Directors. None of the above has, however, helped the board or the independent directors of Satyam, individually or as a group, to detect the corporate fraud that happened under the board’s very nose. It is indeed ironic that one of the independent directors of Satyam, Professor Krishna Palepu had the distinction of co-authoring with Professor Paul Healy of Harvard Business School a landmark book titled “The Fall of Enron” in 2003! Obviously, there is more than individual expertise and integrity that is on test under the independent directors system.

The fault does not lie in the independent directors, per se. The very act of having professionals at the peak of their respective careers or at the launch of new careers post-retirement as independent directors brings with it the twin disadvantages of a non-aligned career focus and an enormous time constraint. In the few hours they have at their disposal for each board meeting, such directors can bring no more than a whiff of world’s best practices or a gentle advice of caution to the deliberations of the boards. They would have neither the time nor the capability to analyze projects, operations, plans and finances to detect systematic fraudulent activities. The problem of inadequate attention gets compounded as such reputed professionals are much sought after as outside directors in several companies.

India has several thousand joint stock companies out of which over 5000 are listed in India’s oldest stock exchange, Bombay Stock Exchange. Assuming that these board managed companies require 5 to 7 independent directors each (based on an average board size of 10, with 2 to 3 members being whole-time directors and 2 members representing investors) there is a gigantic requirement for 25000 to 35000 independent directors to guide and manage these listed companies. It would be self-defeating to try to source them from a professional pool which is otherwise engaged in fulltime work of its own. If one superimposes the need for such independent directors to contribute effectively to the affairs of the company through industry knowledge, strategic guidance, operational oversight and risk management and in addition in the post-Satyam situation by way of regulatory compliance, internal audit and management audit the job of independent directors becomes a fulltime job with specific skill sets. The problem is not confined to private sector alone; several public sector companies too face the problem.

If the Government of India and India, Inc are serious about making the boards truly perceptive and powerful bodies with independent directors making a distinctive knowledge cum practice based contribution to the functioning of the boards, major structural and systemic changes in the institution of independent directors are called for. There are three aspects to this: (a) creation of a dedicated all-India talent pool for independent directors (b) making the independent directors truly independent and empowered and (c) integrating the independent directors in the strategic functioning of the company. These objectives can be fulfilled by the creation of an Indian Directorial Service (IDS) on the lines of the famed Indian Administrative Service (IAS) which creditably runs the Indian government.

IDS will be a special, high profile corporate cadre selected, trained, placed and compensated by the Government of India through its entities. The selection to IDS will be made through an all-India selection process by a newly created Union Corporate Directors Commission (UCDC) akin to the Union Public Services Commission (UPSC). The training for the directors selected for IDS will be carried out by a newly created National Corporate Directors Academy (NCDA) akin to the National Defence Academy (NDA) in collaboration with the various Indian Institutes of Management, which will be encouraged to set up academic verticals for corporate directors. The placement of independent directors from the IDS in various companies will be made by a Standing Committee for Independent Directors (SCID) under the governance of SEBI. The compensation for the independent directors will be carved out of a share of tax earnings reported by the corporate entities and administered by the Ministry of Corporate Affairs(MCA) if necessary through Company Law Board (CLB).

Unlike the IAS and other public services, the minimum entry age for IDS will be 40 years of age with a minimum of post-graduate qualification and15 years of senior level industrial, business, academic or armed forces experience. Maximum age of entry will be 60 years. Superannuation age will be 70 years. Senior executives from private and public sector companies as well as universities will be encouraged to apply. Aptitude, intelligence and psychological tests appropriate to directorial responsibilities will be administered as part of the selection process. The selection will be national and conducted annually. The tenure will typically be for renewable terms of 5 years and subject to the usual shareholder approvals. The IDS pool will be typically rotated across companies and industries to promote cross-fertilization of ideas and avoid the development of vested interests.

The independent directors are expected to influence the boards to make bjective and ethical quarterly and annual reports to the shareholders, stock exchanges, SEBI, SCID and MCA on the state of affairs of the companies they manage. The reports will be strategic in nature and cover critical aspects such as business environment facing the company, competitiveness of the company, performance parameters and ratio analysis, regulatory compliance, SHE (safety, health and environmental) profile, risk and prudential management and human resource accounting. Each of the independent directors on the board is expected to take a lead role in each of the 7 areas. One of the independent directors is expected to be appointed as the Chairman or Vice-Chairman of the company.

It is expected that each independent director from IDS will not be on the boards of two or three companies and not be on the board of more than one company from the same industry. Each independent director will have a working office as well as a basic secretariat in the company and possess the freedom to operate fulltime in the company. The independent directors will be provided access to the management information system (MIS) of the company and will be afforded the freedom to interact with the senior tier of executives directly reporting to the CEO.

When IDS takes off on the lines suggested above, it may evolve from being a governance cadre to a becoming a total talent source for directorships in the companies. It may lead to a healthy competition between the home-grown whole-time directors and the externally-inducted independent directors. Companies would have the benefit of a knowledge driven, fully functional board contributing to all aspects of corporate management.

Obviously for a major structural initiative such as IDS to succeed, this new public service has to be provided with the necessary legal enablement. Necessary supportive institutions such as UCDC, NCDA, SCID discussed here should be established. MCA and CLB as well as SEBI should be expanded to be able to handle additional administrative responsibilities efficiently. Apex industry associations such as Confederation of Indian Industry (CII) should lend their full support to the concept. Indian Directorial Service could be a major structural and systemic reform that could be a pioneering one even globally.

Posted by Dr CB Rao on January 11, 2009.

Corporate Growth and Collapse:A Competence-Conscientiousness Interplay?

Enron, Tyco, Worldcom and Xerox of the recent years, the Wall Street of the recent months and Satyam of the recent days raise the question as to how just one or two top ranking leaders of a company can perpetuate gross operational mistakes and / or financial falsification of the magnitude reported in each case. The occurrence of such events in a public listed company is even more surprising given the size and scale of operations a large company has, the public visibility it receives and the innumerable transactions it has with thousands of its stakeholders.

