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IN THIS ISSUE : STEPHEN M SAMMUT AND LAWTON R BURNS CALL FOR INNOVATIVE SOLUTIONS TO MEET INDIA'S HEALTHCARE CHALLENGES DR DEVI SHETTY ON HIS SUCCESSFUL MODEL OF HEALTH CITIES NANDINI RAJAGOPALAN DISCUSSES THE MERITS OF HIRING AN OUTSIDER CEO

NANDINI RAJAGOPALAN DISCUSSES THE MERITS OF HIRING AN OUTSIDER CEO Volume 9 Issue 2 India’s Healthcare

Volume 9 Issue 2

India’s

Healthcare

Hurdles

RS 250

As part of the ISB’s ten year celebrations, the School hosted an event in Evanston,

As part of the ISB’s ten year celebrations, the School hosted an event in Evanston, Illinois, to thank one of its Founding Associate Schools, Kellogg School of Management, and particularly Donald Jacobs for his visionary role in shaping the ISB. Donald Jacobs, Dean Emeritus and Gaylord Freeman Professor of Banking, Kellogg School of Management, Northwestern University (Left), with Ajit Rangnekar, Dean, Indian School of Business (ISB) (Right)

from the editor’s desk
from the editor’s desk
from the editor’s desk Dear Reader, These are exciting times for us at ISB – not

Dear Reader,

These are exciting times for us at ISB – not only are we celebrating the tenth year of the school, we are also vigorously preparing for the start of our new campus in Mohali, Punjab in April 2012. Apart from offering the flagship Post Graduate Programme in Management, the Mohali campus will have specialist institutes in areas critical to India’s development - Healthcare, Infrastructure, Manufacturing and Public Policy. Over the next few issues, we will highlight each of these areas in the ISBInsight, beginning with this issue on Healthcare. I thank Professors Stephen M Sammut and Lawton R Burns of The Wharton School, our academic partner for the Max Institute for Healthcare Management in Mohali, for kindly collaborating with us on this issue. India needs a healthcare system that can meet the demands of over a billion people, most of whom are unable to bear the burden of healthcare costs – each year 39 million people are pushed into poverty because of their inability to meet healthcare costs. The challenges are gargantuan, as our cover stories point out: India leads the world in terms of maternal deaths; there is a dearth of qualified medical professionals in rural areas; health insurance covers only about a fifth of the population while unorganised private sector accounts for almost 80% of outpatient healthcare. But even in these bleak circumstances, some medical entrepreneurs have crafted solutions within their limited resources – Dr Devi Shetty is one such person, and we present an interview with him in this issue. Our feature stories demystify some long-held beliefs: Outsider CEOs might not be the superheroes that will save your firm, and blogging, even if it’s sometimes negative, can help your company. I hope you find this issue interesting and insightful. Do send me your feedback at editor_insight@isb.edu. I look forward to hearing from you.

insightful. Do send me your feedback at editor_insight@isb.edu. I look forward to hearing from you. Sriram

Sriram Gopalakrishnan

Volume 9 Issue 2

contents

5

Cover Story

5 MEETING THE CHALLENGES OF HEALTHCARE NEEDS IN INDIA: PATHS TO INNOVATION Professors Stephen M Sammut and Lawton R Burns of the Wharton School analyse the healthcare requirements of the burgeoning Indian population.

10 BUILDING INDIA'S HEALTHCARE SYSTEM: A CAUTIONARY NOTE Healthcare systems must be designed to address the requirements of all its citizens explains Professor Arnold J Rosoff of the Wharton School.

12 HEALTHCARE FINANCE:

THE ROAD AHEAD Health insurance is a growing sector in India. Sofi Bergkvist analyses this sector with special emphasis on Aarogyasri.

16 DOING MORE WITH LESS:

LESSONS FROM A DOCTOR Dr Shetty talks about how specialisation of healthcare services and resource optimisation can provide low-cost, quality treatments to the poor.

can provide low-cost, quality treatments to the poor. 16 20 USING OPERATIONS MANAGEMENT TO IMPROVE HEALTHCARE

16

20 USING OPERATIONS

MANAGEMENT TO IMPROVE HEALTHCARE ACCESS How can point-of-care devices enhance the efficiency of healthcare networks in developing countries? Professors Milind Sohoni and Sarang Deo present their findings.

Features

24 HIRING AN OUTSIDER CEO:

CHANGE IS NOT ALWAYS GOOD Are companies better off hiring expensive CEOs from outside their organisations? Professor Nandini Rajagopalan discusses.

27 LIFE AFTER M&As

What are the post-merger implications on the acquired, as well as existing assets of a company? Professor N R Prabhala presents his findings.

Editorial: Vimla Sriram, Mariya Mustan and Sriram Gopalakrishnan

Print/Distribution: Laxmi Devi Pant and T A V Srinivas

Design & Cover Illustration By Trapeze | Resources: Learning Resource Centre at the ISB Printed At Kala Jyothi Process Pvt Ltd

© COPYRIGHT, 2007. INDIAN SCHOOL OF BUSINESS (ISB). ALL RIGHTS RESERVED. ALL ARTICLES HAVE BEEN COPYRIGHTED BY ISB AND NO PART OF THIS MAGAZINE MAY BE REPRODUCED EITHER IN PART OR FULL, OR ELECTRONICALLY STORED INTO A RETRIEVAL SYSTEM, OR DISSEMINATED IN ANY FORM (ELECTRONIC, MECHANICAL, PHOTOCOPYING, RECORDING OR OTHERWISE) WITHOUT ISB’S PRIOR WRITTEN PERMISSION.

