Creating a Stronger Ecosystem by Fixing the Nuts & Bolts of the Economy
Scams are fast becoming a new normal in the corporate world. However, this isn’t a good sign of a healthy economy. There are several instances where the board and the management team played the bad guy that killed their organization, ruined the career of thousands of their employees and their family. Indeed when many wear the same hat, it takes a man with a spine to call a spade a spade and fix the gaps.
Good governance, transparency, accountability and fairness are four such mantras that the technology magnate Narayana Murthy (the Founder, and former Chairman, CEO and Chief Mentor of Infosys) advices to deal with such situations. I spoke to the ‘Father of Indian IT sector, Nagavara Ramarao Narayana Murthy, on this and more at length. We discussed about the governance deficit, startup ecosystem, work from home and some personal questions on knowing him more as an individual. Believing in a disciplined life, he keeps himself engaged to uplift the ecosystem, create the next line of leaders and guides startups to make them successful through his firm Catamaran Ventures.
Read to know his views & suggestions and know a little more about the ‘man who put India on the global technology map’.
You have pitched for a fair balance of power in companies – between the CEOs, management and the board of directors – to check the scams and frauds and to ensure corporate resources are not used to gain personal riches. You had also highlighted the fair remuneration of CEOs and the management teams to ensure fair practices. Could you please highlight more on this concept and how can this be achieved?
Good governance is about deciding to do the right thing while good management is about doing that right thing well. Good corporate governance is about creating sustained competitive differentiation in the marketplace to maximize the shareholder value legally, ethically and on a sustainable basis while ensuring fairness, transparency and accountability to every stakeholder of a company – customers, employees, investors, vendor-partners, the government of the land and the community. Governance is a reflection of the culture and the values of a company’s board and management. Good governance in a company enhances confidence, trust and enthusiasm of its stakeholders.
The primary functions of a corporate board include ensuring a robust growth of both the top line and the bottom line of the company apart from protecting and enhancing the reputation of the company; reviewing, critiquing and improving the strategy presented by the management; and setting clear KPIs for the CXOs and other officers of the company. The responsibility also includes recommending a fair and performance-based compensation to the CXOs and other officers of the company after consulting key, knowledgeable shareholders as it happens in the case of some well-governed companies in the West and after obtaining the approval of the shareholders. They should create a succession plan for the CXOs and key officers of the company; identify risks and take timely action to mitigate them; put in place systems of information, control, checks and balances and ensure that they are working.
The responsibility is further to ensure full compliance of regulations required by every statutory authority of the land; getting capital and revenue budgets prepared and approved after informed discussions; apply mind, review and approve acquisitions, mergers, dividends, rights issues, bonus shares, and buyback of shares proposed by the management; address shareholder grievances in a fair and transparent manner; and install a robust whistle-blower policy while ensuring its proper functioning to address the complaints of whistle-blowers.
There are three key players in a corporate governance system. The shareholders are the owners of the company in proportion to the number of voting shares they hold in the company. The board of directors is responsible for the governance of the company, oversees the management, is appointed by the shareholders, and is therefore accountable to the shareholders. The CXOs and other executive officers form the management of the company, run the business, and report the performance of the company to the shareholders periodically through the board of directors.
Managerial remuneration should be based on three principles – a fair multiple of the compensation of the lowest level employee in the company; full transparency on details of such compensation to shareholders; and accountability by linking the variable part of the compensation with long term performance of the company. These days, most experts believe that a ratio of 70 to 80 between the compensation of the CEO and the median salary of the company seems fair. In some well-run global corporations, the compensation of the CEO is discussed with a few top shareholders and their opinion is considered before a decision is made. It is then placed before the shareholders for their approval at an AGM or an EGM.
What is your thought on the governance deficits in corporates? How can the board and the management deal with them efficiently?
Governance deficits happen when a board is either ignorant of or unwilling to follow the right process when a problem appears. This also happens when the board fails to accept its responsibility in solving problems that impact any of the stakeholders. Generally, these problems cannot be solved or should not be solved by the management of a corporation.
The most frequent reason for a governance deficit is due to the maximization of agency costs by the management. The primary corporate governance problem is to minimize agency cost. Agency cost is the cost incurred by the management for achieving the objectives of the company as decided by the shareholders. Agency costs tend to be inflated due to the divergence of interest between the management and the shareholders. Experts have said that in ‘professional-managed’ companies, such costs manifest as the propensity of management leaders to wring out of a weak or disinterested board high and unjustifiable compensation for themselves and to violate the company rules to use the company’s resources for their benefits and comforts of their families and friends or in exchange for illegal benefits to the management.
