As one gets sick, distressed and tired of reading day in and day out the impact and implications of the meltdown in the global economy, global terrorism and other related aspects one thing is certain to happen – irrespective of whether or not the depression is as deep as the early 1930’s the number of people who are going to be extremely depressed is going to significantly higher!
The news item on the increase by nearly 30% of the anti-depressant drugs in India and the long waiting lists for appointments with counselors is a clear indication of that.
The increasing corporatisation of the healthcare industry for a multitude of reasons with the simultaneous increasing awareness amongst all segments is bound to bring the healthcare service providers under pressure from multiple fronts. The publication, in a business magazine, of a leading Delhi based hospital being accused of medical negligence causing the death of senior functionary from an industry confederation is a sure pointer in this regard. Even as I write this another news items that has been in the circuits is about the death of a 25 year old who participated in the clinical trials in a southern metro. The issue of regulatory monitoring in the sphere of medical diagnostics has been a major cause for concern amongst the medical fraternity. There have been reported incidents of patients test reports reflecting significantly varied readings from different laboratories. That by itself does not mean anything as one was not sure if the test results represented readings from the same sample or samples taken at different points of time! Irrespective of what the truth is, the fact remains that there has always been an element of doubt in the minds of the users if there are any controls on these establishments. One would be surprised to know that the medical diagnostic laboratory, in most parts of the country, operates under the Shops and Establishment Acts of the state. The fact that healthcare is a state subject has compounded to the problem. The Clinical Regulations Bill 2007 referred to the select committee in the parliament may not see the light of day before the term of current Lok Sabha.
Healthcare organisations in that context would do themselves good by embarking on a structured risk management strategy to deal with the multiple risks that they are exposed to. Organisational and professional reputation is going to be at stake. The quantum of risk is accentuated by the fact the process and service structure is significantly more complicated than a normal business process. The medical responses in each individual case could be significantly different but implications of the same enormous. One is reminded of the old joke of a mechanic removing the cylinder heads from the motor of a car of a famous heart surgeon in his shop. The mechanic after fixing the car straightened up, wiped his hands and asked argumentatively, "So doctor, look at this. I also open hearts, take valves out, put in new parts, and when I finish this will work as a new one. So how come you get the big money, when you and me is doing basically the same work? “The doctor leaned over and whispered to the mechanic and said: "Try to do it when the engine is running".
Any normal business organisation represents a plethora of inter connected complex process wherein on must expect and be prepared for something to go wrong. The implications of that in the context of healthcare organisations are profound. The role of paramedics and other support staff is extremely critical for successful outcomes. More often than not, it is at this interchange that things go wrong. The recent years have seen a number of good accreditation standards in the context of healthcare organisation being introduced. Some of the more prominent include that for hospitals in the form of the National Accreditation Board for Healthcare and Hospitals (NABH), both large and small, Laboratories (NABL), Blood Banks and more that have released targeted organisations wellness clinics that now covers practically the whole of the residual medical services other than hospitals. These have to a large extent adopted the already well accepted international systems like the JCI (Joint Commission International) USA or the Australia Council for Healthcare Standards (ACHS). Accreditation apart healthcare organisations would do well for themselves in embarking on implementing these well defined systems to ensure that their risks are minimized atleast from an operational perspective.
Without delving on the standards and its focus, one area that any healthcare organisation should definitely address is its management of sentinel events. Risks that healthcare organisations are exposed to are even more pronounced considering it has implications from a customer perspective, employee perspective, and the brand not to speak of just financial aspects. Sentinel event being defined as any unanticipated event in a healthcare setting resulting in death or serious physical or psychological injury to a person or persons, not related to the natural course of the patient's illness. Organisations like the JCI or ACHS have already defined many of these and have data and statistics of their occurrence. A healthcare organisation need not necessarily have to reinvent the wheel by trying to identify these. However, as the saying always goes act global think local - customization of these events to local conditions is a mandatory must. One may not have reported events, in the international scenario, of bodies being handed over to the wrong person; surgery on the wrong person; new born getting burnt in the incubator or a now born bitten to death by ants! A well defined and structured system to deal with sentinel events is definitely warranted.
The other aspect that needs attention in the current context is the ability of hospitals to manage public emergencies. The UNIDO document on the management of public emergency definitely warrants attention by organisations. The recent incidents in Mumbai definitely warrant the need for more structured response at hospitals to public emergencies be it natural disasters or man-made. The ministry of health should make it mandatory for all healthcare organisations to establish and practice responses in respect of public emergencies. The clinical regulations bill should also make it mandatory for all healthcare organisations to report defined sentinel events including near misses so that the data could be used by other organisations to review their own processes and initiate preventive actions.
