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VOLUME 01 ISSUE 09 Rs.50









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After spending 17 years with Godrej Agrovet, S Varadaraj is a happy exception in the age of job -hopping.



WE ARE FAMILY! Find out how today’s CFOs are leading family-owned businesses into the future


A&%8+&!'B)( 38 INDIA’S ON FIRE As per a KPMG study, India is set to outdo BRIC partners in the growth graph

&8'"&$C 10 V LAKSHMI NARASIMHAN CFO, Magma Fincorp Ltd talks about the proposed draft guidelines on securitisation for NBFCs

@(#-()D*8E,)@!#*(8*'B-9 THE NAGGING VOICE WITHIN 48 Narayan Barasia, CFO, Godrej Household Products talks about how SAP was implemented


ATTRIBUTES OF ENDURING FAMILY BUSINESSES 24 The keys to long-term success are professional management and keeping the family committed




How the fallout from the global economic crisis exposed a vulnerability for inadequate risk governance in some organisations


P. 20









How to improve financial productivity and boost employee morale



'"( $% *+,'&) * A 9. 9 MEDIA

44 CLINCHING DEALS Working in a team has its advantages and problems. The trick is to turn every hurdle in your favour







Empronc Solutions Inside Front Cover | Financial Executive 02 | Inside Back Cover | ICICI Bank Back Cover

HP 05 |

Ace Data Devices 13 | Speaker Bureau 37 | Sodexo



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MANAGING DIRECTOR: Dr. Pramath Raj Sinha

The Professional Touch

A LEOPARD, THEY say, does not change its spots. Don’t look now, but that great institution – the family-owned Indian business house – is busy changing its spots (or stripes, if you please)! As India Inc. grows in leaps and bounds and extends its footprints globally, family-owned (and in most cases family-run) businesses, both big and small, are fast waking up to the importance of seasoned professionals to manage and lead different functions of their companies, especially complex financial issues and tricky M&A deals. As our contributing editor Bennett Voyles, who spoke to CFOs and experts across three continents for this issue’s cover story (page 14) says, if you look at the top 500 largest companies in India, about two-thirds of them belong to business groups, and in most cases these conglomerates are family-controlled. It’s not that family-owned businesses hadn’t taken the ‘professional route’ earlier. Many like the Rs 12000 crore Godrej Industries or the Dabur group have been run by professional CXOs since many years. Many others are changing direction after acquiring a foreign firm or two, scaling up their business within India or expanding abroad – moves which have brought about an urgent need for professional managers and leaders. Yet, the transition is at best half complete. On an average, nearly half the board members in such businesses are ‘insiders’ or family members. Independent directors are few and far between. The cover package looks at how the CFO fits into a family business, the role he plays and what his biggest challenges will be if such businesses are to grow at a faster clip. In other sections, we look at the contentious issue of risk management, spend a day with the CFO of Godrej Agrovet, talking everything from mergers to yoga and get the CFO of Magma Fincorp to pen his apprehensions about the draft Guidelines on Securitisation for NBFCs. We have introduced a few new sections and columns from this issue. ‘Case Study’ will have CFOs telling us about lessons learnt from facing a tough professional challenge. The ‘Lounge’ section too sees ‘automobiles’ as a new entrant. Spend a few minutes checking out the new BMW 535i series, planning your next holiday to China or if art is what grabs you – reading about two young and exciting artists from Punjab. We hope you like the new-look CFO. Like family-owned businesses, we too are changing. Changing for the better. Enjoy!

EDITORIAL EDITOR: Anuradha Das Mathur MANAGING EDITOR: Dhiman Chattopadhyay ASSISTANT EDITOR: Anoop Chugh CONTRIBUTING EDITOR: Bennett Voyles DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Binesh Sreedharan ASSOCIATE ART DIRECTOR: Anil VK MANAGER DESIGN: Chander Shekhar SENIOR VISUALISERS: PC Anoop, Santosh Kushwaha SR GRAPHIC DESIGNER: Suresh Kumar SENIOR DESIGNERS: TR Prasanth & Anil T DESIGNER: SRISTI MAURYA CHIEF PHOTOGRAPHER: Subhojit Paul THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg NATIONAL HEAD: Bindu Krishna MANAGER: Shreya Pilani ASSOCIATE: Priyam Mahajan SALES & MARKETING V-P SALES & MARKETING: Naveen Chand Singh NATIONAL MANAGER (SALES): Pranav Saran (+91-9312685289) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) NATIONAL MANAGER (ONLINE): Nitin Walia (+91-9811772466) ASSISTANT BRAND MANAGER: Arpita Ganguli CO-ORDINATOR (AD SALES, MIS, SCHEDULING): Aatish Mohite SOUTH: Vinodh Kaliappan (+91-9740714817) WEST: Sachin N Mhashilkar (+91-9920348755) PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar M Hiremath PRODUCTION EXECUTIVE: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari, Shashi Shekhar Singh OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd Kakson House, A & B Wing, 2nd Floor 80 Sion Trombay Road, Chembur, Mumbai- 400071 INDIA. Published, Printed and Owned by Nine Dot Nine Interactive Pvt Ltd. Published and printed on their behalf by Kanak Ghosh. Published at Bunglow No. 725, Sector - 1, Shirvane, Nerul, Navi Mumbai - 400706 Printed at Silver point Press Pvt Ltd, D107, MIDC, TTC Industrial Area, Nerul, Mumbai 400706.

Copyright, All rights reserved: Reproduction in whole or in part without written permission from Nine Dot Nine Interactive Pvt Ltd is prohibited.


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To merge or not? CFO India’s July cover story (1+1=1?) presented a very cautious approach before a merger. Surely, such deals are of great significance for the CFO. It’s really important for a CFO to not get carried away by the size of the deal. He should learn to say ‘No’ even when he has slightest of doubt about the deal. That said and done, I wish the cover story had also emphasised on the other side - When to say ‘Yes’ to a deal. Though, the article has been well-researched and covered, how I wish it would have a little optimistic tone to it. If possible please do a second part to the cover talking about the best merger deals India has seen. Kanwal Nain C, New Delhi

08.10 EASY READ Honestly, I was quite surprised to read ‘not so profound’ language in the magazine with a title like ‘CFO India’. It’s great in a way, as it keeps the reader glued. Of course, we would like to see the lighter side behind the stone face of a CFO. The trivia on CFOs (Profile) help us to get to know our CFOs really well. Though, at the same time, it’s important to not lose the core issues among all the lifestylish features on CFOs. —Radhakrishnan, Bengaluru

Your voice can make a change: Share your view point on what’s happening in the community and your feedback on the magazine at

us. Instead, can’t we have more of analysis than news in the section? For example, in the last issue the analysis on Basel III reforms was a good read. Carry more of such elements. —Manish Jain, Pune

LEISURE READ It goes without saying the magazine is a great leisure read but I believe there has to be a clear distinction between the Lounge section and the rest of the magazine. Presently, the Lounge starts abruptly and the layout is similar to the rest of the magazine. —Ramesh Gupta, Mumbai

GREAT IDEA The ‘Bonhomie’ article in the last issue talking about geniality among CFOs and CIOs was a great feature. Mostly, companies find it difficult to define hierarchy among them. The idea was presented, both visually and in writing, extremely well. —Sakshi Tiwari, Hyderabad

MORE ON LIFESTYLE PLEASE The CFO is a magazine raising the issues pertaining to the financial world. I admire it for the inpractice section. Say, issues like ‘What boards expect from the CFOs’ (July issue) are day-to-day queries faced by finance heads. We expect the magazine to focus on such relevant issues. It would be great if the inpractice can be made lengthier and you could include case studies into it. —Noorain Jehan, Mumbai

TOPLINE OR OLDLINE? I am a regular subscriber to your magazine. I have a little piece of suggestion if that can be taken into consideration. I believe some of the news stories featured in the ‘Topline’ section get a little dated, atleast by the time the magazine reaches

MISSING ‘VIEW FROM THE TOP’ I have noticed ‘View from the top’ segment is conspicuous by its absence in the last two issues. It’s great to know the opinion of the leaders at the top. Please reintroduce the segment. —Jose Carvalho, Delhi

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Chinese Sunrise

CHINA IS SNAPPING at Uncle Sam’s ankles. And India, riding on the hope that her economy would grow at over 10% by 2013, is poised, along with China, to ensure Asia upstages the US and European Union as the world’s most powerful continent, financially. Last fortnight, the world’s most populous nation overtook Japan (another Asian giant) as the second largest economy, as receding global growth sapped momentum and stunted a shaky recovery for Tokyo. Yi Gang, head of the state administration of foreign exchange and deupty governor of the People’s Bank of China , in a statement posted on his agency’s website said he hoped that even a 5% growth rate for the nation in the coming years would ensure an unprecedented overall growth rate over more than three decades and catapult China as the world’s largest economy by 2025. The figures underscore China’s emergence as an economic power that is 6


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changing everything from the global balance of military and financial power to how cars are designed. It is already the biggest exporter, auto buyer and steel producer, and its global influence is expanding. China, along with India has been a major force behind the world’s emergence from recession, delivering not just hope but real money and real jobs to the economies of U.S., Japan and Europe. Tokyo’s latest numbers, however, suggest that Chinese demand alone may not be enough for Japan or other economic giants. On a less spectacular scale, but on the back of what many consider far more solid growth, India is quickly moving towards one of the top 10 economies of the world. Now ranked 11th, India is expected to become the world’s fastest growing economy by 2013, outstripping even China. “Over the next two years, India should start matching China’s GDP growth of around 9% barring another global financial crisis,” Morgan Stanley economists Chetan Ahya and Tanvee Gupta mentioned in a recent report. More importantly, they noted that by 2013-15 India will outpace China noticeably on the growth barometer. The rise of the world’s two most populous nations as economic super powers coincides with Japan’s decline, that has in fact been quite as spectacular as China’s rise as economic power. “Japan is


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Nitin Sood cfobook .............................................. Pg 08 Outsourced to the US? ........................................ Pg 08 Faster M&As soon................................................Pg 09 Coming up: Reliance-CBS TV.............................Pg 09

the canary in the gold mine because it depends very much on demand in Asia and China, and this demand is cooling quite a bit,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “This is a warning sign for all major economies that just focusing on overseas demand won’t be sufficient.” China has surpassed Japan in quarterly GDP figures before, but this time it’s unlikely to relinquish the lead. China’s economy will almost certainly be bigger than Japan’s at the end of 2010 because of the huge difference in each country’s growth rates. China is growing at about 10 percent a year, while Japan’s economy is forecast to grow between 2 to 3 percent this year. The gap between the size of the two economies at the end of last year was already narrow. Japan has held the No. 2 spot after the U.S. since 1968, when it overtook West Germany. From the ashes of World War II, the country rose to become a global manufacturing and financial powerhouse. But its so-called “economic miracle” turned into a massive real estate bubble in the 1980s before imploding in 1991. It was around the same time that India’s growth story began to unravel, a journey that is now gaining momentum on the back of a fresh boom in the manufacturing sector and with all global outlook surveys indicating India would lead the economic recovery in the months to come. That CFOs of corporations across India, big and small, will have to play a significant, often crucial role if this momentum is to be sustained, goes without saying.


Will RBI’s decision to increase repo rate affect expansion plans of Indian firms?

47% No 36% Yes 17% Maybe


Will the hike in US visa fees affect not just jobs but also finances of Indian IT firms? 2*3,$+*4$53$444678*9+:393;3,67*<=>*??


American CFOs predict rising expenses WHILE CFOs IN INDIA have all the reasons to feel buoyant, things are not half as rosy on the other side of the world. Across the United States of America, Chief Financial Officers are expressing less confidence and more caution, with realisation dawning that the US economy and their own businesses may still be vulnerable. According to the second quarter 2010 “CFO Outlook Survey,” released recently by Financial Executives International (FEI) and Baruch College’s Zicklin School of Business, CFOs in the US will face a number of added expenses over the Those polled predict new next 12 months, including expenses in next 12 months new costs related to taxes, Continued economic financial regulatory reform uncertainty has resulted in and healthcare. The only lower confidence glimmer of hope? While confidence is down, and CFOs remain cautious on capital spending areas such as IPO activity and the rate of capital spendHowever they are more ing remain slow, CFOs’ outpositive on credit conditions look toward credit is more favourable and various findings demonstrate substantial progress since 2009. When asked about their companies’ current capital spending, over twothirds of respondents state that they are still spending cautiously or holding off on all or nearly all capital investments (69%). Many of the CFOs also indicated that they feared a number of newly added expenses would appear on their balance sheets over the next 12 months. Separately, the majority of CFOs (53%) also predict their taxes will increase. For the survey, the FEI team interacted with 279 corporate CFOs via email all through July.


