Tuesday, February 11, 2020

How Will You Measure Your Life

Since I am personally fond of writing and penning my thoughts as an active blogger, I have never been a fan of producing anything verbatim. But Clay Christensen s article from Harvard Business Review, below, is a lethal combination of philosophy, Corporate Conduct, Prioritisation, life lessons and above all refreshingly different from the humdrum of infinitely large supply of gyaan available on the net. I wanted this to be a permanent part of my timeline – Do read, leave a comment and share if You please.

Before I published The Innovator’s Dilemma, I got a call from Andrew Grove, then the chairman of Intel. He had read one of my early papers about disruptive technology, and he asked if I could talk to his direct reports and explain my research and what it implied for Intel. Excited, I flew to Silicon Valley and showed up at the appointed time, only to have Grove say, “Look, stuff has happened. We have only 10 minutes for you. Tell us what your model of disruption means for Intel.” I said that I couldn’t—that I needed a full 30 minutes to explain the model, because only with it as context would any comments about Intel make sense. Ten minutes into my explanation, Grove interrupted: “Look, I’ve got your model. Just tell us what it means for Intel.”

I insisted that I needed 10 more minutes to describe how the process of disruption had worked its way through a very different industry, steel, so that he and his team could understand how disruption worked. I told the story of how Nucor and other steel minimills had begun by attacking the lowest end of the market—steel reinforcing bars, or rebar—and later moved up toward the high end, undercutting the traditional steel mills.

When I finished the minimill story, Grove said, “OK, I get it. What it means for Intel is…,” and then went on to articulate what would become the company’s strategy for going to the bottom of the market to launch the Celeron processor.

I’ve thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I’d have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

That experience had a profound influence on me. When people ask what I think they should do, I rarely answer their question directly. Instead, I run the question aloud through one of my models. I’ll describe how the process in the model worked its way through an industry quite different from their own. And then, more often than not, they’ll say, “OK, I get it.” And they’ll answer their own question more insightfully than I could have.

My class at HBS is structured to help my students understand what good management theory is and how it is built. To that backbone I attach different models or theories that help students think about the various dimensions of a general manager’s job in stimulating innovation and growth. In each session we look at one company through the lenses of those theories—using them to explain how the company got into its situation and to examine what managerial actions will yield the needed results.

On the last day of class, I ask my students to turn those theoretical lenses on themselves, to find cogent answers to three questions: First, how can I be sure that I’ll be happy in my career? Second, how can I be sure that my relationships with my spouse and my family become an enduring source of happiness? Third, how can I be sure I’ll stay out of jail? Though the last question sounds lighthearted, it’s not. Two of the 32 people in my Rhodes scholar class spent time in jail. Jeff Skilling of Enron fame was a classmate of mine at HBS. These were good guys—but something in their lives sent them off in the wrong direction.

As the students discuss the answers to these questions, I open my own life to them as a case study of sorts, to illustrate how they can use the theories from our course to guide their life decisions.

One of the theories that gives great insight on the first question—how to be sure we find happiness in our careers—is from Frederick Herzberg, who asserts that the powerful motivator in our lives isn’t money; it’s the opportunity to learn, grow in responsibilities, contribute to others, and be recognized for achievements. I tell the students about a vision of sorts I had while I was running the company I founded before becoming an academic. In my mind’s eye I saw one of my managers leave for work one morning with a relatively strong level of self-esteem. Then I pictured her driving home to her family 10 hours later, feeling unappreciated, frustrated, underutilized, and demeaned. I imagined how profoundly her lowered self-esteem affected the way she interacted with her children. The vision in my mind then fast-forwarded to another day, when she drove home with greater self-esteem—feeling that she had learned a lot, been recognized for achieving valuable things, and played a significant role in the success of some important initiatives. I then imagined how positively that affected her as a spouse and a parent. My conclusion: Management is the most noble of professions if it’s practiced well. No other occupation offers as many ways to help others learn and grow, take responsibility and be recognized for achievement, and contribute to the success of a team. More and more MBA students come to school thinking that a career in business means buying, selling, and investing in companies. That’s unfortunate. Doing deals doesn’t yield the deep rewards that come from building up people.

I want students to leave my classroom knowing that.

Create a Strategy for Your Life
A theory that is helpful in answering the second question—How can I ensure that my relationship with my family proves to be an enduring source of happiness?—concerns how strategy is defined and implemented. Its primary insight is that a company’s strategy is determined by the types of initiatives that management invests in. If a company’s resource allocation process is not managed masterfully, what emerges from it can be very different from what management intended. Because companies’ decision-making systems are designed to steer investments to initiatives that offer the most tangible and immediate returns, companies shortchange investments in initiatives that are crucial to their long-term strategies.

Over the years I’ve watched the fates of my HBS classmates from 1979 unfold; I’ve seen more and more of them come to reunions unhappy, divorced, and alienated from their children. I can guarantee you that not a single one of them graduated with the deliberate strategy of getting divorced and raising children who would become estranged from them. And yet a shocking number of them implemented that strategy. The reason? They didn’t keep the purpose of their lives front and center as they decided how to spend their time, talents, and energy.

It’s quite startling that a significant fraction of the 900 students that HBS draws each year from the world’s best have given little thought to the purpose of their lives. I tell the students that HBS might be one of their last chances to reflect deeply on that question. If they think that they’ll have more time and energy to reflect later, they’re nuts, because life only gets more demanding: You take on a mortgage; you’re working 70 hours a week; you have a spouse and children.