The corporatisation of healthcare organisations not to speak of the large public hospitals in the area of public charitable trusts has meant that the stakeholders in these organisations have gone up manifold. The public awareness to medical negligence has also gone by quite a bit. The management team should equip itself to deal with situations in more comprehensive manner. Implementation of process based systems is extremely critical. Organisations need to implement these systems from a more holistic perspective and not merely an accreditation point of view. Even the accreditation needs to be from a constructive point of view and not a critique representing the personal views. Organisations should also clearly recognise the fact that accreditation or certification is only the beginning and not go back to old times post the event. This is particularly true in India where the system needs to continuously monitored and audited with the active participation of the senior management team till the system is completely and comprehensively internalised.
Friday, December 26, 2008
Monday, December 8, 2008
Succession Planning & Governance
Even as one stands paralysed with disbelief at the happenings around us, another stark fact begins to hit you harder. The absolute lack of foresight or a sense of urgency that exists at various levels on the need for succession plan to deal with contingencies be it in an emergency or otherwise.
How else would one explain the situation where the financial capital of the country has been hit hard, the home minister and the chief minister have either resigned or shown the door but the decision makers are have sat and procrastinated for whole week trying to identify their successors? The moot point here is that if the state did not require the key functionaries at this point of time then did they ever require them! Is this the time for us to exhibit our classical indecisiveness?
This is not the first time that we have observed this situation, be it an emergency or normal time. We have had innumerable occasions in the past wherein key posts at regulatory bodies or heads of institutions where the incumbent tenure was completed and the successor not nominated until the last moment or positions kept vacant for day, weeks and months. On the one hand, we have a policy that rightly stipulates that senior positions require that the candidates should have minimum residuary service of atleast two years but then the same policy does not provide that the succession should take place well in advance so that the succession is seamless and complete. The case in point is that succession planning is being ignored as a key governance issue at all levels be it public administration or at various levels in corporate. We are excellent in fire fighting, for we created it and then have a false sense of pride when flames are doused.
Succession Planning is not a will
Succession planning is not be equated to that of a will or a last testament. The will or the last testament would be one of the components of an effective succession plan. Succession planning is not be made only the context of a retirement but needs has to be made in the context any emergency be it temporary unavailability to permanent vacancy for whatever reason. The quality of leadership would largely be determined by the fulfillment its obligation on leadership matters. The existence of well-conceived and defined succession plan can go a long way in enhancing the confidence levels for all the stakeholders and can be an enormous source of reassurance.
Well-defined process
A well-orchestrated succession plan should to exhibit a lot of thought, planning and above all execution. There are definitive principles enunciated for the process of a succession plans. Amongst them include - Identifying the right leader at the right time; It is leadership driven collaborative process; It is a continuous process; constantly ensuring that the pool in churned for size and quality and circumstances; It should be driven by a carefully articulated strategy.
Succession planning is a dynamic and creative process. It would belittle the process to reduce something very significant to a formula. A few basic rules do apply. To begin with, the leadership team should take responsibility for “Ownership” of the succession planning. The plan should be reviewed and updated at least once a year. The plan should contain key elements like an assessment of the organisational management requirements; an assessment of the strengths and weaknesses of the incumbent head and others in the existing hierarchy; identification of potential internal candidates and above all an interim transition plan, particularly where there is no clear internal successor and a separate emergency crisis management plan with designated internal interim successors.
Viewed in the context of above requirements, it would observed that more often than not the succession plans are driven by adhocism, crisis management of the poorest quality driven by events that could have easily been identified and addressed with great ease.
A debate on succession is definitely bound to evoke passionate debates on whether the successor needs to be an insider or should be lateral selection from outside. One can never give a opinion on this that a perfect fit in all circumstances. An insider would definitely be the choice if the organisation is already on good growth path and it just requires management. On the other hand if organisation requires a transformation or a dramatic shift in strategy an outsider would be a more appropriate choice.
No discussion on succession planning would be complete without a discussion on the need for mentoring. An effective succession plan, amongst others, would necessarily have to address the need for grooming of the identified successor. Mentoring can be the one of most effective and efficient means to bridge the current and future. It does not require outside facilitators or trainers as it builds on the internal strengths. It is more often than not the most institutionalized process of transfer of knowledge, often be the single most important goal of a succession-planning program. It would be giving a new sense of purpose to the older generation of being recognised as it lets them know that they are valued. It can provide a renewed energy and motivation as they are in the last lap of their professional career. As far as the identified successor goes it gives him a great opportunity to use an old horse as a sounding board and can take the decisions under well-controlled conditions for decisions are bound to be monitored and reviewed to ensure that impact of wrong decisions are minimized.
Succession planning is an inevitable process that has to be addressed except if one is willing to risk the peril of postponing the inevitable. Family run organisations sometime need it more as the seniors find it hard to cut the proverbial umbilical cord. Cricket buffs would recall the famous words of Graham Yallop the stylish Australian batsman who retired at the peak of his career and wrote in his memoirs that was better to quit when people are still asking why rather than why not”!
How else would one explain the situation where the financial capital of the country has been hit hard, the home minister and the chief minister have either resigned or shown the door but the decision makers are have sat and procrastinated for whole week trying to identify their successors? The moot point here is that if the state did not require the key functionaries at this point of time then did they ever require them! Is this the time for us to exhibit our classical indecisiveness?