These experts also opine that in the case of ‘promoter-managed’ companies, this problem generally manifests as the asymmetry of benefits created by these owner-managers in their favour and against other shareholders. A typical example would be the use of the funds of a listed company owned partially by an owner-manager to fund the growth of a private company held wholly or to a large extent by the owner-manager, his or her family, and friends. This is generally called a ‘Related party transaction’. That is, conducting a company’s financial transactions with either a senior management staff or his or her relatives or friends.
Generally, such transactions result in inflated costs and financial damages to the company, and favour the other party in the transaction. Many a time, related party transactions involve paying unusually large severance payments beyond the contracted amount to an officer of the company. Such unusually high payments have the potential to raise doubts whether the board and the management are making an attempt to buy the departing officer’s silence. The duty of a board is to apply their mind and prevent such transactions.
Generally, governance deficits are brought to light by whistle-blowers. According to Wikipedia, a whistle-blower is a person who exposes information about a secretive, illegal and unethical activity that is supposed to have taken place in a private or public organization. The whistle-blower may be an internal employee or an outsider.
How should boards address such a complaint? An important duty of a board is to protect and enhance the reputation of the company and discharge its fiduciary responsibilities. Therefore, addressing a whistle-blower complaint in a transparent and trust-enhancing manner is a must. If the complaint is against a middle or a low level employee, an internal committee consisting of senior employees not connected with the accused and committed to total fairness and transparency should be sufficient.
If the complaint is against any member of the board including the chairman, the CEO, an executive director, or an officer of the company, there is a tendency among some Indian boards to investigate such complaints themselves assisted by an outside law firm. This is not a good idea. You cannot be the judge, the jury and the defendant!
The boards of some globally-reputed companies totally recuse themselves from the investigation of the complaint in such situations. The top ten shareholders, most of whom are institutional investors, are requested by the chairman of the board to form a committee of highly-respected individuals in the society to investigate the whistle-blower’s complaint. The company secretary is fully empowered by the board to provide all the resources (including an external law firm selected by the investigating committee and not the board) needed by this committee to conduct a thorough investigation.
SEBI may be concerned about the possibility of the friends and sympathisers of a company’s board members and officers being appointed to such an investigating committee. If so, SEBI may take over the responsibility of appointing such a committee. After all, you do not get too many whistle-blower complaints in a year.
If the investigation concludes that the board and the officers of the company did not want to perform their fiduciary duties and contributed to a governance deficit by omission or commission, the investigating committee should recommend to the shareholders that a penalty must be paid by every member of the board and every one of the concerned officers. Unfortunately, the white-collar guilty people in India do not pay any penalty for their violations and crimes. They are just asked to resign.
This is not a good idea. SEBI may evolve a gradation of penalties from a mere warning to blacklisting these board members and officers based on the severity of the governance deficit created. The shareholders may vote the board members out if the report of the committee concludes that the board did not discharge its fiduciary duty. The shareholders may use the severity of the deficit created to claw back 20 percent to 100 percent of the compensation or the fee received by the board and by the officers during the tenure of the incident reported by the whistle-blower. SEBI may consider imposing some additional penalties.
You are not a great fan of work from home, but there are news abuzz that several companies are preparing to incorporate it as a permanent work culture. How is that going to impact the productivity and the performance of employees? What would be its long term impact on companies and workers?
Most international trade experts say that Indian work productivity and quality are low. In the case of some services, we have solved this problem by charging low rates for services and low prices for our products so that our productivity and rework does not appear exorbitant to our customers. This is not a good strategy if we want to improve our per-capita revenue productivity and our per-capita net after-tax dollars added per employee to be on par with the best global services companies. Further, if we want to create jobs for the large number of semi-literate and illiterate rural Indians working in agriculture and rural services at very low per-capita productivity, then we have to shift them to manufacturing starting with low-tech manufacturing. We must have a higher contribution from exports to our GDP. That requires us to become internationally competitive in our productivity and quality.