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Nitin Sood Wall




What’s on your mind? Attach

Share Nitin Sood believes PVR is an entertainment hub June 15 at 1:40pm · Comment · Like


Born on: 14 Dec 1975 Married to: Gurudeep Kaur Religious Views: Liberal Political Views: Reformist

#'DE&!B.@ CA, Accountancy, Financial Management , 1995 — 1998

0.1F CFO, PVR Limited (Public Company; Entertainment industry) December 2001 — Present (8

Nitin Sood believes there’s some serious business happening behind the glamourous face of the Indian Film Industry June 15 at 1:40pm · 5 people Commented · Like

Nitin Sood says one has to live with the age of high money. Best way to survive is to learn how to juggle finances. June 15 at 1:40pm · Comment · 2 people Like this

I Read...

Three mistakes of my life: Chetan Bhagat June 15 at 1:40pm · Comment · 2 people Like this

Execution: The way to get things done June 15 at 1:40pm · Comment · 2 people Like this

years 9 months)

SR. MANAGER Dimensions Consulting (P) Ltd (Entertainment industry) June 1998 — Nov 2001 (3.6 years)

Industrial Trainee Escorts Finance Limited (Financial Services industry) September 1996 — March 1998 (1 year 7 months)

RECENT ACTIVITY Nitin Sood likes CFO India and 7 others

Nitin Sood likes “3 Idiots” and “Jab We Met”

THE DEFINITION: The term is used to describe deceptive use of green marketing in order to promote a misleading perception that a company’s policies or products are environmentfriendly. THE USAGE: Next time an environmentalist or your colleague in marketing tells you: “switching off lights during earth hour is probably just greenwashing,” you would know exactly what he means!

June 15 at 1:40pm · Comment · 2 people Like this


Outsourced to the US? DUE TO HIGH levels of unemployment, call centre workers are becoming cheaper to hire in the US. According to the head of the country’s largest business process outsourcing company, the wages in the country have come down to match the call centre costs in India, reports James Lamont and Joe Leahy of High unemployment levels have driven down wages for some lowskilled outsourcing services in parts of the US, particularly among the Hispanic population. But at the same time, wages in India’s outsourcing sector have risen by 10 per cent this year. According to Pramod Bhasin, the Chief Executive of Genpact, the company is expected to treble its workforce in the US over the next two years, from about 1,500 employees.



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Faster M&As soon? THIS WILL COME as good news to the country’s CFO community and India Inc. in general. As Indian firms scale up their ambitions and look to extend their footprint globally, the need of the hour is to speed up the Merger and Acquisitions process. And that is exactly what the government plans to do by the end of this year hopefully. The stage is set for a new tribunal that will put all M&A processes on the fast track, Corporate Affairs Minister Salman Khurshid has said. To be called National Company Law Tribunal, it will replace the Company

Law Board, the Board for Industrial and Financial Reconstruction (BIFR) and High Court jurisdiction relating to matters under the Companies Act. The Supreme Court has given the green signal to the tribunal, Khurshid told Members of Parliament in a written reply on August 17. “National Company Law Tribunal with its exclusive jurisdiction to deal with all matters connected with the Companies Act will hasten the process of mergers and acquisitions,” the minister said. Here’s wishing God speed to the setting up of this tribunal!


Retail Investors Eye Bigger IPO Pie THE SECURITIES AND Exchange Board of India (Sebi) may consider a proposal to redesign the term “retail investor” to mean any individual putting in an application for shares worth up to Rs. 2 lakh from up to Rs.1 lakh at present. The market regulator may also simultaneously look at raising the percentage of shares in public issues allocated to retail investors. At present, 35 percent of shares in public issues are earmarked for retail investors. Going by the current definition, an investor would not be able to bid for more than 100 shares in the retail category for the just concluded SKS Microfinance IPO, where the price band was Rs 850-Rs985 a share. The retail segment of the IPO was subscribed nearly three times. A senior Sebi official said if the regulator decides to redefine the term to include all investors who are buying up to Rs 2 lakh worth of shares in public issues, it will have to simultaneously raise the allocation of shares in public issues to retail investors from the present 35 per cent.

Reliance-CBS TV next up Anil Ambani Group firm Reliance Broadcast Network (RBN) has finally sealed a deal with US media conglomerate CBS Corp to form a JV to own and operate TV channels. RBN will form a 50:50 joint venture with CBS Studios, a division of CBS Corp, the company said in a filing to the Bombay Stock Exchange. The JV will own and /or, operate market and promote a portfolio of television channels in India, Nepal, Bhutan, Sri Lanka, Bangladesh, the Maldives and Pakistan, it added. Shares of Reliance Media World were trading at Rs. 80.10, up 3.22 per cent from the previous close.

Wipro in defence Technology major Wipro is set to enter the defence sector. The Foreign Investment Promotion Board (FIPB) has given its nod to Wipro for designing, developing and manufacturing defencerelated software and referred the matter for the Finance Minister’s approval. The case assumes importance as even the FIPB was not clear whether approval from them is required for companies engaged in software activities to enter the defence sector.

‘Netting’ employees Following a string of suicides at its Chinese factories, iPhone maker Foxconn Technology Group has raised workers’ wages and installed safety nets on buildings to catch would-be jumpers.

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says the proposed draft guidelines on securitisation for NBFCs are a source of concern THE RESERVE BANK OF INDIA HAS RECENTLY circulated draft guidelines on securitisation by NBFCs. It appears similar to the draft guidelines on securitisation issued for Commercial Banks. While it is common knowledge that Commercial Banks take large single exposures on their corporate clients, Asset Financing NBFCs (referred to as NBFCs) have almost always operated only in the retail loan domain. Given this fundamental difference between the two segments of the credit sphere, in my view it will be appropriate to take a re-look at the proposed guidelines. NBFCs have been recognised for their role in credit delivery in remote corners of India and have carved a niche for themselves in the semiurban and rural segments of the country. NBFCs are known for their proven skills in assessing the credit needs and creditworthiness of the unorganised 10


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sectors of society. More than half the customers are those who are borrowing for the first time in their life and hence are acquiring a productive asset for the first time. NBFC Asset Finance Companies, through their deep penetration, local presence and domain expertise have developed well honed skills to identify such needs and fund them after conducting appropriate due diligence.

“NBFCs have been recognised for their role in credit delivery in remote parts of India and have carved a niche for themselves.”

While the strength of Commercial Banks lies in their capability to warehouse the assets thanks to their superior capital base and to their ability to access low cost deposits, the strengths of the NBFCs lie in their loan origination/appraisal from/of the un-organised sectors and servicing skills. Thus, this unique wholesaler/retailer collaboration model between the banks and NBFCs has ensured increased flow of credit to under-served, credit starved sections of society, which in turn has helped significantly in creation of assets and wealth in rural and semi urban parts of the country and at the same time deepen the credit delivery to remote parts of the country. Such a partnership between banks and NBFCs has not only supported in fulfilling the banks’ statutory compliance of priority sector lending but has also provided NBFCs a regular source of funds. The ability of NBFCs to securitise


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!"#$!%& their pool of receivables with the bankers has resulted in lower dependence on public deposits for financing their business and accordingly in the last few years the deposits growth for the NBFCs has been largely muted as compared to their asset growth and asset creation. In view of this, the NBFCs have resorted to securitisation as an important funding mechanism in the following ways: z They provide credit inter-alia to the priority sector, SRTO, agricultural sector, weaker section in the semi-urban and rural segments and create a pool of assets. z The pool of assets is then rated by an approved credit rating agency (usually rated AAA (SO)). z The underlying receivables are then sold through the process of securitisation which has now become the lifeline for the NBFC sector. During the last two years the RBI, with a view to prevent systemic risks, has periodically raised the level of capital adequacy requirements for



is the minimum holding period prescribed for NBFCs in the draft guidelines The draft guidelines prescribe a minimum holding period of 9 to 12 months, where maturity of the loans in the pool securitised is up to 24 months/ more than 24 months. This actually means that a loan can be securitised only after 10 to 13 months from the date of originating the loan. NBFCs normally provide vehicle loans for a period of 36 to 60 months with average tenor being 44 months.

“There is a need for differentiating a retail securitisation transaction from the single loan sell down transaction, which is essentially securitisation of single corporate loan.” non deposit taking NBFC AFCs, from 10% to 12% and further from 12% to 15% (by 31st March 2011). The need for securitisation is therefore felt even more today in view of such higher CRAR. However, the suggested stipulations in the draft guidelines on securitisation, pertaining to minimum holding period and minimum holding of residual interest would cause significant stress on NBFCs. 12


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Currently these loans are offered for securitisation even if the holding period is as low as one or two months. The rating agencies while assigning a rating, consider various aspects like the experience of the originator, past pool performance, portfolio analysis, composition of the portfolio in terms of asset class, loan to value, seasoning, over dues at the time of securitisation, geographical location, customer profile, etc.

Past performance is a lead indicator of future performance and the fact of their quality sourcing is evidenced through the various publications of the eminent Credit rating agencies in the country that the receivables originated by most NBFCs have shown consistently excellent performance and exhibit a very high level of credit quality. Hence, there is a need for differentiating a retail securitisation transaction from the single loan sell down transaction, which is essentially securitisation of single corporate loan. In such a transaction, the risk is completely dependent on the underlying customer and hence the stipulation of minimum seasoning may be relevant. However, in a securitisation transaction of retail assets as is being done by NBFCs, the main comfort for the investor and the rating agency is that the risk is widely distributed, backed by the originators experience in managing such retail assets. In this background the rating agencies prescribe appropriate levels of credit enhancement for offering the highest rating of “AAA SO”.

TO SUM UP z Stipulation of minimum holding period for assets securitised by NBFCs would put severe pressure on the capital of such companies restricting their abilities to extend loans to the priority sector and weaker sections of society. z NBFCs need securitisation of their assets constantly to churn their portfolio and provide credit on a continuous basis. z The credit enhancement that is prescribed by the rating agencies to offer a rating of “ AAA (SO) ” appropriately deals with the minimum residual interest as is proposed in the guideline. Note: The views expressed in this article are the personal views of the author.





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BENNETT VOYLES FROM TINY TO Tata, family-controlled companies continue to dominate the Indian economy and are an increasing presence around the world as well. But will they continue to lead Indian growth in this new millennium? The answer may depend on how successful their CFOs are in pressing their companies to adopt more formal accounting and governance practices. Although informal practices may have served family and company well (or at least well enough) in past decades, the global investors

that the fastest-growing family firms need to woo as partners and investors today require strong assurances that their investments are safe. Certainly, some of the larger groups have already made this transition. “To my mind the line between family and professionally run companies has blurred a great deal in recent times,” says Sunam Sarkar, CFO of the family-owned Apollo Tyres Ltd. Many others, however, have work ahead. Family companies may have a lot riding on AU G U S T 2 0 1 0



(#)'"*+,#"whether they make a successful transition to new levels of professionalism. To an extent, their success could well determine whether the company continues to keep pace with the growing economy, or finds itself outmaneuvered by nimbler competitors. For the country as a whole, too, reaching this next stage may prove important. In some of the developed Western economies, family ownership is not an especially significant part of the economy. But in India, as in the rest of Asia, it’s a different story. “As a matter of statistics, if you look at the top 500 largest companies in India, about two-thirds of them belong to business groups...and in most cases these conglomerates are family-controlled,” says Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business in Hyderabad. Among small and medium-sized firms, he says, the degree of family ownership rises to 90 percent. In all, he says, 40 percent of Indian exports are conducted by family firms.