One conclusion that emerges is that such adverse outcomes cannot be attributed to just one leader, however powerful he or she is in an organization but probably are the result of a number of individuals working collectively together, knowingly or unknowingly, towards such outcomes. However, even this conclusion is paradoxical in the context of such organizations being expected to have people with established backgrounds and appropriate perspectives. Are these adverse outcomes caused by an organizational behaviour dynamic that is not adequately researched?

The answer probably lies in the interplay between two critical dimensions that drive human behaviour. Competence and conscientiousness are the two dimensions which drive the behaviour of any personality, in an organizational context. Competence is the important skill (or skill-set) that is needed to do a job effectively. Such competencies are acquired through education and experience. Conscientiousness is the part of an individual’s thought process that judges the morality of the individual’s own actions.
Competence stems from knowledge and awareness. The more competent a person the more likely the person is likely to be able to contribute in his or her role to the organization. A competent person is likely to be aware of the various decisions he takes and the implications for business growth and propriety. More importantly, competence provides a unique sense of self-worth and the requisite confidence to an individual to operate as per the fair dictates of his or her profession. A competent person is thus likely to stand his ground against any undue pressures and conduct his activities in a performance oriented and ethical manner. As a corollary, an incompetent person is likely to be a pliant individual susceptible to various types of pressures besides being a poor contributor to corporate performance.

Conscientiousness provides the sense of right or wrong to an individual. It helps a person with the requisite sensitivity to analyse whether the decisions and actions he takes by himself or is asked to take by his superiors are consistent with professional and business ethics and practices of good governance. A conscientious person is more likely to exercise his competence in a positive manner for the good of the business and society. As a corollary, a person who is not conscientious is likely to be more amenable to undue pressures and questionable ways, and worse still may even put his competence to misuse in pursuit of short run gains.

A person’s contribution to and influence over the ethical performance of a company is thus an interplay of these two essential dimensions of a personality. The issues one encounters in various organisations are linked to the variability that is found in each of these the two dimensions. Like every attribute or outcome in the universe, competence and conscientiousness also follow stochastic distributions. In a well-run organisation, the talent pool is likely to reflect a normal distribution in terms of levels of competence and conscientiousness each.

One can, therefore view the human resource base of an organization, irrespective of the domain specialization or hierarchy level to which the talent pool belongs, in terms of a 2 X 2 matrix which classifies people in terms of high or low levels of competency or conscientiousness. Organizations being the sum-total of individual profiles, the aggregation of competency-conscientiousness profiles of the individuals also contributes to the organizational DNA. An interplay of these two dimensions of a collective human resource base results in organizations which are clearly differentiated, as shown by the 2 X 2 organizational grid below.

High in Competence and High in Conscientiousness: Virtuous and vibrant organizations
High in Competence and Low in Conscientiousness: Aggressive and mercenary organizations
Low in Competence and High in Conscientiousness: Ethical and static organizations
Low in Competence and Low in Conscientiousness: Opaque and shallow organizations

Organizations which have people with high levels of individual competence and conscientiousness turn out to be virtuous and vibrant organizations which demonstrate industry leading performance in business, ethics, governance and safety. These firms figure consistently as the top rankers in the blue chip league and often set the tone in all aspects of corporate behaviour. Companies such as Toyota fall in this category.

Organizations which have large pools of highly competent people but with low levels of conscientiousness typically post high business growth rates. However, the methods they deploy to achieve the performance could be questionable. These organizations are typically driven overwhelmingly by a performance criterion and are likely to choose the quantitative goals of performance over qualitative ideals of ethics, governance or safety if it were to come to a crunch ever. Most performance-centric companies which are loved by investors for the momentum of their earnings tend to fall in this category.

Organizations which have a preponderance of people who subscribe to high levels of ethics but have not bothered to equip themselves with the competencies required to handle the challenges of modern-day business would be virtuous organizations but with pedestrian performance. Though such organizations have the ability and intent to do good to the economy and the society they would be unable to do so for want of requisite technical and managerial bandwidth. Most traditional family-held businesses and NGOs run by individual champions fall in this category.

Organizations which are low in competence and conscientiousness are a drag to the economy as well as society for they represent a waste of public resource. In addition, if these companies desire to emulate the high performance companies without the inherent competence and conscientiousness they could pose a grave risk to the economy and society. Such companies could resort to questionable means to grow in business. Short term tactics deployed by such companies under the cover of opaque management processes result in hollow and risky business models that are susceptible to collapse at the first downturn. From Enron to Satyam, gigantic corporate failures take place in companies with such low levels of competence-conscientiousness mix that fail to support aspirations of high achievement.

Given the interplay discussed above, the top leadership in an organization has to aim at enlarging the human resource pool that is truly both competent and conscientious while shrinking the human resource base that is patently low in competence and conscientiousness. This is easier said than done for a couple of reasons. Competence is often measurable and visible as quantitative outcomes of performance while conscientiousness is qualitative and perceptional. It is a matter of further complication that high level of quantitative performance could itself be due to low levels of conscientiousness.

Organizations have to deploy 360 degree analysis during recruitment, training and performance appraisal phases of its human resource management so that each individual is analyzed in terms of not only the individual’s competence and conscientiousness levels but also how he or she integrates these two essential factors in terms of a performance work ethic. The top leadership of a company has to necessarily set the pace for processes which recognize and reward individuals only when their competencies are combined with conscientiousness. Such an approach will doubtless help create an organizational DNA that is virtuous and vibrant, leading to high performance with high ethics.

Posted by Dr CB Rao on January 9, 2009

The Sordid Satyam Saga : DAACS in the Dock?

The continuing Satyam saga has touched a new, horrendous low today with the resignation of the Chairman, B Ramalinga Raju and the shocking explanation tendered by him on the inflated accounts of the company. If the earlier episode of the aborted Satyam-Maytas merger brought into question the role, in corporate governcnce, of board of directors in the overall and that of the independent directors in particular, today’s episode brings into focus an errant axis that could exist amongst the promoters and directors, accountants, auditors and company secretaries (DAACS) in deviant corporations.

Viewed in a relevant perspective, DAACS as a group of corporate officers are trustees of public money that is created, transacted or held through corporate mechanisms. Each of these corporate officers has a specific purpose in an organization that serves corporate as well as public interest.

