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Wednesday, November 12, 2008

Murthy feels in the end it is always about ethics and personal values

India best placed to fight global eco mess: Narayana Murthy
Published on Tue, Nov 11, 2008, Updated at Wed, Nov 12, 2008 Source : CNBC-TV18 Moneycontrol » News » MARKET OUTLOOK
Speaking to Vallabh Bhanshali of ENAM Securities at the ENAM 2020 conference, NR Narayana Murthy, Chairman and Chief Mentor of Infosys, said if greed overtakes leaders, it is inevitable to avoid disasters because in the end systems are much more powerful than individuals.

Murthy feels in the end it is always about ethics and personal values. "That is why it is very important for every society to create checks and balances. That is why it is very important for every society not to create incentives for people to become greedier. That is why it is very important for all of us in the corporate world to create incentives for long-term performance rather than short-term performance."

"I believe that India is better placed than any of the leading economies of the world to recover from the mess that the world economy has got into because of a very simple reason. We are primarily a domestic economy focused nation. Our fundamentals are good. Our productivity is improving." Here is a verbatim transcript of the exclusive interview of NR Narayana Murthy on CNBC-TV18. Also watch the accompanying video.

Q: Wall Street is probably a collection of the best minds in the world and yet in recent times they seem to have created one disaster after other. The current one probably the biggest of the world they had seen in recent times. You wrote or you spoke at one forum and what I consider is one of the most seminal pieces of intellectualisation that I have come across. When you talked about Eastern values and Western values and you have been an admirer of the governance in the West in general. Could you please tell us what has failed and what has not?

A: It doesn’t matter how bright a person is. How smart a person is. If they don’t understand the risk emanating from what they are doing, if they are not suitably regulated and if greed overtakes them it is inevitable that one sees disasters because in the end systems are much more powerful than individuals.

Having said that I must say that I am very impressed with the alacrity that the US has reacted and taken steps, that Europe has done and I am also very happy about how our Finance Minister P Chidambaram and the Governor of Reserve Bank of India, Subbarao, have quickly taken action. I am also very happy, frankly, with how KV Kamath and Chanda Kochhar handled what could have become a very serious situation. Also let us remember one thing––when one operates at the huge scale and the pace at which the Wall Street is operating unless he has good real time control systems and have eyes on the gauge all the time it could lead to disaster.

It is almost like the control centre of the rocket. That’s why they have real time control. They monitor it second by second. In some sense the complexity of what is happening in the Wall Street has become somewhat of a real time necessitated system requirement.

Q: There is this obvious attempt to explain what happened in America and maybe in some of the other Western countries. You did mention that if greed overtakes the best of institutions would fail. But do you subscribe to the general theory that it’s becoming popular that it was greed that overtook ethics because for long years the institution of ethics was probably not nurtured, or even if ignored, and it was not just a question of failing of some regulation?

A: In the end it is always about ethics and all about personal values. That is why it is very important for every society to create checks and balances. That is why it is very important for every society not to create incentives for people to become greedier. That is why it is very important for all of us in the corporate world to create incentives for long-term performance rather than short-term performance. When you create systems that focus on short-term performance, when you create a system that reveres money rather than decency, honesty and respect, when you make it a fashion for youngsters to revel in the power of their wealth, it is inevitable.For example, a month ago, I was on a flight from Frankfurt. I saw two young men in their late or mid-20s who were travelling by the first class, and I was slightly surprised. I had gone to attend a board meeting and it was a huge bank, and they pay. That is fine. But these were 25 or 26-year old people and they were travelling first class. What does it mean? It means we have created a value system that says you are a success if you travel by first class, you are a success if you own a flashy car, you are a success if you own a big house, etc. That is why, in fact, I suggested at Davos a few years ago that we need to create a system where we can rank world corporate leaders based on their respectability. Today, we have the most powerful leaders, the best managed companies, companies by market capitalisation and all of that. But we have to move towards a regime which will rank corporate leaders based on their respectability and everybody must say that I want to become the most respected leader in the world.

Q: All the large economies of the world, US, Europe, Japan seem to be in greater economic distress than the emerging markets. India and China are mentioned most often as possibly helping the world out. Do you think we have (specifically India than China) what it takes to don this mantle of world leaders?

