Potential and Hurdles for VBM in India

The potential and urgency for applying Value Based Management (VBM) in Indian companies is immense for the following reasons.

Most companies in India have substantial physical assets which are under-utilized. This is reflected in low productivity of capital.

Historically most business groups in India diversified into a number of sectors, thanks to various inducements, compulsions, and temptations. The heightening competition from the mid-1990s has forced many business houses to review and restructure their portfolios to achieve greater focus.

Equity investors have earned dismal returns in the past five years. This has been perhaps the worst quinquennium for them. Disenchanted with their lot, they are producing corporate managements to focus on creating value for shareholders.

While the scope and need for applying VBM in India is enormous, there are some hurdles in dong that which arise mainly from certain attitudes, beliefs, values, and practices that are inimical to VBM. The major hurdles presently are as follows:

Most managements in India do not seem to have a genuine commitment to promote the welfare of ordinary shareholders. Often there is a divide between the interest of the dominant shareholder (who controls the company) ad other shareholders. The dominant shareholder, whether it is a private Indian business group, or a foreign parent, or the Government of India, or whatever may be more interested in using the company for its parochial objectives and less interested in the welfare of all the shareholders. The market value of the company may not be the main agenda of the dominant shareholders. Indeed in some cases the dominant shareholders may even welcome a depressed valuation of the company so that it can step up its stake directly in the company by way of a creeping acquisition in the market place or indirectly through a share buyback program.

Financial literacy of employees in India is not high and many managements may not be too keen to raise it. Traditionally, financial numbers in India have been closely guarded. The general attitude of the top management may be summed up as follows: Let the operating people produce more, sell more, and control costs. Let them not bother about or even know what the financial numbers are. They need not know how we get our finances, and how we manage our cash flows.

The accounting model seems to dominate corporate thinking and managers believe that stock prices are determined largely by reported earnings. No wonder managing the bottom line is a favorite corporate pastime in India.

The degree of decentralization in India is not very high. Barring a few operating decisions of a routine nature, most other decisions are highly centralized. Employees down the line hardly have any say in investment and financing decisions and very limited say in strategic operating decisions. Meaningful decentralization and empowerment of people down the line, which is often an important precondition for introducing VBM, does not exist in most companies.

Many top managements in India believe in monitoring employee behavior by watching over their shoulders and rewarding them on the basis of their subjective personal assessment. They may be reluctant to give up their discretion in favor of an objective system, particularly with respect to performance evaluation and incentive compensation.

Managers in India are used to a compensation structure in which the fixed component is high and the variable component is low. They may not be psychologically ready to accept a compensation structure in which is a substantial part of the pay is performance linked and variable in nature. They welcome incentive compensation provided it does not in any way lower the fixed pay they are used to.