Monday, November 28, 2011

Not documented equals not done-leads to great quality or checkbox mentality?

While reading professional standards, it struck me that the basic premise of documenting a professional services engagement is that in case the professional is sued for malpractice, the working papers will prove the extent of, and diligence put in, the work done. Of course, it has positive uses also such as helping plan the assignment, building the knowledge bank for recurring assignments, and infusing a general discipline into the whole process. Also, there is always merit in having a checklist to avoid making mistakes during complex processes. Hence, I cannot reasonably argue the merits of following a checklist/process. The only issue is whether the person performing the assignment, will consider the checklist/standard as the end of his responsibility, given the protection from negligence lawsuits filed by disgruntled clients.

So now we are at a corundum. The protection from negligence lawsuits is the trigger to motivate professions to comply with service quality standards. But senior professionals themselves write the standards, so chances are they would incorporate recent memory, and rarely include future looking requirements identified from academic research. For example, India is going through several paradigm shifts in terms of introducing IFRS/XBRL/e-filing. But while ICAI has been quick to clamour for new professional work in these areas, it has been slower to issue fresh/modified guidance. And this is not a new phenomenon. New standards are often issued after the horse has bolted from the stable(viz scams/issues/controversies). For instance, while complex financial instruments valuation made the headlines in 2008, their formal auditing guidelines were published only in Oct-11. So for mistakes done before that, the auditor could claim protection. And some standards have been issued only when the ICAI has been dragged kicking and screaming. For example,the reporting standard on segment reporting/cash flow statement needed SEBI to step in, and cut the red tape.

So how do we motivate professionals to go beyond the minimal standards? There could be a best practices repository, and the professional submitting the most/top rated ones could be awarded. Or there could be awards for uncovering the highest amount of scam, mistakes, issues(subject to client confidentiality agreements) etc. Also, the data base could have a weightage while selecting auditors for key assignments and complex work. Lets see if this idea sees the light of day in my life!

Sunday, November 27, 2011

Burning issues remain that way because people don't delve into data

Recently, I presented a business plan to set up a chain of rural warehouses for storing post harvest produce. Amongst the 4 member jury, 2 of them had no prior experience in the agriculture sector(investing/operations) etc, and this showed in the slightly naive questions they asked. While my team's rigorous ground work helped, it opened my eyes to the fact that people often do not seek out publicly available data on the internet, and prefer to rely on the sensational and biased media reporting. This is why several burning issues/misconceptions prevail on the net. Some of them are below
  • Human rights violations by police/armed forces:-Activists are prompt to critique the 'rampant' human rights violations under AFSPA and other laws, but forget that the members of police/army are often drawn from the same poor classes whom they oppress. Also, the numbers are not analyzed(how many incidents vs overall scale of violence) etc
  • Agricultural input subsidy:-Lobbies commission exquisite reports about how agriculture needs subsidized electricity, seeds, fertilizer, higher MSP, cheap loans etc. What is not highlighted is who gets the lion's share of these(not small farmers), and whether these are effective or not(Prof Anil Gupta cites evidence that non sustainable farming is costly AND a failure).
  • Actual volumes/outcomes:-India has good patent laws, but very few design registrations(even though at Rs 100/design it is the cheapest IP). Similarly, the number of beneficiaries of certain schemes are quite low. It is easy to understand spending trends, but not that easy to search for outcomes. But how many of us bother to do that?
  •  Election result analysis:-With a wealth of data about voter turnouts, victory margins, constituency trends, election expenditure etc, there is scope for an entire website devoted to analyzing in an user friendly way(dashboards, drill down, export to Excel) election data. But this is not done, and often the only time it happens is the day post elections. Thankfully, papers like TOI are giving this wide coverage and hopefully election analysis will soon go way past the number of seats won/vote share.
  • Ticking timebombs like budget deficits:-As an equity research analyst would know under the mosaic theory, weaving together numbers from different perspectives gives a good view to avoid '7 wise men of Hindustan' type of tunnel vision. Unfortunately, only consultants/investment bankers do such narratives, and in the public discourse space, this is not done. 
  • Reservations:-Few issues match this in the public divide, vitiated debate and lack of data/research. there is no way to settle this issue one way or the other. But unfortunately, worthwhile data/stats are tucked away in obscure sociological research. and are not part of the public debate sphere. 
The Way forward:-Google Scholar gives access to otherwise unreachable data, and the same is true for Wikileaks/Google Public Data explorer. It is now the public duty to delve into data, atleast for data one is interested in, and then share the results with the public via open source platforms like updating Wikipedia entries, editing Wikibooks or publishing on blogs. 