THE AGENCY PROBLEM As these companies grow, their future success may depend on their ability to answer two simple questions. Sumant Sinha, the former group CFO of the Aditya Birla Group and

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COO of Suzlon Energy (58 percent of which is owned by the Tanti family) – one a sprawling conglomerate, the other a narrowly-focused wind energy company -- says he would want to find out two things before investing in any venture owned by a family business. Now the CEO of SaVant Ventures, a financial advisory firm he recently founded, Sinha says he would ask first whether the company acts separately or if there are transactions between the companies. Second, how involved is the family in managing the business? At the bottom, the challenge is what academics call an agency problem: how do you ensure that the people running the company are acting in the interests of the shareholders? At first glance, the whole idea of an agency problem seems nearly absurd in the context of a family company. After all, how can a family steal from itself? But the question becomes more serious once the company brings in outside shareholders. When that happens, certain habits

(#)'"*+,#"that may have helped build the family firm in the past – “tunneling” funds back from subsidiary companies; using personal funds to prop up failing business units; overpaying family members; trusting too much in home-grown expertise – habits that once made a kind of sense, may now pose a risk to the company’s future prospects. Clarifying the operating rules is not easy work. At many companies, the transition to being a professionally run company is still underway. “It’s a work in progress,’ says Kaushik Dutta, a Delhi-based author of several books on corporate governance. Will it be done in five years? Probably not, he says. In ten years, however, he says, most businesses should be getting close. But before they get there, many will need to resolve a number of issues, experts say.

TUNNEL VISION One of the most pervasive and difficult problems facing CFOs who want to make family companies safe for outside investors is to end the practice of tunneling – that is, extracting money from a profitable company in which the family has little equity in order to pass the profits along to a company in which the family has more shares. Typically this is handled either through simple cash transfers or unrealistic transfer prices. ‘This is obviously an unethical practice and illegal as well but there is some statistical evidence that this is going on,’ says Chakrabarti. Working from old annual reports, for instance, groups of scholars have found unexpected anomalies in the profit of the subsidiaries versus the flagship company, in which, for instance, the associated companies earn less profit than would be suggested by market conditions. Sometimes, executives will even try to bail out family members’ separate businesses. Consider for instance the difficulties in which the Raju family, former owners of the Satyam software company, found themselves after

CEOs AT INDIAN FAMILY-RUN COMPANIES EARN AN AVERAGE OF 30 PER CENT MORE THAN CEOS OF OTHER COMPANIES Ramalinga Raju tried to arrange the purchase of his sons’ two failing real estate and infrastructure businesses at the height of the crash in 2008. Stockholders balked at the plan, and that led in short order to the admission by Raju that the management team had cooked the books for years, but didn’t know how to stop lying. “It was like riding a tiger, not knowing how to get off without being eaten,” he wrote. Researchers allege that companies normally divert revenues between entities for one of two reasons. Either management wants to inflate

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the amount of profit that the family receives, by cutting out minority shareholders, or they send their own money in to prop up a part of the business that’s experiencing difficulties. In both cases, the family wins – but only in the short run. In the long run, such practices can starve the company of the resources it needs to grow, either by cutting it out of the capital markets when investors catch on to the scam, or by reallocating money from the more profitable parts of the company to the less profitable. “We see a lot of inter-company transactions and double-accounting that happens,” confirms Nitin Deshmukh, CEO of Kotak Private Equity Group in Mumbai. That’s why, before his group makes any investment, it insists that the family merge all its businesses into a single holding company – and submits the company to a detailed investigation by a forensic accounting firm.

THE SIEGE MENTALITY This conservatism has consequences. Some academics claim that this tendency to bail out losing units actually makes family companies less capable of dealing with innovation than public companies, because management effectively starves winners of resources while prolonging the life of sunset businesses. One group of Canadian theorists, examining Canadian familyowned companies, have suggested that a problem with family conglomerates is that they often hold on to old business lines even as another part of the company is moving ahead with more forward-looking technology. Unlike an ordinary firm that profits outright if its innovation is accepted by the market, the family conglomerate is likely to be held back as another business it owns is harmed by the innovation, according to Randall Morck and Bernard Yeung, finance professors at the University of Alberta School of Business in Edmonton, Canada. In the end, even as the company profits from AU G U S T 2 0 1 0



(#)'"*+,#"the “creative destruction” of its innovation, it will also be hurt by it. “The bottom line is that the family business groups internalise the destruction resulting from creative destruction... In contrast, if an independent firm produces the new product, the destruction is wrought upon others,” they write.

SUCCESS WITH SUCCESSION Executive succession is a difficult issue for any company but may be especially difficult in a family-owned company, where the death or retirement of a patriarch can set off a messy scramble for power. Few Indian companies, including family companies, plan for succession. A recent survey of 44 top Indian companies by Bain & Co., the Boston-based management consulting firm, found that 75 percent of firms interviewed never talked about succession. By comparison, 40 percent of the S&P 500 in the U.S. confessed that they had not

FEW INDIAN COMPANIES, INCLUDING FAMILY COMPANIES, PLAN FOR SUCCESSION, SAYS A BAIN & CO SURVEY discussed executive succession. Although this might seem theoretically easier in a family company, particularly a company with a tradition of drawing leaders from the family, often it seems to make the challenge even greater. Succession battles within families can be notoriously harsh, with unpleasant consequences if it breaks out into the news, the way the Ambani brothers’ succession did a few years back.

Such problems are so common that Deshmukh of Kotak says that before his group makes an equity investment in a family business he always looks to see the age of the family’s children. If they are ten years away from coming into the business, he doesn’t much worry, but if they are two years away, that’s another story. “While it is a positive sign because the younger kids are very energetic and enthusiastic...they also bring lot of questions,” he says. Typically, he says, brothers running a business manage to get along together, but the situation changes when their children start trying to find roles for themselves in the business. “That’s when the problems start,” he says. As part of his due diligence process, he asks the companies to prepare very clear details about the roles and responsibilities of everyone involved in the business. One tactic that some companies seem to be using is to hire outside consultants or nominate boards to select the company’s next generation. The Tata

S)1/2:/29=>/DE3/ 49=3/?3D<33=/85294:/ 5=>/G6183AA91=544:/ 6@=/I12G5=93A/E5A/ ?4@663>/5/7635D/>354/ 9=/63I3=D/D923ATU/ — SUNAM SARKAR, CFO, APOLLO TYRES



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Group, for instance, now has a team searching for a replacement for Ratan Tata, the current chairman, who is set to retire next year, when he reaches 75.

SHARING THE WHEEL Solving these kinds of problems requires some major adjustments in the executive suite. The two biggest, says Kaushik Dutta, a Delhi-based author of several books on corporate governance: learning to share information, first, and second, learning to share decision-making. Stepping back from hands-on decision-making can be a tough adjustment for companies previously run by either a founder or a small group of family members – not least for the former leader. Typically, Dutta says, the leader’s entire identity is wrapped up in the company. “That’s a pain point,” he says. Such problems also extend to familydominated boards. Although SarbanesOxley has pushed some US-listed companies toward greater board independence, Chakrabarti says problems still arise regarding boards that aren’t sufficiently independent. One example: the Satyam scandal. Board members approved the purchases of the Raju sons’ businesses, despite their questionable value and despite obvious signs that there were conflicts of interest. Another sign: Chakrabarti says that some studies have found that CEOs at Indian family companies earn an average of 30 percent more than CEOs of other Indian companies. A refusal to share decision-making can hurt the company in other ways as well. For instance, some business dynasties are able to maintain control of their empires with just 10 or 20 percent of the stock, but many families try to stay absolutely secure in their ownership by retaining more than 50 percent of their equity. This creates a challenge for the CFO looking to raise additional capital, as he needs to do it without diluting the family’s holdings or level of control.

S(8/:1@/411B/ 5D/DE3/D1G/ VKK/45673AD/ I12G5=93A/9=/ (=>95T/5?1@D/ D<1;DE96>A/18/ DE32/?341=7/ D1/?@A9=3AA/ 761@GAWU/ — RAJESH CHAKRABARTI,ISB

Their 50+ percent solution ensures control, but at a price. The biggest cost, says Chakrabarti, is that the lack of available stock makes the company less attractive to institutional investors because it leaves “room for machinations.” The lack of available stock makes it easier for someone to manipulate the market, and more difficult for investors to determine their shares’ true price. Holding on to all that equity may put pressure on family groups’ capital formation in other ways as well, by making debt placements look relatively more attractive than equity for reasons of control, not cost of capital. “They think twice about issuing new equity,” says Chakrabarti.

How difficult the CFO finds leading this kind of transformation depends, of course, on the degree the degree of professionalism already present in the company. In a highly professional company, the role of CFO is no different than at any other company, according to one CFO. “It is not significantly different if the company is professionally run, even if led by a family member. Rapport with the owners is of course important, but so is the case when a professional CEO runs the company,” says Sarkar. For Dutta, the degree of success the CFO achieves in making reforms is more related to the age of the family members actually running the company. A founder may fight the CFO, but a second-generation owner who has studied or worked abroad, may have a clearer idea of how a business should function, according to Dutta. “Today’s promoter family members are professionally qualified and have got exposure in other organisations or in different departments within the company before they take charge,” he adds. However, Sinha believes the age of the company itself will have something to do with the degree of leverage the CFO has to make changes. The older and more established the company, the more bureaucratic it’s likely to be, according to Sinha. With younger companies, the CFO may have a freer hand, he says. Such companies tend to be “more open-minded and frankly more accommodating.” Young or old, however, one factor common to most family-owned businesses should help make some of these changes easier: the special ability to take a long-term view that tends to go along with having your name over the door. “The family sees their wealth creation in terms of generations, rather than the quarterly stock price mirrored on various exchanges and captured in financial reports,” explains Sarkar of Apollo. AU G U S T 2 0 1 0




!"#$%&' ()*+"+,+"+-



modern CFO is an

Having spent 17 years at Godrej Agrovet, S Varadaraj, the 41-year-old CFO and Vice President (Finance and IT) of the company says his goal is clear: to make each division of GAVL, already market leaders in their field, the most profitable and financially sound amongst peers. DHIMAN CHATTOPADHYAY 20


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HIS PROWESS ON the squash court is impressive, given that he is not a sprightly teenager any more, nor is squash his profession. “I was pretty bad at it originally you know. But I stuck to it and my game has improved over time. The trick is to persist,” smiles S. Varadaraj CFO and VP of Godrej Agrovet (GAVL) the Rs 1600 crore agribusiness arm of the diverse Godrej Industries empire. And it is this determined nature in the man that’s helped him rise in the cut-throat world of India Inc. and overcome challenges along the way with relative ease. In an era when job hopping is the name of the game, Varadaraj is a happy exception. The 41-year-old has spent close to two decades in the world of corporate finance, picking up bits and pieces of wisdom on the way. His CV however, does not have too many columns in the space




.%&'(/#0'( DEAL OF MY LIFE The Rs 100 crore Godrej-Tyson Foods JV in 2008 that catapulted us to the top in the poultry business THOSE GLORIOUS DAYS Proud of the fact that I finally did my MBA after a few years at Godrej THE A HA! MOMENT We acquired a company for a valuation of Rs 4.5 crore. Within a year, when we wanted to get into a JV, to gain access to technical know-how, we were able to transfer and value this company at Rs 13.5 crore A POSITIVE TRAIT My ability to persist, whether itâ&#x20AC;&#x2122;s an M&A, a bank loan or a degree that I am chasing. AU G U S T 2 0 1 0



!"# !"#$%&' reserved for companies he has worked in. In fact it lists just one: Godrej Agrovet, the firm he joined as a management trainee, back in 1993. “I think there is a big lesson in this for younger management graduates. It not only makes good common (and financial) sense to stick to one company if you enjoy working there, you gain more professionally: you genuinely know your business inside out, build relationships with people over years and work as a stakeholder instead of just an employee,” says Varadaraj, as he slips out of his T-shirt and tracks, dons his grey suit, settles into his chair and prepares to tackle the questions we are already throwing at him. Born in a middle class Tamilian family, Varadaraj, a CA and a masters in financial management, entered GAVL when it was a relatively small company with an annual turnover of less than Rs 100 crore. This probably helped the young Varadaraj learn different aspects of financial management more than he imagined at that time. “I spent the first two years laying down systems and processes. The next few years were devoted to treasury operations – restructuring our financial position, meeting banks and ensuring we got the best loan rates. When I look back I realise this was the best training I could have received – handling different parts of finance at different times. I hope therefore that I am not just a CFO who has a bird’s eye view of the company, but someone who knows exactly how each subset of finance functions,” says Varadaraj, adding: “Today a CFO’s job is no longer just ensuring processes and systems are in place. That’s a given. But he or she needs to understand other functions, be knowledgeable about IT, law and HR issues and act as the principal advisor cum partner of the CEO. The modern CFO is an all rounder.” As he rose from the ranks, to assistant manager finance in 1999, manager and then to deputy general manager in 2002 before finally donning the hat of CFO and VP finance and IT, this amiable ‘Thanekar’ (he was brought up and even today, lives in Thane) helped Agrovet grow into a Rs 1600 crore megacorp. Any CFO prides himself on the number of M&A deals he has been involved in, and Varadaraj is visibly proud of the fact that he can lay claims to having sealed 12 of them. “In the process of signing these M&As I ended up reading and learning more about legal mat22


