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Globalisation
is essentially an integration of national economic activities
with international economic systems, and this implies
financial and trade liberalization, deregulation and privatization,
among other things. As long as there are losers in the
process of globalization, the song and dance of pro-globalisation
will be met with protests, political upheaval and other
forms of demonstration. The current economic paradigm
of globalization gained its momentum after the so-called
Washington Consensus (WC) that was publicized in a summary
paper by Jeff Williamson in 1989 in the context of revival
of some of the Latin American economies. After about a
decade of experimentations, Mr. Williamson admitted in
2000 that that the originally stated premise of the WC
was ‘flawed’ in some respects. The flaws and their adverse
impacts have been more pronounced in the finance sector
and proved extremely costly for some of the developing
countries. The same phenomenon of globalization then leads,
in turn, to negative effects on the export earnings and
on job growth in industrial nations.
The misapplication of the paradigm led to a recent phenomenon
that developing countries have turned ‘net exporters of
capital’ to capital rich countries! The magnitude of such
transfers has been of the order of $40 billion in 2003.
During 2002 the developing world paid $9 billion more
on servicing old debts to international lenders than they
received in new loans. Besides, the quantum of concessional
flows of capital and development aid to developing countries
(including grants) declined rather sharply during the
past five years. Although some of these features are not
entirely the results of globalization, it is time for
a reality check and for corrective reformed globalization.
Privatisation of public sector entities has been a pillar
foundation for globalization processes. Trillions of dollars
worth assets have been privatized and sold merely for
a few billion dollars in some of the East European and
Latin American countries. In terms of the economics and
management of resources, privatization should have been
recognized as one of the options for enhancing economic
efficiency and revitalizing the public sector. It is important
that due process of exchange of assets from public sector
to private sector is followed even there is a clear case
for privatization. Unfortunately the frenzy of globaphobia,
and loan conditionalities of the organizations such as
the IMF led to lopsided and costly approaches to economic
reform. This resulted in the enrichment of rent-seekers
at the expense of public interest.
Lessons of experience in ‘best practices’ in public sector
from some of the West European countries should be of
great relevance in deciphering alternative forms of economic
governance. For promoting economic competition and efficiency,
market-friendly reforms can also be initiated based on
reductions of transaction costs. Creation of potential
competition (or of ‘contestable markets’) is one such
mechanism to enhance economic efficiency. Let us note
that the end product should be the enhancement of economic
efficiency as well as improvement of economic justice.
Globalisation cannot be and end in itself but merely a
merely a means of achieving desired economic goals based
on certain prerequisites. The need for effective legal
infrastructure has often been ignored in many countries,
for any shortcomings in this aspect will lead to significant
costs to the society, whether or not private enterprise
and globalization remains a popular economic paradigm.
An inefficient parasitical economic entity can only act
as a drag on the economy and spill negative contributions
to the society. Globalisation attempts should be preceded
by the provision of effective legal and regulatory mechanism
for the transition and for the governance of new economic
entities.
The elusive reform of the international financial architecture
is closely linked to the provision of meaningful elements
in the policies and processes of globalization. Some of
the important steps required in this context are the following.
1. Financial liberalization must follow, not precede,
prudential financial regulation.
2. Alternative economic organizational arrangements must
be evaluated before jumping to privatization. The requirements
of efficient organizational arrangements, including efficient
regulation, remain relevant even after privatisation if
Enron-like disasters need to be avoided. Public accountability
and active role of all major stakeholders is important
for ensuring transparency and consensus-based economic
governance.
3. Standards, norms, and codes of conduct of activities,
financial accounts as well as environmental responsibilities
of corporate entities, both private and public, need to
be spelled out and relevant regulations effectively enforced.
4. International debt management should be restructured
to enable developing countries cope with volatilities
of their export earnings; debt servicing should be made
flexible and sensitized to an index of export prices and
access to export markets. The IMF should activate its
Compensatory Financing Facility (CFF) to protect developing
country exports against adverse commodity price shocks.
