India’s Big Idea

Following last year’s election of Prime Minister, Narendra Modi, India has seen a raft of changes, including tax incentives, plans for privatisation and lower caps on foreign investment. It’s hoped that collectively, these pro-business measures will help to accelerate growth and cement the country’s position as an economic powerhouse. But one year on, how much has the market really changed?

“Modi knows he has no option but to make it interesting for foreign businesses to invest,” explains David Horlock, Managing Director for Asia Pacific at standards and training provider BSI Group. “I don’t think there’s any going back now. It’s just going to be a matter of time, of unwinding the bureaucracy and the red tape. There’s a political determination to get that done.”

According to the most recent World Investment Report, India received $34 billion of FDI in 2014, up 22 per cent on the previous year. By comparison, while investment flows into China only rose by four per cent, it still received just under four times as much FDI ($129 billion).

David sees Modi as a one-man army who must quash resistance from bureaucrats, even within his own team, the Bharatiya Janata Party (BJP). The challenge for India’s leader is whether he can embed regulatory changes fast enough to realise the country’s potential and successfully compete against China.

A burgeoning middle class and widening pool of talent suggests it can be done, but speed is another matter. Andy Dunkley, CEO of jeans brand Lee Cooper, says: “While the Government is putting through a lot of aspirational changes and it’s moving in the right direction, that’s not really filtering through into real business yet.”

The brightest sign is India’s economic growth, which is predicted to hit 7.5 per cent this year, yet few would understate the obstacles ahead. Crucially, there is the need for regulatory consistency across India’s 29 states, the lack of which is one reason why India sits so far down the World Bank’s Ease of Doing Business Index. Its latest assessment puts India at 142 out of 189 economies.

Understand your market

Inconsistency between India’s states means it pays to study the various regional characteristics. “Get to know the consumer,” suggests Arbinder Chatwal, Leader of Indian Advisory Services at BDO International. “Selling to Mumbai is very different to selling somewhere in Delhi and vice versa. So do that research up front and understand some of the smaller cultural nuances.”

Arbinder cites a motorbike manufacturer that had success in South but not North India. It didn’t realise the difference in consumer tastes: North Indians prefer a kick-start engine, which they perceive as masculine, but it sold a key-start motorbike. It’s a small detail that had a significant effect.

Going in with assumptions about how business is done can have serious repercussions. Shanthi Flynn, Criticaleye Board Mentor and former SVP for HR at Walmart Asia, explains: “India has lots of potential for businesses if they are willing to invest in the future and build at a steady pace. But companies that attempt to launch their brand in multiple states at the same time run much greater risks. The states have different laws and local politics and can vary in how much they support foreign businesses and certain business types.”

A joint venture (JV) with a domestic company can provide new entrants with the local insight needed to navigate through such issues. According to Lee Cooper Brands’ CEO Andy, whose business in India is worth $100 million − up from $20 million five-years ago, “Going in on the ground yourself is nigh on impossible”.

Yet such partnerships can add another layer of complexity, particularly when executive teams don’t fully understand the terms and conditions or set-out a clear break clause. “It’s easy to rush in and do a deal and then find you’re in bed with the wrong person; how you exit from that is very difficult,” he adds.

Additionally, JVs can leave you open to IP theft as regulation is lacking. Lee Cooper Brands protects its product by recording designs, using holograms and talking to customs officers to determine if their products are being illegally exported.

“When we do see counterfeits, which we do, we make a point of going to the end of the legal process, which can take years but there is a pain barrier in knocking off our product,” says Andy. “If you don’t go through that process, the knock-offs will multiply and you’ll lose control of the brand.”

One of the best ways to protect your business in India is to have the right local staff on the ground. Thankfully, one of India’s selling points is its talent, but sometimes aspiration outstrips experience.

