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PSUs: A better half or worse

In Banking, corporate governance, Insurance, Legal, Risk on February 17, 2018 at 4:58 am

PSUs.jpg

Indian PSU’s such as Life Insurance Corporation (LIC) is no doubt a better half of Indian Insurance Industry with total assets of USD 340 billion. Following the leaders from China, Germany, and France (ranked 1st, 2nd and 3rd in Forbes list of Global Insurers), LIC is ranked among top 50 global insurance companies though still unlisted in a global stock exchange where almost all large insurance companies are listed. On the other side, there are several worse halves in Indian financial industry. Post 2007-2008 crisis, bad NPAs in banking and insurance frauds have pushed the liquidity position in Indian financial industry and raised the debates over the inefficiency of PSUs. Almost half of the premium from general and health insurance business in India comes from four large Public Sector General Insurance Companies and more than half from one single public sector life insurance company (LIC). The recent initiative of the government to merge the three worse halves (National Insurance Company, United Indian Insurance Company, and Oriental Insurance Company) to make one better half is one attempt towards providing them strategic direction. In this blog, I am going to discuss what went wrong with these PSUs and how they became the victim of resistance to change (Senge, 2014) and the way forward to become the better half.

Indian PSUs lived on their today with forgone tomorrow and not able to adapt to global practices. For example, when a company is listed in NASDAQ, it has to comply with several rules particularly implementation risk governance and risk management at the holistic level. Implementation of Enterprise Risk Management (ERM) and risk governance takes years to set up infrastructure, create an eco-system for good risk culture and monitoring the risks. Indian PSUs, in general, face several challenges to follow these global practices due to lack of tone from the top.

Challenge 1: We don’t have time for this stuff

After decentralisation in 1997, PSUs had to work hard to remain their market share from aggressive private sector market players. The race of cut-throat competition looks never ending in which PSU adopted a defensive approach. The PSUs senior executives were busy in expansion or retention of market share and others in managing the business operations. Practically, the issue was who has time for risk management in growth-oriented markets. In fact, if the government want them to follow risk management, PSUs need time for reflection and practice.

Challenge 2: We have no help

 If PSUs even accept that implementation of risk governance and risk management is important to maintain their global position and part of the requirement to maintain legitimacy in the international market, who will help them. The PSUs in last few years attempted to execute ERM with the support of some market consultants but found the issues of inadequate coaching, guidance, and support.

Challenge 3: This stuff is not relevant

 PSUs are unaware of the benefits of these global practices due to lack of exposure. Senior executives ask these questions: What I will achieve if I implement risk governance in five years? They are also unaware about why new efforts and learning capabilities are relevant for their business goals. In fact, they face several challenges related to fear, anxiety or concerns for exposure what if the implementation of ERM does not derive any value? This challenge is more related to the negative assessment of the problem.

Challenge 4: We have the right way/they don’t understand us

 PSUs are facing the challenge of overwork. Before decentralisation of 1997, the employees used to work with comfort (10 am to 5 pm) and after entry of private players in the insurance industry, the work pressure suddenly starts percolating. Executives are working day and night with no great appreciation and still called as worse half. New recruitments have been stopped and with under-staffed and over worked departments, the executives are responsible for not only to regain the market position but also to compete in the global market. How is it possible? On the top of that, now the new expectation of adapting ERM and risk governance. Who has time for this stuff? They have the right way but nobody understands them, they have given their whole life for the development of the company but not instead of recognition, the divestment is the worst idea.

Challenge 5: We keep reinventing the wheel

PSUs arguments are based on the premise that okay if world’s top 50 insurance companies are implementing ERM and so we should also implement it. Tell us how they have done it. Why we keep reinventing the same wheel which has been discovered by so many organisations ignoring the current research. A research from Harvard says that there is no one way to implement risk management in an organisation, it depends on the context so it would be different for all organisation. ‘One size does not fit for all’ holds true in case of implementation of ERM (Mikes & Kaplan, 2015).

What may work for PSUs?

Certainly, PSUs need profound change to overcome many challenges they are facing to adopt global practices. Can a short-term training be helpful to PSUs in overcoming those challenges?

Daniel H. Kim, co-founder of the MIT Center for Organisational Learning, found major limitation in the way traditional companies think. His findings revealed that companies would like to mention individual factors critical to success which remain in isolation rather seeing them interrelated sets. For example, companies try to make top 10 risks list or critical factors hampering the achievement of organisational objectives without thinking the key ways in which the risks are related to each other. Then next issue is the companies want to set priorities. He found that list based approach has several problems such as ‘Divide and Conquer Strategy’ where the people do not consider important intersections among different factors. He believed that System thinking and organisation learning can put a theory in place how managerial action can resolve the problems. These learning can be put in PSUs in the current context.