This is not the first time that we have observed this situation, be it an emergency or normal time. We have had innumerable occasions in the past wherein key posts at regulatory bodies or heads of institutions where the incumbent tenure was completed and the successor not nominated until the last moment or positions kept vacant for day, weeks and months. On the one hand, we have a policy that rightly stipulates that senior positions require that the candidates should have minimum residuary service of atleast two years but then the same policy does not provide that the succession should take place well in advance so that the succession is seamless and complete. The case in point is that succession planning is being ignored as a key governance issue at all levels be it public administration or at various levels in corporate. We are excellent in fire fighting, for we created it and then have a false sense of pride when flames are doused.
Succession Planning is not a will
Succession planning is not be equated to that of a will or a last testament. The will or the last testament would be one of the components of an effective succession plan. Succession planning is not be made only the context of a retirement but needs has to be made in the context any emergency be it temporary unavailability to permanent vacancy for whatever reason. The quality of leadership would largely be determined by the fulfillment its obligation on leadership matters. The existence of well-conceived and defined succession plan can go a long way in enhancing the confidence levels for all the stakeholders and can be an enormous source of reassurance.
Well-defined process
A well-orchestrated succession plan should to exhibit a lot of thought, planning and above all execution. There are definitive principles enunciated for the process of a succession plans. Amongst them include - Identifying the right leader at the right time; It is leadership driven collaborative process; It is a continuous process; constantly ensuring that the pool in churned for size and quality and circumstances; It should be driven by a carefully articulated strategy.
Succession planning is a dynamic and creative process. It would belittle the process to reduce something very significant to a formula. A few basic rules do apply. To begin with, the leadership team should take responsibility for “Ownership” of the succession planning. The plan should be reviewed and updated at least once a year. The plan should contain key elements like an assessment of the organisational management requirements; an assessment of the strengths and weaknesses of the incumbent head and others in the existing hierarchy; identification of potential internal candidates and above all an interim transition plan, particularly where there is no clear internal successor and a separate emergency crisis management plan with designated internal interim successors.
Viewed in the context of above requirements, it would observed that more often than not the succession plans are driven by adhocism, crisis management of the poorest quality driven by events that could have easily been identified and addressed with great ease.
A debate on succession is definitely bound to evoke passionate debates on whether the successor needs to be an insider or should be lateral selection from outside. One can never give a opinion on this that a perfect fit in all circumstances. An insider would definitely be the choice if the organisation is already on good growth path and it just requires management. On the other hand if organisation requires a transformation or a dramatic shift in strategy an outsider would be a more appropriate choice.
No discussion on succession planning would be complete without a discussion on the need for mentoring. An effective succession plan, amongst others, would necessarily have to address the need for grooming of the identified successor. Mentoring can be the one of most effective and efficient means to bridge the current and future. It does not require outside facilitators or trainers as it builds on the internal strengths. It is more often than not the most institutionalized process of transfer of knowledge, often be the single most important goal of a succession-planning program. It would be giving a new sense of purpose to the older generation of being recognised as it lets them know that they are valued. It can provide a renewed energy and motivation as they are in the last lap of their professional career. As far as the identified successor goes it gives him a great opportunity to use an old horse as a sounding board and can take the decisions under well-controlled conditions for decisions are bound to be monitored and reviewed to ensure that impact of wrong decisions are minimized.
Succession planning is an inevitable process that has to be addressed except if one is willing to risk the peril of postponing the inevitable. Family run organisations sometime need it more as the seniors find it hard to cut the proverbial umbilical cord. Cricket buffs would recall the famous words of Graham Yallop the stylish Australian batsman who retired at the peak of his career and wrote in his memoirs that was better to quit when people are still asking why rather than why not”!
Friday, November 7, 2008
Global Readjustments
The trauma and tribulations in the global markets now in the financial markets are bound to see the effect trickle, or maybe a wave, across all sectors and countries. The bail-out packages that are being worked are bound to bring some sense of sanity in the market but it would be naïve to expect that it would have a sustaining effect. One already gets the impression that initial sense of comfort is already beginning to wane. The long term comfort will necessarily have to come from metamorphic changes in the global macro economic and business landscape.
Countries gasping for breadth
There have been some initial pointers in that direction. Let us start at a very macro-economic view point. A couple of countries have already borne the initial brunt of the problem with significant economic implications. Take the case of the help Russia extended USD 5.4 Billion to the banks in Iceland to overcome the problems of the financial fall-out. The extent of funding which is about a third of GDP of Iceland is bound to change the global political alignments in the times to come. The second is the case of the Argentina which is on the verge of commiting default for the third in the last decade. Not a very comforting situation for any one. Now there is news that the Hungary is process of seeking assistance from the International Monetary Fund. Ukarine, Turkey and more will follow suit in the times to come. The number of countries that having been standing the doorstep of the international funding agencies are going up and the list will increase at a faster rate than what has been seen. One should not be surprised if therefore we do find USA itself jumping the queue! Lesser mortals like our own neighbour are in the brink of bankruptcy.