A director, whole time or part time, has an inviolable duty to provide the right vision, strategy and execution in an ethical climate to the affairs of the company. When a promoter is also a director or the CEO the responsibility becomes even greater. Whatever may be the seed capital with which an entrepreneur sets up a venture, sooner than later the capital structure gets expanded to include external equity and debt that is several, several times over the seed capital that is brought in by the promoter. It is to be therefore expected that the promoter-director acts as a trustee of the public money for public good rather than as a total owner of a corporation which has grown as much through public money as much through the founder’s passion and capital .

An accountant, or the chief financial officer, has the responsibility to ensure that the operations are conducted in a financially prudent and stable manner while fulfilling the corporate aspirations for growth and insulating the company from economic and business risks. Whatever be the IT and accounting systems deployed, it is ultimately the translation and interpretation of physical performance into the financial numbers and the performance certification that is provided by the CFO that determines the solidity and integrity of the financial status of the company.

Equally, significant emphasis is placed on the audit function, both internal and external, to ensure that a company’s operations and financial numbers are in compliance with all the statutory requirements and are reflective of the true state of affairs. Typically however, auditors are a highly pressured lot having to attend to multiple account closures in short windows of time on a quarterly and yearly basis. In any case it may be impossible to check the veracity of each transaction and consequently, reliance is placed on the self-certification by the operations and management teams. This however, does not absolve the auditors of their responsibility to ensure that a company’s systems and procedures are laid out and observed in practice in such a manner that the accounts represent a true and fair reflection of the business.

Last but no less important is the company secretary who is privy to all the agenda, deliberations and minutes of all board meetings. The secretary who in several companies acts also as the responsible officer for corporate governance and risk management has a special responsibility to ensure that the capabilities and competencies of the board are harnessed for the benefit of company operations. It also dwells on the secretary to ensure that the statute and prudential norms are followed in both letter and spirit and compliance as well as violation is reported diligently to the board.

Given the critical roles played by each of the DAACS officer group, a manipulative crisis of the magnitude that has hit Satyam could have been possible only when each member of the DAACS group collaborated, actively or passively, to abdicate the respective responsibilities and in fact acted in complete counter-direction to such requirements.

Obviously, the corporate and regulatory systems would need fundamental changes to avert these types of collusive behavior. Several measures are needed to ensure the needed robustness to the system. For example, the boards should reflect ownership interests in a truly proportionate manner. The independent directors should be appointed by ombudsman and regulatory institutions such as stock exchanges and SEBI. The two core corporate officers (the CFO and the company secretary) should be made accountable only to the board. Larger companies should be required to have two audit firms on a mandatory basis. Corporate compliance reports should be made a part of overall quarterly reporting as well as annual corporate reporting. Banks and financial institutions should have key client managers. The nexus between analysts and corporate managements should be discouraged. Media and industry associations should control their irrational exuberance and cease painting corporate leaders as demi-Gods. There could be several other logical measures.

If the Satyam episode serves as a clarion call for a fundamentally ethical transformation in the way companies are established, grown and managed; in the way corporate performance is compiled, reported and reviewed; and in the way responsible officers think, act and comply with reference to prudential norms, it would have served a purpose, albeit at a high cost.

Posted by Dr CB Rao on January 7, 2009

Entrepreneurs : A Breed Apart?

A dictionary definition of an entrepreneur is not very flattering, but shorn of the hype it is probably simply factual! According to Oxford, an entrepreneur is a person who makes money by starting new businesses.

In common business parlance, however, an entrepreneur is one who is not an employee and is more than a manager or a leader. Often, an entrepreneur starts with nothing but his or her idea or plan, hard-earned savings and of course passion to create a business.

There are managers and leaders who are routinely starting new businesses within companies, new companies within industries and new industries within economies. There are probably several thousands of them. What distinguishes an entrepreneur from such managers and leaders?

An analogy would probably explain well. An entrepreneur is like a mountaineer who relies on his guts, energy and passion as well as a few basic tools to reach a peak. A manager or a leader is perhaps one who analyses the path and weather and deploys a helicopter to get to the peak. There are applicable challenges and opportunities as well as costs and benefits in both the approaches.

Not every entrepreneur is probably the same. There are entrepreneurs like Henry Ford, Konosuke Matsushita, Akio Morita, Bill Gates, Steve Jobs, Larry Page and Sergey Brin who rewrote industrial history by creating new industries around novel technologies and products commercialized for the first time. There are also follow-on entrepreneurs who expanded and reshaped industries or competed with the pioneers, like William Durant did with General Motors. There are entrepreneurs who created industrial history in a hostile or fledgling environment like Jamshedji Tata or Larsen and Toubro. Entrepreneurs like Dhirubhai Ambani applied an inventive and aggressive mind to redefine what entrepreneurial initiative could deliver for business. Narayana Murthy and Infosys co-founders demonstrated how with little money and abundant skills one could create companies around global opportunities. And so does Raghavendra Rao of Orchid bring out his own story of entrepreneurial creativity, ardor and passion.

Is an entrepreneur for life? Probably not. Somewhere along the path of growth most entrepreneurs become all too adventurous, all too confident or simply all too obsolete. Microsoft, for example, failed to see the Web revolution. Sony failed to see the flat panel revolution. Yet these firms are mercifully surviving and growing because the entrepreneurs in good time created institutions with core strengths and which could reinvent themselves in the face of adversities.

An entrepreneur who ceases to be a good manager or a leader (or fails to recognize the need for good management and leadership) often fails to transform his company into a sustainable growth engine.

Should one have limits for claiming oneself to be an entrepreneur? Probably yes. The moment an entrepreneurial venture achieves a profitable full year of operations, logically the main defining elements of an entrepreneur (no money, no organization but only idea and passion) would have disappeared. The sooner an entrepreneur realizes that and transforms himself into a role model of balanced leadership, the better will it be for him and his company. This is because if he is a true entrepreneur, he will look for new challenges to undertake another resource-strapped, boundary-less quest. It is better for his company, because such a transformation substitutes the singular entrepreneurial zeal of the founder with the diffusion of entrepreneurial management across the company.

Is working as an entrepreneur exciting? Surely, because it is the attitude and personality that drives an entrepreneur. He or she typically likes to define his or her boundaries and rules of game. Yet, as mentioned above an entrepreneur needs also to know when his individual competence and satisfaction have to be subjugated to organizational capabilities and excitement.

