Of being “True and Fair”

When an audit firm undertakes audit of financial performance of a company, the seasoned partner attempts to make a judgement on how well the financial statement represents the financial health of the company and the financial integrity of the management. Some years ago he made this judgement not based on compliance to a set of rules and standards but also on a variety of factors which, based on his experience, helped him to make a true and fair judgement.

There have been many instances of compromises to the spirit of the audit and many unscrupulous managers and auditors connived to hide information and to defraud the shareholders and or the government. This kind of degeneration forced the profession to come up with more and more standards and rules. The pendulum swung the other way with auditors focussing primarily on compliance to rules. The management learned the trick of demonstrating technical compliance and auditors were happy to play along.

The perils attached to this are now getting evident and there is a serious discussion among the accounting professionals that there is a need to find a balance. A sensible balance of using both rules and principles to judge whether the statements are indeed ‘true and fair’ with focus shifting more to principles.

Similar swings have also been witnessed in a variety of areas which require checks and balances. We moved to rule based regulation and we are now swinging back to principle based regulation. As the UK Financial Services Authority has portrayed “Principle based regulation – focussing on the outcomes that matters”.

Even the perception regarding the role of company board is undergoing a change. Its primary role is not only to protect the interests of the absent shareholders, but also to act as a guide and a sounding board for setting the strategic direction of the company.

Such shifts in disciplining methods are not just in the governance models of corporate and regulators. We see it in educational institutions and even family lives. In earlier era the parenting role included strict discipline of rules, timetables and targets; there was friendship and authority. The schools also followed almost regimental structures. Then there has been shift where the role of the teacher and even that of the parents have become primarily advisory in nature. This shift is quite predominant in western cultures. The safeguards that were built to restrict parental abuse and cruel treatment by teachers are now being misused. We see similar ideas being propounded in India too.

The society in now paying the price and there is a great deal of concern on the falling standards of education and falling standards of discipline and value system. I found the thought expressed by Michael R LeGualt in his book ‘Think” relevant in this context. “It seems clear that in setting out to be mainly the child’s friend or self esteem coach a parent is surrendering his or her most important role in shaping child’s values and character-that of mentor, guide and authority”

Such pendulum swings remind us of the need for strengthening the values right from the childhood and the need for a balanced approach instead of carrying any solution or idea to its ridiculous extent. This will be possible only if we have regulators and legislatures who have the vision to build clean institutions and the courage to stand up for what they believe is right. This is often available only in ‘limited edition’. When we see such leadership, it is our role to support them.

“Character is doing the right thing when nobody's looking. There are too many people who think that the only thing that's right is to get by, and the only thing that's wrong is to get caught.” ~J.C. Watts

Octopus Paul and his run of luck

Octopus Paul has added an additional element of excitement to the football mania that the world cup has unleashed. Even though I am not such an enthusiast of football, I still ask how Paul’s prediction has fared. It has added another topic of conversation, another exciting piece of trivia.

Do I believe that there is something divine or mystical about Paul? No, I don’t. Is there anything special about Paul? Yes he is one lucky fellow who has managed to get four out of six predictions in the Euro cup 2008. In this world cup the eight out of eight correct he has managed had a probability of success of 1/ 256. Now we have parrot Mani and the Indian Louse and many more in this game.

Not as lucky as the guy who gets a first price in lottery with few million contestants or even the boy who tops in IIT entrance exams with a million aspirants.

If he was a human being, there would have been books written by him and or on him about his theories on how to predict successful football teams.

He would be a bigger hit if he could repeat his luck in capital market. In fact we often see some lucky players who have run up such lucky streaks for some time and many of them have surely written their books.

This is true of most of what happens in our life. The number of variables that affect most of the outcomes, (whether it is in picking a stock, or in diagnosing an ailment or in choosing a job option) in long term or short term is way too large and complex for anyone to master.

What we can do when we specialise in a field, or work on a project is to get a better idea of the factors that may have a very high probability and or high impact on the outcome and then proceed.

Ceteris Paribas (everything else being equal), the success of one person from a pool of equally capable individual, is just plain luck. So when we improve our skill and knowledge, we improve the probability for a favourable outcome; almost like loading a dice.

On the reverse, when we lose in spite of the excellent preparation we have made or the skills we posses, it could be just being plain unlucky.

