Monday, May 04, 2015

Reviving public sector banks

I was on ET Now over the weekend on the subject of reviving public sector banks. Here's the link to the video.

Friday, May 01, 2015

Executive pay is an unresolved issue of governance

Here's an interesting statistic, cited in an article in the FT,  about a survey done on executive remuneration: 54% of non-executive directors polled think the executive remuneration model is broken.  I suspect the percentage in the public at large would be much higher.

What are the things that are generally perceived to be wrong?

1. CEO pay (which is a proxy for top management pay) is obscenely high in absolute terms: the average pay in the US in the top 350 companies is$15.2 mhn.

ii. CEO pay has risen much faster than the stock market or the average worker's pay. As a result, the ratio of CEO pay to average worker pay - 296:1 in the top 350 companies in the US- is unaccetably high

iii. CEOs are rewarded even if their companies haven't done well.

There are any number of explanations for the explosion in CEO pay. At one extreme, there are people who think that the increase in CEO pay reflects market forces. At the other extreme, people think that CEO pay is a reflection of poor governance and dysfunctional boards of directors.

What is to be done about high CEO pay? Again, there have been any number of solutions proposed: better disclosure, stricter and more transparent pay, shareholder say on pay, curbing or getting rid of stock options, paying CEOs only in cash and restricted stock, getting rid of variable pay altogether.

Better disclosure certainly should be a starting point. This should include disclosure on maximum to minimum pay ratios, as proposed currently in the EU. But the long-term solution is to have tighter regulatory norms and boards that are constituted very differently from today. You cannot expect 'independent' directors to be independent as long as they are beholden to management for their jobs. We need some independent directors at least to be selected independently of management- by stakeholders such as institutional shareholders, banks and employees.

Will this happen? Alas, not in the near future.

Sunday, April 26, 2015

'Edward Snowden of banking'

That's the name given to Herve Falciani, the man who blew the whistle on people who allegedly used HSBC's arm in Switzerland to dodge taxes at home. Falciani gave the information to the French authorities who, in turn, have shared some of it with others. The story has been told often enough. FT has a  lunch session with the man.

Friday, April 24, 2015

Guessing game on Grexit

Not many people can predict correctly the movement of the stock market; there are plenty of people who can give explanations for a rise or fall in the index after it has happened.

The same is true, I guess, of major macroeconomic events. I have been following the twists and turns of the negotiations between the newly elected left-wing government in Greece and the triad of the EU, the ECB and the IMF. I do not have answers to three questions:

i. Will Greece default on its debt?

ii. Would such a default lead to a Greek exit or Grexit?

iii. Will a Grexit seriously impact the world economy.

The best guess I have is that the impact of a Grexit on the world economy will be greater than the European authorities think. I believe that is also the serious apprehension the Americans have, as this article in FT makes clear. The Americans should know. They didn't think the collapse of Lehman Brothers would lead a to crisis; it lead, we know, to a catastrophe. So when the president of the ECB claims that Europe has the tools to handle the fallout of a Grexit, there's reason to be sceptical.

As Martin Wolf points out in another article in the FT, the Greeks have made substantial adjustments in terms of the primary deficit, the fiscal deficit and the current account balance. There have been enormous costs in terms of reduced output and employment. Any further "reforms" must carry with them, not just the promise of the release of bail-out funds already promised by a substantial debt write-off. Very simply, any further sacrifice on the part of the Greeks must carry a substantial reward. Only such a deal can be sold to the people of Greece.

The Europeans think they can handle a Grexit. What if Greece itself is able to handle it? Will that nor provide clear incentives to Spain, Portugal and others? Will not the electorates in those countries want to do likewise?

It would be foolish to under-estimate the long-term impact on the world economy of Grexit.

Wednesday, April 22, 2015

Presenting Hinduism: striking a balance

Much of the discourse on Hinduism in the west tends to be biased. It is equated with Hindutva, which, in turn, is equated with right-wing Hinduism.

An NRI prof, Vamsee Juluri, has attempted to right this discourse in a recent book which is intended partly as a riposte to Wendy Doniger, whose own book on Hinduism came to be banned in India.

Rediff carries an interesting interview. Here's part one and here's part two.

Monday, April 20, 2015

Succession planning? What's that?

Outlook recently had a story on two high-profile companies, L&T and ITC, whose chairmen have hung in for longer than investors and analysts would think desirable. At L&T, AM Naik has been chairman for 12 years; at ITC, Y Deveshwar has been around for even longer-18 years. Neither is exactly young- Naik is 72 and Deveshwar 68.

Many promoter-managed companies have put in place norms for the person at the top to exit at some age. These are two professionally managed companies where succession planning has been found wanting. I refuse to buy the argument that a CEO deserves to stay on because he has performed well. Performance cannot be judged by financial results alone. One dimension on which performance needs to be measured is having a solid line of successors- and seeing how well the company performance after the CEO has exited.

What does the record of the two companies on succession planning say about corporate governance? I leave it to you to judge.

Sunday, April 19, 2015

CEO cuts own pay to pay employees more!

It could be a story straight out of Ripley's Believe it or Not.

A CEO of a small company in the US has decided to cut his own pay from $1 million to $70,000 and will dip into his company's profits so that he can pay his employees more. His objective: to raise the minimum wage in his company to $70,000 over the next three years.

What's special about the figure of $70,000? Well, it turns out that upto $70,000, extra money adds to one's happiness.

To me, what's striking about the CEO's act is that it drives home a basic point about corporate pay: what those at the top earn is often at the expense of what those at the bottom earn. CEOs lobby to keep minimum wages low. They ensure that unions are kept weak. They fire workers in droves and use some of the savings to boost their own pay. They move operations to low-cost economies so that US workers lose their negotiating power.

The result is that the ratio of CEO pay to worker pay has risen from 20:1 in 1965 to 296:1 in 2013. The average CEO pay in the top 350 US companies was $15.2 mn. High CEO pay goes hand in hand with enormous inequality in pay. As the New York Times story, referenced above, notes, the SEC has been reluctant to make it mandatory for US companies to disclose the ratio the highest to lowest pay in US companies.

The story also cites Peter Drucker's norm of 20:1 for the ratio of the highest to lowest pay in a company. In India, the ratio is even higher. I wonder what the ratio is at Infosys where Vishal Sikka is paid more than Rs 30 crore. Would it be 1000:1? And this is the company where N R Narayana Murthy was not long ago talking about a ratio of 20:1 or 25:1 as an acceptable level of disparity in pay!