CFO India - January 2011 by Bhupinder Sharma

ETHICS AND GOVERNANCE WHAT THE LEHMAN & SATYAM CRISES TAUGHT INDIA INC P. 12

BHASWAR MUKHERJEE CFO PROFILE p. 26

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CFO INDIA ETHICS AND GOVERNANCE 12 | CFO PROFILE: BHASWAR MUKHERJEE 26 | STYLE ICON FROM SWEDEN 50 VOLUME

ISSUE

“WHAT WE HAVE ACHIEVED, IS NOTHING SHORT OF A MIRACLE,” SAYS MAHINDRA-SATYAM’S CFO, S. DURGASHANKAR, IN AN EXCLUSIVE INTERVIEW WITH CFO INDIA A 9.9 MEDIA PUBLICATION

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&29(5 6725< 6$7<$0 5(78516 18 THE PHOENIX The complete story of Satyam Computers’ resurgence under the Mahindra-Satyam banner

22 TIGER RIDING FOR FUN AND PROFIT What the fall of Satyam and Lehman Brothers taught companies about corporate governance

,16,*+7 30 EMERGING MARKETS STRAINING GLOBAL FINANCE Surging demand for capital, led by developing economies, could put upward pressure on interest rates and crowd out some investments

&)2 352),/( FUELING A NATION’S HOPES

Bhaswar Mukherjee, Director-Finance, HPCL talks about the challenges and the exciting future that awaits the PSU

A little over 18 months after he assumed charge at Mahindra-Satyam as CFO, S. Durgashankar talks about the challenges

/($'(5·6 :25/' 48 LEARNINGS FROM ADVENTURE Truth, transparency and accepting responsibility – adventure sports teaches us crucial management lessons

&)2 /281*( 50 ON WHEELS | VOLVO XC 60 52 GADGETS | MACBOOK AIR

&$6( 678'< 44 SCALING NEW HEIGHTS A lowdown on how the iYogi team raised funds for two campaigns in one year

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TOUGH TIMES, TOUGHER TEAM

54 TRAVEL | FLORENCE 56 ART | SUDHARSHAN SHETTY 58 BOOKS | FAULT LINES

10 KAMAL PANDE The Associate Director & CFO at Genesis Colors believes ensuring there are no leaks in the system is a CFO’s biggest worry today

5(*8/$56 04 LETTERS TO THE EDITOR 06 O-ZONE 60 NOT JUST THE LAST WORD

COVER DESIGN PRASANTH T R

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The Comeback Kid

MAKING A STRONG COMEBACK when the world has given up on you, is never easy, as those who have ‘been-there-done-that’ will tell you, (tennis ace Kim Clijsters and former India cricket skipper Saurav Ganguly, to take just two examples from the world of sports). And if it is tough for an individual, imagine how Herculean the task must be when a ‘captain’ realises the only way he can save a sinking ship is if all his 27,000 employees understand his vision and work in tandem like synchronised swimmers. Truth however, is stranger than fiction. And the story of Satyam Computers’ resurgence in 2010 ranks right up there among the most amazing turnarounds in India Inc.’s history. Eighteen months after a Rs 6000 crore accounting fraud reduced the software giant to a pile of rubble, their return to profitability under the Mahindra-Satyam banner is a journey that deserves to be captured on celluloid. Sadly we at CFO India are not (yet) into making films. So we did the next best thing possible, spending a day at Mahindra-Satyam’s sprawling campus in Hyderabad, meeting men and women who refused to throw in the towel when their former chairman B Ramalinga Raju admitted he had taken the world for a ride for the past eight years. The real highlight of our visit however, was a meeting with the man who led this financial transformation – M-Sat’s dynamic CFO, S Durgashankar. The challenges his team faced, his vision for M-Sat and his views on whether similar scams are waiting to be unravelled in India – will definitely get you thinking. Read the exclusive interview – the most exciting part of our cover package this time. (Page 12). The rest of the magazine too is full of exciting stuff. As we reel under another hike in fuel prices, we spoke to Hindustan Petroleum Corporation’s Finance Director Bhaswar Mukherjee to find out what the Fortune 500 firm is doing to be self sufficient by 2016. Taking a cue from his word, we drove the new Volvo XC60 from Delhi to Mumbai and beyond – to test, among other things, its fuel efficiency. There is a lot more to read as you turn the pages. Enjoy reading this issue and do keep writing to us with your valuable feedback.

EDITORIAL EDITOR: Anuradha Das Mathur MANAGING EDITOR: Dhiman Chattopadhyay ASSISTANT EDITOR: Anoop Chugh CONTRIBUTING EDITOR: Bennett Voyles DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Binesh Sreedharan ASSOCIATE ART DIRECTOR: Anil VK SENIOR VISUALISER: PC Anoop SENIOR DESIGNERS: Prasanth TR, Anil T, Joffy Jose, Anoop Verma, NV Baiju & Chander Dange DESIGNER: Sristi Maurya & Charu Dwivedi CHIEF PHOTOGRAPHER: Subhojit Paul PHOTOGRAPHER: Jiten Gandhi THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg NATIONAL HEAD: Bindu Krishna SENIOR MANAGER: Shreya Pilani ASSOCIATE: Deepika Sharma SALES & MARKETING V-P SALES & MARKETING: Naveen Chand Singh NATIONAL MANAGER (SALES): Pranav Saran (+91-9811777113) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) NATIONAL MANAGER (ONLINE): Nitin Walia (+91-9811772466) ASSISTANT BRAND MANAGER: Arpita Ganguli CO-ORDINATOR (AD SALES, MIS, SCHEDULING): Aatish Mohite SOUTH: Vinodh Kaliappan (+91-9740714817) WEST: Sachin N Mhashilkar (+91-9920348755) For any customer queries and assistance please contact help@9dot9.in PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar M Hiremath ASSISTANT PRODUCTION MANAGER: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari, Shashi Shekhar Singh OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd Kakson House, A & B Wing, 2nd Floor 80 Sion Trombay Road, Chembur, Mumbai- 400071 INDIA. Published, Printed and Owned by Nine Dot Nine Interactive Pvt Ltd. Published and printed on their behalf by Kanak Ghosh. Published at Bunglow No. 725, Sector - 1, Shirvane, Nerul, Navi Mumbai - 400706 Printed at Silver point Press Pvt Ltd, D107, MIDC, TTC Industrial Area, Nerul, Mumbai 400706.

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LETTERS

CFO INDIA

JANUARY 2011

Eye-opener

COVER

STORY

I enjoyed reading your cover story for December 2010. Since I work for a financial firm, learning about how bank CFOs work was an eyeopener. The ‘Case Study’ section where you interviewed the CFO of Systime, was interesting. We too are contemplating an ESOP scheme for our employees and reading about how Systime met the challenge will definitely help us.

CFOs of a different Hue?

— Suparno Singh, GM-Finance, LPD Financial Services Mumbai

01.11 WITTY IMITATIONS Congratulations on the first anniversary issue of CFO India magazine. It has come out very well. It would be safe to call it a collector’s item. The caricatures have further enhanced the issue. I have liked my caricature very much and would love to get a high resolution soft copy of my caricature. I plan to have that framed. — Ravi S Gupta, Sr. Vice President - Finance, Jubilant FoodWorks Limited, Delhi

BURNING ISSUES While CFO India is a magazine I enjoy reading, I sometimes feel you do not touch upon burning issues of the day, choosing to focus on pre-decided subjects. Maybe you should have a ‘current affairs’ section or a few articles that deal with subjects that are being discussed by the finance community, as you go to press. — Shantanu Sen Gupta, Jadavpur, Kolkata

GREAT LOUNGING WITH YOU It is fun-to-flip through your ‘Lounge’ section since it gives us a glimpse of a world we aspire for. I do not own a Mercedes-Benz or even an Audi yet but reading about how it feels to drive one made me 4

CFO INDIA

JANUARY 2011

COVER STORY

LARGE TRANSACTIONS HANDLED EVERY DAY,

HOURS SPENT ON CONTROLS AND REGULATIONS AND A CLOSE RAPPORT WITH THE GOVERNMENT — A BANK CFO’S JOB IS OFTEN DIFFERENT FROM THOSE IN OTHER INDUSTRIES. WHAT ARE THE CHALLENGES THAT AWAIT THEM, POST THE ECONOMIC SLOWDOWN BENNETT VOYLES

ANIL T

ndia might lead the world in a number of industries, but when it comes to banking, it’s still not even on the map. Of the top 50 banks, none are Indian. Three are Chinese. However, that lack of flash may be a good thing – for the banks, and for India. The Western banks that suffered most in the crash were precisely those that were most innovative and most profitable before the crash. Thin capital reserves, thin liquidity levels, weak risk management and lax regulations all obscured their true risk profile, says James Lam of James Lam & Associates, a Boston-based risk management consultancy. Slow and steady has worked out well for Indian bank CFOs so far. They may not have made the same big deals as their western counterparts in the good times, but they’ve also dodged the subsequent recriminations, public drubbings, and shameful bailouts of the past two years. But will slow and steady win the race?

IT IS DIFFERENT AT THE TOP In many industries, being a CFO is lonely business. Whether you are the sole non-engineer in a conference room of engineers or the sole finance person in a room of sales guys, the CFO tends to be a little outside the dominant culture. While the other executives are out and about, you are Scotty down in the engine room, telling Captain Kirk that the ship cannot take it anymore. DECEMBER 2010

CFO INDIA

Your voice can make a change: Share your view point on what’s happening in the community and your feedback on the magazine at cfofeedback@9dot9.in or editor@cfo-india.in

close my eyes and imagine the situation. One suggestion: even though we are busy finance professionals, we do love to eat out sometimes! Can you introduce a column where you feature the best new place to dine out? It is just a suggestion. — Kanchan Sidhu, Consulting Chartered Accountant, Delhi

HOW ABOUT TECHNOLOGY? I would welcome more articles on technology and how finance professionals can be made better aware of technological tools and their use. I have co-founded a software solutions firm in Pune and coming from a finance background, I sometimes find myself embarrassingly ignorant of some of the latest advances in software technology. Please do start a regular section where experts, perhaps even CIOs can advise CFOs and other finance professionals on tech-tools and systems they should know more about.? — Sandip Khare, Co-founder and CFO, S&S Solutions, Hinjewadi, Pune

THEY MAKE US THINK It’s a pleasure to read the opinions of the people who matter. The segment - I Think - is a great read as been-there-done-that professionals from the finance industry put forward their view on relevant topics. I, especially, liked Hiren Israni’s (CFO, Microsoft India) piece in the last issue where he had shared the insights on mastering the art of people management. Keep it up! — Rahul Sane, ICWAI, Mumbai

01.11 THE LEAD

Price rise stumps UPA government

Food inflation is down marginally from

December 2010, in January 2011 Vegetable prices, however, are rising Govt has asked NAFED to sell onions

@Rs 35/kg Govt also plans to curb export and ease

import restrictions. State agencies told to buy essential commodities Secretarial panel to review price rise with individual states Govt to encourage investment in supply chains to minimise wastage

THE GOVERNMENT OF INDIA has finally admitted that it has rather limited control over soaring vegetable and fruit prices – a price rise that has led to a huge jump in inflation. Announcing a 14-point agenda on January 13, 2011, a communiqué from the Prime Minister’s office said the government would review export and import of all essential commodities regularly and 6

CFO INDIA

JANUARY 2011

initiate stringent action against hoarders and black marketers. In a significant move, all Public Sector Units have been told to intensify purchases of essential food items such as edible oils and pulses so that they can distribute these through their own retail outlets at subsidised rates. “The current bout of inflation is driven by a rise in prices of vegetables and fruits, which is more difficult to manage because these commodities are not held in public stocks,” the PMO statement said. It said an inter-ministerial group, chaired by its chief economic adviser Kaushik Basu, will review the overall situation while a panel of bureaucrats under cabinet secretary KM Chandrashekhar will interact with states. In another development Nafed, the

WHAT’S AROUND ZONE cfobook ................................................................. Pg 08 No Honda, still a Hero......................................... Pg 08 India high on ‘bribe’ list ......................................Pg 09 Friendly hires .......................................................Pg 09

THE CFO POLL RESULT

Will the telecom scam and events surrounding it hurt India Inc.’s image?

75% Yes

25% No

CURRENT POLL QUESTION

Will the recent fuel hike affect the government’s attempts to curb inflation? Vote now at www.cfoinstitute.com/poll

agricultural co-operative, has been instructed to sell onions at a subsidised price of Rs 35 a kg. Albeit a bit late in the day, the measures have come as good news to people at large. However, observers fear this is too little and too late. “These measures are cosmetic in nature and will have limited impact,” Sunil Sinha, head of research and senior economist at Crisil, told The Economic Times. While wholesale price-based food inflation came down a bit to 16.91 per cent for the last week of December 2010, from the year’s high of 18.32 per cent, it did not stop vegetable prices from shooting up by 3.84 per cent in the first week of January, in comparison to the previous week. Meanwhile, the cabinet secretary has officially stated that he feels foreign direct investment (FDI) in multi-branded retail would be a good way to try and tame soaring food prices. Mr Chandrashekhar has submitted his proposal in a presentation made to Prime Minister Manmohan Singh and senior cabinet members. India currently allows 51 per cent FDI in single-brand retail and 100 per cent in wholesale cash-and-carry. Mr Chandrashekhar said the sector could be opened up with a minimum investment of Rs 500 crore, 50 per cent of which should be in back-end infrastructure, such as cold chain and logistics. According to industry estimates, the lack of back-end infrastructure results in wastage of about 40 per cent of farm produce, worth Rs 50,000 crore, every year .

POPULATION

India To Miss 2045 Deadline INDIA WILL NOT BE able to achieve its ‘zero per cent population growth’ target by 2045. In fact it might take a further 15 years to achieve what is known as population stability. The union health ministry had set itself the goal of attaining replacement levels of fertility (when a couple has no more than two children) by 2010 - to achieve the larger goal of population stabilisation by 2045. However, by the end of 2010, only 14 states achieved the target. In fact, six states have fertility as high as 3-4. In all likelihood, therefore, instead of reaching population stabilisation in 2045 at 145 crore, we will reach the target around 2060 at 165 crores. Union health minister Ghulam Nabi Azad feels improving the use of contraceptives, IUCDs or pills will help India reach its target. The government has, therefore, under a pilot project involving 150 districts, decided to use Accredited Social Health Activists (ASHAs) to deliver contraceptives to the doorstep of villagers. In an interview to The Times of India, Mr Azad said instead of sending the contraceptives to states and “letting them rot in their godowns”, ASHAs will be given contraceptives free of charge by the Centre. The ASHAs will go from door to door in designated villages and sell them at 10 per cent of the cost. Population stabilisation is a stage when the size of the population remains unchanged. Global population is said to be stabilising when births equal deaths. JANUARY 2011

CFO INDIA

O-ZONE cfobook

JARGON DECODED

PUNCH THE TREE

Rajesh Sharma Wall

Info

Boxes

What’s on your mind? Attach

Share Rajesh Sharma has played a pivotal role in setting up timely and accurate reporting systems which provide relevant information to the key Stakeholders, regional and corporate, departments and operations at Barista Lavazza. December 13 at 10:50pm · Comment · Like

WORK July 2006 — Present (4 years 7 months); CFO, Barista Coffee Company Limited (Privately Held; Retail industry) April 2002 — July 2006 (4 years 4 months); Head-Finance, Accounts & Legal; Global Healthline Private Limited - 98.4 (Retail industry) October 1999 — March 2002 (2 years 6 months); Sr. Manager Finance & Company Secretary Velocient Technologies Limited (Retail industry) February 1998 — September 1999 (1 year 8 months) Member, Singhania & Co;(Retail industry)

EDUCATION LLB, Law - Delhi University FCS - Institute of Company Secretaries of India ICWAI - Institute of Cost and Works Accountants of India

Rajesh Sharma has effectively handled configuration & validation, bill runs, robust RA processes to eliminate any revenue leakages, strong revenue risk management processes to ensure compliances to all collection, credit & risk related policies at Barista Lavazza. December 3 at 7:30pm · 5 people Commented · Like

Rajesh Sharma has managed the staffing at Barista Lavazza and created the finance, accounts, internal control and statutory compliance while having perception that the department is to support other departments in providing financial analysis. December 1 at 1:10pm · Comment · 2 people Like this

I Read...