Changing shareholding patterns in national icons
There has already been enough news on the sovereign funds accounting for significant part of commercial organisations that have been more synonymous or iconic in countries to which they belong. Take the cases of Citi Bank where sovereign funds from Abu Dhabi are the largest shareholders. This is the similar story with a whole host of corporate and financial houses in the USA where the Chinese investments are the largest not to speak of the Japanese which always had a significant amount of investments. The recent policy shifts of some of proponents of the free market economy to have government investments in banks point to sudden sense of national insecurity due to foreign shareholding.
In the business world the recent news about General Motors and Ford Motors were having had talks on the sidelines examining the option of merging gives definitive pointers to the ominous future that is unfolding. That having had its problems we now hear that GM and Chrysler are in talks for a possible merger.
The collapse of Kaupthing Bank in Iceland is bound to throw a whole host of problems to commercial houses in UK. The Reykjavik-based bank owns stakes in a variety of retail chains and there is expectation that the administrator of the UK entities may sell the holding to private equity firms.
We may now see the next wave of cross border mergers and acquisitions between companies who were at one point of time fierce competitors. What will be even more surprising is the fact that these mergers and acqusitions would not be restricted to only companies having problems.
On the Indian front, recent announcement of the strategic alliance between Jet and Kingfisher only goes to show that the strategic thinking has taken been quite dramatic. Both the cases one in US and other in India only goes to show that thinking has to be out of the box to resolve issues that are out of the ordinary.
Currency Volatility
The global financial markets have seen an extreme level of currency volatility over the last one year. A number of companies have gone bust in the process of embarking on exotic currency trades. Many companies have lost heavily having paid a hefty price in lure of short term profits. This definitely, in hindsight, was not something that most corporates were equipped to handle.
If the consistent depreciation of the dollar against all currency was the order of the time for a good part of 2007, the reverse has been true over the last couple of months. The dollar has appreciated close to 20% against most currencies in the last couple of months. One is not sure if the dollar has appreciated or other currencies have lost ground. A classic case of glass half full and half empty! What would intrigue most is the fact that on one side the country, viz., USA, is reportedly having problems in its financial system that never seem to ending and here we see its currency appreciating! No one has yet a very plausible reason for it but one rationale way to explain it would be the fact the dollar is the currency for international trade and there is a shortage for dollars as no one is willing to part with it! Banks are not willing to lend to each let out facilitate credit expansion. Banks are refusing the recognize letters of credit issued by other banks. So commercial transactions in international trade is taking place on cash basis that explains the shortage for dollars. Strange it may sound but that appears to be the reality.
The shortage of funds appears to be so acute that gold, normally considered a safe haven investment instrument in uncertain times, has lost close to 20% of its value in the last couple of months. That at a time when uncertainty was at its peak. It is possible to explain the phenomena to excessive speculation in the past but here again the unloading for the purposes of generating cash could be reason.
One of the significant issues that are bound to surface in the next couple of months is the acceptance of Euro! The emergence of a single European currency to counter the dollar is now going to be put to acid test. The foundation of the Euro as a currency is based on the compliance to an agreed macro economic discipline. These are bound to be questioned by nationalists in countries and incumbent governments may be under pressure to take populist decisions that are contrary to the Euro norms! One, therefore, should not be surprised if we see the re-emergence of the dual currency norm in the next couple of months!
As has been rightly said, the DNA of the world is about to change. So let us all brace up and tighten our seat belts for turbulent weather and heavy landing.
Countries gasping for breadth
There have been some initial pointers in that direction. Let us start at a very macro-economic view point. A couple of countries have already borne the initial brunt of the problem with significant economic implications. Take the case of the help Russia extended USD 5.4 Billion to the banks in Iceland to overcome the problems of the financial fall-out. The extent of funding which is about a third of GDP of Iceland is bound to change the global political alignments in the times to come. The second is the case of the Argentina which is on the verge of commiting default for the third in the last decade. Not a very comforting situation for any one. Now there is news that the Hungary is process of seeking assistance from the International Monetary Fund. Ukarine, Turkey and more will follow suit in the times to come. The number of countries that having been standing the doorstep of the international funding agencies are going up and the list will increase at a faster rate than what has been seen. One should not be surprised if therefore we do find USA itself jumping the queue! Lesser mortals like our own neighbour are in the brink of bankruptcy.
Changing shareholding patterns in national icons
There has already been enough news on the sovereign funds accounting for significant part of commercial organisations that have been more synonymous or iconic in countries to which they belong. Take the cases of Citi Bank where sovereign funds from Abu Dhabi are the largest shareholders. This is the similar story with a whole host of corporate and financial houses in the USA where the Chinese investments are the largest not to speak of the Japanese which always had a significant amount of investments. The recent policy shifts of some of proponents of the free market economy to have government investments in banks point to sudden sense of national insecurity due to foreign shareholding.
In the business world the recent news about General Motors and Ford Motors were having had talks on the sidelines examining the option of merging gives definitive pointers to the ominous future that is unfolding. That having had its problems we now hear that GM and Chrysler are in talks for a possible merger.