For me, having a clear purpose in my life has been essential. But it was something I had to think long and hard about before I understood it. When I was a Rhodes scholar, I was in a very demanding academic program, trying to cram an extra year’s worth of work into my time at Oxford. I decided to spend an hour every night reading, thinking, and praying about why God put me on this earth. That was a very challenging commitment to keep, because every hour I spent doing that, I wasn’t studying applied econometrics. I was conflicted about whether I could really afford to take that time away from my studies, but I stuck with it—and ultimately figured out the purpose of my life.

Doing deals doesn’t yield the deep rewards that come from building up people.

Had I instead spent that hour each day learning the latest techniques for mastering the problems of autocorrelation in regression analysis, I would have badly misspent my life. I apply the tools of econometrics a few times a year, but I apply my knowledge of the purpose of my life every day. It’s the single most useful thing I’ve ever learned. I promise my students that if they take the time to figure out their life purpose, they’ll look back on it as the most important thing they discovered at HBS. If they don’t figure it out, they will just sail off without a rudder and get buffeted in the very rough seas of life. Clarity about their purpose will trump knowledge of activity-based costing, balanced scorecards, core competence, disruptive innovation, the four Ps, and the five forces.

My purpose grew out of my religious faith, but faith isn’t the only thing that gives people direction. For example, one of my former students decided that his purpose was to bring honesty and economic prosperity to his country and to raise children who were as capably committed to this cause, and to each other, as he was. His purpose is focused on family and others—as mine is.

The choice and successful pursuit of a profession is but one tool for achieving your purpose. But without a purpose, life can become hollow.

Allocate Your Resources
Your decisions about allocating your personal time, energy, and talent ultimately shape your life’s strategy.

I have a bunch of “businesses” that compete for these resources: I’m trying to have a rewarding relationship with my wife, raise great kids, contribute to my community, succeed in my career, contribute to my church, and so on. And I have exactly the same problem that a corporation does. I have a limited amount of time and energy and talent. How much do I devote to each of these pursuits?

Allocation choices can make your life turn out to be very different from what you intended. Sometimes that’s good: Opportunities that you never planned for emerge. But if you misinvest your resources, the outcome can be bad. As I think about my former classmates who inadvertently invested for lives of hollow unhappiness, I can’t help believing that their troubles relate right back to a short-term perspective.

When people who have a high need for achievement—and that includes all Harvard Business School graduates—have an extra half hour of time or an extra ounce of energy, they’ll unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, teach a class, publish a paper, get paid, get promoted. In contrast, investing time and energy in your relationship with your spouse and children typically doesn’t offer that same immediate sense of achievement. Kids misbehave every day. It’s really not until 20 years down the road that you can put your hands on your hips and say, “I raised a good son or a good daughter.” You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to underinvest in their families and overinvest in their careers—even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.

If you study the root causes of business disasters, over and over you’ll find this predisposition toward endeavors that offer immediate gratification. If you look at personal lives through that lens, you’ll see the same stunning and sobering pattern: people allocating fewer and fewer resources to the things they would have once said mattered most.

Create a Culture
There’s an important model in our class called the Tools of Cooperation, which basically says that being a visionary manager isn’t all it’s cracked up to be. It’s one thing to see into the foggy future with acuity and chart the course corrections that the company must make. But it’s quite another to persuade employees who might not see the changes ahead to line up and work cooperatively to take the company in that new direction. Knowing what tools to wield to elicit the needed cooperation is a critical managerial skill.

The theory arrays these tools along two dimensions—the extent to which members of the organization agree on what they want from their participation in the enterprise, and the extent to which they agree on what actions will produce the desired results. When there is little agreement on both axes, you have to use “power tools”—coercion, threats, punishment, and so on—to secure cooperation. Many companies start in this quadrant, which is why the founding executive team must play such an assertive role in defining what must be done and how. If employees’ ways of working together to address those tasks succeed over and over, consensus begins to form. MIT’s Edgar Schein has described this process as the mechanism by which a culture is built. Ultimately, people don’t even think about whether their way of doing things yields success. They embrace priorities and follow procedures by instinct and assumption rather than by explicit decision—which means that they’ve created a culture. Culture, in compelling but unspoken ways, dictates the proven, acceptable methods by which members of the group address recurrent problems. And culture defines the priority given to different types of problems. It can be a powerful management tool.

In using this model to address the question, How can I be sure that my family becomes an enduring source of happiness?, my students quickly see that the simplest tools that parents can wield to elicit cooperation from children are power tools. But there comes a point during the teen years when power tools no longer work. At that point parents start wishing that they had begun working with their children at a very young age to build a culture at home in which children instinctively behave respectfully toward one another, obey their parents, and choose the right thing to do. Families have cultures, just as companies do. Those cultures can be built consciously or evolve inadvertently.

If you want your kids to have strong self-esteem and confidence that they can solve hard problems, those qualities won’t magically materialize in high school. You have to design them into your family’s culture—and you have to think about this very early on. Like employees, children build self-esteem by doing things that are hard and learning what works.

Avoid the “Marginal Costs” Mistake
We’re taught in finance and economics that in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and marginal revenues that each alternative entails. We learn in our course that this doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. If we knew the future would be exactly the same as the past, that approach would be fine. But if the future’s different—and it almost always is—then it’s the wrong thing to do.

This theory addresses the third question I discuss with my students—how to live a life of integrity (stay out of jail). Unconsciously, we often employ the marginal cost doctrine in our personal lives when we choose between right and wrong. A voice in our head says, “Look, I know that as a general rule, most people shouldn’t do this. But in this particular extenuating circumstance, just this once, it’s OK.” The marginal cost of doing something wrong “just this once” always seems alluringly low. It suckers you in, and you don’t ever look at where that path ultimately is headed and at the full costs that the choice entails. Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.”