The Last Day Of My Life September 29 at 1:35pm · Comment · 3 people Like this

I Sip... Cappuccino, cold coffee October 05 at 06:20 am · Comment · 5 people Like this RECENT ACTIVITY Rajesh Sharma likes CFO India and five others...

Rajesh Sharma likes Barista Lavazza, Punjabi food, Continental food, Cash & Carry, Cricket December 15 at 11:00pm · Comment · 5 people Like this

PAY MORE

Auto Insurance Costlier INSURING YOUR VEHICLE could get costlier soon. A new price structure proposed by the Insurance Regulatory and Development Authority (IRDA) means car and bike owners will have to pay about 10 per cent more on new covers, while truck owners will have to shell out around 80 per cent more than before. The IRDA has published its proposed new tariff for third party motor insurance - the cover which compensates accident victims and has to be mandatorily purchased by all vehicle owners. The regulator has revised prices considering that third party motor insurance faces a deficit that could touch Rs 2,000 crore. While the premium for private vehicles will rise, it will not be as steep as that for trucks. For a sub-1000cc vehicle, the increase will be from Rs 670 to Rs 740, while for cars up to 1500cc the premium will rise from Rs 800 to Rs 880. 8

CFO INDIA

JANUARY 2011

THE DEFINITION ‘Punch the tree’ suggests that one vent anger at an inanimate object in lieu of the person who caused it. THE USAGE Don’t hurt your hand by trying to box a Neem tree if your colleague tells you to “Take five, punch the tree, and come back in here with a clear head.” All that he wants is for you to glare at the table lamp next to you instead of shouting at some poor soul!

O-ZONE TINY TECH

NOW, AN IPHONE APP FOR TODDLERS INTERNATIONAL PUBLISHING HOUSE Penguin has released what seems to be one of the first book apps designed for children as young as three months — apparently to help enhance their hearing, visual and motor skills. The ‘Baby Touch Peekaboo App’ goes live in the Apple app store and brings to life the popular Ladybird series of books on the touchscreen. The application has been specifically designed for and tested on toddlers so they are able to easily interact with the story on a touch screen device. Simple taps of the screen make different characters appear in lots of bold

colours with sound effects. Anna Rafferty, managing director of Penguin Digital, said: “We are not aware of any other apps designed specifically for babies. The Baby Touch series of books has been extremely popular since its launch in 2005 and we thought it was a good story to turn into an app.” She said that the target group was from three to 12 months old and that babies as young as six months would be able to operate the app without their parents’ help. The app also features an auto play tool - which allows parents to play the entire content of the app as a movie.

FLYING HIGH

A-380 From India Soon INDIA MAY SOON see the first commercial operations of the world’s largest airliner – Airbus A-380. German major Lufthansa has sought a government nod to fly the super-jumbo jet on a daily basis between Delhi and Frankfurt from May 15, making IGI its fifth destination for this aircraft after Tokyo, Beijing, Johannesburg and New York, reports The Economic Times. Enabling this would require alteration in the existing IndoGerman bilateral agreement that allows Boeing 747 as the largest plane flying between the two countries, a clause that would have to be changed to include the A-380. Delhi now has a terminal and runway that can easily accommodate the A-380. Reacting to Lufthansa’s request, a cautious sounding aviation minister Praful Patel said: “The ministry will examine it.” On the other hand, the airline is upbeat. “Lufthansa is ready to fly the A-380 on the Delhi-Frankfurt route from this year. We have applied for acquiring the rights for this flight in India,” said Axel Hilgers, Lufthansa’s director-south Asia. The preparation, among other things, requires getting a flight caterer with a lift to load food trays on the second deck of the aircraft!

SNIPPETS IPL drama Shah Rukh Khan has realised not retaining Sourav Ganguly for his KKR team may cost him not just fan following but also a lot of money. With thousands of ‘Dada’ fans vowing to boycott KKR matches, not only will KKR lose gate receipts but sponsors may also back out fearing lack of enough eyeballs. An olive branch is now being handed out to the ‘Price of Kolkata’. SRK, in fact, has said he always wanted Sourav to be part of Kolkata Knight Riders. “Dada is like a younger brother to me and I want to win more games together,” he said. Will Sourav listen?

IndiGo’s record

Domestic low-cost carrier IndiGo has ordered180 Airbus A-320 single-aisle aircraft for $16.4 billion (Rs 742.24 billion). The deal is said to be the largest jet order in commercial aviation history. Under the agreement, the airline will acquire 150 of the upgraded A320 aircraft that are loaded with more fuel-efficient engines. IndiGo will also buy 30 planes of the standard singleaisle type. France-based Airbus will start delivering the planes in 2016. It is expected that the aircrafts deliver fuel savings of up to 15 per cent, along with cuts in pollution.

Nuclear insurance

Providing insurance cover for nuclear accidents has become the major concern of Insurance Regulator IRDA which is in its early stages of drafting a regulation for the same.

JANUARY 2011

CFO INDIA

CFO

I THINK

Facts & Trivia EDUCATION: LLB from Delhi University PROFESSIONAL QUALIFICATION: Chartered Accountant , from ICWA, 1985 FIRST JOB: Auditor, Ramnath Iyer & Co PREVIOUS JOB: CFO , Timex Watches PASSIONS: Networking, travelling

A STRATEGIC PARTNER, THE conscience keeper and the person the board and stakeholders trust with implementing stringent corporate governance norms — the role of the Chief Financial Officer has evolved over the years and today the CFO plays a pivotal role in the company’s plans. Increasily, the CFO acts as a partner of the CEO/MD/promoter in developing and implementing long term strategic plan for the company. However, the diversity of roles has, if anything, also added to his worries. Traditionally the ‘backroom’ guy, the CFO today is often the ‘face’ of the company, speaking to the media and facing stiff challenges when executing critical assignments, especially where coordination with other agencies is involved. The promoter or the CEO also looks up to the CFO to ensure that there are no leakages or loopholes in the 10

CFO INDIA

JANUARY 2011

KAMAL PANDE

The Associate Director & CFO at Genesis Colors believes ensuring there are no leaks in the system is a CFO’s biggest worry today.

systems, anywhere in the company. While during the growth phase all systems and processes that a CFO would like to follow are compromised in the name of speed and need, the CFO still has to ensure there are enough preventive checks in place to

“With costs going up in all categories, there is great pressure on CFOs to figure out ways to make up for these increases.”

minimise chances of fraud. This is actually one of the biggest worries that keeps today’s CFO awake at night. Another major issue that bothers a CFO, especially if he is in the retail sector, is the possibility of revenue leakage by front-end sales staff in stores by manipulating invoicing and discount policies and procedures. With employee turnover increasing in retail, one other area that keeps CFOs on their toes is the challenge to ensure that all front-end employees are trained and educated in preventive controls that must be deployed to avoid leakage of revenue or costs. While the company may have well documented processes and procedures, ensuring that new employees are trained properly is a regular headache. Very often when a failure is detected, it is found out that it happened because the person involved was a new employee who had not been properly

NITISH KUMAR

inducted, thanks to an urgent need to put him on to a job straight away. Of course a critical aspect of any CFO’s job is meeting the targets set out in the company’s budget. While the sales head is responsible for the top line of the company, the bottom line is the CFO’s responsibility and every CEO or promoter expects the

CFO to keep a tight watch on the bottom line of the company. With expenditure going up in all areas from raw material to manpower costs as well as other direct and indirect overheads, there is tremendous pressure on the margins, and the CFO is spending an increasing amount of time figuring out ways and opportuni-

ties to rationalise spending to make up for these increases in expenditure. To add to this is constant pressure from the private equity partners who expect the firm to deliver on their promise as their valuations are directly dependent on the company’s ability to meet the targets set out in the annual budget. JANUARY 2011

CFO INDIA

&29(5 6725<

4 $

&29(5 6725<

WHAT WE HAVE ACHIEVED SO FAR IS NOTHING SHORT OF A MIRACLE A LITTLE OVER 18 MONTHS after he assumed charge at Mahindra-Satyam as CFO, S Durgashankar talks about the challenges he and his team faced every day DHIMAN CHATTOPADHYAY

hen S Durgashankar took over as CFO of Mahindra Satyam in June 2009, there was mayhem all around. His near impossible task: To set the house in order at Satyam Computer Services Limited, a company affected by a whopping financial scam and to help turning its fortunes around. In less than 15 months, the company’s annual accounts not only for 2009 but also for 2010 fiscal year were compiled and audited. The Annual General Meeting

A.PRABHAKAR RAO

of the Company has been held and the accounts have been approved. The Company is also current in its Indian GAAP filing, having published Q1 and Q2 results for the 2010-11 financial year. The company’s operations have turned profitable. With most of the ‘debris’ left by the scam now cleared, Dhiman Chattopadhyay met a relatively relaxed Durgashankar at the company’s sprawling campus in Hyderabad’s Hitech City to find out how Team M-Sat tackled the challenges head on, the road ahead for the company and whether India could face similar frauds in future. JANUARY 2011

CFO INDIA

&29(5 6725< If you had to prioritise where the biggest problem lay in the Satyam scam – people, processes, technology – what would you say? Technology and processes are created by people and while a defective technology or a defective process can be set right, defective people are much harder to identify and correct. I would even go so far as to say that while having good processes is very important, it is even more important to have good people at the helm. If one had to make a choice between having good people at the helm but with not-so-good processes & systems, and having good systems but with not good people at the helm, I would always choose the first option. Hence, if I were to identify the biggest reasons for the scam in their descending order of priority, it would start with people (the defective ones) and only then followed by defective processes and technology. While Satyam always had the advantage of having committed employees in its fold, on hindsight, it is clear that it also had some not-so-great individuals and it is this lot that was the major reason for the problems.

Could what happened at Satyam been avoided? This is a very interesting question. It is also contemporaneous, given the number of scams that we see reported almost daily in the newspapers. Strictly and only as a matter of theory, if we had the right societal values, right processes and systems, right checks and balances, right deterrent mechanisms, then my answer would be “Yes, it could have been avoided”. However, as a practical matter, given our existing social values, complex accounting systems, market based incentives etc, in my view, a scam like this was always waiting to happen and hence was inevitable. 14

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Do you think a scam like this can happen again in India? As per Cressey’s (Donald R Cressey) Fraud Triangle theory, fraud occurs due to the conjunction of three factors: The Motive, the Rationalisation and the Opportunity for committing a fraud. In India today, we have a society where financial success is the only type of success that is recognised, where corruption and dishonesty are tacitly accepted as a way of life, where financial ends justify following any means, a system of accounting that is complex, where the market focuses brutally on quarter-on-quarter performance and where the persons who are responsible for reporting the numbers are incentivised (through market-based incentives) whenever higher financial numbers are reported. Given this volatile cocktail of

issues, let me ask you back - don’t you think a scam like this can happen again in India?

Over the last 18 months, as CFO of Mahindra-Satyam, what has been your key focus? What are the three most critical measures you have taken to bring things back on track? I believe my role, like that of any CFO, is first to stand up for the right values, to stand up for integrity and honesty in business and to have the moral courage to speak my mind. I believe that I have done so till now and will continue to do so. There is great pride and satisfaction in working for a company that does business honestly, whatever be its profitability, than in

&29(5 6725< working for a company with higher reported profits, arrived at through dubious means. Hence, the most important focus areas are putting transparency and honesty back on the agenda, bringing the feeling of self-pride and self-worth back to the finance team and improving the internal control systems and processes. Brahmayya & Co was engaged in the initial days to identify the lacunae in internal controls, many of which have now been set right. New statutory auditors (Deloitte) and new internal auditors (Grant Thornton) have been appointed. KPMG, which did the investigation for the company, was roped in to help finalise the accounts. BDO Haribhakti helped with setting up SOX related controls. Ethics and whistle blower policies too were revamped.

Looking back, if you were the CFO of the erstwhile Satyam, what would you have done differently? When I look back, I sometimes feel we could have put in place an ERP system sooner. We are in the process of doing so now. But to be honest, I think the team was already stretched for time.

Do you regret not having implemented this earlier though? With the benefit of hindsight, it is always possible to find things that one may want to do differently. But then when we came in we were battling a dozen issues at the same time. We had ongoing investigations by various investigative agencies where our people were grilled for days on end. The information needed to aid the investigations

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was to be provided in great detail across a period of 8 to 10 years. We had new statutory auditors and new internal auditors, who had to first familiarise themselves fully, which resulted in going over vast amounts of information over and over again with different agencies. A substantiated part of our data was in CBI custody, which compounded the problem of access. We had to do all this in a situation where the old top finance layer had left or was in legal custody, and a new top layer had just taken over. The pressurecooker atmosphere resulted in very high levels of attrition, which further compounded problems. Motivational levels were low, given the unremitting work load and pressure. We were also battling multiple legal cases. Amidst all this we had to keep the day-to-day operations going. I am proud that my team rose to the occasion in an exemplary manner. Each team member was doing the job fit for three or four people. When one looks back after the dust has settled, there are always a few decisions that we might have taken differently.

As CFO of MahindraSatyam, what is your primary responsibility going forward? We are now current on I-GAAP. Our next task is to become up-to-date on US-GAAP and from April 2011, to conform to the new IFRS norms. I also see improving the Management Information System (MIS) as a key task in the months to come.