The collapse of Kaupthing Bank in Iceland is bound to throw a whole host of problems to commercial houses in UK. The Reykjavik-based bank owns stakes in a variety of retail chains and there is expectation that the administrator of the UK entities may sell the holding to private equity firms.
We may now see the next wave of cross border mergers and acquisitions between companies who were at one point of time fierce competitors. What will be even more surprising is the fact that these mergers and acqusitions would not be restricted to only companies having problems.
On the Indian front, recent announcement of the strategic alliance between Jet and Kingfisher only goes to show that the strategic thinking has taken been quite dramatic. Both the cases one in US and other in India only goes to show that thinking has to be out of the box to resolve issues that are out of the ordinary.
Currency Volatility
The global financial markets have seen an extreme level of currency volatility over the last one year. A number of companies have gone bust in the process of embarking on exotic currency trades. Many companies have lost heavily having paid a hefty price in lure of short term profits. This definitely, in hindsight, was not something that most corporates were equipped to handle.
If the consistent depreciation of the dollar against all currency was the order of the time for a good part of 2007, the reverse has been true over the last couple of months. The dollar has appreciated close to 20% against most currencies in the last couple of months. One is not sure if the dollar has appreciated or other currencies have lost ground. A classic case of glass half full and half empty! What would intrigue most is the fact that on one side the country, viz., USA, is reportedly having problems in its financial system that never seem to ending and here we see its currency appreciating! No one has yet a very plausible reason for it but one rationale way to explain it would be the fact the dollar is the currency for international trade and there is a shortage for dollars as no one is willing to part with it! Banks are not willing to lend to each let out facilitate credit expansion. Banks are refusing the recognize letters of credit issued by other banks. So commercial transactions in international trade is taking place on cash basis that explains the shortage for dollars. Strange it may sound but that appears to be the reality.
The shortage of funds appears to be so acute that gold, normally considered a safe haven investment instrument in uncertain times, has lost close to 20% of its value in the last couple of months. That at a time when uncertainty was at its peak. It is possible to explain the phenomena to excessive speculation in the past but here again the unloading for the purposes of generating cash could be reason.
One of the significant issues that are bound to surface in the next couple of months is the acceptance of Euro! The emergence of a single European currency to counter the dollar is now going to be put to acid test. The foundation of the Euro as a currency is based on the compliance to an agreed macro economic discipline. These are bound to be questioned by nationalists in countries and incumbent governments may be under pressure to take populist decisions that are contrary to the Euro norms! One, therefore, should not be surprised if we see the re-emergence of the dual currency norm in the next couple of months!
As has been rightly said, the DNA of the world is about to change. So let us all brace up and tighten our seat belts for turbulent weather and heavy landing.
Wednesday, September 24, 2008
9/11 to 7/11 - Destruction of Towers
There is such an eerie similarity in the numbers, not totally though, but atleast in the manner it rhymes while saying it. The memories and the macabre pictures of that terrible tragedy of September 11th 2001 are far too vivid to be forgotten in a hurry. The death and destruction to innumerable families, and more critically, the realization of vulnerability, to a nation that for a moment stood stunned in silence, virtually sent shivers down the spine of public consciousness all over. The crumbling of the Two World Trade Towers overnight was as much symbolic of dangers that lurked around for the strongest of civilizations, as it was a paralyzing moment of truth, for those who lost their near and dear, all in a jiffy.
The month of September 2008 has brought about another similar disaster this time on the global financial sector. The seven eleven represents the financial disasters in USA that has caused a financial tsunami leading to a global meltdown - the filing bankruptcy applications by financial giants under Chapter Seven and Eleven of US Bankruptcy laws.
The Nine-Eleven tragedy was on account of fundamental extremism this time it is fundamentally due to financial extremism. Both the tragedies happened in an economy that had supreme confidence in systems that was replete with jargons and acronyms! It is classic case of supreme confidence to the sub-prime to the submerged!
The collateral damage that these events have brought on the system the world-over is enormous. Typical of the nine eleven tragedy – though it was the Twin Towers that fell, other edifices symbolizing the psychology of confidence of people in the U S also fell. It was also followed by a traumatic period of insecurity for the entire world. Likewise, the bankruptcy of a couple of major entities in the U S would carry far-reaching implications to the entire monetary apparatus of the world, leaving behind it ,a long trail of terrible doubt and insecurity in the international financial arena.
For such of those are not upto speed on the USA bankruptcy laws, here is what it means - When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed almost immediately. The Trustee generally sells all the assets and distributes the proceeds to the creditors. This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation. Fully-secured creditors have a legally-enforceable right to the collateral securing their loans or to the equivalent value, which right cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully-secured creditors are not entitled to participate in any distribution of liquidated assets which the bankruptcy trustee might make. On the other hand in the case of chapter 11 filing is usually an attempt to stay in business while a bankruptcy court supervises the "reorganization" of the company's contractual and debt obligations. The court can grant complete or partial relief from most of the company's debts and its contracts, so that the company can make a fresh start. Sometimes, if the business's debts exceed its assets, then at the completion of bankruptcy the company's owners all end up without anything; all their rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company. Either way as far as the company is concerned it is a closed chapter!
