Patrick Lencioni runs a management consulting firm called the Table Group in the US and has authored several bestselling books on management skills development. “The Five Temptations of a CEO” and “The Four Obsessions of an Extraordinary Executive” are the two of my favourites among them.

The Five Temptations of a CEO was first published in 1998 and was one of the first of several books that uses fable type

The Five Temptations of a CEO

 story telling to drive home a message. Written in lucid style, the story fascinated me such that I, normally a slow reader, finished the book in just one sitting.

In the story, Andrew, the CEO of a company which is not doing well, is about to face a Board meeting the next day and is expecting a rough meeting. On the way back home at just past midnight and ready to do another few hours of preparatory work, he meets an old man on the train, who looks like just a janitor. Strangely, this janitor called Charlie sits down and talks to Andrew and grills him throughout the ride with some hard hitting questions on his company and draws out lessons to make Andrew understand the temptations he fell for as a CEO.

In the second part of the book, Patrick turns from a storyteller to an executive coach and takes the reader once again through the temptations, this time analysing the rationale and providing advice on how to overcome them.

These temptations described by Patrick are so common and natural that I could easily identify myself with them. Yes I have fallen prey to all of these temptations some time or the other. Patrick also runs a section on self assessment, as the closing chapter in the book, for you to check on yours temptation index.

What are these temptations?

When your company fails to meet its objectives and you do not consider this to be your own professional failure but on account of, say, adverse market conditions, you have perhaps fallen prey to the first temptation of “choosing status over results”.

If you consider yourself to be a close friend of your direct reports and are often reluctant to give negative feedback on their performance, you are suffering from the second temptation of “choosing popularity over accountability”. Chances are high that you are finding it difficult to hold someone accountable, because you have not set clear goals and responsibilities. This is perhaps because you are waiting for some more information to come in before you decide correctly on tasks to be done etc. This is on account of temptation number three of “choosing certainty over clarity”.

Temptation four is the “desire for harmony”. But “harmony is like cancer to good decision making”. Through productive conflict in meetings you can get the benefit of the wisdom of the entire team which helps better decision making, rather than having quiet peaceful meetings with only ‘yes-men’ around.

But why do we feel uncomfortable with conflicts, professional and productive ones? Is it because we suffer from the fifth temptation and “choose invulnerability over trust”? People who trust one another are not worried about holding back their opinions – they say what they think and know they are not going to be vulnerable if they do. When there is no trust among the leadership team members, the consequences can be quite disruptive for the organisation.

Take the self-assessment test at the end of the book and check for yourself where you stand. If you have difficulty in identifying your temptations, you may wish to ‘trust’ your direct reports to review the test for you and compare their views with yours.

In the next post, we will go through the “Four Obsessions” that an executive must have.

Global warming? – that’s too global a concept for me. Vanishing glaciers? Thinning ice layers at North Pole? – never wish to be near a glacier nor will I ever be anywhere near the North Pole.

That has been my attitude to talks of global warming. I thought that, as an ordinary individual, I could do very little to contribute in this cause. It must be the task of the big corporations, the developed nations and bodies like UN to investigate, research, plan and work out methods to arrest and reverse the climate change process that we, the homo sapiens, have so meticulously orchestrated over the centuries, more so in the last couple of hundred years.

Then I saw the film “An Inconvenient Truth” by Al Gore at a seminar on carbon credit at the training centre of the CA Institute last month. It’s a very hard hitting film. The realisation dawned on me that “we have entered a period of consequences”. We have already begun to face the effects of our past actions. The Katrina hurricane of 2005…… the Mumbai deluge of July 2005 …the total absence of winter in Kolkata in 08-09….things are really coming closer home now.

I have now realised that my attitude of avoidance and thinking that ‘the problem is not mine’ must change. Even as an ordinary individual person, I must take it upon myself to do my own “small” bit to turn the tide around. And if several of us start doing the same, aggregation effect will be consequential. In our day to day lives, there are many things that we do or don’t do or could do differently, which can contribute in cumulation to the reversal of climate change of the earth. It needs a modification of lifestyle for all of us.

Complied below is a list of 16 simple things that we can do at an individual level and small businesses, apart from, of course, what can be done by big corporations and bigger nations and government. The focus is on conservation of energy and on using renewable energy sources and these two elements form the basis of the lifestyle change approach that is recommended.

