Clean. Simple. 100% Finance.

Archive for the ‘Management’ Category

Understanding ‘Conflict of Interest’ is need of hour in India

In Banking, corporate governance, fraud, Insurance, Legal, Management, Uncategorized on December 23, 2018 at 3:57 am

100shares

I was not really shocked to read another issue of conflict-of-interest for Bank of Maharashtra after Chanda Kochhar case at ICICI Bank. Conflict of interest issues has been discussed for several years in news and media. Banking than insurance industry have more examples to such nature, though in the government we have seen examples where lawmakers have taken up roles resulting in the conflict-of-interest. This is because Insurance regulator in India has mentioned it specifically in Corporate Governance Guidelines that Conflict of interest and nature of interest should be defined, yet banking regulator is lagging behind. RBI guidelines indicated that there should be no conflict of interest but do not indicate ‘how to identify and take actions’ for such activities. Conflict of interest arises when a board member takes the strategic decision considering personal interest. Board members of all significant MNC’s in the global market place have to sign either ethical framework/Compliance guidelines or follow conflict of interest policy.

There is a desperate need of Conflict of Interest policy for Indian banking system. Ideally, it should be at all levels in the organisation  from managers to board members. For example, In some cases in India, bank managers are receiving more incentives than their salaries for selling insurance policies which divert their attention from selling banking products. Technically, insurance policies are sold by both banks and insurance companies while banking products are not even sold by their core employees, why? Why not introduce reverse bancassurance where insurance companies can also offer banking products. The reason is ‘KYC’. Some practitioners argue that banks know their customer more than insurance companies. Others argue that in a bank, customers receive money, while in insurance companies they pay money. The differentiation in the quality of agents between banks and insurance also sets the increased expectations. In a bank, a top MBA graduate joins as manager while in insurance companies they do not pay such salary at managerial level. Instead, I saw a reverse trend of hiring graduates in banking following insurance industry to lower the cost.

How do banks promote their products when half of the time banking executives spend on selling insurance? They cannot ignore banking services but what they can easily overlook is controls. Another conflict of interest arises related to favoritism by CMD of banks or CMD of insurance companies: who can question them. In case of banks, it could be a case of favouritism in granting new loans or extending the existing loans which may, later on, turn as NPA while in case of insurance companies, it may be a market investment to gain personal benefits.

What is a Conflict of Interest Policy?

A Conflict of Interest policy can be prepared by the Corporate legal department and must be signed by all board members at the first organizational board meeting. It should be mandated that no board member should be allowed to serve without signing this policy. It includes fiduciary duties (considering organizational interest for financial and legal matters), the duty of loyalty (putting board responsibilities for outside interests), and duty of confidentiality ( keeping how key business will deal with private information). Moreover, it should define the key definition about ‘interested person’ and ‘financial interest,’ duty to disclose and procedures for addressing conflict of interest for board and individuals. The process of deriving reasonable cause to show the violation of conflict of interest should also be discussed. Some questions like how compensation of director will impact the board quality of discussion. There is a requirement of the annual review of conflict of interest policy, the disclosure of outside interests and re-signing of the policy.

Worldwide, Conflict of Interest issue is not resolved in good faith. Recently, I have met Group CROs and senior executives of German Insurance Companies and regulator. The regulatory board in Germany and their staff have to sign an ethical framework compulsorily. The logic behind signing an ethical framework is that every employee in the organization takes the responsibility of disclosure of conflict of interest. This also depicts their promise of not engaging in any such activity. Thus, conflict of interest can be reduced by promoting a cognitive risk culture where everyone understands the risk of conflict of interest and their associated role in dealing with the risks.  India may follow German market for good practices to deal with the emerging issue of ‘Conflict of Interest’.

comments welcome !

Advertisements

Why Management practice is not practical?

In Management on July 24, 2017 at 5:31 am

Practice is a practice that is different from theory. Many of us argue that learning concepts are distinct from its application during practice. In this blog, I will discuss three arguments of practice discussed by academics, industry leaders and my own observation.

Theory and practice

Idea 1: Manager as coordinator and integrator

An academic will define coordination, and integration would be as good management practice for a manager. It does not matter how many hours an employee work. What is important – how a manager is integrating the unique abilities of its employees to achieve the goal. In fact, the success of a manager depends upon how he/she turns people talent into performance. In Physics, a force is called work when there is a displacement of the point of application in the direction of the force.

Idea 2: A Manager as ‘implementer’

Jack Welch (CEO, GE) believed to be a gatekeeper in transmitting the ideas to his managers by choosing right people, rightly compensated and channelizing their energy to implement the idea.

“If you pick the right people and give them the opportunity to spread their wings—and put compensation as a carrier behind it—you almost don’t have to manage them.” – Jack Welch

 Idea 3: A Successful Practical Manager

 In fact, when I returned after completing my PhD from University of Edinburgh, I found that practice requires impractical people. I argue that a short term thinking believes in practical management while a long-term approach leads to a sound management practice. Good management practice is not possible until senior management reward creativity by rightly compensating managers and establish an open and proactive culture.

Contrary to this, a new word for practical is unethical. In large organisations, rules and policies are set by the board of directors. This led managers to reject those projects which fall out of the scope of company’s policies. A practical manager will manipulate the language and may accept all the projects. He may show higher sales in short run and receive the bonus. In long-term also, that manager will gain as the consequences of accepting the projects will be faced by his/her successors. Very soon, rules will remain in paper and manipulation of language in a contract will become management practice. Competitors will also follow and may make it as the industry norm. If everybody is making some mistakes, it is nobody’s mistake.

P-O-L-C framework of management supports managers to respond to the challenge of creative problem solving.

Is something missing in this framework. I observed that management practice in general substantially differ from practical management. Ethics and risk management are important for managers. Ethics support in the decision making of what is right and what is wrong while risk management guides on the consequences. Surprisingly, both are not included in management curriculum at many places considering them as not practical. Planning, organizing, leading and controlling in normal market situation is easy however, it is very challenging in turbulent markets. We need reformist, leaders, veterans who can think, act and implement good management practices.

Corporate practices are full of such issues and to understand these practices, one has to be in business to learn how to do business. Another example could be word ‘professional’. Professionals are the people who are subject matter experts, have undergone specialised training and have capabilities for independent decision making. They are expected to demonstrate ‘ethical code of conduct’. With my current engagements in an Asian market. I found that many people talk about:

“Now a days’ doctors and lawyers have become professional”

I asked them that these doctors and lawyers are professionals from a long time, what’s new about it. They were pointing out the wrong definition of professionalism. From professionalism, they mean ‘unethical’. In this situation, everyone bears the losses due to some short-cuts are taken by others. Management as a practice will not survive until we don’t avoid unethical decision making under the umbrella of being ‘practical’.