For subscriptions and advertisements contact isbinsight@isb.edu

30 HARNESSING THE POWER OF

EMPLOYEE BLOGS Professor Ram Gopal explains how companies can benefit from their employees’ blogging.

Face to Face

34 POST-CRISES FINANCIAL

REGULATION Professor Anjan Thakor speaks on financial regulation in the emerging markets, in light of the recent crises.

38 DATA ANALYTICS: THE

FOUNDATION OF A SUCCESSFUL BUSINESS What is data analytics and how is it relevant to the business world? Professor Galit Shmueli explains.

41 TEACHING INDIA TO LEARN

Shaheen Mistri, Founder, Teach for India, talks with the ISBInsight team about her vision for education in India and leadership in the classroom.

Knowledge Sessions

45 OUT OF AFRICA: A STORY OF

HOPE AND RECONCILIATION

H E Williams Nkurunziza, High

Commissioner of Rwanda talks about how Rwanda charted its history after the 1994 genocide.

46 FOSTERING INNOVATION

What role can companies play to inculcate a culture of innovation? This panel discussion lends a corporate perspective.

47 SUSTAINABLE GROWTH:

A PIPE DREAM?

The panelists in the World Ecnonomic Forum Young Global Leaders South Asia Meet call for reform.

48 ON ENHANCING

SHAREHOLDER CONTROL:

A (DODD-) FRANK ASSESSMENT

OF PROXY ACCESS

A summary of the award-winning

paper at the Centre for Analytical Finance (CAF) Summer Research Conference 2011.

20
20
34
34

In Brief

50 News and happenings from the ISB.

Book Review

52 A review of “Blind Spots – Why

We Fail to Do What’s Right and What to Do about It” by Max-H Bazerman and Ann E Tenbrunsel.

Cover Story Cover Story Meeting the Challenges of Healthcare Needs in India: Paths to Innovation
Cover Story Cover Story
Cover Story
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Cover Story Cover Story Meeting the Challenges of Healthcare Needs in India: Paths to Innovation BY
Cover Story Cover Story Meeting the Challenges of Healthcare Needs in India: Paths to Innovation BY
Cover Story Cover Story Meeting the Challenges of Healthcare Needs in India: Paths to Innovation BY

Meeting the Challenges of Healthcare Needs in India:

Paths to Innovation

BY STEPHEN M SAMMUT AND LAWTON R BURNS

How does the quality and availability of healthcare services keep pace with a vastly improving standard of living in a rapidly developing country? And to what extent can access to that quality care be available to all socioeconomic levels? These questions have a special relevance to India because progress in healthcare availability – or the lack of it – will accelerate or deter growth as well as determine the future of political leaders. 1 This article explores the particular challenges to medical professionals in the industry of wellness and healing, and to national policy-makers in meeting the needs of the growing Indian population.

What are the key goals of healthcare in every country? We can summarise them as follows:

Improved quality of care and population health as measured by life expectancy and other measures of wellness. Cost containment and pooled risk-sharing by the population to allow fi nancial access to care as well as avoid catastrophic ruin. Provide access to care in an equitable manner for all citizens. It is not our purpose here to grade India on its performance on these goals. Many studies have addressed these quantitatively and qualitatively. 2,3,4 The particular challenges should be inventoried so that their impact may be assessed, the interventions described, and innovations prescribed.

The Structure of the Indian Healthcare System The public side of the Indian healthcare system has different roles for the national government and individual states. The Government of India addresses health policies, regulatory matters and disease control. The states address healthcare delivery, fi nancing, and the training of personnel. The national Ministry of Health has several functional departments: Health Services, Family Welfare, Health Research, and Traditional Medical Systems. The state ministries typically have departments of Medical Education and, similar to the national ministry, Health Services and Family Welfare. 5 Despite this large infrastructure and attention to need, the public sector actually provides only about 20% of actual care services. The

Cover Story balance of care is provided by private hospitals and practitioners. Challenges in Healthcare
Cover Story balance of care is provided by private hospitals and practitioners. Challenges in Healthcare

Cover Story

Cover Story balance of care is provided by private hospitals and practitioners. Challenges in Healthcare The

balance of care is provided by private hospitals and practitioners.

Challenges in Healthcare The ministries must address several prevailing challenges, as described in a recent series on India in The Lancet:

Continuing burden of infectious diseases in health. Reproductive and child health and nutrition Chronic diseases and injuries Universal access to care and health equity Healthcare human resources Healthcare fi nance The series offers one of the most coherent and thorough analyses of these factors and provides a provocative framework for this article. The six topics are abstracted and for each, we will describe the situation, an innovative intervention, and the business and organisational challenges that they represent.