Wednesday, November 23, 2011

Knowledge-the major new factor of production

Knowledge is power-but only when applied and commercialized. In the minds of some, knowledge is something which is taught, discussed, published and understood-with the burden of its application passed on to those in the sordid 'industry'. But they forget that one cannot separate knowledge and its application, because what use is knowledge which cannot be applied?

History is replete with examples of wars won by superb battle strategy/tactics(Genghis Khan, Alexander's win, USA civil wars, British East India conquest etc) where smart warriors used their minds to win battles over much larger foes). In the retail industry, WalMart used its information centres and data analytics to introduce JIT/improve supplier coordination etc to improve sales and profits, while actually shrinking the need for inventory. That is a great example of replacing physical assets('inventory') with information(via RFID/barcoded inventory). An interesting example is the online retail of goods, music, books, insurance search, banking etc which have replaced the need for brick and mortar store. Yes, they do depend on a physical logistics backbone for execution, but that is much smaller than the cumulative assets they replaced.  The low carbon movement has led to a spurt in energy efficiency, green supply chain planning etc which drastically lowers the resource requirement. Even in the military era, the use of nukes as a deterrent may reduce the need/size of standing armies in future. This is true also given the new dangers of cyberwar, where a handful of hackers can bring down entire countries on their knees.

Of course, the limit to this is that knowledge is always a complementary factor of production, which would always need some other factor. That said, applied knowledge can cut resource use substantially. And that is why it is necessary to increase interest, improve curriculum quality etc of the STEM subjects(Science Technology Engineering Medicine)-since the fruits of these can really help the economy in future. But non STEM graduates also should not shirk their responsibility to think innovatively on how to replace assets with knowledge. If that leads to more virtualization, so be it.

Are shareholder value maximizing managers like Valmiki of Mahabharata?

Those who have read the Mahabharata would recognize what I'm alluding it. For the others, it is suffice to explain that saint Valmiki was originally a highway robber, who robbed others for a living. Once, he tried to rob a wise person who asked him about whom was he doing all that for. When the robber replied that he was doing this to support his family, the wise person asked him to return home and confirm with them whether they endorsed his actions or not. Hea was quite confident that the very people he was doing it for, would endorse and support his actions. To his shock, his wife and children(for whom he was robbing others) said that they did not want his sins to rub on to them. They felt that a basic living was his duty to provide, but they certainly did not want to share in his sins. Shocked by this, the robber saw his error and then reformed, to become the renowed saint Valmiki.

So what is the point of this parable? Under the garb of shareholder value maximization, other stakeholders are often squeezed. Suppliers are compelled to sell at unremunerative prices and often paid late; employees are underpaid and overworked; society is denuded of clean air/water and loaded with congestion/pollution; Governments are deprived of their due tax revenues etc. But it is often argued that this is what shareholders want! But in the absence of direct democracy for routine issues, it is not possible to ask them. But if companies did ask their shareholders, I'm sure their response would be similar to that of Valmiki's family. After all, psychological studies show that humans are not 100% rational, and are often suckers for a sob story.

Now, some may point to the 'Knowing Doing' gap i,e the importance of looking at people's actions instead of their professed sentiments. There is some truth in this because people are aware of the causes and ill effects of smoking, obesity and a host of other vices. Still, they remain addicted to it OR inertia stops them from changing habits. Similarly, in the investing context, though many investors especially the institutional ones have learnt the importance of inclusive corporate governance etc, it is doubtful that they give a damm, With the exception of Norway SWF, Calpers and a handful of other investors; few investors have behaved like Valmiki's family(censure and repudiation) when confronted with evidence of corporate wrong doing. The market capitalization may suffer in fear of economic penalties but not otherwise. So the managers may not be wrong, when they feel that they have the support of their shareholder family, in whatever they do.

Monday, November 21, 2011

The online forum users who get my hackles up.