I’d like to share a story about how I came to understand the potential damage of “just this once” in my own life. I played on the Oxford University varsity basketball team. We worked our tails off and finished the season undefeated. The guys on the team were the best friends I’ve ever had in my life. We got to the British equivalent of the NCAA tournament—and made it to the final four. It turned out the championship game was scheduled to be played on a Sunday. I had made a personal commitment to God at age 16 that I would never play ball on Sunday. So I went to the coach and explained my problem. He was incredulous. My teammates were, too, because I was the starting center. Every one of the guys on the team came to me and said, “You’ve got to play. Can’t you break the rule just this one time?

I’m a deeply religious man, so I went away and prayed about what I should do. I got a very clear feeling that I shouldn’t break my commitment—so I didn’t play in the championship game.

In many ways that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, resisting the temptation whose logic was “In this extenuating circumstance, just this once, it’s OK” has proven to be one of the most important decisions of my life. Why? My life has been one unending stream of extenuating circumstances. Had I crossed the line that one time, I would have done it over and over in the years that followed.

The lesson I learned from this is that it’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. If you give in to “just this once,” based on a marginal cost analysis, as some of my former classmates have done, you’ll regret where you end up. You’ve got to define for yourself what you stand for and draw the line in a safe place.

Remember the Importance of Humility
I got this insight when I was asked to teach a class on humility at Harvard College. I asked all the students to describe the most humble person they knew. One characteristic of these humble people stood out: They had a high level of self-esteem. They knew who they were, and they felt good about who they were. We also decided that humility was defined not by self-deprecating behavior or attitudes but by the esteem with which you regard others. Good behavior flows naturally from that kind of humility. For example, you would never steal from someone, because you respect that person too much. You’d never lie to someone, either.

It’s crucial to take a sense of humility into the world. By the time you make it to a top graduate school, almost all your learning has come from people who are smarter and more experienced than you: parents, teachers, bosses. But once you’ve finished at Harvard Business School or any other top academic institution, the vast majority of people you’ll interact with on a day-to-day basis may not be smarter than you. And if your attitude is that only smarter people have something to teach you, your learning opportunities will be very limited. But if you have a humble eagerness to learn something from everybody, your learning opportunities will be unlimited. Generally, you can be humble only if you feel really good about yourself—and you want to help those around you feel really good about themselves, too. When we see people acting in an abusive, arrogant, or demeaning manner toward others, their behavior almost always is a symptom of their lack of self-esteem. They need to put someone else down to feel good about themselves.

Choose the Right Yardstick
This past year I was diagnosed with cancer and faced the possibility that my life would end sooner than I’d planned. Thankfully, it now looks as if I’ll be spared. But the experience has given me important insight into my life.

I have a pretty clear idea of how my ideas have generated enormous revenue for companies that have used my research; I know I’ve had a substantial impact. But as I’ve confronted this disease, it’s been interesting to see how unimportant that impact is to me now. I’ve concluded that the metric by which God will assess my life isn’t dollars but the individual people whose lives I’ve touched.

I think that’s the way it will work for us all. Don’t worry about the level of individual prominence you have achieved; worry about the individuals you have helped become better people. This is my final recommendation: Think about the metric by which your life will be judged, and make a resolution to live every day so that in the end, your life will be judged a success.

Saturday, February 1, 2020

10 Commandments for promoters of Listed Companies

If You are a promoter of a listed company and your basic idea is to loot the gullible public by privatising profits and socialising losses as recently done by Uber and tried hard by we-work this piece is a waste of time for you. If not read on…..

Google.v top wealth destroyers in last 2 years and You will deduce that the behavioral pattern of all companies and their promoters is shockingly congruent. Malafide intent of promoters has resulted in almost entire market capitalization being eroded away and gullible minority shareholders left holding just an entry in their demat statement.

At least 1-2 friends/acquaintances send me their portfolios each day for a review and the list of defunct companies in those, is shockingly long. Thousands of companies have just vanished since early 90’s and the erstwhile promoters must all be sipping mojitos in some Caribbean country such as Antigua. A sampler of these is pasted here for nostalgia. Some names were the darling of markets - Pentamedia graphics, Aftek Infosys, Crest communication.........

In a short life where the vicissitudes of health, fate or accident could just kill you instantly doing a Houdini on your minority shareholders, wont take You anywhere. But philosophy of life later or in some other piece.

This is not Your Pop’s company
Even if you own more than 50% of the company you are responsible for and towards the minority shareholder who has no access to your operations, books, has no say in management decisions and sometimes millions of shareholders end up trusting their hard earned money by investing in your company in the belief that You would do justice to the job that you are supposed to do. You are a representative of the smallest shareholder who doesn’t have a voice.

Don’t overdraw Your salary and misuse Your perks
It was shocking to hear way back in Sep 18 that the promoters of Apollo Tyres were drawing close to 12 million dollars in salary + perks (upto 300% of the salary) . Obviously minority shareholders revolted and the stock price tumbled and never ever recovered from there. More erosion happened in the market capitalization of Apollo Tyres when investors realized that the promoters were running a public company like their piggy bank rather than by the loss through their skyhigh salary, despite the muted cyclical performance QoQ.

Are You kidding me - Its appalling, when as a minority shareholder I learn that the manager of my company (call him promoter for the purpose of respect) is drawing more salary than the base salary of CEO of Google , Apple and Microsoft.

The company is struggling for growth, costs are increasing and the father son duo are breaking all records while owning only 41% of the company. Nothing gives them the right to short change the rest of the 60% shareholders – just because they don’t have a voice. Obviously the company’s EPS is falling with religious regularity over the last few years.

