Saturday, July 18, 2009

Corporate Governance : Sir David Walker's Report

Sir David Walker has submitted "A review of corporate governance in UK banks and other financial industry entities " with 39 recommendations. He has done this at the instance of prime minister of UK. The report is interim in nature and will be followed by the final version in November.

Any report on corporate governance will attract myriad eyeballs ; therefore, we can look forward to widespread support and criticism of the report in the next few weeks. There are 5 recommendations covering Board size, composition and qualification, 8 on functions of the Board and evaluation of its performance, 9 on the role of institutional shareholders, 5 on Risk Governance and the maximum of 12 recommendations on Remuneration.

Some recommendations are path-breaking and are worthy of study and early implementation . For example, it is proposed that the Board should undertake a formal and rigorous evaluation of its performance with external facilitation. A commendable idea whose time has come ! All pay should be linked to performance (who can take exception to this Biblical statement?) and the payout of bonuses for top earners , i.e. those earning more than the median pay of executive directors, should be staggered over five years. Sir David claims that the recommendations on remuneration are "as tough or tougher than anything to be found elsewhere in the world". Obviously he has not studied the Indian Companies Act as it existed a decade back.

It is strange that the report recommends creation of a new role of Chief Risk Officer (is there no such person in British banks now?) answerable only to the Board as well as a new Risk Committee (why new?). It is recommended that the Board should establish a Board Risk Committee separately from the Audit Committee. Surprising that CRO, Risk Committee etc. are not yet institutionalised in the UK.

Expectedly, there is a lot of bloodletting on the role of non-executive directors (NED). NEDs , it is recommended, should spend more time doing their jobs - between 30 and 36 days a year - and have more professional and structured support including regular " business awareness sessions". Will it solve the problem? NEDs were derelict not because they were ignorant of business but because they were "obliged" to the promoters.

Institutional shareholders should comply or explain non-compliance with Shareholders' Code. Chairman should face re-election every year. Would not facilitating recall be a better tool?

Sir David hopes that the standards and disclosures recommended will set benchmarks for initiative and emulation elsewhere. One need not be a cynic to comment that there are benchmarks aplenty already but practices are woefully falling short.

It is interesting that Sir Christopher Hogg, Chairman of Financial Reporting Council, is presently undertaking a consultation on the Combined Code on corporate governance for all listed companies. Hence, we will soon be treated to another

well-written and highly readable report.

Friday, July 10, 2009

"How the mighty fall"

Jim Collins, the author of "Built to last" and "Good to great", has now written "How the mighty fall" which amply attempts to correct the unwarranted optimism of earlier books. His categorical observation in the new book that "Whether you prevail or fail, endure or die, depends more on what you do to yourself than on what the world does to you" indicates that he is into oriental literature of late.

He diagnoses five stages in deep descent of companies from glory to shambles. The stages are hubris, undisciplined growth, denial of risk and peril, urge for transformational acquisitions and finally death. Is the author trying to preempt criticism of his earlier works? Good tactics ! I believe that the new book's title best describes the predicament of the author also.

Tuesday, July 07, 2009

Robert S. McNamara

Robert Strange (yes, his middle name is indeed Strange) McNamara is no more. He contributed enormously to the success of Ford Motors and to statistical management. But he will be remembered more for the messy Vietnam war. He was Secretary of Defense under J F Kennedy and L B Johnson. He has been held atleast partially responsible for the ignominious Bay of Pigs invasion and Vietnam blunder.

An MBA from Harvard, he pioneered what may be christened as misanthropic misadventures. Vietnam war which resulted in mortality of millions was the military equivalent of economic meltdown. His successor MBAs from Harvard have ensured over-financialisation of economy resulting in economic apocalypse.

Monday, July 06, 2009

Judicial somersault on political interference

Justice Reghupathi's open-court reference to ministerial pressure on him has taken an expected anticlimactic turn. He has informed the High Court Chief Justice that no union minister directly spoke to him. Hon. CJ of the Supreme Court who was earlier vociferous against political pressure has now softpedalled the issue saying there is nothing to suggest that the minister had called the judge.

It is not difficult to conclude that there has been intense pressure to ease the minister off the hook and the judiciary is only all too willing for rapprochement. The denouement of this judicial-political farce was never in doubt though the modus operandi has been amateurish. Assuming that the minister did not speak to the judge, is it the end of the matter? Is Justice Reghupathi now convinced there was after all no pressure on him and that he was only paranoid? Is the CJI certain that nothing is amiss? Is the Prime Minister satisfied that his ministers are squeaky -clean?

Politics behind the budget

It was expected that the budget would be focussing on reforms since the anti-reform communists are not a hindrance to UPA any longer. Surprisingly, the 90-minute budget speech was laconic on reforms. Divestment which is considered as a main indicator of reforms was soft-pedalled. Trinamool Congress is happy about this. Apparently Trinamool Congress has taken the place of its bete-noire, the Marxists. As they say, the more politics changes , the more it remains the same. The announcement regarding funds allocation for Mumbai drainage improvement is aimed at upcoming state elections in Maharashtra. The budget has also announced a grant of Rs.50 crore to the Punjab University. Is it because our PM was a student and also a Professor there?

Budget 2009-10

The budget presented by Pranab Mukherjee today has been humourless and disappointingly bereft of Tagore quotes. Quotes from Kautilya are neither here nor there. Stock market also is not humoured. However, the negative reaction of Stock Indices has been overdone and we can expect a sharp pullback even in the course of the day today.

Changes in direct taxes are revenue-neutral whereas indirect taxes are amended to fetch Rs.2000 crore more. This from an economic viewpoint is regressive. Fiscal deficit of 6.8% will not permit reduction in interest rates. Treasury profits of banks will be hit.

In retrospect, this was an eminently expectable budget though few expected such a budget.