Continuing burden of infectious diseases The Situation: John et al 6 point out that several infectious diseases and vaccine-preventable childhood diseases still contribute 30% of the disease burden in India as measured in “disability adjusted life years lost.” The economic impact of this is enormous. The consequence is also an overloaded public hospital care network that must address the primary care needs of infected patients. Innovative Intervention: The traditional approach of a national government intervention programme for each disease is not likely to be effective or cost- effi cient according to John et al. They recommend the creation of a “functional public health infrastructure that is shared between central and state governments, with professional leadership and a formally trained cadre of personnel who manage an integrated control mechanism of diseases in districts for infectious and non-infectious diseases and injury.”

Business and Organisational Challenges: The formation of an integrated national/state public health system represents a new category of costs for the government. Historically, in other countries, public health policies and laws have had to fi nd a balance with personal privacy and civil liberties. Is the timing right for India to undertake such efforts? What is the role of a business school in this transformation?

Reproductive and child health, and nutrition The Situation: India has the world’s greatest burden of maternal, newborn and childhood deaths. India also has the greatest number of undernourished children. 7 The pace of improvement has been slow and falls short. “Among the reasons is that coverage for priority interventions remains insuffi cient, and the content and quality of existing programmes is suboptimum, further complicated by unacceptable inequities” is the conclusion drawn by Paul et al. 8 Innovative Intervention: Paul et al cite other reasons but also provide a solution. They offer that the health system has to be rethought with decentralised planning in districts, effective service delivery in communities and health facilities, a reasoned approach to demand- side fi nancing, a sustained programme to change household behaviours, and creation of centres of excellence for health and nutrition policy research. Business and Organisational Challenges: Proposals for change and improvement must be abetted by input from policy-makers and the private sector. There are specifi c challenges that academics may consider in order to have equitable and sustained improvements. These cut across the entire spectrum of a major business school curriculum.

Chronic diseases and injuries The Situation: According to Patel et al, “Chronic diseases and injuries are the leading causes of death and disability in India and there will be pronounced increases in their contribution to the burden of disease

during the next 25 years. Most chronic diseases are

equally prevalent in poor and rural populations, and

often occur

diseases and injuries is provided in the private sector

and can be very

the early stages of a chronic disease and injury epidemic;

in view of the implication for future disease burden and

the demographic transition that is in progress in India, the rate at which effective prevention and control is implemented should be substantially increased.” 9 Innovative Interventions: In the West, more than two- thirds of all healthcare costs are consumed by patients with fi ve or more concurrent chronic diseases. In the West, public or private insurance systems dominate healthcare fi nance. Beyond interventions for potentially catastrophic fi nancial impact on patients and their families, are the interventions for prevention and management of risk factors. For example, cardiovascular diseases present with tangible risk factors such as hypertension, high body-mass index, high blood glucose and cholesterol, and tobacco use. Business and Organisational Challenge: The principal challenge with respect to chronic disease and injury is to provide care at a cost that will not bankrupt the national economy or households.

A key to this problem is avoiding onset of the diseases

or limiting their severity. The role of businesses in this dimension of intervention is one of cooperation and collaboration, that is to say, receptiveness to behaving in accordance with the public good. The medicinal interventions can leverage the commanding position that the Indian generic pharmaceutical

industry has established.

Much of the care for chronic

India has already passed

Universal access to care and health equity The Situation: Balarajan et al report that inequalities are related to socioeconomic status, geography, and gender and are compounded by high out-of-pocket expenditures, with more than three-quarters of the

ISB INSIGHT

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increasing fi nancial burden of healthcare being met by households. Healthcare expenditures exacerbate poverty, with about 39 million people falling into poverty every year as a result of such expenditures. Balarajan identifi es key challenges for the achievement of equity in service provision, and equity in fi nancing and fi nancial risk protection. These include an imbalance in resource allocation, inadequate physical access to high quality health services and human resources for health, high out-of-pocket health expenditures, infl ation in health spending, and behavioural factors that affect the demand for appropriate healthcare. 10 Innovative Interventions: There are principles of health equity that Balarajan promotes: “Equity metrics, as applied to data for health and health systems, needs to be integrated into all health system policies and implementation strategies at every stage of the reform process. An equity-focused approach is needed to gather, use, and apply data for health outcomes and processes of healthcare, and during monitoring and assessment of health systems performance.” Business and Organisational Challenge: Any data- driven approach and analytic system must be driven by systems analysis and software development undertaken by the private sector. The quest for health equity presents an ideal opportunity for a series of public-private partnerships directed at definition, data capture and analysis, and transfer and implementation of the conclusions into practice. As much as 80% of Indian healthcare is privately provided, and that care is increasingly funded by insurance programmes; the mechanism for a fully integrated system is falling into place.

