The CEO Practices and CREAM Report for Corporate Electron
You can’t connect the dots, looking forward, you can only connect them looking backward. So, you have to trust that the dots will somehow connect in your future.
—Steve Jobs*
There are three issue areas in connecting the dots between the past and the future. First, the past is presented in the analysis of Hindustan Unilever Limited (HUL), a subsidiary of Unilever (UL), in a CREAM Report made up of corporate governance, risk management, earnings, accounting quality, and management quality. This report provides the basis of CREAM Analytics. Second, a brief outline of the Capital-Output ratio related to India’s growth targets and vision for a $5 trillion economy by 2024 is presented. Growth targets estimated need to be tracked with the help of a CREAM Report. Third, a CREAM Report for Strategy Plan 2024 is taken up. Converting CAGR and CARR into CDGR, CDRR respectively that is going to play a major role in tracking the goals set. The fault lines of the past, challenges of the present, and the effort to the future under CEO practices, the electron, exemplify the need to arrest management failures that companies currently face. As mentioned in earlier chapters, the corporate electron spins around the nucleus that contains the board, policies, and regulatory bodies. Given the right mix and the capability of individuals, there’s no reason to disbelieve that a corporate renaissance would emerge.
Data from 2007 to 2018–19 is analyzed. For the convenience of presentation in a book format, we consider the two years 2007 and 2008-09, and then three years 2016-17, 2017-18 and the latest annual report 2018-19, skipping the intermediate years. The two tables provided in Chapter 7 indicate 1. Index of inactivity (IA) by Process Area and 2. IA by Resource Area. The data is derived from the published annual reports of HUL from 2007 to 2018-19. The data provided here is a consolidated figure of the CREAM Report, totaling 170 Process Blocks. One of the categories, management quality, has 98 combining 97 + 1(19) Process Blocks, with 19 Blocks compressed into 1. These are open-ended Process Blocks that vary from company to company, but the core issue areas are well covered and are applicable to all companies. Management quality (98) consists of the following:
- Board of Directors (9)
- Audit Committee (13)
- Nomination and Remuneration Committee (9)
- Reward Policy (12)
- Stakeholders’ Relationship Committee (3)
- CSR and other functional committees (7)
- UL CoBP (19)
- HUL CoBP (7)
- Preventing Conflict of Interests (7)
- Whistleblower Policy (5)
- Share Dealing Code (4)
- UN Global Compact (3)
Total Issue Areas (98)
IA (Table 7.1) by Process Area reveals the CREAM details. The total of Active + Inactive elements represents the total number of Process Blocks handled during the respective year. At the optimized level of performance, each gets valued 5. With 5 people for each process, it would be 25. The total number of Process Blocks is 152 in the first two years and 151 in the last three years; multiplication by 25 gets the total number of points 3,800 or 3,775 as the case may be.
Earnings: Each category is independently assessed, block by block. In the case of earnings, they are calculated as per the profitability statement and the balance sheet but brought to the same ratings as in Table 5.2, at a standard of 15 percent CAGR. Earnings are the only quantitative element, with 12 Process Blocks, which are fair representations to understand how the company is doing. Yet IA percent for the same runs from 59.33 percent to 70.00 percent, which is high. IA percent ideally should be 0 percent, to confirm that what is targeted, is achieved. When 59.33 percent is the IA percent, then the fault lines are high as well as it reveals that the standard 15 percent CAGR is unachievable. In order to reduce the IA percent from 59.33 percent, more effort is called for. One of the major contributors to this high IA percent in earnings is the ratio of Employee Benefits per day to Sales per day. Not in a single year, is the ratio anywhere near the target of 15 percent. This means the company performance of employees is below par. So is the case with Advertising and Promotion Expenses.
Per day sales: Annual Accounts for 2007 were by the calendar year, that is, 365 days. Whereas in 2008–2009, the number of days was 457, since the annual accounting year was extended by another quarter to change the accounting year, as per country rules. However, the number of days is considered to calculate the daily sales for each year, variation being whether it is a leap year or not. This is the main principle behind CAGR converted into CDGR or CARR into CDRR. Also, the basis of IBCM (see Chapter 6) is “Activity has a cost incidence whereas Inactivity a cost consequence. Measure Cost Consequence, Now, Now, Now.” First, quarterly reports and annual reports are of no use to this end. Second, decisions made need to be tracked with immediacy, on a daily basis. We start a project and delegate without a proper tracking system in place. Per day changes have to be tracked vis-à-vis the targets set. Management quality has 98 Process Blocks, none of which are tracked. Infosys is currently engaged in firefighting work on its whistleblower policy, which is one of the 98 under the aforementioned management quality. On a single day, on October 21, 2019, the U.S.-listed American Depository Receipts (ADRs) of the IT major Infosys fell 15.7 percent, according to news reports.1 A Big 4 multinational professional services firm, a legal firm, and the audit committee of Infosys are entrusted with unraveling whistleblower complaints. Corporate Governance is a dynamic function. The number of Process Blocks shown for corporate governance in Table 7.1 Index of Inactivity by Process Area is 19, whereas management quality is 98. Companies neither take action on such policies they have created nor report on them. Ideally, corporate governance issue areas must be more than what is stated under management quality. Each must be brought under return on intangible rating system, daily.