A: I am conservative in these matters. It’s too early to think of countries like India and China taking the mantle of world leadership, though at the G-20 meeting they will discuss a new financial architecture with a greater role for countries like India, China, etc. on November 15 or 16.It’s too early for a simple reason that the US has had the experience of going through such times in the past. The US, Europe – particularly UK, have had robust growth for about a decade or so. Japan has demonstrated its resilience by coming out of a long recession. Japan has had the ability to manage the mess in the financial system, particularly in the banking sector. That is one aspect. The most important thing is that US, Europe and Japan have been the engines of innovation. As long as the engines of innovation are alive, and they attract the best talent, the leadership will continue to be with them.Secondly, China has done a good job with USD 3.7 trillion of GDP and perhaps USD 8-9 trillion on a Purchasing Power Parity (PPP) basis, India with probably USD 1.2 trillion and perhaps USD 2.6-3 trillion on a PPP basis has done reasonably well. Both the countries have grown pretty well.However, even if we grew at say 8% this year, we will be adding about USD 100 billion. China at 8% will add USD 300 billion. If the President-Elect Obama were to bring in all the changes that he would want next year not this year – next year if US were to grow at 1-1.5% your looking at anywhere between USD 120-180 billion dollars of addition. But the important thing is that our growth comes primarily from the domestic market. In other words, we do not impact the global trade. We do not impact the global financial system as significantly as US, China, Japan and UK would do. In that sense, while I am a great admirer of all the good things that India has done, while I bask in the glory of all that has happened in the last decade, I would like to say that it is too early to think of India assuming the mantel of leadership in the global financial and global economy.

Q: There is large number of optimism in the country and they have two arguments. We started on the path of economic reforms in 1991 and we have sustained them by and large. We survived the Asian crisis. We went through 9/11 and we became a nuclear power in the last few years. If we can manage this financial crisis rather well, the world will look at us with a new respect. This is one thing which is being put forth. The second argument is that this country was one of the most prosperous and respected countries of the world for 100 years and very different from the models that we are talking about currently based on hard infrastructure etc. This was done on the basis of its spiritual thought that it was able to influence two-third of the population of the world without as Chinese Ambassador said firing a single arrow or a bullet – it was able to conquer large countries and this was based on what is called the soft infrastructure of its family values, social orders and the system of sacrifice. Do you think there is leadership potential to position this correctly as an opportunity and rally the imagination of the country even if the path to leadership – in leadership in itself doesn’t mean anything because I am sure it will come with a lot of responsibilities for example America obtained its leadership by playing a very decisive role in the World War II and therefore earned the respect of the world. So it will come with this but just for the benefit of these several optimists – do you see this is quite misplaced and as you talked about innovation and discipline – they being a lot more important?

A: Again I am a believer in the adage – performance leads to recognition, recognition leads to respect and respect leads to power. We are at this stage when we are focusing on performance and we have received some recognition. There is no doubt at all and we have also received some respect because we have insulated ourselves from what happened during the Asian financial crisis, currency crisis. We have insulated a little bit from what has happened in the global financial crisis now. The country is growing well, but I don’t know if we have reached a stage when what we do in India impacts what happens in the US.

Yes in our IT sector - software sector no doubt about that but unlike India, what happens in China in some way impacts the US economy, the European economy, the Japanese economy much more. For this very simple reason – all of us have seen, you go to any supermarket in the US, almost 70-80% of things there are all manufactured in China. That is the reason why I don’t want to make the statement that we have the power to influence the global market.

What we are doing is we are becoming better. We are making the lives of our middle class better. We are enhancing our foreign exchange reserves. We have enhanced our GDP growth rate. This year I was told year-to-date our agriculture has grown by 7%. All of these are excellent things, and we have to keep doing more of it.But whether this has given us the power to influence the globe, whether it has given us the wherewithal to assume the mantle of leadership in the global economy is something we will have to discuss and debate.

Q: You mentioned about the response of the IT industry. That is very interesting and opportune. Just as the IT industry saw the Y2K difficulty and then 9/11 as opportunities to showcase the capability of the Indian IT sector and grow quite seriously after that. Do you see such opportunities today?

A: It is too early to say. I do believe that any economic difficulty in a market will necessitate greater need for innovation, will necessitate greater competitiveness through better value for money.
So, I do believe that there is much greater opportunity for Indian companies, particularly, in the software sector as we move forward, once the dust settles down, and corporations get up and start running.
The second area where we perhaps would see opportunities would be in the new financial architecture that will come into place, in the new regulatory system that perhaps may be put in place, because the world has pumped in something like USD 4 trillion, if we include all the countries. When one puts in USD 4 trillion, obviously, one want to make sure that corporations don’t falter again, and don’t commit the same mistake again.
So, in that sense I do see opportunities for the Indian software industry. But it is somewhat early for us to make any predictions.

Q: You have been on the Prime Minister’s Advisory Council and several other Councils where you have looked at the prospects of several other industries. Do you see any such opportunity for other industry outside IT?