What are the biggest challenges on the horizon? From a finance perspective, I think we have won two large battles by getting our accounts up-to-date and by regaining the trust among shareholders and clients. The challenge now is to help improve the revenues and the margins of the company. JANUARY 2011

CFO INDIA

&29(5 6725< You have been a CFO at various firms for many years now. However, this must have been a unique experience. Any key takeaways or lessons learnt here? The important lesson for me really has been the discovery of what can be achieved by people coming together. The job we had set out to do in finance was a very tough one. It was a race against time and against all odds. It was done only because of the grit and determination shown by my team, by many across our company and also by the auditors. My biggest takeaway is that the right cause ignites the passion of the people involved and they dig deep into their mental and physical resources to deliver on even “impossible” tasks. The right cause also unites people across the spectrum and brings them all together. I remember that on the last day when we were completing the accounts, the room was full of accountants and auditors. I noticed several of the auditors sporting a stubble and asked them about it. One of them said, “Forget about having the time to shave, none of us had the time to even shower for the last 72 hours.” Such was the level of commitment that was demonstrated by people across the spectrum. Another example is that on the same day, when the announcement of financial results was being covered by the media, my room was packed with more than 50 people (accountants and auditors alike), all watching the television. Many of them were close to exhaustion and while waiting for the news coverage to start, some could not help nodding off due to prolonged sleep deprivation. When the announcement of our results was made, all those assembled were standing up and cheering as one. To me it was a moment of revelation – of how a just and fair cause can bring people together and make them move mountains. 16

CFO INDIA

JANUARY 2011

, ZRXOG EH O\LQJ LI , VDLG WKDW WKH HQRUPLW\ RI WKH FKDOOHQJH GLG QRW ZRUU\ PH ,W ZDV D GDXQWLQJ SUREOHP DQG , KDG VOHHSOHVV QLJKWV ZRQGHULQJ KRZ ZH ZRXOG DFFRPSOLVK WKLV As a CFO, the reputation of where you work is paramount. Did you think hard before taking on this role – given the tarnished image of the organisation? Not really. You see, coming from the M&M stable, I was aware of the very high value systems espoused by the group and I knew that I had nothing to worry about on that score. However, I would be lying if I said that the enormity of the challenge did not worry me. It was a daunting problem and I did have sleepless nights wondering how we would accomplish this gargantuan task.

Still, public perception remains. Did the scam and its aftermath lead to problems in attracting talent or convincing banks, investors or clients? The problem was there in the beginning. Immediately after the scam, our employees had problems in getting loans and credit cards. However, there were a few banks who stood by us in times of trouble and helped us during those difficult times. Thanks to the tough guys who chose to stay back, dig in and fight, we were able to see this challenge through. Today, the banks are back in queue to lend and we don’t have problems in attracting banks, employees or talent. It is back to business as usual.

From the CFO’s chair, how do you rate the role played by the board in the recent past? The company is very lucky in having excellent members of the board during both the government hand-holding period, as well as now. These are men of unimpeachable integrity, of exceptional talent, with fantastic track records and with extraordinary commitment and vision. The government-appointed board had the task of steering the ship during the days of uncertainty. It is a tribute to their vision and commitment that within three months they could retrieve the situation and, through a transparent bidding process, bring in a strategic partner (Tech Mahindra). The current board has continued this awesome work and is taking all possible measures to put the company back on the road to higher profitability. I am fortunate to enjoy the full support, guidance and encouragement of the board in accomplishing the task.

What are you looking forward to? When will you feel you have been successful as the CFO of Mahindra-Satyam ? We are now well past questions of viability and stability of the company. My task is to take the company back to its days of glory – but this time it will be an all round growth based on real performance. The task of the CFO, as part of the senior management team, is to help contribute to this cause.

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COVER STORY

SATYAM RETURNS

When B Ramalinga Raju admitted to a Rs 6000 crore fraud in January 2009, Satyam Computer Services lay discredited. Here’s the story of their resurgence under the Mahindra-Satyam banner

DHIMAN CHATTOPADHYAY

S MILLIONS OF spectators across the world watched Spain’s Andres Iniesta tapping in what would be the winning goal of the 2010 FIFA World Cup final in South Africa, most did not notice a large red and white banner advertisement placed just behind the goal post. Those who did and those who had kept track of corporate frauds in India, however, were surprised to see what it said: “Mahindra-Satyam, official IT service providers for FIFA 2010.”

CFO INDIA

JANUARY 2011

COVER STORY That 10-feet banner encapsulated the amazing story of Satyam’s turnaround – 18 months after the top management of what was then India’s fourth-largest software company was bundled off to prison following a Rs 6000 crore accounting fraud. Their remarkable reversal of fortunes in the months following Tech-Mahindra’s acquisition of Satyam (re-christened Mahindra-Satyam) is perhaps one of the best examples of what good corporate governance coupled with dedicated teamwork and a little bit of financial genius can do. After all, turning a Rs 1250 crore loss-making firm into a profit-making one in 12 months, while dealing with demanding investigators, noisy shareholders, unsure clients and a sceptical public, is nothing short of a miracle.

THE BODY BLOW “Things were very different in the days following Raju’s confession. You could hear a pin drop in the canteen that January,” remembers Sudhir K, an engineer who joined Satyam just three months before January 7, 2009, when the group’s chairman, B Ramalinga Raju, admitted to the world that he had fudged accounts to show a non-existent bank balance of Rs 5040 crore. That startling confession, would almost overnight, push Satyam to the edge of the precipice. “I remember reading his letter where he says it was like ‘riding a tiger, not knowing how to get off without being eaten,’ and thinking my career was probably doomed before it had even begun,” says Sudhir, as we sit in the 1000-seater cafeteria that offers cuisines from around India and much of the world – in keeping with the company’s multilingual and multicultural workforce. The cafeteria is buzzing today – with smiling faces and animated conversations suggesting a return to happy days. “The transformation continues to amaze us,” adds his colleague Sunaina Iyengar.

VITAL STATS

HOW THE DEBRIS WAS CLEARED: IN NUMBERS

100 There were

forensic investigators on campus through 2009

THEY REVIEWED 2 TERRABYTES OF DATA, ENOUGH TO FILL

2,70,000 FILE CABINETS

2 million Over

e-mails were reviewed as well

300

SOME

COMPUTER HARD DRIVES WERE IMAGED

Mahindra-Satyam lost

17,000

employees between January 2009 and October 2010

M-SAT APPOINTED NEW EXTERNAL AND INTERNAL AUDITORS AND GOT A LEGAL OMBUDSMAN IN PLACE For nearly

18 months, the entire finance team and many others worked through weekends

BY NOVEMBER, THEY WERE UPTODATE ON INDIA GAAP The company bounced back from a consolidated loss of

Nearly

1 billion 1250 lines of transaction data were analysed

200 STATEMENTS WERE SOUGHT FOR

BANKS ACCOUNTS

crores

in 2009-10, to net profits of

97.5 crores 23.3 crores and

in Q1 and Q2 of the 2010-2011 fiscal JANUARY 2011

CFO INDIA

COVER STORY These have indeed been unusual months for everyone at M-Sat, and everyone from the top management to the young techies agree on one count – that their Phoenix-like resurgence was made possible because every one of the 27,000 employees genuinely believed that challenges of any nature could be met if they worked as one.

OVERCOMING HURDLES Spearheading this transformation is the 150-strong finance team under CFO, S. Durgashankar, many of whom went 18 months without weekends, often working till late and returning to office the next morning at 9. And the results have been satisfying. Mahindra-Satyam’s first ever Q1 and Q2 results are out (2010-11) and from a net loss of Rs 1250 crore in the 2009-10 fiscal, things have looked up – with consolidated profits of Rs 97.5 crore and Rs 23.3 crores in Q1 and Q2 respectively. In simple terms this means all accounts of the company are now up-to-date and instead of losing clients, staff and money everyday as they were doing back in 2009, M-Sat is a growing baby today. The journey to relative nirvana was by no means easy. One look at the situation at the time of the TechMahindra acquisition will tell you so. In May 2010, as the new management assumed office, nine different inves-

ALL ACCOUNTS OF THE COMPANY ARE UP-TO-DATE AND INSTEAD OF LOSING CLIENTS, STAFF AND MONEY EVERYDAY AS THEY WERE DOING IN 2009, M-SAT TODAY IS A GROWING BABY 20

CFO INDIA

JANUARY 2011

Everyone across functions chipped in. Some helped verify data, others volunteered to meet clients and convince them to stay on while others ensured incidental costs were taken care of.” —VVK RAJU , SENIOR VICE PRESIDENT, MAHINDRA-SATYAM

tigating agencies hovered over their heads everyday, questioning employees and demanding documents. They included officers from the CBI, SEBI, ED, Security Exchange Commission, the IT department and the Registrar of Companies. Each day, members from M-Sat’s finance team did their daily work and then spent hours being interrogated by these officers. “Here are some facts for you to digest,” laughs CFO S. Durgashankar, proceeding to rattle off figures. “There were 100 forensic investigators on campus who reviewed 2 terrabytes of data, enough to fill 2,70,000 file cabinets as well as over 2 million e-mails. Other teams imaged 300 computer hard drives, analysed 1 billion lines of transaction data and sought statements for 200 banks accounts.”

A LESSON IN TEAM WORK As any CFO would agree, this was work even a 200-member strong team would have struggled to undertake. And here was a team less than half its size, and one that was losing colleagues almost every day (Mahindra-Satyam recently announced that it had lost 17,000 employees in the past two years) – being asked to perform a superhuman feat. “That we could do it

was thanks to the undying spirit of those who stayed on, colleagues who literally lived in office forgoing weekends and holidays. Everyone across functions chipped in. Some helped verify data, others volunteered to meet clients and convince them to stay on and still others paid money from their own pockets to make sure incidental costs such as travel and hotel stays were taken care of till we could get a system in place,” recalls VVK Raju, now senior VP finance at M-Sat and a Satyam veteran of 9 years. The next several months witnessed frenzied activity across the company as the senior management got down to clearing the debris. But there were many obstacles along the way – not the least of which was coming to terms with what had happened. VVK remembers those initial days well. “My first reaction was complete shock. Till then, as Satyam employees we were made to feel special wherever we went in Hyderabad. Overnight much of that changed. Some banks even stopped issuing credit cards,” he says. Agrees MV Sridhar, VP marketing, when I meet him over a cup of coffee later in the day. A former first class cricketer for Hyderabad ‘Doc’ as he is known to colleagues, (he is also a qualified medical practitioner) says he felt a sense of

COVER STORY

“Satyam’s success was real. The businesses we had, the products, were all real. No one was willing to let go of all that good work. ” —M V SHRIDHAR, VICE PRESIDENT MARKETING, MAHINDRA-SATYAM

“disbelief” when he heard the news. “To all of us the man (Raju) and his stature was awe inspiring,” he remembers. Thankfully, dark clouds soon gave way to hope. Within a day of the scam becoming public, most surviving senior executives met and decided to brave out the storm instead of quitting. “We had to fight it out ” says Sridhar. And stick together they did. Till the Mahindra acquisition (in May 2009) 99 per cent of the surviving leadership stayed put to salvage what remained. “Satyam’s success was real. The businesses we had, the products we had, were all real. No one was willing to let go of all that good work,” he says, sounding every bit like the dogged opening batsman, determined to brave out all that is thrown at him. More hope and reassurance came within the next 72 hours, when the Government of India stepped in. “They acted fast, announcing the appointment of the interim board on a Sunday. The very next morning all board members had arrived in our office. It gave us all a boost,” recalls Sridhar.

THE FINANCIAL TURNAROUND The real credit for the company’s return to the path of growth however, has to go

to the finance department. Most employees I spoke to in M-Sat’s HR, marketing and communications departments believe reaching today’s levels would not have been possible but for the finance

while costs were cut and manpower rationalised, the company brought in Deloitte and Grant Thornton as auditors, appointed an ethics ombudsman and set in place a strict whistle-blower policy. Next came a number of manual controls to minimise chances of any accounting errors and the painstaking task of restating accounts for the past eight years.

A JOB HALF DONE Indeed both the balance sheet as well as the mood in the campus clearly suggests the worst is over. But, as Durgashankar points out, even though a lot of debris has been cleared, the job is far from over. Some of the scars, for instance, will take longer to heal. “It has been a painfully slow return to growth thus far,” says the CFO. The good news is that today M-Sat gets 20 per cent of its new hirings from Tier-I companies such as Infosys, Wipro and TCS. It indicates that most of the old

WHILE COSTS WERE CUT AND MANPOWER RATIONALISED, THE COMPANY BROUGHT IN DELOITTE AND GRANT THORNTON AS AUDITORS, APPOINTED AN ETHICS OMBUDSMAN AND SET IN PLACE A STRICT WHISTLE-BLOWER POLICY team. “Essentially this was an accounting fraud and the ones who could really bring things back on par would have to be us finance guys. We knew we had to perform,” says VVK. It was a herculean task though. “If doing the entire restatement of accounts for the past eight years was a big ask, then to come up with Q1 and Q2 results in just a month after that, was amazing,” says Sridhar, adding, “the finance guys are really the unsung heroes for me.” Realising the need for quick action, Durgashankar set in motion a few changes upfront. Re-establishing credibility and financial transparency came first. So,

‘credibility’ is back. “Our conversion rate (actual number of new joinees compared to offers made) has also gone up significantly in the past 12 months. It is now a healthy 68 per cent, well above the industry average,” says Sridhar. The key task now, as Durgashankar concludes, is to ensure profit margins keep growing. “We were the leaders in the business solutions space. The big challenge now is to get back to the top,” he says. And if the kind of teamwork and resolve that the entire team at M-Sat showed during the past 18 months is any indication, achieving this task will just be a matter of time. JANUARY 2011

CFO INDIA

COVER STORY

ETHICS INC.

What the fall of Satyam and Lehman Brothers taught companies about corporate governance

BENNETT VOYLES

t has been two and a half years now since Lehman Brothers declared bankruptcy, and two since the Satyam Computer Services scandal broke. Lehman’s $600 billion implosion contributed to many other collapses and precipitated a global financial crisis. Satyam’s revelation that $1bn+ in reserves were imaginary wasn’t big enough to precipitate a crisis, but it too had an outsized impact,

CFO INDIA

JANUARY 2011

shattering an image not only of a respected company, but the probity of India Inc. itself. What have we learned? It is easy to blame both disasters on bad leadership – one weak choice that led to a long string of others. Certainly that is part of it. But the misrepresentations of earnings quarter after quarter at Satyam, which chairman B Ramalinga Raju described memorably as “like riding a tiger, not knowing how to get off without being

COVER STORY eaten,” took more than a conspiracy of executives. Lehman’s troubles too -- so large that the company couldn’t even estimate it – weren’t only the product of the executive suite. For Lehman and Satyam alike, the executives’ tiger ride required a whole circus of witting and unwitting supporters – including levitating board members, acrobatic accountants, shortsighted regulatory ringmasters, and most of all, investors and lenders in the stands happy enough to keep watching the show. Without early detection, disclosure problems that began cub-sized gradually grew into man-eating beasts. Of course, not many companies ever get into this degree of trouble. Ishaat Hussain, the CFO of Tata Sons, points out that out of the thousands of major global corporations, he can only think of five major corporate failures in the past decade which involved fraud. Even Lehman, he says, he would classify less as a cause of fraud and more of excessive risk-taking. “By and large, people want to do good and behave properly,” he says. “…I sit on many boards and I don’t think anybody is there to take the shareholder for a ride by choice.” Still, there are other good reasons to think about governance. “Good governance means running a corporation so as to make the best possible use of the savings people have invested in it,” says Randall Morck, a finance professor at the University of Alberta School of Business and a specialist in global governance issues. It is also a good way to get cheaper credit. A number of studies have correlated better corporate governance with a lower cost of capital, according to Krishnamurthy Subramanian, assistant professor of finance, Indian School of Business, Hyderabad.