The same info by Process Areas is created by Resource Area (see Table 7.2).
In the context of past results being analyzed, fiscal responsibility is equally shared, whereas ethical responsibility is given independently for each Process Block. Although one may get the impression that past results cannot be detected for either of the responsibilities, return on intangible helps to identify fault lines. The Six Stages of Transformation to Substance helps. One can identify a whistleblower policy created with Quality, by its full marks, a rating of 5, whereas when left abandoned as a “read, laughed, filed code,” it’s 0. So Intellectual Value Capital is 5 and Action Value Capital is 0, resulting in an Intangible Value Capital of 2. An Intangible Value Capital of 2 is a disaster for any company with IA of 60 percent.
The 98 Process Blocks in management quality have three issue areas being discussed conflict of interest, conflict of personal interest, and conflict of conscience. Normally, steps are taken for the first one with board members giving information in advance of interested parties they are related to. On the other hand, conflict of personal interest is difficult to catch, despite established insider trading rules. In the case of conflicts of interest versus conflicts of personal interest, one prevents participation and the other urges nonparticipation. But as they say, “No gentleman is a hero to his valet.” The culprit is identified by some close contacts within a company. Arthapatti (presumption or implication) can help, for there must be a linga (form or symbol), like smoke from fire, thunder from clouds, which leaves a clue. Conflict of conscience arises for people who easily find smoke where there is not even a spark of a fire. They are part of the whistleblowing community. To them, the absence of evidence is not evidence of absence. Their contribution to Corporate Ethical Assets is truly great but never acknowledged.
China in 2005 had a GDP of $2.285 trillion. It reached $5.109 trillion by 2009. That is a CAGR of 22.28 percent in four years. If India has to grow from $2.75 trillion in 2018 to $5 trillion in 2024, the CAGR would be 16.12 percent. The current growth rate is waning but for the 2014 to 2018 years,2 there has been a steady growth at 7 percent. To understand Capital–Output Ratio, suppose investment is 32 percent (of GDP) and the economic growth corresponding to this level of investment is 8 percent, Capital–Output Ratio is 32/8 or 4. If the expected growth rate for next year is 9 percent, then the level of investment needs to increase from 32 to 36 (9 × 4). Capital–Output Ratio becomes the relationship between the level of investment and the corresponding economic growth. China could expand fast in four years mainly on account of infusion of foreign direct investment (FDI), whereas India did not get its share. “India contributes nearly 3% of the world’s GDP but has only a 1% share of global investment money. If this figure were to just double to 2%, that would mean nearly $3 trillion of investments flowing into India,”3 says Prem Watsa, of Fairfax Financial Holdings, Canada.
That apart, what is crucial is the Capital–Output Ratio. If it is 3 instead of 4, when the investment is 32 percent, then the growth rate is 10.67 percent (32/3) and 12 if investment reaches 36 percent. With underutilized capacity and investments already made, corporate needs increased productivity from each sector. For example, India stands second in the hierarchy of agriculture for all countries, per data 2017, at $401.32 billion. The same year, India’s GDP stood at $2597.49 billion. This is about 15.45 percent. Between 1960 and 1988, China and India were neck and neck in agri production. From 1989 onward, China galloped, achieving 2.87 times India’s growth in the year 2015.4 China had left India far behind. India has a lot of catching up to do. On the one hand, FDIs in agriculture would be most welcome. So far, FDI in agri is pretty meager.5 (FDI in India’s food processing sector, for example, stood at $628.24 million in 2018–19.) On the other hand, yield should take precedence over investments if Capital–Output Ratio has to improve.
