Nearly a month and a half after my first write-up on the discouraging and dull economic scenario that has set in since the second half of 2008, I continue from where I had left it in my last blog. It is time I believe to elaborate on what are I think are some of the areas where we seem to have made mistakes and where we need to make amends going forward to prevent or rather reduce the impact of similar circumstances in future. Before I elaborate, let me draw your attention to the central theme of my first blog on global recession - The need to shift focus from rapid growth to sustained growth.
Modifying the goals and strategies of organisations to change path from rapid growth to sustainable growth would need to see a paradigm shift in the attitudes and approaches of those in charge of governing these organisations. One may note that in an attempt to expand organisations and their activities, companies have effectively paid little heed to risk management. Excessive risk-taking with a view to maximise short-term gains is perhaps one of the reasons for the collapse of the banking sector and the subsequent credit crisis. In an attempt to be one up on competition and to rapidly expand scope of operations, entities in banking and non-banking sectors seems to have undertaken certain investments without sufficient analysis of the risk profiles of the investments.
On the same note, there seems to have also been a violation of the trust and the principles of stewardship that are assumed to hold good in corporations. Recent corporate failures have bought to light chinks in the corporate governance frameworks and the need for better regulation and transparency in company operations. The failures at AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Bros are results of insufficient risk management processes and sheer ignorance on the part of those in charge of governance. Instances of corporate fraud like that at Satyam Computer Services only add to the growing mistrust between investors and the corporate management. There is now an inevitable responsibility on those in charge of governance world-over to regain this lost trust and restore investor confidence through visionary leadership and responsible administration of investor funds pooled into organisations. I am sure the current scenario will act as a lasting reminder to us on the need to build and maintain effective and fool-proof risk management processes and a proper corporate governance framework.
It may be noted that the current downturn has also called to question the hefty and unwarranted pay-checks and unjustified remuneration schemes prevalent in some organisations/sectors. In attempting to make most of the PRP (Performance-related-pay) schemes, it is unfortunate to note that few executives have resorted to ignore the adverse long-term effects of corporate decisions and chosen to focus on short-term gains and profits. Some may have even resorted to fudging of the books and manipulation of the financials. These acts are once again a clear assault on the very foundation of the principles of mutual trust and custodianship on which corporations are founded. Remuneration needs to commensurate with the efforts and performance of individuals and in future PRP schemes will need to be devised taking into account a series of factors to ensure that the long-term perspective is not ignored by executives. Mere redesign of remuneration schemes will not be sufficient. We will need spirited, ethical and passionate executives to lead from the front in the best interest of the various stakeholders in any company.
On the same note, I must point out another fact that is perhaps better understood in the context of the Indian economy. Although it is unfortunate that the downturn has resulted in job-cuts and severe down-sizing, it has certainly led to rationalisation of salary levels in non-conventional sectors like IT/software development. This has certainly addressed the mismatch and disparity that existed in the remuneration levels in these sectors as compared to conventional business sectors. This has perhaps renewed the concept of fairness and equity that should exist between skills/experience and pay-scale. This renewal is indeed inevitable in the long-run and is in the best interest of the world economy. In economies like India, unjustified pay-scales in non-conventional sectors had led to an increasing inclination for youth to move away from conventional sectors like agriculture. This in the long-run may not have been in the best interest of a traditionally agrarian society like India. To an extent the economic downturn will result in renewal of the so-called traditional sectors which in the long run is essential and desirable.
While we have discussed a few of the lessons to be learnt in retrospect from the current economic downturn, there is much more to discuss on this topic and I promise to continue this over the next few months through this forum. Do key in your comments and views!!!
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