A grave lesson for Indian corporates & headless PSUs - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A grave lesson for Indian corporates & headless PSUs 

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In this issue:
» India's industrial output slacken in September
» Is India heading towards a power blackout?
» Will BRIC currencies recoup recent losses?
» China's massive copper inventory is worrying
» ...and more!

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Which is one of the most important qualitative factors that value investors take seriously into account while investing in companies? Without any doubt, it is the quality of the leadership. If you have a good captain, your ship can sail through many a storm.

The corollary to this is that succession planning is an extremely important task that no organisation must ignore. You may recall the much-publicised hunt for chairman and CEO by Infosys some months ago. Compare that with several Indian public sector undertakings (PSUs) that have no formal succession planning and remain headless for extended periods when old leaders retire. No wonder that such PSUs lack vision and function very inefficiently.

There is a very important lesson on succession planning that many Indian companies and PSUs in particular can learn from Mr A G Lafley, a former CEO of Procter & Gamble. You would be surprised to know that Mr Lafley commenced the search for a successor right from the beginning of his term. In many companies, the incumbent CEO often resists the entire idea of someone else succeeding over him. And company boards, too, do not take succession planning seriously until the incumbent CEO is close to retirement.

In the case of P&G, Mr Lafley built elaborate processes to fruitfully engage the company's board in succession planning and made sure that possible future leaders from within the organisation were exposed to them. He put potential leaders through several tests. In the end, the person who finally succeeded Mr Lafley had been on every single list from 2001 to 2010.

Is it difficult to imagine the huge benefit that P&G has had because of such proactive succession planning? Not at all! Indeed, Indian corporates and PSUs would do themselves a great deal of good if they take a lesson or two from P&G.

Do you think Indian companies are doing enough for succession planning? Share your comments with us or post your views on our Facebook page.

01:08  Chart of the day
The Indian economy has been witnessing some changing patterns of growth. The previously laggard states have registered high growth rates in recent years. For instance, the GDP (Gross Domestic Product) growth data for the financial year 2010-11 shows that the state of Bihar reported the highest GDP growth rate (14.2%) among all Indian states. This is indeed a good sign and proof of what good governance and political will can do to an economy.

Data source: Mint
*At 2004-05 constant prices

While the US and Europe are facing a debt crisis, India is showing signs of economic slowdown. With the slew of gloomy data flowing around, the warning is hard to ignore. The industrial output growth as per the Index of Industrial Production (IIP) has slackened to below 5% in August this year, led by contraction in the mining and manufacturing sector. This is in continuation with the trend seen in the last month. As suggested by HSBC Purchasing Managers' Index for September, the service industry and industrial output are heading towards tough times. With 88% contribution to the GDP, the impact on GDP growth can hardly be undermined. With such negative pointers all around, an annual growth estimate of 8% may seem a little too ambitious.

The recent statistics force one to question RBI's stance on monetary policies. The continuous rate hikes have impacted investment and demand while inflation levels remain unaffected at above 9% which may prompt RBI to go for another round of rate hike. However, we believe that the matter is beyond the control of central bank now and it seems to be fighting a lonely battle with monetary policy as its only tool. Before it becomes worse, it's time for the Indian government to step in and speed up economic reforms to leverage every opportunity in a tough economy.

The country is headed for a power blackout. That is unless Coal India (CIL) can step up on coal production. The thermal power plants in the country have just a few days of coal supply left. Once this runs out, there would be a power blackout in several regions. Around 44 of the country's thermal power plants that account for nearly 60% of the total power supply are facing severe coal shortages. Some have less than 7 days' stock in hand. Unfortunately, CIL has not been able to meet the demand. One major reason for this is the unprecedented rain that has caused disruptions in supply. At the same time, political turmoil in the Telangana area has also hit the supply from the mines located in the region.

However, the power industry has a different view of the problem. They blame CIL's inability to explore new mines as the main cause of these troubles. This indeed could be the root cause. Due to the lack of new mines, CIL's production of coal has stagnated to the 2009 levels. With increasing expansion in power capacity, the problem of coal shortage is just becoming more acute by the day. Unless the government intervenes and allows some of the new projects of CIL to materialise (these are stuck with the environment ministry) the country could face a blackout very soon.