This is the critical aspect of management of corporate or agriculture—better utilization of investments. “Agriculture is the primary source of livelihood for about 58 percent of India’s population. Gross Value Added by agriculture, forestry, and fishing is estimated at Rs 18.53 trillion (US$ 271.00 billion) in FY18, as per IBEF study.”6 Being a single large sector, it is agriculture, more than corporate India, that would trigger the race toward a $5 trillion Indian economy by 2024. Though neglected over several decades, farmer producer organisations (FPOs) and farmer producer companies (FPCs) are well structured and accommodate millions of farmers. Each FPO is made up of about 1,000 farmers and each farmer buys a share @Rs1,000 ($14.29), making it an FPO company with a share capital of Rs10 lakhs ($14,285/). For example, Gujpro Agribusiness Consortium Producer Company, Gujarat, has about 30 FPOs under its supervision, covering 40,000 farmers. There are hundreds of such FPOs in India. In the 2019 budget, Finance Minister Nirmala Sitharaman proposed to create a minimum of 10,000 FPOs that would cover about 13 million farmers. Unlike corporate that indulges in killing competition, FPOs share their problems, help each other, and are ready to listen. Investments in agriculture in India will raise the productivity index sufficiently to compete with China, in turn increasing the scope for returns. Return on intangible applied to individual FPOs could transform the whole agri sector toward prosperity with exports. Farmers’ groups are willing to introduce Fairtrade, HACCP, Agri Codex, and various other ethical standards in their units. Basically, Indian farmers have maintained their tradition of honesty and integrity even at their own cost and peril. Such measures would help reduce the tragedy of farmer suicides.
Strategy Plan Is Declaring That a Company Is Binding Their Commitment Deeper, with a CREAM Report
The Six Stages of Transformation to Substance, from the thinking stage to a Strategy Plan in 2024, needs to take place in every company, and mainly in startups. To continue to do the same thing, will earn only the same results. The new strategy is measuring by cost consequence now, now, now, which brings to limelight the decisions taken today are tracked to their efficacy then and there. Corporate Atomic Structure facilitates an organized decision-making capability by clear-cut responsibility in the first instance and tracked with return on intangible for accountability, performance, nonperformance, and self-governance.
Keeping a $5 trillion Indian economy and its growth rates in focus, let each corporate and agri sector prepare a Strategy Plan with clarity on sustainability of Efficiency, sustainability of Value System, and sustainability of Profits, establishing growth rates and reduction rates, CAGR, and CARR. The crucial aspect of the exercise would be to arrive at the National Grid of Governance by each company being connected to each other. Return on intangible is a formula created for assessing performance as well as nonperformance of each individual. Participants need to exchange data and help each other to raise their company’s ratings from the current status to the targeted optimized level. To set CAGR much higher than it is now will depend on the optimized performances of individual companies. Tasks schedules, like project management, a series of tasks by respective series of Time, should be entrusted to respective individuals, by a series of Dates. For example, in New Delhi currently, there is a proposal cleared for the massive revamp of Rajpath (which is a ceremonial boulevard in New Delhi), construction of a new Parliament and central secretariat—a plan that aims at creating a new office district for several ministries and offices. The work would be spread over the next four years. The contractor company would be better served by their team targeting 2024 with CDGR starting now. Tracking the project daily with an Index of Inactivity by several process areas and more importantly by resource area would go to establish progress at all fronts. The Strategy Plan 2024 would cover CREAM Report contents in all respects.
Spot Your Place
Establish a connection between yourself and the $5 trillion Indian economy. Establish a connection between the $5 trillion economy and all countries above India’s GDP—France, the United Kingdom, Germany, Japan, China, and the United States. Spot your place today and what you want to be four years hence. Analyze the CREAM Report of each company and check what it adds up to in the Indian economy. Spotting your place seems pretty tiny for a startup. India has a tradition of chanting a sankalpa on every New Moon day. A sankalpa is nothing more than an intention—a solemn vow, determination, or will. In practical terms, a sankalpa means a one-pointed resolve to focus both psychologically and philosophically on a specific goal. In addition, the sacred practitioners declare where they are in the context of time. They start from the Big Bang and list the time that has elapsed since then until today’s date, calculating step by step, and arriving at the day by identifying oneself with the universe. The same commitment is expected for any company to relate itself with all countries above India’s own GDP. If you must be an ant, be an atom ant. These are the building blocks of CREAM Reports, constructing values and deconstructing the valueless, that connect to the $5 trillion Indian economy on a daily basis.
