Monday, March 29, 2010

Air India's intriguing transparency

It is customary for companies to be discreet about selection of new CXOs and not to announce names of contenders / applicants till the final choice is effected. One is surprised therefore that Air India sources have gleefully announced that the new COO will be one of the three shortlisted who have been named. They are presently with Austrian Airlines, Air Malta and Rapidair.

Will this not needlessly create friction in the relationship of these applicants with their present employers ? This apart, is it likely that there is no one within the country who can do a better job ? Air India is not just a business organisation. It is also caught in a political cobweb and hence someone more appreciative of India's political nuances would be a better choice. But then, serial bungling is Air India's forte !

Saturday, March 27, 2010

World's most ethical companies

The 2010 list of world's most ethical (WME) companies prepared by Ethisphere Institute is now out. Ethisphere Institute, a U S based organisation describes itself as "a leading international think-tank dedicated to the creation, advancement and sharing of best practices in business ethics, corporate social responsibility, anti-corruption and sustainability". Be that as it may, this is an America-centric institute. The 2010 list of WME companies includes 79 American companies out of a total of 100. (The companies are not ranked; it is in a way correct because one is either ethical or not and there is no halfway house in ethical behaviour).

The parameters used for inclusion in the list are 1)integrity track records and reputation, 2)internal system and ethics / compliance programme, 3)industry leadership in setting standards, 4)executive leadership and tone from the top, 5)corporate governance, 6)corporate citizenship and responsibility and 7)innovation that contributes to public well-being.

The qualifying attributes for inclusion are employee strength of atleast 100 and annual turnover of minimum $50 mn or equivalent.

Some of the companies in the 2010 list are Thomson Reuters and Time-Warner in media, publishing and entertainment, Astra Zeneca and Novo Nordisk in pharma, Pepsico in food and beverages, Google and Zappos in internet. The omissions are glaring and perhaps deserved.

The institute claims that it pays to be ethical because the WME list (needless to say the list varies from year to year, but there is bound to be some stickiness as ethical behaviour is thankfully not a fly-by-night phenomenon) has consistently out-performed S&P 500 and FTSE 100 every year from 2005 to 2010.

The institute encouragingly reports that "the WME designation recognises companies that truly go beyond making statements about doing business 'ethically' and translate those words into action". Ethisphere Institute's credo is "Good. Smart. Business. Profit." It should be ethical for the institute to cast its net more globally for preparing the WME list.

Saturday, March 20, 2010

Lehman Brothers -- the Indian connection

Repo 105 detailed in an earlier post may be regarded as the acme of financial skulduggery at Lehman Brothers. But it is not the only malpractice adopted by the bankrupt firm. Though LB acted as a cohesive group in misleading the financial world, there was one conscientious employee  who was predictably sacked after he wrote a confidential letter to top management expressing his discomfort about the firm's presentation of financial statements.

The honest deviant is one Mr.Matthew Lee who wrote to the top management on May 16 2008. In this letter which is likely to be profusely quoted in different platforms in the near future, he describes his official position as "Senior Vice President in charge of the firm's consolidated and unconsolidated Balance Sheets of over one thousand legal entities worldwide". What is interesting is that of all these 1.000 + legal entities (one may note with disdain that the entities were legal, only their accounting processes perhaps were not), he singles out the Mumbai office for an unflattering comment.

Para 5 in the brief letter says, "Based upon my experience and the years I have worked for the Firm, I do not believe there is sufficient knowledgable management in place in the Mumbai, India Finance functions and department. There is a very real possibility of a potential misstatement of material facts being efficiently distributed by that office". (Efficient distribution of a misstatement , how prophetically sarcastic ! )

Speaking of the entire firm, Lee observes "certain senior level internal audit personnel do not have the professional expertise to properly exercise the audit functions they are entrusted to manage".

Is there any reason to trust that other equally "reputable" firms are managed better ?