The religious minded will ascribe this as the wish of god or fate.

I am not questioning the existence of god, but reminding that even god would want us to be prepared and to exercise our choice (“It is for me to choose”) and not put the blame on him!

We can’t do anything about the genes we are born with or the environment we are born into. But, we can try to improve the probability of successful outcomes by enhancing our expertise, network and resources.

“Luck Favours the Prepared” Louis Pasteur

Sleeping with the enemy

Human beings are social animals. We have friends and we have enemies. They are nothing but two sides of the same coin; often changing from one form to another based on context or on situation.

What drives our enmity to somebody? The two key factors that influence this are Desire and Pride. Desire on one extreme could be the greed for more and more and on the other extreme it could be the need for self preservation, protection of what we hold precious or demanding what is due. Similarly, pride on one extreme could be the bloated ego or on the other extreme could be defending our dignity.

When we have a conflict with another person about something we desire, or when he hurts our pride in some fashion he becomes our enemy.

The degree of conflict or the stakes associated in this conflict will also determine the intensity of our hostility. If we are fighting for a large material benefit or preservation of our dignity and honour we may even fight harder.

Enmity is also contextual and situational. When Sachin and Jayasurya are playing for India and Sri Lanka they are competing and they are enemies during the game. But when they are playing for Mumbai Indians they are friends. May be in private life they would be friends. Similarly, if I am working with one Mutual Fund, I will be fighting and in competition with other Mutual Funds; maybe I will even try a few tricks to make my competition look not good enough. But when all the mutual funds are fighting with the insurance industry or we are lobbying with the regulator, we are all friends. Mukesh and Anil Ambani may have been fighting with each other to further the interest of their companies and also their personal pride.

That is why sometime the enemy of our enemy becomes our friend. Remember the famous quote from Mr Bush, the past president of America. “You are either my friend or my enemy”.

It is also person dependent. Some people are more tolerant about desire and conflicts associated with it; some people are more accommodating about hurt to their ego so long as there is a material benefit.

When we deal with people, whether in business or in friendship, we need to develop a skill to assess how they would react if and when there is a conflict with respect to either their desire or their pride. We need to also be sensitive to how the reaction would differ as per the situation, the people present or the stakes involved.

If the other person is very greedy, he may use any means to get what he wants or on the other hand we may be able to buy him at a price. If the other person is very proud and hot-headed, it may not be a good idea to needle his pride.

We have to also factor in how powerful, the person with whom we have a conflict is. The more powerful we are, in relation with the other person, we have a better handle. But we need to keep in mind, that the power is determined by not just what he possess or what his position is; but, also by what he perceives that he has to lose. That is why one suicide bomber, can inflict more damage than a battalion of regular soldiers.

“In a war, just or unjust, in the end nobody wins”

“Vanity my favourite sin”

Nuremberg trials are a series of military tribunals held by the allied forces who won the Second World War. These trials were held to prosecute members of political and military leadership of the Nazi Germany for their crime against humanity. In most of these cases, they were being prosecuted for what they did, for their obedience to their superior’s commands as expected from a disciplined officer of any organisation, more so of the armed forces. Therefore, a certain set of principals had been evolved to determine what constitutes war crime. These principals called the ‘Nuremberg Principles’ had been created by the International Law Commission of the United Nations.

It is now accepted at a philosophical level, that when we act as per the directions of the superiors, we also have the moral responsibility to assess the fairness of the actions and express our dissent when those actions are against the larger interest of the society.

The issues associated with ‘blind following of the order from the superior officer’ are not just a concern in military actions. We face it in our day-to-day life as an officer of the government or even of commercial entities. It is practically difficult for many of us to act on a moral choice to “blow the whistle” as the potential retribution of such action could have an adverse impact in our personal life.

In many cases, the individuals who have questioned the actions of their superiors have been harassed and had to suffer significant damage to their life and career. This include dismissal from job, coming in the way of he getting alternate employment, tarnishing his image so on and so forth.

Society has been trying to evolve legal structures to protect and encourage citizens to ‘blow the whistle’ when they come across un-ethical or fraudulent actions and to give them the right to demand information that could elicit truth.

The listing agreement between the stock exchanges and the companies has a provision (though still non -mandatory) that all listed companies should have a published ‘whistle blower policy’ for employees to report instances of unethical behaviour, actual or suspected fraud or violation of the Company’s code of conduct or ethics policy.

