The Indian corporate sector has matured significantly in the last two decades and we are in the process of building large global conglomerates. It is indeed a proud moment for the Indian corporate sector. However, to sustain the further emergence of strong corporate it is time we start focusing more and more on corporate governance, particularly board governance.
The Board of Director is the supreme policy making body as also the final custodian to protect the interest of all the stakeholders. With the corporate sector gaining strong economic power as also the recent corporate fraud in Satyam Computers, the functioning of the board and corporate governance assume strong significance.
In most of the Indian companies, the Boards still function more to meet the regulatory requirement than any business requirement. The CEO, still largely controls the appointment of the Board. This is dichotomous, since one of the core function of the Board is to review the functioning and performance of the CEO. Many Boards still operate within the broader contours set out by the CEO. The Board agenda as also the Board meetings are largely controlled by the CEOs even in companies where the CEO is not the chairman of the Board. The Boards still depend on the views of the other executive directors and senior officials, who are controlled by the CEO. So in reality the effective functioning of the board to a large extent depends on the desire and willingness of the CEO to make the Board an effective entity.
In addition most of the Board members do not take additional interest in the company beyond the confines of the board meeting. They tend to meet a limited set of senior personnel and do not normally have a keen sense of the ground level realities. The cultural issues of an organization, which has important bearing in any business strategy formulation as also effective implementation, is quite likely to be missed out by the Board.
It is therefore important to build a cadre of strong professional directors, quite in contrast with the largely prevalent practice of ornamental directors, well known names in their respective fields, but not necessarily strong in corporate management. The recent insistence of SEBI for implementation of Clause 49 is a step in the right direction. It will force most of the companies to give a more serious look at the Board. In addition, it is time for institutional shareholders like Mutual funds, FIIs to vie for board representation. They will be able to help in professional sing the Boards. The entry of venture funds and private equity funds will also further help in this direction.
The Board to be more effective should get into the skin of the organization a lot more without any semblance of interference in the day to day working of the company. It should also have the ability to obtain independent professional advice on the various strategies and implementation from outside consultants and professionals. The Board should also be able to obtain independent opinion on bench making of the corporate with other competitors. Bench marking would provide a good platform to judge the performance company and the CEO in a more objective way.
With the corporate CEOs assuming larger than life status in the world of business, the Board has an onerous responsibility in playing the role of an objective evaluator to protect the interests of the stakeholders including the shareholders and the employees.
Tuesday, June 16, 2009
India - Need for Uniform School Education
I am not an educationist. However, I write this piece as this is an issue which has bothered me a lot for a long time. The Indian education system is hailed as a strong system which has enabled the country to create a large pool of educated class. It also provides a good opportunity to students in all parts of the country, be it in a small village or in a metro access to education. The networks of government schools all over the country also provide access to relatively low cost or free education.
However, what strikes me is the complete lack of uniformity in education. We have state boards, the central boards and now also the International Baccalaureate. We have the state government run schools, the schools by the central government, the private schools and also schools run by religious institutions. We have various mediums of educations, English, Hindi and all the state languages.
The plethora of mediums as also the types of education creates a strong divide amongst students. We have the English speaking elites and the low profile vernacular types. We also have the private school “haves” and the government school “have nots”. There is also a differentiation of class between the elite private schools and the other private schools.
This differentiation also carries to the next level of education at the undergraduate levels with its undesirable consequences. I have seen there is always polarization of students in the campuses coming from these various types of schools. While the centers of higher education should be melting pots, they still tend to continue as islands of isolation of these different groups. This is further accentuated by strong alumni network of the exclusive schools create a further divide between the elite schools and the ordinary schools. The strong networks of these elite institutions also create a further social divide.
So in effect you find a situation wherein the schooling creates deep divide amongst students. It creates the differentiation in the new society. So when we look at the entry to schools, the elite schools are available only for the children of the rich and famous. It is also the prerogative of the kids of the metros and large towns. In effect we are denying the kids in the small towns and the kids from lower and middle class families.
If we are to provide an equal opportunity to the whole country, we should strive towards creating a uniform educational system somewhat on the lines of the US, wherein you have the right to get the admission in the neighborhood school. Only the very rich should be in a position to send their children to the exclusive private schools. This will provide access to every one to the same quality education. This will necessitate that the state and the central government work together to standardize the educational curriculum including moving the medium of education to English. It will require strong political will and substantial investment to bring in the state government and central schools at par with the with the top end private schools. However, it will provide the immense benefit of building a strong educational infrastructure with the flexibility of changing the curriculum with changing times. Once we have a common educational platform, we can put better systems to identify talents. It will provide an opportunity to small town/village students to compete more effectively without being burdened with the disadvantages of curriculum and modes of education as it is at present. It will also provide an added advantage for better mobility of people across the country.
