Desicritics Category: BizTech: Companies

How Companies React To Major Crisis Events

Dr Bhaskar Dasgupta — Sun, 4 Jan 2009 20:17:29 EST

The infamous Mohammad cartoons crisis had reached global proportions. One of the most common reactions by Muslims was to embark on a consumer goods boycott against firms which were primarily Danish, but other firms were involved as well, all the way from New Zealand. Similar situations like these keep coming up, whether it relates to boycotts of Israeli made/associated firms/products, or environmental disasters, or religiously oriented issues, corporate firms keep on getting in the crossfire. Unfortunately and unlike nation-states, they are not organised to handle political, religious and other crisis like this. So it was instructive to read how various firms reacted in different ways to the Cartoon crisis.

The paper was quite interesting indeed. Crisis management of this scale is not something that firms do very well. Take for example the recent news story that Lehman Brothers so totally mismanaged their bankruptcy and demise that it cost creditors up to $75 billion US Dollars. The authors quote some interesting events such as:

Environmental catastrophes such as the Union Carbide/Bhopal industrial accident and the Exxon Valdez oil spill had long-term ramifications for the companies involved. Criminal and terrorist acts such as the Tylenol poisonings, the Lockerbie/Pan American disaster and the 9/11 World Trade Center attacks have sensitised the public to a world of intense danger. Some crises, such as the Perrier water contamination crisis, seem largely of the company's own making through quality control failure.4 Others, such as the Belgian Coca-Cola crisis, seem to have arisen out of nowhere, apparently attributable to mass hysteria triggered by the previous dioxin scare, but intensified by corporate mismanagement. According to Johnson & Peppas: “A senior Coca-Cola Enterprises official, Phillippe Lenfant, did state that the scare had been mishandled, that communication was inadequate, and that the company was unprepared for a crisis of this magnitude

But religion is perhaps the one which is most difficult to deal with. Usually religion is the furthest from the minds of corporate executives (with perhaps the exception of praying for divine intervention when sales tank or losses mount) and the authors point to some events:

In 1994, the McDonald's fast-food restaurant chain, during its promotion of the Soccer World Cup, printed the flags of participating nations on its disposable bags. Included was that of Saudi Arabia, which bears the Shahada (Islamic creed) including the name of Allah. Muslims were outraged that the name of God was printed on material to be crumpled up and thrown away.18 A similar situation arose when Amstel, the Dutch brewer, printed the flags under the caps of beer bottles, in contact with alcoholic beverage. In India, Reebok encountered huge controversy over its brand champion, Indian cricket captain Mohammed Azharuddin, autographing footwear – including on the sole – resulting in the name Mohammed being trampled in the dirt, which was seen by some as particularly offensive.

The authors have given a nice timeline for the Mohammad Cartoons crisis.

30 September 2005: Danish newspaper Jyllands-Posten publishes editorial cartoons depicting the prophet Muhammad.

12 Oct: Eleven ambassadors from Islamic countries complain to Danish prime minister and request a meeting with him.

17 Oct: Egyptian newspaper El Fagr reprints six of the cartoons together with an article strongly condemning them.

21 Oct: Danish PM replies to the ambassadors, indicating that freedom of expression is the foundation of Danish democracy and the Danish government has no means of influencing the press. (Refusal to meet the ambassadors has been subsequently condemned by 22 Danish former ambassadors).

28 Oct: Coalition of Danish Muslim groups files criminal complaint. A regional prosecutor investigates but decides against prosecution.

10 January 2006: Norwegian Christian newspaper Magazinet reprints the cartoons, greatly inflaming the situation.

26 Jan: Saudi ambassador to Denmark recalled; retaliatory boycotts against Danish products initiated in Saudi Arabia with supermarkets displaying signs indicating that Danish products have been removed. Norwegian foreign minister condemns publication of the cartoons in a Norwegian newspaper, on the grounds that they incite hatred or hateful expressions.

30 Jan: Jyllands-Posten publishes open letters in Danish and Arabic: “In our opinion, the 12 drawings were sober. They were not intended to be offensive, nor were they at variance with Danish law, but they have indisputably offended many Muslims for which we apologise.”

31 Jan: Danish Muslim group says the apology is “ambiguous” and demands a clearer one.

1-2 Feb: Media in many European countries (France, Germany, Spain, Iceland, Italy, Belgium, Switzerland etc) and in Jordan reprint the cartoons.

2 Feb: Boycott again mentioned in Friday prayers in Saudi Arabia and Kuwait; in Qatar, the Grand Mufti calls for boycotts of Danish products; in Yemen, posters of Danish PM set alight; in Lebanon, the boycott situation “has worsened significantly”; in Morocco, “the affair continues to run in the media”; in Egypt, “the controversy is the main topic in the media and Danish products have been removed from all Egyptian supermarkets”; in Sudan, “the president has issued a statement forbidding buying or trading in Danish products.”

3 Feb: Wellington NZ newspaper Dominion Post indicates an intention to republish the cartoons in spite of the outrage in the Middle East and the already-significant losses reported by Danish dairy giant Arla.

4 Feb: New Zealand ministers warn that the decision by New Zealand newspapers to publish the cartoons is irresponsible and could threaten NZ trade. Specific mention is made of Fonterra which “sells much of its product in Muslim countries”. NZ meat industry officials lambast the media for placing trade at risk. Danish and Norwegian embassies in Damascus and Danish embassy in Beirut torched.

6 Feb: Supermarkets across the Middle East remove Danish products from their shelves. Arla is losing €1.3m a day in sales.

7 Feb: The Iranian government sets up a committee to look at possibly annulling trade deals with countries that have published the cartoons, threatening more than NZ$100m-worth of New Zealand exports.

8 Feb: Politicians in Jordan call for cancellation of trade worth NZ$70m. Prime Minister Helen Clark condemns the publishing of the cartoons and refers to New Zealand's reputation as a “peaceful and understanding nation”. Arla – Fonterra's partner in the UK butter market – closes its factory in Riyadh as the boycott bites. Fonterra publishes advertisements in Middle Eastern newspapers emphasising the NZ origins of its Anchor brand milk powders. NZ diplomatic posts are placed on high alert.

By April 2006: retailers across the Middle East were beginning to restock Arla's products, although uptake was slow, with only 20 per cent of pre-boycott sales being recorded by the end of May. Market recovery proved slow in spite of Arla investing heavily in advertising campaigns in selected markets such as Algeria.

Dec 2006: The cost to Arla Foods of the boycott of Danish products in the Middle East amounts to approx. DKr400m for 2006. This equates to a loss of DKr40,000 for each of Arla's 10,000 Danish and Swedish co-operative members. “It's a relief that the boycott has come to an end … many products have been sold at discounted prices.” According to Finn Hansen (divisional director, Arla), “the boycott will have pushed back Arla's development in the Middle East two years.”

March 2007: Arla chairman Knud Erik Jensen was able to say: “We're back in the Middle East and expect to return to previous levels of sales by the end of 2007.”

What I found amusing was the last line, all that outrage and foaming and what was the result? Not much and not for long. But time heals all wounds, so to say, and all it needed was a bit of courage and lots of communications to heal those wounds. Arla went after the crisis with a perspective of doing something is better than doing nothing. They tried to communicate the fact that freedom of speech was part and parcel of western life and supporting the Danish stance. This did not work, and then Arla tried to distance itself. On the other hand, the New Zealand firms simply refused comment or tried to comment as little as possible, keeping heads down hoping that it blows over.