THE BOARD Boards tend to be high on many governance fix-it lists, for obvious reasons. “In too many cases, like Lehman Broth-

Good governance means running a Rs 6000 crore corporation so as to make the best possible use of the savings people have invested in it.” — RANDALL MORCK, PROFESSOR OF FINANCE, UNIVERSITY OF ALBERTA SCHOOL OF BUSINESS

ers and Bear Stearns, the CEO virtually hand-picked the directors,” says J. Richard Finlay, founder of the Torontobased Centre for Corporate & Public Governance. “The lesson of this financial meltdown, as it was in the 1930s, is that directors need to ask discerning questions and they need to remind themselves that they are there to prevent disaster - not to be passive bystanders to it, as they too often have been.” In India, director independence is also an issue, but for different reasons. The average listed Indian company is 48 per cent owned by the promoter. In some ownership is as high as 80 per cent according to Umakanth Varottil, an assistant professor of law at the University of Singapore. “Due to the dominance of the controlling share-

A number of studies have correlated better corporate governance with a lower cost of capital

holders, they are able to determine the composition of the board and senior management,” he says. Varottil argues that this can be corrected through special elections that give minority shareholders more say, such as votes that exclude the promoter from voting on director hiring. The idea is that independence breeds independent thought. But independence may be less of a guarantee of uprightness than it is billed. One case in point: Satyam, winner of the 2008 Golden Peacock Award for corporate governance, did have six independent directors, including four academics, a former cabinet secretary, and a retired executive. So why do boards not seem to uncover more dirt? One factor may be that it is hard to be in a group and yet maintain independence. “In all my life, working with the professional accounting firms… I have never seen a dissenting minute. That does not auger well,” says Kaushik Dutta, New Delhi-based author of several books on corporate governance and an advisor on corporate governance to the Institute of Corporate Affairs of the Ministry of Corporate Affairs. Another is that it is not easy to track a major company with thousands of employees and global operations as a part-time job – particularly if you have no particular training in the industry. “Boards don’t meet that often. They have limited resources and yet we expect them to figure everything out,” says Afra Afsharipour, acting professor at the University of California, Davis School of Law. JANUARY 2011

CFO INDIA

COVER STORY In India, the Satyam scandal seems to have acted as a catalyst in making the corporate world see just how difficult and risky board membership can be. A large number of board members quit right after Satyam, particularly the most senior members who would have the most to lose from a scandal. “Many academics and people who cared for their reputations went flying for cover,” Subramanian says. In January 2009, he says, 120 directors left, five or six times greater than the normal turnover. Not surprisingly, directors’ salaries have risen 12 to 15 per cent since January 2009, according to Subramanian, a reflection of how much more work is being required of directors now -- and how much harder it is to find someone who will take the job.

UNDER THE BIG TOP But no matter how closely the nobs hob-nob, one of the biggest lessons of both collapses is that they need to talk to everybody else too. “The biggest governance problems always seem to come where people are afraid to argue with a powerful CEO or a business family patriarch,” says Morck. Bu s i n e s s s h o u l d l e a r n f r o m governments, Morck advises. Most governments he says, have learned over the years that opposition is ultimately beneficial. “Leaders in power understandably hate this, but most people in most countries think it delivers better governance than any alternative system on offer. The criticism slows down decisions, but democracy protected India from great leaps forward and cultural revolutions.” Such transparency is also valuable externally. Vikramaditya Khanna, a professor of law at the University of Michigan, says that in most of the major corporate implosions of the past decade, earnings management – whether inflating revenues or hiding losses – has been a consistent thread. 24

CFO INDIA

JANUARY 2011

“I sit on many boards and I don’t think anybody is there to take the shareholder for a ride by choice” —ISHAAT HUSSAIN, CFO, TATA SONS

“Boards don’t meet that often. They have limited resources and yet we expect them to figure everything out.” —AFRA AFSHARIPOUR, UNIVERSITY OF CALIFORNIA, DAVIS SCHOOL OF LAW

THE ROUSTABOUTS It is no coincidence, then, that accountants have been implicated in many of the recent corporate scandals and disasters. “In Lehman, Satyam, Enron, even Parmalat, auditors seem to have had some sense of what was going on,” says Khanna, “and yet you do not seem to see a great deal of disclosure about it.” Despite the destruction of Arthur Andersen in the Enron scandal and stricter supervision of external auditors by audit committees mandated for large US traded-companies by SarbanesOxley, problems still seem to crop up. This is perhaps not too surprising. As American social critic Upton Sinclair once quipped, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” Some critics charge that the credit rating agencies also played a role, giving positive, investment-grade ratings to Lehman Brothers right up to its collapse. Standard & Poor’s analysts denied it, in a report released a few weeks after the collapse, countering that in fact what happened was the result of escalating fears turning into

a loss of confidence, that “ultimately becoming a real threat to Lehman’s viability in a way that fundamental credit analysis could not have anticipated.” However, analysis may not have relied so much on the numbers as on a longstanding reputation as a successful high-flier. Credit analyst Ann Rutledge, a principal at R&R Consulting in New York, recalls that even back in the 90s, Lehman had a reputation for taking outsized risks. Rutledge, a Moody Rating Agency analyst at the time, says she knew that in certain investment areas, Lehman had a reputation for maintaining extremely aggressive positions. Some critics of the rating agency system have charged that the agencies have a vested interest in giving good ratings, because they are paid by the issuer. However, even aside from the potential of such conflicts of interest at the rating agency, it is often not that easy to get the right information out of a company when the managers or promoters are determined to keep information to themselves. There are many ways for executives to avoid answering even direct questions, citing confidentiality, regulations, or competition,

COVER STORY according to Niren Shah, an analyst for the Mumbai branch of Kroll, the global investigation service. As an equity analyst for another firm in May 2008, he recalls a presentation where analysts, acting on a rumour about an American hedge fund report about Satyam, asked company executives again and again about the company’s cash position – and were repeatedly rebuffed. In fact, financial information is often so problematic that Kroll investigator Richard Dailly advises prospective investors to look elsewhere. “One of the things that we tell our clients when they ask us to assess companies is that it is much better to spend money investigating the person running the company than investigating the company’s accounts,” he says.

THE BIG PUZZLE The last elements of the financial circus are perhaps the most vital of all in this circus – the equity holders and lenders. Why do they make such risky bets? The reason shareholders take risks is easy -- they gain if a company takes on an outside risk and wins. What is much more puzzling to Lawrence White, a professor of finance at New York University’s Stern School of Business, is why sophisticated, institutional lenders kept on lending to such a highly leveraged enterprise as Lehman Brothers, which before its dissolution was operating at 33-1 leverage, not counting $50bn in off-balance sheet debt disclosed after the collapse. “I have not seen any satisfactory answer to that puzzle other than that this was just indicative of the whole era that there was an under-appreciation of risk, an excessive belief that nothing could go wrong,” White says. Again, Rutledge points to the investment bank’s long track record: Lehman Brothers had been in business for over 120 years, and succeeded with plenty of big bets before they made a fatal decision to pile up on sub-prime mortgage paper.

“Until we start to look at the credit exposures of all these institutions on a more continious basis, we won’t be able to eliminate the bubble.” —ANN RUTLEDGE, PRINCIPAL AT R&R CONSULTING, NEW YORK

COMING ATTRACTIONS High-profile collapses tend to lead, rationally enough, to new regulation. But opinion is divided about whether the new rules will work. Rutledge, for one, is suspicious of Dodd-Frank, whose new rules, she says, do not really address the essential problem of measuring credit risk. “Until we start to look at the credit exposure of all these institutions on a more continuous basis, we will not be able to eliminate the bubbles,” she says. Massive credit exposures are traded every day, she says, but the accounting still reflects only a moment at the end of the quarter, making it impossible for inves-

The reason shareholders take risks is easy -- they gain if a company takes on an outside risk and wins

tors and lenders to see the true state of affairs. “You are just never going to be able to monitor the buildup of risk, ever,” she stresses. In India, the slowly simmering Companies Bill is also getting mixed reviews. Dutta is optimistic that the bill will help improve governance, through such measures as mandatory rotation of auditors. Khanna wants the proposal to strengthen audit committee rights, and for creating the possibility of suing companies on a classaction basis, which he believes would help protect minority shareholders against majority abuse. Others aren’t as optimistic about the bill, or indeed about the prospect of regulatory change being truly transformational for Indian businesses, except perhaps by opening up the possibility of hostile takeovers, and the liberalisation of those older industries still somewhat protected from competition through licensing, such as power, infrastructure, and mining. Although better rules and more skeptical investors and lenders may limit the risk of another Satyam, Dailly and Shah of Kroll believe that what will really make the biggest difference for governance in India is generational change, as an increasing number of companies gain executives with international experience and awareness of the importance of compliance, and the old guard retires. JANUARY 2011

CFO INDIA

CFO

PROFILE BHASWAR MUKHERJEE

DIRECTOR – FINANCE, HINDUSTAN PETROLEUM CORPORATION LIMITED

Fuelling Hopes

the

Nation

Over 31 years ago Bhaswar Mukherjee joined HPCL as an accounts officer. Today as Director-Finance of the same ‘Fortune 500’ company that is eyeing a 250 per cent growth over the next five years, Mukherjee is excited to be in the thick of things. He talks about the challenges and the lessons learnt over the years and the exciting future that awaits the PSU. DHIMAN CHATTOPADHYAY

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JANUARY 2011

HE WAS BORN in Balasore, a few miles away from Chandipur, the coastal town in Orissa now famous for India’s missile testing programme. But Bhaswar Mukherjee insists he has nothing to do with rockets and jet planes - other than running a company that sells them fuel! In fact most of his adult life has been spent dealing with fuel. Mukherjee has just completed 31 years at Hindustan Petroleum Corporation Limited. The Director-Finance of HPCL loves a good joke and is a quintessential Bengali who loves his food, is a voracious reader and never misses a chance to visit Kolkata during Durga Puja! Yet this description in a way, would only be half the story. For it does not talk about the astute finance professional, the able leader and the great team man that he is. Mukherjee, as director finance has steered HPCL through the despairing economic crisis of 2008-09, leading his team of men and women to achieve a mini miracle when the company bounced back from a Rs 4500 crore loss in Q3 of the fiscal,

JITEN GANDHI

of a

CFO PROFILE

MILESTONES FIRST JOB With PwC in Mumbai just after I became a Chartered Accountant BIG BREAK When I had joined HPCL in 1979 A HA! MOMENT When we managed to turn around the companyâ&#x20AC;&#x2122;s fortunes within three short months, after a terrible Q3 in 2008-09. LITTLE KNOWN FACT: I enjoy watching theatre and listening to old Bengali songs DREAM To see HPCL achieve complete self-sufficiency by 2016 JANUARY 2011

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CFO PROFILE

to being profitable once more by the very next quarter! Today, he is in the thick of things as HPCL launches an unprecedented expansion plan in order to produce over 40 million tonnes of fuel by 2016. “We moved to Kolkata a few months after I was born and I spent my formative years there, attending school, college and the CA course from the city,” says Mukherjee as we make ourselves comfortable in his office – a cabin almost as large (if not larger) than most of Mumbai’s famed tiny ‘1bhk’ apartments. This is an office Mukherjee has worked hard to reach. After completing his CA in 1978, he worked for a year at PwC – a job which also brought him to Mumbai. A year later, in 1979, he joined HPCL – a love affair that continues to this day. In the past three decades, Mukherjee has worked across functions and in almost every area of finance. Marketing, internal audit and even HR - he has done it all. Among his ‘big breaks’ he lists his move to Mangalore Refinery and Petrochemicals Ltd in 1997, where he developed systems and processes for the company. In those days, MRPL was a JV between HPCL and the AV Birla group. “This was a great opportunity for me to learn about setting up processes and also work closely with one of India’s largest private conglomerates,” recalls Mukherjee. The coffee arrives at this point and Mukherjee becomes nostalgic once more. “Some of the most enjoyable years of my life however,” he says, “came shortly afterwards in 2001, when I moved out of finance for six years, to become head of HR for the company.” The new role made him look at things differently. “I was looking at the company as a whole. It was during this time that we rolled out the Balanced Score Card system – only the second firm after the Taj Group to implement this system, whereby all employees are given clear guidelines and targets and their ‘score card’ is reviewed by the management at the end of every quarter,” he says. Mukherjee believes every manager should spend a few years outside his or her comfort zone to get a holistic view of a business. His own stint as the head of HR, however, ended when he took over as director-finance in February 2008. It meant an elevation to 28

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FAVOURITE

PICKS

NEWSPAPERS TOI/ET/Ananda Bazaar Patrika MAGAZINES HBR/ The Economist MUSIC Songs by Hemanta Mukherjee and Manna De MOVIE Satyajit Ray’s Pather Panchali BOOK Many. I am a voracious reader

MUKHERJEE ENJOYS WATCHING HINDI FILMS, LISTENING TO OLD BENGALI SONGS AND READING WHATEVER HE CAN LAY HIS HANDS ON

DESTINATION London BELIEF Be curious. A curious mind learns new things everyday

the Board as well, a well-deserved recognition of his calibre and track record. And, almost on cue, a few months after he took over the finance function, the global economic crisis broke out. It affected the company as well and HPCL suffered a Rs 4500 crore loss in Q3 of 2008-09. This was when Mukherjee and his team stood firm and turned the tide. “We

CFO PROFILE

“What is important is the future. We are planning investments to the tune of Rs 50,000 crore over the next five to six years to expand refineries and launch new ones.”

bounced back in the next quarter and made a profit. It was no mean achievement,” he says modestly. The 2009-10 fiscal too has been tough for HPCL. “We are a Rs 1,08,000 crore company, yet our profits last year were a mere Rs 1300 crore. It is simply not enough,” he says. His focus, though, is clearly on tomorrow. “What is important is the future. We are planning investments to the tune of Rs 50,000 crore over the next five to six years. We have everything sorted out – the financing, the projects and even the deadlines. We will be expanding our refinery in Vizag, launching a greenfield project in Maharashtra and planning a few other projects as well. We

need to plug the gap between domestic supply (16 million tonnes) and demand (24 million tonnes) that exists today,” says Mukherjee. That the finance team will have to play a crucial role in this entire excerise is not lost on him and he has already identified key areas his team needs to focus on. “Liquidity is a problem, because we get government funds only in fits and starts towards the end of the financial year. So, treasury management is crucial,” he says. His hands are indeed full, but the 57-year-old still finds time to indulge in his hobbies. He enjoys watching Hindi films, listening to old Bengali songs and reading whatever he can lay his hands on.