I know of a popular Entrepreneur in India who claims that he hasn't taken a salary hike in 10 years and only  draws some 2 Mil USD per annum. Its public knowledge that his electricity bill is 1.3 Mil USD. Isnt it obvious that minority shareholders are unknowingly paying for all his lifestyle and his expenses? 

Lesson – No one ever gets a second chance in life and in corporate world unless you are making a movie – life isn’t a film shoot where you can keep taking a retake unless you achieve a perfect shot. You f%$# up once you will never be pardoned.

Never take personal holidays in the garb of an official trip
I know a lot many promoters who travel along with families on company expense. And mostly in the garb of an official trip. Imagine giving a pro-rata travel subsidy to all shareholders. You can get away with all this for a while, but one day it will catch up with you because its just not right. And You and Your share price will be punished.

Don’t load the company with expenses of personal staff
Your being at the helm doesn’t give you a right to seek subsidy for your personal staff expenses from the minority shareholders. Lead a lifestyle that’s afforded by Your salary that’s approved by the board and is in public domain. There is a verified story that our Ex Prime Minister Sh. L B Shastri ji personally paid when family used the official car in sharp contrast to today's national political leaders and CEO s and promoters of listed companies who use the nation and their corporate authority as their personal piggy bank – and that too shamelessly.

Watch Your words in Public Domain
You Gentlemen are the custodians of the company’s public image and reputation. Your public conduct and character and any tongue malfunction can have ramifications that are sometimes hard to fathom. If Paytm was a listed company I would have been very very wary of buying its common stock and if bought – holding the same after the stellar performance of its founder Vijay Sharma.

Demonstrate benevolence and humility
What goes around, comes around is well known to everyone. But very few can fathom the intensity and quickness of ‘coming around’. If You are riding a crest of success, you will most certainly see a trough and a tempest sometime later in Your journey as a promoter. Build reputation and relationships through benevolence and humility so that the world conspires to give you support when required. Lehman Brothers was the big daddy when it opposed the bailout of Bear Sterns in March 2008 when BSC was going down and while there is very little evidence or data, the rumor has it that Lehman was left alone when it needed the support a few months later and while Lehman’s assets and liabilities matched to a great extent, the powers that be – allowed Lehman to sink while teaching them a lesson.

The lifestyle of Dick Fuld would have put God to shame and when his company was in trouble this CEO who was like a tiger riding a tiger just couldn’t get off – and neither was he allowed to – by his alleged friends.

Don’t flash your expensive toys and lifestyle
In an ideal world the promoter is really the Chief Servant of the minority shareholders and in good times the media christens You as the Branson of Your respective country ala Mr. Vijay Mallaya but don’t sympathise with You when You ever land on thin ice. On the contrary media pulls the carpet under  your feet when you would least expect it. If Mr. Mallaya had kept a low profile during his tough times, he would have easily come out of his troubles and could have still been enjoying his envious Villa in tropical Candolim rather than weathering the biting cold of the Hertfordshire. Does anyone know that Mallaya’s 1 Billion USD in debt is a fraction of the top defaulting companies in India. If only he had postponed Eminems trip for his 60th he could have gained some sympathy and some reprieve.

The system and the regulator comes after You even more harshly when they see a diluted intent. Naresh Goyal of Jet smartly offloaded his headache to the Govt and the Banks (SBI) and maintained a low decibel lifestyle and almost took that proverbial Houdini flight recently while on the other hand the regulators are still counting cars and houses of the Wadhawan clan ( HDIL and DHFL ). One hell of a capacity - this Wadhawan family has to create a systemic faultline.

Lead a frugal meaningful life
Inspite of being billionaires, all the founders of Infosys lead a simple inspiring life. Help the society thru genuine foundations and philanthropy. They talk of values more than the wealth they have created, they talk of their social responsibility and they don’t hesitate to call a spade a spade (even at the cost of wealth erosion in stock price) when they see anything wrong. The analysts have written off Infosys many times but I have always tanked up on the share when its going thru the seemingly ‘baddest’ time - to my financial advantage.

The culture and character of organisations that is usually set and left to flourish by the promoters is often unshakable and its like the stuxnet virus that keeps flowing in the proverbial veins and arteries of the organisations for infinite periods of time to achieve the end objective and common compelling goals of the organisations. And that’s why Infy always emerges stronger from every momentary crisis thereby creating swathes of loyal shareholders who don’t ditch its stock or the ‘proud part ownership’.

Don’t borrow based on excel sheets and best case scenario
I have professed before (in a lighter vain) that the biggest disservice to the corporate world has been done by Bill Gates for making Excel program that allows the new age CFO s and analysts to make specious assumptions of growth and plot it for tens and tens of years by just dragging the formula across infinitely convenient columns and make anything look rosy.

The gullible promoters fall for the elusive growth trap and start expanding to achieve what?? More promoters fail because of leverage than the ones who are able to manage leverage to their advantage.

I knew of a CFO at close quarters who would tell his battery of analysts to just make up the numbers to borrow from financial institutions thereby putting both the promoter and the business in harms way. The CFO moved on to meet his eventual fate of karma etc but the promoter was left holding a cluster of hot potatoes and an unmanageable debt portfolio.

In this VUCA world and environment – even if someone is God s gift to mankind, an unknown variable or an unknown disruption will take the wind out of Your sail and at that time margin of safety is what would hold You in good stead rather than being hit by the train – head-on from which the recovery is impossible. Simply follow what Buffet says “find a reason not to invest and then find a compelling investment” rather than the other way round.