A: I would say that contract research, clinical trials, is one sector where I believe there is great opportunity for India because there is a tremendous need to bring the cost of healthcare down in the US. There is a tremendous need amongst the pharmaceutical companies to bring the total cost of releasing a new drug into the market. I believe that India is in a unique position because of its huge population and competency in biochemistry, medicine, etc. I believe that this industry has tremendous opportunity. But this requires that we work well amongst the government, the corporate leaders and the academicians just as my industry, the IT and software industry worked exceedingly well in the 90s, and work as a wonderful team to create tremendous growth in our industry. We need that to happen. If it happens, I think we will definitely see opportunities.

Secondly, we have done reasonably good in certain specialised manufacturing. For example, forging is a good area where India has done pretty well. I think we have to learn from the lessons of Bharat Forge and other companies and perhaps scale up because the world needs more of it than what we are able to produce.

First of all, most of it is being used in India. We can become the forging factory for the world. I think there are a few areas that are complementary to China. I think that is the direction for us to go.

Q: At Infosys you did several pioneering things such as developing the global delivery model, listing the company at Nasdaq, making a huge investment in training much before people could see the need for it and most importantly you went about exploiting challenges whether it was 9/11 a year in which you were the only company to meet guidance or whether it was Y2K or the chancing shape of IT when BPO (Business Process Outsourcing) became a very large business and you charted your own course in this. So there was something about your method will you like to share something about those thoughts?

A: Infosys has brought pretty smart people together. Infosys has given opportunity for youngsters to come out with new ideas. Infosys has created a platform where meritocracy has prevailed. Infosys has put premium on innovation; we have created incentives for people who are innovative. Infosys has been an enlightened democracy where the hierarchy of ideas prevails over hierarchy of men and women. Infosys has built-up a mindset where everybody makes short-term sacrifices because they see long-term benefit in that. Infosys has laser focus on customers; Infosys brings customers into its premises, into our software engineering and technology lab, so that we can serve our customers better. Infosys is a place where there is tremendous energy and enthusiasm because of the leadership. I think those were the needs of the day.

Q: Do you see that as the formula for exploiting the opportunities which may not be very obvious at this point of time but definitely lurk in all crises?

A: There is only one ingredient for innovation and that is the power of the human mind. As long as a company is able to attract, enable, empower and retain the best of the brightest, it will have a play. As long as the leadership of companies ensure that the physically and mentally tired mind that leaves office at whatever 7:00 pm - 8:00 pm or 9:00 pm comes back mentally and physically reenergised and enthusiastic to add significant value to the customer next morning, the job is done.
That’s why at Infosys we say at 9:00 am when every one of our people is working the marketcap maybe whatever it is, 15-16 in these tough days, but at 6:15 or 7:00 pm when the last of us has gone or maybe 9:00 pm when the last of us has gone home the marketcap is zero. I think that is the fundamental instrument that every corporation must believe in. That’s the power of the mind; the power of the happy, enthusiastic, energetic, satisfied, aspirational mind. The moment you create that rest is all simple.

Q: One of the opportunities in current times is acquiring low price assets or good assets at attractive prices. Infosys despite having made a statement that we want to make acquisitions has been very careful and today it is looking very glorious having done that. At the same time we know that Indian companies became acquisitive rather late in the season and some of the stock prices have been beaten down by the market alleging that these acquisitions were not very attractive. The flip side for Infosys has been that it has been from periodically developing a large reserve of cash and of course you have distributed it couple of times to the shareholders – it is not that you have been very found of cash for the sake of it. And I want to ask you a related question – you emphasized being ethical, being strictly legal all the time and the third dimension of governance which you have practiced is one of prudence that whether it is dividing your business by markets by customers, by service offering etc, - you have driven this with a great fervor. I must say that we don’t come across this prudence aspect very often. One way to describe the current crisis really is that prudence was given a go by in a big way in the world – whether it was leverage of the banks, whether it was the Reliance of the markets. I have linked the two questions and if you would share your experience and views.

A: There are two fundamental characteristics of Infosys. One; we are an engineering company. Two; we are a company founded by middleclass people. I will link the two. Being an engineering company, we discuss and debate, collect data, analyse, argue and then come to some conclusion. As we are middleclass people that founded the company – we don’t go by flats, we don’t go buy fashion and we don’t want to look good in a party just because we have spent a billion dollars to acquire a company.
When you combine these two powerful attributes, you end up being conservative. There is no doubt at all. Infosys is conservative, but there is a method in this conservative behaviour. We have clearly laid out rules for operation. We said our people will have to collect money because at the end of the day the real happiness is cash in the bank. We say profit is an opinion – the real happiness is cash in the bank. We created incentives for our sales and customer facing people which would ensure that they collect money.

Secondly, we hired pretty smart sales people in the industry and that’s why you will notice that we have anywhere from 500-600 basis point of higher operating margin than any of our competitors because we tell them that if the customer thinks that USD 100 is the price – your smartness is to sell it for USD 105 and give the customer USD 110 worth of value. Don’t cheat him, but sell it at USD 105 and provide value of USD 110. That is what we have focused on a lot.

