Thanks to these six factors, a new breed of entrepreneurs is participating in the recovery of the Covid-hit economy.
George Fernandes once said, “When I chucked out Coca-Cola in 1977, I made the point that 90 per cent of India’s villages didn’t have drinking water, whereas Coke had reached every village.” It’s too late to ask the talented politician two questions: Instead of chucking out Coke, could we have learnt their secret of reaching every village? Did chucking out a law-abiding job creator help drinking water reach 90 per cent of our villages? The “Fernandes” anti-private bias lives on. Reactions to expanded corporate roles in farming and banking suggest every Indian entrepreneur deserves an episode in Bad Boys Billionaires. We make the case that this stale view ignores six “hearing aids” that are making our companies stronger by helping them to listen better.
In the wonderful movie, Two Popes, the conservative pope played by Anthony Hopkins tells his younger colleague, “All change is compromise but I need a hearing aid”. The pope’s deep insight — the most dangerous lies are the lies we tell ourselves — suggests listening needs structures, people, and tools. Reforms since 1991 mean a new breed of entrepreneurs is replacing crony capitalists because of six hearing aids.
One, lower entrepreneur equity holding. The average entrepreneur equity holding in listed companies is 50 per cent (we cringe at the “promoter” designation that implies circus showmanship). Not surprisingly, many bankrupt companies have entrepreneur holdings above 50 per cent because banks allowed them to borrow or steal their equity. But many new companies — Flipkart, Ola, Paytm, Inmobi for instance — have lower entrepreneur stakes, usually between 5 and 25 per cent because of multiple founders, multiple investors, and low debt. This is not unusual. Jeff Bezos owns 14 per cent of Amazon, Jack Ma owns 9 per cent of Alibaba, and Reed Hastings owns 4 per cent of Netflix. This is not dangerous: Conventional wisdom about skin in the game is not wrong, but company governance does seem to improve when entrepreneurs listen to institutional shareholders.
Two, the new insolvency and bankruptcy code. The suspension of IBC during Covid was painful but it is now back. Over decades, many financially unviable and operationally viable companies didn’t revive themselves because banks couldn’t force change and courts bafflingly allied with entrepreneurs rather than bank depositors. The negotiating leverage for banks has changed with IBC and we expect over 200 companies to change hands over the next 24 months. IBC’s biggest impact is outside the code: Entrepreneurs are careful about debt because of lender tools to eject them.
Three, bad diversification role models. The poet Maya Angelou said, “The universe is not made of atoms but stories.” Role models matter and the licence raj celebrated diversification because regulatory connections mattered more than ambition, courage, and persistence. But many competent entrepreneurs sunk their fortunes by diversifying too much too fast (diworsification). Higher competition now means that companies don’t have hostages but customers and success require them to focus on skills, brands, and talent that compound over decades. India’s new wealth creators usually run simple businesses and reward shareholders by allowing them to make their own diversification decisions.
Four, good partitioning role models. Entrepreneurs have three distinct roles — shareholder, board director, and CEO. Traditional thinking believed these three are guaranteed, permanent and concurrent. But many listed companies like Marico, Britannia, Dabur, Asian Paints, and Pidilite have, in recent times, grown their value and success by separating these roles and hiring CEOs with different and diverse surnames. Entrepreneurs now recognise that getting the train out of the station sometimes requires different skills than keeping the trains running on time, or making the train go faster.
Five, a growth and governance valuation premium. The drivers of a premium stock market valuation are slowly shifting from regulatory connections to growth and governance. Neelkanth Mishra of Credit Suisse suggests a supporting revolution — unlisted companies valued above a billion dollars now number about a third of the listed companies with that value. Some of this repricing is obviously driven by investor recognition that India is the only large nation on the planet with 20 years of secular growth ahead of it, but the lower risks of execution and capital allocation arising from improved governance are also important. These premiums catalyse a virtuous cycle of role modelling that in turn accelerates change.
Six, rising board effectiveness. Many entrepreneurs now acknowledge that a board of directors that protects them from themselves is a valuable asset. The Tamil classic Tirukkural agrees: “Idippaarai illaadha emaraa mannan/ ketuppa rillaanung kedum” (The king whom no one checks, no minister corrects/ Does not have to wait for foes, himself he vivisects). Too many entrepreneurs discount the importance of cognitive diversity and distributed power because, as Wharton Professor Adam Grant suggests in Think Again, “We listen to opinions that make us feel good rather than ideas that make us think hard.” Cognitively diverse, empowered, and engaged boards seem better at stimulating a broader search for information, considering more alternatives, using multiple strategies, more original thinking, and cutting losses earlier on mistakes.
These hearing aids are creating an Indian private sector worthy of overcoming its trust deficit and will take the country’s GDP ranking to third over the next decade (from fifth today) with its superior outcomes for investors, employees, and national productivity. But Covid suggests administrative capacity holds back taking our per-capita GDP into the top 50 (from 142nd today) and we need equally powerful hearing aids for our civil service to overcome their execution deficit. India’s new tryst with destiny is an appointment she will keep only if we replace the tug-of-war metaphor between entrepreneurs and government — the “suit boot ki sarkar” insult or the Coke chucking out power trip — with a dance where neither is superior or skilled than the other. They just play different, crucial, and complementary roles.
This column first appeared in the print edition on June 9, 2021 under the title ‘Listening better’. The writers are co-founders of Teamlease Services and Gaja Capital respectively.
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