Corporate managers must rise to the challenge: analysis
Countries have been pushed into war-like efforts to combat the crisis caused by coronavirus disease (Covid-19). The only parallel is the time when large sectors of industry in the United States (US) were pressured into producing goods necessary for war in the 1940s. By reopening debates on deepening inequalities in society, the current war on the virus has raised the question of how companies, with their talents and efficiencies, can play a greater role in solving some of the challenges. The large number of economic reforms announced by the government gives Indian companies the opportunity to play that role. Achieving this will require a paradigm shift in thinking between banks, business owners, and the government.
The government stimulus package has some general themes. First, the government intends to revive micro, medium, and small businesses (MSMEs) through the provision of guarantees to guarantee the flow of credit. It will also do so by releasing capital locked into the reverse repository with the Reserve Bank of India (RBI) or cash reserve ratios with banks. However, transmitting unlocked reservations requires a different approach to risk taking. Bankers will play a national role if they can, at least in the case of MSMEs that are existing borrowers, avoid total risk aversion and encourage reasonable loans that balance the need to keep jobs and consumption intact. After the depression, JM Keynes pointed out that when the facts change, economic theory must change. Also after Covid-19, lending practices must change to allow small businesses to recover.
In this regard, fintech lenders have, since 2015, dabbled deeply in the types of companies facing the ultimate pain now. In the United States, major fintech lenders have been eligible for direct Federal Reserve funds, which are fully guaranteed, as a means to help finance small businesses. If banks and non-bank financial companies were to refinance fintech platforms, this would accelerate the flow of credit.
Large sums have been identified for investments through funds in small and medium-sized enterprises and in the agricultural space, largely supervised by the Small Industries Development Bank of India. Here, too, the conventional investment logic, which requires all projects to meet major obstacles to return, has less meaning when the most urgent need is to revive a stagnant economy. There needs to be a clear acceptance that the multiplier effect of job creation, wage generation and demand can greatly offset the impact of bad investment or loans.
The desire to reform and privatize agricultural procurement, coal, defense, and energy distribution is commendable. In doing so, it is important to put aside old issues that include concerns about anti-competitive behavior and corruption during bidding processes, which delayed past reforms. In light of fears among officials about the 2G and carbon scams, there should be clear communication from the government that officers will be rewarded for aggressive steps in good faith to bring about change. This does not mean that gross negligence or corruption cases must be approved. Although they do not deny the probability of these risks, the economies do not emerge from the crisis playing it safe.
A less noticeable but important shift in focus is required for large shareholder investors. In evaluating the returns they want from investments, they must examine why, when shareholders have done well in recent years, these increases in valuation have not touched on other critical issues, such as job creation, improving their ratio. Green or Two-Month Salary Security Networks In recent years, the valuations of some companies, especially in the technology sector, have left behind organizations that create high-quality jobs, such as General Motors (GM), Hilton or Unilever. The desire for the market to outperform returns at all times has apparently meant an unwillingness to invest in strong, useful, and economy-enhancing plays, which pay 3-4% above the cost of capital but do not provide great benefits. That is why, for example, in India, there is no market for a mortgage guarantee company, which would materially improve the quality of life. The institutional investment community may need to re-examine the lens through which it reviews its investments.
Finally and most critically, the proposed reforms provide an opportunity for the industry to rise to the occasion, as its ancestors did in the immediate post-Independence era. Large corporate houses, which drive most of the industry, have the opportunity to pick up the gauntlet in several new areas where privatization has been offered. There is a complete alignment between significant risk-taking and national reconstruction as evidenced by groups like the Tatas, whose investments in energy, software, chemicals, and other industries were once pioneering, even though they might have been considered as risky in time. Many other Indian groups have similar stories that involve entering unrelated areas and putting their best talent behind new projects.
Even with a supportive mindset from the above groups, a successful national reconstruction will only be achieved if India’s large management group enjoys the opportunity to prosper under uncertainty and challenge. In the 1950s Charlie Wilson, GM’s CEO said, “What is good for GM is good for America.” The opposite was also true. What is good for the country is also good for the individual company. As the government faces arguably the greatest challenge in India’s history, managers can play a bigger role in the national response as some already do. Great managers are used to operating in difficult competitive environments. They will do a fantastic job of delivering meaningful national results like job creation or privatization of key industries without compromising long-term returns if they have the backing of their investors and developers to do so. One hopes that the answer to these bold reforms is the time of World War II in India, after which the corporate sector applies its talent, financial strength, and risk appetite to the task of nation building.
Govind Sankaranarayanan, former COO and CFO of Tata Capital, is currently Vice President of ESG Fund ECube Investment Advisors
The opinions expressed are personal.