1) Switch off your computer, monitor, printer whenever you are away from office for a while or out for lunch, and surely at the end of each day.
2) Extend the usage life of IT hardware – unless they are energy inefficient
3) Go for ‘green’ desktops – low energy consuming models that consume one-tenth the power of a regular computer.
4) Reduce usage of paper – disconnect or turn the printer off.
5) Unplug all chargers, whether at work or at home, unless they are charging something, and switch off stand-by mode TV, radio, hi-fi.
6) Change light bulbs to CFL or better still to LED lamps.
7) Move the AC thermostat temperature up by a degree or two.
8 ) Make a carpool to and from work
9) Stop using disposable plates and cups – instead invest in a dishwasher
10) Opt for using solar, wind or biomass energy
11) Walk or bike or use mass transit as much as possible
12) Recycle as much as you can – carry your own bag or packet to the shop
13) Use less hot water – heating water takes up lots of energy
14) Use a clothesline instead of a dryer
15) Plant a tree – it will absorb carbon dioxide
16) Read, learn and spread the word – knowledge is power

For more information please refer to the following sites
http://www.climatecrisis.net/
Bizammo
http://environment.nationalgeographic.com/environment/global-warming/gw-solutions.html
http://ourworld.unu.edu/en/series/climate/

In January 2008, Tata Motors India made breaking news when they presented the model of Nano as the world’s cheapest car at INR 100,000 only ($ 2500 at that time). For various reasons, the car is yet to be launched in the market. Without getting into the political issues associated, the Tata Nano car, in my opinion, is an unviable business model and therefore will continue to run into bad weather, unless fundamental changes are made therein.

My opinion is based on just three issues – (a) cost-price structure of Tata Motors Nano car is unbalanced and hence unsustainable, (b) Tata Nano car is against the grain of environmental climate issues of the day and (c) Tata Motors have taken a laid back management style in resolving critical social issues like displacement of farmland.

Cost Price Structure

We gather from press reports that Tata Motors have been driving hard bargains with the state governments to try and obtain as much subsidies as possible for the small car project. The subsidies they had obtained from West Bengal Government, as enumerated by the Economic Times of 25th September 2008, in an article “El Nano: A Perfect Storm” by Arvind Panagariya, are as follows -

a) land lease at throw-away prices (Rs 1,260/- only per acre per month)
b) a soft loan of Rs 2 billion for 20 years at interest rate of 1% per annum
c) concessional tariff of electricity at Rs 3 per kwh
d) VAT waiver for some Rs 10 billion or so
e) subsidised rates of water, stamp duties and other infrastructural facilities at nil or very low costs.

A recent press report says that it has been claimed that the amount of subsidy works out to Rs 60,000 per car, which is as high as 60% of its retail selling price.

In fact the cost equation is so thinly balanced, even after grant of the above subsidies, that Tata Motors management rejected a proposal to shift the vendor site location from the plant site to just across the road on the ground that the additional costs will make the project unviable.

It has never been wise to depend for business viability solely on government grants and subsidies and short term tax incentives. Nano however is trying to go against this basic business philosophy.

An Inconvenient Truth

We need to change our lifestyles and social-styles to deal with climate crisis and global warming on a long term basis. One of the things we must do in the automobile industry is to focus on improving mass transport systems rather than expand the market for small cars by producing low priced cars for almost every individual.

Even if the Nano car adheres to latest norms of pollution control and also develops a battery operated electric model, the “car for the masses” project still goes against the grain of current needs of the earth’s climate. In this context please refer to the treehugger site here.

Laid-back Management style

The laid-back management style adopted by Tata Motors for its Nano car is something which I find quite strange, to say the least. Tata Motors management avoided any participation in crisis management when social issues of displacement of farmland and farmers cropped up and which then turned into a social unrest. They solely depended on the West Bengal government for resolving the problem and therefore concurred silently to their act of removing farmers through police atrocities and armed hooligans of the ruling party, as witnessed on television by the whole world. Proactive management could have easily diffused the issue at an early stage and not made Nano a politically controversial project.

You can judge for yourself whether a business proposition which is based on 60% of its selling price being funded from taxpayers contribution, which does negatively contribute to global climate crisis and is backed by a laid-back management style relying on political hooliganism, can be a viable business model ever.

Satyam Computer Services Ltd won the Golden Peacock Global Award for Excellence in corporate governance in September 2008. Three months later, on 7th January 2009, the chairman of Satyam Computer resigned, sending a letter to its Board detailing large scale financial irregularities carried out in the company for the past so many years.

Don’t you see a contradiction here? Doesn’t corporate governance have something to do with corporate ethics? Or is it just well crafted policies and statements in spiral-bound books and a few pro bono activities covering up for the basic ground realities that go on in the corporate world?

No, I am not pretending to stand on high ground and trying to preach morality. I am only pointing out that if we do not wish incidents of the order and enormity like in Satyam Computers or Enron (or others yet to unfold) to recur, then we need to start practising governance and ethics at the grass root level – not just at the superficial level to meet statutory disclosures. We need to stop taking certain kinds of corporate activities for granted, stop having a ‘chalta hai’ approach to the petty misdeeds that we keep doing every day in our corporate lives.

There is a saying in Bengali which translates into “Theft and deception are great forms of art, as long as we do NOT get caught”. And I must say that most of us are artists, at least petty,  if not great.