“India has a lot of smart, English speaking talent. You’ll find more people who feel ready to be CEO here than anywhere else in Asia. The challenge is that the number of managers with broad experience are limited, so they’re expensive. Salaries at the leadership level don’t always match experience,” Shanthi explains.

Getting the right local talent is essential. “There’s no point flying an expat in to do these bits for you,” says Arbinder. “You need to have your own man on the ground who’s got your interests, wearing your logo; essentially, has got your interests at heart.”

According to Andrew Minton, Executive Director at Criticaleye: “One thing to bear in mind is how Indian employees expect to be led and inspired. India’s successful leaders often have a long-term, internal focus. This means a deep investment in people instead of looking first to the shareholders. Western leaders should bear this in mind when considering how they lead in the subcontinent.”

Indeed, longevity is the best approach. “India is a long-term, strategic play as opposed to a ‘get rich quick’ investment, so set your expectations,” instructs David.

Fast economic growth and increasing FDI suggest that may be starting to change. Executives, entrepreneurs and investors certainly hope so.

By Mary-Anne Baldwin, Editor – Corporate


A Strong Case for M&A

The appetite for acquisitions among corporates and private equity-backed businesses continues to grow. This is driven by a combination of mounting pressure from shareholders and investors, who want to see tangible signs of growth, and the availability of cheap money. It’s created a seller’s market and, therefore, buyers need to thoroughly analyse a company’s compatibility, while also being careful not to overpay.

Richard Madden, Chief Executive of corporate finance house DC Advisory, says: “There’s an awful lot of money chasing a small number of good opportunities. As a vendor, it means that good businesses are going for full prices, which may not work so well for buyers – but only time will tell.”

According to research from professional services firm EY, which surveyed 1,600 executives in 54 countries, 56 per cent of companies intend to pursue acquisitions in the next 12 months (up from 31 per cent in 2014).

In such a competitive market, management teams have to build a strong case for an acquisition and be rigorous when assessing how it’s going to deliver value. Pam Powell, Non-executive Director of Premier Foods and soft drinks manufacturer A.G. Barr, comments: “You’ve got to start with your strategy… Any [proposal for] an acquisition has to be considered against… what’s needed in the future in terms of growth, the sector that you’re in, and the capabilities and resources that the business needs.”

It will also be necessary to define the advocates of a deal. Paul Budge, Managing Director for the UK and Ireland at distribution and outsourcing group Bunzl, says: “The operating company leader, who is going to take this acquisition on, is the person who [needs to be] accountable for its success.

“They are charged with, as I describe it, falling in love with the acquisition or not. You can’t hold somebody accountable if they weren’t part of signing up to it in the first place.”

Andrew Minton, Executive Director at Criticaleye, comments: “If an acquisition is to deliver long-term value it needs to be led from the outset by the executives who will ultimately be responsible for its success. It demonstrates to everyone within the acquired business that you’re serious about their future as part of the combined company, and that you’re not just looking for a quick win.”

All in the planning

A well-considered approach to identifying and prioritising targets will be needed. “If you’re entirely opportunistic you risk having a business or a set of businesses that don’t really fit together,” says Joe Garrood, Investment Director at private equity firm ECI Partners. “[It’s why you need to] have a framework that accounts for acquisitions.”

At standards and training provider BSI Group, country and sector managers are expected to analyse relevant target businesses and propose them to the Group Executive Team. Howard Kerr, CEO of the company, comments: “We have a current list of more than 200 companies that we have identified as fitting our criteria for acquisition. It doesn’t mean they’re for sale and it doesn’t mean we’re interested in them.

“It’s just a large number of companies we can work from because, in my experience, if you don’t have a healthy M&A pipeline, how do you know you’re actually buying the right company at the right time? The danger is that you [take the first opportunity] and reduce your ability to acquire a much better target afterwards [because] capital and management have already been deployed.”

Andrew Hosty, COO of manufacturing concern Morgan Advanced Materials, says: “The only reason I would acquire a business is to accelerate our strategy. They have to be doing something that clearly works alongside our company.”

