Corporate Restructuring
An efficient Insolvency System
By Sujit Mundul
It has been witnessed in many countries that corporate restructuring depends on policy measures and many other factors including financial sector reform, development of restructuring mechanisms, choice of a leading agent undertaking restructuring, and willingness to change the corporate governance and competition frameworks. Since countries adopt different policies and differ in numerous ways, the link between policies and outcomes is difficult to establish. Furthermore, it is the overall consistency between the various reforms that determines the likelihood of success, making it difficult to point to specific policy instruments and measures. Nevertheless, specific policy lessons emerge from this and other cross-country comparisons.
An efficient court-supervised process is a necessity, and without it an out-of-court corporate restructuring framework can only help to a limited degree.
The efficacy of the out-of-court system depends on the formal court system. The fact that the frameworks for out-of-court corporate workouts were more effective in countries like Korea and Malaysia, than in Mexico, Thailand, and Indonesia reflects clear differences in the ability of each country’s insolvency and creditor rights system to impose losses on debtors. In Korea, because of a bankruptcy regime that was credible at the beginning of the financial crisis, many controlling shareholders saw their shareholdings severely diluted and managerial discretion controlled. However, even in Korea, bankruptcy affected small and medium enterprises (SME) much more than large corporations, and some heavily indebted corporations were able to avoid bankruptcy for long period of time. In Malaysia, bankruptcy was an effective threat, but again not for large or politically connected firms. In other countries, like Brazil and Mexico, the inability to persuade existing shareholders was more widespread, and bankruptcy was not a viable threat for any firm.
Although the formal bankruptcy regimes can be improved relatively quickly, and they have been improved in many countries, legal enforcement often remains limited. This is both for technical and political reasons, as courts are overworked, understaffed, and often subject to political pressures. Evidence of the uncertainties introduced by the courts is plentiful, and the comparative data presented on costs and time delays back up the large discrepancy between developing and developed countries. Although it takes considerable time, reforms to enhance the efficiency and integrity of the bankruptcy process, including the introduction of specialized bankruptcy courts, are often necessary. In the meantime, introducing London type approaches even when not in a crisis can be useful. However, the regime needs to be tighter than some of the crisis affected countries allowed and backed up by those aspects of in court regimes that operate relatively strongly. Furthermore, market based alternatives to debt resolution mechanisms should be explored, with the powers and involvement of the courts to remain limited.
Adequate loss absorption capacity is necessary, but preferably with as many private sector incentives as possible and without perverse links. To restore bank capital adequacy, recapitalization by the private sector is preferred but is rarely sufficient in times of a systemic financial crisis. If the government steps in, as is typical in a systemic crisis, it should try to preserve as many private sector incentives as possible, which is a difficult tradeoff. Incentives can be strengthened by linking government financial resources directly to the financial corporate restructuring undertaken by banks, as was done in some countries (viz Mexico, Thailand).
A proper incentive structure also means limited ownership links between banks and corporations. This is necessary in order to reduce the chances of the same party being both debtor and creditor. In many countries, extensive links between banks and corporations limited the restructuring. In Indonesia, the Widaja family was the controlling owner of a financially distressed corporation that had large debts to the defunct bank that was also controlled by the same family. Such links cannot be removed overnight, but restructuring approaches have to take them into account. More broadly, links between the financial and corporate sectors, through the political system and otherwise, have to be considered.
(Mundul is a CEO of Standard Chartered Bank Nepal Ltd.)
Mantras for growth
By Manohar Man Shrestha
Most of us have listened to the song from the movie MadMax sung by Tina Turner crying out, "We don't need another hero". In the context of the movie where tough headed people fought against each other to death, it made sense. However for business and management in Nepal we need a new song, "We need more heroes".
Recently we learnt that the GDP growth in the last fiscal year was an appallingly low 2.5 percent. India and China have a growth rate of 9 percent or more. We are dwarfed. But I don't want to stop our thinking process here. How would our life be if, like our neighbors, we had a double-digit growth? What would it mean to my wife's pay-cheque? How about my consulting and training business - how would it look? How would we go to work if we started having that hypothetical 15% GDP growth rate? Would we be driving cars 'made in Nepal'? My friend Binod who spent two years in Japan told me that one of the biggest culture shocks he experienced was that tomatoes were displayed like we display watches in Nepal and that it was that expensive too. Would we end up adding value to our green vegetables to such an extent that they too would look like gold?
On an assignment in Biratnagar, I was thinking of visiting Arati Strips - regarded as the biggest Nepali factory for making roofing sheets. It was famous, it was huge: so it must have money to spend on training. But my local friend explained to me that it would be pointless since it was about to shut down its operation in Nepal. Months later, I read in the newspaper that the Rs. 500 million Crescent Industries has left Nepal.