Healthcare human resources The Situation: India has, according to Rao, a severe shortage of qualifi ed health workers and the workforce is concentrated in urban areas. Many Indians, especially those living in rural areas, receive

COVER STORY

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care from unqualified providers. The outmigration

of qualified physicians and nurses is substantial. The resources to train nurses are still inadequate. The rapid privatisation of medical and nursing education has implications for its quality and governance. Such issues are a result of underinvestment in and poor governance of the health sector – two issues that the government urgently needs to address. 11 Innovative Interventions: There are numerous interventions and Rao highlights steps taken in Tamil Nadu. Among them, new positions were established in primary healthcare settings. Nurses, in particular, were expanded from one to three. The nurses are set up with a team of two medical officers to provide round-the-clock service. Tamil Nadu has also made provision for education of physicians and nurses in the public sector. Incentives and policies are in place to attract and retain personnel. In return for education, professionals have three years

of mandatory rural service. This strategy can be duplicated in other states. Business and Organisational Challenge:

Service in small cities, remote villages and rural settings remains an unmet need. It is not necessarily a function of income; physicians and nurses prefer to develop their knowledge base and practice within a community of providers. Nevertheless, packages of incentives, both financial and less tangible, must be developed and supported, perhaps in concert with the development of rural health insurance programmes.

with the development of rural health insurance programmes. Stephen M Sammut is Senior Fellow at Department

Stephen M Sammut is Senior Fellow at Department of Health Care Management at The Wharton School, University of Pennsylvania

Management at The Wharton School, University of Pennsylvania Lawton R Burns is Professor and Chair at

Lawton R Burns is Professor and Chair at Department of Health Care Management at The Wharton School, University of Pennsylvania

Healthcare finance The Situation: Kumar et al observed that “India’s health financing system is a cause of and exacerbating factor in the

COVER STORY

challenges of health inequity, inadequate availability and reach, unequal access, and poor quality and costly health care services. Low per-person spending on health and insufficient public expenditure result in one of the highest proportions of private out-of- pocket expenses in the world. Financial protection against medical expenditures is far from universal with only 10% of the population having medical insurance. (See the article in this issue on healthcare access.) The Government of India has made a commitment to increase public spending on health from less than 1% to 3% of gross domestic product during the next few years.” 12 Innovative Interventions: Kumar et al outline six policy responses:

“Ensure achievement of government’s commit- ment to increase public spending on health from less than 1% to 3% of GDP.

Improve quality, performance efficiency and accountability of public and private health systems.

Introduce policy and legislative changes to con- tain the rising costs of medical care and drugs.

Increase availability of health services through di- rect expansion of public health services.

Increase insurance and risk pooling to include financial protection.

Introduce a predominantly tax-paid universal medical insurance plan that offers essential cov- erage to all citizens.” Business and Organisational Challenge: The private sector should have an expanding role in the provision of care. The Lancet Series is silent on the role of the private hospital systems, such as MaxHealthcare, and the role they play for middle-class access and the provision they make for providing for the less fortunate. Moreover, the role of such efforts at the Aravind Eye Care System, Dr Devi Shetty’s Narayana Hrudayalaya Cardiac Centre (See the interview in this issue with Dr Shetty), and the Vaatsalya Hospital

8

ISB INSIGHT

Cover Story system strategy for delivering care in underserved areas all offer valuable and reproducible

Cover Story

Cover Story system strategy for delivering care in underserved areas all offer valuable and reproducible strategies.

system strategy for delivering care in underserved areas all offer valuable and reproducible strategies. The challenge in the expansion and implementation encompasses all the above issues as well as meeting capital needs of the organisations.

Conclusion This brief article may overwhelm readers unfamiliar with Indian healthcare, with the magnitude of the problems and their complexity. That is an appropriate response, but the problems are addressable at the level of the enterprise and are solvable with innovative thinking. The positions of many of the authors cited within do seem to favour the role of governments, national and state, as the entities with primary responsibility. This may be true, but the expansion of the Indian healthcare system will likely remain a hybrid of private providers and public providers. Convergence of these two worlds presents the challenge of all challenges. Driving this convergence and the teaching of the best principles of healthcare management will be prevailing themes in the curriculum of the new major in Healthcare Management to be launched at ISB’s new Mohali Campus.

This article is an adaptation of the introductory chapter of the book based upon a course entitled “Innovation and the Healthcare Industry” conducted by Professor Burns at the Indian School of Business (ISB) in January 2010 and 2011, to combined classes of ISB and Wharton students.

1 Bloom, D., D Caning and J. Sevilla. “The Effect of Health on Economic Growth” World Development, 2004, 32:1-33.

2 Mahal A., B. Debray and L. Bandari, eds. India Health Report. 2010 Indicus Analytics. Published by BS Books, New Delhi (www.business-standard.com/books)

3 Central Bureau of Health Intelligence (CBHI). National Health Profile 2007. 2007. New Delhi: Government of India, Director General of Health Services, Ministry of Health and Family Welfare.

4 Horton, R., P. Das. “Indian health: the path from crisis to progress.” The Lancet. January 15, 2011. 377: 181-183.

5 Government of India. Ministry of Health and Family Welfare. http://www.mohfw.nic.in/stategov.htm

6 John, T.J., L. Dandona, et al. “Continuing challenge of infectious diseases in India.” The Lancet. January 22, 2011. 377: 252-269.

7 Hogan, MC, KJ Foreman, et al. “Maternal mortality for 181 countries, 1980 – 2008.” The Lancet, 2010. 375: 1609-23.

8 Paul, V.K., H. S. Sachdev, D. Mavalankar, et al. “Reproductive health and child health and nutrition in India". The Lancet. January 22, 2011. 377:332-349.

