The Financial Institutions Will Be A Catalyst For Change
Q: Where do you think we are headed on corporate governance?
A: Corporate governance is a complex issue. Culturally, I doubt, whether our society is ready for the Cadbury committee report. The first step would be to ensure that there is transparency in the management of any enterprise where the public has a stake. And secondly, that the laws are followed. It is not a question of enforcement but rather a voluntary acceptance.
Most of the issues that we talk about are already covered by the various legislations. Instead of taking an attitude that so long as we can get away with it and no one catches you, we can carry on evading, we must change. The attitude must be to ensure compliance with the law rather than flouting it. If we accept this, then the non-executive directors on any board will play a significant role in ensuring compliance.
Q: Do you think these changes need to be institutionalised?
A: I believe that the board should form committees. The board meets only once a quarter and there is no need for it to meet more frequently. So how can it ensure compliance? It is done by forming small committees. The number of committees will depend on what the corporate sector sees as its key tasks. Today, the major emphasis is on financial compliance, so the audit committees will gain importance. I think that more and more companies will find it more prudent to have their own audit committees and non-executive directors will play an important role in these committees.
At the second level, if we take the allegations that we dont plan succession seriously, then the second committee that will emerge is a personnel committee. Its task will be to review the performance of the top management and ask the executives for succession plans for the company. This committee would also look into the remuneration of the top management what are they getting, why are they getting and so on. Overall the broad banding of salaries will come out.
Q: What role do you see for the financial institutions?
A: I believe that the financial institutions (FIs) will be a catalyst for change because on an average, they own around 25 per cent of the market equity. So they are a very powerful force. But we must also not forget that since the financial institutions are seen to be under the thumb of the North Block, they must not enforce the will of the finance ministry. That would be disastrous. The government has enough power at its disposal without using the financial institutions.
Q: What specifically must the FIs do...?
A: Financial institutions have enough expert personnel to judge whether the company is doing well. If the company is performing below its potential, then it is the duty of the financial institutions to examine the issues and see how we can improve profitability and efficiency. That is the role financial institutions will play but it is not going to be easy for them to do so. Because apart from the North Block factor, how many senior personnel would they have to take on such a role.
I was talking to a few foreign businessmen and they were telling me that now that the Cadbury committee report is being followed by most companies, it is becoming difficult for one person to function as a non-executive director on the board of more than 4-5 companies. Also, if the Cadbury committee recommendations are to be followed, then the non-executive directors have to be paid well. In the financial institutions, the directors have to turn over their entire fees to the institutions. Who would do a free job like this?
Q: We are looking at a major attitudinal change here...
A: Yes, this is it. So far we felt that the promoter actually owned the company and that he was doing a favour to shareholders and he must get the first cut in the business. What we are now talking about is corporate democracy where all shareholders are equal. That is the fundamental shift taking place and that is where the problems will arise. Today, 70 per cent of the top companies in the country have private sector promoters. Would the family promoters really accept that they are equal in law or treatment to the others? So long as they dont, all this talk of corporate governance is balderdash.
Q: Indian industrialists have also been raising a hue and cry about the kind of opportunities being provided to the multinationals in the country? What are your views on this?
A: Multinationals are certainly interested in India as a market. But, we contribute 0.6 per cent of the worlds GDP. So if we wish to keep them out, the multinationals will not die. It is our choice. By all means let us kick the multinationals out and then we can chug along at 3 per cent growth. We are looking at foreign direct investment (FDI) only because we want higher growth rates and a higher investment rate. So it is our choice. We can shut ourselves out and accept low growth rates or let the multinationals in and accept the fact that they are necessary for a higher growth rate.
Q: Indian industry and economists have also been concerned over the slowdown in Indian economy. Your comments.
A: There is no doubt that there has been a slow down. The reason, I believe is that agricultural output itself has slowed down. The rural markets which provided the major impetus for growth in the previous 5-6 years has slowed down considerably. The second reason is that if you see the return on savings instruments have gone up rather sharply. The incentive to save is up and so people are consuming less and saving more.
There is also another phenomenon. Gold consumption has gone up considerably this year. Compared to last year, it is up by 30-35 per cent. Now this could be a real increase in gold consumption or it could be due to the liberalisation in baggage rules. If there is a real increase in consumption of gold, then this is an indicator that the people are going in for savings in assets like gold rather than consumption.
In capital goods and construction too we have seen a slowdown and that has happened because the actual expenditure on projects start ups have absolutely stopped. The government cannot spend any money because they cannot generate any surplus after the revenue expenditure and private sector projects have not been cleared at all. So where is the consumption or demand going to come from?
Q: Will this continue?
A: On the consumer durables side, there is reason to hope that 1997 will be better. For, agricultural output is expected to look up and possibly we will get a 4 per cent growth this year. But on the producer goods side, I dont see any hope because the government is still in utter confusion. No policy framework has emerged and we will continue to have such a stagnant situation.
Q: Even in the future, then, we are looking at the rural markets to spur growth.
A: In the urban markets I am not an economist and therefore, cannot quote chapter and verse there is a certain level of demand you have to satisfy. After you have bought one fridge or one television, you dont normally go for another. So there is a sort of a saturation level and we get a S-curve in the consumption pattern.
Q: Would this then mean that many of the new multinationals who seem to be targetting the urban rich or middle class are making a mistake?
A: Personally, I would say yes. Because if you look at the NCAER report about market structures, then any single market segment or product segment, the discount or the popular priced segment accounts for 70-90 per cent of the total. If this is not targeted at all but only the top 10 per cent is, then it is a very shortsighted policy.
Q: What are the other problems that need to be tackled?
A: The first is better productivity on assets both fixed assets as well as working capital. The second area will be, as we get more and more debt instruments, the mix of the financial package. This will not be a stable one, but a dynamic one which will have to change to always optimise the financing costs that is better treasury management. And thirdly, we will see an improvement in the logistics arrangement. The chain from the customer to the manufacturer to the supplier will become more responsive. What we are talking about is a tighter and a wider distribution network.
Q: Do you think, employee costs will also come into focus..
A: Certainly. The trade unions are also taking a more responsible view of the entire issue. They realise that if employee cost goes up then it will affect the competitiveness of the company but what they are looking for is a firm and enlightened leadership from the management.