WFH is suited for a small percentage of Indian workers. It is primarily talked about in the context of hi-tech services like software and in the business enabler functions like HR, Finance and other support functions in many other sectors of our economy during the pandemic. But, as you know, the software industry contributes, at best, five percent to six percent of our GDP of $3 trillion. Even here, there are many areas like hardware maintenance, data communication maintenance, and jobs which require physical access to advanced technologies and will be difficult to deliver from home. Unless we have evolved productivity standards for development and maintenance of evolving technologies, we will have no way of determining whether an employee is actually delivering what is expected of him or her.
So, the first task is for NASSCOM to publish work productivity standards for software development and maintenance in these emerging technologies. Even then, how do you decide the productivity standards for secretaries, documentation specialists and many other professions that are not easy to deliver from home! Further, not all employees live in big houses where it is possible to work away from the household disturbance and noise factors. Several younger people tell me that it is very difficult to focus on office work at home due to a variety of factors like children, old parents, and unscheduled guests and telephone calls. The bandwidth available in most middle-class urban houses is pretty low.
As it is, the country’s economic growth is just recovering after declining for the last two quarters. Therefore, this is the time for India to say that we will take all precautions like social distancing and PPEs but we will work extra hours and bring back our economic growth.
04. You have been an inspiration to one and all across the borders when it comes to technology, business and mentorship. Many start-ups were born taking inspiration from you, and even you have been involved in funding and guiding the start-ups. Do you feel that we, as an ecosystem, have done enough to ensure start-ups don’t fail?
We have obviously not done enough. The success of a start-up depends on how differentiating the idea is; how receptive the market is to the idea; how competent the team is; how value-based, hardworking and austere the team is; and, finally, how lucky the entrepreneur is. I am convinced that luck plays a big part in any success. Louis Pasteur put it well when he said, “When God is shy to announce His presence, He comes in the form of chance!” However, he also said, “God favors the prepared mind”. That is why other parameters that I spoke about matter before luck smiles on the entrepreneur.
There are many bottlenecks to the success of an entrepreneur that we have to remove in India. We have to improve the quality of our education system and improve talent availability. We have to improve domestic money flows in to the VC system. We have to make the VC system much easier to operate in India. We have to make India more hospitable for people from advanced countries to visit us and stay here. We have to reduce friction to business from our governments. We have to reduce delays in supply chain. We have to reduce harassment of small firms by low level functionaries. And, we have to eliminate unreasonable laws.
05. What is your take on the current government’s schemes and benefits for the start-ups? Are these enough or other necessary measures need to be taken?
My simplest solution to encouraging start-ups is to leave the start-up ecosystem – entrepreneurs, VC companies, legal firms helping start-ups, accounting firms helping start-ups and other firms helping start-ups – completely free with zero intervention from the government for 10 years. No taxes, no hassles by bureaucracy, and no harassment by customs officials and factory inspectors. These entrepreneurs must be allowed to do whatever they want as long as it is ethical and legal so that start-ups can succeed. They should only be measured by the number of jobs created by them, the median salary of the company, and per-capita exports in US$. The tax on them should be among the global lowest after the first ten years. If you remember the software industry and our beauty industry (Miss World and Miss Universe), this is exactly what happened to these industries and they came up well. This is an experiment worth detailing, improving and trying.
06. Any interesting start-up incident or story that touched your heart? If so, please share with us.
I do not remember any incident but I can tell you some of the exciting people with whom I have worked. These are extremely well educated and value-based individuals. I have an entrepreneur from Wharton who has founded Hector Beverages, a soft drinks company, which produces Paper Boat. I have a Ph D from MIT working on an inexpensive blood testing mechanism for the global market. I have a Ph D from Johns Hopkins who is working on a new model of education. These are very exciting ideas.
07. You have invested in a few start-ups and interacted with thousands of them. What best do you feel about the Indian start-ups and what not that they need to fix?
I have realized that a disproportionate part of the time of our entrepreneurs is spent in solving non-revenue related issues – talent hunting, office building, getting electricity and water, getting approval from municipalities, and handling the tyranny of factory inspectors. Second, today, the market is a lot more competitive than what it was during my time. Therefore, it takes 10 to 12 years before they can see profits.
Good quality talent is extremely difficult to get. The quality of the available talent is pretty poor. The expectation of our youngsters from their companies is unrealistic. Prices for rental have shot through the roof. In 1980, you could get a pretty decent two-bed room house for Rs.2000 per month. Today, the same costs Rs.30,000 to Rs.40,000 per month. In 1980, we could get a good software engineer for Rs.1,500 per month. Today, the talent you get for Rs.30,000 (more than 16 times the salary in 1980) per month is generally of poor quality. The inflation in India in terms of urban living and urban salaries has been about seven-eight percent year-after-year during the last 40 years. This is high particularly for those start-ups that focus on export markets which have a lower level of inflation.