Be it Rediff/Facebook pages/online job postings etc, one invariably sees a lot of spam and clutter. This is because of the people below.
  • The Q jumper:-This person does not bother to use the 'report abuse'/'customer service ticket' options but straight away plugs in a forum message
  • The spammer:-This person advertises their product/services ranging from Nigerian letter fraud to work from home to online retail for certain err..drugs.
  • The English challenged:-This person posts rants in broken English. Nothing wrong in that per se, just that I dislike it.
  • The Agenda pusher:-This person has a rant against a person(say AzimPremji/Sonia Gandhi/Congress/missionaries) and whatever be the topic, somehow finds a way to insert their views into the fray and create a mess. 
  • The CAPSLOCKER:-This person imagines that by  writing everything in caps, they will somehow get more attention. Nothing can be farther than the truth.
  • The hoarder:-When a kind soul states that s(he) will email/share a resource with all those who email them, the hoarder is too lazy to send an email, but instead decides to
  • The potential social engineering victim:-This person gives their personal details like name/address/contact details and even account numbers, hoping that the customer care person will take care of it OR that the

Friday, November 18, 2011

The Vocabulary premium-part 2

The limits of my language are the limits of my world-Ludwig Wittgenstein(Philosopher)
Earlier, I blogged on the importance of vocabulary( This post takes those sentiments forward, as I take a break from completing those umpteen assignments in the twilight days at IIM-A.

As a kid, my parents and teachers emphasized the importance of having a good vocabulary. What I am today, is significantly attributable to my reading habit, which stoked a virtuous cycle of curiosity driven reading. Yes, I did miss out on watching the TV serials/comics and other junk, but I think it was a good bargain. Of course, for some periods in between, I did get addicted to fiction, which then became a hobby. Thankfully, that hobby did not break the mental concentration and interest necessary to complete a non fiction book. I know people who can spend the night reading the latest best seller, but get bored of reading a non fiction book after just 30min. And that is NOT because of the dry writing style.

While any kind of reading will improve vocabulary, some kinds of reading are better than others for that purpose. Reading biographies, classics and the kind of stuff which could be mandatory school readings; not only improve vocabulary but are also time tested ways of boosting critical thinking and analytical skills. Therefore, do not think that reading that pulp fiction bestseller will confer that vocabulary premium, but do widen your reading,

Sunday, November 13, 2011

Corporate Governance and Political governance deficit-the similarities

In 2010/2011, several scams rocked the Indian political scenario right from the mother of them all(2G spectrum allocation, Karnataka mining licenses, Adarsh housing society etc). Chief Ministers were dismissed, inquiry commissions set up and heads rolled. The media gleefully credited their reporting and publicity as a deterrent factor. All that was to change when the spurt of corporate scams errupted. Just recouping from the FY09 Satyam scam, multiple scams were exposed right from the mining licenses(Jharkhand, Karnataka), land acquisition(for SEZ, projects), Radia tapes, bribery, cases etc. While some CEOs were arrested/dismissed(Gautam Doshi, Everonn CEO, Money Matters, LIC Housing Finance), industry forums were quick to pass them off as rotten apples. But on deeper reflection, one should not have been surprised for these scams. After all, the inconvinient truth is that corporate governance reflects the society it resides in. And the common reasons are
  • No separation of powers:-Like how most political parties are one man shows, so are most companies. The CEO-Chairman position is not separated.
  • First past the post:-Like how 30% voting share is often enough to win seats, the same is true for companies as well. As there is no proportional representation, the shareholders with even 30% voting power can often control the Board easily.
  • Redistribution focus over governance:-Few Indians would genuinely expect their MP/MLA to debate larger issues in the assembly/parliament, at the cost of giving attention to local issues. Similarly, investors do not expect their directors to show exquisite coalition dharma viz corporate governance; but instead expect share price maximization
  • Opaque funding/controls:-like how political parties benefit from anonymous contributions and exempt income, often without tax returns scrutiny; company promoters benefit from related party transactions that enable major siphoning out of funds. 
However, there are major exceptions also
  •   Contest ability is much more in politics than in companies, where hostile takovers are quite rare. Companies can be defeated at the market place, but rarely are corporate power battles(especially takeover bids) fought in public.
  • Coalition dharma is much more relevant in companies than at the assemble level in politics. While the company must juggle the interests of workers, investors, employees, government(at the bare minimum!!), the politician is often content with jugging the interests of his voters(or atleast appearing to do so).
This analogy is so relevant that next time we blame the Government for anything, it is better to take a hard look at our corporates, to see whether we are committing the same sins or not. 

Saturday, November 12, 2011

Assisted Access to e-governance services-will this be its Waterloo?