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MOVIE LAGAAN BUSINESS LEADER Ratan Tata and Adi Godrej QUOTE “Nothing is impossible”


ters than I otherwise would have. Again it’s a knowledge which has helped strengthen my profile,” he says. The success with which he has closed deals or managed to secure loans at low interest rates, has won him admirers even among his senior colleagues. Says Mark Kahn, executive vice president, strategy and business development at GAVL: “Watching Varada (this is what most colleagues refer to him as) negotiate is a sight to behold. Whether haggling with bankers over loan terms or drilling into valuations of competing businesses, he has a methodical and relentless approach that wears down his opponent. It’s

!"# !"#$%&'

“He (Varadaraj) has a methodical and relentless approach that wears down his opponents. It’s like Viswanathan Anand playing chess.”-

Mark Kahn, executive VP, strategy and business development, GAVL

like Viswanathan Anand playing chess. You just feel sorry for the guy on the other side of the table.” It is this dedicated approach to work, along with a few other sterling qualities, that has continued to increase Varadarajan’s value in the company. In GAVL’s core area of Animal Feed, it is unquestionably on top with a market share of well over 50 per cent. It’s a business the company was into since the 1970s but one than took off in the 90s. “In the initial years, we had HUL and Tata’s as close competitors. Then the animal feed division of HUL acquired Tata Oil Mills and for a while this new entity became our main competitor. By the end of the 90s though, HUL was ready to move out of this sector and it suited us to acquire their business,” he says. Sounds quite simple, but what this meant was that at a single stroke, an M&A deal had been inked, effectively killing off any national level competition. “In 2009-10, we generated revenues to the tune of Rs 1600 crore (overall) and we hope to reach Rs 2000 crore by 2011. Today we produce a little under 7,30,000 tons of animal feed annually. There is competition at the regional level in the shape of local players such as Keratin Feeds or SKM. But competition is good for us. It keeps us on our toes,” he laughs. The CFO however wants to ensure that the company doesn’t rest on its laurels. So recently a JV was signed with the US firm Gold Coin to bring in improved aqua feed into the Indian market. “It helped them get a foothold in India and gave us a chance to gain access to their superior technology,” explains Varada-

raj. Similarly they have a JV with the ACI group in Bangladesh and is set to become the leading supplier of animal feed and in poultry breeding. Similar plans have also seen the Agri Input division (the palm oil plantation business) spread its wings over 37,000 hectares and 6 states. The poultry division too (where Varadaraj was instrumental in signing yet another JV, this time with the US food giant Tyson Foods) boasts of a 45 per cent share in the processed poultry market in India through its brands Real Good Chicken and Yummiez. Financially the next big challenge for Varadaraj and Agrovet is dealing with the reality of the government slowly but surely withdrawing the economic sops that became the norm following the economic slowdown. “It is a concern but we are confident of tackling it successfully. Most of our core businesses are fairly self sufficient in terms of cash reserves,” he says. The coffee has arrived and after a few sips, Varadaraj is open to talking about larger issues concerning the changing role of the CFO. “It is essential that a CFO has independence of mind and is not guided by pressure groups or other issues. In any case, unlike CFOs of the past, we cannot afford to sit in isolation and simply be ‘that number crunching guy in the office’. For instance I also handle IT, a function which the traditional CFO would have looked upon as a unnecessary cost! Today a CFO’s role is that of a value adding business partner who, at the same time, ensures that all the systems and processes are in place,” he says.

Integrity and honesty are qualities he says he values immensely, something he picked up from his parents at an early age. “My mother gave me my first lessons in leadership skills and my elder brother, a six sigma black belt in karate, drilled in the virtues of persistence and clear thinking,” says Varadaraj, who also has a younger brother, two years his junior, whom he is still “very protective about.” He also owes a lot to his wife, a banker, who he says, “cajoled and pushed me into doing an MBA later in life, so that my career prospects improved.” It is this humble nature, the ease with which he gives credit to others, that makes him an effective and likeable leader. “One of Varada’s lesserknown gifts is his ability to develop subordinates. He sees to it that they get holistic exposure to accounts and finance, ensuring their professional development under his tutelage,” points out Kahn. The Q&A session is over and we proceed to one of the many ‘gardens’ and ‘creativity centres’ that abound the vast, open Godrej campus in Vikhroli, in the central suburbs of Mumbai. Varadaraj happily agrees to get into his ‘sports gear’ one more time, this time to perform a few yoga postures! He’s not one to complain though. “I have to keep pace with my 11-year-old son. And in any case I intend to watch my figure. Staying in shape is essential for a healthy and clear mind,” he quips. For a man who has dealt with numbers and figures most of his life, this should be child’s play. AU G U S T 2 0 1 0





THE FIVE ATTRIBUTES OF ENDURING FAMILY BUSINESSES The keys to long-term success are professional management and keeping the family committed to and capable of carrying on as the owner. CHRISTIAN CASPAR, ANNA KATRINA BIAS, AND HEINZ-PETER MAELSTROM



amily businesses are an often overlooked form of ownership. Yet they are all around us—from neighbourhood mom-and-pop stores and the millions of small and mid size companies that underpin many economies to household names such as BMW, Samsung, and Wal-Mart Stores. Onethird of all companies in the S&P 500 index and 40 percent of the 250 largest companies in France and Germany are defined as family businesses, meaning that a family owns a significant share and can influence important decisions, particularly the election of the chairman and CEO. As family businesses expand from their entrepreneurial beginnings, they face unique performance and governance challenges. The generations that follow the founder, for example, may insist on running the company even though they are not suited for the job. And as the number of family shareholders increases exponentially generation by generation, with few actually working in the business, the commitment to carry on as owners can’t be taken for granted. Indeed, less than 30 percent of family businesses survive into the third generation of family ownership. Those that do, however, tend to perform well over time compared with their corporate peers, according to recent McKinsey research. Their performance suggests that they have a story of interest not only to family businesses around the world, of various sizes and in various stages of development, but also to companies with other forms of ownership. To be successful as both the company and the family grow, 24


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a family business must meet two intertwined challenges: achieving strong business performance and keeping the family committed to and capable of carrying on as the owner. Five dimensions of activity must work well and in synchrony: harmonious relations within the family and an understanding of how it should be involved with the business, an ownership structure that provides sufficient capital for growth while allowing the family to control key parts of the business,

Five Dimensions

FAMILY z Family forums z Family policies z Family services

BUSINESS AND PORTFOLIO GOVERNANCE z Corporate governance z Dynamic portfolio evolution z Business portfolio z Capital composition, structure z New-business development

OWNERSHIP z Shareholder agreements z Holding structures Legal documents

WEALTH MANAGEMENT z Investment office z Legacy assets and new

opportunities z Governance

FOUNDATIONS z Management and governance

of family’s own foundation z Third-party foundations


strong governance of the company and a dynamic business portfolio, professional management of the family’s wealth, and charitable foundations to promote family values across generations (Exhibit 1).

FAMILY Family businesses can go under for many reasons, including family conflicts over money, nepotism leading to poor management, and infighting over the succession of power from one generation to the next. Regulating the family’s roles as shareholders, board members, and managers is essential because it can help avoid these pitfalls. Large family businesses that survive for many generations make sure to permeate their ethos of ownership with a strong sense of purpose. Over decades, they develop oral and written agreements that address issues such as the

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of its members, and the industries in which the business competes. For example, the Australia-based investment business ROI Group, which now spans four generations of the Owens family, encourages family members to work outside the business first and gain relevant experience before seeking senior-management positions at ROI. Any appointment to them must be approved both by the owners’ board, which represents the family, and the advisory council, a group of indepenAU G U S T 2 0 1 0



$+*$,-( dent business advisers who provide strategic guidance to the board. As families grow and ownership fragments, family institutions play an important role in making continued ownership meaningful by nurturing family values and giving new generations a sense of pride in the company’s contribution to society. Family offices, some employing less than a handful of professionals, others as many as 40, can bring together family members who want to pursue common interests, such as social work, often through large charity organisations linked to the family.

OWNERSHIP Maintaining family control or influence while raising fresh capital for the business and satisfying the family’s cash needs is an equation that must be addressed, since it’s a major source of potential conflict, particularly in the transition of power from one generation to the next. . Many of these family businesses are privately held holding companies with

reasonably independent subsidiaries that might be publicly owned, though in general the family holding company fully controls the more important ones. By keeping the holding private, the family avoids conflicts of interest with more diversified institutional investors looking for higher short-term returns. Financial policies often aim to keep the family in control. Many family businesses pay relatively low dividends because reinvesting profits is a good way to expand without diluting ownership by issuing new stock or assuming big debts. In fact, some families decide to shut

external investors out of the entire business and to fuel growth by reinvesting most of the profits, which requires good profitability and relatively low dividends. Others decide to bring in private equity as a way to inject capital and introduce a more effective corporate governance culture. In 2000, for example, the private-equity investor Kohlberg Kravis Roberts gave Zumtobel, the Austria-based European market leader for professional lighting, a capital infusion (KKR exited in 2006). Such deals can add value, but the downside is that they dilute family control. Others take the IPO route and float a portion of

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Taking the long view Lower levels of financial leverage . . . Median debt-to-equity ratio, % 40

Benchmark of peer companies1


. . . and a lower cost of debt The average yield spread on corporate bonds is 32 basis points lower for family-owned businesses 3

30 25

Family businesses2

20 15

Annual median of current constituents of S&P 500, HDAX, and SBF 120 (Société des Bourses Françaises 120 Index); excludes financial companies and family businesses.



2 Annual median of sample of 149 family-influenced companies in United States and Western Europe; excludes financial companies.

5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

3 Sample consisted of 250 industrial firms in S&P 500 from 1993–98; weighted for factors that influence spread differences (eg, degree of leverage, performance, company size, credit rating).

Source: McKinsey's corporate performance analysis tool (CPAT); McKinsey analysis



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$+*$,-( the shares. An IPO can also be a way to provide liquidity at a fair market price for family members wanting to exit as shareholders. To keep control, many family businesses restrict the trading of shares. Family shareholders who want to sell must offer their siblings and then their cousins the right of first refusal. Because exit is restricted and dividends are comparatively low, some family businesses have resorted to “generational liquidity events” to satisfy the family’s cash needs. These may take the form of sales of publicly traded businesses in the holding or of sales of family shares to employees or to the company itself, with the proceeds going to the family.