The effect of these developments will be that more than 500 will lose their jobs while tens of thousands of others will be affected. And these people are people like me - suppliers of raw materials, maintenance service, machinery, engineering, construction, consultancy and so forth. When Hotel Narayani closed down, it was not just the employees who suffered. So did the suppliers of toilet papers, kitchenware, furniture, food and beverage and so many other services and products. In turn, the suppliers of the suppliers too got the axe, followed by their suppliers and so on. It is an immense and intricate web.
One Harvard MBA manager lashed out at his colleague shouting in sheer frustration, "Are you a manager or a clerk?" The latter could not make a decision on his own; it just seemed that he was a mouthpiece of the CEO. The two of them were supposed to organize an event together. The CEO wanted it at a particular venue and time. However the venue was already booked. All that was needed was to make a change in the time of the event by around three hours but the locally educated manager could not tell this to his boss. The Harvard graduate coaxed him, lured him, threatened him, and the only option left was to point a gun at him or beg with him.
The stubborn manager who was a TU graduate would have made a fine executive. I pay my executives to get the job done, no matter what, no matter how, using no matter who. I don't pay them to teach me or to advise me. My wish should be a command for them. My executives should be a resourceful, intelligent, cunning, goal-achieving breed. That is how I like them. But my managers have got to be different. I look at my managers as a patient looks at surgeons, doctors and nurses. They are my five senses and brain. I pay them to keep my organization from failing. I listen to their concerns and accept the challenges they pose to me. I don't like them, mind you. But I need them and, most important of all, I trust their decisions and actions because like engineers, they've been trained to design organizations and keep them operating.
At a party, an economist friend exclaimed, "We Nepalis are screwed. We are proud that in a particular year we received 500 thousand tourists. But Cambodia, a country far less developed than us, stripped of all its intellectuals of whose only skulls remain in torture camps, has on an average one million tourists arrivals every year. Forget about other developed countries." Where have we gone wrong? Imagine if we too had one million tourists coming yearly. That would be about 100,000 per month. That would mean that at any time in Kathmandu every person in 10 would be a foreigner.
You've learnt five lessons on how to grow your business if you are an entrepreneur, how to lead your organization if you are a manager, and how to transform Nepal if you are holding a key position in the government or how to manage a house-hold if you are a family-person. If you have not already deduced them, here they are:
1. Celebrate acts of heroism: what gets rewarded gets repeated (Tina Turner and MadMax)
2. Go beyond numbers and see their implications: have a vision, not just a plan (GDP growth of 2.5% this year)
3. Understand your inter-connectedness with the world: you are not alone (Rs.500 million worth Crescent Industries shutting down)
4. Create a culture of empowerment: don't expect it taste sweet if you plant lemons, you reap what you sow (Foreign MBA Vs TU MBA)
5. Use the proper measuring rods: see it in the correct perspective (Tourist arrival in Nepal compared to that in Cambodia)
Celebrate heroism
Every day I go on a morning walk to Pashupatinath. I cross the busy roads and then I reach the Sleshmantak forest. Suddenly I feel I am transported to thousands of years back: no air pollution, no noise pollution, no sight pollution (none of the concrete jungle can be seen from there). I think to myself, "This is how my ancestors must have felt: free, fresh, and afar." I rejoice being in that time machine. Every year during the time of Shiva Ratri, hundreds of Sadhus swarm the place. "Why are they here?" I ask myself. Is it to feel the 3 F's? They have left their earthly belongings and all their chains to material misery. So that could not be the only reason for them to have covered such large distances to attend the birthday of Shiva. I look closely at them. And voila I find the answer. Shiva is their hero whom they have tried to emulate during all those years. They have come here to celebrate the heroism of Shiva the Mahadev.
No one knows for sure how true the stories of Shiva, Rama or Krishna are. But we celebrate them. In psycho-therapy there is one fundamental axiom that memories need not be factual to be perceived as real. So, if some real memories disturb the patient he is encouraged to change the plot of the memory. Soon he feels much better. It is possible that scriptures were not historical accounts but stories meant to lead the mass towards certain ideals, ways of life and behaviors that were deemed beneficial at the time when they were composed.
Well that worked. The babajee's we see during Shiva Ratri are following the footsteps of Shiva, wearing ashes, smoking marijuana and lost in bliss. Somebody should have told these stories to Osama Bin Laden. I can imagine him holding a damaru instead of a machine gun.
But how do we create heroes at work and at home? Use the formula SPICEES whenever your employees or children do something right.
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Stop everything: they do it best on TV reality shows. The camera comes: everybody is around. Soon there is a pin-drop silence. You too can create a similar effect by just pausing in time, taking long breaths and asking everyone to pay attention to what you have to say, dropping whatever they are doing.
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Pinpoint: next tell the employee or child what she had done right. You will be surprised that most of the time they have no idea about what they had done right.
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Illumine: Explain to her why what she just did is a great thing to do and how it will help others.
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Congratulate: Felicitate her with a handshake or a hug and say "Great work. Congrats."
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Express joy: Don't forget that big smile and the thrill of excitement running in your blood. Show it with a dance of joy.
