Hidden Agenda Holds the Key..

Transformational projects that attempt to bring about revolutionary changes in processes, structure, technology or strategy are both exciting and frustrating. It germinates from visionary leadership and will succeed only with patience and perseverance.

When we embark on such a project for an industry or a large cross section of society the challenges becomes manifold. Three essential ingredients for such projects to succeed are (i) design of right incentive structure for the participants, (II) building awareness, interest and demand among the users and (iii) identification of and safeguarding against the conflicting agendas and incentives.

Normally the first two get significantly more attention than the last because it is hidden behind a veil of apparent co-operation or hidden in the garb of protection of the weak. Failure to unearth these agendas often is the reason for failure of many projects. We see that many protests against reform measures in capital markets come in the name of the ‘small investors’, protests against taxation reforms comes in the name of ‘small taxpayers’ or protests against agricultural reforms comes in the name of ‘small farmer’. Critical analysis of the issues often reveals that the problem lies elsewhere.

In this article I attempt to share some examples of our experience in this count. The intention is to highlight the importance of such issues and the need to make strategies to address these agendas an important component of the design plan.

1. Conflict of interest at industry level

Sometimes the reform measures have negative impact on the prospect of the industry. Therefore no individual firm would be willing to co-operate of participate and seldom the industry association take a collective view. In such cases compliance can be ensured only by regulatory intervention.

For example strict KYC verification is required to be undertaken in case of investments in capital markets, mutual funds and even bank accounts to restrict social evils like tax evasion, money laundering. As far as the industry is concerned such measures will dampen attractiveness of these investment options and without regulatory compulsion nobody would be interested to ensure compliance.

2. Conflict of interest at the firm level

In some cases the investments made by the individual firms or the strategic interests of the related firms my work against the transformation.

Ideally the establishment of the securities depository was in Indian capital market should be welcomed by any custodian or fund manager on account of the reduction in risk and improvement in efficiency. However when NSDL was set up in 1996, there were some custodians who found this to be a matter of inconvenience at least in the short term. This is because these custodians had, in the immediate past, established infrastructure to handle physical securities and were able to charge premium rates for this and depository would have removed this strategic advantage. While they did not obstruct overtly and in fact had joined as the depository participants they quietly advised their FII clients of the need for ‘wait and watch’.

In this case we had to also work directly with the end clients (the fund managers) who could evaluate the option without such biases.

3. Conflict of interest at individual level

Some time there could be conflict between the interest of the individual officers and the interest of the organization. The resistance of some of the officers who were handling the share transfer department on account of the loss in importance and financial power resulting from dematerialization of share certificates is a good example for this.

We managed to address this issue to quite an extent by means of direct dialogue with the senior management of such firms.

4. Conflict of interest of the regulating / enforcement authority

Most of the transformational projects in the area of governance lead to transparency and reduce rent seeking opportunities which may not be liked by some who profit from the inefficiency.

On the other hand some of the officers may attempt short cuts without the larger interest of the project in mind for their personal credit; especially because they want to show some magic results during their tenure. Such short-termism could lead to the failure/ delay of the project.

While both are corruption in some ways, the latter is more difficult to manage and this is the most difficult problem to crack in case of PPP projects.

Tailpiece: In any project we need develop an eye to hidden agendas and have strategies to address these. The solution to all such hidden agendas cannot be regulatory fiats as it will be impractical to ensure compliance. We should learn to address these more by managing incentives or by identifying countervailing forces.