It is time that the industry and regulators understood that it is not enough that there is an act in place but the discipline has to come through the implementation of sound processes. We are familiar with B2B – starting with the Boom to Bust of .com companies, then onto realignment of business practices on Business to Business channels but now it is time for Back to Basics!
To begin with we might as go back to what the Americans so passionately refer to as “KISS” – “Keep it Simple Stupid”. The next, it is not enough if you have SOX but it more important to have BOOTS – Build Operate Operationally Transparent Systems. In an endeavour to create technology savvy organisation we have created technology monsters! Go to any organisation and don’t be surprised if they claim that they have expert systems... As a wag once put it, an expert is someone who knows more and more about less and less until, eventually, he knows everything about nothing. The modularisation of business processes based on highly complex technology applications has meant that invariably very few people are aware of the process in its entirety. The unscrupulous are bound to exploit the information vacuum that is created in the bargain. By no stretch of imagination is one suggesting that technology does not provide controls on the contrary, sometimes, it has so many that transaction is never understood in its totality and relative implications less understood!
Though the current situation represents the collective and cumulative failure of all concerned the law makers, regulators, corporate boards, independent professionals but as the same time we need to recognise that business organisations cannot be run on based on audits, external ratings and regulatory policing but sound internal systems. The Reserve Bank of India has rightly expressed concern over excessive dependence on external credit rating agencies by lenders. The banking regulator has recently expressed apprehensions that it may not be prudent to rely only on these agencies, given the current context in the global economy. These views were expressed as recently as July 2008 and how true it has come! Take the recent cases of AIG in America where a couple of rating agencies down graded the commercial papers a couple of days before the company was taken over. It literally was the proverbial bolting of doors after the horses had bolted! To think of it, even there it was only downgraded to an A –ve which still represented an investment grade when the company was literally in the doorsteps of a run and bankruptcy. The credit rating mechanism has been truly and surely exposed as a shallow exercise in the current context. These rating organisations have got to go back to the drawing boards and reexamine their whole rating process and mechanism.
Time has come for all organisations to have critical relook at their corporate practices. It is time that organisations are run based on strong trust based value systems addressing all facets of governance, risk and compliance. One does not necessarily have to ape the west for everything, we could learn from their mistakes. Let it not represent a situation where you ape someone and get monkeys. Let us not go overboard in the name of independence. Independence is not a qualification it is a state of mind. India has a had its own share of corporate and financial scams where the quantum of monies spent on investigations and committees have in some cases far exceeded the value of the purported scam without even having identified what the problem was.
It is time to ponder, analyse, take actions, and above all create a sense of values in business dealings. It is not just the recent shocks in the financial systems, but even the not so distant happenings around the Enrons and the Andersons, that bear strong evidence to confidence going overboard, and basic discipline in systems and time tested business principles, taking a serious knock. History, they say, repeats itself, because people repeat their mistakes. Can this big price we have now paid, be an investment for a stable tomorrow? Some serious points for introspection.
Credit Rating - A crisis of confidence
If you have suddenly found the investors fidgety or moody don’t blame them for the rating standards have become poor!
Never before has any single industry come under the scanner as in recent times with financials institutions falling nine pins. The consecutive failure of the giants only indicates that more is to come in the next couple days, weeks and months. The news reports based on the data released by the Federal Deposit Insurance Corporation indicating the banks and savings institutions on the ‘problem list’ grew to 117 in the second quarter of the calendar year 2008 against 90 in the first quarter. A 30% increase in the number of potential delinquents. The information evidently is not going to go down too well in the banking and financial community not to speak of the investors or the average layman who may just be wondering as where on earth he could keep his savings. It sounds literally like the nursery rhyme written “Ringa Ringa Rosie” with every conceivable financial entity falling!
Investors, be it the institutional financial investors or the retail investors, have always derived comfort from the any external assurance like professional audit and credit rating agencies. The turn of events over the last week has dealt a body blow on the confidence levels. One definitely is intrigued by the fact that the entire international rating agencies had assigned a credit rating of AA to AIG till May 2008 and suddenly down graded it just the night before the company was taken over the federal government under the bailout package. Even the down grading was to an investment grade which raises the basic question as how could a company on verge of significant credit default and bankruptcy has an investment grade rating?!
If investors in the failed companies are still looking at heaven to obtain plausible explanations, the failed giants namely AIG, Lehman and others to follow themselves, with all their financial acumen, appear to have been done by their trust on credit-rating agencies. The main credit raters — Moody's and Standard & Poor's, Fitch had assigned AAA and AA ratings to all sorts of exotic mortgage securities and other financial without evidently understanding or communicating to layman the underlying risks involved. An average investor would be last person to know how and understand the risks in the context of a collateralized loan obligation or commercial-mortgage-backed securities.