I have certain issues with this. Letting things blow over, especially when you are talking about quarterly financial reporting cycles, free flow of capital, footloose capital, fast changing credit ratings and the like is just not possible. Firms cannot absorb losses over such a long period of time. So one thing which corporates should remember is whenever governmental or Societal related boycotts hit you, you should immediately ask you’re your government’s support so that the firm can endure the boycott or survive the event. Public memory is short and as they say, a week is a long time in politics. It might take longer when we are talking about religion, specially considering that religion is the opium of the masses, but pass it will. You just need capital to ride over the issue.

Second is that corporates should not tie themselves to government or political stances. That is dangerous. Firms are not organised to handle political issues nor can they spin news as is required in today’s 24 hour news and media management. So they will simply stumble and cause issues for themselves. Keeping the head down is a good idea indeed.

Third is the use of gatekeepers. The authors recommend using gatekeepers to link into the populace. Looking at this cartoon issue itself, who would be the gatekeepers? I wrote some essays on this issue.

So go to Al Azhar or to Qum? Or start debates on Al Jazeera or MBC? Or get some fatwas in your favour? Or start dealing with the famed Muslim / Arab Street? And how do you keep them listening to the message? This area is highly emotional, charged with religious symbolism, prone to minefields, subject to linguistic interpretations, full of politics, in short, everything that a corporate executive will never have had handled before in his life. So how on earth would the executive or the corporate communications team know how to handle such aspects? I mean, they themselves make heavy weather of investor relations with bog standard corporate disasters such as losses. Can you imagine them working with a religiously sensitive topic such as this? That said, there is nothing like getting some discreet conversations underway with the gatekeepers and opinion formers directly (and be prepared to pay out of your nose, as these opinion formers are not going to be cheap), but put them on retainer and see what comes up.

Oh! Also pray.

All this to be taken with a grain of piquant salt!

Book Review: Maria Misra's Business, Race, and Politics in British India

Vinod Joseph — Fri, 19 Dec 2008 01:01:58 EST

I came across this wonderful book while trying to learn a little bit more about managing agency houses which dominated Indian industry prior to independence and for a brief while after that. I heard the term ‘managing agency’ for the first time over 12 years ago while attending corporate law lectures as a law student in Bangalore. ‘Managing agency contracts,’ our highly respected professor told us with uncharacteristic brevity, ‘are banned. BANNED. Companies are not allowed to enter into such contracts any more.’

His eyes conveyed a sense of horror as if managing agency contracts were something very disgusting and dirty, akin to may be the slave trade, as if he could never explain to us youngsters, how horrible a managing agency arrangement was. We students left it at that, not particularly wanting to inquire into something not very relevant for us and add to our workload.

The second time I came across the term managing agency house was when I read Vikram Seth’s A Suitable Boy, the best book about India I have read so far. One of the characters in the book, snooty anglophile Arun Mehra works for a managing agency house. Seth takes some trouble to explain to the reader how a managing agency house functioned and how elitist and exclusive it was, even after India’s independence. However, even Seth does not manage to explain how managing agency houses dominated Indian industry during the British era. Maria Misra manages to do what neither my professor nor Vikram Seth could do (to be honest, they didn’t try to do so), that is, to convey to her readers an image of British India dominated by managing agency houses.

To explain in simplistic terms, a managing agency was a partnership which carried on the business of managing other business enterprises. A typical managing agency would enter into contracts with various companies for managing them. Under Indian company law, as it existed then, shareholders of a company could not challenge or override such contracts, even if they were contrary to shareholder interests. British India was dominated by 60 or so managing agency houses which controlled and managed most Indian businesses.

The usual modus operandi for managing agency houses was to start an enterprise with their capital, execute a managing agency contract with it for a term of twenty or thirty years and then issue shares in the company to investors, who would be stuck with the managing agent. These agencies were run by British businessmen, both English and Scottish, who believed in the racial superiority of the British over Indians, who epitomised the values around which the Empire was built and the ‘white man’s burden’ was discharged. Much more conservative than even the British Indian government, they were at the zenith of their dominance before the beginning of the First World War.

Misra explains in detail how these managing agency houses refused to change with the times and eventually lost out to multinational and Indian owned firms. Misra’s book is crowded with statistics. Misra tells us that senior assistants at these managing agency houses made INR. 3,500 per month, a huge amount of money for those days. Partners would typically retire with a fortune of around £60,000, whilst senior assistants could squirrel away an average of £30,000. Managing agencies paid their employees more than what the Indian Civil Service paid. The managing agents believed that the ideal businessman was a generalist, who would not be too ‘technical’ and who could take a holistic view of the business and its prospects. Technical people were distrusted.

As technology advanced, managing agents began to lose out on account of their technical incompetence. Misra gives us the example of Gillander, a leading managing agency, ordering railway engine paint which wouldn’t dry in the Indian climate for Duco Paints (an ICI subsidiary). Prudential, an MNC fired its managing agent since it did not understand the insurance business.

Managing agencies had so much contempt for Indians and their lack of ‘character’ that they refused to Indianise even after the Indian Civil Service started to do so. Few Indians were said to have the ‘character’ required to be a manager, with the exception of the Parsis. Indians were said to make good accountants and their rote learning skills gave them an unfair advantage in academic exams, though it was not of much use in real business. Frank Russell, a Calcutta businessman, took the view that Hindus had more brains that Muslims, but did not compare in character or physical courage. N. Macleod, a business witness to the 1913 Public Services Commission said that ‘instead of choosing men who are merely a bundle of bones and book-learning, the selectors should give preference to those men whose physical stature and appearance who be in keeping with the dignified and important position they are likely to be called on to fill in India. There is after all in the administration of Eastern countries, a great deal to be said for the man who looks the part.’

When an Indian businessman by the name Birla invited Basil Eddis of Gillander to join the Board of one of his cotton mills, the offer was coolly declined. When another Indian business house by the name Tata invited Gillander to collaborate with it in the production of steel, the offer was turned down. Misra’s book is filled with interesting anecdotes such as these. The most interesting aspect of the entire managing agency business was that managing agency contracts were void under English law whilst they were enforceable in India – until 1970.

Jet Airways Reverses Layoffs, Naresh Goyal Apologizes

Aaman Lamba — Thu, 16 Oct 2008 14:18:02 EDT

In another indication that capitalism as practiced in India is tempered by the socialist and democratic framework it operates in, Jet Airways founder and Chairman Naresh Goyal announced the company had reinstated all 1,900 employees who had been retrenched only yesterday. They would join duty on October 17th.

Mr. Goyal apologized to the employees and indicated that the move might have been a hasty decision, among a clutch of options considered for reducing costs. He said the decision to reinstate the employees had been his own, made without consulting anyone. He also stressed that the earlier decision to layoff employees had not been related to the proposed alliance with Vijay Mallya's Kingfisher Airlines. He said a joint Jet-Kingfisher Alliance Council had been set up to explore cost reduction options, including route rationalization and shared costs.

The layoffs had evoked negative reactions from various quarters, with the employees' union planning a Jet Airways boycott, and heated comments from Maharastrian politico Raj Thackeray. It had been followed by an announcement from Air India that 15,000 employees were being asked to proceed on 3-5 years leave without pay. The Indian airline industry had been grappling with the prospect of drastic shrinkage in travel arising out of high fuel costs and the general economic slowdown. The Indian government is being propositioned for a large bail-out package to avoid potential bankruptcies in the industry.

The emotional announcement by Mr. Goyal came as a surprise, and his frankness was in stark contrast to typical bland corporate announcements. The future of the industry and Jet Airways may still be uncertain, but there's no gainsaying that Mr. Goyal has won the hearts of his employees for now.