9 Patel, V., S. Chatterji, D. Chisholm., et al. “Chronic diseases and injuries in India.” The Lancet. January 22, 2011. 377: 413-428.

10 Balarajan, Y., S. Selvaraj, S.V. Subramanian. “Healthcare and equity in India.” The Lancet. January 22, 2011. 377: 505-515.

11 Rao, M., K.D. Rao, et al. “Human resources for health in India.” The Lancet. January 22, 2011. 377: 587-598.

12 Kumar, A.K.S., L. Chen, et al. “Financing healthcare for all.” The Lancet. January 22, 2011. 377: 668-679.

Cover Story

Cover Story Building India’s Healthcare System: A Cautionary Note BY ARNOLD J ROSOFF In this article,

Building India’s Healthcare System:

A Cautionary Note

BY ARNOLD J ROSOFF

In this article, the author stresses that India must build a healthcare system that takes the needs of its entire population into account.

India faces enormous challenges as it builds its healthcare system to meet the rapidly growing needs and desires of a burgeoning middle-class that will increasingly want, expect, and ultimately demand, world-class healthcare. Great challenges bring great opportunities. Enterprising companies, individuals and government entities are rising to the challenge and doing wonderful things in India’s healthcare sector. The decision by the Indian School of Business (ISB) to develop a premier healthcare management programme responds to this exciting progress and will support and build upon it. It is a bold and ambitious undertaking. My contribution here, in addition to offering much- deserved applause for this initiative, voices a signifi cant caution for both ISB and India. Unless adequate, ongoing attention is paid to the needs of its entire population, India may one day fi nd itself in the unenviable position of the United States, having a stubbornly intractable

healthcare underclass – a mass of people who do not have regular, assured access to a decent, satisfactory level of healthcare services. As the US healthcare-reform

level of healthcare services. As the US healthcare-reform Arnold J Rosoff is Professor of Legal Studies

Arnold J Rosoff is

Professor of Legal Studies and Healthcare Management at The Wharton School, University of Pennsylvania.

COVER STORY

struggles of the past few years have demonstrated too

well, the challenge of bringing the residual segment of

a nation’s population “into the healthcare tent” can

be daunting, maybe even impossible. Given the size of the Indian underclass, the depth of its poverty, and the immensity of its needs, the challenge India faces may be much greater. Over the past fi ve years, I have pondered and researched why the United States, nearly alone among the world’s major nations, has not committed itself to achieving Universal Health Care (UHC), an adequate level of care for all its citizens. As part of my study, I travelled to countries around the world – including Argentina, France, Italy, Japan and Singapore – to try to understand better the paths and factors that led these countries to commit to UHC. One of my conclusions, summarised in a recent Penn Law Review article 1 , is that unless a nation keeps the goal of UHC

fi rmly in mind as it constructs its healthcare system,

it may end up with a system that can never achieve this goal. As one would expect in a capitalistic, free-market society, the healthcare system in the US evolved, over generations, principally to satisfy the needs and wants of those with the fi nancial resources to

ISB INSIGHT

afford health services. The problem with this is that once the advantaged group has a system that it finds satisfactory, it is extremely hard to marshal support for opening that system up to the disadvantaged. The “haves” are understandably concerned that their own

healthcare may suffer when the system is stretched to include the “have-nots”. So it may well be in India.

A vigorous private health insurance market and a

myriad of superior private healthcare facilities will be constructed to meet the desires of more prosperous Indians for the latest and best in healthcare. That is a most natural development; it is well and good so far as it goes – but it is not sufficient. Healthcare for those less well-positioned to get their needs met must be constantly reinforced as a national priority or it will almost certainly be underserved. As I travelled around India this past spring, learning about the country’s healthcare system and

Cover Story

light on the opportunities and potential satisfactions of developing and working in organisations that emphasise the provision of quality healthcare to the underclasses. This includes innovative, entrepreneurial private entities, both for-profit and non-profit, such as Vaatsalya, 2 the L V Prasad Eye Institute, 3 Narayana Hrudayalaya, 4 and other organisations of similar character. It also includes creative public initiatives, such as the Aarogyasri health insurance programme in Andhra Pradesh. The executive offices and perks in these organisations may not be as grand as in the big pharmaceutical companies and in some of the hospital chains, but the opportunities for professional growth, social impact and deep personal satisfaction are no less strong. Moreover, focusing on the health of the less advantaged does not require foregoing prospects for a good income. Given the size of the underclasses and the immensity of their needs, there are vast markets

Unless adequate, ongoing attention is paid to the needs of its entire population, India may one day find itself in the unenviable position of the United States, having a stubbornly intractable healthcare underclass.

needs, it was reassuring to hear many speak of the imperative to bring good quality healthcare to the poor, to the roughly 600 million people below the

poverty line, to people in the rural areas, villages and towns. But, without meaning to question the sincerity and commitment of those who spoke about the needs

of the underclasses, it will take more than lip-service

and good intentions to assure adequate healthcare for the bottom tier of India’s population pyramid. This effort will take a national public focus and commitment that is mirrored in the objectives and actions of the private sector, including thought-

leading educational institutions such as ISB. Students drawn to ISB’s healthcare management programme

by the enticing opportunities in the healthcare sector

may well be disproportionately drawn also to the “glamour jobs,” – executive positions with industry- leading hospital chains like Max HealthCare, Apollo and Fortis, to jobs in the prosperous pharmaceutical industry and in the rapidly growing health insurance sector. Jobs with well-established, profitable companies have high visibility and substantial financial rewards and, so, will be a natural focus of students’ aspirations. To maintain a proper balance, deliberate and consistent efforts must be made to shine a positive