Is it exciting to work with entrepreneurs? Yes, because they tend to be inspirational and energetic individuals fizzing with ideas and optimism. They believe in individuals and let people experiment. Yet, in their strengths lie their own weaknesses. They fail often in drawing the line between being truly inspirational and excessively rabble-rousing. They have too many ideas to get excited about, and in trying to implement all of them they tend to cross prudential norms. Their relentless optimism sometimes strays into dangerous territory which is characterized by foolish risk-taking, a denial of reality, and persistence beyond common sense. Many successful entrepreneurs fail to delegate. Some entrepreneurs who get surrounded by incompetent individuals remind one of lessons in history where successful emperors failed to retain their successes because when they overreached they had no one to bring them to their senses.

All things said, entrepreneurs are the inventors, the makers and the builders. The economies need them for the momentum of growth. The clever and sagacious ones who translate their singular entrepreneurial competence into organizational capability and who surround themselves with able supporters to balance out their imperfections will make a lasting mark on the history.

Posted by Dr CB Rao on December 30, 2008

Economic Meltdown: A Failure of Forecasting?

The severe global economic meltdown has taken the governments, corporations and public by surprise. It is even more surprising, however, that the meltdown has been preceded and accompanied by severe forecasting errors. For example, it was forecast that the crude oil will jump to USD 200 per barrel; now it is forecast that it would go as low as USD 20 per barrel. Similar gross variations between forecasts and actual levels have occurred in the currency exchange rates as well as in various economic parameters. Governments, central banks, economic agencies, consultants and experts have uniformly failed in generating forecasts that could have reasonably mirrored the likely actual levels.

Given the enormous progress made in archiving and analyzing data through information technology and the internet and the equally significant progress made in quantitative and stochastic modeling using mathematics, heuristics and simulations, the failure of forecasting is truly amazing. Perhaps one has to go back to the era of simpler models and their evolution into complex quantitative techniques to understand the reasons.

In the 1960s and 1970s, the forecasting models were based on mathematical models which analyzed a small set of past data to project a future trend. Within this, improvements were made to identify the impact of trends such as seasonality and cyclicality and smoothen the forecasts. As the quantitative capability enhanced thanks to information technology, the forecasting models became more sophisticated and moved into the domain of simulation. Eventually generic as well as domain specific simulation models, covering multiple sectors from FMCG to industrial equipment and from energy to economy, evolved.

Despite the increased sophistication, the failures of forecasting and simulation models have only increased. The reasons are many; some of which can be addressed and others which are difficult to address as discussed below.

Complexity of variables

A model is considered more sophisticated if it considers as many relevant variables as possible. Here lies the essential fallacy of complex models. Each variable is in itself dependent on a series of sub-variables and needs to be forecast based on its own simulation. As one would expect, any decrease in the forecasting efficiency of the primary variables will only decrease the accuracy of the final forecasting outcome in a multiplicative manner. And in several cases, as the variables and sub-variables arise from multiple sectors of the economy and/or multiple geographies, it is nearly impossible to achieve a uniform level of rigor in quantifying the variables and sub-variables. It is therefore necessary to limit the variables that are considered in modeling to only those that would have a significant impact on the outcomes, preferably by using ABC analysis.

Inflection Points

While identification of cyclicality and seasonality do help in generating a better model, the techniques do not help when inflection points emerge in respect of certain variables. For example, in today’s scenario purchasing power could have reached an inflection point with reference to the housing sector. The prices of commodities, especially of agricultural products could have a determining impact on the evolution of biofuel space.

Not all inflection points are economic in substance, however. Some inflection points are caused by technology. Ability to redefine the form factor of a device (whether a mobile phone or a laptop computer, or both) could substitute or combine the demand for such products each of which hitherto functioned as independent product-market segments. Ability to combine multiple functionalities in a single product could lead to generation of new product-market structures that are completely different and path-breaking. It is therefore necessary to conduct appropriate qualitative macro-economic evaluation and Delphi type technological analysis prior to embarking on detailed forecasting models.

Inflection points are hard to detect if organizations are mired in managerial dogmas. One is aware of the IBM chief’s observation made decades ago in the context of building of the first computing device that the world would not need more than a handful of computers. Cellular technology collaborators who introduced mobile telephony to India a few years ago felt that India could not support more than a few thousand cellular connections. In both these cases, separated by several decades, the dogmatic beliefs were beaten hollow by the new technology waves that these two products represented. In each case, sheer utility, affordability and proactive market segmentation led to levels of market expansion and penetration, which no forecasting models or leadership judgement could identify.

Cause-effect relationships

In today’s complex world where technological and economical factors generate lateral (and sometimes tectonic) shifts in supply side and consumption side factors, the cause-effect relationships are particularly complex to identify. These changing relationships impact the outcomes in several inexplicable ways.

The demand for oil, for example, is not determined merely by economic growth factors such as industrialization, or the infrastructure factors such as roads and automobiles but by the emergence of alternative cleaner energy sources such as biofuels, hydrogen energy, electric energy, solar energy or several combinations thereof. As seen earlier, each sector has its own variables and each variable is influenced by several sub-variables. The more pervasive, and the more multi-component a variable is, the more difficult would it be to define or quantify. Forecasting the overall demand for energy is not a sufficient solution in the alternative because, demand estimation for individual components is essential for sustainable economic and industrial planning.

Amongst all the intriguing aspects of forecasting and simulation, the cause-effect relationships are the most difficult to handle. It is important to aim at scenarios rather than specific outcomes to handle this issue.

Ignoring errors

The common perception is that forecasting is a statistically supported precise science. This has been a major contributor for the inadequate appreciation and incorrect application of this science. Forecasting is not an exact science. In fact, the subject of forecast errors is a fundamental part of the overall forecasting science. Identification of forecast errors and their sources helps the elimination of systematic deficiencies and refinement of the forecasting model.

Integration of the application domain and forecasting expertise would generate a feedback loop that helps the forecasters and users understand the benefits and limitations of forecasting with accuracy levels that should reasonably be expected. If forecasting through a model and its application in practice are treated as two different disciplines there would be no scope to study forecast errors in a real time framework. Modification of models based on a systematic study of forecast errors is essential to develop robust forecasting models.