Wall Street - Cold, Flat, and Broke

C R Sridhar — Mon, 6 Oct 2008 11:40:33 EDT

“Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns.” - Michele Catalano of Long Island, an angry blogger.

The month of September was cruel for Wall Street. Stormy winds blew away the venerable institutions of Wall Street and they collapsed one by one like a pack of cards. Lehman Brothers, the 158-year investment global investment bank, went belly up. Merrill Lynch was swallowed up by Bank of America. American International Group (AIG), a $1 trillion insurance company, had to be rescued by $85 billion dollar deal by the Federal Government on the ground that it was too big to fall. Capturing the mood of panic in Wall Street Mike Whitney, a widely quoted freelance writer, wrote ‘Lehman gone; Merrill Lynch swallowed up; AIG Going… Who’s Next for Madam Defarge?’¹

Madam Defarge and the tumbrels were kept busy while heads rolled in the basket in a grisly fashion. Fannie Mae and Freddie Mac, the biggies of Mortgage lenders, became terminally ill requiring a massive bail out at a cost estimated to be in the region of $5.3 trillion. Washington Mutual went bust followed by Wachovia. Earlier in March, Bear Stearns became insolvent after bad bets turned into bad debts requiring Fed intervention. The concept of Wall Street investment banking was blown sky high when the remaining Goliaths Morgan Stanley and Goldman Sachs haemorrhaged sustaining huge losses and took the unprecedented step to covert themselves into low risk and tightly regulated commercial banks. The pervasive mood of despair and anger of Main Street was reflected by the black humour on Wall Street, one of the most popular being-“Question-What is the difference between a pigeon and an investment banker? Answer- Only a pigeon can make a deposit on a BMW.”

The dour looking, Harvard educated economist Nouriel Roubini was one of the early sceptics to predict the financial meltdown in Wall Street when he dropped the bombshell way back in 2006 that US would be heading towards the most serious financial and banking crisis since the Great Depression. His dark prophecies were met with derision and disbelief earning him the epithet- the prophet of doom. But Roubini had the last laugh when the US financial system melted down as he had predicted and he became an instant celebrity on media channels.

A bipartisan blunder

One of the contributing factors for the financial meltdown was the reckless financial deregulation that led to financial concentration and inefficient markets. The perception of regulation as hampering the animal magnetism of Wall Street bankers was a dangerous delusion that fostered the irrational drive to take unacceptable risks. As the economist Arthur MacEwan explains-“When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn’t take particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations.”²

Moreover, the extent of deregulation reached dangerous levels with the repeal of Glass- Steagall Act of 1933, which was passed after the financial debacle of 1929. This act separated investment banking from commercial banking and protected the investors from risky speculation of investment banking. Thus a commercial bank could not be in both insurance and/or investment business.

Hectic lobbying for Wall Street by Phil Gramm -the Republican Senator from Texas and the economic advisor for John McCain - and Robert Rubin in the Clinton administration were the guiding forces for the repeal of the act. This repeal became law when it received President Clinton’s assent in 1999. In 2000 another nail was driven in the regulatory coffin when Gramm introduced the Commodity Futures Modernisation Act, which excluded the scrutiny of counter derivatives, credit derivatives, credit defaults, and swaps, by regulatory agencies. Many economists hold the view that the repeal of the Glass –Steagal Act was instrumental in causing the 2007 subprime mortgage crisis.

The crucial point is to note that Wall Street enjoyed the support of both the Republicans and the Democrats for the repeal of the act. Even today both the presidential candidates Obama and McCain receive campaign money from Wall Street bankers and executives. This prompted Ralph Nader, the consumer activist, to acidly comment that there are no significant differences between Democrats and Republicans on major issues pertaining to Wall Street.

A flawed business model

The reward system is skewed in favour of brokers who make money for their Wall Street employer and not how well the client portfolios perform. As Pam Martens, an insider of Wall Street, says “A Wall Street broker receives remuneration that rises from approximately 30 to 50 per cent of the gross commission based on their cumulative trading commissions with zero regard to how well the clients’ accounts have done.” This attitude is responsible in her words for “ the industry to be irreconcilably incentivized to corruption just as brokers have been socialized to silence.” This is on account of the fact that the broker receives more commission on investing junk bonds in client portfolios rather than investing in safe treasuries.

The other questionable practice is housing a trading desk inside the same company that is supposed to give unbiased research to the public. As Pam Martens points out “For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.”³

Perils of a casino economy

While greed, corruption, and an excessively deregulated financial market offer interesting explanations about the systemic collapse of Wall Street, they remain unsatisfactory as they not explain or explore the deeper malaise afflicting the US economy. For a rigorous and conceptually sound analysis, one must turn to the series of extraordinary essays written by Harry Magdoff and Paul Sweezy in Monthly Review during 1970 and 1980’s.

The main thrust of the articles was to show that the general economic tendency of mature capitalism is toward stagnation. The main challenge of capitalist economy is surplus capital, which has diminishing opportunities for profitable investment. Deploying investment in the mature productive economy yields fewer returns as the markets are saturated. A number of strategies such as military spending, government spending, consumer spending, exploitation of third world economies as sources of cheap labour, raw materials and markets are used to counter stagnation in capitalist economies but do not resolve the problem of stagnation. As the authors point out “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most important), self-limiting.”⁴

The problem of surplus capital finding suitable avenues for profitable return is sometimes solved by key inventions and technologies, which provide economic stimuli. The invention of automobile in the “early twentieth century led eventually to huge developments that transformed the U.S. economy, even aside from the mass ownership of automobiles: the building of an extensive system of roads, bridges, and tunnels; the need for a network of gas stations, restaurants, automotive parts and repair shops; the efficient and inexpensive movement of goods from any location to any other location.” But the new information technologies such as computers, software, and the Internet do not appear to provide the same epoch making long-term economic stimuli as automobiles did.⁵

In the productive economy, money is used to purchase raw materials, machines, and labour to produce commodities, which are sold, with the capitalist receiving back money (M-C-M). While in speculation, money makes more money directly, represented as M–M. A significant change in the way banks and financial institutions operate today as opposed to the past lies in the fact that the massive borrowed money goes into speculative finance and very little is invested in the productive economy. There is practically no stimulatory effect on the economy as there are few jobs created as there are relatively fewer people employed in the speculative economy. The profits generated by speculation are rarely invested in factories or the service sector but finds its way for financing more risky financial schemes creating speculative bubbles.

This sorry state of affairs is evident when one examines the failed financial institutions of Wall Street. One common denominator linking these institutions is that all were under capitalised and over leveraged. As Mike Whitney points out “when Bear Stearns went down, it was levered at a ratio of 26 to 1. When Carlyle capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally taken over by the US Treasury; the two behemoths were levered at 80 to 1, which is to say that they had a one dollar cushion for every $80 they had loaned out.”

With huge quantity of money sloshing around the world and being invested into financial speculation there has been an explosion of speculation. One mind-boggling figure is “the daily trading on the world currency markets, which has gone from $18 billion a day in 1977, to the current average of $1.8 trillion a day! That means that every twenty-four days the dollar volume of currency trading equals the entire world’s annual GDP!” Moreover, “Today financial analysts frequently pretend that finance can levitate forever at higher and higher levels independently of the underlying productive economy. Stock markets and currency trading (betting that one nation’s currency will change relative to another) have become little more than giant casinos where the number and values of transactions have increased far out of proportion to the underlying economy.”⁶

This flight of investment from the productive economy to the casino economy is made worse by the availability of easy credit to persons who are least credit worthy. Many Americans who had little financial stability to buy houses took on mortgages, which were attractive on the face of it but carried a heavy debt burden. As real wages declined for the American household, it took on more debts for meeting the consumption needs. Total household debt stood at the end of March 2006 at 11.8 trillion.