08. ‘Aatmanirbhar Bharat’ and ‘Vocal for Local’ – the two prominent missions of the government. How can corporates and consumers work towards achieving this as there lies several gaps in between?
The old Indian idea of a country resorting to import substitution and producing from nuts to ships internally failed miserably, led to the disaster of 1990, and was rightly abandoned. Self-reliance in today’s world is the ability to export enough in the global market at the best prices so that you can import what you need from the global market at the cheapest prices if your country does not or cannot produce it at the global best prices. To do this, we have to follow what David Ricardo said more than 200 years ago – identify, strengthen and compete on your competitive advantage in the global market. So, India has to recognize its competitive advantages, create factor conditions to improve them by leaps and bounds, compete in the global market, obtain a major share of the global market in these areas, enhance our export to at least 35-40 percent of our GDP, and import what we need. That is exactly what successful countries have done.
09. A businessman, philanthropist and an investor. How do you balance your roles? What keeps you up and running with such enthusiasm even today when most people either retire or plan their retirement?
I do not believe in bringing my work home. I am of the opinion that office is for work and home is for spending time with your family and for recharging your batteries. I did not mix the two until this COVID-19 pandemic came along. I have an excellent family – my wife, my children, their spouses and grandchildren. I love spending time with them even though it may be through Zoom or Facetime these days.
I believe I am an average person with average capabilities. I believe in high aspiration, discipline, hard work, time management and high productivity and quality. My hope is that India would become a nation where the poorest child in the remotest village from Delhi would live with reasonable access to education, healthcare, nutrition, shelter and a hope & opportunity for a better living for itself and its progenies. Whatever little I can do through my helping entrepreneurs in achieving this objective is what wakes me up every morning and keeps my enthusiasm alive.
10. What keeps you engaged & motivated? Tell us about a day in your life.
I have already answered the first part of your question. Let me come to the second part. I get up around 6.30 am, read my on-line newspapers from India and abroad. I also handle my mail. Then, I have my bath and breakfast. I walk for half an hour in my small garden.
Generally, my workday has several Zoom calls since I have been homebound since March 10, 2020. These calls refer to Catamaran issues including reviewing the progress of our VC investments, JVs, public investments and organizational matters. Sometimes, I have a lecture to prepare and to deliver.
I have my lunch around 1 pm and sleep for 60 to 90 minutes. I restart my Catamaran work or my board work (I am on several boards abroad) or I start preparing for my speeches or I deliver them. I have my dinner at around 8 pm and sleep by 9 pm.
11. Can you share about your favourite books, gadgets, movies, food/cuisine and travel destination?
I believe in reading – popular science, mathematics, computer science, philosophy and economics. I spend an hour a day reading a book in one of these areas. Most of my reading these days is on Kindle on my iPad. Right now, I am reading an excellent book on Economic Policy by Dr. Vijay Kelkar and Ajay Shah. It is called ‘In service of the Republic – The art and science of Economic policy’. I would suggest to every one of the CEOs to buy it and read it.
The second book I am reading is ‘The Art of Doing Science and Engineering – Learning to Learn’ by Richard Hamming, a professor at the US Naval Post Graduate School in Monterrey, California. It is about thinking and how great scientists and great engineers think and find solutions to problems. He is an out-of-the box thinker. Let me quote a statement from him about teaching. He says, “Teachers should prepare the student for the student’s future, not for the teacher’s past”. Those of you who are engineering and science enthusiasts among the audience may want to buy this book online and read.
I am a technology buff. My son introduced this habit to me. I love gadgets. I buy the latest gadget in every area. Last week, I bought Beosound 2, a Google-assistant enabled speaker from Bang and Olufsen.
While doing my work, I listen to music. I like all kinds of music – Western classical, South Indian classical, English Pop, Hindi film songs, Kannada film songs and Kannada Bhavageete. Sometimes, I watch TV shows. My favorite ones are science shows and sitcoms. Sometimes, I watch online Kannada and English plays.
I am a vegetarian. I am moderate in my food habits. I like Indian, Italian and Mexican food.
My favorite city is Mysore & Paris.