Marketing of forecasts

Forecasts were seen in the past by the decision makers as well as lay public as guideposts for an uncertain future. Over time, these have come to be creatively positioned and eagerly lapped up by decision makers to make economic or business moves. Even lay men are increasingly basing their consumer purchase or retail investment decisions on slickly marketed forecasts.

Nowhere is this seen more evidently than in forecasts about corporate performance or stock movements. Over the last few years forecasting of corporate performance has become a “speculative science” built on the foundations of management projections and simple financial planning. The glaring absence of economic and business analysis in such forecasting is covered up under an excessive projection of the so called growth drivers and financial triggers.

At another level, analysts, institutions and agencies use forecasts as a tool to market themselves. It is a matter of concern that despite their apparent data orientation, these bodies rarely compare the forecasts with actual developments and seldom use them for effecting changes in their forecasting methodologies.

Value destroyers

In recent years, forecasting has moved into a new domain called derivatives. Based on an underlying transaction, be it related to exports or demand-supply match, calls are taken on the future course of current investments which are, indexed to forecast movements in variables such as currency exchange rates. Scores of companies have lost millions of dollars individually, and billions in the aggregate, in exotic derivative deals. It is with great wisdom and appropriate that Warren Buffet called the modern day derivatives as weapons of mass economic destruction.

Intrinsically, forecasting offers no guarantee in derivatives despite the element of “future projection” that is involved. Movements in foreign exchange rates are subject to unexpected substantial changes and volatility in macro and cross-border economic developments such as demand for dollars, foreign direct investments, balance of trade, industrial recession and so on. Even the most sophisticated experts failed to predict the drastic change in dollar-euro parity or the unrelenting strengthening of Japanese yen. No wonder then that the banks that sold exotic derivative products and the companies which bought them for attractive service fees and profit opportunities respectively are nursing huge losses.

Healing the physicians

Being in the forecasting business does not mean that the wisdom to ensure a future of certainty, and insure an uncertain future accrues through forecasting. We have the case of Goldman Sachs causing a tremor in the global economy with its dramatic forecast of USD 200 per barrel crude not so long ago. While crude is now in a rapid reverse trend towards a low that is just 15 per cent of the forecast, Goldman Sachs could not forecast the downfall of its own institution caused by its erroneous economic and asset forecasts, and related management decisions.

There appears to be a valid case for forecasters to appreciate the science of forecasting in a more temperate and holistic sense, carefully charting all the variable and sub-variable trees, understanding the inflection points and tectonic shifts, delineating cause-effect relationships and recognizing the science of forecast errors. Resisting the temptation to hyper-market forecasts or misusing them to destroy economic value, the forecasting experts have to introspect on the capabilities and the limitations of the science of forecasting, and function as reliable and sensitive guides to considered decision making by the governments, corporations and people at large.

Posted by Dr CB Rao on December 29, 2008

Satyam - Maytas Saga : Governance in Reverse Gear?

By any account, the Satyam-Maytas saga has been a bizarre episode of a blue sky vision for creating an integrated IT and infrastructure group collapsing into a muddled and messy strategic failure. It would be interesting to analyze what was wrong and right with the decision, and its quick reversal, and speculate on the future course of options.

Background

Satyam Computers Services Limited (Satyam) founded by Mr B Ramalinga Raju in 1987 is India’s fourth largest information technology (IT) company with a turnover of US$2 billion. Maytas Infra and Maytas Properties are two companies of the Raju family, managed by his sons operating in the infrastructure and realty sectors. Maytas Infra is a public limited company with a turnover of $450 million while Maytas Properties is a privately held company with an estimated turnover of $90 million.

On December 16, 2008, in a stunning move, Satyam announced its decision to acquire the majority (51%) stake in Maytas infrastructure for $300 million and 100% stake in Maytas Properties for $1.1 billion by buying out the shareholding of the promoters i.e., the members of Mr Raju’s family. The $1.6 billion deal, if it had gone through would have consumed all the cash of $1.2 billion in Satyam’s books and even forced it to raise a debt of $400 million. From a quick look at the financials of the listed entities of the deal, the profitability of the combined entity would have slipped due to the current lower margins as well as the long gestation period and revenue volatility of future projects in the infrastructure and realty sectors.

Teasingly, Maytas is Satyam, with the letter string in reverse order. Satyam’s founders who were in construction business prior to setting up and growing the IT business, probably thought that information technology and infrastructure are two sides of the same coin and decided to re-enter the infrastructure business. Unfortunately for the Satyam Group, all of its investor community, media and public thought otherwise and a spontaneous uproar followed. The Satyam Group was accused of derailing corporate governance through a self-serving, opaque decision which would place a major part of $1.6 billion of Satyam’s free cash in the hands of Mr Raju’s sons and family associates through the buyout. With only around 9 per cent of the stake in Satyam being held by Mr Ramalinga Raju and associates, it was alleged that he had no right to fitter away the Company’s resources without a proper discussion with other major investors and without seeking shareholders’ approvals, that too at a time when companies are conserving cash for their core businesses. Satyam’s ADR, listed in NYSE, lost 53% in a free fall on December 16, 2008. A similar drubbing for Satyam stock was to follow the next day on the Indian bourses.


On the night of December 16, 2008, Mr Ramalinga Raju explained over the investor calls and on the TV networks that the acquisition move was a well thought-out decision that would de-risk the core IT business and enhance long term value to the shareholders. He said that the investors who reacted adversely would calm down once the facts got understood in a proper perspective. Yet, as the chorus of protests went up, Satyam hastily reversed its decision just a few hours later and called off the Maytas acquisition deal on December 17, 2008. Mr Raju said that the decision to abort the proposed deal was taken in deference to the wishes of the investor community. Thereafter the Company has been at pains to mend fences, promising not to diversify out of the IT business and hinting that the Company would take several investor-friendly measures, including share buyback, to shore up credibility and restore investor confidence.

Strategic Purpose

Any decision to integrate, diversify, merge or acquire in related or unrelated manner needs to be inspired by a strategic vision or purpose. In this case, the acquisition of Maytas appeared to have little strategic purpose when announced. Was it to diversify Satyam into a growth sector of India, which infrastructure probably is, or was it to simply create a conglomerate group? If it was to de-risk the IT business, is it reasonable to conclude that IT became strategically risky for Satyam? Per contra, is there any assurance in the era of global meltdown that infrastructure is any less risky? Apparently, there has been no synergistic vision or strategic purpose that would have brought out the rationale of Satyam seeking to acquire Maytas.