Corporate and Tax laws/procedures have been significantly modified to allow for e-governance. Some examples are mentioned below
  • All excise/service tax returns must be filed online irrespective of amount etc
  • Significant chunk of income tax returns are filed online 
  • All company law forms/returns are filed online, and payments
  • Many state VAT laws now mandate electronic filing of returns/audit reports/registration
To ensure greater data integrity, the initial mandate was that certain practising professionals(CA, CS,CWA) could pre-certify the filing, using their digital signature. But the issue then rose about accessibility. After all, not all are techsavvy, even fewer have a good broadband connection etc. Therefore, the concept then arose of Certified Filing Centres(CFCs) for both corporate and tax laws, which essentially provide administrative support for filing including scanning, uploading, reformatting etc. The primary responsibility of the filing remains with the filer though. These CFCs may be run by professionals themselves or by private parties.

The Code of Conduct of the respective professional institutes may ensure good quality work by professional run CFCs but the issue is whether this is sustainable? After all, such work does not need a CA to do it, and would result in higher fees than compared to non CA/CS/CWA doing it.

But if one throws open CFCs to persons not regulated by their respective professional councils, then the issue comes about compensation for erroneous filings etc. No amount of security deposit can really suffice, nor can the amount be readily computed. To strike the balance between public interest(lower fees) and information integrity, a good midway could be online checks/validations which would avoid gross errors, as well as random confirmations in case of outlier numbers. This is done for TDS returns, MVAT returns etc, and can be extended to all. I'm sure the IT industry would be ready to help set up and design forms allowing for live validation checks and confirmations. If this is not done, then the inevitable errors when publicized, may lead to loss of faith in the new system

Where familiarity breeds contempt-the case of IT engineers

At the outset, let me clarify my immense respect for those engineers/other graduates who have helped India's ITES companies become world beater. As someone said, success is not an accident, and the ITES industry success is due to excellent skills in management, control, quality, knowledge management etc. While these functions are often siloed, the professionals working in those companies, if having done the work sincerely, do pickup those skills especially disciplined approach, domain expertise etc.

Then why is the apparent bias against them, when it comes to MBA admissions? Read any interview of the Admissions Director/faculty of Bschools, and they all stress on the need for diversity. Now, diversity can be viewed through many lenses(education, gender, experience)-but it is usually boiled down to rejecting male engineers who have worked in ITES. Granted that they make up a large chunk of the applicant pool, but it may be too much of a logical stress to argue that consequentially they think alike, and so should be weaned out.

I must confess to an initial bias that engineers in ITES switching to MBA, were self selecting themselves out of the rat race there, and so 'were not the cream'. This is true for freshers(especially IIT/NITians) where the 'creme de lae' often study abroad or pick up plum jobs post engineering. However, despite that, the ITES guys and IIT/NIT freshers often 'kick ass' the collective derrieres of the others. Is this a reflection of their quality or indictment of the education system is hard to say, but needs some thinking.

Still, I conclude this rant by stating that before passing value judgements on a 'typical' IT guy turned MBA aspirant's CV, we should understand the person's work domain(support/coding/sales..), client work(which sectors), work appraisals(awards, promotions) and quality(say 1yr+). It is difficult because appreciation letters are dime a dozen,something like some army medals/service awards in the USA. But that does not deprive us of the responsibility of taking the time to understand the 80:20 rule to shortlist CVs etc.

Saturday, November 5, 2011

So what are priority sectors anyway?

A careful listener of the annual Union Budget speech(and related commentary/analysis) would hear the term 'priority sector' used(overused?) ad-nauseum, in the context of tax relief, subsidies, soft loans etc. Some known sectors are textiles, agriculture, renewable energy, gems etc. While the rationale for some of these are political like for sugar(powerful barons in Maharashtra/UP) or wheat(powerful farmers in Punjab/Haryana), the reality is that some are prompted by quite logical considerations.  The National Manufacturing Policy of Oct-11( gives an interesting analysis of priority sector, in the context of proposing sector specific interventions. To quote from Section 7 of that document,The priority sectors as identified in the Planning Commission and NMCC papers are:-
a) Employment intensive industries like textiles and garments; leather and
footwear; gems and jewellery; and food processing.
b) Capital goods like machine tools; heavy electronic equipment; heavy transport, earth moving and mining equipment; high technology equipment like telecom, power, ICT and electronic hardware.
c) Strategic industries like aerospace; shipping; IT and electronic hardware;
renewable energy; solar, wind etc; defence equipment.
d) Industries where India enjoys a comparative advantage like automotive; pharmaceuticals.

While the socialist legacy of India politics would explain (a), (b) & (c), the post liberalization budgets have slowly begun to push sectors where India has a comparative advantage viz (d). One would like to believe that the above sectors are favoured for logical reasons, and not just for crony capitalism. Hence, the purpose of this post to try giving some credit to the Govt.