Rather than trumpeting the urgency of globalization all
around, the IMF should recognize and address the prerequisites
for reaping potential benefits of globalization, and seriously
devise strategies to ensure such benefits accrue to all
sections of the society.
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The assumption behind a good compensation
design is that it attracts, retains and motivates appropriate
talent to yield cost-effective and competitive performance.
There are broad principles such as internal and external
equity and scientifically structured variable pay that
are important in designing compensation. These principles
which are important for managers cannot be practised in
the case of directors, as there are infirmities in their
structures and motivational dynamics.
Unlike managers who come as one class with a similar type
of employment contract, directors are a portfolio. They
may be a bunch of non-executive directors (NEDs) representing
the financial institutions, promoters or strategic equity
holders; whole time directors; NEDs representing special
interest groups either in compliance with law such as
in the case of banking, or by convention; or independent
directors. Each is a class that is not comparable with
the rest.
To the NEDs representing financial institutions, directorship
is less material than their contracts of employment, thus
making director compensation inconsequential. In any case,
most such institutions insist on direct payment to them
or decline director compensation. This aggravates the
loyalty issue. Though the principle of corporate governance
states that directors owe their first duty to the company,
in practice they bear upper most in mind, the interests
of their constituency or powerful individuals. No wonder
that representatives of institutional investors and venture
capitalists would be more worried about valuations of
their stock and exit strategies than the long-term interests
of the company.
A similar situation applies to full-time directors who
have employment contracts with the company. The pay, including
bonus and incentives, is related to their performance
as executives and not as directors. In the process, most
working directors do not make a distinction between their
duties and responsibilities as directors and their role
as executives. This makes the full-time director full
of management and little of board.
In the case of NEDs representing promoters, it is assumed
that their performance will be guided by enlightened self-interest,
of increasing shareholder wealth, which may indeed be
convergent with those of all the shareholders. Contrarily,
there is a pronounced distortion in the motivational pact
of the directors representing special interest groups
such as trade unions, small investors or borrowers. While
the principle of corporate governance exhorts them to
think of the company first, the very motivation behind
sectional or special representation is to protect the
interest of the constituency.
Thus, eventually, it is left to the independent directors
to balance the diversities and bring forth board independence.
However, there are increasing doubts on how independent
directors can be, especially in view of the dynamics associated
with their appointment and compensation. The diversity
among independent directors in their background and market
worth creates distortions in internal and external equity.
While some may be high profile industry leaders, others
may be from NGOs or academia. The market worth of such
directors would be different from one another. Yet, the
compensation — in the form of sitting fee, commission
on profits, director fee, or stock grants as provided
under the law or on obtaining necessary approvals of the
shareholders and the Central government, where necessary
— is invariably the same.
The unstated principle appears to be “same class same
pay”. Unlike most managers, directors don’t have any pay
for performance. Variance in pay is only in sitting fee,
where applicable, as it is linked to attendance. Commission
on profits, which in any case is considered free-riding
by many, does not differentiate between one’s single meeting
from another’s eight in the year. Hence, the highest pay
becomes the common factor for the members of the Board.
One reason for not varying director remuneration amongst
the independent directors is the fear of enhanced liability
commensurate with higher fee. Consequently, the international
practice also is to make the fee common to all NEDs and
compensate additionally the independent Chair or Chairs
of committees and other committee work.
Because of the need for parity, some directors may end
up getting paid more than what they are worth in terms
of their market value or contribution in the board. If
an independent director is overpaid, the conditions would
be right for cronyism. Also, as most companies do not
undertake director and chairman evaluation, linking compensation
with performance will never arise. Thus, the principles
of internal equity, external equity as well as pay for
performance get undermined in many ways.
Compensation under these circumstances is no different
from cattle grazing. One has to be on the right spot to
graze well — such grazing has little to do with one’s
size or the amount of milk one can produce!
(Published in Financial Express,
May 17, 2004)
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