Kolkata, of course, remains one of his favourite cities to visit. So, now that his children are settled (his daughter is an engineer and an MBA and his son is doing his MBA) do he and his wife plan to go back to Kolkata post retirement? “It’s still some years away. I am not even thinking about it. There is so much left to do at HPCL, so much to achieve and aspire for,” says Mukherjee. There is no doubt that it is this zeal and enthusiasm of a 25-year-old that has not just kept him going so long but has made him such a successful finance professional. There is perhaps a lesson or two that aspiring CFOs may learn from his story. JANUARY 2011

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INSIGHT

GROWTH PANGS

HOW THE GROWTH OF EMERGING MARKETS WILL STRAIN GLOBAL FINANCE Surging demand for capital, led by developing economies, could put upward pressure on interest rates and crowd out some investment.

PHOTOS.COM

RICHARD DOBBS, SUSAN LUND, AND ANDREAS SCHREINER

hort-term doldrums aside, the world’s corporations would seem to be in a strong position to grow as the global economy recovers. They enjoy healthy cash balances, with $3.8 trillion in cash holdings at the end of 2009, and they have access to cheap capital, with real long-term interest rates languishing near 1.5 percent. Indeed, as developing economies continue to pick up the pace of urbanisation, the prognosis for companies that can tap into that growth over the next decade looks promising. Yet all those new roads, ports, water and power systems, and other kinds of public infrastructure—and the many companies building new plants and buying machinery—may put unexpected strains on the global financial system. The McKinsey Global Institute’s (MGI) recent analysis finds that by 2030, the world’s supply of capital—that is, its willingness to save— will fall short of its demand for capital, or the desired level of investment needed to finance all those projects. Indeed, household saving rates have generally declined in mature econo30

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mies for nearly three decades, and an ageing population seems unlikely to reverse that trend. China’s efforts to rebalance its economy toward increased consumption will reduce global saving as well. The gap between the world’s supply of, and demand for, capital to invest could put upward pressure on real interest rates, crowd out some investment, and potentially act as a drag on growth. Moreover, as patterns of global saving and investment shift, capital flows between countries will likely change course, requiring new channels of financial intermediation and policy intervention. These findings have important implications for business executives, investors, government policy makers, and financial institutions alike.

SURGING DEMAND FOR CAPITAL Several economic periods in history have required massive investment in physical assets such as infrastructure, factories, and housing. These eras include the industrial revolution and the post–World War II reconstruction

of Europe and Japan. We are now at the beginning of another investment boom, this time fuelled by rapid growth in emerging markets. Across Africa, Asia, and Latin America, the demand for new homes, transport systems, water systems, factories, offices, hospitals, schools, and shopping centres has already caused investment to jump. The global investment rate increased from a recent low of 20.8 percent of GDP in 2002 to 23.7 percent in 2008 but then dipped again during the global recession of 2009. The increase from 2002 through 2008 resulted primarily from the very high investment rates in China and India but reflected higher rates in other emerging markets as well. Considering the very low levels of physical-capital stock these economies have accumulated, our analysis suggests that high investment rates could continue for decades. In several scenarios of economic growth, we project that global investment demand could exceed 25 percent of GDP by 2030. To support growth in line with the forecasters’ consensus, global

INSIGHT

The McKinsey Global Institute’s analysis finds that by 2030, the world’s supply of capital will fall short of its demand for capital. particularly large in transportation (for instance, roads, airports, and railways), followed by power and water systems. We project global investment demand of about $4 trillion in infrastructure and $5 trillion in residential real estate in 2030, if the global economy grows in line with the consensus of forecasters.

investment will amount to $24 trillion in 2030, compared with about $11 trillion in 20083 (Exhibit 1). When we examine alternative growth scenarios, we find that investment will still increase from current levels, though less so in the event of slower global GDP growth. The mix of global investment will shift as emerging-market economies grow. When mature economies invest, they are largely upgrading their capital stock: factories replace old machinery

with more efficient equipment, and people make home improvements. But the coming investment boom will involve relatively more investment in infrastructure and residential real estate. Consider the fact that emerging economies already invest in infrastructure at a rate more than two times higher than that of mature economies (5.7 percent of GDP versus 2.8 percent, respectively, in 2008). The gap exists in all categories of infrastructure but is

A DECLINE IN SAVINGS The capital needed to finance this investment comes from the world’s savings. Over the three decades or so ending in 2002, the global saving rate (saving as a share of GDP) fell, driven mainly by a sharp decline in household saving in mature countries. The global rate has increased since then, from 20.5 percent of GDP in 2002 to 24 percent in 2008, as household saving rebounded in mature economies and many of the developing countries with the highest rates—particularly China—have come to account for a growing share of world GDP. Our analysis suggests, however, that the global saving rate is not likely to rise in the decades ahead, as a result of several structural shifts in the world economy. JANUARY 2011

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INSIGHT Exhibit 1

In 2030, global demand for investment is expected to reach $24 trillion. Global investment 1 for selected years, $ trillion Compound annual growth rate (CAGR), %

24.0 4.9

1981 –2008

3.7

2008–30 projected

Residential real estate

3.8

Infrastructure

3.3

4.0

3.0

3.7

10.7 2.1 1.6 0.8 0.7

15.4

4.6

Other productive investment— eg, commercial buildings, factories, and machinery

7.0 3.1 1981

2008

2030 projected

At constant 2005 prices and exchange rates; forecast assumes price of capital goods increases at same rate as other goods and assumes no change in inventory.

Source: Economist Intelligence Unit; Global Insight; Oxford Economics; World Development Indicators, World Bank; McKinsey Global Institute analysis

First, China’s saving rate will probably decline as it rebalances its economy so that domestic consumption plays a greater role. In 2008, China surpassed the United States as the world’s largest saver, with the national saving rate reaching over 50 percent of GDP. But if China follows the historical experience of other countries, its saving rate will decline over time as the country grows richer, as happened in Japan, South Korea, Taiwan, and other economies (Exhibit 2). It is unclear when this process will begin, but already the country’s leaders have started to adopt policies that will increase consumption and reduce saving. If China succeeds at increasing consumption, it would reduce the 2030 global saving rate by around two percentage points compared with 2007 levels—or about $2 trillion less than China would have accumulated by 2030 at current rates. 32

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Moreover, expenditures related to ageing populations will increasingly reduce global saving. By 2030, the proportion of the population over the age of 60 will reach record levels around the world. The cost of providing health care, pensions, and other services will rise along with the ranks of the elderly. Recent research suggests that spending for the retired could increase by about 3.5 percentage points of global GDP by 2030. All of this additional consumption will lower global saving, either through larger government deficits or lower household and corporate saving. Sceptics may point out that households in the United States and the United Kingdom have been saving at higher rates since the 2008 financial crisis, especially through paying down debt. In the United States, household saving rose to 6.6 percent of GDP in the second quarter of 2010, from 2.8

percent in the third quarter of 2005. In the United Kingdom, saving rose from 1.4 percent of GDP in 2007 to 4.5 percent in the first half of 2010. But even if these rates persist for two decades, they would increase the global saving rate by just one percentage point in 2030—not enough to offset the impact of increased consumption in China and of ageing. Together, these trends mean that if the consensus forecasts of GDP growth are borne out, the global supply of savings will be around 23 percent of GDP by 2030, falling short of global investment demand by $2.4 trillion. This gap could slow global GDP growth by around one percentage point a year. What’s more, sensitivity analysis of several scenarios suggests that a similar gap occurs even if China’s and India’s GDP growth slows, the world economy recovers more slowly than expected from the global financial crisis, or other

INSIGHT plausible possibilities transpire, such as exchange-rate appreciation in emerging markets or significant global investment to combat and adapt to climate change.

IMPLICATIONS Our analysis has important implications for both business leaders and policy makers. Businesses and investors will have to adapt to a new era in which capital costs are higher and emerging markets account for most of the world’s saving and investment. Governments will play a vital role in setting the rules and creating the conditions that could facilitate this transition. HIGHER CAPITAL COSTS Nominal and real interest rates are currently at 30-year lows, but both are likely to rise in coming years. If real long-term

interest rates returned to their 40-year average, they would rise by about 150 basis points from the level seen in the autumn of 2010. The growing imbalance between the supply of savings and the demand for investment capital will be significant by 2020. However, real long-term rates—such as the real yield on a ten-year bond—could start rising even within the next five years as investors anticipate this structural shift. Furthermore, the move upward isn’t likely to be a one-time adjustment, since the projected gap between the demand for and the supply of capital widens continuously from 2020 through 2030. Capital costs could easily go even higher. Real interest rates can also include a risk premium to compensate investors for the possibility that inflation might increase more than expect-

ed. History shows that real interest rates rise when investors worry about the possibility of unexpected spikes in inflation. Today, investors are beginning to anticipate higher inflation resulting from expansive monetary policies that major governments have pursued. Finally, as the recent crisis demonstrated, short-term capital isn’t always available in a capital-constrained world. Companies should seek more stable (though also more expensive) sources of funding, reversing the trend toward the increasing use of short-term debt over the past two decades. The portion of all debt issued for maturities of less than one year rose from 23 percent in the first half of the 1990s to 47 percent in the second half of the 2000s. Financing long-term corporate investments through short-term funding will be riskier in the new world, compared

Exhibit 2

Historically, as countries grow wealthier their household saving rates decline. Household saving rate and GDP per capita for selected countries, 1960–2008 Saving rate, % of disposable personal income

China

Taiwan

30 25

Japan

India

20 15

Germany

10 5

United States

South Korea

0 –5 0

Real GDP per capita,1 $ thousand

At constant 2005 prices and exchange rates. Source: Bank of Japan, Bank of Korea; Directorate-General Budget Accounting and Statistics, Republic of China; Global Insight; Reserve Bank of India; World Development Indicators, World Bank; US Bureau of Economic Analysis; McKinsey Global Institute analysis 1

JANUARY 2011

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INSIGHT Exhibit 3

Even if investment demand slows, the supply of savings still falls short.

Global investment demand and saving rate as % of global GDP 2030 scenarios Consensus global growth

Global demand for investment Global saving rate 2030 savings shortfall

$2.4 trillion

Slower long-term growth in China and India

Weak global recovery

25.1

23.7

23.6

22.6

21.3

22.7

$2.2 trillion

$0.8 trillion

Source: Economist Intelligence Unit; Global Insight; Oxford Economics; World Development Indicators, World Bank; McKinsey Global Institute analysis

with financing through equity and longer-term funding. To better align incentives, boards should revisit some of their inadvertent debt-oriented biases, such as using earnings per share (EPS) as a performance metric.

CHANGING BUSINESS MODELS If capital costs increase, companies with higher capital productivityâ&#x20AC;&#x201D; greater output per dollar investedâ&#x20AC;&#x201D;will enjoy more strategic flexibility because they require less capital to finance their growth. Companies with direct and privileged sources of financing will also have a clear competitive advantage. Traditionally, this approach meant nurturing relationships with major financial institutions in financial hubs such as London, New York, and Tokyo. In the future, it might also mean building ties

with additional sources of capital, such as sovereign-wealth funds, pension funds, and other financial institutions from countries with high saving rates. Moreover, for companies whose business models rely on cheap capital, an increase in real long-term interest rates would significantly reduce their profitability, if not undermine their operations. The financing and leasing arms of consumer-durables companies, for example, would find it increasingly difficult to achieve the high returns of the recent past as the cost of funding increases. Companies whose sales depend on easily available consumer credit would find growth harder to achieve.

SHIFTING INVESTOR STRATEGIES Investors will want to rethink some of

Recent research suggests taht spending for the retired could increase by 3.5 percentage points of global GDP by 2030, lowering global saving. 34

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their strategies as real long-term interest rates rise. In the short term, any increase in interest rates will mean losses for current bondholders. But over the longer term, higher real rates will enable investors to earn better returns from fixed-income investments than they have in the years of cheap capital. This change could shift some investment portfolios back to traditional fixed-income instruments and deposits and away from equities and alternative investments. For pension funds, insurers, endowments, and other institutional investors with multi-decade liabilities, the worldâ&#x20AC;&#x2122;s growing infrastructure investment could be an attractive opportunity. Many of these institutions, however, will need to improve their governance and incentive structures, reducing pressure to meet quarterly or annual performance benchmarks based on mark-to-market accounting and allowing managers to focus on longer-term returns. This change would be required as institutions come to manage portfolios with a growing proportion of less liquid, long-term investments, since volatility in market prices may reflect market liquidity conditions rather than an

INSIGHT investment’s intrinsic, long-term value. Emerging markets, though they may present attractive opportunities, also pose many risks and complexities, and returns could vary significantly across countries. As incomes in emerging markets rise and capital markets develop, non-financial businesses can expect healthy growth from investing in both physical and financial assets. Returns to financial investors are less certain, however, particularly in countries with low returns on capital or savings trapped in domestic markets by capital controls or a “home bias” among domestic savers and investors. These countries will remain susceptible to bubbles in equity, real-estate, and other asset markets, with valuations exceeding intrinsic levels. Foreign investors will need to assess valuations carefully before committing their capital. They will also have to take a long-term perspective, since volatility in these bubble-prone markets may remain higher than it is in the developed world.

