Tuesday, February 21, 2012

Interesting Readings: 22-2-2012


Let's start light: Interesting Bookcase designs :)


New Ideas in Online Retail of Apparels - technology & customization


Article on rise in power of money in american elections, especially after the Citizen's United verdict of Supreme court #PAC or political action committees


Efforts to make a really free and democratic internet. Also, shows how internet's current (business) structure of doing things through ISPs has made it easy to control


Al Gore's manifesto for sustainable capitalism


Good and detailed analysis of Obama as President


Good article for some ideas on the right balance between incremental and disruptive innovation


Clayton Christensen on how new financial tools destroy innovation


Impact of famous blogs on papers published in economics. Super star effect


Umair Haque on what should we do in life. Though written in reference to Davos WEF. 10 things


Interesting ideas on how to redefine education in developing countries

Paul Romer's speech - IMF. On economic crisis


Umair Haque's valentine's day post on love - generically on relationships - slightly philosophical


Facebook's ranking algorithms - Edgerank and Graphrank described


Great piece on explosion in human population and a sick (though maybe true) argument on how income inequality is just another struggle for survival in the evolutionary sense


Seriously Rapid Source Review- tool to find live-reporting or eye witness sources on Twitter


US Foreign Policy, Iran, methods to increase utility of prediction excercises


Tibetan self-immolations & extreme Chinese security in Aba


Note on the Reality of Tax-progressivity in USA


Ideas and quality of debate in US of 1912 on income inequality as an evil and against democracy


Bashing FED and hailing Ayn Rand atlas shrugged style


We humans have two parallel sets of moral-beliefs to help us make the decisions


Interesting finding: Specialized skills force people to vote for welfare state as they have already made a risky investment in acquiring such skills - folks with generic skills go against welfare state. School and education systems provide and shape such input into labor-force and political-economy


How people become experts in anything - deliberate practice


How experts/winners can sustain superior performance

Mathematical equations which describe most of physics


In future both education and work would become more and more informal, and look like a coffee-shop


Risks and injustice because memories are fuzzy. Also, how new memories can even be created


On drugs that could enhance or boost memory


Learning disability/dyslexia means a person can't focus for long but there is trade-off and it may mean such people can detect abnormalities in confusing patterns faster


How Chinese property ownership concept got started in 1978 in a small village, and then China forever


Speech by Christina Romer of Berkeley on financial crisis


Great post for data-visualizations freaks


Why privatization of public goods may not be a good idea


Charts shown to US Senate on income inequality in USA


Ideas for good business practices in retail sector


Open Government Initiative by White House to put most data in public domain


Interesting infographic comparing Africa's size to most of the important countries


Joseph Nye on Women's role in Future - building up from Steven Pinker's book The Better Angels of Our Nature


Article on how conservatives are genetically different from liberals


To find new and interesting books to read


Technology progress has been superexponential in last 2 centuries


Economist's article on how scientists are trying to understand why the universe is expanding

Wednesday, February 08, 2012

Fair Profit Company: Making Case for a New Type of Entity for Social Enterprises



Increasingly a lot of dissent has been rising towards Capitalism that the system doesn’t contribute enough to the welfare of society at large. The reason behind this is that businesses are viewed (most often rightly) as the primary cause for social, environmental, and economic problems which different societies are facing. To put it simply, businesses and businessmen are now being widely perceived to be prospering at the expense of society at large.

The fiduciary duty of companies to maximize shareholder value only at the expense of everything else (otherwise they could be held legally liable) and the short term outlook followed by the companies are cited as the underlying causes for this loss of legitimacy for the Capitalism as a system. At the same time, governments and civil society organizations also try to solve the problems faced by the society at the expense of business. The trade-off between economic efficiency and welfare of the society at large has been taken as given, and guides the interventions by the government and civil society actors.

Here is a simplified take on what happens:
· Capitalism was the outcome of an attempt to create a system for efficient allocation of capital in the projects/ideas with highest possible returns.

· This lead to race among the investors to increase their returns on capital, which in turn demanded faster returns too. This quest for ever increasing and faster return got institutionalized with the advent of stock markets and VC funds.

· The narrow focus of investors in the return on their capital alone, meant that they and the businesses they had invested in started ignoring the broader influences which determine their success in long-term.

· This resulted in negative externalities for the environment and society, costs of which they were not supposed to pay and hence with economic growth the costs of these externalities have started weighing more day-by-day due to accumulation effects.

