Clean. Simple. 100% Finance.

Archive for the ‘Management’ Category

Governance @ Distance

In board members, corporate governance, Finance, fraud, General, Management, Uncategorized on April 5, 2019 at 1:12 pm

CorpGov.jpeg

Transparency, higher commitment, and independence are buzz words for good corporate governance. The role of independent directors plays an important role in Corporate governance to keep an eye on the board activities to flag off non-promoter group issues. However, the challenge is neither the independent directors get appropriate compulsory training to understand their roles and responsibilities in an organisation nor the appropriate data promptly to act upon effectively. Board has a limited duration to understand and reflect on issues. Sometimes the independent directors are from different industries and are not able to understand the context and indulge in granularities, though, diversity of thoughts may add significant value. Governance at distance is often seen where the board chairman leads the discussion and independent directors often distant from reality less engaged in a discussion.

According to recent Board Practice Report by Deloitte Centre for Board Effectiveness and Society for Corporate Governance, almost 80% of board members think that their primary focus is on company strategy, 42% attributes risk oversight as important and 29% focuses on board selection. To sum up, strategy formulation, risk oversight and board selection are three important roles of board. In this blog, I will talk about the issues related to the first two.

In the current business environment, the markets are turbulent more than ever. World over, not only regulators, every stakeholder such as partners, and creditor are accusing board if anything goes wrong in governance. Social media and newspapers have abundant stories of poor risk governance. A board strategy cannot be the same in normal, turbulent and crisis situations. Strategic change has become important for companies. Punjab National Bank (PNB) in India has recently faced one of the biggest frauds in history, and within a short period, the company’s board needs to change the strategy of the company to address the crisis. Not only the fraud affected the PNB strategy, but it also impacted the strategy of other banks in India and the global market. The strategies perfectly working in normal market conditions may not work in crisis situation. Are companies’ board trained and prepared to handle how to change the company’s strategy in normal, volatile and crisis situations?

Post-2008 crisis, the role of the board in enterprise-wide risk oversight has become challenging. No specific training is provided to the board to refresh their knowledge on the subject. Many companies still don’t know what are their key risks and issues in the management of risks. Surprisingly, directors don’t know their roles and responsibility in risk oversight. Understanding the inter-connectivity of risk is the next big challenge, and a very few companies are able to link risk management with strategy and compensation system. How the board of directors perform their duty in overseeing the executive decisions and how compensation structures and practices drive an executive’s risk-taking. Many such questions need to be answered.

Let us understand the logic of why the understanding of risk is paramount for the board for effective corporate governance. Shareholders want a higher return for higher risk and vice-a-versa. One of the roles of the board is to define the risk appetite (the amount and extent of risk the company is willing to take as promised to shareholders) in the company. The informal approach of risk management will bring several surprises in the organization and may hinder the fulfillment of organisational objectives. To deal with the situation, the board needs to effectively oversee the organisation key risks holistically and disclose them to shareholder at appropriate times so that value at risk can be calculated. The only quantification of risk exposure will not suffice; the quality of risk-taking directly impacts the profitability of a company. Quality of risk profile also needs a significant attention. Balancing the risk while adding value to the organisation is only possible when risk management is well understood by board, implemented in a formal way and linked to the organisational strategy.

I strongly believe that the board should get a refresher course or a certificate course to carry out their duties effectively. Governance at a distance is not working. Categorization of risks in market risks, operational risk, and strategic risk has become bizarre and mundane.  Helicopter view of risk for oversight has become unacceptable as stakeholders want to understand what were the key risks of the organisation last year, whether risks are increasing or decreasing and the reasons behind them. Higher interaction and participation of the board by probing questions will certainly enhance the current state of governance. Higher engagement of the board is the key to good governance.

Advertisements

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 !

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’.