A CALL FOR GOVERNMENT ACTION Governments will need to encourage the flow of capital from the world’s savers to places where it can be invested in productive ways while minimising the risks inherent in closely intertwined global capital markets. Governments in countries with mature markets should encourage more saving and domestic investment, rebalancing their economies so they depend less on consumption to fuel growth. Policy makers in these countries, particularly the United Kingdom and the United States, should start by putting in place mechanisms to sustain recent increases in household saving. They could, for instance, implement policies that encourage workers to increase their contributions to saving plans, enrol in pension plans, and work longer than the current retirement age. Further, governments can themselves contribute to gross national savings by cutting expenditures. To replace consumption as an engine of economic growth, governments

In emerging economies, governments should promote the continued development of deep and stable financial markets that can effectively gather national savings and channel funds to the most productive investments. in these countries also should adopt measures aimed at boosting domestic investment. They could, for example, provide accelerated tax depreciation for corporations, as well as greater clarity on carbon pricing—the current uncertainty is holding back clean-tech investment. They should also address their own infrastructure-investment backlog, although this could require them to revise government accounting methods that treat investment and consumption in the same way. In emerging economies, governments should promote the continued development of deep and stable financial markets that can effectively gather national savings and channel funds to the most productive investments. Today, the financial systems in emerging markets generally have a limited capacity to allocate savings to users of capital. We see this in these countries’ low level of financial depth—or the value of domestic equities, bonds, and bank deposits as a percentage of GDP. Policy makers should also create incentives to extend banking and other financial services to the entire population. At the same time, policy makers around the world should create the conditions to promote long-term funding and avoid financial-protectionist measures that obstruct the flow of capital. This will require removing constraints on cross-border investing, whether through restrictions on pension funds and other investors or on capital accounts. Policy makers must

also create the governance and incentives that enable managers of investment funds with long-term liabilities, such as pension funds, insurance companies, and sovereign-wealth funds, to focus on long-term returns and not on quarterly results that reflect market movements and can deviate from longterm valuations. At this writing, global investment already appears to be rebounding from the 2009 recession. The outlook for global saving is less certain. A climate of costlier credit will test the entire global economy and could dampen future growth. The challenge for leaders will be to address the current economic malaise and simultaneously create the conditions for robust long-term growth for years to come. RICHARD DOBBS IS A DIRECTOR OF THE MCKINSEY GLOBAL INSTITUTE (MGI) AND A PARTNER IN MCKINSEY’S SEOUL OFFICE, SUSAN LUND IS DIRECTOR OF RESEARCH AT MGI, AND ANDREAS SCHREINER IS A CONSULTANT IN THE NEW YORK OFFICE. THIS ARTICLE IS ADAPTED FROM FAREWELL TO CHEAP CAPITAL? THE IMPLICATIONS OF LONG-TERM SHIFTS IN GLOBAL INVESTMENT AND SAVING, AVAILABLE ON THE MCKINSEY & COMPANY WEB SITE, WHERE YOU MAY ALSO DOWNLOAD THE REPORT AS AN EBOOK (BOTH EPUB AND AMAZON KINDLE FORMATS OFFERED). COPYRIGHT © 2010 MCKINSEY & COMPANY. ALL RIGHTS RESERVED. JANUARY 2011

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IN PRACTICE

OPINION

CORPORATE ETHICS – A CASE OF THE DEVIL QUOTING THE SCRIPTURES A self-confessed capitalist flings stones from his glass abode at the Scrooges who run businesses. NAWSHIR MIRZA

et me not beat about the bush. Corporate ethics is an oxymoron – a contradiction in terms. A corporation is, by instinct and purpose, a ruthless buccaneer in whose philosophy true ethics can find no place. How ethical was the conduct of the following corporations? Union Carbide India continued to run a production process that used highly poisonous gas in a location that had become surrounded by shanties, albeit illegal. Certain financial institutions risked their depositors’ and shareholders’ funds in high risk products that no one understood, while their managements awarded themselves enormous bonuses for imaginary profits earned. Some bottled water businesses brain-wash people into believing that drinking safe tap water is cheap, shameful behaviour. Certain cigarette businesses advertised the virtues of smoking to new mothers, claiming that it burns the fat accumulated during pregnancy. Two stand-alone and wholly profit36

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able businesses that merge with the sole purpose of reducing manpower, thereby putting people out of employment with the sole object of making the holders of equity in those businesses even wealthier. Businesses mine minerals in pristine forest areas knowing well that the flora and fauna destroyed can never be replaced. The list can be endless. The fact is there are few corporations that can claim ethical conduct when they adopt practices or policies that are not considerate towards stakeholders other than the providers of risk-based capital. Business managers and finance officers in corporations are trained to believe that in the ultimate analysis, every business

decision must pass the test of enhancing shareholder value. Even CSR decisions must be justified on this ground. If there is a conflict between the interests of providers of equity and any other stakeholders in a business, the former will inevitably win. The capitalist system has conveniently reduced the definition of ethics to not paying bribes and not consciously violating the laws. Marginal doubts (and often not-so marginal ones) of compliance are resolved by asking lawyers for opinions that justify adoption of a practice which violates the spirit (and in many cases the letter) of the law. I recall having a meeting with the Global Director of Ethics of one of the world’s largest companies whose

There are few corporations that can claim ethical conduct when they adopt practices or policies that are not considerate towards stakeholders...

PHOTOS.COM

IN PRACTICE

definition of bribes was money paid for securing an illegal advantage but excluded speed-money, paid for securing more quickly than normal, an approval that the corporation was legally entitled to. The recent exposures of corruption in Delhi’s government are startling not so much because they happened. Indian corporations have been bribing ministers and bureaucrats in Delhi since India’s independence. But those bribes were to secure favours in violation of policy; e.g., import licences to which they were not entitled. The current ones are shocking because the bribes now being paid are with the intent to subvert the policy itself or to determine what it should be; e.g., to decide if there should be go and no-go areas in mining or policy determining the consideration for which scarce national resources, owned by the government, are transferred to their capitalist

exploiters. Ratan Tata feared that we were becoming a banana republic. Indeed, we have been one for many years already. Returning once again to the main theme of this article, corporations cannot be ethical when their business practices involve the following: Exploiting stakeholders to the maximum so as to earn super profits for the providers of equity. Creating demand for an unnecessary product. Increasing the consumption of a product by building-in physical obsolescence or by making buyers believe that they must upgrade to the next version. Sacrificing, for the purpose of the business, the natural world. The system has kept the measures of success, value and growth limited to financial ones – GDP, revenues, profits, cash flows, net worth and ratios based

on these. But a reaction is beginning to take place. At a national level the King of Bhutan, in 1972, said he wanted to measure Gross National Happiness. His comment was received with derision in economist circles. It took a global recession for the capitalist countries to finally acknowledge that happiness cannot be equated with wealth, that there are many more factors that go into it. The French Joseph Stiglitz Commission in 2008 and, recently, the David Cameron government have made happiness an important measure of national success. At a corporate level it is slowly, too slowly I am afraid, finding acceptance as well. Triple bottom lines, the Global Reporting Initiative, The Malcolm Baldrige model (internalised in the Tata Group as the Tata Business Excellence Model) are examples of responsible, ethical corporations recognising the need for measuring success in more ways than purely financial. Even these companies may fail on the touchstone of their products or businesses damaging the long term environment. Indeed, in some cases these very measures have been adopted by companies that deal in products such as cigarettes or hedonistic luxuries – a classic case of the devil dealing with the scriptures. If corporations are to become ethical, they need to measure the net “value” they create for all stakeholders combined. To do this, every decision will need to be justified on that measure. Along with IRR and NPV, project decisions should involve the board studying the Environmental Impact Assessment report. Annual and quarterly reports should cover all stakeholder value creation minus destruction. Indeed, so radical is the change needed in the system that we are unlikely to see it happen in our lifetimes. Till then, the rest of the world (outside of company boardrooms) will continue treating the phrase “Corporate Ethics” with the same hilarity as it does that classic example of an oxymoron – military intelligence. The author is President, Institute of Internal Auditors, Calcutta and Indo-American Chamber of Commerce, Western India. JANUARY 2011

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IN PRACTICE

RISK MANAGEMENT

WHY RISK FAILURES OCCUR AND HOW TO PREVENT THEM Did Toyota and BP lack the resources to minimise recent hits to their reputations? Certainly not. But successful risk mitigation often requires something more than conventional tools: A nextgeneration solution. WILLIAM S. BOJAN JR

ost risk management failures aren’t the result of a lack of available risk management models, approaches, methodologies, processes or tools. In many cases, it is not about spending more. Significant investments have been made by many organisations as part of their conventional risk management foundation, including infrastructure, risk identification, assessment, management, monitoring and reporting. Yet conventional approaches to risk management are no match for the complexities of today’s marketplace. That foundation is insufficient to produce appropriate protection and value for the organisation in the area of risk management. Most failures are rooted in the lack of robust execution — weaknesses in coordination (overlooking key risks and their interdependencies), collaboration (untapped value creation and connection with key management processes) and integration (deficient linkage 38

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among monitoring disciplines and a bridge for board risk oversight). The solution to preventing and reducing these failures is to improve the execution, including linkage to the organisation’s corporate governance. The roles of “execution” and “integration” cannot be overemphasised. Financial executives need an effective roadmap to better risk management execution, the “how-to” that is so often missing in the dialogue about risk management. The next generation of risk management must integrate the key dimensions of coordination, collaboration and integration with the

organisation’s business processes, and help it achieve improved corporate governance as well. Next-generation corporate governance can be viewed as the new standard necessary to restore trust in an increasingly challenging and complex environment.

APPROPRIATE ROLE OF RISK MANAGEMENT In a healthy organisation, a triad exists in the form of checks and balances among senior management, the board of directors and risk management. This

Next-generation corporate governance can be viewed as the new standard necessary to restore trust in an increasingly challenging and complex environment.

triad is analogous to the three branches of the United States government: The board of directors, as the legislative branch, establishes and oversees compliance with the rules regarding the organisation’s corporate governance. Senior management is the executive branch, carrying out those rules, while risk management, as the judicial branch, monitors and reports on the appropriate execution of the rules. When the power within the triad is balanced, the checks and balances function is in a healthy position and risk can be managed appropriately. When the role of risk management is diminished within the triad, the organi-

sation’s sustainability is jeopardised because the process for speaking the truth about risks to the organisation’s health has been stifled. This can lead to the types of problems that have surfaced with American International Group Inc., Toyota Motor Co. and British Petroleum Inc., among others. There is significant value that risk management — as monitor and reporter — can provide an organisation. An organisation will realise an enhanced return on its risk management investment when it embraces and executes on these next-generation dimensions and elements, in addition to its existing foundation described above:

Coordination: Understanding exposure. Addressing all aspects of risk. Understanding risk interdependencies. Collaboration: Driving engagement. Facilitating value creation across the organisation. Connecting to key management processes. Integration: Viewing holistically. Linking to other key monitoring disciplines. Bridging to board risk oversight. Table 1, Risk Operating Model, illustrates the foregoing dimensions and elements. JANUARY 2011

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PHOTOS.COM

IN PRACTICE

By engaging the organisation and understanding exposure through consideration of all aspects of risk, those responsible can avoid pitfalls and begin to add real value in their organisations. COORDINATION Understanding exposure, addressing all aspects of risk and understanding risk interdependencies. An integrated view of risk includes many dimensions that must be considered, moving beyond solely financial or insurable risk. All dimensions of risk need to be viewed in concert, not as separate elements. Often, various dimensions of risk are allocated to isolated management and board groups for management and oversight responsibilities. The

danger in viewing risk in such a disaggregated manner is that interrelationships among these risks can be lost and the real exposure not well understood. Indeed, issues such as the current economic crisis have real impact on growth, products and operations. Considering issues only for their impact on financial performance or compliance will inhibit effective decision-making. It is also important to adopt a common language encompassing all rel-

Risk Operating Model

evant aspects of risk that can be utilised across the organisation to identify, assess and manage key risks. Think of it as the organisation’s universe of risk. Each of these elements could become an organisation’s Achilles heel, and a careful review of each element should be on the agenda. Questions such as “what could go wrong” and “what would be the impact?” should be asked. By engaging the organisation and understanding exposure through consideration of all aspects of risk, those responsible for risk management can avoid pitfalls and begin to add real value in their organisations.

COLLABORATION Driving engagement; facilitating value creation across the organisation and connecting to key management processes (creating synergy). If the entire organisation is not engaged in the risk management discipline, it can be a “check the-box” compliance exercise that misses true risks to the organisation at all appropriate levels. Effective risk management must drive business-specific value. When leaders understand the risks of their next technology initiative, product roll-out or acquisition integration, understanding risk becomes relevant and engagement increases. The following activities should be key focus areas for engaging the organisation in a discussion of risk: Enterprise Risk Assessment – which encompasses optimising the overall control environment and delivering peace of mind to key stakeholders. This considers both the upside and the downside of risk and establishes and monitors risk tolerances. Business Plan Performance – identify and manage threats to the achievement of the business plan. Linking to strategic and business planning provides context for meaningful risks and linking to periodic performance management process provides context for risk management performance.

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IN PRACTICE

Major Change Events – identify and address the risks associated with major change events by enhancing change execution of strategies and initiatives with higher risk profiles, such as international expansion, new business lines or products, process re-engineering, technology platform changes, off shoring, high growth and acquisitions. Chronic Underperforming Areas – identify and address the risks/ root causes underlying areas such as underperforming business units, divisions, processes, initiatives, etc. Emerging Risks – identify and m o n i t o r “o v e r t h e h o r i z o n” risks to ensure they are proactively addressed (i.e., emerging risks related to industry, competitor, environment and regulatory).

Linking to Other Key Monitoring Disciplines

4 5

INTEGRATION Viewing holistically; linking to other key monitoring disciplines. To create synergy for unlocking the value of next-generation risk management in an organisation, the dots must be connected — integration must occur between the risk management process and other key processes for managing the business, such as strategic planning. This is important because risk and return should be managed in conjunction with the strategic direction of the business and how business performance is measured and monitored.

Typically, four primary monitoring disciplines should exist within an organisation in addition to risk monitoring. These include ethics, social responsibility and audit/compliance. Each of these monitoring disciplines supports a primary relationship with one of the four cornerstone components of any business operating model: The mission, vision and values, as well as strategy, execution and controls. (See Table 2 Linking to Other Key Monitoring Disciplines.) Just as the organisation would not function well if these business model

Typically, four primary monitoring disciplines should exist within an organisation in addition to risk monitoring. These include ethics, social responsibility and audit/ compliance.

components were not well aligned and integrated, the monitoring system’s ability to check the health of the organisation and “see things whole” is also significantly constrained if these four basic monitoring elements are not aligned or coordinated. For example, consider the recent sub-prime lending crisis. Was there an ethical component or issues around social responsibility? Of course. More effective and integrated monitoring could have — should have — identified these issues sooner. By connecting processes and coordinating disciplines, risk leaders can align these critical elements of an organisation’s success to their overall objectives. Let’s take an end-to-end view on global risk management, from the boardroom through implementation. Starting with the final element of nextgeneration risk management — bridging to board risk oversight — governing effectively requires strong integration of the organisation’s risk management process and reporting with the board’s responsibility for risk oversight. In today’s marketplace, this is an area of heightened focus for businesses operJANUARY 2011

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IN PRACTICE ating in the United States, as well as within the government. The current disintegration that frequently occurs at the board level around risk oversight often centres around one or more of the following common pitfalls: Poor Risk Management Information. Lack of organizational sophistication, competency and holistic reporting mechanisms; and weaknesses around risk aggregation, interdependencies and portfolio concentrations. Unclear Oversight Ownership. Unclear ownership by the board of the oversight of the organisation’s risk management — both the individual components and overall. No Assessment Mechanism. No effective mechanisms to assess the organisation’s risk management process and information quality. Inadequate Risk Expertise. Inadequate level of deep risk management expertise on the board (member and advisory). Reactionary Posture. Tendency not to listen or respond to early warnings of risks until it is too late to avoid crisis; this is often most prevalent when current performance and performance trend is favourable. An approach that integrates board level risk oversight with the risk management process will help organisations overcome these common pitfalls and be leaders in risk management effectiveness. This will help their businesses be more successful and will quickly build and restore public trust in business overall. Additionally, the full board must oversee and assess the organisation’s overall risk management effectiveness — possibly through an appropriate board committee, such as a risk committee. This includes consideration of the organisation’s risk profile in the aggregate, based on a holistic view of risk oversight assignments to individual board committees. Clear ownership and accountability regarding the oversight of the organisation’s risk management sys42

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Improving the execution of risk management will enhance corporate value in a variety of ways, such as reducing or eliminating the significant and sometimes crippling cost of risk management failure... tems is critical to realising its full value. Ownership among senior management and the board must be clear regarding risk types, exposure (aggregation, interdependencies and portfolio concentrations) and acceptance (in relation to an established risk appetite and specific risk tolerances).