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Encourage to repeat: Tell her that you expect her to keep doing the right things.
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Spread the news: Tell people about what she did. They in turn will tell her that you told them the good news. This will reinforce the story.
Thus you have created a myth. At a national level, many countries give medals of honour. Due to this everyone works so hard and with such accountability. They are made heroes and everyone else wants to become a hero like them.
Andrew Carnegie, Rockefeller, Henry Ford, Warren Buffet and Bill Gates have been given the status of heroes. Is it any wonder that entrepreneurs abound in the USA?
Have a vision not just plan
Did the government plan the formation of Microsoft? Did it commission the Wright brothers to test planes? Were Galileo, Kepler, Newton, Faraday and Einstein given government grants to discover the laws of the universe on which the modern economy is founded? Did the Middle East nations plan to make fossil fuel (that they had in plenty) the source of energy for engines? Goals are good but quantum leaps in our economy, in our business, is what we must strive for. Let's have a vision of the future. Let's not restrict ourselves to GDP growth rates. Let's dare to imagine the future and let thinkers and entrepreneurs lead us there. Let's make Nepal a haven for these breeds.
John F Kennedy had no idea about rocket science. Yet one fine day, he told his nation that his vision was "To have the first man on the moon by 1970's". He had no plans, just a dream. Eventually the impossible was made possible. Nepal's economy may follow a similar path. We want a GDP growth of 15%. Let's not stop at this. Let's say, "We want to have such a Nepal where unemployment will be negative. Foreigners will be wanting to come to Nepal to work not only because the pay is great here but also because the challenge and the vision are great. Cities will have skyscrapers. The countryside will be purely dedicated for agriculture of natural herbs and cash crops. There will be holes in the mountains of Nepal made by tunnels connecting east to west, north to south. No more noisy, rickety tempos and smoke belching vehicles. We will be going to work in air-conditioned bullet trains. We won't be screened like we are now to get visas to other countries. We would be so rich, they wont' require us to get visa to visit their country. Who would want to stay in the UK or US when you get more opportunities in beautiful Nepal? Universities and research labs would attract the top brains of the world. There will be three stories of highways. We would be supplying our surplus hydropower to India or even beyond. All the streets would be spotlessly clean. We would have cleared all our debts to ADB and IMF. Instead of taking donations, we would be giving grants to other less developed countries. We would have Nepali blockbusters showing all over the world. We would be rich and happy: everyone who would work hard and honestly would be able to fulfill this national norm. Such is the Nepal with a GDP growth rate of 15%."
Understand you are part of a bigger whole
We can't understand the intricacies of the world. In science the unified theory that is to explain gravitation and molecular attraction at one time, is eluding all. How then can we think of the ideal plan for Nepal's economic growth? I don't make detailed plans for my company. It doesn't work. I set a vision. I understand that I am not alone. All I need is to be is a link in the chain of supply and demand. I need to survive not to be the weak link. LinkTree and Serving Minds are Business Process Outsourcing (BPO). They are striving because some companies in the developed nations needed a supplier to handle work they did not want to do at a cheaper rate. We are all born for a purpose. Find the purpose and you will be taken care of by the system: it could be the economy or the cosmos.
Empower people
In a recent management workshop, I asked the participating HR managers to make a puppet show. I gave them dolls, strings and sticks. The story and script had the roles and actions carried out by employees. What's the meaning of the game? Puppets mean employees. Strings and sticks mean the job description. Thus you have dolls acting out on their own on a stage whereas in reality they are being guided. My point was that the job of the HR manager is like that of a script writer. You have to define (orient, educate, train) the staffs to play their part. First they must know what it is. Lower level staffs follow orders but need to be more responsible now-a-days due to faster business processes. Executives need to get the job done with preferably higher Emotional Intelligence (EI) than before due to more educated staffs. Managers need to design work-flows and growth for efficiency as well as effectiveness and be willing to be fired for even the correct decisions. Let's write a winning story: a story of empowered people. The pen is in your hands.
See in the correct perspective
I read an interview with Maoist leader Dr. Baburam Bhattarai recently and discovered that his major skill was in re-framing problems. For example, when confronted with the allegation that agitations and bandas by the Maoists and others slowed the economy, he says that the economy was on a downfall even before the JanaAndolan-2. Maybe he is right. We as a nation must come to realize that things are not as good or bad as they seem. I have to meditate in order to see the problem in the right light. Businesses should begin bench-marking with others in the industry. Nepal must leave aside success on the political front and focus on the shortcoming in the economic front.
Conclusion
For me, a piece of news is meaningless as long as I can't derive lessons from it. There is a pattern in history: news is history in the making. It is like a jigsaw puzzle. Every news is a piece in this puzzle. This article is a puzzle that I fitted with recent news. I don't know how to read stars but I do know how to decipher news to unfold knowledge. Can I be your hero in this matter?
(Shrestha is Senior Trainer & Advisor of Standard Icon Pvt. Ltd.)
