Castles of Sand: Here Today, Gone Tomorrow

This article was published in tehelka.com’s ‘Personal Histories’ column with a different title in their 27 Sep 2014 issue .


It happened almost overnight. A company that had been built brick-by-brick over 90 long years, a firm that employed 85,000 people in over 80 countries, collapsed in a few short weeks due to the actions of one man. Just one man’s greed for higher annual bonuses destroyed a veritable institution in the world of accounting and consulting. Arthur Andersen.

It was a bolt from the blue for us in India. The unthinkable had happened. We had an acute sense of history being made, and being a part of that history. Only, it was the wrong kind of history. All of a sudden, tens of thousands of careers were at stake. Bright young people who had trusted their future to us were left in the lurch. Though the Indian arm was considerably smaller than some others, we nevertheless were a microcosm of what was happening worldwide.

In our midst were some who had married recently, and others who were expecting little ones. There were those who had taken large loans for buying flats. Among the older colleagues were some who had leveraged themselves to educate their children abroad. Across the board, people were desperately dependent on their pay cheques. If Andersen ceased to be, where would they go at this terrible time? In the wake of the 9/11 attacks, the job market was at a nadir.

All this had come to pass because of one selfish man sitting in some office somewhere on the other side of the planet. While India was at last beginning to enjoy the fruits of globalisation, we had the dubious privilege of experiencing the perils of it — first-hand.

The first decade of the new millennium was a terrible one for us. The 9/11 bombing was followed by Andersen’s collapse. As if that were not enough, along came the sub-prime crisis. These three calamities had two threads in common.

First, all three were results of warped minds and dark emotions — be it greed, anger or plain vindictiveness. Second, none of them had anything to do with India, but their impact was felt by us in full measure. Globalisation had truly arrived.

The aftermath was traumatic. The most difficult thing I have had to do in my three decades in the corporate world was to look a colleague in the eye and tell him that he no longer had a job. Knowing fully well that he and his wife were expecting a child in two months, and she had just quit her job in anticipation of the bundle of joy.

Difficult times also bring out the worst in some people. Accusations and barbs began flying indiscriminately. From melodramatic whispers like ‘he is snatching food from my son’s lips’ to more unmentionable ones.

But alongside them were others who showed their true worth during crisis. They worked doubly hard, and took voluntary pay cuts so that some of their colleagues could keep their jobs. Among them were senior people who took such deep cuts that they took home less than their juniors did.

When the dust finally settled and each of us found new equilibriums in life, some of us found that our perspectives had changed. We were now acutely aware of innumerable factors far outside our control that could wreak havoc on our personal and professional lives. We couldn’t avoid them, and we could do nothing to combat them.

The greed of Wall Street could lay low innocent victims in Chennai. Men like Bin Laden could destroy the lives of nameless folk in Hyderabad and Pune. Events on the other side of the planet could bring things crashing down in India. There was only one defence — to be prepared for the unexpected.

The lesson I take away is that in our new interconnected world where unseen strangers can yank the carpet from under our feet, our best allies are prudence and humility.

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Thin LInes

This article was published in Economic Times Corporate Dossier on 12 Sep 2014.

RV Raman, former head of KPMG’s Consulting Practice, tells five stories from his formative years.


1. Grab your chances.

The battery of tests and campus interviews had finally ended, and I had my first job offer from Tata Motors, a coveted prize for mechanical engineers in the early 80s. Just as I rose and shook hands with the panel, they popped me a question. Did I want to be a mainstream shop floor Graduate Engineer Trainees like many before me, or did I want to join the new Management Services Division (MSD)? The folks at MSD, they said, did computer programming; a new area where the waters were yet untested.

It was in an era when ‘computer science’ and ‘information technology’ hadn’t entered the Indian lexicon. I had a snap decision to make. I could take the tried and tested route to the shop floor, and take the well-treaded path up the organisational ladder. Or, I could risk striking into a new territory.

The thrill of telling a machine what to do was irresistible. I chose MSD. It was a decision I never regretted; a choice that took me into software, and then into management consulting.

Unexpected chances were thrown my way twice more in my career. I grabbed them. I’m happy I did.

2. Never stop adding skills. Reinvent yourself.

“Don’t rest on your laurels,” we were told at Tata Motors. “Opportunities will be endless if you continuously add skills.”

It was advice I took literally. Only, I didn’t limit it to software. Two years later, I realised that learning more software languages was incremental and insufficient. I got myself an MBA from IIM Bangalore and entered management consulting, where we advised clients on IT choices they needed to make. Software was a tool that made operations efficient, but to do that you had to understand all manner of processes – a whole new set of skills for me to acquire.

Gradually, I figured that process improvement was not an end in itself. Clients wanted to maximise shareholder wealth. For that, IT and processes had to blend with people, strategy and M&A. To my technical skills, I now had to add an array of soft skills. It was not easy, but the rewards were disproportionate to the effort.

In search of that elusive meaningfulness in life, I am now reinventing myself as a part-time writer and a teacher. Only time will tell how rewarding this iteration will be.