Prudence in lending money to credit worthy persons was thrown to the winds as the banks encouraged people to borrow more and spend more. As the report in Wall Street Journal says “The banks are more aggressive because they rarely keep the loans they make. Instead, they sell them to others, who then repackage, or securitize, the loans and sell them to investors in exotic-sounding vehicles, such as CLOs, or collateralized-loan obligations. Every week brings announcements of billions of dollars in new CLOs, created by traditional money-management and hedge funds, which then sell them to other investors.”⁷

The toxic power of optimism

The belief in alchemy led mankind in the futile quest of converting base metal into gold. The bankers and traders in Wall Street were the practitioners of the alchemy of finance, which was the elusive quest of converting junk bonds into real wealth. There was an incorrigible optimism and conviction that ordinary people were meant to be rich. There was also goodwill for the captains of finance whose investment schemes were magic wands to transport investors to prosperity. Such a feeling of trust, as Galbraith reminds us, is essential for the boom.

The media played its role by lulling us into a false feeling of comfort by assuring that the fundamentals of the economy was strong and invincible. Critical views were suppressed in debates as the effusions of malcontents. A financial disaster was merely technical correction and there was more money to be made in depressed stock prices. As the financial pillars collapsed in Wall Street last month, a pie hit the glum faces of the financial analysts. The malcontents were right. As Galbraith again reminds us wisely-“when people are cautious, questioning, misanthropic, suspicious, or mean, they are immune to speculative enthusiasms.”⁸ In the aftermath of the melt down, the sceptics were rehabilitated quickly and became instant celebrities on talk shows. They taught us an important lesson, which the financier Bernard Baruch learned during the Great Depression: “ Any one taken as a individual is tolerable sensible and reasonable- as a member of a crowd, he at once becomes a blockhead.”

Plus ça change, plus c'est la même chose.

From the financial bubbles of the Mississippi scheme and South-Sea Bubble to the delusions of Tulip mania and the Great Depression nothing much has changed. As Charles Mackay says in his book Extraordinary Popular Delusions & the Madness of Crowds, “Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

But there is very little that one learns from speculative disasters, as human memory is short and unreliable. The Great Depression taught the American public the perils of unregulated market and the elected representatives passed the Glass- Steagal Act to protect the ordinary investors from financial ruin. The Act was repealed in 1999 when the memory dimmed about the Great Depression. Then another financial disaster hit Wall Street. Now there is talk of imposing controls on financial markets again.

“Wall Street”, a cynic once said, “ is a Street with a river at one end and a graveyard at the other.” Perhaps it would be appropriate to inscribe on the tombstone the words, Plus ça change, plus c'est la même chose. The inscription in French simply means, the more things change, the more they're the same.

----------------
1 The Tumbrils Roll at Dawn- Mike Whitney
2 The Greed Fallacy- Arthur MacEwan-Dollars & Sense.
3 The Wall Street Model: Unintelligent Design- Pam Martens- Counterpunch.org
4 Stagnation and the Financial Explosion- Monthly Review Press.
5 The explosion of debt and speculation- Fred Magdoff- Monthly Review
6 The explosion of debt and speculation- Fred Magdoff- Monthly Review
7 Wall Street Journal, March 3, 2006.
8 The Great Crash 1929-J.K.Galbraith- Pelican Book.

Tata Leaves West Bengal, Blames Mamta Banerjee

Ashish — Sun, 5 Oct 2008 14:53:50 EDT

The Nano project was a dream for Ratan Tata, and he was wooed by many states eager to get this prestigious project to their state. Besides the prestige, the project was also expected to generate jobs (the main project plus ancillaries are expected to be big business). Of course, there was the expectation that land needed to be sought for this purpose. And therein lies the problem. When a project needs a major amount of land, the land acquisition is a problem, and given the increase in industrialization in the country, we will continue to face more problems.

Land fragmentation is so high that to get the required amount of contiguous land for a factory or a major project means negotiating with a large number of farmers. And this is where the state steps in - the state, in situations where it is a question of industrialization, can actually acquire land at the market rate from farmers for 'public purpose'. There has been doubt in the past about whether acquiring land for a private company is a public purpose, and a recent Supreme Court judgment has sanctioned this - the court makes clear that public purpose need not mean that land only needs to be used for a Government need, but any project that generates employment and is beneficial for the local economy can be termed as a 'public purpose' project.

For the romantics who worry about a loss of village life, about the loss of land from farmers, and so on; one should ask them to live in villages for some time, especially with fragmented holdings; then they will realize that a village life is not so romantic. The known path for economic prosperity is where an economy moves up the path of industrialization, away from an agricultural focus and more into manufacturing and services where the value added is much greater. This is not meant to say that farmers land should be acquired just like that. Acquiring land for a project needs careful study; I believe Gujarat has a policy whereby there is an evaluation whether waste land can be used for this purpose, and only after that, is land taken from farmers. Farmers and others (landless laborers, sharecroppers, etc who are not compensated for land acquisition) affected by land acquisition all need to get a stake in the project, whether that be through granting them a mechanism like shares in the project, making sure that locals get enough jobs, etc.

Education is also an important part of the whole acquisition ball game. Typically, political parties don't take it very kindly when their policies are opposed by another political party. One way to avoid this is through educating villagers about how this will be beneficial to the local economy and to them (you can only do this if there are actual benefits).

Onto the current case. This is a mystery; you have a Communist Government trying to enforce a industrial project, and you have an opposition maverick politician using the acknowledged Communist methods of protest - use propaganda, rally people, block the local economic movement by blocking the main road artery, and so on. She succeeded to such an extent that the West Bengal Chief Minister could not even question the locus standi if Mamta Banerjee ? Nobody even attempted to ask as to how the Trinamool Congress claimed to be a representative of the local farmers and others. Mamta quite clearly sees this as a way of depicting the CPM as anti-poor and anti-farmer and try to rally the rural votebank behind her. In the short run, this has caused a crisis of confidence in West Bengal's ability to attract businesses:

West Bengal's worst fear has come true. Ratan Tata announced on Friday that he was leaving Singur, taking with him the Nano car project and the state's dream of an economic revival and leaving it with a tattered image in the investor's eye. The Nano project will also take with it all vendors despite the huge shifting costs, leaving a 1,000-acre black hole in the lush green Singur farmlands where Buddhadeb Bhattacharjee had hope to reap a huge political dividend as well.
On Friday, a ''distressed'' chief minister heard Tata Group chairman Ratan Tata's message, loud and clear. He made fervent pleas to Tata to stay back and keep his Rs 1,500 crore investment, even argued with Ratan Tata that his decision wasn't correct but couldn't change the industrialist's mind. The Tata Group chairman said he wasn't the one to blame for things coming to this pass. He squarely blamed Mamata Banerjee for pushing him to take the pullout decision, two years after his tryst with the Nano car factory in West Bengal.

What Ratan Tata says is quite correct. If he is setting up an industry, he would want to do it in an environment which is conducive to business; this is a basic need for having a healthy and prosperous business. The fact that Mamta Banerjee did all sort of things, including tacitly encouraging physical attack on the plant's workers would have terribly shaken Ratan Tata's confidence about the reception his factory is likely to get on an ongoing basis.