Don’t frivolously announce buybacks to hide Your mess
We have seen in Indian markets that the moment a promoter is caught with his pants down they announce a buy back as a distraction and diversion (D&D) tactic. Markets are intelligent and now the investors even more. And D&D will oft be punished brutally and sometimes it becomes terribly difficult to emerge victorious from that. PC Jewellers announced a buyback to skittle away attention from its abysmal corp governance when it was caught.
Of course it was D&D and the stock that was the darling of the analysts and traded at some Rs 600 is now trading at Rs 20, a 96% wealth erosion…..

Declare dividends as evidence of performance and real cash
Only hard cash in the hands of minority shareholders is an evidence of your performance and intent. The translation of EBIDTA to PAT is the only real evidence of performance. Don’t hide your mess in the below the EBIDTA line items. Investors are wise and investors are unforgiving. Share the company profits with shareholders. Declare dividends to allow cash to flow to the mute believers in your performance. Cash is tangible and its rewarded. Promise of just the elusive capital appreciation doesn’t hold water with today’s well informed investor.

Above all – Don’t ever lie
When in doubt – Disclose, has been Mr. Narayan Murthy’s dharma for the longest period of time and is gospel truth for corporate conduct. No matter how bad the news is – Disclosure will always hold You and Your company in good light

As we see hundreds of companies that are trading at abysmally low valuations struggle to emerge from even the realms of nothingness, some of the top companies where the quality of promoter and management team is impeccable, continue to outperform the indices and are rewarded through very rich valuations.

And Lastly

Watch the movie – Snowden / Enemy of the State
Rules are tightening and technology is so advanced that most of us cannot fathom. Surveillance agencies can listen to every conversation, track every movement, map all spending patterns to draw conclusions. Basically hiding and doing a Houdini on the Bankers and Shareholders will become more and more difficult. What the MD of Bhushan Steel recently did like many of his brethren in the past will become almost impossible as new Govt policies come into effect and whats the point in hiding in a remote island / country , away from the family, not able to return with a solace that You have billions stashed somewhere.

A noble life full of respect and love from the people around You, cannot be founded on the bedrock of fraud and diluted intent. When we die ( which we most certainly will – sooner than we think ) we become a body in a second from Mr. So and So. Remember this and life will be just fine and world will become a better place.

Manu also writes for the Huffington Post

Tuesday, October 22, 2019

5 Life Lessons to learn from Rana Kapoor of Yes Bank

There isn’t an investor I know who hasn’t got scathed in the Yes Bank carnage. From a high price of 400 in Aug 2018 it touched 28 in less than 12 months. For easy math – its was down 94% from its peak in a year and it will have to go up by 1300% just to regain the same top – if it ever does.

Much has been said and written about the bank in magazines and papers and some Astute and Prolific Journalists such as Andy Mukherjee of Bloomberg wrote about and predicted the troubles of Yes much before the meltdown began but this piece is about the philosophy of life and the specific lessons to be learnt from Mr. Rana Kapoor s leadership and conduct.

All style and minimal substance
Sift thru the internet and a few websites and one would see that Yes Bank managed to get almost every award in the banking space. Its alleged greatness was greater than thou and when the industry and all other banks were showing signs of slowdown and stress it kept declaring stupendous numbers with the lowest NPA s in industry (even lower than HDFC bank in many quarters)
Banking is a difficult industry. NIMs are 2-5 % in best case which implies – to earn a margin of 2% you lend an amount X and hope to collect all of it back thru the life of that loan and if one large account defaults, it can wipe out the capital of the bank
I kept wondering thru the meteoric rise of the bank – are robots evaluating, disbursing and collecting loans. If the same kind of employees are working across the industry how can Yes be an outlier. At its peak Yes traded at about 6 times book and 50 PE.

Businesses that seem too good to be true are seldom that good. In its zeal to expand and a soon wanna-be HDFC, Yes took unmanageable risks and lent out money to every suspicious borrower (everything is in public domain now - the less said the better) and allegedly grew remarkably well. But most of its large borrowers had no intention / sources / business model to pay back. If you are in business or in a job - Aspire to grow in line or slightly better than the industry, you will be just fine and the power of compounding will take care of the rest. In a zeal to achieve stratospheric growth, you not only end up taking unreasonable risks but also put in jeopardy the existential probability. Greed kills.

The Business Model and its Conduct
All the readers of this piece would have taken a loan one or the other time in life and we all know that the .5% processing fees can be negotiated or even waived off at times. After all processing fees isn’t a fees for any effort or paperwork (which entails another fee), it’s part of the business model. It is heard that Yes bank developed an interesting model of charging humongous amounts of processing fees (in some cases upwards of 8-10% of the loan amount). This processing fees reflected in qtrly PnLs as fees income / other income etc and showed Yes bank to be a very intellectually superior bank that could generate such large amounts of fees as a proportion of its Net Profits. What everyone ignored was the fact that the relationship managers and senior officers on the field were expanding the lending book by taking undue risks, in some cases with collusion of the promoters, charging this large upfront fees that would make the deal look awesome from a short term perspective, earning hefty bonuses for themselves and eventually leaving the bank with rotten lemons. If Rana Kapoor was a part of this scheme, its even worse, if he was not, obviously as the Boss of the bank, he was distracted fighting his petty battles while losing the war. I would love to be wrong here but my gut tells me that all these loans would not even have a decent backing of monetizable securities. Time will tell.

Hire people not only on the basis of fancy degrees or self-proclaimed past achievements. Build teams where the team members have superior sense of responsibility and unquestionable ethics. Senior executives should have as much knowledge of philosophy and psychology as of the subject matter. For only then will they remain grounded and steer clear of designs based on the foundations of greed.
Banking industry is rife with examples of executives working on extreme short termism, earning huge bonuses and leaving a trail of destruction and sometimes orchestrating the demise of the institution. Does anyone remember Dick Fuld. He brought down Lehman and still got to keep the bonuses.
If You are at the helm and operating and building large organisations, the bonuses of your key personnel should not be tied to short term paper profits, the sustainability of which is in question. The incessant pressure of QoQ and YoY growth will most certainly create a fertile ground for executives to cook books. And they will.