ISB INSIGHT

11

to be developed in this sector. Working to improve healthcare for all of India offers tremendous, exciting opportunities for both financial and other rewards. The Wharton School is proud to be part of the ISB healthcare initiative. Some may view Wharton as a temple of capitalism, a place where bright, hardworking people come to learn how to make their fortunes. But it exists as well to achieve positive social impact, to help make the world a better place. ISB is also deeply committed to this goal of contributing to all of society, as shown by its support of the Centre for Emerging Markets Solutions (CEMS) and ACCESS Health, ISB’s upcoming healthcare management programme is both a further evidence of this commitment and a most promising venue for pursuing this most valuable and commendable goal.

1 Arnold J. Rosoff, “Of Stars and Proper Alignment: Scanning the Heavens for the Future of Healthcare Reform”, 159 U. Pennsylvania L. Rev. 2085 (2011).

2 http://vaatsalya.com/, a for-profit company.

3 http://www.lvpei.org/, a non-profit.

4 http://www.narayanahospitals.com/, a for-profit venture with participation by international companies AIG and J.P. Morgan. [cross-reference other mentions of NH in this issue of Insight].

5 [Cross-reference to Cover Story 3]

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Cover Story Cover Story
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Cover Story Cover Story Healthcare Finance: The Road Ahead BY SOFI BERGKVIST In 2008, the Centre

Healthcare Finance:

The Road Ahead

BY SOFI BERGKVIST

In 2008, the Centre for Emerging Markets Solutions (CEMS) and ACCESS Health decided to work together to research the healthcare market in India. This article provides an overview of recent developments in the health insurance programmes in India, where the coverage has increased from 4% to 20% of the population in less than

Healthcare: The Challenges in India Quality of Services and Expenditures Nearly 80% of outpatient healthcare and more than 50% of hospital care in India is provided by the private sector. For patients, this is generally an out- of-pocket expense, to an extent where many have had to sell assets and take loans to fi nance hospitalisations. Besides cost, an additional problem is that outpatient services are mainly provided by fragmented and unregulated healthcare providers, many of them in the informal sector with limited or no formal training in healthcare. India would have one of the highest numbers of healthcare workers per capita in the world, if the informal providers are taken into account. However, the quality of health services is a major concern, with over-prescription of antibiotics, use of steroids and delayed referrals, being serious issues that are commonly encountered.

Good Practices, but Limited Scope India is also home to a unique pool of entrepreneurs who have developed processes for high quality and low-cost care. These healthcare providers have developed their own cadres of professionals and para- professionals to perform specifi c tasks after internal

COVER STORY

training. This has brought down cost and increased specialisation. As a result of these innovative practices, major improvements in health outcomes have been documented in maternal and child health, eye care, cardiology and also primary healthcare. However, only a fraction of the population has access to these healthcare providers. Majority of the care is still provided by the highly fragmented and unregulated healthcare providers.

Information Asymmetry One of the main issues characterising the healthcare market is information asymmetry. Patients are ill- equipped to judge the providers based on the quality of services, and prices are rarely transparent. It is hard to ensure value for money and compare the healthcare providers. Over-investigations and over-treatments are prevalent. The Government of India has limited information about the quality of care provided in the public sector and hardly any information about the private sector, where most people are treated. This issue is important because information asymmetry leads to market failure, which means that the services of highest quality and best price are not competitive because patients do not have suffi cient

ISB INSIGHT

information to make informed decisions. This is certainly the case in India, which is characterised by an unregulated market.

Recent Developments New Insurance Schemes Emerge The government must incentivise the provision of quality healthcare and penalise behaviour that leads to poor quality of services. Enforcing regulation is a challenge in India but strategic purchasing and effective management of information can address many issues that regulation fails to address. In the last four years, large-scale insurance schemes have been unveiled in India. One such example is the Aarogyasri Health Insurance scheme in Andhra Pradesh, which has networked 241 private and 97 government hospitals to provide cashless treatment of 938 hospital procedures for more than 70 million people. This makes it one of the largest health insurance programmes in the world. The government pays the premium of R439 per family per year and there is no co-payment by the families. The government believes that the administration cost to collect premium would not make it feasible as of now. The awareness of this scheme is high. We surveyed 534 households in the low-income areas of coastal Andhra Pradesh and reported 100% awareness and appreciation of the scheme. Thus far, about 4.5 million people have been screened at health camps that all networked hospitals have to provide every week, in locations decided by the government. More than one million people have been treated under the scheme since its inception in 2007. This new platform provides opportunities for the government to serve as a strategic purchaser of services, monitor the quality of care and address issues of information asymmetries. Some measures have been taken to impact the providers – more than 70 hospitals have been delisted and barred from being reimbursed by the government after they were found to have inconsistencies. However, there remains a lot to do in terms of standardising and improving the quality of care through this platform.