In hindsight it appears even sophisticated investors took Moody's and S&P's assessment of companies & instruments at face value and it turned out that the agencies sailing in the same boat as that of investors - clueless! A survey, a couple of years back, of the Association for Financial Professionals revealed that about 30% of finance managers perceived the credit ratings of their own organizations to be inaccurate; about 40% perceived rating changes to be untimely.
The role of credit rating agencies has been under the scanner ever since the sub-prime crisis started making its rounds in the international financial markets. The credit rating agencies have had to put up a strong defense to deny the accusation that they gave inflated ratings to sub-prime mortgage debt and other discredited bonds in order to attract more Wall Street investment banks that have now failed. This has happened not too long back and was about the same time last year.
Going back to the case of AIG, one wonders if the rating agencies had factored into the rating assignment the key issues of the leverage that is ratio of borrowings to capital. It was the highest in comparison to its peers at 11 to 1. This has to be viewed in the context of its exposure to the credit default swaps coverage that it had extended. The entire risk management mechanism of the company evidently was skewed and this, in retrospect, did not meet the eye rating agencies. The only aspect that raises an alarm is that all the agencies have accorded the same rating. The question that begs answer is if there is a cartel on rating or the rating mechanism shallow and fundamentally flawed! Harsh questions but definitely would be crossing the minds of every affected person.
Warren Buffet the sage from Omaha and financial expert had in an interview just after the Enron saga had said that derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets - in effect buy insurance against market movements - but have quickly become a means of investment in their own right. He had warned that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998. The words sound likes that of Nostradamus.
The credit default swaps (CDS) one of the many weapons of mass destruction that caused the current market meltdown has evidently not been brought under the scanner by the rating companies in their assessment. How else would one account for the madness of a virtual financial time bomb? According to industry, The International Swaps and Derivatives Association, estimates in USA the CDS market has exploded over the past decade to more than roughly $58 trillion.. That is many times over the size of the U.S. stock market and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market. Pardon me for my lack of mathematically knowledge - I would be happy if someone got a fixation on the number of zeros attached to these numbers! Maybe we should take the zero has no value, beyond the decimals, but in this case once the market is decimated!!
One of the allegations that surfaced in the review of the credit rating agencies conducted by the Securities Exchange Commission USA was that certain of the larger credit rating agencies abused their dominant market position by engaging in certain aggressive competitive practices. Fitch complained that S&P and Moody's were attempting to squeeze it out of certain structured finance markets by engaging in the practice of "notching" — lowering their ratings on, or refusing to rate, securities issued by certain asset pools (e.g., collateralized debt obligations), unless a substantial portion of the assets within those pools were also rated by them.
A US government staff report in the context of the failure of Enron had the following to say. “In the case of Enron, the credit rating agencies failed tus used their legally sanctioned power and access to the public’s benefit, instead displaying lack of due diligence in their coverage and assessment in their coverage and assessment of Enron. Credit rating agencies did not ask sufficiently probing questions in formulating their ratings, and in many cases merely accepted at face value what they were told by Enron officials, Rating agencies apparently ignored or glossed over warning signs, and despite their mission to make long term credit assessments, failed to sufficiently consider factors affecting the long term health of Enron, particularly accounting irregularities and overly complex financing structures” This Para would aptly summarize that nothing has really changed over the over the couple of years!
The intent is not to discredit the agencies or cast aspersions on the agencies as much to say that the process has not been addressed over the years the problems of the 2001 Enron episode have reared their ugly face yet again.
A major issue that the users have been grappling is relatively less regulatory role on the rating industry and process. The rating process has become a virtual financial black-box with little or no clarity on the methodology used in the process. The lack of transparency is something that the industry needs to desperately work on. All other independent professional assessment or assurance has clearly laid out standards, guidelines and reviews. Increased disclosure about rating processes and decision outcomes would also improve transparency in the rating process. Again the ratings have to be simplified in terms of communication rather than list of alphabets from A to Z with multiple combinations of AAA to CCC with positive and negative signs being added to compound to users woes.
It is not just a lesson for the credit rating process but for all independent professionals to get back to introspection mode and examine as to how the faith of the investing community can be restored.
Never before has any single industry come under the scanner as in recent times with financials institutions falling nine pins. The consecutive failure of the giants only indicates that more is to come in the next couple days, weeks and months. The news reports based on the data released by the Federal Deposit Insurance Corporation indicating the banks and savings institutions on the ‘problem list’ grew to 117 in the second quarter of the calendar year 2008 against 90 in the first quarter. A 30% increase in the number of potential delinquents. The information evidently is not going to go down too well in the banking and financial community not to speak of the investors or the average layman who may just be wondering as where on earth he could keep his savings. It sounds literally like the nursery rhyme written “Ringa Ringa Rosie” with every conceivable financial entity falling!