To improve PSUs current position, they can form a group along with private insurance companies to learn risk management at the industry level. My previous two blogs on ‘do Indian Insurance Market need a Professional CRO forum’ and ‘role of CRO Forum’ explain the concept in detail.

See ‘https://finguru.org/2016/01/18/do-indian-insurance-market-need-a-professional-cro-forum/

See https://finguru.org/2016/02/26/role-of-cro-forum-in-india/

The major questions PSUs need to ask before engaging in learning approach:

Why is the change required? What went wrong?

Who wants change to happen? What results are expected?

How the change will happen and who will support it?

Who will be involved and what is our personal contribution and gain?

Peter Senge, Assistant Professor at MIT, believed that to make these learning efforts sustainable, the efforts should be so designed that each effort could learn from each other. A lesson from several kinds of literature for PSUs is: “Don’t try to learn in silos, learn together, learn from others and share learning. Start from small, create trust, set the example, understand interconnected issues, and then resolve critical issues. This way, PSUs can resolve many issues at one go”.

 

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How governance works in practice !

In corporate governance on April 25, 2017 at 11:28 pm

 

Corporate-Governance

Establishing good corporate governance is a new desired objective for corporates. I am curious to explore how it works in practice. From institutional theory perspective, large institutions should become isomorphic over time. Another contradictory perspective is ‘how institutions differ from each other’. Simply put, there are three types of institutions: shareholder-focused, management-focused and stakeholder focused based on three prominent theories: agency theory (focus on shareholder), managerial hegemony theory (focus on management) and stakeholder theory (focus on stakeholder) respectively. I found issues with all three types of corporate governance during practice. My key question is: What should be the focus of Corporate Governance during practice?

Management-focused

When CEO has control over all management information and he/she reveals the minimal information to board. In such case, CEO has power to influence board decision making.  Enron is an example for this type of leadership. The major issues for Enron bankruptcy were lack of good corporate culture and adherence to poor corporate governance standards. When a high-performance company is not thinking about its employees’ welfare and development rather it conceals the frauds/misconducts in the race of the achievement of targets, the outcomes are different. This type of company often does not believe in investing in risk management. Several projects are delayed and from CEO to workers, all are working hard to deliver projects on time. Workers are paid overtime salaries, executives enjoy high bonuses, celebrations take place, awards are won, agents receive trips to Australia and Thailand and shareholders are provided high dividend. Is this approach good?

Shareholder-focused

In another company without board approval, even small decisions are not taken. All information is revealed to board, practically board is flooded with ambiguous information and clueless about what to do, how to do with a notion to safeguard their own position. Employees are indulged in monotonous work for decades, tired of filling same forms, similar reports and same weekly meetings with boss. Shareholder value maximization is the major agenda. Royal Bank of Scotland (RBS) is a recent example for this where decision for investment in IT is side-lined for years to maximise profits of shareholders in short term. In this situation, board is not concerned for management issues rather they want getting thing done. Executives work as agents for shareholders and their representative board. Delay in decision making or no decision making is one of the challenge of such organisation. To implement a single decision which is a non-priority issue for board may take years in execution. Operation losses, errors and delays become deep rooted in such culture. Adaptation, innovation and change in process and systems become very challenging for implementation.

Stakeholder-focused

In my research on large institutions, I observed that organisational values are deep rooted in large institutions. Plethora of new management approaches have been adopted to provide high value to stakeholders in short term and long term: Total Quality Management, Employee empowerment, Continuous improvement, reengineering, kaizen and team building. Value based management (VBM) provides value to all stakeholders upon which entire metrics can be built. In this method, value of company is determined by its discounted cash flows and companies like to invest capital at returns that exceed its cost of capital. VBM has influenced companies’ major strategic and operational decision making. Now my questions arise: what is the long-term value of communication, informal meetings, networking, and risk management? Fraud could result due to operational negligence and it may cost first year $500. It can easily be ignored by board and management as it is not worth value discussion. Next year, it becomes $5000, it is discussed within management. Third year, it is deeply penetrated and costed $500000. Now board, regulator, media, credit rating agencies, shareholders, customer and you name any other stakeholder suddenly become worried. It shows, values are not only financial in nature rather, values are ethical and professional. It also guides dos and don’ts.

I believe in these three types of organisations that there is misalignment between management and governance. If management performance is simply not evaluated based on the targets given, rather than it should also be based on following ethics, corporate governance code of conduct, good organisational culture, employee and team development, a part of the problems can be reduced. Another approach could be rather than giving annual targets and predicting long term targets, company can set vision for achievement of long-term goals and break down it in yearly targets with greater degree of flexibility or believe in continuous learning. Remember, vision without implementation has no value. Share goal, collaborative working and team efforts can be linked to performance in new era where governance and management will work together to achieve organisational goals. I feel still many questions remain unanswered. Kindly share your thoughts what you feel as good governance during practice.