Critique and Opportunities There are ongoing debates about the issues and opportunities with these schemes. Some criticism is pointed towards the increased public spending on tertiary hospital care while most of the burden of disease, for example, fever, diarrhoea, etc, has to be managed at the primary

ISB INSIGHT

13

Cover Story

Enforcing regulation is a challenge in India but strategic purchasing and effective management of information can address many issues that regulation fails to address.

care level, which is not covered. This criticism is valid but it is important to recognise that many countries initiated health financing reforms by covering the costs of major surgeries in hospitals. The motivation has been to protect people against catastrophic expenditures. Another reason is that in-patient care is easier to monitor than primary care services. Thailand is an example of a country which has, over decades, developed coverage from hospital-based care and expanded to primary care and chronic disease management. Criticism is also pointed towards the fact that hospital care represents a small part of healthcare expenditure. Most expenditure is incurred for outpatient care, in particular for medicine, which accounts for 82% of outpatient care expenditure. Researchers have suggested that the schemes that cover only hospital expenses, such as the new government-funded insurance schemes in India, will fail to protect the poor against impoverishment. While these findings are important and should guide policy decisions, it is also important to look at the severity and implications of the expenditure – hospital care is what is said to have caused indebtedness and people to sell assets. Government officials are also skeptical about the amount of funding being channeled to private healthcare providers, especially when the government has invested in infrastructure in government hospitals that is not used. Another problem is that students in government medical colleges need patients to work with and these new schemes are said to drive patients to private facilities. This is a valid concern. However, it must also be understood that one motivation behind the scheme was to improve the competitiveness of public hospitals. They are reimbursed the same rates as private hospitals for each procedure done. Salaries and infrastructure are already subsidised for public hospitals and they are supposed to use the additional income to make investments to improve their competitiveness. However, it is evident that many

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public hospitals have not been able to make effective use of this opportunity, one of the reasons being a lack of autonomy for the hospitals to hire or contract staff when needed. People are also concerned about increased malpractice with hospital-induced demand for needless surgeries as a result of the emerging insurance schemes. This concern is extremely relevant as the government may be subsidising unnecessary treatments. As such, the government must build the capacity to use available data to improve and not worsen the quality of care. All the hospitals in the insurance network have to use an IT platform developed by the government. The data collected includes everything from videos of angiograms and x-ray films to details on the drugs used. Through this platform, the government also has access to information regarding the physician, the surgery performed, and the hospital where it was performed. Access to this information has provided the government an opportunity to do value-based purchasing of healthcare services, to curb malpractice, and incentivise improved quality of care with protocols for evidence-based treatments and rational drug use. From this discussion, it is clear that the new schemes have given the government access to information that was previously not available to them and this can serve as a step to address issues of information asymmetries.

Work by CEMS and ACCESS Health There is need for more evidence on the impact of the new insurance schemes. Currently, we are evaluating the Aarogyasri scheme to assess how effective it has been to meet the objectives of mitigating indebtedness due to healthcare expenditures. We are also assessing how use of healthcare has changed. One of the main areas of interest is how the government uses the data now available to address information asymmetries regarding quality and price of healthcare. We look at its implications and study the responses from the private and public healthcare providers in terms of investments and service provision. Many low and middle-income countries are looking at health financing

reforms because many governments have failed to deliver care through their own public system. The rigid and bureaucratic systems have not been able to motivate

and bureaucratic systems have not been able to motivate Sofi Bergkvist is senior researcher at the

Sofi Bergkvist is senior

researcher at the Centre for Emerging Markets (CEMS) and the founding Managing Director of ACCESS Health International.

COVER STORY

staff and improve efficiency in the delivery of services. Governments in emerging markets are now looking at means to purchase services from the growing private sector. ACCESS Health works with eight countries, which are part of a Joint Learning Network 1 . These countries have introduced health financing reforms,

The government needs to access information about the available resources in the private and the public sector in order to design health financing reforms.

where government purchases healthcare services from the public and private sectors. We organise learning programmes in these countries in areas such as the use of technology to improve transparency and on performance incentives to providers. We are looking into the expertise that is needed to develop these systems in India. We have identified two critical areas: Access to information and capacity- building. The government needs to access information about the available resources in the private and the public sector in order to design health financing reforms. There is also a need to build capacity to become a strategic purchaser – a purchaser that contains costs and catalyses quality improvements in health services. This shift in government focus needs to be gradual as it requires new skills. Mistakes can result in more harm than good with malpractice and cost escalation. In this regard, we are working to provide information on public-private partnerships and training in health financing to the government and private sector. The opportunity for improved quality and productivity of care through strategic purchasing by the government also requires support to providers. It is critical that management capacity is built among providers to respond to increased demand for more and better quality services. Reforms in health financing are often motivated to increase competition. However, there are examples where the demand for services rapidly increases with reform but the healthcare providers are not ready to meet the demand and quality standards. Management of healthcare facilities is a major issue. Even the larger private hospitals struggle with process management

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ISB INSIGHT

and ineffi ciencies. For example, the outpatient waiting time for a consultation is often four to six hours. This same time frame applies to the discharge time, which is the amount of time taken after the doctor has seen the patient until the papers are in order and the patient actually leaves. We are working with hospital teams to build their process-management capacity. We introduce process improvement programmes and continuously measure the performance. The objective is to build capacity of these teams and also to generate evidence on process improvement initiatives in hospitals. The evidence and data should later inform purchasers of healthcare services, such as the insurance schemes to develop performance incentives.