Investors, be it the institutional financial investors or the retail investors, have always derived comfort from the any external assurance like professional audit and credit rating agencies. The turn of events over the last week has dealt a body blow on the confidence levels. One definitely is intrigued by the fact that the entire international rating agencies had assigned a credit rating of AA to AIG till May 2008 and suddenly down graded it just the night before the company was taken over the federal government under the bailout package. Even the down grading was to an investment grade which raises the basic question as how could a company on verge of significant credit default and bankruptcy has an investment grade rating?!
If investors in the failed companies are still looking at heaven to obtain plausible explanations, the failed giants namely AIG, Lehman and others to follow themselves, with all their financial acumen, appear to have been done by their trust on credit-rating agencies. The main credit raters — Moody's and Standard & Poor's, Fitch had assigned AAA and AA ratings to all sorts of exotic mortgage securities and other financial without evidently understanding or communicating to layman the underlying risks involved. An average investor would be last person to know how and understand the risks in the context of a collateralized loan obligation or commercial-mortgage-backed securities.
In hindsight it appears even sophisticated investors took Moody's and S&P's assessment of companies & instruments at face value and it turned out that the agencies sailing in the same boat as that of investors - clueless! A survey, a couple of years back, of the Association for Financial Professionals revealed that about 30% of finance managers perceived the credit ratings of their own organizations to be inaccurate; about 40% perceived rating changes to be untimely.
The role of credit rating agencies has been under the scanner ever since the sub-prime crisis started making its rounds in the international financial markets. The credit rating agencies have had to put up a strong defense to deny the accusation that they gave inflated ratings to sub-prime mortgage debt and other discredited bonds in order to attract more Wall Street investment banks that have now failed. This has happened not too long back and was about the same time last year.
Going back to the case of AIG, one wonders if the rating agencies had factored into the rating assignment the key issues of the leverage that is ratio of borrowings to capital. It was the highest in comparison to its peers at 11 to 1. This has to be viewed in the context of its exposure to the credit default swaps coverage that it had extended. The entire risk management mechanism of the company evidently was skewed and this, in retrospect, did not meet the eye rating agencies. The only aspect that raises an alarm is that all the agencies have accorded the same rating. The question that begs answer is if there is a cartel on rating or the rating mechanism shallow and fundamentally flawed! Harsh questions but definitely would be crossing the minds of every affected person.
Warren Buffet the sage from Omaha and financial expert had in an interview just after the Enron saga had said that derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets - in effect buy insurance against market movements - but have quickly become a means of investment in their own right. He had warned that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998. The words sound likes that of Nostradamus.
The credit default swaps (CDS) one of the many weapons of mass destruction that caused the current market meltdown has evidently not been brought under the scanner by the rating companies in their assessment. How else would one account for the madness of a virtual financial time bomb? According to industry, The International Swaps and Derivatives Association, estimates in USA the CDS market has exploded over the past decade to more than roughly $58 trillion.. That is many times over the size of the U.S. stock market and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market. Pardon me for my lack of mathematically knowledge - I would be happy if someone got a fixation on the number of zeros attached to these numbers! Maybe we should take the zero has no value, beyond the decimals, but in this case once the market is decimated!!
One of the allegations that surfaced in the review of the credit rating agencies conducted by the Securities Exchange Commission USA was that certain of the larger credit rating agencies abused their dominant market position by engaging in certain aggressive competitive practices. Fitch complained that S&P and Moody's were attempting to squeeze it out of certain structured finance markets by engaging in the practice of "notching" — lowering their ratings on, or refusing to rate, securities issued by certain asset pools (e.g., collateralized debt obligations), unless a substantial portion of the assets within those pools were also rated by them.
A US government staff report in the context of the failure of Enron had the following to say. “In the case of Enron, the credit rating agencies failed tus used their legally sanctioned power and access to the public’s benefit, instead displaying lack of due diligence in their coverage and assessment in their coverage and assessment of Enron. Credit rating agencies did not ask sufficiently probing questions in formulating their ratings, and in many cases merely accepted at face value what they were told by Enron officials, Rating agencies apparently ignored or glossed over warning signs, and despite their mission to make long term credit assessments, failed to sufficiently consider factors affecting the long term health of Enron, particularly accounting irregularities and overly complex financing structures” This Para would aptly summarize that nothing has really changed over the over the couple of years!
The intent is not to discredit the agencies or cast aspersions on the agencies as much to say that the process has not been addressed over the years the problems of the 2001 Enron episode have reared their ugly face yet again.
A major issue that the users have been grappling is relatively less regulatory role on the rating industry and process. The rating process has become a virtual financial black-box with little or no clarity on the methodology used in the process. The lack of transparency is something that the industry needs to desperately work on. All other independent professional assessment or assurance has clearly laid out standards, guidelines and reviews. Increased disclosure about rating processes and decision outcomes would also improve transparency in the rating process. Again the ratings have to be simplified in terms of communication rather than list of alphabets from A to Z with multiple combinations of AAA to CCC with positive and negative signs being added to compound to users woes.
It is not just a lesson for the credit rating process but for all independent professionals to get back to introspection mode and examine as to how the faith of the investing community can be restored.
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