Granting for a moment that IT growth has slowed down or the IT business itself has turned risky, given the cash reserves it had, did Satyam truly and sincerely analyze all the options that could have been possible to de-risk the IT business? Various options could have existed; from a merger with or acquisition of another IT behemoth to acquisition of a domain specialist which could strengthen any or some of its verticals. Under the former route, being a predominantly services company, Satyam could have acquired a pure product company or a pure web and search business company. In the latter route, having specialized in verticals such as SAP, engineering or life sciences, it could have joined forces with a design-driven manufacturing firm or a research-driven pharmaceutical firm.

Again, granting for a moment that entry into infrastructure was the best option for Satyam to consider, did Satyam truly compile and evaluate all the infrastructural options that could exist? Would it be appropriate to acquire realty and construction oriented infrastructure companies such as Maytas Properties and Maytas Infra or to consider companies in other infrastructure sectors such as power equipment, engineering & construction competence or alternative energy? Again, it is not clear if such options were compiled and analyzed. Lastly, assuming that realty and construction management oriented Maytas was the best fit, how were valuations arrived at? Were there stand-alone and combined business plans, pre- and post-merger, which demonstrated a superior value that the merger would bring to all the parties to the deal? Silence on the front did indicate that no major analysis was carried out.

Process and Governance

The early thoughts of the proposed acquisition would have been seeded a few months ago but apparently the formal processes happened only over the last two weeks. The Board which comprised several reputed management and industry experts from India and abroad as independent directors did consider the issue without the interested directors being present. Yet, it is unclear if powerful arguments against the deal that are brought out here, and elsewhere in the media, were forecast by the board and balanced by equally powerful or more compelling arguments in favor of the acquisition decision. If so, Satyam should have gone to town with such logic rather than succumb to the adverse market reaction and reverse a decision that was claimed to be well thought-out and debated internally.

Transactions of this nature, especially between related parties required independent valuations of the target companies and an investment advisor (or multiple advisors) to make sure that the transaction was indeed an arm’s length transaction. Clearly, no investment banker of international repute was involved in the deal. Equally importantly the process of management analysis and decision making that preceded the sudden acquisition decision appeared to be deficient.

Given the low promoter holding and the related party nature of acquisition transaction, the founder-family and Satyam on one hand and Maytas Infra and Maytas Properties as the target companies on the other hand should have been extremely cautious in analyzing and pushing through the deal. Such transactions should be conceptualized and conducted, reflecting the adage on Caesar’s wife, in such a manner that the founder family is beyond any suspicion. Unfortunately in this case, governance matters appear to have been given the short shrift. Although the agreed upon valuations technically enabled the Company to move ahead with the acquisition without any regulatory or shareholder approvals, in spirit it was in violation of good governance practices. Given the related party nature of transaction, transparent and threadbare discussion of all issues, including business models of stand-alone and combined entities, valuation options, alternative deal structures, intended use of proceeds and future outlook would have been appropriate. Ideally, a committee of independent directors should have been constituted to make a thorough study of the proposed move and come up with multiple scenarios and a balanced professional judgment.

The justification in terms of de-risking the core IT business also brings to the fore the risk profile of Satyam’s IT business. If the management indeed believed that the core business had stalled it had a duty to incorporate this into its corporate guidance and unveil measures to address it with business strategies relevant to the IT field rather than disclose such slow-down as a justification for the contentious move.

In rescinding its decision as hastily as it has made, Satyam demonstrated little conviction in its own decision and little faith in its own wisdom. Panic in the wake of adverse investor reaction and the subsequent free fall in share price seem to have once again prompted expediency. An urgent consideration of share buy back proposal is now proposed to win back investor confidence. Here again, the assumption seems to be that investors can be placated by financial rewards which will mitigate concerns on governance. This assumption also appears contrary to good governance logic. Fundamentally, reassurances on the IT business model of Satyam, strategic options and measures to reinforce governance are called for rather than immediate shareholder rewards.

From knee-jerk response to strategic resolution

The controversy that has been generated over the Satyam-Maytas saga should not however limit one from analyzing the strategic implications and compulsions of an aspiring firm or a founder group in a professional and dispassionate manner. The fundamental issue is whether the founders of Satyam and the major investors would want Satyam to become a diversified conglomerate, in quest of which entry into infrastructure could be one of the components. If this proposition is accepted, the right company and the right deal with the right timing would become relevant. Though Satyam could theoretically select a non-Maytas option from among the various companies engaged in the infrastructure business, it is fair to assume that none of the established infrastructure leaders would be ready for a sell-out, dilution or even an alliance. Maytas Infra and Maytas Properties are cash strapped to execute projects, given the huge order book of $3billion (plus $4 billion of Metro Rail) and the land bank of 6700 acres that they respectively have on their hands. It is thus in the mutual interest of Satyam and Maytas to concur on the acquisition. The deal structure would follow as the next issue. The controversy related to the movement of the free cash from Satyam to the promoters’ hands through the Maytas buyout could be handled by bringing cash into Maytas Infra and Maytas Properties instead of using it to buy the promoters’ shareholdings. The entire deal would need to be analyzed and valued by independent accounting houses appointed by each of the three parties and the final proposals put through to the investors and shareholders.

If the investors and shareholders see value they would be happy to support such a proposal. For example, there could be significant operational synergy of deploying IT in infrastructure field, from project management to project operations. Satyam could create a new vertical for infrastructure in its core IT business to provide IT solutions in the infrastructure space to Maytas and beyond. Given that Maytas Infra has bagged major projects like Hyderabad Metro and Maytas Properties has pan-Indian property bank, the strong balance sheet of the combined entity could create an infrastructure business in a faster and more expensive manner than would have been normally feasible. Issues of corporate governance could be handled by keeping all the three companies separate and allowing them to function independently with separate boards and management teams. Governance would also be seen to be acted upon in both letter and spirit if the promoters connected with the three companies, Mr B Ramalinga Raju of Satyam, Mr Teja Raju of Maytas Infra and Mr B Rama Raju Jr of Maytas Properties ensure that the executive responsibilities are in the hands of independent professional managers.