· One of the core strength of Capitalism is competition for promoting innovations to keep an economy vibrant. But the excessively myopic pursuit of returns on capital started meaning that companies needed to maintain their competitive advantage

· This in turn leads to big companies trying to make sure that competition dies out by using their money and other advantages to deter the entry of new players in the industry, which means decrease in innovation.

It is established that private ownership and efficient allocation of capital by markets i.e. Capitalism as we know today, is probably the most powerful, flexible, and robust system for growing society’s prosperity. At the same time, we know that the economy is just an aspect/part (probably the most vital one) of the society and the purpose of every society/ civilization is the welfare of its citizens. So economy and its constituents i.e. businesses should also serve that greater cause. But as interests of Capitalism are increasingly getting pitted against the broader interests of our society, Capitalism has to evolve to meet all the objectives of the society. Fortunately, this evolution of the role business in society has been happening albeit slowly over time, but the big push has come from increasingly growing number of social enterprises.

Rise of Social Enterprises
Social enterprises or socially responsible businesses try to solve this problem of negative externalities by internalizing the costs associated with them. This mean, shareholder value maximization is a part of the broader agenda for such enterprises. Their agenda could be to reduce environmental footprint, increase the welfare of the local communities, empowerment or focus on marginalized sections of the society, and in general a longer term outlook for the business ecosystem as a whole in the industry and locality they are working in. This means long term welfare and interests of all stakeholders in the business like consumers, employees, community, suppliers or other stake holders from the value chain has to be kept in mind while making decisions, and not just the interests of investors/shareholders.

Rise of social enterprises will go down as the characteristic transformation of our times in the economic history to be written in future. Governments and other influential bodies supporting this transition in the business is conducted would be hailed as the pioneers. The reckless pursuit of shareholder value maximization in turn got translated into making of GDP and the growth rates as the only criteria for measuring development of societies and countries. Other dimensions of development of society just got ignored, which has given rise to or increased the extent of many of our societal problems. Therefore the renewal or evolution of capitalism as a more inclusive system, would serve as a systemic intervention of bottom-up nature to solve the problems we have in our world today by promoting a nurturing environment for the innovations for this purpose.

Problems
Various structures and models are being tried by social entrepreneurs for achieving a balanced growth along with the welfare of public or fulfillment of other social goals like livelihoods security, health, education, empowerment of marginalized, etc. Some of these efforts have been highly successful but on the whole social enterprise ecosystem is not in the shape it should be to make it possible for new social enterprises/innovations to get into in the market and scale-up fast enough. While there are many dimensions of this ecosystem that require attention and support from the government, we would focus here on three very specific and heavily inter-related aspects.

1. Our current laws don’t provide for an alternative to pursue the society’s interests as a whole through sustainable models or mission driven businesses. Company law doesn’t provide for scope to pursue a second or third bottom-line beyond profits, though some entrepreneurs have tinkered with existing structure of a company to suit the needs of socially responsible business. Many new social enterprises get torn between their social commitment for which the business was started and their fiduciary duty.

2. Philanthropic donations, government programs and aid-money have tried to address the challenges of human development with a mixed record so far, and social enterprises are also a similar attempt which many believe to be having a great potential. For investors and anyone else to be assured that social returns expected on their investment are being reaped, a standardized system of measuring the social impact is not in place. So far people use proxies for the impact which can’t exactly be compared across different projects/ideas because of the differences in the methodology used and things measured. Profits or financial returns on capital are easy to measure and compare. A well developed social enterprise ecosystem would also require an equally good societal impact measurement system to compare different types of impact. Impact measurement methods used by development projects could definitely be of help here. Existence of a reliable standardized impact measurement system would also enable us to differentiate between false propaganda/claims by some corporations v/s the real impact.

3. Lack of reliable impact measurement keeps socially responsible investors suspicious and low on confidence to make investment decisions. This causes a slow investment rate which combined with lack of liquidity of such investments becomes a huge constraint for the social enterprises.

Solutions
In order to solve the problems mentioned in above sections, many jurisdictions have been adopting different methods. Based on the ideas implemented internationally to tackle these problems, we recommend following strategies:

New legal structure: Allowing for new type of entities (let’s say Fair Profit Company or FPC) to be registered in which shareholder primacy gets diluted in favor of public welfare in general, with increased transparency and accountability is definitely going to encourage and support mission driven entrepreneurs. Such a legal structure would allow for shareholder value maximization after ensuring that the social mission of such a FPC doesn’t get compromised.