Increasing risk aversion due to the ensuing European debt crisis had led to a withdrawal of funds from emerging markets to other safe haven investments. This led to a sharp depreciation in emerging market currencies particularly BRIC nations. However, a recent poll conducted by Reuters has revealed that all the four currencies are expected to recoup majority of the losses registered in the past. While Ruble may gain as Russian central bank has sold dollar reserves to support its currency, the Indian rupee may also surprise on the upside if the global environment stabilises. Rising pressure on China to discontinue the currency peg may force the government to revalue the currency on the upside to a minor extent. However, basket appreciation of all BRIC currencies can happen once the low borrowing rates in developed economies urge the investors to seek superior returns by investing in high yield currencies of emerging markets. And for such a carry trade arbitrage, confidence has to return back in the markets. This can happen only when an amicable solution to the European debt crisis is figured out. And this appears to be a remote possibility now.

Commodity prices have seen a correction in recent times and copper especially has witnessed a slide. Hence, data released about copper inventories held by China paints a worrying picture. This is the first time that the dragon nation has revealed the estimated size of its copper inventories which show that the latter stood at 1.9 m tonnes at the end of 2010. This is more than what the US consumes in a year and is significantly higher than the 1-1.5 m tonnes range that was estimated in the past. All of this then implies that Chinese demand for copper has been lower than what was initially thought to be. The concerns stem from the fact that China has a dominant role to play in the global copper market, as it accounts for about 40% of global copper demand. This was amply evident in early 2009, when a buying spree by the country, helped trigger a price rally from the lows of the financial crisis to new records this year of above US$ 10,000 a tonne. There are talks from some quarters that whatever the size of Chinese inventories, China will always want copper. That may be true. But in the immediate future at least, a meltdown in copper prices cannot be entirely ruled out.

The Indian stock markets have been trading below the dotted line. At the time of writing, the benchmark BSE Sensex was down by 88 points (0.5%). Most sectoral indices were in the negative, led by the capital goods and auto sectors. Most Asian stock markets were trading in the green. Malaysia (up 1.1%), Indonesia (up 1.1%) and Japan (up 1%) were the biggest gainers. However, European markets have opened on a negative note.

04:45  Today's investing mantra
"What you're doing when you invest is deferring consumption and laying money out now to get more money back at a later time. And there are really only two questions. One is how much you're going to get back, and the other is when" - Warren Buffett
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6 Responses to "A grave lesson for Indian corporates & headless PSUs"


Oct 15, 2011

Well said. Succession planning seems non-existent in our corporations/business houses. Probably, the sons and daughters of the promoter become a natural choice and hence no need felt for any advance planning.
In our PSUs, the less said is better. It is inability to choose a successor because the process is not transparent and professional, perhaps. Most vacancies of CEOs in our PSUs are not filled without a long delay. Procrastination and inability to decide are the quintessential qualities of our bureaucracy.



Oct 13, 2011

Eq.Master Team,
In all humility I may observe(on the subject under reference)as under:

We have often heard the usage "12th hour preparation : last minute preparation ". All around we have seen(whether in the corporate or Government controlled corporations) the same attitude: When a CEO is about to lay down reins of Office,everyone is in a frantic scouting exercise to locate a suitable CEO to take command ?? This prompts me to quote another appropriate adage " WHEN YOU FAIL TO PLAN, YOU ARE PLANNING TO FAIL ""

I hasten to conclude !!



Oct 13, 2011

The PSU's have only one agenda : Milking cows for the political parties and the IAS . There are also domianted either by BIMARU state represenatives viz. Bihari/UP/Bengali/Andhras whether in Manipur or Kashmir, Gujrath or Kanyakumari . Expect little . The OIl PSUs two decdes back were bigger then athier Chinese counterparts and better organised today they are Bimaru state rehabilitation agencies . The coming collapse of India is unfolding



Oct 13, 2011

Excellent article. CEOs of many indian Companies like L&T etc. should have learnt this lesson from Mr Lafley



Oct 13, 2011

Succession plan!!!! hey what is this? This is India man. We do not think about anyone succeeding me until I die. Even then my ghost will manage the show. Many a great managed concerns are disintegrated and pieced into smaller units. No need to give any examples cos there is plenty of them. As far as PSUs' are concerned we think that they need no one to run as they run on their own inertia the great example is our Maharajah, so long as the concerned minister is stuck to his position.



Oct 13, 2011

Succession planning in PSU 's ! In fact , it is the other way - the incumbent CEO particularly ensures that an effective succesesion is not allowed to build- up . A promising potential successor , is shunted out to obscure position so as not to be a threat to the present incumbent .He is always keen to seek an extension of his service .

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