However, what strikes me is the complete lack of uniformity in education. We have state boards, the central boards and now also the International Baccalaureate. We have the state government run schools, the schools by the central government, the private schools and also schools run by religious institutions. We have various mediums of educations, English, Hindi and all the state languages.
The plethora of mediums as also the types of education creates a strong divide amongst students. We have the English speaking elites and the low profile vernacular types. We also have the private school “haves” and the government school “have nots”. There is also a differentiation of class between the elite private schools and the other private schools.
This differentiation also carries to the next level of education at the undergraduate levels with its undesirable consequences. I have seen there is always polarization of students in the campuses coming from these various types of schools. While the centers of higher education should be melting pots, they still tend to continue as islands of isolation of these different groups. This is further accentuated by strong alumni network of the exclusive schools create a further divide between the elite schools and the ordinary schools. The strong networks of these elite institutions also create a further social divide.
So in effect you find a situation wherein the schooling creates deep divide amongst students. It creates the differentiation in the new society. So when we look at the entry to schools, the elite schools are available only for the children of the rich and famous. It is also the prerogative of the kids of the metros and large towns. In effect we are denying the kids in the small towns and the kids from lower and middle class families.
If we are to provide an equal opportunity to the whole country, we should strive towards creating a uniform educational system somewhat on the lines of the US, wherein you have the right to get the admission in the neighborhood school. Only the very rich should be in a position to send their children to the exclusive private schools. This will provide access to every one to the same quality education. This will necessitate that the state and the central government work together to standardize the educational curriculum including moving the medium of education to English. It will require strong political will and substantial investment to bring in the state government and central schools at par with the with the top end private schools. However, it will provide the immense benefit of building a strong educational infrastructure with the flexibility of changing the curriculum with changing times. Once we have a common educational platform, we can put better systems to identify talents. It will provide an opportunity to small town/village students to compete more effectively without being burdened with the disadvantages of curriculum and modes of education as it is at present. It will also provide an added advantage for better mobility of people across the country.
Sunday, November 2, 2008
Embrace other cultures
Indians have made their mark globally—from professors to engineers to doctors to corporate executives. The appointment of Vikram Pandit as the CEO of Citigroup is like a jewel in this crown.
The success of these Indian professionals is attributed to a number of factors, including a sound and competitive system of education, the Indian way of life where work is worship, a disciplined lifestyle and strong family values, which help us handle the stress and strain of corporate life.
However, most of the Indian success stories we hear about are from the Anglo-Saxon world: North America, England and Australia. Even in West Asia, where Indians are a dominant expat community, professional success is relatively limited due to the nature of the corporate hierarchy there. This is despite the fact that Indians play a very important role in local companies and are dominant in the business world.
The power equation will change in the next few decades as the US loses its prime position in the world economy and Europe becomes a strong alternative. However, barring the UK, European countries do not speak English.
As India emerges as a dominant economic power, it will also have to build strategic relationships in Africa, West Asia and even Latin America, some parts of which do not speak English. And, of course, in China.
Indian companies have already been involved in acquisitions in countries such as the UK, Holland and South Korea.
Indian professionals will have to build a global mindset. It is in this context that we have to look closely at our educational system. While the colonial legacy has built a relatively strong base in English, very few Indians speak the other globally important languages such as Chinese, French, Arabic or Spanish. It is important that at least one foreign language other than English should be made compulsory in our curriculum, to bring in a sufficient level of proficiency. While this may lead to debates about the load on students who will have to learn at least three or four languages (the mother tongue, Hindi, English and a foreign language), this burden can be handled easily by young students. If we look at countries such as Lebanon and Syria, the education system there makes students proficient in English, French and Arabic. Most Europeans are multilingual and handle English and the local language with equal proficiency. Multilingual efficiency will open up doors for back office service opportunities for the non-English speaking European world as also for the Arab world.
We also have to strengthen our curriculum for a better understanding of other religions and cultures. This will provide a base for a tolerant country and will make the country truly secular. The political class can bring in this reform rather than only using the rhetoric of secularism for divisive electoral politics. This change will also provide young Indians with a good understanding of cultures and a better acceptance of, and integration with, other counties and cultures.
I have found that people from small countries have far better understanding of cross-cultural issues, since often they have to study and/or work in other countries, compared to persons from larger countries such as the US, China, India or Russia.
In the global world, we have to overcome this disadvantage.
Published in Mint: Wall Street Journal on Jan 25, 2008Better cautious than sorry
The world financial market is going through an upheaval which has emanated from the subprime crisis in the US. With the globalization of the financial sector, this crisis is spreading to other parts of the world.