The “Right to Information Act” tries to provide a strong tool in the hands of the citizen to demand access to information regarding the actions of the government.

This legal enablement has helped to bring about more transparency in administration and corporate governance. One of the main criticisms against these provisions is that many a time these are misused to further private agenda, inter-personal conflicts or even to clog the pipes of the administrative machinery.

In spite of all these, India is still rated high on corruption both in private and government sector. The tag line of an article written by Mohan Murti (former Europe Director, CII, and lives in Cologne, Germany) in Business Line titled “Is the nation in a coma?” reads “Europeans believe that Indian leaders are too blinded by new wealth and deceit to comprehend that the day will come when the have-nots will hit the streets”

Corruption is not just with respect to monetary returns for favours dispensed or deviation from law; it is also applicable to the actions of commission and omission by the so called clean and honest people, that pander to their needs of ego satisfaction, self glorification and just plain megalomania. As John Milton played by Al Pacino in the award winning movie quips “Vanity definitely my favourite Sin”. And un-ethical actions that satisfy this vanity is equally despicable as the actions that layers the pocket.

While continuous evolvement of the legal framework can help the cleansing process, each us has a responsibility; the responsibility to act ethically and to question ethical violations (especially the ones which are technically and may be even legally correct) that hinders the path to building a cleaner society that respects decency and fair play more than the smell of greenbacks and self edification.

“Nearly all men can stand adversity, but if you want to test a man's character, give him power”. Abraham Lincoln

You don’t get rich if the government prints more money

This is the season when the board examination results (for class 10 and 12) are declared. Many schools with 100% pass rate, thousands of students with more than 90% marks and there is excitement all around. It feels nice to join the celebrations. I also read that a child who got 98% in class 10 could not get admission for the course she wanted in the college she preferred.

But then I can’t help having some contrarian thoughts. Normally, when an examination paper is set there is a sort of algorithm that is used. 50 to 60% questions check the basic level of learning of the topics, 20 to 25% check a little deeper understanding and the remaining evaluate the ability to apply the learning in practical applications and/or the ability to interpret.

When students prepare for the exams, those who just want to pass can afford cursory studies and those who want to do well will have to work harder. The results will more or less be able to differentiate quality and hard work.

Then everybody will not get good marks. But does it really matter? What matters for the admission to next level are, either marks in the board exams or scores in the qualifying entrance examination. If it is the former, then it is not the absolute marks but the relative marks that will determine. If lots of people get 99% cut off marks for admission to the next level may be 97% and if only few get 99% then the cut off could be 80% and so on.

If the admission is on the basis of entrance examination, what is critical is the depth of understanding. Here preparation for a difficult board examination may really help in the preparation for the entrance examination.

Today in India we are seeing competition among the various academic boards (CBSE, ICSE, State Boards and so on) in giving more marks to more students more than strengthening the learning process; sort of academic inflation.

If I use an example from economics, the country cannot make every citizen richer by printing money and distributing. It has to strengthen health, education and infrastructure, it has to provide guaranteed titles to property, it has to ensure rule of law, and it has to empower people to build on this.

If there are lots of aspirants who don’t get admission on account of poor marks, the solution cannot be found by giving everybody more marks. The solution is to have more colleges. Dilution of standards and liberal valuation just provides temporary elation and is almost like a peg of good whisky!

True education is what remains after one has forgotten everything he learned in school.
- Albert Einstein

Question of Existence

We humans are part of a giant living system. We are unique, independent, and self contained; but we are also part of the whole and have no existence in isolation. Take a handful of mud from the top soil of a river bank. Is it live? Ask a farmer. He will tell you that it is bustling with life. From micro-organism that we can’t see to insects, to worms! Does it have a collective property? Yes it has. It is fertile. As a combination of those millions of creatures that goes about its routine it becomes a fertile block. Devoid of these teeming life forms, this same mud would be dead.

Look at our human body. Ask a doctor! He will tell you that our various body parts are swamped with multitude of micro-organisms and without them there, we would not survive. If by some magic we manage to get rid of them, we can no longer sustain.

Sometimes some of the organisms mutate and grow too fast or virulent that it destroys the balance. Then the nature has its own way to contain and curtail and bring the balance back.