It was terribly unfortunate that Mr. Ashok Kapur was killed in the 26/11 attacks in Bombay. A bank that was jointly founded by the co brothers Rana and Ashok then befell to be managed by Rana Kapoor. Obviously Rana Kapoor didn’t want to give a sliver of board space away to his co-sister. What was the point in denying the rightful board seat to Madhu Kapoor and family Rana Kapoor fought tooth and nail to keep Madhu Kapoor away from the Yes Board. We used to hear about the law of karma and if we do a misdeed, it will come back to haunt us in our next life. God perhaps got worried that the present generation in this kalaguya doesn’t give a damn about the next life and therefore shortened the turnaround time dramatically. These days Karma comes around rather swiftly. And in less than a year when the meltdown started the diamonds of Rana Kapoor got withered away at the price of marbles.

We often forget that when we are born we are a mere 3 odd kilos and when we die we reduce to the same in the ashes that are left behind. And we cannot take anything along. The amount of time and energy that Rana Kapoor invested in fighting with his relatives would have definitely taken a large share of his mind-space and attention, while his professionals ran the bank aground. Yes came to be respected as a reasonably good, technologically advanced, and a forward looking bank. But I will have my cake and eat it too  was the undoing that set the seeds of banks erosion of capital and credibility.
We teach our children a simple yet powerful lesson Sharing is Caring but forget the same ourselves along our lives – and then one day we lose it all or suddenly die. We all know that our time on this planet is limited but tend to generally disbelieve this for ourselves while remembering this for everyone else. And if we ever reflect peacefully, our significance on this ever evolving planet with millions of years of humanity and over 7 billion of us at any time on this earth is so negligible that a calculation or real reflection is humbling. So why be greedy and why not truly remember and imbibe in our personality the famous Chapter 2 , Verse 71 of Bhagwad Gita that says we came empty handed and so shall we leave.

Debt and the desire to acquire/hoard more
Pledging the entire holding of his stock to make alternate investments became a self fulfilling prophesy. When the value of the stock tanked, all the fair weather friends and lenders didn’t blink an eyelid before selling Rana’s stake.  

We all know that debt is death. Debt works 24 hrs relentlessly, whereas factories and executives and organisations work for limited hrs in a day and take weekends off. The modern monetary theory that professes ever expanding debt and the new age entrepreneurs and managers who take its refuge might not be able to fully fathom the ramifications of the same. Some of the most successful investors and thinkers such as Warren Buffett have rubbished this vehemently. Avoid debt as much as possible. Depreciating assets and objects of gratification should never be purchased using debt.
Most Friends and Well wishers only offer umbrellas when its bright and sunny. The true umbrellas are seldom found when its pouring. Just remembering this is enough to keep you grounded, responsible and strategic.

When in doubt Disclose
I am reasonably certain that Rana and the top echelons of Yes knew that the loan book is far more rotten than what they were disclosing a few qtrs ago. Else why would the edifice of lies come crashing down just one qtr later when the new CEO took over. Obviously top guys were riding a tiger that they couldn’t get off without being eaten (I remember this line from Satyam’s Ramalinga Raju’s confession in Jan 2009). If these guys had taken RBI seriously and mustered the courage to come out clean rather than making up the lower than actual NPA numbers, coming clean on divergences and apologised and course corrected – which would have been possible only if they acknowledged the mistake, the markets would have been kinder.

‘When in doubt disclose’ - This is what the legendary Sh. NR Narayana Murthy says about corporate governance. Inspite of all the personal criticism he stood his ground when he smelt impropriety in a few transactions at Infosys a few years ago. And I truly respect him for that. Omkar Goswami came heavily on Mr. Murthy – but then who is Omkar Goswami anyway.
Shareholders, media and public can pardon a few bad qtrs or a bad year of financial performance but impropriety and doubt over corporate governance (even if the net effect of the same is much lesser than bad performance) is brutally punished and brands can seldom recover from that damage thereby destroying shareholder wealth permanently. Corporates and Individuals should choose to lose money, if need be, as money can be recovered easily over time but a shred of reputation if lost never comes back. What takes a lifetime to build can be destroyed in just a second.

We are all born innocent and pure. The vicissitudes of life (everyone has them) can either derail us from the General Accepted Life Principles of Propriety or keep us firmly on track and make us want to be the Human Beings, Managers and Owners that we expect others around us to be like.

Manu also writes on the Huffington Post
Twitter @manurishiguptha

Monday, July 29, 2019

Electric Vehicles – Awesome Potential & Dream 'BUT' Very Distant Reality

I wonder how many readers of this blog have ever used Indian Railways but when I first saw the water mug (used by Indians to clean their derrière) tied to chain using a miniature lock – the contraption far heavier than the mug itself, I wondered, A country where a petty mug needs protection – what’s the future of our future and who will protect it with which harness or security.

The answer is a big ‘NO-ONE’.

This little example is to set the scene for this piece and hopelessness that persists because of a generally degenerate attitude of us Indians.

The Government’s 2025 vision is a thing that dreams are made of. Our economy is likely to be 5 Trillion USD, we would have sent missions to various planets by then. And some say, some influential politicians would already have amassed large tracts of real estate on moon and mars by that time, before anyone-else got a whiff.

Nothing shocks me anymore. Bad budget, Irresponsible statements by politicians, the abject neglect of our beautiful nation by its custodians – Nothing. I have set my expectations so so low that I am generally happy and satisfied with my environment but yes I do get surprised more than often.