3. Culture is set at the top

When we merged Arthur Andersen’s consulting practice with KPMG’s, we figured that organisational culture was the key to our continued success. Meritocracy was one of the cornerstones. People had to be rewarded for their contribution, and not for their proximity to leaders, or to the optics of working late hours. But no amount of saying so had the required impact.

We therefore introduced a mechanism for promotions that is now an industry standard. Every six months, Partners and Managers (i.e. the people running the practice) locked ourselves away for two days, where the performance of every consultant was discussed threadbare before promotions and ratings were decided.

There were two instances where my view of a consultant’s performance was diametrically opposite to the view of their managers. Despite several iterations, the gaps couldn’t be narrowed. I was faced with a choice. I could overrule the group’s decision as Partners often do, or I could let the process I had created determine the outcome.

I chose the latter. The consultants in question – both brilliant guys – were not promoted, and left the firm. But the culture of meritocracy was firmly established.

4. The importance of humility

“The day you lose your humility, you lose your soul,” my father had said early in my life. It was philosophical advice that meant little to a young boy then, but it was to come back strongly in later years.

It is easy to let success go to the head when bright young consultants begin addressing CEOs and Boards before they hit thirty years of age. It becomes even easier at 35, when you call industry captains by their first name. It’s a heady cocktail that makes you think that you know all there is to know. You have arrived!

Nothing could be further from the truth. Once hubris sets in, you stop seeing and listening. Your glasses become coloured, and your ability to understand your client’s problems gets impaired. You can no longer advise dispassionately, and you fail as an advisor. Humility is your insurance.

Once every year, I stand in a corner at Mumbai airport’s arrival area and watch the young and the middle-aged hurrying about, wrapped in their self-importance. It helps me keep my feet on the ground.

5. There is a thin line between ambition and greed

Consulting attracts not only some of the brightest people, but some of the most ambitious ones too. Sometimes, ambition can turn into something ugly. Not very long back, a successful and respected consulting Partner crossed the line. It began with a small confidential document being shared with an outsider. One thing led to another, and soon, the Partner’s name was on the slippery slope.

While the breach was not illegal, it was unethical nevertheless. What was shocking is how the Partner, with so many years behind him, convinced himself that he was doing nothing wrong. He wanted to add a zero or two to his wealth.

This was shockingly similar to the Galleon Hedge Fund case, where highly respected executives couldn’t resist temptation. They deluded themselves into doing things that interns in their office would have no trouble seeing as illegal. They have paid a steep price.


The original article (pdf) from Economic Times

Sketch of a corporate fraudster

Here is an interesting infographic from Canadian Business that is based on KPMG’s profiling of the corporate fraudster.

Corporate Fraudster Profile

Source: canadianbusiness.com

 What I find interesting is that:

  • 96% of fraudsters are repeat offenders
  • All but 18% of fraudsters are in the management layers of organisations
  • Most fraudsters work/collude with others inside or outside their organisations to perpetrate the crimes

These confirm beliefs some of us in corporate India have long held.

 

 

Holmes or Poirot? A difficult choice.

Holmes or Poirot? I just can’t choose between the two. One goes by physical evidence and the other by behaviour and motivations. Both have idiosyncrasies that could initially be annoying, but they grow on you as you read more of them.

What is more interesting than the creations are the two authors themselves. Here is a contrast that may explain the different natures of their creations.

  • Agatha Christie, in her own words, had a very happy childhood in a well-off family. Conan Doyle’s childhood was very different. His happiest moments were when he wrote to his mother from his oppressive boarding school.
  • Christie was home-schooled and had a governess, whereas Doyle learnt his ropes outside in the world.
  • Doyle travelled extensively, including to the arctic and Africa. At least in the initial years, Christie was mostly in England and France
  • Doyle was a practicing doctor, while Christie was a pharmacist.

To me, this seems to explain why Holmes was an outdoors, vigorous, physical evidence detective, while Poirot was more of the indoors, armchair variety who relied mostly on soft aspects. The characters reflect their creators’ lives.

Their training seems to explain why Watson was a practicing doctor, while Hastings was an incorrigible romantic.

PoirotHolmes

Smartphones: A tool for insider trading?

In today’s wired and wireless world, it is impossible to stop information from flowing. Not only is it impracticable, it is also getting increasingly difficult to track down information flows after they happen.

Rajat Gupta was convicted on the basis of a telephone call he made immediately after a board meeting. Sixteen seconds after a board meeting ended (which Mr Gupta participated by phone), he is said to have called to Raj Rajaratnam at the Galleon Group hedge fund. A $5 billion investment by Warren Buffett had just been approved in the Goldman Sachs board meeting.

Two minutes later, Mr Rajaratnam ordered the purchase of one lakh shares of Goldman Sachs. A minute later, he ordered another 2.5 lakh shares. Total outlay? $43 million.

This conviction was possible because of phone records.

But what if no records were available? What if the information transmitted was indistinguishable from trillions of data packets traversing the web every hour? What if it had not been a phone call?