GOVERNANCE AND THE BUSINESS PORTFOLIO With clear rules and guidelines as an anchor, family enterprises can get on with their business strategies. Two success factors show up frequently: strong boards and a long-term view coupled with a prudent but dynamic portfolio strategy. „ STRONG BOARDS Large and durable family businesses tend to have strong governance. Members of these families avoid the principal–agent issue by participating actively in the work of company boards, where they monitor performance diligently and draw on deep industry knowledge gained through a long history. On average, 39 percent of the board members of family businesses are inside directors (including 20 percent who belong to the family), compared with 23 percent in non-family companies, according to an analysis of the S&P 500. “The family is a true asset to the management team, since they have been around the industry for decades,” said the CEO of a family business. “Still, they separate ownership and management in a good way.” Of course, it’s important to complement the family’s knowledge with the

Reinventing the family business „ Family businesses suffer because of conflicts over money, nepotism etc. leading to poor management, and infighting over succession „ Family businesses continue to have a majority of family members or insiders on the board, a situation that needs to be changed „ Such businesses tend to have not only lower levels of financial leverage but also a lower cost of debt than their corporate peers do „Most successful family businesses now insist that gen-next first works outside to gain experience „ Foundations (for charity) set up by entrepreneurial families represent a huge share of philanthropic giving around the world

fresh strategic perspectives of qualified outsiders. Even when a family holds all of the equity in a company, its board will most likely include a significant proportion of outside directors. However, procedures for all nominations to

the board—insiders as well as outsiders—differ from company to company. Some boards select new members and then seek consent by an inner family committee and formal approval by a shareholder assembly. Formal mechanisms differ; what counts most is for the family to understand the importance of a strong board, which should be deeply involved in top-executive matters and manage the business portfolio actively. „ A LONG-TERM PORTFOLIO VIEW Successful family companies usually seek steady long-term growth and performance to avoid risking the family’s wealth and control of the business. This approach tends to shield them from the temptation—which has recently brought many corporations to their knees—of pursuing maximum shortterm performance at the expense of long-term company health. A longerterm planning horizon and more moderate risk taking serve the interests of debt holders too, so family businesses tend to have not only lower levels of financial leverage but also a lower cost of debt than their corporate peers do (Exhibit 2). The longer perspective may make family businesses less successful during booms but increases their chances of staying alive in periods of crisis and of achieving healthy returns over time. In fact, despite the unique challenges facing family-influenced businesses, from 1997 to 2009 a broad index of publicly traded ones in the United States and Western Europe achieved total returns to shareholders two to three percentage points higher than those of the MSCI World, the S&P 500, and the MSCI Europe indexes (Exhibit 3). This long-term focus implies relatively conservative portfolio strategies based on competencies built over time, coupled with moderate diversification around the core businesses and, in many cases, a natural preference for organic growth. Family-influenced businesses tend to be prudent when they do M&A, making smaller but AU G U S T 2 0 1 0




Healthy returns over time 10-year total returns to shareholders (TRS)

Family businesses 2 Index

By region 8 7 6 CAGR,1 weighted 5 average, Jan 1997– Sept 2009, % 4

SBF 1203 MSCI Europe


MSCI World

2 1

By sector


Western Europe

United States, Western Europe

S&P 500

United States



10 9 8

7 CAGR,1 weighted average, Jan 1997– 6 Sept 2009, % 5 4

MSCI World MSCI World


MSCI World MSCI World


MSCI World

MSCI World

1 Industrial

Information technology

Consumer staples

Consumer discretionary

Health care

Financial services

1Compound annual growth rate. 2Sample consisted of 154 publicly listed family-influenced companies (ie, those with >10% family ownership at end of 2007) in United States and Western Europe. 3 Société des Bourses Françaises 120 Index. Source: Thomson Reuters Datastream; McKinsey's corporate performance analysis tool (CPAT); McKinsey analysis

more value-creating deals than their corporate counterparts do, according to our analysis of M&A deals worth over $500 million in the United States and Western Europe from 2005 to late 2009. Nonetheless, too much prudence can be dangerous. Family owners, who usually have a significant part of their wealth associated with the business, face the challenge of preventing an excessive aversion to risk from influencing company decisions. Excessive risk aversion might, for example, 28


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unduly limit investments to maintain and build competitive advantage and to diversify the family’s wealth. That’s why most large, successful family-influenced survivors are multi business companies that renew their portfolios over time. In general, family businesses seek a mix: companies with stable cash flows and others with higher risk and returns. Many complement a group of core enterprises with venture capital and private-equity arms in which they invest 10 to 20 percent of

their equity. The idea is to renew the portfolio constantly so that the family holding can preserve a good mix of investments by shifting gradually from mature to growth sectors.

WEALTH MANAGEMENT Success is not a sure thing. Many wealthy families around the world lost a lot of money in the financial crisis— losses that vary by geography but averaged 30 to 60 percent from the second



quarter of 2008 to the first quarter of 2009. One European family investor with a portfolio mainly in the money market and in prime income-generating real estate lost less than 5 percent. At the other extreme, a family investor in the same country, with 80 percent of his assets in real-estate developments and hedge funds, both with 50 to 70 percent leverage, lost 30 to 50 percent of the value in these asset classes at the peak of the crisis. These different outcomes highlight the importance of a professional organisation with strong, consolidated, and rigorous risk management to oversee the wealth family businesses generate. For large fortunes, the best solution is a wealth-management office serving a single family—either a separate entity or part of a family office providing a range of family services (described earlier in this article). Our work with family wealth-management offices has helped us identify five key factors that increase the chances of success: a high level of professionalism, with institutionalised processes and procedures; rigorous investment and divestment criteria; strict performance management; a strong risk-

sational and operational choices about how best to use their funds. Several have concluded that in today’s complex environment, partnerships—for example, with non-profits or non-governmental organisations—can promote the family’s social goals. These foundations build on the experience and local presence of other organisations, particularly when implementing projects in unfamiliar geographies. To ensure high performance and continual improvement, family foundations must combine passion with professionalism and a strict assessment of their impact. In our experience, family foundations should focus their monitoring and evaluation efforts around learning and improved decision making. Almost all companies start out as

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CHARITY FOUNDATIONS Charity is an important element in keeping families committed to the business, by providing meaningful jobs for family members who don’t work in it and by promoting family values as the generations come and go. Foundations set up by entrepreneurial families represent a huge share of philanthropic giving around the world. In the United States, they include 13 of the 20 largest players, such as the Bill and Melinda Gates Foundation. Family foundations also face organi-

family businesses, but only those that master the challenges intrinsic to this form of ownership endure and prosper over the generations. The work involved is complex, extensive, and never-ending, but the evidence suggests that it is worth the effort for the family, the business, and society at large.

ABOUT THE AUTHOR Christian Caspar is a director in McKinsey’s Zurich office; Ana Karina Dias is an associate principal in the São Paulo office, where Heinz-Peter Elstrodt is a director. The authors wish to acknowledge the contributions of Andres Maldonado, an alumnus of McKinsey’s São Paulo office. AU G U S T 2 0 1 0





RISK GOVERNANCE FOUNDATION FOR LONG-TERM VALUE Risk governance not only provides a portfolio view of the risks, it also constructs the operating model and decision-making framework



allout from the global economic crisis exposed a vulnerability in some organisations: inadequate risk gover nance. Companies that staved off catastrophic losses were those that addressed risk issues promptly, delineated clear roles and accountabilities and implemented a risk culture that encouraged candid discussions of risk between the business and risk control functions that had equal stature and clear independence. Regulatory reform may soon raise the risk-management bar for all companies, and new mechanisms to control irresponsible risk taking — such as vesting periods for options, ‘clawback’ programmes to reclaim effectiveness of three lines of defense: the business units, inde pendent risk and control functions and the internal audit department. Business units are responsible for managing risk in conjunction with embedded risk managers, with the goal of achieving risk-adjusted performance targets. Placing risk managers within



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business units allows companies to manage risk at the operational level. The resulting collegial tension can uncover risks that might otherwise go unnoticed or fail to be addressed properly. Embedded risk managers who generally report directly to the chief risk offi-

cer (CRO) and have autonomy to make granted bonuses and compensation and incentives policies rooted in longterm value rather than short-term gain — are being evaluated. To achieve true risk resilience, however, an organisation needs effective risk

!"#$%&'(!') governance — the structural, cultural, process and accountability improvements that support good decisionmaking and serve as the foundation of risk management. Only with a strong founda tion in place can companies navigate regulatory and economic challenges.

STRUCTURE, ROLES AND RESPONSIBILITIES Risk governance not only provides a portfolio view of the risks a company faces — strategic, compliance, operational or financial — it constructs the operating model and decision-making framework for optimal response. It requires that the board and senior management oversee the implement crucial decisions in keeping with the organisation’s business objectives. Independent risk and control functions communicate a defined enterprise view of risk, delineating standards around governance, process, technology and culture. These authoritative and independent centralised functions can challenge and monitor the business as it consolidates risk data from each business unit. In this model, the CRO reports to the Chief Executive Officer. Increasing emphasis is placed on enterprise risk management (ERM) to understand and oversee the highly interdependent relationships across credit, market, operational, compliance and other risk categories. This ensures that the board and senior management are provided with a portfolio view of enterprise risk. During strategic planning, merger and acquisition activity or other key strategic decisions, the risk and control functions brief senior management about risk governance ramifications. The Internal Audit department provides independent assurance that risk management is governed appropriately and operating effectively; the board relies on that guidance and supports internal audit with the resources it needs. With audit committee oversight, internal audit assesses risk manage-

ment capabilities, reviews governance processes, evaluates governance performance measures and tests issue-escalation procedures. Assessing the operating effectiveness of risk-based compensation poli cies also falls within the purview of internal audit. Senior management sets the tone for a successful risk governance culture. Company leaders approve enterprise risk management policy. They also drive enterprise risk management

understand the types of risk inherent in the company’s various operations and ensure that those risks are actively managed to mitigate threat and pursue opportunity. Charters of the board, senior management and business unit committees define reporting requirements and expectations, create transparency in committee decisions and make sure that risk-informed decisions balance growth, risk and return. The following guidelines offer a blueprint for effective and efficient reports

(*+#,-.+/-01#023,.#3+40/.5+-.# 4/67,3+8#,-3+4+-3+-.#0882/9 0-:+#.*0.#/,8;#50-0<+5+-.#,8# <67+/-+3#044/64/,0.+1=#0-3# 64+/0.,-<#+>>+:.,7+1=#0.#011# .,5+8?# implementation to obtain a portfolio view of risks and place risk management in essential business processes such as strategic planning, performance management, capital allocation and incentives and rewards. Several committees established by senior management keep an eye on ERM and are charged with managing specific risks — market, credit, operational and compliance. The board sets the tone and reviews and approves the appetite for risk within the context of the organisation’s strategic and risk-governance objectives. Audit Committees, Risk Committees and Compensation Committees help the full board oversee the effectiveness of the enterprise risk management system.

MONITORING AND REPORTING In an effective risk governance model, the board and senior management

to senior management and the board of directors. Reporting should be: z Clear, timely, relevant, accurate and actionable z Focused on key risks, issues and exceptions z Executive level — limiting content to help focus on actionable information z Supported by evidence — quantitative and qualitative data z Prospectively focused versus backwards looking z Performance-oriented — biased toward performance monitoring versus status reporting z Balanced in presentation of standardised reporting and content as well as nonstandard content, such as stress conditions and reviews of business level performance and risk drivers. Effective reporting supplies the board and senior management with an integrated view of the key connec tion points at which new risks — and new AU G U S T 2 0 1 0



"(%,!'-+"-* opportunities for business growth — might arise. It’s this ability to transform data into actionable management information that allows companies to judge the threats and opportunities that might affect business performance.

THE CULTURE Strong risk governance originates at the highest levels of an organisation — the board and senior management. The leaders of world-class companies recognise it simply as good business. The board and senior management establish an effective risk culture through the following: TONE AT THE TOP: By hearing the board and senior management champion the purpose, goals and outcomes of risk governance, employees are better prepared to engage in risk-resilient behavior that reinforces it. The company recruits, retains and rewards people who view risk governance as a personal responsibility and drive appropriate outcomes that leverage riskinformed decision making. BUSINESS STRATEGY AND RISK APPETITE: Risk governance starts at strategy-setting with board and senior management consensus on clearly defined business objectives and risk appetite. Once defined, senior leaders can weigh the amount of risk an organisation will accept in pursuit of growth. INCENTIVE STRUCTURE: When the board and senior management assign clear accountability for risk governance and systematically quantify the rewards associated with it, they change the decision-making game for their managers. Comprehensive risk governance hinges on an incentive structure that rewards risk-adjusted performance. Bonuses should recognise a focus on long-term value rather than short-term gain. An effective compensation system should include vesting periods for options and mechanisms under which bonuses could be forfeited if performance lags.



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."/* Practical Steps toAssessing and Improving Risk Governance

@ A B C D

Perform a quick health check of your risk governance strategy, structure, culture, processes and accountabilities. Use the assessment to identify critical gaps and determine immediate and long-term responses. Develop and prioritis recommendations that will drive the necessary change and enable the greatest effectiveness over the short-term, while planning for medium- and long-term recommendations over time. Develop robust business cases for priority initiatives that address the most significant gaps. Implement the right sponsorship and governance model around initiatives to drive implementation and successful change.