In theory, this approach should make the deal quicker, although time and effort must be spent on due diligence. “Don’t compromise,” he adds. “You need to explain upfront: ‘This is what we’re going to do and this is how we’re going to go and do it.’”

Mark Brockway, Executive Director for Corporate Finance at EY, warns that the process shouldn’t become a box-ticking exercise. He says: “You need to prioritise what’s really important for the situation, such as the retention of a CEO. We helped a listed client incentivise the management of an acquisition target with new roles and equity-like incentives.

“The business had great clients, but the perceived risk was entrepreneurial management losing interest without a fresh challenge. They spent a lot of time just making sure they were happy before concluding due diligence.”

Managing the merger

Absolute clarity about why an asset has been acquired will make it far easier to implement an integration plan. “If the reason for buying is the cross-sell opportunity, that’s where you need to start. If it’s about efficiency of systems, then begin there,” says Joe.

For John Allan, Non-executive Chairman of retail concern Tesco, the trick is to start early and at the very top. He was Chairman of Dixons when it merged with Carphone Warehouse in August 2014 and says one of the key considerations before the deal went through was how the merged business was going to be run.

“We had a very intensive period of negotiation about board structure and the key management positions. We felt strongly that to get major benefits out of the merger, we needed to run it with an integrated management team,” he says.

“I think sorting those issues out before the deal transacted, while quite difficult at times, was the right thing to do. It meant that from the get-go we’d agreed the key principles of integration and people could then just start to get on with it.”

Rob Crossland, CEO of employment services group Optionis, comments: “It’s really important to quickly work out strengths, weaknesses, character fits, and which organisational disciplines that you need around the board table, and to make sure that people are comfortable with their new roles.”

The majority of acquisitions will carry an element of risk, especially when they’re dependent on people adjusting to a new organisation. It’s up to boards to smoke out lazily planned attempts to build market share, without any real thoughts about integration.

As Mark from EY says: “The main board has to sponsor the deal and be accountable. When issues come up, deals lose momentum or fall over quickly without that key individual [who is] prepared to put their reputation on the line.”

I hope to see you soon.


All Change for Executive Pay

Comm update_16 July

Seemingly lavish rewards for executives with little explanation or context will always make for good headlines. It’s up to the chairman of the remuneration committee (remco) to disclose what’s happening in a fashion which stakeholders understand, while finding a way to blend salaries with short and long-term incentives which attract and retain the best people, meet regulatory requirements and drive high performance.

Failure to disclose the rationale behind decisions adequately will see institutional investors and proxy agencies push back hard. According to research from Big Four firm EY, examples of recent red flags for shareholders include hikes in bonuses despite falling profits, granting Long Term Incentive Plans (LTIPs) above the normal maximum, which have been justified by ‘exceptional circumstances’, and the introduction of a new LTIP which increased the maximum award value to 350 per cent of salary.

There is plenty for remco chairs to juggle and scrutinise. Jeff Harris, who is Non-executive Chairman of plastic and fibres supplier Essentra and also Chairman of the Remuneration Committee at Synergy Health, welcomes the improved communication now occurring in the UK following regulatory reforms. “It’s positive because if we understand the objectives of the investors, boards can meet them better and can refer to their wishes in arguing points with company executives,” he says.

Mark Shelton, Partner and Head of Executive Compensation & Reward at EY, says: “The remco chair needs to reflect and remind themselves that they’re fundamentally there to drive business performance, and that means attracting, retaining and incentivising talent within a landscape of the new regulatory environment for shareholders. Then it’s about the public and the politicians.”

A similar point is made by Roger McDowell, who is Chairman of engineering company Avingtrans and Chairman of the Remuneration Committee at beauty and cosmetics designer Swallowfield: “Absolutely uppermost is development of shareholder value through motivation of management, I mean that is what it is about… But in terms of getting the motivation, there has to be something that is broadly acceptable to all stakeholders.”