That must be happening today. Somewhere? Everywhere? In all probability, lots of price sensitive information is being transmitted over the web using devices like smartphones. With phone apps proliferating and smartphones becoming ubiquitous, it will not be easy to nail the next conviction for insider trading.

On its part, SEBI is beginning to take note of this issue. A recent article in ET spoke about SEBI taking ‘stringent action to check the risks of new smartphone messaging services’. The article goes on to say this:

Traders, possibly working as a cartel, are using these platforms for insider trading, front running and other manipulative activities, said market sources. For instance, a market operator buys a stock and then leaks price-sensitive information about it on instant messaging and social media platforms, leading to the stock running up sharply, at which point the operator exits his positions with huge profits.’

This is going to be an uphill battle. SEBI can’t keep pace with the growth of apps and smart devices. They may start thinking about ring fencing trading room environments and putting in place data monitoring mechanisms. But with encryption, cloaking and newer ways to ensure anonymity, that will not be easy either.

Perhaps the best way is for all capital market regulators around the world to get together to find technological solutions to track and log information flows that can be used for subsequent legal proceedings.

ECB: Risks of a negative interest rate

The European Central Bank has taken some radical steps and entered, as commentators have pointed out, uncharted waters. While policy makers genuinely believe that their actions will help revive Europe, there are significant risks to the banking sector, and therefore to the economy.

Europe’s track record in financial matters has not been stellar. The concept of a common European currency, which was debated for years, was flawed in its implementation. While innumerable people spent countless person-years designing it and defining norms for countries entering the union, they left largely unaddressed the aspect of countries leaving it – a fundamental design flaw. Countries are bound to have their ups and downs. An exit clause was essential.

One hopes that ECB’s drastic slashing of interest rates (including one of them turning negative), does not have unintended consequences. Negative interest rate essentially means that a bank has to pay the borrower to borrow – a difficult idea to visualise.

One cannot draw comfort in what economists say either, as there will always some support for all kinds of policies, however risky they may be. One just has to look at what economists said a year or two before the financial meltdown in the US.

Viewing this new situation from a bank’s viewpoint, one is left wondering how banks would remain profitable when spreads are so miniscule. How does a well-run bank meet its costs, fulfil the expectations of policy makers, and meet shareholder expectations? The first knee-jerk reaction would be to cut costs.

Cutting costs brings tremendous pressure on the fundamental operational aspects of a bank, including credit appraisal and asset evaluation. And with compressed spreads, banks will have to lend more than before to merely to stay afloat. This means that more work will need to be done in less time, and with lower budgets – a perfect recipe for asset quality deterioration .

And with miniscule spreads, it will not take very many defaults to sink a bank.

Let us hope that this come to pass. We can ill afford another financial crisis, this time on the other side of the Atlantic.

Crossborder flows are hurting India

A look at a report published by Global Financial Integrity in Dec 2013 confirms the explosive growth of one aspect of white-collar crime in India – Illicit Financial Flows.

Global Financial Integrity defines illicit financial flows as “ … cross-border movement of money that is illegally earned, transferred, or utilized. These flows generally involve money earned through illegal activities such as corruption, transactions involving contraband goods, criminal activities and efforts to shelter wealth from a country’s tax authorities.”

The chart below illustrate the spread of this cancer:

illicit flows from india

Illicit financial flows from India have grown ten-fold in the nine years under consideration. When the GDP growth has been in single digits, these cross-border flows have grown at a CAGR of 30%.

In the last two years (2009-2011), it has grown at a whopping 297% – a tripling in two years.

An obvious question that comes up is whether this is a feature of developing countries, which have weaker controls and higher moral hazard.

Global Financial Integrity’s report suggests that most developing countries suffer from this malice. However, with a ten-fold increase, India beats China, Brazil, Mexico, Russia, and pretty much every developing country by a handsome margin, except South Africa. The rise in India has been five times that of China, ten times Mexico and three times Brazil.

india's share

It appears that we have also outpaced the rest of the developing world in this regard. Our share has more than tripled from 3.9% to 12.2%.

This is perhaps a testimony to how much our business & political environment has been eroded.

Source: Global Financial Integrity report ‘Illicit Financial Flows from Developing Countries: 2002-2011

Fraudster: The Novel

White collar fraud is not new to India, but the scale is.

The spectacular growth India has enjoyed in the past decade has driven the stakes higher than ever before, and has had an unintended casualty – ethics.

The growth that brought a flood of opportunities and created entrepreneurs has also enabled scam artists. Businessmen who had nothing to do with power generation, for instance, try to set up power projects. Colleges sprout on vast acreages in the middle of nowhere, with few students and fewer teachers. Warehouses and retail space sometimes serve as facades for real estate plays.

In this occasionally unholy dash, aspiration sometimes outpaces ability, and men resort to murky means. Access to funds and approvals become the tallest hurdles to profiteering, but some enterprising ones find ingenious ways around these obstacles.

In this, they are abetted by another consequence of our dramatic growth – greed. Men who held staid jobs for years suddenly find themselves as gatekeepers, controlling the flow of money and approvals. Some fall to temptation.

Fraudster is a story of the black sheep of corporate India.