IMPLEMENTING NEXTGENERATION RISK MANAGEMENT Moving to a practical implementation strategy is often the challenge that, unmet, becomes the downfall of wellintentioned risk management leaders in any discipline. An integrated implementation approach will help ensure that the leaders achieve their objectives. It is important to build a foundation of support, engage leaders throughout the organisation and then deepen and enhance the understanding of the value that integrated risk management provides. Driving from an overall foundation through real integration is an effort, but certainly important and worthwhile. An appropriate implementation approach begins with establishing a foundation for risk management at the business unit level, by developing awareness and capability and aligning expectations. Next, risk can be managed at that level through engagement in specific risk issues, demonstrating tangible value and implementing the risk management process. Ultimately, risk can be managed at the enterprise

level through executing on coordination, collaboration and integration as discussed earlier. By focusing these efforts in a phased approach, engagement will increase, collaboration will improve and risk management leaders will have a powerful platform for delivering a holistic view of the risks facing their organisation and how the organisation can respond to those risks. Improving the execution of risk management will enhance corporate value in a variety of ways, including reducing or eliminating the significant and sometimes crippling costs of risk management failure, increasing the return on investment on the risk management spend, helping organisations assume risk intelligently and preserving the reputation of the organisation, its leadership and its board. By effectively working with their boards, risk management leaders can build next-generation risk management practices that truly support the organisation’s success and sustainability. WILLIAM S. BOJAN JR. (WILLIAMBOJAN@INTE GRATEDGOVERNANCE. COM) IS PRESIDENT AND CEO OF INTEGRATED GOVERNANCE SOLUTIONS LLC IN MINNEAPOLIS. IGS OFFERS POWERFUL NEXT-GENERATION GOVERNANCE TOOLS TO HELP ORGANISATIONS OF ALL SIZES ACHIEVE AND SUSTAIN HEALTH, AGILITY AND TRUST.© 2010 FINANCIAL EXECUTIVES INTERNATIONAL WWW.FINANCIALEXECUTIVES.ORG

CASE

STUDY

PROJECT MAP THE CHALLENGE: Raise funds for rapid expansion TIME PERIOD: Between January and November 2010

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PEOPLE INVOLVED: Finance team and top management KEY TAKEAWAYS: Focus on people, avoid unnecessary bureaucracy

CASE STUDY

NEW

Scaling

Heights

Fortifying the corporate finance function to meet the demands of rapid growth and going through two fund raising campaigns within one year were key areas iYogi’s CFO Joy Basu focused on during 2010. Here is how team iYogi achieved their target. DEEPAK GARG

SUBHOJIT PAUL

n October 2009, Joy Basu, former CFO of Nasdaq listed Rediff.com, joined the fast growing, four-year-old, tech support firm iYogi. He had not anticipated the far reaching possibilities that the company was inherently prepared for but needed fine tuning and focused direction for growth. With sound fundamentals for a high growth subscription business, Joy spent time on the growth trajectory and achieved numbers. “I am a numbers man, and that becomes the most important criteria for evaluating any decision, weather it is buying a car or a new pair of shoes. It’s only after I

joined the company and analysed the numbers, that I quickly realised that the opportunity was much larger and the company was perfectly poised.” iYogi is the first direct-to-consumer service brand from India. In the last few years it has emerged as the largest independent remote tech support company in the world. The company has grown at a dramatic 300 per cent growth rate, increasing tech support executives from 1,250 to 5,500 in the last 12 months, across eight delivery locations in India. iYogi’s services are currently available in the United States, the United Kingdom, Australia and Canada, with an expanding footprint in the Middle East and Europe.

THE CHALLENGE In a fast growth company like iYogi, Basu’s immediate focus area was to build on foundations laid by the founders to prepare for an even larger and faster pace of growth. The first step he took was to institutionalise the finance function with streamlined processes and a clear vision for the next five years. “I am delighted that I got a free reign, the management had confidence in my years of experience in managing similar functions and governance practices for listed companies.” Additionally, there were the complexities of the business itself where there was a database of individual subscribers from different JANUARY 2011

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CASE STUDY support iYogi and also understand the space required for our entrepreneurial style”. Basu also had to ensure that capital raised was at the right valuation, without overly diluting value for current shareholders. In the last two series of raising venture capital iYogi has raised a total of $45 million from blue chip investors like Sequoia Capital and Draper Fisher Jurvetson. Rather than raise the entire sum in one go, iYogi prudently opted for raising two tranches, of $15 million and $30 million respectively and within a span of twelve months.

THE LESSONS

“To build world-class facilities and manage recruitment and training in a short time requires not just large investments but a huge amount of management bandwidth.” countries, multiple vendors and global marketing partnerships. To add to this iYogi was also planning to raise successive rounds of venture financing which required Joy to work with multiple venture funds, as there were primary and follow-on investors.

HOW THEY DID IT Managing such a frenetic growth pace and making the company future ready can be challenging and requires strategic planning and controlled implementation. The first steps were to automate; to develop an ERP system that could manage the complexity of a business model that is subscription based, multi – geographical and deals with multiple vendors. This is now supported with a large finance team. “The complexity is enormous. To build world class facilities and manage recruitment, administration and training for thousands of skilled 46

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employees in a short time requires not just large investments but a huge amount of management bandwidth. Rather than attempt to do everything in house we entered into carefully planned outsourcing alliances with leading BPO companies such as IBM and Genpact. The key was to outsource a select part of our service offerings and attain a uniform level of efficiency at multiple locations under different management. It was a strategy which worked out very well and today iYogi successfully outsources approximately 40 per cent of its tech support staff,” says Basu. And then, of course, there was the challenge of raising the capital needed for further expansion and growth plans. “Given what we had already achieved, getting interest from venture capital firms was in itself not terribly difficult” says Basu. “The key was to raise capital from investors who would

According to Basu, the biggest lesson is to focus on people rather than numbers. “Before joining I had studied the numbers carefully but no balance sheet can foretell the future of a business. It can only tell the story of the past and show the status at present. In my interactions with the management I wondered about their insight into the business. And what I found was a sharp focus on customers and employees, clearly enunciated goals, a deep understanding of the opportunities and challenges and a well thought out plan to tackle them. Add to that a scalable, proven, technology platform developed in-house and the neverending zeal to experiment with new ideas, led Basu to conclude that he had found a winner. Basu believes that in these dynamic times, nimble-footed management will have a distinct edge over slower competition. Basu also feels mistakes will happen, but what is important is the ability to identify such mistakes early on, take timely corrective action and to learn from them. And while one cannot underscore the need for instituting the right controls, which are essential building blocks of a scaling organisation, care must be taken to avoid excessive and unnecessary bureaucracy, which could lead to a straightjacket situation, constricting growth and creativity.

LEADER’S

WORLD

Ethics : World What We Can Learn from the

Adventure

Truth, transparency, respecting best practices and accepting responsibility – adventure sports teaches us some crucial management lessons. DAVID LIM

ABOUT THE AUTHOR David Lim, Founder, Everest Motivation Team, is a leadership and negotiation coach, best-selling author and two-time Mt Everest expedition leader. He can be reached at his blog http://theasiannegotiator. wordpress.com, or david@ everestmotivation.com

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IN 1968, DONALD CROWHURST was part of a flotilla of yachts competing in a round the world race. After crossing the Atlantic from the start of the race from Britain, he began falsifying his logbook and radio transmissions to give the impression that he was doing well in the race. When his plan began to get exposed, he could not bear it and threw himself overboard, never to been seen again. Only his notes and papers found on his abandoned yacht revealed the true nature of his ‘achievement’. In the 1990s, ace Slovenian climber Tomo Cesen claimed to have solo-climbed the much-attempted and stupendously difficult 2000m high south face of the 8500m-high Lhotse. Feted for a while, discrepancies soon arose from studies of his photographs and other evidence. He is now discredited. Quite a few years ago some climbers were written about in newspapers after they claimed to have summitted Shishapangma, an 8046m peak in Tibet. The team enjoyed accolades before their claim was challenged. It seemed they had climbed a lower, subsidiary point along the 2km-long summit ridge known as Shishapangma Central, and that they did not climb to the top, as claimed in the media. In their defense, the team submitted a ‘certificate’ by the Chinese Mountaineering Association that deemed that any team that climbed

LEADER’S WORLD Shishapangma Central was considered to have summitted the peak. This, to some, flew in face of common wisdom – if one has not climbed to the top, then no certificate in the world, surely, can assist you to do so after the fact. There are some written ‘rules’ in existence in the adventure-sports world, such as the English Channel Swimming Association’s rules about the actual amount of assistance a swimmer is allowed to receive. In climbing, there are a few written rules, but many unwritten ones that dictate how an ascent be categorised. Tomo Cesen was just another climber who got caught. More complex issues surround achievements based on doing something in a particular style. In order to distinguish milestones in a sport, you need some yardstick to sort them out according to their quality of achievement. By doing so, you can sort out the best achievements and those who are pushing the sport’s limits in terms of endeavour and skill. So climbing a challenging peak with minimal gear and support counts for more than a standard ascent involving porters and such aids. However, if people do not pay heed to style issues, such claims only serve to demean the achievement of those dedicated to quality results – very much like how people who have earned their doctorates feel about people who literally ‘buy’ their PhDs from degree mills with minimal academic study and challenge. John Barnes, Australian sociologist and author of the book, ‘A Pack of Lies’, reflects how society expects sportsmen and women to somehow aspire to higher level of existence – that they are above crass commercialism and cheating. But with greater emphasis on sponsorship, money, spectator interest and expectations have grown as well. And so, society is disappointed when a sportsperson is found wanting. If we can fib about not stepping on that steel bolt to help us gain a few inches in order to complete a particular rock climbing route on a Sunday afternoon climb, what else might we be capable of? Ultimately, the integrity of adventure sports achievements, done out of the glare of TV cameras, depends on the ethics of their practitioners. There is often too great a temptation to say ‘we did it’ especially after suffering for days or weeks for our goal. Yet, it is the stronger soul who says “we nearly made it, but for….” The beauty of sports such as mountaineering is that it embraces all – from those who find challenge in a blank 20m piece of vertical granite, to those who like to suck thin air over 7000 metres. However, the climbing community expects that its practitioners be completely transparent about the style in which a challenge is achieved.

There is often too great a temptation to say ‘we did it’ especially after suffering for days or weeks for our goal. Yet, it is the stronger soul who says ‘we nearly made it, but for….’ What can we apply from the world of adventure to the corporate world? The lessons are simple: 1) Ensure your claim or achievement is beyond reproach or doubt 2) Be absolutely transparent about how you achieved a specific objective in the workplace 3) Respect best practices in your field of endeavour 4) You are responsible for your workplace and public announcements The current game of climbing the really big peaks in the world, such as the 8850m-high Mount Everest, sees fewer dedicated mountaineers, and more dilettantes or list-tickers attempting it for the privilege of having said they did it. The mountaineering world embraces all of them, although it does expect that climbers be honest about how they did it as much as whether or not they got to the top. However, one rule remains: summits have to be reached. Exceptions include certain sacred summits, like Kanchenjunga, where for local or religious deference, one might stop some metres from the actual top. But you can only say you have climbed a peak like Mount Everest when you have… uh… climbed it! Reinhold Messner, the first to complete climbing all the 14 peaks in the world over 8000-metres in height, said, “All the 8,000-ers have one, nothing else, and that is a main summit. No certificate issued by any man-made organisation can say otherwise.” That is the ultimate truth. JANUARY 2011

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Lounge

01.11

CFO

This month drive the safest thing on four- wheel - Volvo XC60, own the sleekest gadget for your work station - MacBook Air, travel to the most aesthetic destination in Europe - Florence, experience uncustomary art by Sudharshan Shetty, and attribute a meaning to Fault Lines in economy.

VOLVO XC60

Better ‘Volvo’ than sorry Volvo XC60 drives you around and not vice versa, vouches Anoop Chugh I HAD A late realisation driving Volvo’s bold, sporty and muscular small, premium utility automobile – XC60. During the latter half of the 2500-odd-km journey between New Delhi and Mangalore via Jaipur-UdaipurAhmedabad-Surat-Mumbai-MahabaleshwarRatnagiri and Panaji, my belief that it wasn’t me driving the Scandinavian-crossover around, grew even stronger. I felt like a child who had been given a phony steering to make it look

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real. It was all a sham. This is one car that you don’t need to drive at all – it drives you!

Looks It is not often that one gets a chance to talk about the looks of a Volvo car. Volvo reviews generally start with safety gadgetry and ends with it. After all, the only place safer than a Volvo cabin is probably a Volvo cabin inside

DID YOU

KNOW?

Volvo cars are the benchmark for safety-on-wheels. In 1958, Volvo invented the modern 3-point safety belt. It was the first company to produce cars with padded dashboards. Additionally, it developed the first rear-facing child seat in 1964.

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ON WHEELS the White House. Mind you, the XC60 is a pleasant exception to the golden Volvo rule of “Bland looking, but safe”. The XC60 will keep you out of harm’s way too, but with style, elegance and adulation. The XC60 is, perhaps, the first Volvo ever that seems to have spent some time in a gym. The car’s shoulders are exceptionally broad, true of a SUV silhouette, mainly due to the clear sculpted, seductive lines when viewed from the side. The large wheels, the bold wheel arches and the darker livery of the body’s lower section further enhance the muscular feel. Volvo has also revolutionised the interiors of the XC60. The most appealing bit about the interior is the slim centre stack, which is made with pure emotion and sensation as opposed to mere intellectuality. The centre console is slightly angled towards the driver, leaving no doubt as to where the best seat in the car is located. One would have to thank Jonathan Disley for the interior environment radiating high-tech feel and ergonomically designed instruments. The threesection rear seat (40/20/40) can be completely flattened to drive off on a weekend getaway with kids.

THE MOST APPEALING BIT ABOUT THE INTERIOR IS THE SLIM CENTRE STACK. ALSO, THE THREE-SECTION REAR SEAT CAN BE COMPLETELY FLATTENED .

