Saturday, October 25, 2008

Everybody loves a good bubble!

We had some great years in the stock markets, real estate, commodities market, and in finance. When the times were good we walked around with $$ signs in our eyes, when times became bad we blame the system, the politicians, the conservatives, the liberals and everybody in between. Of course we ourselves are not to blame; we are innocent bystanders!

Adding to the millions of home grown experts on the situation, I add my top 3 culprits:

1. We the consumer, small investor, the normal person on the street : We enjoyed the highs, always looked for better yield, borrowed more than we could afford, bought gadgets and homes we did not need or could not afford, travelled more than we needed to, and demanded more and more wages than were often justified. We invested in things we did not understand, we cheered when our investments brought us returns that were too good to be true. All these things add to the causing the bubbles we have seen in the recent past. All of us individually contribute to mass hysteria and we have to be cognisant of this.

2. Ideology without pragmatism: Complete belief that markets will correct themselves without any oversight, or the belief that an overly regulated markets will avoid bubbles and speculation are both absurd. There was enough regulation, and laws in all the major economies to avoid the blatant misuse of "financial instruments" but the regulators and politicians were asleep on the wheel. The same politicians, who claim capitalism and free markets to be the bane of society, are the ones who in countries like the US forced banks to loan money to subprime borrowers, or in countries like India regularly force banks to pardon loans to subprime borrowers. The human spirit should be free to innovate and experiment in order to grow, but there should also be an implicit understanding that there should be checks and balances to ensure that the freedom is not misused or criminalized.

3. Business without core values: Insurance companies, regular banks, investment banks, ratings agencies all started drifting from their core purpose and values. They all became companies with no other compelling vision other than "make money at all costs". And we all encouraged this behaviour. The problem with "make money at all costs" is make money for whom, the customer, the investor, or the employees?? Each has a different answer.

Swaminathan S Anklesaria Aiya of the Economic Times has published a well written article titled Who murdered the financial system? This article gives some insight into some of the causes of the muddle we are in, and rightfully suggests that for a few years we will remember the lessons learnt from 2008, and then in a decade or two we will be back to creating new bubbles. The unfortunate fallout are the retirees and the people who were just about to retire. But for the rest - as much as the present scenario is depressing it is good to remember that every bust is followed by periods of growth. So you gotta love the bubbles!

Tuesday, October 21, 2008

Curing an illness and killing the patient - What cures are you contemplating for your organization?

Being in a business in which no industry segment is more than 10% of our revenue gives me the good fortune to work with many different industries and to build professional and personal relationships with people across different industries.

Recently I was asked to attend a strategy meeting of an FMCG (Fast moving consumer goods) company. The Asia head of this company wanted to get an outsider perspective on the leadership and it's discussions in a time of slowing economy.

Even in this turmoil filled economy I continue to be an unashamedly free market capitalist. But the discussions at the strategy meeting felt hollow and incomplete. The whole conversation had all segments of the business concentrate only on the benefits (short term) to the share holders and ignored all the other stake holders in the company.

Let me explain: Every business has 4 major stake holders; the customer, the employee, the investors and the supplier. About 80% of the discussions at the meeting centred around spinning things for the investor conference. About 10% of the time involved talk about employee morale. The remaining 10% was spent on pressurizing suppliers into providing better terms and repackaging existing products in different ways to add profits. There was 0% discussion on providing tangible value to the ‘CUSTOMER’.

Investors in a business are clearly important. They are also fickle, and many of them care more for short term profits than on long term success. The employees, at least a vast majority of them want to build successful careers, wealth and value for themselves and the companies they work for. They have longer term loyalty towards the company. The customer, wether he buys milk, or she buys instant noodle, or an electronic gadget is the one that will ensure long term success or failure of the company.

I asked the question to the group that I was observing – why their focus was so heavily lopsided towards making the investor happy, at the expense of all the other stake holders. None of the senior execs had a reasonable answer that they themselves could rally behind. After about three hours, the discussion got shepherded towards value creation and profitable growth. In the time of economic turmoil, common sense often takes a back seat. It is important to keep the core values of your business in sight, develop tangible value to all your stake holders, and most importantly not get caught up in financial and tax engineering to make your company look better to Wall Street. In panic people often come up with ideas that could create short term finacial gains but could end up killing the organization.

Ensure that the fundamentals of the business with and the core values do not get diluted by “smart talk” about fake value. “It is too complex to explain or understand” is the most commonly used line by engineers of fake value –whether it be financial engineering or engineering products or services with limited value to the customer.