Ethical Assets Premium Account
It is proposed that every Management Quality Process Block having a number of Quality principles, such as UNGC or UNCAC or CoBP, has a debit and credit account for it. For example, on account of one quality policy document, such as CoBP, a notional value of Rs1 crore ($142,850/-) will be debited to the Ethical Assets Account and the same amount credited to the Ethical Assets Premium Account, subject to fulfilling certain conditions. The condition being that CoBP will be certified by a certification agency or the auditor of the company according to the ratings obtained, as per Table 5.2. If ratings are at the optimized level of 5, then 100 percent of the notional value gets debited and correspondingly credited to the premium account. FPOs, made up of ordinary farmers, are designed to have a small value share capital. However there are several ethical assets FPOs possess, such as the code of agribusiness practices, Fairtrade, HACCP, CoC. Once say four such ethical assets are monetized, the premium account value is bound to be substantial, for each FPO. An FPC is made up of several FPOs. The ethical assets premium account would surpass their collective share capital many a time since many FPOs operate under a single FPC. It would help an FDI to immediately track the Ethical Values followed by a company while committing their investments. The same Ethical Assets Account for a major corporate vis-à-vis the auditor involved, anything less than 100 percent, could be a disaster on their corporate governance leadership. The likes of IL&FS would never arise if the Ethical Assets Premium Account is monitored on a daily basis. For such companies, it is not too late to start the creation of an Ethical Assets Account now.
- Connecting the dots: Past, present, and future need to be connected, in a systematic manner. Past is to correct the fault lines; present is the opportunity to state that our dreams have to be bigger - set our ambitions higher - binding our commitment deeper, and then move forward to the future - to exert our efforts greater. This is a step-by-step successive advancement from strategy idea to strategy planning to strategy plan to strategy action.
- CREAM Report of HUL with an overall IA by Process Area and Resource Area explains the intricacies of preparing and using data for corporate governance, risk management, earnings, accounting quality, and management quality analytics. Differentiating conflicts of interest, conflicts of personal interest, and conflicts of conscience adds spice to the menu. CREAM Report highlights how qualitative elements of management are far greater than the quantitative elements of management, that it is no surprise when 85 percent of corporate management is not measured or tracked. Principle #1—what gets measured, gets managed—is a true statement.
- Capital - Output Ratio underlines our need to reach out to the $5 trillion Indian economy, the ingredients for successful productivity, and how the return on intangible would be necessary. Agri sector is elaborated with FPOs and FPCs participating in a major revolution for increased GDP being a homogenous unit, and they are collectively better than corporate to handle and contribute. The crucial point of observation is the willingness of the farmers to cooperate, help each other, embrace standards, and increase yields, which would aid meeting the targets attracting FDIs.
- Strategy Plan - binding our commitment deeper - CREAM Report is the time to commit on paper a strategy plan for the future. Future is brought to present as CAGR and CARR are converted into CDGR and CDRR, which are Daily controls to track the decisions made today and checked today itself.
- Spot your place is to identify a startup to reach out to the stars. Connecting the dots means startup, to the related sector, Indian $5 trillion economy, challenge China is in straight line, enabling a tiny industrious individual to relate to the global economy.
- The importance of Qualitative Elements of management, which make up the Ethical Assets, is highlighted as how to measure and how to create Ethical Assets Premium Account. This is crucial for corporate as well as audit firms to buck up.
- The electron - CEO team - is the most visible aspect of corporate management. Brought under control by the nucleus of a Corporate Atomic Structure, containing the stakeholders, it delineates the duty, responsibility, and accountability.
Action Point
- Leadership “is not about giving energy, but unleashing others’ people energy”; leadership is the electron of the Corporate Atomic Structure.
- A $5 trillion Indian economy in 2024 from the 2018 $2.75 trillion at a CAGR of 16.12 percent should have a breakup of all major GDP contributors—agriculture, energy, infrastructure construction, trade, hotels, tourism, transport, storage, communication, banking, financing, insurance, real estate, business services, community, social and personal services, and so on—with individual CAGR from the start-up levels. Then convert to CDGR for each unit of the building blocks, and then track the progress from today’s $2.75 trillion to the $5 trillion target, Daily.
- Looking at Whistleblower policy and the FCPA, one is protective and the other intends to punish ex post facto, but neither of them is proactive. Change the denominator.
1. BusinessToday.In. 2019. “Infosys US-Listed Shares Tumble 16% after Whistleblower Complaints.” https://www.businesstoday.in/markets/company-stock/infosys-us-listed-shares-tumble-16-after-whistleblower-complaints/story/385969.html.
2. The World Bank. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IN.
3. M. Bhalla. 2019. “Fairfax to Invest $5 Billion More in India in Next 5 Years.” https://economictimes.indiatimes.com/news/economy/finance/fairfax-to-invest-5-billion-morein-india-in-next-5-years/articleshow/70942015.cms.
4. World Bank. n.d. “Agriculture, Forestry, and Fishing, Value Added (current US$),” World Bank national accounts data, and OECD National Accounts data files. https://data.worldbank.org/indicator/NV.AGR.TOTL.CD.
5. IBEF. 2020. “Indian Agriculture and Allied Industries Industry Report.” https://www.ibef.org/industry/agriculture-india.aspx.
6. Ibid.