Book Review: The Ten Commandments for Business Failure

Aaman Lamba — Thu, 18 Sep 2008 14:49:58 EDT

In this time of failing corporate giants, it feels appropriate to review a slim cautionary book called The Ten Commandments for Business Failure, written by the President of a company who has survived quite well so far. Donald Keough was former president of the Coca-Cola Company, and provides us an invaluable how-not-to guide, bolstered by a foreword by Warren Buffett, and reccomendations from the likes of Bill Gates, Rupert Murdoch, and Jack Welch.

As Warren Buffett puts it in the foreword, Mr. Keough is a human personification of the Coca-Cola Company, in all its multi-dimensionality, and has an ability to 'cut to the chase on an issue' and keeps his prescriptions simple, grounded in deep experience, and it is interesting to see how many of the dicta in this book were ignored or outright flouted by recent large failed corporations.

The very first commandment, 'top of the list' as it were, is 'Quit Taking Risks'. This might seem obvious, but as the examples of Xerox and many other giants shows, often enough, the companies that get complacent and believe themselves to be secure in their business model, stop trying to rock the boat, take risks, and bet the farm on the anti-thesis of their core ideas. This was illustrated efectively by Clayton Christansen in The Innovator's Dilemma, and more recently we have seen all the Indian IT Service majors continue to propagate their low-cost services model, venturing only marginally into alternative business models, purely because the current ones have served them well for so long.

The second commandment, "Be Inflexible" is an even more powerful mechanism for ensuring failure. The resitance of the auto industry to shed existing product lines has meant their return to near-bankruptcy. Other classic examples of inflexibility are the IBM PC, Digital Corporation, and as Mr. Keough acknowledges, Coca-Cola's own inability to move beyond the iconic bottle for years, losing market share to Pepsico. The movie industry's avoidance of television for a long time, and more recently, the music industry's Internet blind spot, are compelling examples of the power of inflexibility to destroy an industry's market positioning and value.

"Isolate Yourself" is equally effective, creating a culture where bringing good news is rewarded, and bearers of bad news excoriated. This ivory tower syndrome was observed most recently in the case of Dick Fuld, CEO of Lehman Brothers, who refused to see reason and sell out when he could have got at least a meaningful value for his firm, instead of pennies on the dollar, which will go to creditors rather than the stakeholders. Bringing bad news early is an invaluable skill that advisors must cultivate, and CEOs/leaders reward. The supporting corollaries to this rule are to only listen to those who agree with you, and take all the limelight for successes. As Mr. Keough puts it, "Watch out for bright lights who surround themselves with dim bulbs!"

"Assume Infallibility" means passing the blame for failure, typically on subordinates, but even more effectively on customers - after all, the boss is always right:) A grand alternative is Warren Buffett, who, as Mr. Keough notes, provides a full accounting of successes and failures in his annual letter to his shareholders, as opposed to CEOs who make their annual report 'an exercise in fingerpointing'.

The next commandment builds on the previous, "Play Close to the Foul Line", by highlighting the assumption that since one can do no wrong, whatever one does, no matter how gray, must be right. This enables effortless flouting of ethical boundaries to achieve one's goals, such as when loans were disbursed to people who patently did not qualify for them, leading, in part, to the subprime crisis. N R Narayana Murthy, the iconic founder of Infosys, is fond of saying that the softest pillow is a clear conscience, a dictum that might be the exact opposite of this one. The American International Group failure could be attributed to some extent to the rampant accounting irregularities in the 2000s, inculculated by then-CEO, Hank Greenberg. Mr. Keough notes the pressure for short term results at the cost of longer term perspectives, or outright fudging of earnings, as a pertinent example of 'playing close to the foul line'.

"Don't Take Time to Think" is another easy path to follow in the frenetic data-driven business stream. The author looks at the costs of such an attitude to business, from the Human Toll to the masking of reality, to finally the dangers and foolishness of not taking time to think about consequences. The volumes of data flowing through the corporate ecosystem do not necessarily contribute to more accurate decision making, and can cause leaders to overlook critical insights.

"Put All Your Faith In Experts and Outside Consultants" is a caution against the millions of con artists who have their own companies' interests ahead of your own. The compelling example used by Mr. Keough is that of New Coke, where the company made a famous and costly misstep, finding out before the Internet-driven meme age the costs of taking the word of consultants to switch the core product that consumers were used to. He notes research that shows 'experts' were 80% confident about their predictions, yet right only 45% of the time. As the old saying goes, we don't know which half was right. Statistics, that favorite tool of the marketer and consultant are counterpoised by the observation of the classical economist Ludwig von Mises, a personal icon, where he said "Statistical figures tell us what happened in a nonrepeatable histocical case."

The author segues into another, perhaps more dangerous constituency than external consultants - the bureaucracy in the organization. He recalls Jack Welch's final letter to General Electric stockholders, where he noted "Hate the bureaucracy in your organization" to coin the counter-intuitive commandment "Love Your Bureaucracy". The support systems and middle managers often enough become obsessed with micro-managing, sustaining their internal power centers, and perpetuating the rituals of their functions. He illustrates how these 'choke points' often become primary causes of attrition, and worse, stifle the company culture, leading to atrophied superstructures of busy workers producing little output.

"Sending Mixed Messages" is an extremely common phenomenon, almost inevitable in large organizations. An interesting example is sending the mixed message "It doesn't matter what you do, you will be rewarded". When a company harps on excellent customer service and delivers piss-poor service through multiple channels, it is sending the worst mixed message possible - that they don't care about their customers. Similarly, the same company, say Coca-Cola, is marketed in different geographies as a low margin, high volume product and at the same time as a high value product in others. A positive example touched on briefly in the book is that of IBM - its shift from a closed organization to an open, customer-friendly society is worth considering, in part, because it entailed the elimination of mixed messages and bringing a consistency to the entire global company on how they approached and engaged with customers.

Finally, "Be Afraid of the Future" is the anti-thesis of "Quit Taking Risks". This refers to the creeping malaise of pessimism that envelops organizations particularly successful ones. Fear-mongering and focusing on failure becomes the norm, leading to decision paralysis and demoralizing the organization.

A hidden eleventh commandment adds a final spice to these recipes for failure. "Lose Your Passion For Work - And Life". This essay goes into more mystical territory, dealing with notions of self-esteem, presentation, and making an emotional connection with one's work and life pursuits. The analogy of any food tasting better in a McDonald's box is an apt one, and tapping into the emotional aspirations of one's people is the critical factor in organizational or individual success.

This slim book is eminently readable and works best if the nuggets are mapped to one's own perspective and experiences. It should come with a handy flash card of commandments of failure. Surprisingly, they work more effectively when worded the way they are rather than in the positive sense.

Apple Loses Its Innovation Edge

Aaman Lamba — Tue, 9 Sep 2008 14:52:39 EDT

Steve Jobs belied the rumours of his demise and released an array of Fall season ensembles in his Let's Rock! event in San Francisco. Unfortunately, there wasn't that much to offer, and left the faithful yearning for the traditional 'one more thing', besides sending Apple stock price (AAPL) down over 3%.

When Steve Jobs introduced the original iPod to the world on October 23, 2001, not long after another fateful day, he proclaimed, "With iPod, listening to music will never be the same again!" He could not have been more right. The music industry has gone from a lingering distaste for online music delivery to serving up 8,500,000 songs on iTunes, and the iPod still holds 73% market share.