Set clear goals and monitor the benefits of enhanced effectiveness and efficiency; communicate those benefits

E,.*#FDG#./,11,6-#,-#<16H01# I+01.*#168.#H+.I++-#J+4.+5H+/# AGGK#0-3#L0/:*#AGGMN#H28,9 -+88+8#0/+#>6:28+3#8O20/+1=#6-# 0#-+I#,54+/0.,7+P#Q,-;,-<#;+=# /,8;#,-3,:0.6/8#I,.*#;+=#4+/>6/ RISK ADJUSTED PERFORMANCE MEASUREMENT: Such an approach to capital allocation requires a company to focus on two basic questions: What have I really got to lose? The answer represents value at risk, the amount a company is willing to lose over a given amount of time if an initiative fails. How much shock can my balance sheet endure? A key consideration for any potentially risky business initiative, determining how much capital is needed to survive a worst-case scenario. Experience with companies with

strong risk governance in place — combined with empirical research — has helped to identity the following attributes of a world-class risk management culture: ACCOUNTABILITY: Clearly defined roles and responsibilities delineate accountability for risk at all levels of the organisation. TRANSPARENCY: Rapid escalation of issues, with the objective of timely response, is commonplace in a culture where employees are encouraged to admit mistakes and take responsibility without fear of repercussions.

"(%,!'-+"-* ATTENTION TO DETAIL: Continuous monitoring of risk throughout the enterprise identifies business opportunities and fortifies against threats. CONTINUOUS IMPROVEMENT: Les sons learned from unexpected events, whether positive or negative, become part of the organisation’s repository of risk knowledge, informing all future risk-related decisions. COLLEGIAL TENSION: Within a culture that champions risk governance and urges participation at all levels, employees are encouraged to challenge the status quo, keeping business units vigilant. EQUAL STATURE: Leaders of support and control functions maintain a stature equal to the front office. A pervasive organisational culture of risk governance underpins effective risk management. No matter how diligent a risk management program, its effectiveness cannot rise above the ethical values of the people who create, administer and monitor it.

approvals for exceptions. Risk appetite is clearly defined and linked to risk-adjusted perform ance measures. A finely tuned portfolio of risk-adjusted performance measures includes both financial and operational metrics. In fact, a 2007 PwC survey of 193 senior executives at European mul-

PROCESSES To be effective, risk governance must align strategic planning and risk appetite. Various other operational processes come into play for this alignment to succeed. Strategic planning continually examines the threats and opportunities presented by new markets, new geographies and new product development, allocating appropriate resources to manage these risks. Reflecting the company’s clearly defined risk appetite, the planning is tied to budgeting, capital allocation and performance evaluation processes. Deviations from strategic and annual plans must contain explicit consideration of risk appetite in relation to new product plans and business initiatives, as well as mergers and acquisitions and related due diligence. Clearly defined standards for minimum due diligence and merger integration require specific

growth, risk and return in pursuit of long-term value. With ongoing calls for lasting risk reform, companies must look beyond narrow, compliance-driven approaches to risk management. They must evolve from managing risk in silos to managing risk holistically in order to achieve risk resilience. The first step in that evolution is risk governance, which allows a com pany to quantify risk appetite; act on emerging risks and opportunities across the business portfolio; assess risk interdependencies and their threats to performance goals; channel resources to minimise threats and maximise rewards; align financial incentives for risk taking with potential outcomes; and continually monitor emerging risks using both financial and operational metrics. With a foundation of risk governance in place, companies can begin to uncover the links between risk and reward in anticipation of emerging threats and opportunities — thus achieving risk resilience. And with that risk resilience comes the ability to drive sustained per-

(*+#6-<6,-<#:*011+-<+#,8#*6I# 52:*#/,8;#.6#.0;+#0-3#.6#076,3N# 08#.*+#:6540-=#H010-:+8# </6I.*N#/,8;#0-3#/+.2/-#,-#42/9 82,.#6>#16-<9.+/5#7012+?# tinationals found that companies that reported betterthan-expected financial performance over the previous three years relied on operational metrics — in addition to financial metrics — far more than their under-performing peers. Risk appetite is reviewed annually to ensure that it is in line with the firm’s long-term strategic objectives and current market conditions. The ongoing challenge is how much risk to take, and to avoid, as the company balances

formance, even in the face of the regulatory and economic uncertainty that lies ahead.

ABOUT THE AUTHORS JOE ATKINSON (joseph.atkinson@ com) is a principal in PricewaterhouseCoopers‘ advisory practice in Philadelphia, and CARLO DI FLORIO (carlo.diflorio@us. is a principal in Pricewaterhouse Coopers‘ advisory practice in New York.

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SPEND MANAGEMENT SOLUTION UNRAVELED Read on if cost saving, financial productivity and employee satisfaction is at the top of your agenda JAYANT DWIVEDY


oes your organisation have an active spend management strategy? This question by default obtains the answer ‘Yes’ from most organisations, big or small. Entrepreneurs and business leaders do understand the importance of increasing revenue faster than expenses or decreasing expenses while maintaining revenue. What is important to note early in this article is that spend management solution and spend analysis solution are different. Spend analysis software tells the organisation where it spends it money but does not give an integrated solution that leads to cost reduction, policy management and compliance, employee satisfaction and productivity improvement. A spend management solution integrates spend from a compliance perspective, fits it into an accounting framework, improves financial productivity, provides analysis, controls spend and delivers savings.

before documents are ready for accounting entries. In the world of corporate governance, policy management in large organisations is a nightmare if desired integration and reporting has not been achieved. The design of accounting framework is often not automated and in most cases not integrated to spend initiation (both fundamentally and electronically). This leads to subjectivity and a high dependence on people.





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THE NEXT SET OF QUESTIONS: „ Does the organisation have an ERP or financial system? The answer in most cases is “yes”. „ Does the organisation have an online system that gets spend into your accounting framework right from initiation? The answer in majority of the cases is “no”. „ Has the organisation electronically connected the “bottom of the pyramid” for spend management? Again the answer in most cases is “no”. Millions of manual transactions happen



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Not in use AND/ OR The electronic aspects of available systems have not been evaluated and SPEND MANAGEMENT SOFTWARE not available Readiness for future OUTSOURCING not examined comprehensively .

Not in use OR Used only by Finance OR Used off-line and not contributing to day to day management (budget custodian checks manually for key expenses) followed by monthly reports..


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Not in use because no one initiated OR

Module not available OR

Perceived to be difficult and expensive and therefore not in use OR

Available but difficult/ complex and therefore not useddetails maintained in a spread sheet offline

Manual or dependant on Admin or Travel desk OR

Limited to payments in Accounts payable and no online control or analysis

Manual and dependant on formats filled by employees and sent across for approvals and processing OR

The manual methods work and people do the MIS every month end

In-house package/ standalone package with workflows for approval and not integrated to financial system AND No online reports.

In-house package/ standalone package with workflows for approval BUT not integrated to financial system AND No online reports

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!"'()%*&!*+ functional head and CXO level. Let us therefore examine online possibilities that enable granular spend information and control. They have been provided as check points in TABLE- I: Having established facts that necessitate online control of spend in an integrated fashion, it is prudent to determine the status of the current deployments in organisations through a simple classification on current deployment “Type”. This is shown in the illustration and explained in TABLE-II.

Type B + Business Inteligence + Out Sourcing Ready


Inhouse Development


Manual Process




ERP + Spend Management Integrated


The responsibility of managing the complexity of the changing environment, with company growth while ensuring quality and integrity of financial data is a big burden to carry. The sunk cost in the existing systems is an impediment to the newer integrated solutions that link the “bottom of the pyramid”. These options are cost effective and pay for themselves. Due to the historical nature and setup of existing systems and the reports, organisations most likely see and manage spend once a month at the

THE KEY MESSAGES: A Your organisation most likely needs a spend management solution to compliment your existing financial system. B The spend management solution automates the accounting framework while linking spend to the initiation stage. C The spend management solution makes your spend granular and delivers cost savings, compliance, financial productivity and employees satisfaction (TABLE: I); outsourcing readiness gets established. D On line spend management solution is different from a spend analysis software. E Use TABLE-II to determine your “TYPE” of current deployment.

F Every CXO has a role to play in spend management solution.









Spend Management


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Spread sheets and paper formats rule; people and hidden costs are very high

High degree of support staff to maintain the systems; best practices not necessarily in use; integration not achieved

Surprisingly majority of the transactions are still manual; compliance is still an issue; system does not drive cost savings

Bottom of the pyramid gets integrated; Compliance by Design gets practiced; Spend visibility enables breakthrough cost reduction; a fair amount of decision support.

This is an evolved state; the organisation focuses on Continuous Improvement; right information is available at all points of time for strategic reviews.



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INDIA SET TO OUTDO BRIC PARTNERS IN GROWTH METRE? A KPMG study suggests that while optimism is cooling in China and Brazil, inflationary worries haven’t dampened India’s growth outlook. DEEPAK GARG


he angst related to future global growth prospects appears to be taking a turn for the better, based on KPMG’s recent Global Business Outlook Survey for worldwide Manufacturing and Services. And India at least is poised to surge ahead of fellow BRIC nations. The survey results indicate that confidence in global growth prospects remains largely intact in the summer of 2010. Both manufacturers and service providers remain confident of rising activity during the next twelve months, supporting growth of revenues and profits. However, while some BRIC firms remain upbeat, the sense of euphoria that was present all through the last quarter of 2009 seems to have weakened amid expectations of slower growth in China and Brazil. In contrast, the mood is one of hope and positive growth in India. In fact even as global employment prospects brighten (Figures 1 & 2), India is expected to post the strongest rates of job creation.


ECONOMIC GROWTH What are the reasons pushing India’s growth story to the next level? The survey suggests that confidence has grown in India, where positive sentiment is higher than at any time since mid-2008. “India’s numbers are marching firmly in the opposite direction to its BRIC counterparts (i.e. upwards), meaning that they are enjoying the upswing in optimism



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!"#$%"&'()* 60



49.7 48


which the others enjoyed over the past two surveys. This could be indicative of a more inherently cautious national mindset – but it could also be indicative of another outsourcing boom which India may be the first to benefit from. This new optimism is emerging from the healthcare sector, where India’s generic drug manufacturers and medical analysis outsourcing providers stand ready to capitalise on the West’s growing focus on a healthcare cost containment agenda.” says Ian Gomes, Chairman of KPMG’s High Growth Markets practice in the U.K.

INFLATION Overall, inflation is expected to rise globally. Inflationary pressures are set to be strongest in Brazil and Russia, which post the highest net balances for all price-related variables across both the manufacturing and service sectors. In India, while rising inflation is a cause for concern, it seems to have

8.6 9.4 Output Prices

Input Prices

R&D Expenditure

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17.1 18.9 20.8

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failed to dampen the buoyant outlook.

LABOUR MARKET Job creation is set to strengthen with the outlook for global employment having brightened since February 2010. Growth of employment is set to be largely driven by the US and BRIC countries such as India. In contrast, companies in the EU and Japan maintain cautious attitudes towards their labour forces. In Greece and Spain, declines in employment are expected.

INVESTMENT The survey results indicate that expenditure on both capital and R&D is anticipated in the global manufacturing sector in twelve months’ time. The strongest increases in investment are forecast in the BRIC countries, led by Brazil. However, investment plans remain notably subdued in the EU, particularly amongst service providers.

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42.7 41.2 39.1

40.7 37.9 40.7

46.5 44 43.9


THE INCREDIBLE INDIA STORY MANUFACTURING SECTOR If there is one area where India is expected to grow in leaps and bounds, it is in the manufacturing sector. Manufacturers in India hold a more optimistic business outlook for the year ahead than was the case in February 2010. In fact solid expansions in both R&D and capital spending is expected. Higher forecasts for activity and new business have fed through into expectations for employment and capacity utilisation in June 2010. “The latest Indian survey data is notable for the way in which confidence is oozing through the manufacturing sector. India has set its sights on becoming a global manufacturing hub and seems well on its way to achieving this aim. Productivity is improving – as is quality, with a large number of Indian manufacturers now holding their own in terms of quality comparisons with their Asian competitors,” says Richard Rekhy, Head of Advisory, KPMG India.