VOLVO XC60 Price

2400cc

Max Power

205bhp

Max Torque

420Nm

Gear Box Wheelbase Top speed Cylinders Fuel efficiency

Ride & Performance Volvo’s manual is car technology’s encyclopaedia. If Volvo does not have it, it’s probably not invented yet. Not in any particular order, the car boasts of an All Wheel Drive (AWD) with Instant traction; Dynamic Stability and Traction Control (DSTC) to stabilise the car in evasive manoeuvres; Hill Descent Control (HDC) that automatically controls the car’s speed when driving down steep slopes; Continuously Controlled Chassis Concept (FOUR-C) that makes it possible to choose a chassis setting to suit a certain driving style and the Trailer Stability Assist (TSA) which can stabilise the car and trailer. Other

Rs 39.5 lakhs

Engine

6speed GT 2815 mm 210kmph 5 in-line 10.5kmpl

Turning circle

11.9m

0-100kmph

8.9sec

POSITIVES

Safe as the White House, surprising good looks, aesthetic interiors, pricing when compared to the rivals NEGATIVES At times overdose of safety features make the drive dull and boring, disinclined engine VERDICT The XC60 doesn’t have the grunt of the X3, or the presence of the Q5, or the pedigree of the Freelander, but with the premium-utility vehicle Volvo has come closest to the perfection.

safety mechanisms include the Driver Alert Control that detects tired and distracted drivers; the Blind Spot Information System (BLIS) that helps detect vehicles in the offset rear blind spot on both sides of the car and the Lane Departure Warning that alerts the driver if the car runs across the lane markers without the turn indicator being used. At times you feel all these safety functions make the drive a bit too safe and non-dramatic, but at least you reach your destination safe and sound. We only had the opportunity to drive the assiduous D5 turbocharged diesel variant of the five engines available. However, after driving the five-cylinder D5 engine (205 horsepower and 420 Nm) around we were still griping for some additional punch. Call it our insatiable greed. The D5 felt more-at-home on NH8; but the two-lane NH17 from Mumbai dissipated the D5’s all-round capabilities. Perhaps for Indian conditions, the new five-cylinder D3, in principle the same engine as the well-established 2.4-litre diesel, would have been a better choice with a shorter stroke and lower fuel consumption. JANUARY 2011

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GIZMOS NEW LAUNCHES

HOT SPOT

Motorola Tablet The Xoom, one of the first tablets to run on Google’s Android 3.0 Honeycomb OS has been unveiled by Motorola. Specifications: Operating system: Google’s Android 3.0; Dual core processor 2GHz processing power; Price: N/A

Skin deep! The New MacBook Air is here. Anoop Chugh FOR THE CONFIGURATION, the price of almost Rs 1 lakh makes the Macbook Air an expensive proposition. However, that discounts the fact that it is a beautiful piece of equipment. This is one of those products you buy when your heart rules your head. The new Air comes in two sizes - 11-inches and 13-inches. The Air can be defined with the same language one would use for Keeley Hazell - slim and curvy in the right places. The uni-body is still a gorgeous piece of equipment, and the lid and body are rigid. The Air is also sharp-looking once flipped open. The keypad is the same size as the MacBook Pro, and there is enough space around the sides. The keypad is a segregated design and exudes good feedback, and the keys, although not bevelled, have sufficient spacing to make up for this. While Apple gets the display resolution right (1440x900 pixels), it has gone cheap on the quality of the panel. Colours look washed out, contrast is minimal, and on maximum brightness, 52

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the blackness level looks mediocre. The Air comes with a 1.86 GHz Core 2 Duo - not bad, considering its slimness. The graphics solution is a pretty robust NVIDIA GeForce 320M running of a PCI bus, with 256 megabytes of video RAM. This should suffice for casual gamers, and is definitely a cut above Intel’s integrated solutions. The 2 GB of DDR3 RAM might seem a bit slim, but we keep reminding ourselves that the Air is only skin deep. The real surprise is the inclusion of a 256 GB SSD. This obviously saves on space as well as improving overall performance. The downside is, it adds to the price, big time! There are two configurations. A smaller 128 GB SSD in lieu of the 256 GB one reduces the price to Rs. 79,900. However, at this price, you can pick up a MacBook Pro, with better hardware. SPECIFICATIONS: CPU: Core 2 Duo L9400 (1.86 GHz); RAM: 2 GB DDR3; Graphics: NVIDIA GeForce GT320M (256 MB); Storage: 256 GB SSD; display: 13inch, 1440 x 900 pixels; weight: 1.32 kgs. PRICE: Rs 98,900

HTC 7 Mozart The Mozart is a Windows 7-based handheld offering from HTC. The phone features Microsoft Zune integration, so that users can synch media on their HTC with their PC. Other specs include an 8MP camera with auto focus and flash, 576MB of RAM and 512MB of ROM. Price: Rs 26,490

Samsung NX 11

The NX11 is a mirrorless camera. Its lens includes a button that allows the user to control the shutter speed, aperture and exposure. It offers 14.6-megapixel captures and a 3-inch OLED display Price: $649 POWERED BY

ad Re Y st OG Mo L E ’s NO ZIN dia CH GA In TE MA

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TRAVEL

FLORENCE, ITALY

In Italy’s Art Capital Anoop Chugh travels to Florence

on a whistle-stop tour and comes back pining for more.

TWO OF ITALY’S contributions to the world have always attracted me, even before I was introduced to penne, spaghetti or gelato: The Italian pizza and the Italian renaissance. A two-day stop-over at the country’s cultural capital of Florence was a dream come true for an art aficionado. Here was a place that had reinvented money (in the form of gold florin), pioneered the use of vernacular (marking the end of Latin), invented both Renaissance and neoclassical architecture, sold pizzas in weight and pioneered the art of Opera. It is also the birthplace of, among others, Leonardo da Vinci, Niccolo Machiavelli, Michelangelo and Gelileo Galilei. For those fashionably inclined, two of its more recent celebrity sons are Salvatore Ferragamo and Roberto Cavalli. The dilemma that most tourists end up with here is how to visit the many museums, art galleries and churches stuffed with some of the finest art works in the world and still find time to have a nice Italian meal and see the many other sights of Florence. The faster (and a little expensive) way of seeing the city is by renting a self-driven car. The problem is, cars would not allow you access to the historic city-centre of Florence. Only residents with permits are allowed to drive there. To make matters worse, Florence has some of the narrowest streets in Europe (even by Indian standards), a series of labyrinthine that confuse even locals. Driving however, is recommended to reach destinations outside the city including Siena and Arezzo. If you can ride a bike, though, rent one. Bikes can be hired at several points in the city (and returned to the same place). Almost all the historic centres of Florence can be reached by this mode of transport. But be warned traffic is terrible, and buses, trucks, cars and motorcycles are all fighting for the same space. If you are an art lover, do not miss this chance to visit the Piazza del Duomo, the historic Palatine Gallery or the Modern Art Gallery. The 54

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ABOVE: IF YOU ARE AN ART LOVER, DO NOT MISS THIS CHANCE TO VISIT THE PIAZZA DEL DUOMO LEFT: THE PALAZZO VECCHIO IS THE TOWN HALL OF FLORENCE. THIS MASSIVE, ROMANESQUE, CRENELLATED FORTRESSPALACE IS AMONG THE MOST IMPRESSIVE TOWN HALLS OF TUSCANY.

Palazzo Vecchio or the town hall and the vast expense of the Boboli Gardens are also must visits. If art is the last thing on your mind and you still happen to be in the city, you can indulge in some serious retail therapy here. And if it is bargains that is on your mind, try the San Lorenzo market for great deals. If nothing else, navigate the winding staircases inside the Duomo or the nearby bell tower to capture some of the best views of the city.

WHERE TO STAY: Giardino di Leopolda if on a budget. The Grand

Hotel Cavour and Hotel Degli Orafi are luxury hotels. HOW TO REACH: Jet Aiarways. Al Italia and many other airlines

operate flights out of major Indian cities to Rome or Milan and on to Florence.

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ARTS

ARTIST OF THE MONTH

This Too Shall Pass Sudharshan Shetty’s

exhibition of installations and sculptures dwells on the history of Mumbai. By Anoop Chugh

Born in 1961 in Mangalore, Sudarshan Shetty completed his Bachelor of Fine Arts from Sir J.J. School of Art, Mumbai (1980 to 85). He received Fellowship at the Kanoria Centre for Arts, Ahmedabad. His art world reflects contemporary urban life. He has participated in the ‘Private Mythology: Contemporary Art from India’ (Tokyo) in 1998, ‘Kwangju Biennale’ (Korea) in 2000, and ‘Century City’ (UK) in 2001. His work was on display at the Indian Art Summit at Pragati Maidan, New Delhi from Jan 21-23.

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SUDARSHAN SHETTY HAS been a creator of artworks since 1990s, sculptures and installations being his specilisation. Through his installations he represents a world full of light-heartedness and freedom, liberated from political issues. His latest show titled “This too shall pass”, makes a poignant statement about everyday life and silently reassures us that ‘this too shall pass’. The show underlines the value of fleeting memories that often escape us, experiences that one wishes to hold on to but cannot. Shetty’s work can be best described as philosophical investigation of the vulnerabilities and lost histories of a metropolis - in this case the city of Mumbai. His unconventional approach can be gauged from his life sized gold-leafed fibreglass statue of himself. Shetty leans his sculpture at an angle, connecting it to a donation box, whose weight balances its own. A total of about Rs. 25,000 in coins will make the statue stand upright again. This work raises multiple issues: does the donation box delegate sanctity to the statue, making it one to be worshipped? Are objects in the museum always divorced from religiosity? Does a leaning statue even deserve to be in a museum collection? Further recounting the age-old tradition of weighing monarchs in gold, Shetty allows the people to decide the fate of his statue. By making the donation voluntary, Shetty not only renders

JANUARY 2011

HIS LATEST WORK (ABOVE AND LEFT-BELOW) IS A POIGNANT STATEMENT ABOUT EVERYDAY LIFE THAT REASSURES US THAT ‘THIS TOO SHALL PASS’

(RIGHT) SHETTY’S WORK FROM ONE OF HIS PREVIOUS EXHIBITIONS - LEAVING HOME (2008)

the work participatory, but also allows the viewer to make the choice of participation. Another piece of his contemplative art work is a delicately carved chair with a bright red seat cushion that ‘bleeds’ in drops from one of its corners. Placed on the chair is a neon sign reading ‘scar’, which conjures up images of ghastly pasts, trauma and perhaps even shame. So even though ‘this too shall pass’, the scars remain, branding the body of the survivor with a grim reminder of times gone by. Another work, an ornately carved wooden doorway with a sword swinging precariously over it, threatens to behead the viewer. The wooden remains of a ghost car and a steel carcass of a rocking horse also hint at the ravages that the passage of time wreaks.

CFO LOUNGE

BOOKS

NEW RELEASE

Use your head PICK OF THE MONTH

Final Call Is a financial crisis like that of 2008 waiting to happen again? Read this book to find out. By Anoop Chugh FAULT LINES IS A book where economist and author Raghuram G Rajan forewarns us about skeletons still hidden in the cupboards of many corporate houses. The author fears that the shortcomings that had led to the crisis of 2008 might have not been fully addressed; hence the turmoil may reappear as our tendency to take risks and the unabashed greed get better of prudence. There weren’t many takers for his warning note (‘White Paper’) when last time he had foreseen a financial crisis in the making in early 2007. This time ignore him at your own peril. In Geology, fault lines are breaks in the earth’s surface where tectonic plates come in contact or collide resulting in great stress around these fault lines. The author has used the same metaphor to talk about fault lines that have emerged in the global economy. He cites three reasons why these fault lines could prove ominous: political decisions that are popular instead of being financially prudent, trade imbalances between countries and different types of financial systems trying to merge. At times the writing would seem pessimistic, even distrustful of the current economic revival. Is the so-called revival a sham? One will have to read the book to find out.

Book: Fault Lines Author: Raghuram G Rajan Publisher: Harper Collins Price: Rs 499 58

CFO INDIA

JANUARY 2011

EVER WONDERED what goes on up there. What makes us happy or sad, angry or anxious? The Freeman brothers unravel the secrets of the mind and explain the scientific facts behind our behavior. Having trouble sleeping? Suffering from panic attacks? Use Your Head will pin-point your symptoms and give you practical advice on how to overcome these difficulties. Clear, concise and immediately relevant.

Publisher: Hachette Price: Rs 299 OTHER RELEASES

Destination Work AT THE BOOK’S centre is the story of Nancy Kim, a human resources director at a magazine that is struggling with all the problems associated with unhappy employees - low productivity and morale along with high absenteeism and turnover. After she challenges the CEO’s management-by-the-numbers system, she’s asked to offer an alterbative. Filled with real-world studies, Destination Work! shows anyone how to turn the workplace into a destination - a place where working is enjoyable and fun.

Publisher: Westland Price: Rs 150

Highway on my plate DRIVING THROUGH INDIA and want to know where to eat on the road? Try Highway on my Plate: the Indian guide to roadside eating, the country’s first guide to dhabas and roadside restaurants. Adapted from the hit TV series on NDTV Good Times, ‘Highway on my Plate’, it lists the top eats on almost every major Indian highway and routes as presented by the popular anchors Rocky and Mayur.

Publisher: Random House Price: Rs 299

NOT JUST

THE LAST WORD

Zero tolerance – the need of the hour? Reading through this issue of CFO India, I am struck by two things. The varied understanding of what is ‘ethical corporate behaviour’; and the chasm between what people expect and what they do/accept i.e the gap between words and behaviour. Both these observations, muddy the potential for a cleaner corporate ecosystem in the future. Let me explain why I think so. Ishat Hussain, one of our most reputed and admired senior corporate leaders, says that out of thousands of large corporations only a handful have seen fraud in the last decade or so. His list includes Enron, Andersen, Satyam, Parmalat and when he comes to Lehman, he isn’t quite sure that it qualifies as fraud. His belief is that by and large, companies want to do good and behave responsibly. On the other end of the spectrum, is Nawshir Mirza who says and I quote, “ the capitalist system has conveniently reduced the definition of ethics to not paying bribes and not consciously violating the law. Marginal doubts and often not-so marginal ones of compliance are resolved by asking lawyers for opinions that justify adoption of a practice which violates the spirit (and in many cases the letter) of the law.’ Most of us of course, conveniently and predictably, sit somewhere in between. Which means our levels of tolerance for what might be inappropriate or unethical conduct – but is not purposefully fraudulent – are pretty high. A dangerous place for a CFO to inhabit! As a society and a corporate ecosystem, we rationalise our behaviour which is often substantively short of ethical – but continue to lament the erosion of values, the lack of ethics, misgovernance, widespread corruption, etc. So what do we really want? Are we okay with existing corporate norms - which may be poor on governance at large, but aren’t fraudulent? Or are we pushing for a cleaner and more trustworthy environment where corporations and their leaders set the tone for exemplary ethics? Are we genuinely done with living in a corrupt environment? Has the impact of poor governance now reached ‘People Like Us’ and therefore we want change? 60

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JANUARY 2011

If we are divided on this issue, then we must make peace with the way things are. And stop lamenting. But if a large majority wants things to change and create a cleaner ecosystem then we have to make a transformational effort. The penalties of deviation from expected behaviour must be immediate and disproportionately high for a ‘crime’. The message has to be loud and clear – the system and society have ‘zero tolerance’ for certain kinds of behaviour. Punishment that is inadequate and delayed is as good as non-existent given the myopic quarter-on-quarter approach to life in corporate India. There is one more compelling reason for demonstrating zero tolerance. A friend who is familiar with Pavlovian principles (around the reaction of humans/animals to their external environment) and conditioned reflexes told me that what it takes 20 sessions to learn – needs more than a 1000 to unlearn. Applying this information to the problem at hand – what we as a people have been doing for the last few decades will not change overnight or even in a decade left to itself. And since we can’t afford to wait a century to change – we have to create an artificial environment for this transformation. Extraordinary challenges like corruption in India demand and deserve extraordinary re sponses. Do you agree? Anuradha Das Mathur, Publisher CFO India