Our mother earth too, with multitudes of creatures, collectively makes a living system. Though often we see ourselves, fallaciously, as masters of this planet, we are nothing but one of the component that sustains her (or that is sustained by her). In the recent past, we humans have been multiplying too fast and turning virulent to the detriment of our environment, threatening its balance and our own survival.

We humans are endowed with intelligence to understand and we are also way up the chain of enlightenment that we can observe and realise the consequences of our actions.

We have two choices. Learn to discipline this run away plundering or let nature come at us with a heavy hand.

Let us look at our life from a different perspective. All through the past few thousand centuries some men, to some extent attempted and managed to be in synch with the nature and understand, appreciate and connect with the big picture of cosmos. From this connection they shared their insights as Bible, Vedas, Upanishads, Khuran, etc; the windows to this cosmic force and a tool for our spiritual linkage. We have seen, that in spite of rational thinking and scientific progress these truths still remain and sustain, though the rationalist may point out the conflicts and disconnects.

With a large majority of human beings being restricted by this rationalist way of thinking, the link that human beings have with the ‘cosmic truth’ appears to be getting weaker and weaker and the progress in our spiritual maturing appears to have been arrested.

From both perspectives, it appears that unless we realise our irresponsible exploitation of our ‘mother ship’ earth and unless we try to re-synch with the cosmic forces, the nature will soon hit “ctl, alt, del”.

“It is not that science and religion are in conflict; it is just that science is too young to understand” Unknown

“Beg to differ”

Some of my friends are pilots. One of them once explained to me an interesting point of view. According to him, planes are primarily designed to fly and not to land as most of the time it is up in the air and flying. Therefore, landing can be seen as a managed crash. That is why more accidents have happened during landings and take-off than during cruise.

In a similar fashion, most large organisations particularly bureaucracies, are designed to maintain status quo. One of the primary considerations of such design is to have policies, procedures, rules and conventions that are not adventurous and try to prevent misuse and misappropriations. Such excessively straight-jacketed organisations limit opportunities for human innovation and initiative. Adding on to this is the status quo bias (1) which is inherent in most human beings, and this encourages these organisations to resist change intensely.

For these reasons, transformation that is a game changer becomes a difficult challenge to pull through. However, occasionally when we get a leader (or a team) who wants to make things happen and who has the courage to manoeuvre around the hurdles that is an inherent characteristic of bureaucracies (whether public or private sector), then we witness transformations in its true sense.

Whenever such a combination of stars comes together, we should work in overdrive and try to achieve a level which is irrevocable. If we manage to reach this level, we can be reasonably confident that the transformation will be long lasting if not permanent. This is because even to screw -up something there has to be people with courage and initiative.

One of the conflicts that we often face, especially in social/ public leadership, is the choice we are forced to make between the leaders who deliver and the leaders who are good an honest. This is because the probability of the good and honest leader being a courageous leader who delivers is often not so high. The good often get caught within the technicalities and interpretation and focus only on doing things right and not doing the right things.

I am sure all of us will have number examples on this to share. One of the incidents narrated by Capt Gopinath in his biography stands as an excellent example and is entertaining by being so ludicrous.

When he first acquired fixed wing aircrafts for Air Deccan, he and his senior colleagues went with their family to take possession of the aircraft. Their first port of call in India was Mumbai. He was proceeding from Mumbai to Bengaluru next day morning. His aircraft was allowed to park in a far end of the airport and none of the passengers and pilots were allowed to come in to terminal as the customs formalities of clearing the aircraft was to take place in Bengaluru. The aircraft had no fully functional toilets and all the passengers including women and children and the pilots had to go behind the bushes in the airport to answer to the call of nature. This was in spite pleading to allow ladies to use at least the toilets in the terminal.

So much for doing things right. On the other hand the greedy and selfish leaders may put their might behind honourable causes (if you present the right incentive to them) at least because it offers them good public relations. The information available in public domain about what happened in case of IPL is an interesting case in point.

So the second best choice for the society is to have a few of such elements playing some key roles. If we also have a process in place to contain and discipline such innovations we may be better off than merely having leaders who just try to maintain status quo.

Is this the challenge of democracy?

"The status quo is the only solution that cannot be vetoed," Clark Kerr

(1) Read up some more on Status Quo Bias

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