SERVICE SECTOR Optimism amongst Indian services 40


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firms regarding future business conditions have improved slightly in June 2010, but remain below those recorded prior to the global downturn. Growth of outsourcing at Indian service providers is anticipated to remain moderate. Both input and output prices are forecast to increase in the year ahead. However, input cost inflation is expected to be sharper than charge inflation. A breakdown of input prices shows that the greatest upward pressure on costs will come from wages and other staff-related expenses. . “The economy is looking particularly robust with leading stock market indices all moving in the right direction

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16.9 17.1 19.3


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and with the increased collections from excise duty and corporate tax. In addition, the recent auction of 3G licenses brought in far more income than had been originally expected. The government has stated its aim to achieve double digit GDP growth and to attract yet more foreign investment – and they seem well placed to succeed. However, the cautionary watchword here is inflation. The growth which India is pursuing will very likely lead to a rise in inflation. Energy and wage costs are already increasing but it is food costs which most people worry about. As inflation hits food prices, this affects the poorest members of society the most. That

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+G9.?89;2?6-65$3.$".=39$,0:=$9$ 406-$012343523;$H?53.-55$0?2:00I$ 806$2,-$@-96$9,-9=$2,9.$/95$2,-$ ;95-$3.$J-H6?96@$KLMLD$".$89;2$50:3=$ -N19.530.5$3.$H02,$)OP$9.=$;913A 29:$51-.=3.7$35$-N1-;2-=D$ is the point at which the pressure will build to bring inflation down but at the moment there appears to be no tension between government and the central bank about when to start addressing this issue.” says Rekhy.

TREADING CAUTIOUSLY Yunus Bookwala, CFO, Capgemini India comments on the findings. “I



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broadly agree with the survey findings. For India the growth story still seems intact with a good monsoon being reported across India – except in few regions of North India. Thus for companies that are focused on Indian market, there is optimism all around. But for those companies which are export oriented, there is still caution around the bend. The jury is still not out whether the growth or rate of growth

has remained constant, declined or accelerated.” For Indian companies, though there is growth, there is also a tremendous push to maintain margins. Costs are increasing and now to rein in inflation the RBI may take much tougher actions in the future. For IT & ITES, which are people based organisations, rise in salary cost and attrition also needs to be effectively handled. Thus all in all, we need to see the end of 2010 to arrive at a verdict as to how 2011 will shape. Trends foretell growth, but sustainability may still be suspect.




& Clinching Of Great


Deals Working in a team has its advantages and problems. The trick is to turn every hurdle in your favour.

ABOUT THE AUTHOR David Lim, founder, Everest Motivation Team, is a leadership and negotiation coach, best-selling author and two-time Mt Everest expedition leader. He can be found at his blog http://theasiannegotiator., or david@



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AS A LEADERSHIP COACH, I often get asked for my opinion about topical events. One such event that has captivated the world, is of course, the World Cup football tournament held recently in Africa. A fascinating aspect of this game is that often size does not matter, and a beautiful turn by a single individual can create history, the ‘beautiful game’ as it has been once described is full of such examples. When Sir Henry Percival and three other British officers sat across from General Tomoyuki Yamashita at 4pm, 15th Feb 1942, it was to negotiate the surrender of Singapore. The negotiations went bad very quickly and they had to surrender unconditionally to the invading Japanese forces that had beaten the much larger British Army defending the Malayan Peninsula and Singapore. Winston Churchill, the then Prime Minister of Britain, called it “the worst disaster and largest capitulation in British history”. Luckily for the rest of us, we rarely have a team negotiation where the perceived and actual power we have is as little as that held by Percival, and where the outcome so stacked against us. Team negotiations present unique challenges and opportunities. Perhaps we can best understand team negotiations with an analysis of the var-

!"#$"%&'()*%!$ ious advantages and disadvantages team negotiations provide. Let’s first look at the advantages. Here are at least seven:


Often increasing the number of negotiators, in and of itself, provides an advantage to team negotiations because of the apparent show of strength with more numbers. This factor should be carefully analysed, however, because in some situations it might appear that you are attempting to compensate for a weak position by large numbers. 2. MORAL SUPPORT

What we mean here is that when there is more than one person negotiating, one person can think while the other talks. When you are on a team, there is certainly less pressure for this reason and it provides a distinct advantage.

“The most interesting aspects of the game are selfbelief, leadership, and team cohesion.” —David Lim



My observations of team negotiations indicate that, for whatever reason, most teams tend to plan more and better than if a single individual was responsible for the negotiation. Obviously, a better-prepared team will perform better.

With more people observing the process of the negotiation, there is considerably less chance that there will be unnoticed error -- a significant reason for lack of negotiation effectiveness in many negotiations. For all these reasons, team negotiations may add greatly to your side’s negotiating effectiveness.


A not-so-obvious advantage of team negotiation is that once those negotiations are completed, more people on that negotiating team feel ownership in the decisions, because of their involvement in the negotiation. Internal coordination, or implementing the results of the negotiation, can often be greatly enhanced by having more of those who are responsible for carrying out the results be involved in the negotiation. This is why we often see members of various departments involved in a particularly negotiation, because each of those departments will play a significant role in carrying out or living with the results of the negotiation. 5. MORE EXPERTISE

Or, in other words, more brainpower is provided whenever we add an individual to our negotiating team. “Two heads are better than one,” is an excellent thought for team negotiations.


Obviously, it is more expensive to have more people involved. This must be carefully weighed against the seven advantages just discussed, to see if the magnitude of the negotiation is sufficient to justify the increased cost. 2. DISUNITY/DIVERSE OPINIONS

One of the biggest potential disadvantages of team negotiation is simply the fact that, whenever you have more than one person, you are very likely to have more than one opinion. There certainly can be more than one successful way to approach each negotiation situation, but one thing is sure -- none of them will work if there is not unity on the team. 3. LEAKING INFORMATION


One party might be the leader, another party, the note taker, another the skeptic or bad guy, another the good guy or relationship builder, and yet another, the one assigned to read body language. Each can concentrate specifically on their task and be sure it is done correctly.

A common error is for someone on a team to inadvertently or unknowingly leak important information that adversely affect their position in that negotiation. It might be the representative from the quality control department who says, “But their product is the only one that meets our company’s mandatory quality control standards.” Talk about leaking important information! AU G U S T 2 0 1 0



$&'%&#()*!"#$% 4. TIME

Most team negotiations take longer than individual negotiations, for obvious reasons. Again, weigh this factor against the benefits to see if, in any given negotiation, it merits using a team versus an individual negotiation. With these disadvantages in mind, there are ways in which one can be more effective with team negotiations:

that your team can recess to discuss any differences in opinion they may have. Differences discussed openly in front of the other party can only create problems for you later in the negotiation. 3. READ BODY LANGUAGE WHEN SOMEONE ELSE IS SPEAKING

Decide ahead of time, as a team, that you will have no open-end disagreements at the negotiating table.

When a member of your team is speaking, concentrate on the other teams’ body language. There is no advantage to you to look at the member of your team when they speak, although it is the natural tendency. The skilled negotiator will use this opportunity to pick up valuable body language cues from the other team.



It is a perfectly acceptable procedure to ask for a break in the negotiation so

If you have the largest negotiating team and want to maintain strength in num-




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bers, keep your team seated together to maintain the show of strength. On the other hand, if you have the smaller negotiating team, you may want to disperse your small numbers throughout their team, thus defusing the show of strength if their numbers. If you’re negotiating alone, opposite two or more on the other side, position yourself so that you can see all members of the other team at once, thus enabling you to read all body language cues simultaneously. This positioning accomplishes one other important consideration -- members of the other team cannot signal to each other without your seeing them do so. Remember, negotiating in a team takes planning, a clear sense of desired outcomes, and prudence in revealing information to the other party. Good luck – or rather, Good negotiations!



‘That nagging voice within was the biggest challenge’ 48


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t 39, Narayan Barasia was facing one of the toughest challenges of his decade-long stint at the Godrej Group. The CFO and company secretary at Godrej Household Products (GHP)who also doubles as Global Business Practices officer responsible for driving governance and ethics at GHP, was told to implement SAP – the systems application and product software that enables its customers to interact with a common corporate database for a wide range of applications. Barasia, who later won HSBC’s prestigious “Best Domestic Cash Management Solution,” award for 2009 for the successful


&'()*+",-.& NATURE Implementing SAP in the company TIME FACTOR October 2009 to March 2010 TEAM The entire finance team and in fact, most of the senior management across functions PROJECT COST Over a few crores DIRECT IMPACT Totally automated system for generating financial statements, scenario planning and invoice processing led to improved productivity and profitability of the company.

implementation of SAP says many pre conceived notions were demolished during this exercise and he treats it like a case study as the exercise helped him learn more than one valuable business lesson.

THE CHALLENGE “Honestly the biggest issue I faced was the nagging doubts about whether it was correct to have rushed into SAP,” smiles Barasia as we sit in his ground floor office inside the mini-township called ‘Godrej Industries Complex’ in suburban Mumbai. “We were moving from one ARP to another and I wasn’t sure initially if SAP would necessarily improve the financial processes and controls that

Narayan Barasia, CFO, Godrej Household Products talks about how SAP was implemented in the company. DHIMAN CHATTOPADHYAY

we had in place. The fact that we were spending over a few crores on the project did not help matters. Even a few of my senior colleagues were debating whether it was worth spending so much just to generate financial statements through a sophisticated software. The challenge was to understand and then convince others about how SAP could be used to leverage business, impact sales and ultimately lead to greater profit,” says Barasia. There were also concerns across the team about technical glitches that such software is prone to. Was there a way to ensure there were no disruptions of ERP transitions on the date of launch?

HOW THEY CRACKED IT In fact, recalls Barasia, these questions proved to be a far greater challenge than what the senior management had feared would pose to be an issue: convincing the majority of employees about the need and advantages of an extremely technology driven system. The first thing the commerce graduate from Calcutta University (he later did his CA from ICFAI) did was involve the entire finance team and even other divisions in the process. “We went through internal debates and discussions on best practices. Also we visited other offices where SAP had been implemented, asked questions, found out what the teething problems were, if any, and finally set clear and precise goals for the team,” he says. The fear that there could be disruptions or technical glitches at the eleventh hour, also played on the mind of

the core team at GHP. “We managed the calender so that before going live, we checked everything in the test database. We had dummy runs for two weeks and we involved our statutory auditor in the process from day one so that the entire team went through the exercise in real time.”

THE LESSONS Today the SAP software is running smoothly and we have even been awarded for the successful implementation of SAP,” says a proud Barasia as we step out of his office and move into the interestingly named ‘creativity room’ next door – a diamond shaped glass panelled room with solar panels on the roof, where employees are encouraged to experiment with a new project or a new concept. So what lessons did he learn from the exercise? Barasia says his biggest ‘technical’ lesson has been the realisation that SAP is a great software. “It runs like blood through the veins of the organisation. Today I have five different projects being implemented through SAP. For instance, our automatic invoice processing system runs on SAP. We also do our scenario planning exercises on SAP now,” he says. The exercise also helped him understand other functions of the company better and he feels, it made him a better man manager. “It was believed till not so long back that finance professionals needn’t bother about HR or other areas of work. The SAP challenge showed me how wrong that is. I am now fine tuning my HR skills,” says Barasia. AU G U S T 2 0 1 0






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High (on a) Five! The new BMW 535i could well have a brain of its own, says Anoop Chugh THINGS WERE MOVING AT AN ALMOST sleepy pace on the newly-laid cat-eyed streets of Noida. Colourless signals (they were on the blink, in case you didn’t guess), traffic snarls at intersections, posters of the chief minister smiling down at the chaos and excitement on the faces of sweat shop workers as a siren marked the end of yet another slothish day. It surely couldn’t be the end. The early-to-bed city could do with some excitement and it came in the form a long-hooded, kidney-grilled, chiselled creature who flew past the chaos. Was Batman out to save



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Gotham City, err...Noida? Meanwhile, somewhere close by around the same time, I was behind the wheels of the newly unmasked BMW 5 series, the 535i, going relatively fast for the liking of the cattle, enjoying its evening supper in the middle of the road. I was on board the longest wheelbase in the segment, a long and sleek engine compartment lid, short overhangs front and rear and a coupe-



The new 5 series (F10) is designed by Adrian van Hooydonk. It’s launched in India with four engine variants, two diesel - 525d and 530d and two petrol - 523i and 535i. The 535i features BMW’s new TwinPower Turbo and VALVETRONIC technology


8,$#:;;<& like, graceful roofline. Somehow, you tend to start believing it’s the 7-Series in disguise. The elongated wheelbase (2968mm) is actually almost comparable to the bigger version.