Friday, March 19, 2010

Abusive leadership

In a story titled, rather pejoratively, "The Sea Witch", Time magazine (dated 22nd March) details the track record of Captain Holly Graf who is "the first woman to command a Navy cruiser and who rose fast through the ranks --until reports of her abusive command style caught up with her". The report quotes many persons who happened to work with her and there is near unanimity that the Captain was abusive and demotivational. The Navy report points out, "Persons in authority are forbidden to injure their subordinates by tyrannical or capricious conduct, or by abusive language. But Graf did so by demeaning, humiliating, publicly belittling and verbally assaulting subordinates with harsh language and profanity... rarely followed with any instruction".

Defence services and the fact that the Captain concerned is a lady lend a certain amount of gravitas to the report and probably make it sensational too. However it deserves to be recognised that such unsavoury behaviour in work places is not all that uncommon. People who subscribe to Douglas McGregor's Theory X may not fully appreciate the immense long-term damage done to an organisation by abusive leaders.

ABC (Abuse, Bully and Confound the subordinates) style of management is behind the short-term success of dysfunctional leaders. The sooner an organisation identifies such unethical misfits and screens them out, the better it is.

Thursday, March 18, 2010

Unilever in crisis mode ?

Hindustan Unilever (HUL) is strategically important to Unilever as repeatedly claimed by the latter. The number of households as customer base is perhaps the largest for HUL among all Unilever companies. Unilever admittedly learns a lot from the experience of HUL. HUL (HLL before it was rechristened) has produced many stalwarts (called Listers inhouse) who were subsequently promoted and repositioned globally by Unilever. HUL markets a bouquet of products which are household names in India. HUL has also been a coveted employer for a long time. Many executives trained and sharpened in HUL are now ably managing other companies.

All does not seem to be well with HUL of late. Unilever is rumoured to have cracked its whip and advised HUL to show better results, both topline and bottomline. The renowned marketing expertise of HUL has been steadily losing its sheen in this century. Has the company lost its way ? In early noughties, HLL started focusing its attention on "power brands" with a view to bolster its profitability. Instead of boosting profits, the strategy resulted in diminished sales and profits. This double whammy forced the company to dwell on opportunities from bottom of the pyramid for some time. When this changed marketing strategy failed to improve its fortunes, the company started re-emphasising its high-margin products. This to-and-fro marketing mess-up brought disrepute to the company and stakeholders began to view it as a company in terminal decline.

When a firm is seen to be in decline, exits from top management lend further credence to negative public opinion. D,Sundaram, Vice-Chairman of the company quit a few months back. He was the CFO of the company for a pretty long time and the public used to associate him with the financial well-being of HUL. His departure from the company when he was only 54 years of age fuelled suspicion that HUL was perhaps a sinking ship.

Even before this news was fully digested by the market, out comes the information that M S Banga who was earlier Chairman of HLL and presently in executive Board of Unilever has decided to call it a day in Unilever and to reinvent himself in some other (and perhaps better) environment. He is aged 55. Is there something behind the formal mutual encomiums exchanged between Unilever and Banga when the surprising announcement was made ?

When in a crisis, it is not unusual for persons and companies to go berserk. Is this what happened when HUL released an advertisement recently disparaging Tide natural ( detergent made by P&G) by name ? Is it desperation masquerading as a competitive ad ?

Corporate distress is often foreshadowed by a dent in the share price. HUL, ITC and P&G Hygiene are viewed as peers in the stock market . HUL was quoting at a premium of Rs.40 over ITC for a long time. It has now started suffering a discount by the same amount. HUL's Price to Earnings Ratio was traditionally more than ITC's because of the latter's predominant exposure to tobacco. At present, PE Ratios of HUL, ITC and P&G are 24.4, 25.8 and 29.7 (based on closing prices on 18th March) respectively.

Will HUL regain its pristine lustre as a sought-after employer, a marketer of "quality products" and a darling of the stock market ? Or will it cease to be a gem in Unilever group, denting the group's fortunes in the process ?