An ongoing concern about executive pay is that regulatory changes are resulting in a box-ticking approach, which actually serves to inflate reward packages. “There is now a prescriptive way to disclose a number of matters on executive remuneration and that will increase transparency,” says Mark. “The unintended consequence, though, is it will increase pay because people will look at what’s been disclosed and move towards the common standard.

“To drive business performance, remco chairs will need to be very sensitive to what’s right for the business and not be overly led by market practice and also what is now being publically disclosed.”

Jeff comments: “The main challenge, as ever, is balancing the ‘benchmarked’ expectations of executives with the constraints of the investors who are the owners. It’s not helped by… the lemming-like rush to the upper quartile by executives.”

It’s up to remco chairs to take a tougher stance and, where necessary, educate CEOs and senior leadership teams about the new regime for executive pay. The emphasis is firmly on a fixed salary, while short and long-term incentives are linked to company performance that may in turn be related to total shareholder return, cash generation, profitability or earnings per share, among others.

Camilla Rhodes, Non-executive Director and Chairman of the Remuneration Committee at Johnston Press, explains: “As long as the communication between the executive team and the remuneration committee is right, and the talent pool is right for the business strategy, it’s a relationship that’s certainly manageable. But I don’t think the remco chair is ever going to be the best friend of the CEO, nor should they be.”

On the money

Devising acceptable packages is complex. Often the calculations involved leave those who lack expertise in this area baffled – even those who do understand it can be exasperated. Vanda Murray, Senior Independent Director at manufacturing company Fenner and Chairman of the Remuneration Committee at software company Microgen, says: “Really, you’re looking forward and trying to assess what is stretching the business on a one, two and three year horizon; how it can change over time and, if it changes dramatically, you’ll need to be able to adjust accordingly.”

Roger says: “What I always try to do is keep the big picture in mind. I’ll have a [long-term scheme] for up to three or five years… or some other form of share-based motivation scheme… If the market cap of the business doubles over a three-year timeframe, is that something that the shareholders would be pleased with?

“Would that be the business considerably outperforming its peer group and… be a feather in management’s cap? Whatever a great result is for shareholders, it should also deliver a great result for management.”

It’s a pragmatic approach, whereby remuneration is designed to focus the minds of executives on the future success of the company. If, however, performance proves to be under-par, there ought to be deferred remuneration and ‘clawbacks’ against variable compensation in place to further protect shareholders.

Mark says: “Clawbacks in executive remuneration have come to mean clawbacks of awards that are as yet unvested but shouldn’t be delivered. This is entirely enforceable as long as it’s undelivered. What is less likely to be enforceable – and there have certainly been some challenges on it – is clawing back awards that have been paid, taxed, delivered to individuals and potentially even spent.”

The position of the remco chair is set to remain controversial. Leslie Van de Walle, Chairman of construction industry suppler SIG and Chairman of the Remuneration Committee at diversified investment group DCC, says: “It is a difficult and sensitive area and it is getting worse because… remcos are torn between two objectives which are not always compatible.”

It has become a social issue, particularly in the UK – increasingly in the US too – where the sums earned by executives can seem astronomical compared to ‘ordinary people.’ Lady Barbara Judge, Chairman UCL Energy Institute, comments: “The real problem is when people make a huge amount of money that they can never spend… and other people work in the company for just as many hours [but receive a lot less]…

“I think that gap is what the problem is, not how much people make at the upper end, but the differential at the lower end.”

This can be managed if a remco chair isn’t hampered by sclerotic thinking and fully appreciates that times have changed when it comes to transparency. For the immediate future, what’s required is a period of calm so companies can devise compensation packages – free from regulatory and political interference – which minimise risks, promote clear disclosure and are rooted in the best interests of businesses.

Added to that, it helps to bear in mind that it’s impossible to keep everyone happy.

I hope to see you soon.