Design The styling on the sixth generation Beemer isn’t much different from the last generation. One can’t miss the expressive front end, the elegantly stretched silhouette and the powerfully chiselled rear even at first glance. The coupe-like, flowing roof-line comes out even more convincingly through the sheer length of the car. The trademark kidney-grill, double barrel headlamps and long boot add nostalgia to the moment. On the inside, the car made me recall the English play from my high school days where the immortal machines would, eventually, rule the world, and humans, become mere slaves. I too was starting to suspect that ‘she’ had a brain of its own. With features like driver assistance systems including a parking assistant, surround view, collision warning with application of the brakes, active cruise control, and a new speed limit device, the car almost takes owners for granted. The endless other features - lane change warning, lane departure warning, a head-up display, BMW night vision with detection of individual persons – make one feel quite like the boy who’s too shy to ask the pretty celebrity out on a date. At the rear, the seats are like quicksand, something you’d sink into. It’s hard to pick between the leg room and the head room – as to what’s more roomier. The instrument cluster and the black panel are intertwined into one another like conjoined twins.

Performance It was time to head to roads with more gravel and less limits. The 25km-long flawless Greater Noida Expressway was the ideal answer.

!"#$%=%> Price

58 lakh



Max Power


Max Torque Gear Box Wheelbase

400Nm 8-speed AT 2968mm

Ground clearence


Top speed




Fuel efficiency


Turning circle




POSITIVES the space, the gadgetry, the power, the comfort, the design, the drive NEGATIVES If you can’t afford it - the price, the handling when compared to the A6, electric steering has lost a bit of the driving fun VERDICT Roomy interiors, latest drive assist software, raw power and unmistakable ride give the 5 series a clear edge over rivals E-Class and A6.

Out of the four models that the German automaker has introduced in India, the 535i at Rs 58 lakhs (ex-showroom, Delhi) is perhaps the sleekest. Beating at the heart of the coveted model is the company’s new 3-litre singleturbo in-line 6, with 300 horsepower and 400 Newtonmeter of torque. I pushed the foot to the metal and in no time the speed-o-meter read 100, or was it 150? The clock later revealed the rev-hungry beast did 0-100KM in six seconds. The six-cylinder engine is mated with a 8-speed automatic transmission which barely went wrong when it came to selecting the right gear ratio. Just to reassert man’s dominance over the machine, I disagreed with her once in a while only to realise she’s more judicious than me in choosing the right gear. Though, at times on the highway I thought she could have been better at a lower gear. But, she would know better! Just when I thought this ‘5’ could do anything possible though, she almost spun her tail out at a fast corner. Thankfully, the active roll stabilisation ensured it was a momentary lapse of stability and control. She regained her grip back on the tarmac in a jiffy. By the way, I just realised that the ‘Batman’ in Noida was the BMW 535i. No, thespian end here.

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LG LED Projector


Nokia N900 Review A Debian in your pocket

The LG HS201G is an ultra portable LED projector (weighing hardly 800 grams) with 30,000 hours lamp life (factory rated), and direct USB media support that supports playback of DivX, MP3, JPEG and HD compliant video files. Price: Rs 48,000

Blackberry Torch

THE N900 IS the latest in Nokia’s series of Maemo-based Internet tablets. The previous Internet tablets that Nokia created did not even feature phone support, and N900 is the first. Knowing this, it is important to realise that telephony is a mere feature of this device, not its function. It is only slightly more convenient than making calls from your desktop using a modem. Visually, the Nokia N900 isn’t as captivating as some of the other phones you may have seen. Nokia isn’t known for the best designs, and many people will fail to find the N900 a magnificent beauty. Otherwise, the N900 is a magnificent device. One not without its flaws though. For one, it is a rather expensive device, at around Rs 30,000, at that price one would expect it to have a capacitive touchscreen, which is its second drawback. As it is, the touch experience on the N900 is a little disappoint52


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ing. Part of the reason for this is that not all applications available in the repositories are optimised for a touch screen display. With the QWERTY keypad though, the phone works quite well. Sadly some commonly used keys for the console, are absent – such as the Tab key, although it is still placed on the console window within reach. Sound has always been problematic on Linux, and the N900 was no exception. However this being a single device with a single hardware and software specification on which it has to run, such issues were not expected. For a geek, getting the N900 is like meeting your soul-mate, your true love, and then finding out he / she bites his / her toe-nails. Just a little short of perfection: a capacitive touchscreen here, a TAB key there, and the N900 could have been much better — not perfect though, but much better. Price: Rs 30,000

What was known as the BlackBerry Bold 9800 is now officially the BlackBerry Torch, a QWERTY-slider phone that’s powered by a 624MHz Marvell processor, and runs on BlackBerry 6 OS. Price: Rs 24,500

RIM Blackpad

It seems that the now infamous BlackPad, or BlackBerry tablet, is a step closer to reality. The BlackPad will have all the same specifications we’ve previously heard about (9.7inch screen, WiFi, front and rear cameras, Bluetooth, etc.) Price: Rumoured $499 POWERED BY

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Dragon Country Dhiman Chattopadhyay travels

to the city of Xi’an in China to meet the Terracotta Warriors.

IT’S NO LONGER an inhospitable land where tourists fear to tread. Far from it actually. As China becomes the world’s most preferred destination for companies and more and more businesses head to the world’s most populated nation, tourists too seem to be arriving in droves. And if Beijing and Shanghai are obvious favourites, then 3000-year-old Xi’an, one of the four ancient capitals of China is not too far behind. We arrived in this city in the Guanzhong province, after being pampered on the overnight train journey from Beijing. Nestled between the Quinlin mountains and the Wei river, Xi’an is home to the world famous Terracotta Warriors. Our cabin on the train was luxury personified: television sets attached to each berth, large bathrooms, two restaurants and a bar that ensured we stayed jovial on the way. The first glimpse of Xi’an evoked awe. Much of the city is guarded by a 12 metre-high wall that is so thick that a motorable road has been built on top of it. Within the city, a few minutes walk from our base, the Bell Tower Hotel, stood the giant Bell Tower and the neighbouring Drum Tower, two star attractions of the city. Built in 1384 during the early Ming Dynasty, these two towers overlooking the city-centre, are the grandest of their kind in China. It was the terracotta army however, that had lured us this far and so, the next morning, we booked a taxi and set off 40km east, to a village where the historic tombs lay. The Terracotta Army (or warriors) was discovered in the spring of 1974 by local farmers, specifically by a man called Yang who was drilling a water well and suddenly found what seemed like human figures underground. Jeremy, our guide, told us that the army is a form of funerary art, with hundreds of life-like figures buried with the First Emperor of the Qin dynasty (209 BC). It apparently took 700,000 men over a decade to complete the tomb. We had another day to spare before we returned to Beijing, so we used it to explore the rest of the city. The Wild Goose Pagoda on top of a hill is worth seeing and for local


souvenirs, there are few better options than the small shops lining Muslim Street, just behind the Bell Tower. And if sampling local cuisine is your thing, try the Yang Rou Pao Mo (unleavened bread dipped in mutton stew) or Jia Mo (the Chinese equivalent of a meat burger) at the night market of Nanshao Gate. You won’t regret spending a weekend at this ancient town. HOW TO REACH: You can fly in to Xi’an via Bangkok, Singapore or

Hong Kong. Or, if you are already in Beijing, take the luxury night train to arrive in Xi’an at the crack of dawn. WHERE TO STAY: The Bell Tower Hotel is a four star business hotel and Shangri-La is a five star resort. Both are located in the heart of the city. HOW MUCH: The best rooms in Bell Tower come at a shade under Rs 5000 a night. AU G U S T 2 0 1 0






Punjabi by art! Thukral and Tagra’s work

comprises an imaginary living room, with a painting featuring dreamlike imagery of buildings By Anoop Chugh

Jiten Thukral and Sumir Tagra are real mavericks. They are almost inseparable. Thukral and Tagra, as they are popularly known are alumnus of prestigious New Delhi College of Arts. They work collaboratively in a wide variety of media including painting, sculpture, installation, video, graphic and product design, websites, music and fashion. They are best known for blurring the lines between fine art and popular culture, product placement and exhibition design.



THE WORK OF Jiten Thukral and Sumir Tagra offers a seductively vibrant take on contemporary Indian society and culture. Witty and colourful, Thukral & Tagra’s refined aesthetic taste is applied to painting, sculpture and installation as well as graphics, interiors, fashion and product design, under the provocative label of Bosedk. Their structured approach to creative work provides their projects with a high level of detail, finish and accessibility, with key themes researched and developed over time and made adaptable to specific concerns and contexts. As part of a generation of Indian artists for whom “transcultural experience is the only certain basis for contemporary artistic practice”, Thukral & Tagra’s work ranges freely across forms and references, while maintaining a distinctly local perspective. Their ongoing series ‘Effugio/Escape’ for example is inspired by a feature of Punjabi society in which young people, particularly men, are encouraged to move abroad. Although wandering and migration has been a long-standing aspect of Punjabi culture, emigration accelerated during the second half of the twentieth century, through exploding global demand for labour and more relaxed immigration policies in some western nations as well as local ‘push factors’ such as the Partition of India and political instability around Operation Blue Star in the 1980s. “We play with cultural forces such as the high status

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conferred upon those who emigrate and by extension, upon their families back home,” says Jiten Thukral. Both Punjabis, Thukral & Tagra began to document and analyse this condition around 2003, linking it to broader shifts in Indian society. Drawing on personal experience and interviews with young men the artists have constructed a hallucinatory world of hyped-up aspirations and burgeoning wealth. Glossy paintings, fashionable clothing, and shelves bursting with inviting packaging fill their installations, which are often configured as retail or domestic environments. Thukral & Tagra’s work for Asia Pacific Triennial 6 is comprised of an imaginary living room, dominated by a large painting featuring dreamlike imagery of baroque buildings, inspired by those springing up all over India. With their pastiche of European styles, such villas and apartment blocks reflect the desires of the middle class, yet are wildly unsuited to the local climate. The seriousness of Thukral & Tagra’s subject matter is conveyed with directness and humour, reflecting the empathy the artists feel for their subject. The alluring aesthetics of design, and the ‘dream factory’ approach of advertising, are employed for their communicatory potential.


EDU TECH December 2009



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Home is where the history is This book will make you fall in love with your house, yet again, says Anoop Chugh

Medium Raw Medium Raw marks the return of the inimitable Anthony Bourdain, author of the bestseller Kitchen Confidential and three-time Emmy Award-nominated host of No Reservations on television. In the ten years since his classic Kitchen Confidential first alerted us to the lurking perils of eating out, from Monday fish to the breadbasket conspiracy, much has changed for the subculture of chefs and cooks, for the restaurant business—and for Anthony Bourdain. Medium Raw explores these changes, moving back and forth from the author’s bad old days to the present.

Publisher: Harper Collins Price: Available at

)9LKQ.QK!KPMKM BILL BRYSON’S A GUY who can make history sound like a full moon party on Koh Phangan Island. One would have to thank Bryson’s state of doldrums (when he’s at home) for his latest masterpiece. Titled ‘At home: A short history of private life’ (it could so easily have been named ‘At a British Home’), the book is a diligent and systematic investigation into the history of whatever constitutes an Englishman’s house. The plot is his house, a former rectory in Norfolk. He goes around it with an avid eye for every minute detail. The book documents some amazing facts from history about things that are so close to us that we often take them for granted. Say, a fork. What made us realise the need for an instrument having two or more prongs or tines? The book reminds me of the omnipresent mobile book vendors who sell titles like “Astonishing facts you may not know” that try and educate us on what makes the leaning tower of Pisa lean. This book being from the desk of Bill Bryson is not purely about facts like some other ‘I-would-showeryou-with-facts-till-your-eyebrows-go-vertical’ books. It’s about storytelling with brushes of alluring humour and jaw-dropping ‘rats-have-sex-up-to-20-times-a-day’ facts.

Publisher: Random House Author: Bill Bryson Price: Rs 950 56


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It takes a CEO SHOULD CEOS ACT as moral compasses for their companies? Leo Hindery thinks they should. If every CEO did so, then Enron, WorldCom, Adelphia, and Tyco would not have become poster children for greed. They would not have become corporate embarrassments -- living illustrations of all that can go wrong in the corner office. Publisher: Free Press

Price: Rs 395

What Women Want PACO UNDERHILL REPORTS on the growing importance of women in everybody’s marketplace—what makes a package, product, space, or service “female friendly.” Underhill offers a tour of the world’s marketplace—with shrewd observations to help everybody adapt to the new realities.

Publisher: Simon & Schuster Price: Rs 889

CFO India - August 2010