27th November 2019 BUSINESS STANDARD
R. Gopalakrishnan*
Email: rgopal@themindworks.me
(*The author is a corporate advisor and Distinguished Professor of IIT Kharagpur. During his career, he was Director of Tata Sons and Vice Chairman of Hindustan Unilever).
Like persistent bacteria which linger in the gut, debates about facilitating business linger in the alimentary canal of the economy. Last week, I participated in two different panel discussions, one in Mumbai and another in Bangalore. Several lingering issues came up for mention, though I have selected only five for this column.
First issue: There is a strong view among some promoters that independent directors should have skin in the game through ESOPs so that they are better aligned to value creation. ‘Skin in the game’ is an expression that is attributed to Warren Buffet. The role of boards and independent directors (IDs) is explicit in Indian regulations. To ensure that directors provide disinterested oversight of management on behalf of shareholders, their independence from management is a sine qua non. Yet some business leaders and lawyers argue that IDs should have “a closer alignment with management” for value creation (Skin in the game, Nithya Narayanan and Manali Gogate, Journal on Governance, vol I, no 6, 2012). To others, this sounds a bit like Ms Gandhi’s committed judiciary! Anglo-Saxon countries like US, UK, Canada, Australia and Hong Kong count among countries that do not prohibit IDs receiving stock grants, but India does not have to adopt this American practice. ESOPs for IDs is less prevalent in European countries because if IDs watch stock prices through self-interest, then their independence will be challenged and they will defeat their cardinal role as watchdogs. This is a crucial issue at a time when global business leaders are committing themselves to stakeholder interests rather than only shareholder interest.
Second issue: India Inc is over-regulated to the point that entrepreneurs are more preoccupied with compliances than running their business (https://www.bloombergquint.com/law-and-policy). My friends from pre-2000 SEBI say that has been a persistent complaint. If it is persistent, we should not ignore it and maybe we should ask what is over-regulation? Over-regulation occurs when the laws are not fit for purpose and when there is a capability asymmetry ie when the capability to write new laws exceeds the capabilities to enforce. An example is while driving, Indian motorists do not stop at a pedestrian crossing because there is weak enforcement. GST returns–frequency and detail every month, then every quarter, then annually–is a mendacious expectation from small business with income of Rs 1-2 crore. Regulators often do not distinguish between serious, impactful errors and harmless, minor errors in matters such as a director’s inadvertent insider-trading by a portfolio manager or technical breaches in pharma or food manufacturing.
Third issue: Business growth implies that disputes will occur. Our judicial system is so hopelessly inadequate to deal with business growth that it could undermine the confidence of a large investor to do business in India. So far, this aspect has not been called out as a retardant of economic growth. It will surely be so in the future. In ease-of-doing-business rankings, India is hopelessly lagging but who talks about it? I have written about this in my recent book, so I will not repeat my points here (Doodles on Leadership, Chapter 8, Rupa, 2019).
Fourth issue: Getting a Deming Quality award is very tough. After Japan, India has the largest number of Deming awardees. Winning is a miraculous accomplishment but greatly amplified when one considers the infrastructure around our factories and employees’ ways of living and travel. Changing employee mind-sets in such an environment as we have is a huge challenge. Kudos to India Inc for attempting to create world-class companies in infrastructure-deficient environments.
Fifth issue: Our upcoming entrepreneurs play an important role in growing jobs and the economy. We must celebrate their accomplishments, but in a calibrated manner, must denounce their transgressions and find the right way to do both constructively. I worry about celebrating start-up founders excessively and too soon, well before they have earned any profit. We don’t want to replicate the likes of Adam Neumann (WeWork) and Baba Ramdev (Patanjali). If the media hype about valuation-based start-ups continues, many founders will go the way of pop artists. Just during the last week, we have read about the tragic consequences for ABCD actress, Lauren Gottlieb (aka Rhea), American Idol star Antonella Barba, and Korea’s K-pop star, Koo Hara.
These points of view need debate within chambers of commerce in the face of public assertions like “less government, more governance” and imagined leaps in “ease of doing business” rankings.