Here is a representative (and tentative) list of features of such a legal structure:
1. FPCs would give first priority to the explicit commitments to community welfare objectives mentioned in their charter or Memorandum of Association.
2. Cost of negative externalities created due to the business will get accounted into the financial statements of FPC to tackle these externalities by internalizing them.
3. Minimum fraction of ownership to be given to different stakeholders would get mandated e.g. 10% to blue-collar employees, 10% to the suppliers, 10-14% to the communities where FPC markets its offerings and 15% to the communities where the FPC is located.
4. Good corporate governance practices would be enforced with high penalty clauses
5. Explicit commitment to pursue long-term outlook has to be made in the charter and executives would be given flexibility and decision making power to achieve the goals set by shareholders
6. Commitment that fixed fraction of the profit (upto 25% max) will always get distributed as dividends, unless ruled otherwise in the General Body Meeting in that fiscal year
7. These corporations can take in grants with tax benefits to the donors, just as non-profits are allowed to accept grants
8. Foreign investments could easily be made without any restrictions and need of approvals, both in the form equity or debt i.e. easy FDI and ECB allowed through Direct route
9. Extra reporting requirements would be there to both ensure transparency and accountability, and to monitor progress on the social mission of the FPC

10. All tax liabilities for FPCs would be calculated just as it is done for the other companies registered under the Companies Act of India, 1956
11. Cost of measuring social impact can be reduced from the tax liability of an FPC within the permissible limits
12. Heavy penalty for fraudsters not fulfilling the community welfare objectives of FPC or compromising its social mission
13. To increase labor availability for FPCs, deduction in the income tax liability for the employees of FPCs could be provided
14. No license required or significantly eased requirements for getting license to provide goods and services which are highly regulated, including the provision of public goods i.e. power, water, education, health, security, mining, communication, public infrastructure, etc

Impact measurement standards: Setting up a government recognized Standard for impact measurement calculations in the Indian context is a must to be able accept the reports submitted by the FPCs for the purpose of monitoring progress on the social mission of FPCs.

FPC Impact Rating system based on both the absolute impact metrics, peer-rating by other FPCs, NGOs and the community, and/or standardized social audits should be given recognition by the government. Such a rating system would enable everyone to compare the performance of FPCs with each other.

FPC Stock Exchanges: To provide liquidity to the shareholders and FPCs an opportunity to raise capital from public, government should facilitate setting up of new stock exchanges where only FPCs of all sizes can be listed. Spot exchanges or share trading sessions for the trading of shares amongst the community members, employees, suppliers etc. should be organized regularly in the location where FPCs are located. FPC Impact Rating system would serve the purpose of providing the information required by such buyers and sellers for getting into the trade.

Sunday, February 05, 2012

Can Rahul Gandhi Lead India?


Few days back there was an interesting piece by the NYTimes columnist David Brooks, on personal traits that correlate with successful presidencies with Mitt Romney as the case-in-point. Many times I disagree with the way Brooks interprets things, just like many other times I agree with the points he makes. And, this was one of those times he was making some sense though his analysis was not comprehensive enough to rule out other possibilities.

Anyway, even though the four simple criteria he suggested may not be relevant to the Indian context, but reading this piece just made me feel like analyzing Rahul Gandhi within the same limited framework, which Brooks uses for Mitt Romney. So here it is:

Like Brooks article, the question at large is: Will Rahul Gandhi make a successful Prime Minister? Taking the route which Brooks took, one-by-one I am just going to take up the four traits of successful presidents he listed and see how Rahul Gandhi fares on these criteria as an individual because it is quite likely that he would become the Prime Minister of India someday.
1. Brooks says, “First, successful presidents tend to be emotionally secure. They have none of the social resentments and desperate needs that plagued men like Richard Nixon. Instead they were raised, often in an aristocratic family, with a sense that they were the natural leaders of the nation. They were infused, often at an elite prep school, with a sense of obligation and responsibility to perform public service.”

Obviously here our Congress Scion scores well: He belongs to the India’s first family and however much we may be jealous of him, we can’t take away from him his sense of being a natural leader, and obligation and responsibility to get into public service. If he didn’t believe that, then he probably wouldn’t have entered the Indian politics. We can disagree with him saying that it is not right for him to have feelings, or can say that we don’t think that he is really a capable leader. But no one can stop him from thinking that either he is, or he can be a good leader; just the way he can’t stop others from saying otherwise.