The spirit of free thinking and the spirit of corporate governance are mutually reinforcing. The Satyam-Maytas saga has demonstrated how these two vital factors can be ignored by companies and founders only at their peril. Equally, the episode demonstrates to positive thinkers how purposeful vision, clear strategy and transparent governance could enable acceptable solutions for even the trickiest of problems.

Posted by Dr CB Rao on December 22, 2008

Ethics in Management

According to Newsweek (December 22, 2008), consequent to the Wall Street crisis and economic meltdown, the United States would have to eventually spend US$ 8 trillion, in bailout funds and loan commitments. These funds are badly required to shore up the collapsed and collapsing banks, companies and intermediaries and avert an economic crisis of horrendous proportions. This bailout figure represents more than half of US GDP and is a truly astounding reflection of the bloated asset valuations and disguised financials that camouflaged some of the worst kind of corporate and accounting recklessness that was ever witnessed in the US. The issues in Europe and Japan and the consequent bailout commitments are estimated to be no less severe as per the magazine.

These recent happenings, particularly in the Wall Street and Corporate America brought the global economy into a tailspin and caused an unprecedented global liquidity squeeze. The underlying mis-management of economies, industries and corporations that has triggered the deep global recession brings to the fore the issue of ethics in management.

Several principal issues emerge. Are ethics a set of floating principles to be evaluated in a contemporaneous manner relative to the times? Do government regulations and rules as well as professional codes effectively promote ethics? Are individual and professional ethics oftentimes subordinate to corporate wealth maximization goals? What are the boundaries of action for the governments in the face of collective corporate mismanagement? What is the accountability and punishment for managerial recklessness and professional duplicity as well as complicity? How can corporate managements restore a measure of credibility for themselves?

Ethics cannot change; should be cast in stone

Ethics are defined as the moral principles that govern a person’s behavior or how an activity is conducted. Morality is the set of principles concerning the difference between right and wrong. From times immemorial what helps or uplifts the common man has been considered right while what exploits or hurts the common man considered wrong. Governments, which are the ultimate national organizations for managing the economies and the gross national products, are ordained to operate for society’s common good. Corporations which are the organizational instruments for wealth generation in different sectors through specific products and services cannot be any different.



Whatever are the times and whichever the nations, societies are stratified in terms of rich and poor, or high income, middle income and low income. Over time, however, governments have begun to place excessive emphasis on gross economic indicators such as consumer spend, housing stock and mortgages as reflective of society’s economic wellbeing. Individuals have also fallen prey to a single minded pursuit of wealth and/or credit-driven easy living where assets disproportionate to incomes are acquired adventurously. The underlying absolute and relative inequities suffered by the poorer sections have come to be overwhelmed by quantitative indices of gross economic growth, personal incomes and consumer spend.

Sadly, governments and companies began to ignore the ethical compulsions of directing
economic and commercial activities in such a manner that the poor are enabled reasonable and secure disposable incomes and are provided a quality of life consistent with changing times. Banks began enticing consumers with unreal and inflated asset values and indefensible mortgages, throwing safety to winds. Industries churned out inefficient but expensive products and services which came to be accepted by an elitist society with access to growing salaries and easy credit. Multi-million dollar bonuses and commissions computed on virtual and false profits, and golden parachutes of separation pay for senior executives became the rewards of a high-performance corporate imagery. Such lifestyle approaches and economic and business activities which bartered the hard savings of small investors and the job security of rank and file workers for the performance aggrandizement, in some cases, of CEOs, COOs and CFOs as well as other key managerial personnel can hardly be considered ethical. The need for the societies, governments and corporations to cast ethics in stone is more acutely felt than ever.

Regulations have to move beyond compliance reports

Post-Enron, the US has prided itself to be the torchbearer of corporate governance, statutory compliance and risk management. For example, the Sarbanes-Oxley Act enforced on July 30, 2002 in the wake of several corporate and accounting standards imposed a host of governance, compliance and reporting restrictions on corporations listed in the US. What happened in 2008 in the Wall Street and Corporate America is a true shocker on how intrepid and avaricious managements can cleverly circumvent the toughest of regulations.

The US has a legion of legal and governmental boards, commissions and committees, executive departments, independent agencies, judicial organs, legislative bodies and quasi-official watchdogs which are entrusted with oversight on corporate, professional and accounting behavior. Securities and Exchanges Commission, NYSE and Nasdaq have stringent listing and reporting requirements. If the sophisticated governmental agencies fail to detect the economic rumblings and the SEC and stock exchange regulations fail to check incorrect and incongruent business and accounting practices, it is not ethical governance and management either.

The striking takeaway is that regulation has to be internally inspired and intrinsically self-driven. Each company or management knows fully well what it does. The board or the audit firm, despite diligence, has to essentially rely on certifications by the management. It is the ethical perception of the management that differentiates a well-regulated and truly compliant firm from a wayward and exploitative company. No amount of external regulation or board supervision can avert an unethical management from undertaking activities that destroy value for the common man. If only the ethics of larger good for the poorer sections of society are given the governing position such distortions would not occur. It is time that all educational curricula, be they science, engineering or management, incorporate ethics prominently in the studies, and all professional bodies, be they of accountants, analysts or company secretaries, insist on ethics based operations and performance reporting.

Personal and professional ethics should override corporate wealth goals

The CEO who drives growth by stretching resources beyond a sustainable balance or by expanding business boundaries ignoring core competencies has learnt to subordinate his professional logic to personal aspiration. The finance manager who seeks funds based on erroneous use of funds does so thinking that it would help the company raise cash to compensate for performance shortfalls. The procurement manager who sources products from emerging economies at irrationally low prices believes that it helps his company earn enhanced margins. The sales manager who stuffs trade channels with his products thinks that he is preempting the shelf space for his competition. The operations manager who settles for low productivity is happy not to upset the harmonious industrial relations in the company. Each of the above officers in the process is failing to realize the harm he or she is doing to the company in terms of long term risk profile, financial instability, quality erosion and bad debts.