Yet after the iPod and its many iterations, there really hasn't been that much zing. Every innovation has seemed incremental, almost something that should have been there in the first place, and we are still locked into the scenic walled garden of iTunes. The iPhone, for all its hype, brought little revolution to the mobile marketplace - carriers still rule the roost in every country where the iPhone is available, and people still over-pay for more features than they typically use in any given week.

Today could have been different. We are used to expecting wonderful things from the last icon of technology. We would not have been surprised if he had sprung a time travel machine on us (the iTime?). The yearning for good news in a rather bad year perhaps raised expectations beyond what the ivory towers could purvey.

Yet, we perhaps knew there was little great news in store. The rumors that had leaked were not hinting at any large rabbits hidden away in the hat. Even more disquietingly, they were not stamped down like errant knaves from the castle bearing news of the queen's infidelity.

We got 120 GB iPods, a slimmer eco-friendly Nano, earbuds, the 'funnest' iPod Touch ever - lots of games and the 2.1 software update for the iPhone. The big news of the evening was the Genius function, which auto-recommends songs based on your selection, either in your library on in the iTunes Store. That's a neat feature, but not very different from what Amazon has had all these years, and one is surprised it wasn't already built in.

Jack Johnson wrapped up the evening, and while that might be a nice touch, it smacked of half-hearted innovation, like there was no sparkle left in the wand, or perhaps they need a new star. One hopes Mr. Jobs has many years of creative life ahead, yet, a company cannot be dependent on a single icon. Microsoft seems to be making the post-Gates transition well enough, and while it might be too soon to tell, there is no clear succession defined at Apple.

Robert X. Cringely's proclamations aside, the synergy between Disney, Pixar, and Apple has not yet materialized into any grand design. The iPod may continue to outsell the competition, and the iPhone draw admiring eyes (though not many buyers, at least in India), but without a steady stream of ground-breaking innovations, Apple can all too easily slip back into the shadows of the tech-media space it occupied for many years in the first twilight of Steve Jobs.

The Nexus of Corruption: Reliance and Government

C R Sridhar — Tue, 9 Sep 2008 00:58:19 EDT

‘A government, for protecting business only, is but a carcass, and soon falls by its own corruption and decay.’ - Amos Bronson Alcott, American Educator.

One of the common myths circulated in Indian mainstream media is about the inherent dynamism of the Private sector, which offers a refreshing contrast to the venal, corrupt and mendacious class of politicians and government officials. The Captains of Industries are sympathetically portrayed as dynamic, hard working and enterprising people who are thwarted by soul stifling regulation imposed by the Government. Unlike the moribund Public Sector, say the business friendly media, the Private Sector is efficient and creates a big pie in the economy. But unfortunately, like all myths, it has elements of truth but deceives us by not presenting the whole picture.

While there appears to be no dearth of books praising the virtues of Business Magnates, there are few books documenting the corrupt nexus between Big Business and Big Government. One of the most remarkable books to emerge in the Indian publishing scene in recent times is Reliance- The Real Natwar written by Arun K. Agrawal. This book is an unflattering study of the behemoth Reliance Group and its alleged loot of public money with the connivance of politicians and bureaucrats in the government.

The spotlight of the book is on the alleged involvement of Reliance Petroleum Limited (RPL) in the Iraq oil-for-food scam. As the author says in his book,

‘This book has its origin, in the compulsion, born of exasperation, experienced by the author to record the failure- or, more accurately, the self-serving refusal – of the Indian political and administrative system to investigate the award of extremely lucrative oil contracts under the United Nations- administered Oil- for-Food programme in Iraq to RPL in transactions manifestly driven by kickbacks/ bribery and bipartisan political patronage.’

Mr Agrawal, a lawyer and activist, has impressive credentials to his credit having exposed corporate-government scams in the past. He filed a PIL against the 1000MW Cogentrix Power Project in Karnataka alleging that the company with a capital of only forty lakh was awarded the power project by the government of Karnataka without any competitive bidding. When the game was up Cogentrix abandoned the project, which had inflated capital costs, saving the Indian public crores of Rupees. He was also instrumental in preventing the transfer of the highly profitable Alamatti Power Project in Karnataka to the Private sector, which was built with public money. As a consultant to Prasar Bharati, he unearthed the cricket telecast scam which saved twenty crores for Prasar Bharati. Justifiably, the author concentrates his ire on government policies, which bills costs to the public while the profits are pocketed by the private sector.

The Oil-for-Food scam

The lingering public memory of this scam as a political fallout of the Volcker Report involving Mr Natwar Singh, his son Jagat Singh, family friend Andaleeb Sehgal, Asad Khan (son of Congress politician) and the Andaleeb-owned Hamdaan Exports Limited is a distorted picture which is complicated by the alleged involvement of the Congress Party named as non-contractual beneficiary in the Volcker Report. But the prime beneficiary of the scam was Reliance Petroleum Industry, which got off scot-free without any investigation whatsoever.

Perhaps it would be necessary to have an historical perspective on the Oil for Food scam to understand the full ramification of the scam. The story begins with the military misadventure of Saddam Hussein in Kuwait. Even though a cease-fire was agreed by Iraq in February 1991, after her expulsion from Kuwait, the Security Council kept in place one of the cruelest sanctions, which caused untold hardship to the Iraqi people. As the International public opinion mounted against the UN sanctions, the UN Security Council decided to lessen the hardship of the sanction by establishing Food for oil programme in 1995 under resolution no. 986 as a temporary measure to provide for the humanitarian needs of the Iraqi people.

The Oil for Food programme allowed Iraq to export oil to parties registered with UN and the use of the proceeds of oil sale by UN to pay for the food and medicines imported by Iraq, after deducting reparation, war compensation and commission. The programme started from 1996 and completed 13 phases until Saddam was toppled in 2003.

However the Oil for Food programme became a hotbed of corruption involving many highly placed UN officials who turned a blind eye to the irregularities of the programme, which led to the skimming off huge sums of money to the relatives of UN officials, Iraqi officials and oil companies all over the world.

The opportunity of corruption lay in the fact that the Iraqi Oil was sold at a price less than international rates. The difference in pricing of amounts actually paid to UN and the prevailing international price of oil was split between Iraqi officials (bribes/ surcharge), political allottees (commission) and the balance of profits to the traders and financiers.

The lid was blown off the scam when a Committee was appointed to go into the murky dealing of the UN programme. This Committee was headed by Paul Volcker who was former Chairman of Federal Reserve (US). The report of the Committee opened the Pandora’s box as Table III of the report identified three non-contractual beneficiaries, which had paid bribes/ surcharge to the Iraqi officials. The fourth beneficiary Mr Bhim Singh was absolved, as he did not lift even a single barrel of oil. In the report the Natwar–Congress combine lifted 2.93 million barrels, while Reliance lifted 15.78 million barrels for which it paid a bribe of US$3.57 million. 1

The patsy

Making scapegoats of lesser criminals is a national pastime while bigger fish go scot-free. In fierce parliamentary debates that followed the disclosure, there were fingers pointed at Sonia Gandhi who had just recovered from the whiff of cordite fumes of Bofors Guns. The BJP targeted the Congress Party for paying bribes and demanded its resignation. Other members asked for a through probe and made impassioned speeches for the punishment of the guilty. As the top leaders of the Congress Party felt jittery a plot was hatched to make a scapegoat of Mr Natwar Singh who was a Minister for External Affairs. In a damage control operation the Congress party appointed Mr R.S. Pathak, an eminent jurist, who served as the Chief Justice of India and also as a judge in the International Court of Justice at The Hague to institute an enquiry into the Oil for Food programme. The terms of reference of the R.S Pathak Inquiry Authority was restricted to two non-contractual beneficiaries, namely, the Congress Party and Mr Natwar Singh. The significant omission was Reliance Petroleum Limited, which was the largest beneficiary of Oil for Food scam.

