The Indian Ceo Living Dangerously?

Another way of saying the same thing would be that a CEO is the man with whom the buck stops in a company. He takes the decisions that no one else has the power to take. He does not have unfettered power. He must account himself to shareholders; his decisions will be constrained by officers, workers, vendors and customers. In a large company, his decisions may also be conditioned by regulations and bureaucratic structures. Thus a CEO may himself feel that he has no power -- that he is hemmed in on all sides. What distinguishes a CEO is not the power he exercises, but the closeness and frequency with which he is supervised. A CEO reports infrequently to a higher body; he is unsupervised in his day-to-day work.

This also means that a CEO has the opportunity to make the biggest mistakes. To put it bluntly, he has the power to bankrupt a company. Any honest manager will admit that he makes mistakes; the more honest might even say that they would consider themselves lucky if their correct decisions outnumber their wrong decisions. So why do CEOs not drive all companies to bankruptcy? If so many companies survive, the reason must lie in one or more of three options: either there are checks and balances which prevent a CEO from making really big mistakes; or CEOs must be better than most at avoiding mistakes; or companies do not face such a risky environment.

India has some 7,000 quoted companies and over 300,000 unquoted companies which include some of India's biggest manufacturers. Anyone who has worked in these companies must know that checks and balances do not prevent Indian companies from going under. There are many devices known in the corporate world for minimising risk limits on delegation of financial powers, superior reference, continuous audit, independent compliance machinery, collective decision-making etc. Government-owned companies have most of these devices in fact, they have so many checks and balances that they prevent good decisions as frequently as bad ones. But both government enterprises and private companies in India are extremely hierarchical, with strict financial limits and rampant reference to superior authorities; the concentration of powers at the top actually makes them more risk-prone. This is graphically illustrated by the bankruptcy of small government-owned banks, such as the Bank of Karad and

Indian Bank; a CEO with political backing can easily clean up such small companies and depart with a nestegg for himself and his patrons in a couple of years. Larger companies take longer to go down; but they are no less risk-prone.

The second possibility is that Indian CEOs are of exceptional quality. It is true that India is a good breeding ground for managers, and that Indian managers do well in other, more open environments. But the Indian environment is different; Indian companies do not offer a good training ground for managers. Managers everywhere get trained to be CEOs by being left to take decisions on their own. The stronger the hierarchy, the greater the concentration of powers, the more decisions need to be referred upwards, and the poorer the training of managers; that is the case in India.

Is, then, the Indian environment such as to ensure stability? This is simply not true. There have been waves of bankruptcy: the recession of 1966 marked as important a structural break in post-war Indian economic history, and saw a great many businesses bite the dust. In particular, engineering industries were badly affected when the great investment boom of the early 1960s collapsed. Controls and especially product reservations destroyed the capacity of textile companies to react to their environment and sent many of them into bankruptcy in the 1970s. These engineering and textile companies cluttered the rolls of the Bureau of Industrial and Financial Reconstruction for a long time; many were taken over by the central and state governments. Eastern India, where the engineering industry was concentrated, was more adversely affected; multiplier effects of the loss of production and militancy of workers made the crisis worse. We know of these waves of insolvency which affected the bigger companies. There were

no doubt similar whirlwinds which swept away thousands of small firms; we know very little where they came from, and whom they destroyed.

Apart from these closures, there were takeovers. The biggest wave of takeovers was that of British companies. The Indian government specially targeted them. It passed the Companies Act of 1956 which forced the abolition of managing agencies in 1969. Indian managing agents circumvented the intentions of the Act; they renamed themselves promoters, and made a deal with the ruling politicians which allowed them to retain control of their companies. But while they could take their remuneration out of their companies in illegal forms, the British could not do so. They had to take it in foreign exchange; exchange control prevented that. So a great many British companies were sold off to Indian promoters in the 1960s. The government forced the sale of most foreign companies, including the remaining British companies, by means of the Foreign Exchange Regulation Act of 1973.

Thus, the Indian environment has in fact been a highly risky one. This can be shown by comparing the top 50 business houses in 1939 with those in 1997. Of the initial 50, 32 were British; none of them survived in 1997. They were all dismembered and taken over. Of the 18 Indian houses, only seven remained amongst the top 50 -- the Tatas, Birlas, Lalbhais, Mafatlals, Shrirams, Wadias and Walchands. Eleven disappeared.

So any impression we have of stability is an illusion; the Indian environment has been most unstable. And yet any Indian businessman will say that the 1990s have been different -- that the environment has become much tougher. He will point out that of the seven survivors, three the Mafatlals, Shrirams and Walchands may soon disappear from the list. The pace of change has accelerated.

Has it really accelerated? I am not sure. But I think the sources of instability have changed. Till 1991, the instability emanated from the government from the failure of its forced industrialisation of the 1950s and 1960s, from SSI reservations, from the driving out of foreign business, from periodic payments crises. Now the greatest danger faced by Indian companies seems to emanate from other companies, both foreign and Indian. There has been a quantum jump in the intensity of competition. If the Indian CEO is to survive and succeed, he has to understand this change in the environment.

(Part I of a talk given to Baroda Management Association on January 16, 1998)