The genesis of the subprime crisis lay in mortgage loans by banks to higher risk borrowers with lower income and poor credit histories. The strategy of high-risk lending, against conventional banking wisdom, sustained during the period of housing asset price rise between 1996 and 2006. The basic assumption in such lending: the asset financed by such lending will hold on to its value in case the borrower is not able to meet his debt obligations. However, with the drop in the US housing prices, the defaults and foreclosure of these loans started significantly affecting the financial services sector there. Through securitization of these portfolios, a large part of these loans had also been sold by the originating banks to other banks within the US and outside, thus spreading the risk widely. While there is considerable debate about the possibility of the US-originated subprime crisis spreading to emerging markets, it is also time for us to worry about another crisis that may affect emerging markets such as India.
In the past decade, banks have diversified their portfolio from corporate lending to personal lending, to take advantage of the growing market as also for risk mitigation. While housing loans are one part of this portfolio, banks have also moved aggressively into risky areas of lending such as personal loans and loans against credit card obligations.
This is a relatively new activity in India. The growing market has brought in a new set of customers, whose expenditure requirement, be it for weddings, travel or any other special occasions, are funded through these loans. In many cases, even the margin for housing loans are being funded through personal loans. All these lead to a situation where an individual customer is substantially leveraged. My personal experience has been that many customers have started using these loans to meet their normal cash flow mismatch, which may also lead to serious debt traps.
While the developed countries have a relatively well-developed system of individual credit rating, in the emerging markets, there is a complete lack of customer information. We in India also have a major drawback: the lack of a unique identification number. Hence, a customer can manage to borrow such loans from a number of banks within a short span of time. This is made worse by a lack of a good system of intermediaries through which financial institutions do their lending. These intermediaries are relatively less developed, lack a history of performance and are also not quite regulated.
With increasing competition in the banking sector and the entry of a number of new players, we find innovative (as also more risky from banks’ point of view) product designs including “teaser rates” of low initial interest rates, “interest only” in the initial period as also offer of other freebies.
Further, most banks follow a system of substantial automatic loan top-ups. There are also invitations from competing banks for loan transfers, sprinkled with interest holidays and further top-ups. All these work well in a growth market scenario and, as the US subprime crisis illustrates, can lead to substantial problems when market sentiments turn negative.
While the overall market outlook may continue to be positive for emerging markets such as India, perhaps it is time to throw in some caution and build in an element of old world banking conservatism to this area of personal finance. It is better to be cautious than be sorry.
Published in Mint: Wall Street Journal on Feb 25, 2008
The genesis of the subprime crisis lay in mortgage loans by banks to higher risk borrowers with lower income and poor credit histories. The strategy of high-risk lending, against conventional banking wisdom, sustained during the period of housing asset price rise between 1996 and 2006. The basic assumption in such lending: the asset financed by such lending will hold on to its value in case the borrower is not able to meet his debt obligations. However, with the drop in the US housing prices, the defaults and foreclosure of these loans started significantly affecting the financial services sector there. Through securitization of these portfolios, a large part of these loans had also been sold by the originating banks to other banks within the US and outside, thus spreading the risk widely. While there is considerable debate about the possibility of the US-originated subprime crisis spreading to emerging markets, it is also time for us to worry about another crisis that may affect emerging markets such as India.
In the past decade, banks have diversified their portfolio from corporate lending to personal lending, to take advantage of the growing market as also for risk mitigation. While housing loans are one part of this portfolio, banks have also moved aggressively into risky areas of lending such as personal loans and loans against credit card obligations.
This is a relatively new activity in India. The growing market has brought in a new set of customers, whose expenditure requirement, be it for weddings, travel or any other special occasions, are funded through these loans. In many cases, even the margin for housing loans are being funded through personal loans. All these lead to a situation where an individual customer is substantially leveraged. My personal experience has been that many customers have started using these loans to meet their normal cash flow mismatch, which may also lead to serious debt traps.
While the developed countries have a relatively well-developed system of individual credit rating, in the emerging markets, there is a complete lack of customer information. We in India also have a major drawback: the lack of a unique identification number. Hence, a customer can manage to borrow such loans from a number of banks within a short span of time. This is made worse by a lack of a good system of intermediaries through which financial institutions do their lending. These intermediaries are relatively less developed, lack a history of performance and are also not quite regulated.
With increasing competition in the banking sector and the entry of a number of new players, we find innovative (as also more risky from banks’ point of view) product designs including “teaser rates” of low initial interest rates, “interest only” in the initial period as also offer of other freebies.
Further, most banks follow a system of substantial automatic loan top-ups. There are also invitations from competing banks for loan transfers, sprinkled with interest holidays and further top-ups. All these work well in a growth market scenario and, as the US subprime crisis illustrates, can lead to substantial problems when market sentiments turn negative.
While the overall market outlook may continue to be positive for emerging markets such as India, perhaps it is time to throw in some caution and build in an element of old world banking conservatism to this area of personal finance. It is better to be cautious than be sorry.
Published in Mint: Wall Street Journal on Feb 25, 2008
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