Wednesday, March 17, 2010

Lifestyle Audit

The South African Revenue Service (its acronym SARS is more menacing than its own approach to the tax payers) is coming under intense pressure from the country's public to conduct "Lifestyle Audits" of corrupt politicians. Also called "Financial Status Audit", this audit probes the consistency or its lack between the tax payer's reported earnings and expenditure. This development evidences a welcome enhanced sensitivity of the public to governance and rectitude.

Such audits need to be institutionalised in India where tax evasion and conspicuous and not-so-conspicuous expenditure disproportionate to declared incomes are pretty commonplace. If the income tax department becomes more professional in its approach and less amenable to political pressure, our fiscal deficit will get reduced atleast by a few basis points.

Saturday, March 13, 2010

Leadership crisis

We are all used to political leadership with feet of clay. But times have changed and frail leadership is no more the the exclusive core incompetence of politics alone.

Religion, business or auditing---in fact name any field and you will come across leaders falling prey to base instincts, manipulative greed and reckless malpractice. A few current examples would suffice to create angst in the most steadfast minds.

According to media reports today, allegations regarding child abuse have for the first time " touched the Pope's brother as well as the Pontiff himself , albeit indirectly." The recently-reported shenanigans of some "spiritual gurus" in India are too outrageous to recount.

Richard Fuld who was the CEO of Lehman Brothers when it collapsed exemplifies the crisis in business leadership. Referring to the accounting chicanery adopted in the firm to create delusion of deleverage, he has pleaded ignorance of Repo 105. He claims he did not structure or negotiate such tricks ; he was not aware of their accounting treatment and at no time did senior officers of Lehman , legal counsel or Ernst & Young raise any concern about the use of Repo 105 with him. This desperate exhibition of "innocence" is unlikely to mislead anyone.

Ernst & Young , one of the Big Four in audit firms, earned $31 m from Lehman in the year 2007 only to turn a blind eye to the mischief of Repo 105. This is despite some whistle blowers cautioning them. Would the Big Four get truncated to Big Three in the near future?

Friday, March 12, 2010

Speed of insolvency proceedings

Snails move faster than insolvency proceedings in India. Having witnessed with horror the tortuous and labyrinthine course of BIFR hearings in our country, I was amazed to come across the following statement in the examiner's report on Lehman Brothers:

"Lehman could be found to have been insolvent AS FAR BACK AS Sept 2, 2008 even though it did not file for bankruptcy until Sept 15." A two week delay is reported as a misdemeanour !

I am tempted to believe that Indians and Americans live in different timeframes. According to Hindu mythology, six terrestrial months constitute a day and six earthly months constitute a night in heaven / hell. Perhaps one American year is equivalent to a day in India.

Thursday, March 11, 2010

Lehman Brothers : Examiner's report

Anton Valukas, Chairman of the law firm Jenner & Block is the examiner in the bankruptcy proceedings of Lehman Brothers Holdings Inc. He has now submitted his voluminous report in nine volumes containing in all 2,200 interesting pages. It is already getting described as "as absorbing as any bestseller".

The report finds Ernst and Young accountable for professional malpractice and negligence. Lehman Brothers, according to the report, has reasons to proceed against Lehman's erstwhile CEO Dick Fuld and three of its CFOs for breach of fiduciary duties.

In defense of Mr.Fuld, his lawyer has stated that throughout his career, he faithfully and diligently worked in the interests of Lehman and its stakeholders.

Mr.Lowitt, one of the CFOs indicted in the report, has, in the words of his lawyer "in the three months during which he held the job, worked diligently and faithfully to discharge all of his duties as Lehman's CFO."

Apparently there is no common understanding of "faithfulness" and "diligence" between the examiner and Lehman executives !