Mr Natwar Singh whose wrongdoing was minor when compared to Reliance Petroleum Limited was sacrificed on the altar of expediency, as he was not a fundraiser for the Congress party unlike the Reliance Group, which had friends in high places. The commission of 70 lakhs of rupees made by Andaleeb Sehgal certainly involved Natwar Singh who could be accused of using his political connections to favour his son and his crony Andy by providing letters of introduction to the Iraqi authorities. The paltry gain for which Natwar Singh damaged his political future astounded political observers in Delhi. The fact that Natwar Singh was not given the option of disowning his son and leaving political life in blaze of glory sent tongues wagging in political circles. This was indeed strange given the fact that no part of the commission did end up in the personal bank accounts of Natwar Singh. Apparently it was necessary for the powers in the Congress Party to make an example of Natwar Singh and squelch the scandal. Predictably, the Inquiry fixed the blame on Natwar Singh and he was forced to resign.

Parliamentary cover up

In the speeches made by Members of Parliament, the name of Reliance Petroleum Limited never figured in the controversy. If it was mentioned in passing that could be attributed to Mr Sitaram Yechury who to his credit raised the involvement of Reliance in the Oil for Food scam. But even the left party flattered to deceive. At a press conference Prakash Karat of the Left did mention the role of Reliance in the bribery scandal, but there were no coordinated efforts on the part of the Left to bring Reliance within the purview of the Inquiry Commission. There were also reports suggesting that Mukesh Ambani met with the Left leaders but what transpired between them is a matter of conjecture.

All the speeches of the house were directed against the Congress party and Natwar Singh but Reliance Petroleum was spared the attention. A careful transcript of the speeches made at the floor of the Parliament reveals this fact. The Finance Minister, PC Chidambaram carefully avoided any reference to Reliance Petroleum Limited and blew smoke rings. The performance of the seasoned lawyer Kapil Sibal was masterly in suppressing critical facts about the involvement of Reliance in the scam. The BJP also adroitly sidestepped the Reliance issue and harmlessly indulged in verbal pyrotechnics. There was a strange unity among political parties to protect Reliance Petroleum from legal proceedings.2

Tip of the iceberg

The Oil for Food scam was not an isolated instance of Reliance Petroleum Limited walking away from corruption unscathed. There are also other scandals involving the Reliance Group. One of which was the deal involving Panna-Mukta- oil fields - given to Reliance during the Congress government by Captain Satish Sharma who was the Minister of oil and Natural Gas and a close friend of Rajiv Gandhi. The deal was sweetened to benefit Reliance on the specious plea that ONGC’s cost of exploration was inefficient when compared to the exploration costs of the private sector. Further, the royalty payment was on the basis of fixed rate instead of ad valorem rates, which would be beneficial to the government. This is evident as oil is a non-renewable asset and subject to upward revision of prices. The loss to the national exchequer was to the tune of thirty billion US dollars if the price of the barrel is fixed at US$80 with reserves at around 120 MMT. If the additional gas reserves of 1.9 trillion cubic are calculated then there is another staggering loss of about another 10 billion dollars.

The Comptroller and Auditor General adversely commented on the decision, saying no in depth analysis was carried out by the Ministry to arrive at such conclusions. Satish Sharma was later subject to a CBI probe, which said that there was a prima facie case indicating assets disproportionate to known sources of income

For future deals such as KG basin the Royalty payments were changed from fixed rate to ad valorem rates of 5% to 10% of sale realisation. As a result of absurdly low rates of royalty charged the government lost heavy revenues to the tune of over one hundred billion dollars, which was handed on a platter to Reliance as windfall profits.

Other controversies have dogged Reliance such as jacking up capital costs from $1.5 billion (2002) to $8.4 billion in 2006 with respect to the Krishna- Godavari project. The amount represented a massive scam, as gold plating of costs would be recovered before sharing of any production with the government.

The Reliance Group has also shown ingenuity in alleged tax evasion of customs duty of 120 crores in its illegal import of machinery for its PTA plant. The matter has been pending in the courts for over twenty years and has not seen the light of the day.

As the author sums up, the secret of Reliance Group becoming the largest conglomerate in the country could be attributed to,

‘financial engineering, propping up of its own shares, issuing shares of new companies at premium to the public and then merging the companies and, of course, the oil bonanza handed over to it by the government.’3

A dangerous collusion

When the interests of Big business coincide with the personal interests of politicians and bureaucrats of the government, then it can be safely assumed that public good or national interest would be in an irreversible terminal decline. As Timothy P. Carney in his book The Big Rip-off: How Big Business and Big Government Steal Your Money says,

‘Today's largest corporations have mastered the art of working with government officials at every level to stifle market competition. They reap billions through a complex web of higher taxes, stricter regulations, and shameless government handouts.’

He adds ominously that when the players in big business and big government unite, the end result is one of consumer misfortune, where prices are artificially inflated, fewer substitutes are available for sale and there are huge barriers to market entry for small businesses entrepreneurs signifying the death of free competitive markets.4

Apart from creating a stifling monopoly, which destroys competition, the coffers of the state dry up when it hands out national resources for a song and forgoes opportunity to collect revenues. When the state is not able to fulfill its constitutional obligation on account of paucity of resources, it loses its legitimacy in the eyes of the people and becomes inherently unstable.

The important achievement of Arun Agrawal’s book, Reliance - The Real Natwar is to show that it is bad economic policy to substitute the invisible hand of the market with the greased palm of corruption. For this reason alone this book should be read and reread without the ideological blinkers in our mind.

-------
1 For more details refer to Chapter 1 - Scam - pages 23-49-Reliance The Real Natwar- Arun Agrawal- Manas Publications- edition 2008.
2 Refer to chapters 8 and 9 at pages 127 –251 covering parliamentary debates.
3 For details on oil related scams of Reliance refer to chapter 7- the Reliance Saga on pages 89-126
4 Human Events.com- "New book reveals Big Business scams"-Ms Evans- 20/07/2006

The CFO-CIO Crossover, Part III

Dr Bhaskar Dasgupta — Sun, 31 Aug 2008 12:30:59 EDT

We spoke about the interesting roles of CFO and CIO and about the development of both roles in the past and the present. In this essay we will look at the future and make some predictions about the cooperation between them.

1. What developments will occur in IT in the next three to five years? If one looks at a standard finance function, then these are the broadly the main chunks: Product Control, Financial Control, Finance Administration, Operations, Mandatory Reporting, Management Reporting, Taxation, ALM, Risk etc. All these areas are going to get impacted by improvements to workflow systems, communication applications, business intelligence systems, reconciliation systems, fraud detection and exception management systems, product control systems, spreadsheet management applications, better reporting cube / data warehouses / data marts, ERM systems, better cost analysis applications, and so on and so forth. One can write a full book on just this question, but those are the application facing bits. There will be huge numbers of finance related changes coming from the internet, the client aspects, the hardware bits, the database bits, the networking parts, the communication channels, the IT people, the service delivery model, and so on and so forth, which is too much to go into now.