Thirdly, there is tremendous cost consciousness in the company. We are not judged by how opulent our rooms are – we are not judged by whether we travel in this class or that class. So right from the beginning we focused on that. When you focus on middleclass values, when you focus on analytics – it is easy to have a lot of cash in the bank.

Q: You sit on the boards of some of the biggest companies in the world and also some of the most respected universities. Would you like to share the companies and individuals who inspire you as role models?

A: I make an attempt to learn from everybody. I learnt to focus on growth in topline and bottomline and sustain earnings growth from Bill Gates. I learnt to focus on quality from Idei San who used to head Sony. I learnt to focus on human resources from leaders of Hewlett Packard. I learnt so much from my own colleagues.
I learnt from Dean Bob Joseph of Stanford, the importance of being agile. Even in an environment like a university, Stanford revamped their curriculum, made it much more international. They brought in new ideas to encourage critical thinking. I learnt great ideas from Michael Treschow and Patrick Cescau of Unilever on how to sell consumer products.I learnt how to maintain your sense of balance when you run a large bank like HSBC from Stephen Green. So, I have learnt so much from many people.

Q: We started by talking about the depression of 1930, there is much to get depressed about today and not seeing a reference point in the past. As we started saying that it is about depth of your reflection and the purity of your process that you are able to deal with this crisis. I can tell you that there is much dismay and discomfort both amongst corporates and the youth, the youth particularly about whom you are always very hopeful and enthusiastic. Would you like to share as we depart a few thoughts for each of them – corporates and the youth?

A: I have always said that a good leader simplifies business. It doesn’t matter what business he or she runs. So, I would suggest that we use simple business rules, not complex or compound ones. The good thing about simple business rules is that it is easy to understand, easy to practice, easy to communicate, and you cannot cheat anybody with simple business rules. And you can enthuse every one of your colleagues with simple business rules because there is transparency, there is fairness, and there is accountability. As far as the youth of this country is concerned, I would say that for the first time in the last 300 years, this country has received recognition in the global markets, and received certain respect. This is the time for us to work hard, this is the time for us to work smart and consolidate on the gains. Indians are generally not known to have the killer instinct or not known to run the last mile. Yesterday was a wonderful exception when the Indian cricketers beat the Australians. But that is a rare one. We have to make it a habit. We have to make it a habit of what Dhoni and others did yesterday. That is make sure that all the good things that they have achieved in the last 10 years becomes a habit. To do that, you need continued discipline, hard work, smartness, integrity and putting the interest of the country above your own personal interest. There are lots of things that are not good that we read in the papers every day. I don’t want to comment on them, we have all seen this morning’s paper. But let those shameful incidents not be the beacons for our youngsters. So, that is what I would say.

Q: For all these good qualities we need a reference point. Where do you see Indian growth over the next three-four years?

A: I believe that India is better placed than any of the leading economies of the world to recover from the mess that the world economy has got into because of a very simple reason. We are primarily a domestic economy focused nation. Our fundamentals are good. Our productivity is improving. Yes, we had a huge stock market fall, but that was because we are all linked in some sense - we have 25% of market capitalization held by foreign institutional investors and when they see uncertainties in their countries they dramatically want to pullout as much as possible from foreign countries. I do think that things will get back to normalcy, get back to buoyancy quicker in India than in most of the countries – that’s what I feel.

Q: Would you like to put a growth number? This is a number crazy group.

A: I think people up there are much smarter than I am, and much more capable than I am in coming out with an estimate. So, I don’t want to hazard a guess because at the end of the day we have experts. We have a Finance Minister who is a fantastic person, we have an RBI Governor who is another highly knowledgeable person, we have lots of economists and we have people like you. You people should come out and give wisdom to rest of us who are in the trenches. You people have a 50,000 feet view of our economy.

Q: Infosys has shown Indian corporates the way to good governance and how good governance leads to goodness for everyone. When do you think that good people like you would lead the country to good governance?

A: I do think there are wonderful people. I have tremendous respect for Dr. Manmohan Singh, and tremendous respect for his colleagues. But we have to work a little bit more at enhancing the quality of leadership at the state level. There is no doubt at all.

That does not require people like me to participate in the governance at either the national or the state level because we have our work cut out. We have to make our corporations; we have to make areas in which we are interested. Right now I am interested in higher education; I am interested in making a difference to the poorest of the poor and so on. I think if we can put in more hard work, if we can show a little bit of smartness in what we are doing, the country will be better off. So, I think the current leaders will continue on all sides of the aisle, whether it is the Congress or the NDA or the UPA. It doesn’t matter who is going to be in power. But I think there are pretty good people on both sides of the aisle.

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