Another former  CFO, Ms.Erin Callan who is also an indictee has said in a different context, "I do not trust that any journalist ever truly captures the essence of the person or their story, and it is all filtered through someone else's lens." She adds philosophically, "Somehow everything that happened had its purpose and its reason. I try not to read anything about myself, and I have taken myself out of the environment that provided a constant reminder. I have changed my life in a very significant way, which I hope will be more fulfilling and worthwhile. It is difficult to have created such a hard line. But it is the way that, I have learned, is critical to moving forward." Words we don't expect from a corporate high-flier. Incidentally, Callan became Lehman's CFO at the age of 41 and had to be eased out in March 2008, six months before the firm imploded. She joined Credit Suisse and then left CS also and is now incommunicado.

The examiner's report brings out the risk management skills of Warren Buffett very clearly. When Dick Fuld approached him to invest in Lehman Brothers in early 2008, Buffett declined because 1) Lehman executives themselves were not interested in making investments in their firm, 2) Fuld was blaming short-sellers for his firm's distress and 3) Fuld was not transparent about a dud investment in Japan. Warren Buffett's risk-attuned antennae were sharp enough to sense even weak signals. The report is destined to be the subject of animated discussions in corporate corridors for some time to come.

The report points out that the firm was using an Enronesque accounting shenanigan nicknamed "Repo 105" to temporarily offload illiquid investments . This sleight of hand enabled Lehman to window-dress its Balance Sheet by showing reduced borrowings and therefore lowered leverage. This financial engineering resulted in 'disappearance' of investments and debts to the extent of $50 billion. The firm's equity in early 2008 was only around $25 billion and total asset size was $700 billion. By all accounts, the accounting gimmick was material and to a normal mind criminal also. But the report falls short of attributing mens rea.

Justice P D Dinakaran

Justice D V Shylendrakumar has addressed an open letter to Justice P D Dinakaran . The text is available in his website "justdvskumar". The letter raises many ethical issues and even suggests a way for Justice Dinakaran to become "Jesus Christ II". The tamasha has obviously gone too far and it is a pity that the venerable Supreme Court also is only as much a bystander as any of the rest of us.

Wednesday, March 10, 2010

Panic over Credit Default Swaps

Credit Default Swaps (CDS) are perhaps the simplest of derivatives. Therefore, it is surprising that the Presidents of European Commission and France, German Chancellor and Greek Prime Minister are worried over the impact of CDS market on sovereign standing of Greece and consequently the fate of Euro. Increased activity in the CDS market preceded the current Greek financial crisis. Hence the leaders have simplistically assumed that the CDS market is the culprit. Post hoc, ergo  propter hoc ! (After this, therefore on account of this !)

This outcry against the CDS has led to a call for ban on this derivative instrument. Volumes in the market prove that CDS is used as a speculative instrument by many players. What started as a hedging tool degenerated into a speculative weapon because of lack of regulation. The remedy therefore is to strengthen the regulatory framework. Throwing the baby with the bathwater betrays lack of maturity.

Monday, March 08, 2010

Hypocrisy over Women's Reservation Bill

Yesterday was the centennial of international women's day. Under Sonia Gandhi's leadership, the Congress party wanted to pass the Women's Reservation Bill in the Rajya Sabha yesterday in a symbolic act of chivalry.

The bill was introduced in the Rajya Sabha amidst noisy protests from the known denigrators of the bill, namely the Yadavs. The protest in all its unseemliness was expected. The Upper House was adjourned five times since the proceedings were not possible in the absence of firm resolve on the part of the ruling party. BJP and the Left were enjoying the discomfiture of the Congress in an attitude of "I told you so". It is a mystery as to why Hamid Ansari, the no-nonsense Chairman of the Upper House did not find it necessary to enforce orderly conduct of business. Apparently, he took counsel from the Congress.

It is possible that all political parties contain MCPs who are against the bill but are unable to speak out lest their selfish interests become public. Reservation is only a lollipop to women. Only relatives of powerful male politicians will benefit atleast in the beginning. It is a pity that even this lollipop is denied to them for a long time. Meanwhile, parliamentary proceedings are getting more trivialised.