The recent reduction of taxation on Electric Vehicles (EV) was one such moment recently.

Not only was it a dichotomy to the present state of industry and the automobile sector, it was a reflection of the cluelessness of the ‘powers that be’, making policies that are likely to have a significant impact on this nation and eventually on our lives.

The automobile sales (combination of 2 and 4 wheelers) are down 30-40% in the last few qtrs., most of the auto plants are now going through planned prolonged shutdowns and analysts and economists predict hundreds of thousands of people losing jobs in the automobile industry alone.

The EV situation is akin to – Doctors planning to prep, a deeply wounded athlete, (who’s just reached the ER with a severe sports injury) for the next athletic event rather than providing him with the immediate treatment and putting him on a ventilator to save his life at that instance.

EVs are the future – no doubt. And while we are staring at fast depleting fossil fuels across the globe, the world will have to find alternate sources of assimilation of energy through solar, nuclear and hydro, but not unless there is a systemic evolution of infrastructure, culture, attitudes and character of nations.

For EVs to be fully implemented and assimilated into peoples lives – far before the crude is fully depleted and people still preferring the traditional internal combustion engines, the governments of various countries esp ‘The’ densely populated India, a network of charging stations, infrastructure to support, sell, repair and recycle has to be created, maintained and sustained. It’s a paradigm shift in the lifecycle of a nation that has to be effected with multiple catalysts not just a random reduction in sales tax.

A nation where a small 500 mts flyover takes forever to build – if it doesn’t fall off during construction ala Calcutta how on earth do we expect the EV infrastructure to take shape/establish in a nation where everything moves at a snails pace unless 2025 was a misprint in place of 3025. The idea and vision does solicit an entry into the Audacious Project List but then……

I am reminded of the vandalism on the first ever superfast luxury train Tejas where the people in the train destroyed the TV screens and stole anything that could be ripped apart and stolen and people outside simply practiced their cricket and bowling skills by throwing stones and breaking the panes.

Approx 2 yrs ago one of the projects that I was overseeing was vandalized by local goons on an alleged assumption of land encroachment (to the extent of .0055 cents approx. equal to the size of a shirt button). The protectors of their self defined virtuousness damaged property worth approx. 7 Cr that took 2 more years to rebuild and operationalise while the bank interest on the entire project kept piling up. All of these guys are walking scot free and still doing the narebazi. Till the time the corruption and ‘I can get away’ attitude from mind and souls of the citizens isn’t taken out through swiftly enforceable laws – the future is bleak.

Now imagine the effort to establish a Pan India network of charging fields, hard shoulders alongside the freeways and highways and the actual charging contraption that involves a pole, wire, socket and a network of charging grid or whatever.

Perhaps all the unemployed people from the present day automobile industry could be employed as security guards to protect these charging stations.

Sadly, where we need a chain and a lock to protect a petty mug inside a train toilet, we would need a far more robust strategy, execution abilities, set of security protocols and infrastructure even before we embark on this EV journey.

In the meanwhile can someone stop dreaming and look at the bleak present state of liquidity, employment, infrastructure and the massive slowdown that seems to have gripped the nation and its industry.

Follow manu on twitter @manurishiguptha
Manu also writes for Huffington Post

Monday, April 15, 2019

Why a NDA loss might actually be good for the Stock Markets, Investors and India

Markets seem to have a mind of their own and have historically demonstrated that they discount the future far ahead in their present values. Perhaps that explains why Foreign Institutional Investors have pumped in close to 10 Billion USD in 2019 alone whereas they withdrew almost the same in 2018 from Indian markets and barely invested a net total of 2.6 Billion USD in 3 years (2015 2016 and 2017).

Markets are almost certain that Mr. Modi will come back with a resounding victory and obviously for anyone vaguely connected to the markets, one cannot fathom a NDA loss.

But hang on! History is a great teacher and I make my argument that an NDA loss might actually be good for sharp investors and for the economy. When the obvious doesn’t happen, markets perform better. Lemme explain..

Stock Markets
The stage had been set in 2004 for a Vajpayee comeback. India was shining and just to prove this point, it is believed that close to 500 Cr (approx. 109 Mill USD at that time) was spent by NDA in 2004 and on that historic day of 13 May 2004 as the results started pouring in, the obvious didn’t happen – markets crashed from a high of 10th May 2004 to a low just 7 days later by a whopping 28.4%. That’s some fall in 7 days for a size of Indian economy. That was the lack of confidence in UPA or Congress+allies at that time. Yet from the low on 11th May 2004 to the same years high, the markets rose by 69% in just approx. one year. And from the same low (1292 Nifty on 17 May 2004) went on to rise all the way by 392% by 2008 (to 6357 sometime in early 2008).

I still horrifically remember a CPI leader A.B Bardhan (the moment he realised that CPI would end up being an important ally of UPA) on national television saying “to hell with divestment of PSUs and to hell with the economy, and within minutes the markets were locked in lower circuit. God rest his soul in peace. He did succeed in causing a serious consternation with his irresponsible statement on that historic day.

India still shone irrespective of the government. And whilst the obvious didn’t happen in 2004, the investors ended up making tons of money and the wiser ones who weren’t in love with their stocks and could muster the courage to buy when India allegedly stopped shining in May 2004 and sell sometime in early 2008 smiled all the way to their banks.

In 2008 the UPA govt took some stand on the nuclear deal, survived a near death experience when the now defunct CPI withdrew its support and the general public at large was not expecting the Manmohan Sigh Govt to scrape thru in the 2009 polls. In so many years nothing happened on the nuclear front, no new reactor came to be made and nothing changed for the nuclear energy landscape of this country……………….

