Captive Adaptations

Corporate India seems to have been institutionalized by Corporate America. While I am an ardent supporter of free market capitalism, I also always have been an advocate of “Simhavalokana Krama” - which essentially translates to “To continue to Reign as a King, you should learn to question everything you learnt, every step of the way, and only then proceed“.

What does this mean ?. Not to take anything at face value, to introspect and look ahead on continuous improvement. People in Corporate Governance particularly in US have always used buzzwords like Innovation and Continuous Process Improvements. But mostly they have failed to execute on them. Why do I say that ? Because companies in America for the last 8 years relied heavily on “Financial Engineering” to boost earnings. In almost every major company (manufacturing, Retail, Real Estate, etc) the profits from their financial services Biz Units rose to 30-40% of the overall corporate profitability.

Here are some examples of marquee companies which have been doing this.

GM - Why are they today in a mess, is because instead of focusing on innovations in Car Manufacturing or Distribution logistics, they focused on “financing” the purchases of cars, and even entering into mortgage business (ditech.com).

Circuit City - the bellweather electronics retailer which is now history - was making money mostly from its financial services.

GE - through GE Capital, instead of continuing its excellent path of cutting-edge engineering, got side tracked and is now cleaning up the mess.

And not just these, all Investment banks which are now history and a plethora of banks as well, ventured into very risky “financial engineering” and created vast amounts of “Financial Weapons of Mass Distruction - the CDOs, CDS, LBOs, CMBS, MBS etc. The funny part is, Wall Street always tends to pay lower prices for each dollar of financial earnings, apparently viewing them of a “lesser quality” than real-profits. This was even highlighted in this 2005 article.

Most went even a step further and started “Cooking their books”, to show bloated profits on their balance sheets. Starting with Enron, to all these recent guys under FBI investigation.

India Inc, which has been making news in the past decade, seems to have now joined this new bandwagon of “Financial Engineering”. Main Stream Media (MSM) is now covering every bit of news on Satyam, but there are some very big names that are making fast and quick maneuvers which are not covered by the MSM. Siemens Information Systems is now actually part of Siemens Corporate Finance. This is the best example of Financial engineering taking over real engineering.

Mannu Bhai, has already said that episodes like Satyam are a blot on India Inc image. The upheaval caused by the Balance Sheet Adventures or should I say Misadventures is likely to cause a Financial Chill in all of our lives.