Each of the corporate officers illustratively mentioned above has the academic education, professional experience and hopefully personal value system that would tell him or her at first pass to do the right things. However, the superimposition of a corporate role wherein he or she has to contribute to higher revenues or profits or lower costs as his or her key performance metric makes the officer to work for corporate profit maximization as a short run goal. No wonder that a series of corporate profit driven thought processes and actions across the entire hierarchy institutionalizes an organizational eco system which would reward contribution to short term profits and discourage, if not penalize, value building for the future.

While there is no denying that business organizations cannot be run as charitable bodies and they do need to generate wealth to be able to distribute to its stakeholders, clearly considerations such as quality, safety, health, environment, risk and social responsibility have to be given equal weight. The model of “leadership through trusteeship” set by the TATA group in India acting as trustees for public wealth through their corporations is a model worth emulating. Corporate managements and boards have to establish ethics forums where such issues can be brought up and debated. Progressive companies could support this trend by establishing a departmental structure for managing ethics oriented issues. Sooner than later, it should be mandatory for each company to have a Chief Ethics Officer with a board representation and whose compensation and employment contract are guaranteed by a department of ethics in the federal government.

Governmental power and accountability on ethics to be significant

Governments are expected to be the ultimate custodians and trustees for public good. However, as one watches the activities and intents of the governments the world over, whether of dictatorial or democratic variety, one would be saddened that there are only very few enlightened governments and even fewer welfare states. Governments which are regressive in outlook, which indulge in wars and terrorist actions, and which encourage crony capitalism or state corruption can hardly be the role models of ethics.

Governments have to be modern, secular, equitable and ethical to do good for all sections of the society. It appears that the well established ‘checks and balances’ system of government (or the executive), legislature and judiciary has to be further strengthened by creating a constitutionally ordained body for protecting and promoting ethics. Watchdog bodies, vigilance commissions and audit bodies may be brought under the control of such a ministry of ethics.

The events in Corporate America have proved beyond doubt that ethics cannot be implemented through regulations as they are often reduced to meaningless numbers and verbose texts of corporate reports and compliance documentation. Governments have to assume the primary responsibility for ethics by setting example in conduct of governmental affairs, be it in terms of aiding other ethical and democratic nations or curbing elitist and exploitative practices within the country. While the US government may have been corporate-friendly in terms of bailing out many errant corporations by doling out billions of dollars, it is sad that the government is also appearing to be hapless or powerless in the face of collective mismanagement by that many corporations. A more socialistic regime would have totally nationalized such failing enterprises as a quid pro quo for the exceptional funding support provided. While largely adopting an ambassadorial role for ethics, governments should also not fight shy of punishing malpractice wherever it occurs and thus emerging as a powerful icon of ethical accountability.

Corporate recklessness and professional duplicity need deterrence

In the normal course, corporate hierarchy and managerial processes together with the board supervision and investor activism ought to be providing the requisite deterrence against corporate recklessness and professional duplicity. Unfortunately, this does not seem to be adequate or even appropriate to stem unethical practices. The earlier analysis

illustrated that in an era of falling ethical values, a variety of inducements and aspirations, including corporate wealth maximization and personal aggrandizement lead to failures in corporate governance. Unquestioned leadership adulation adds an aura of invincibility for the top leaders when corporate performance is seemingly on a high.

There is considerable body of knowledge that suggests that ethics and values are the superior ethos that control, minimize and refine the primal instincts of human race. As ethics and values fall, greed is the lever that triggers malpractice and fear is the counter-lever that can deter and correct it. Today’s environment suggests that corporations and their CEOs and CFOs are unlikely to have learnt their lessons as they have had fairly easy bailouts and the leaders personally had easy separations, in most cases with multi-million dollar separation payments.

There is a need to engage the failed leaders not necessarily to punish them legally for their erroneous judgments or acts, but to bring out the deficiencies as a warning to others from following similar dicey pathways. It is also necessary to ensure some justice by not allowing such failed leaders to apparently go into oblivion and actually rehabilitate themselves. Bad management and faulty leadership need to be chronicled as much as good management and robust leadership to ensure corporate and professional integrity. Perhaps it would not be inappropriate to establish a journal for failed leadership and management practices and doomed business models. It may even be worthwhile to establish an academy for failed but contrite leaders and a hall of infamy for failed but unrepentant leaders.

Leaders and managers can, and should, work to restore their credibility

Nations and governments do not have unending fountains of dollar-billions to save failing institutions and trigger exceptional stimulus packages and thus insulate economies from deep recession. What has been done for certain financial institutions and automobile companies in the US cannot be repeated for the whole spectrum of enterprises which may start seeking such aid. Banks cannot keep lowering interest rates or keep reducing reserve ratios to enhance velocity of money in the system. It is the corporate sector that needs to act sensibly and soundly to restore its credibility and consequently restore public confidence in the economy.

Leaders and managers have to connect themselves with the changed realities and modify their business plans on the basis of better products, higher productivity and improved pricing that in combination would provide greater value for the customer. Leaders and managers will need to work with scientists and technologists to design new products and adopt better manufacturing practices. As the CEO of Fiat has illustrated in his turnaround story, all CEOs should cease dominating their companies through individual hegemony and instead focus on developing multiple leaders who can drive recovery and rejuvenation.

Corporations have to look beyond the tyranny of quarterly guidance and build value for all stakeholders. Organizations have to refocus on core competencies but go beyond them to develop game changing paradigms that create new markets through innovative products. Japan has always been adept in the innovation game; Korea has been a successful player of late. India has scored an inflection point with the design and manufacture of a transformational micro car called Nano. Leaders and managers have to disown their egos that are fed on external adulation and internal submissiveness over the years, re-learn time-tested ethics and values, and facilitate the spread of ethical leadership and management in their companies. Competence with humility and a concern for equity would lead to a restoration of credibility for the leadership and management in the corporate sector. Leadership and managerial credibility based on sound ethical values would be essential to restore public confidence in the consumer markets, stock markets, housing markets and the economy in general.

The global economy and the comity of nations are facing an economic crisis of unprecedented scale, scope and depth caused by corporate recklessness and in some cases leadership malpractices. Erosion of ethical principles in public governance and corporate management as well as in individual and professional life aspirations are at the root of this sordid saga. When ethics are restored in all walks of life in their pristine purity, there would be sustainable growth with equity all round.

Posted by Dr CB Rao on December 21, 2008