Therefore, to paraphrase Brooks, this sort of premier occupies his position “with ease and confidence, is relatively unscathed by the criticism of the crowd, is able to separate the mask he must wear for public display from the real honest self he knows himself to be”. I wouldn’t hesitate to give him a point on this one.

2. Second characteristic of a successful premier of a country according Brooks is: Superb Political Judgment. He also quotes Isaiah Berlin there to define political judgment as “a capacity for integrating a vast amalgam of constantly changing, multicolored, evanescent perpetually overlapping data”. He goes on to say that political judgment is some sort of implicit knowledge developed slowly by the political insiders over decades through the rich experiences they accumulate.

Given that Rahul Gandhi is just 41 and became an MP first in 2004, he definitely can’t boast a lot on the experience front. Maybe a strong team of advisors who have had rich experiences as political insiders for long could help him overcome that barrier, but public is mostly confused on this front because of the mixed record of public perception about actions/stands he has taken so far (or not taken in many instances). Maybe because I am also young and inexperienced, I feel that it has got a lot about how a leader uses her/his advisors, though others may feel that no number of advisors can fill this lacuna because it is almost impossible to find advisors who can be trusted absolutely in the game that we know as politics.

Another important means of developing such judgment is by having “voracious social contact”. From what we read about Rahul Gandhi, he definitely comes across as someone with a compulsive desire to connect with commoners though we don’t know whether he has developed a sense of gauging what the person in front wants or can actually deliver.

Whatever the compulsions are (or inability), selections of candidates fielded in state after state elections don’t give us (who are not political insiders) the confidence that he has developed a superb sense of political judgment in terms of people. His positions (or lack of) on many issues and follow-actions don’t help either.

On the whole, based on information available to me now, I wouldn’t score him high on the political judgment front. Upcoming elections in UP and other states would definitely be his litmus test. And yes, as his lineage has already given him great advantage, he would be adjudged using higher/stricter standards or metrics than other politicians.

3. Third characteristic which Brooks chose to focus on is the fact that most great leaders have had experienced crushing personal setbacks. Having lived through two assassinations of the loved ones in the family certainly puts him into this category.

He definitely comes across quite composed as an individual. Also, he didn’t do anything like Rahul Mahajan or whatever the stereotype we normally have in our minds for a powerful Indian politician’s son. I (and probably most people) would like attribute such composure to a combination of upbringing and the inherent personality of an individual.

Brooks says that such setbacks typically give these leaders a sense of sympathy for those who are suffering, and a personal realization of the frailty of everything. He continues saying, “They are resilient when things go wrong. They know how dependent they are on others, how prone they are to overconfidence. They are both modest, because they have felt weakness, and aggressive, because they know how hard it is to change anything”.

I don’t know Rahul Gandhi, so can’t say about the resilience part but he definitely comes across as a modest person for the power he holds with him. Overall, I would say he scores well in this category.

4. Fourth criteria he mentions is that “great leaders tend to have an instrumental mentality”. I will just continue quoting Brooks as he is way better than me in articulating arguments. He continues, “They do not feel the office is about them. They are just God’s temporary instrument in service of a larger cause. This sense of being an instrument gives them an organizing purpose. It gives them a longer perspective, so they don’t get distracted by ephemera. It means their administration marches in one direction, even though it is flexible and willing to accept incremental gains along the way”.

Though based on scarce information from whatever little I have read about him and heard about him as the personal assessments of some people who happened to have interacted with him. I am convinced that he has such a sense of instrumental mentality. Definitely many would question me on this, and my response would be in the form of another question to them. That is, put yourself in Rahul Gandhi’s shoes and keeping in mind that he chose not to become anything like Rahul Mahajan (i.e. he is a sensible person), think what you would do if you had also bequeathed such a legacy, which he was lucky enough to receive? Isn’t it obvious that probably you would also like to devote yourself to a cause much bigger than you and everything around you to secure a worthy place in the history books?

All in all, our dude RG scores reasonably well on three out of four criteria Brooks focused on, though his score on the really important criteria of political judgment is at best inconclusive. Brooks ends by saying that great premiers are often aristocrats and experienced political insiders. However much we hate the aristocrats part, it seems that is the hard reality of the world that a significant number of great leaders and reformers belong to that class. So maybe we should not hold that against Rahul Gandhi, but that doesn’t mean he should be allowed to do away with the requirement of political judgment if he wants to be a PM or the next great social reformer of India.