In the corporate world, we can find many such works of art. Does the list below – of commonplace examples of accepted unethical practices in today’s corporate world – look quite familiar?

• Inflating expense statements – by including non-spent conveyance, personal entertainment with family/friends passed off as client entertainment and so on.
• Over-booking or under-booking of sales invoices in order to meet sales targets, to inflate or hide profits, to earn incentives etc.
• Over or underbooking of liabilities depending on whether funds are to be taken out or profits to be inflated
• Overcharging clients by communication agencies with dummy third party invoices.
• Using unlicensed/pirated software.
• A private company or partnership or sole proprietor ‘purchasing’ bills to reduce profits and thus reduce taxes.
• Multinationals fine tuning profits to meet budget and market expectations. Tune it down when above budget and tune it up when short, but always be on budget.
• Listed companies smoothening the profit graph. We believe the market does not like ups and down, just steady profit growth, even if that is unreal
• Private entrepreneur selling equity stake to multinational investor – try and hike up profits to increase valuation and hope like hell, the DDR doesn’t pick it up.
• The age old practice of siphoning funds off the system and bribing officials with only part of those funds.

The above list does not even cover half the tricks of trade. Oscar Wilde had said “Morality, like art, means drawing a line someplace.” Where do we draw the line? Do we make exceptions only for ourselves? Or do we follow what Mark Twain said – “Honesty is the best policy – when there is money in it.”

For business plan, budgeting, target setting, performance measurement and incentive computations, I strongly recommend that we move away from the ‘accounting profit’ based performance indicators to the ‘real’ cash flow based indicators. The change over will be quite simple to implement. We will replace PAT (Profit After Tax) with cFACT (cash Flow Adjusted for Creditors, post Tax) while computing Profitability ratios. Let me get to the details.

Profitability Indicators

Business performance is measured today with Profits as the base. There are two basic types of profitability indicators – one is Profit Margin related (gross, net, pre or post tax profits as % of sales) and the other is Return related (return on investment, on capital employed, on equity, or earnings per share etc). The business community, the markets, the management – all follow these Profit based ratios for business planning, performance evaluation and management incentives.

Profit is an accounting concept

In a previous post “Cash Flow or Profit Growth?”, I had argued about the pitfalls of such an approach. The essence of the matter is that there is no fixed definition of Profit. It will vary according to the accounting standard followed and further, within the standard, vary in accordance with the assumptions, estimates and valuation methods followed. Further, you would have noticed, from recent happenings in the business world, that profits are susceptible to accounting entries made with the objective to window dress the financial statements.

Cash is Real

While Profit generated from business is just an accounting concept, cash generated from business is real and fact based. It can be physically counted and verified from your bank balances. It is also quite difficult – though not impossible – to do window dressing of cash flows in a business.

cFACT

cFACT is the acronym for cash-Flow Adjusted for Creditors, pre or post Tax and is derived from the concept of Free Cash Flow generated by the business, with two adjustments as explained below.

First let us look at how Free Cash Flow (FCF) for an accounting period is arrived at –

a) Start with Profit After Tax from the Profit & Loss Account for the period
b) Deduct (or add) any increase (or decrease) in inventories, trade debtors and other debtors (loans and advances in the Indian context)
c) Add( or deduct) any increase( or decrease) in trade and other current creditors
d) Add back depreciation and other non cash items
e) Deduct capital expenditure

The net balance thus arrived at will reflect Free Cash Flow generated by the business during the period under review.

Adjustments to FCF

There is a small hitch here. If you do not pay your creditors on time and stretch them unduly, you will end up showing higher cash balances and better FCF than the actual performance. Therefore we need to correct this.

The best way is for the management to work out all the overdue creditors and deduct it from FCF arrived at above. An alternative and easier option, especially for a reader of the Financials who does not have access to detailed information, will be to deduct the increase in trade and other creditors (as in c above) from FCF.

The second adjustment relates to capital expenditure. For business performance evaluation we should consider only that part of Capex which is for routine replacement and upkeep and for normal growth of the business. Capital expenditure over and above this, for new investment or for major capacity expansion, should be excluded and be added back to FCF.

cFACT will therefore be arrived at by the following steps –

a) Start with FCF as determined in the Financials
b) Deduct increase in trade and other creditors
c) Add back capex for new investment or capacity expansion

cFACT represents the true cash generated by business operations after payment of overdue creditors and accounting for normal capital expenditure.

How to use cFACT

We can use this cFACT in place of PAT in profitability calculations, both for margins and for returns. Variations of the above can be used for different ratios. For example, for gross margin we can use Gross cFACT, where Gross Profit instead of PAT will be used and the same steps as above will be followed to arrive at Gross cFACT.

cFACT based profitability indicators will be free from the problems of ‘accounting’ Profit based indicators. They will make you see facts rather than just profits.