But Boy.. +- 4,5 days from 16th May 2009 (election results date) the markets went up by 18% around the result time and eventually up by 50.6% in that year alone from the lowest point. And 90.3% in the next 5 years till sometime in 2014.

When the obvious doesn’t happen investors make money and governments have little or no role to play in how the markets and the economy performs.

Acchhe Din started on the 16 May 2014 when Mr. Modi stormed against all odds to become the 14th PM of India. And that year, because he was the obvious choice and in line with expectations of the nation, the markets rose a mere 7% in +- 4-5 days of the election results and a mere 66% in subsequent 5 years of his Prime Ministership.

I have always believed and the same has been historically and statistically proved that the best prime minister can add 50 basis points to the GDP of a democratic nation and the worst can at best (with great effort) shave off no more that 50 basis points off the GDP.

Now just imagine if NDA was to lose this election against the common belief of the nation, what all opportunities would that scenario throw for the prudent and the hungry investor.

Real Estate
Between 2004 and 2008 , people could buy an apartment or a piece of land in the morning and sell it at a neat profit in the evening. That was the kind of frothiness that existed in the real estate market. Brokers in Gurgaon roaming around in antique scooters in 2004 were driving Hummers and Porches by 2008.

The global recession in 2008-2009 didn’t help but the real estate kept going up. The economy progressed at a better than expected rate despite a financial crisis that, some say, was the worst in 100 years.

Real estate that was always considered a safe heaven and an asset class giving guaranteed return bled to death between 2014 and 2019. Some of my friends who bought prime real estate in Gurgaon and Delhi and Bangalore aren’t able to sell their assets at 70 cents to a dollar after holding their apartments and real estate for 5 years.

The point is – NDA has been a disaster for the real estate market that has historically been a safe heaven and some estimates say that the unsold inventory of apartments at a national level is at approx. 7 years. The top 7 cities have an unsold inventory of approx. 700,000 apartments.

A recent article in the Mint pegs UPA II to be significantly ahead of NDA II in almost all parameters in spite of the worst recession of 2008 and oil at lifetime high during that period.

Obviously much is left to be desired from the performance of this Govt wrt to real estate.

Genetic mutations (Darwins theory of evolution) occur over hundreds of years. Character of homo sapiens cant be changed overnight. India over the last 100 years (reasons unknown) became a seriously corrupt nation. NDA tried hard to remove corruption overnight - Stricter policy of Aadhaar, Demonetisation, Watertight rules laid down by MOCA and GST.

Any nation across the planet would have hailed these steps as revolutionary and positively earth/nation shattering. But we poor Indians just couldn’t cope up with this setback. Majority of the people were not ready to weed out corruption or stop dealing in cash or deal in real estate without cash.

Result - : The growth of this nation, Vibrancy in the real estate market (a measure of national growth) and the common man suffered. And suffered hard. Because no one knew how to use the digital means and banking effectively. And this inherently smart and corrupt nation wasn’t ready for this dramatic shift and that’s why the entire demonetised currency found its way back into the system (as people figured out ways around this), much to the surprise of the Powers that Be.

Corruption is the engine of growth for a nation like India and ‘cash economy’ the fuel in it. NDA tried to remove both in a dramatic manner and displeased the nation. The preceding governments allowed a certain free run to everyone across the board (individuals and corporations) and the nation progressed. Cut this fuel supply and everyone suffers.

It is anyone’s guess about the benefits of extolling the virtues of corruption in a diverse, large and a disorganised country like India.

This has become a contentious issue in the last few months. Some leaked reports (authenticity unconfirmed) pegs India’s joblessness at 45 year high. Have a heart,… this is bound to happen. The Govt has endeavoured to change the character of the nation overnight and removed the grease (corruption and cash) that drives the engine. How can anyone expect the nation to thrive? And perhaps that’s the reason why most of the citizens of India are roaming around like headless chickens and putting the NSSO in a spot because they released a report that was a true reflection of the state of the nation.

Alongwith the issue of jobs, everyone is talking of the rural distress. We guys living in urban cities can neither see the distress nor feel it. But speak to an Uber driver, or a ricksawwallah, or a vegetable vendor – the guys are in trouble. No one is feeling prosperous or happy. People love Mr. Modi, they say he is a man with a mission and a clear intent but the distress hasn’t reduced. Approx 12000 farmers commit suicide each year because of financial difficulties. For us urbanites, it’s just a statistic. But what a shame that a nation with its bedrock of progress and prosperity that was based on agrarian economy is in shambles. The farmers that feed the nation are happy to destroy the crop and give up farming because selling it to the middle man is more expensive. Forget 12000 suicides – even a single suicide by any farmer should be a national issue requiring attention from the topmost echelons of politics and strategy (read niti aayog or whatever).

I just read that the food inflation is at a 27 year low. Isnt that counter intuitive – if the population and fuel prices are increasing and area under cultivation is decreasing, such low inflation only means 2 things – either our supply chain management has become hyper efficient or the farmer isn’t getting his due. 

The final Take :
If the obvious happens, which is the NDA win, the markets and the economy isn’t going anywhere – for Indian stock markets are trading at 28-30 times their earnings that make the markets one of the most expensive in the world. If at all - these will come crashing down unexpectedly and against everyone’s wishes when the euphoria is over.

But if a majority of Indians doubt the promise of ache din, and begin to question the 15 lacs that were to come to our accounts, and the regime actually changes, the storm in the tea cup might actually bode well for all of us.

Ye Indians! – figure our where your bets are.

Manu also writes in the Huffington post

Earlier articles that created a flutter…..

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