2. What issues will arise for finance and accounting in the next three to five years? The main issues which will arise can be divided into the following categories:

(a) future regulatory driven change such as liquidity risk management proposals, contingency funding modelling etc. – this will cause a significant impact, best case scenario – a new regulatory report, worst case scenario – a full-blown Basel II type implementation;

(b) feeding old regulatory changes into BAU such as Basel II – Basel II has been rolled out but it will need more time to bed down and impact BAU aspects such as risk weighted capital allocation and performance evaluation;

(c) hitting barriers to service delivery such as human capacity or process architecture / issues;

(d) sharply increased demands for aggressive capital control and management;

(e) increasing demand for better quality financial intelligence and MIS by the business;

(f) little appetite for errors or operational risk or high emphasis on reputational risk management emanating from financial misstatements or mispricing,

(g) continuing and increasing M&A activity etc.

3. How will these issues and developments impact the CFO/CIO relationship? From a generic basis, as can be seen from the above, the level of technical and technology impact on the CFO is just going to grow and grow and grow. So CFO’s will become much more demanding. Not only that, they will expect CIO’s to take responsibility of BAU activities, something that is not commonly understood and accepted. SOXA approvals by CIO’s have caused a severe issue in terms of how CIO’s see their roles, but if this is going to be extended to other parts of the Finance business, then the CIO will become much more embedded in the BAU Finance Change function. So the impact will be from both sides, pushing each other into each other’s arms. Whether it is a hug or a squish depends upon how open-minded the two executives are.

4. How will the issues change the way IT aligns with business strategy? IT will move up the decision making value chain. Before any changes come down the pipeline, IT will start getting involved, because financial institutions have started to understand the benefit of including IT earlier in the decision making process. The business has started to realise that while they define the strategy, delivery is most often dependent upon IT. So the more they involve IT, the more delivery is improved in lock step. IT has to become proactive as well, in terms of analysing its service delivery model to become far more agile and mobile; in terms of analysing its technology M&A methodology; in terms of its reporting data warehouses; etc.

5. Will IT drive changes in business strategy? Will business strategy changes and external factors (e.g. globalisation) drive changes within IT? Will both occur simultaneously? Will IT drive changes in business strategy? On a corporate level we will see very little of that, but on a line of business level yes we will. I can see and have seen business strategy change because new technology has come forth, such as in trading. For example, expansion of product coverage within the FIX protocol can trigger changes in business strategy by suddenly opening new markets or changing existing markets. Changes in technical market infrastructure, such as addition of a new stock trading platform can trigger and driver changes in strategy. Better risk management and fraud detection technologies can give confidence to managers that they can extend personal loans or credit cards to new customer bases. Will business strategy and external factors drive changes in IT? Of course, completely. And yes, both can and do occur simultaneously.

6. How will these changes play out? Let me bring my tarot card deck, crystal ball and tea leaves cup out. That is to say that anything might be possible.

7. Will these changes have an impact on IT’s influence on the integrity of the financials? Anything that changes IT has a 30-50% chance to impact the integrity of the financials (based very roughly on the proportion of systems impacted by SOXA compared to the non-impacted systems). So that will indicate where we have an issue if any external factor impacts technology.

8. What does the future look like for finance and accounting technology? Very bright. And that is primarily because the finance and accounting arena is and will be hit by a tidal wave of changes from its business clients, regulators, professional bodies (IASB..), and so on and so forth. And massive, rapid and huge change like this is perfect breeding grounds for that perfect storm for technology, it will provide mandatory driven investments, fear, ambition, vagueness, and dreams for results/order where technology loves to breed and innovate

We have spoken about the interesting roles of CFO and about the development of both roles in the past and the present. We have also made some predictions about the developments in the future. One aspect is certain, technology is here to stay. While before a CFO would worry about the professional standards, rules and processes versus the humans who would operationalise them, the CFO has to worry about the technology as well. In many structural ways, technology itself is changing the finance profession and vice versa. The future not only promises to be bright, it promises to be entwined like the proverbial double helix.

Technorati Tags: technology, management, financial institutions

Does Every Cloud Have a Sell Order Lining?

Dr Bhaskar Dasgupta — Tue, 26 Aug 2008 08:35:42 EDT

While my days of sitting in front of a trading screen are now long gone and lost in the dim and distant past, every time I pass a trading screen, the familiar tightening of the chest, thumping of the blood and dampening of the palms still happen. How prices are made in the financial markets is a fascinating phenomenon. The theory is pretty simple. The current price of an asset in the markets is supposed to be the best estimate of all the participants of the future performance of the asset. So if the price drops, then the market (or people like you and me) expect that the future performance will be bad. Of course there is much more to it than this.

We are not all Vulcans; we do not have a straightforward unemotional way of judging the future. Strange things do impact us. If I woke up, toddled off to take a shower and found that the hot water had finished, I would be miffed. My day would not be good after this not so good start and frankly I would not be in a good mood. My performance, my duties and responsibilities, my behaviour towards my family, colleagues and friends, howsoever tiny and picayune, will deteriorate. I will go about my day being grumpy and expect the future to be dark.

If I was woken up by my 4 year old little girl who clambered into bed with me early in the morning and then we spent 15 minutes whispering about frogs, princesses, flowers, babies, naughty elder brother, toys, dresses, boyfriends and so on and so forth, then I get out of bed after getting a big hug and a whispered, “you are the bestest daddy”, that’s it, my day is made. I will go through the day with a spring in the step, a smile on my face, a twinkle in my eye, a song on my lips and heart on the sleeve. My behaviour would be good, and I will do my duties with a cheery smile and it would be a great day. I will think the future will be great and wonderful.

So my mood influences how I feel about how the future will be. And this is why good moods, good news and good feelings/emotions push economies and markets up. People feel good about the future so that they go out and purchase stuff, go take up credit, buy houses, spend money and invest in stocks. When the mood goes bad, they stick the money under their mattress, sell their investments, plonk cash into gold and so on and so forth. Governments therefore constantly try to keep giving good news, putting a positive spin on things. That’s why they love big spectaculars, the 100th anniversary of the country’s founding, the Olympics, the Birthday of the President/Queen, the launch of the first hospital, etc.. Good things, things that make you want to celebrate and feel good about the future. (Also if you feel good, you will re-elect the government…)

Since moods influence our perception of the future so much, it is not surprising to hear that stock prices are sensitive to time. For example, did you know that stock prices move differently on Mondays and in January? Or that they move differently between summer and winter? Yep, not only does time influence trading, the weather influences trading as well. And I was reminded of this when I read a recent paper by Chang, Chen, Chou and Lin in the Journal of Banking and Finance (2008, 32, 1754-1766). These doughty chaps went deeper into the weather and trading relationship to explore how prices moved intra-day. In other words, is there a relationship between the prices on the New York Stock Exchange and the weather patterns during the day? As it turns out, yes Sir, there is indeed a relationship. Stock returns are lower on cloudier days. You have more seller initiated trades during market open if the weather is cloudy (akin to your hot water running out?). When the skies are cloudy, the price jumps about much more and does not settle down as much all through the day. There is a ton of research on this topic already, human bio-rhythms do drive trading and economic behaviour.

Strange, no? You normally would not expect the valuation of your pension fund or your mutual fund to be influenced by something as silly as the weather, would you? Especially when the offices these days are all air conditioned, with scientifically calibrated lighting and all the modern conveniences, and so on and so forth. And after all that, you find that those highly paid traders are being impacted by cloud cover? And you call yourself as BSD’s? Pah, buy some umbrellas, you wimps!

(PS: this has nothing to do with investment advice at all, please do not invest based upon this essay)

Technorati Tags: financial institutions, financial markets, trading