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There are many questions regarding the future of the emerging, publicly-funded health insurance programmes in India. We believe the government can improve access to care through strategic purchasing of services from private and public providers. We also believe there is an opportunity to catalyse quality improvements and cost-containment by addressing the issues of information asymmetries. This work has started at the tertiary level of care but we must continue to experiment to address the huge need for quality primary care services. This is a universal problem but with the use of technology and a willingness to experiment, India has an opportunity to develop world-class solutions.

1 www.jointlearningnetwork.org

has an opportunity to develop world-class solutions. 1 www.jointlearningnetwork.org ISB INSIGHT 15 COVER STORY
Cover Story
Cover Story

Doing More with Less:

Lessons from a Doctor

Cover Story Doing More with Less: Lessons from a Doctor Dr Devi Prasad Shetty is the
Cover Story Doing More with Less: Lessons from a Doctor Dr Devi Prasad Shetty is the

Dr Devi Prasad Shetty is the founder of Narayana Hrudayalaya, a hospital specialising in cardiac and cancer care in Bangalore. Established in 2001, the hospital has since grown to become the first centre for artificial heart transplant in Asia. Along with the government of Karnataka, Dr Shetty was also instrumental in designing a cheap, yet comprehensive insurance scheme for the poor farmers of the state. Professors Lawton R Burns and Stephen M Sammut from the Wharton School, talk to Dr Shetty about his initiatives and how he utilises his resources to have maximum impact.

Is India’s healthcare system making progress in reaching the general needs of the Indian society?

We have made great progress in terms of cost and quality. In 1989, I left England to begin my career in Calcutta. In those days, heart surgery used to cost R140,000. However, today we are able to do the heart surgery for R80,000 to R90,000. So, in twenty years, the cost has come down by nearly 50%. As for quality, the outcomes in secondary and tertiary Indian hospi- tals are very good. But this care is reaching perhaps less than 20% of the population. 80% of people really do not have such access. We also haven’t made much progress in primary healthcare.

What accounts for this remarkable improvement in quality?

We produce the largest number of doctors, nurses, and medical technicians in the world. Our medical

education is also aligned with Western education standards. There’s a tradition of young doctors going to the US, Europe, or Australia, soon after graduation, to receive training and then coming back with a lot of knowledge about high standards of healthcare delivery. This has been the single most important reason why we are far ahead of China in terms of tertiary level healthcare. But at the level of primary healthcare, China’s indices are much better than ours

healthcare in India?

We are one of the few countries in the world where a nurse who has 20 years of experience in the ICU (Intensive Care Unit) managing critical care patients is still not legally allowed to give an intravenous injection. All over the world, there are two levels of health practitioners below the doctor, with various degrees

and titles, who can take care of primary healthcare. This is something that should be
and titles, who can take care of primary healthcare. This is something that should be

and titles, who can take care of primary healthcare. This is something that should be implemented in India also.

trained healthcare professionals?

No, not only trained. If you go to the US Bureau of Labor Statistics, out of the 20 fastest growing occupations in the US, 16 are in healthcare. Those 16 occupations in healthcare do not exist in India. We do not even have a training programme because the entire thrust is on doctors. We have failed to develop and grow an alternative medical workforce to serve the people. I wouldn’t say it’s a manpower shortage. The government has to play a more pivotal role in promoting para-medical education.

What are the principal reasons why the costs have fallen so dramatically over the last 20 years in cardiac surgery?

It’s the volume. India does close to 100,000 procedures a year. A few hospitals have suffi ciently large infrastructure to do about 30 to 35 heart surgeries a day. When you do that kind of volume, your outcomes get better and your costs go down. The bulk of the cost in healthcare is the R&D cost. The actual manufacturing cost is very small. So with higher volumes, the vendors can cover their costs. The more procedures you do, the more effi ciency you allow at every step of the process, including manufacturing. Moreover, last year we implanted the largest number of heart valves in the world – so the valve companies give us a better price on the valves.

Health City?

We are in about ten cities now. In Bangalore, we have a campus with 3,000 beds and a 1,000-bed heart hospital which has the infrastructure to perform 60 major heart surgeries in a day. We have reached up to

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heart surgeries in a day. We have reached up to Cover Story Dr Devi Shetty currently

Dr Devi Shetty

currently treat about 8,400 outpatients per day. Our target is to treat 12,000 outpatients a day.

If I recall correctly, it’s the outpatients who pay and

Yes, exactly, because the margin on the outpatient side is about 80%, whereas the inpatient care centres have little margin.

You mentioned ten health cities. Are you going to replicate in the other nine cities what you have in Bangalore?

We will have different models. We have built large health cities in various state capitals. We are in talks with another state where a new government has taken power to build small hospitals. We are going to build six mini specialty hospitals adjacent to a large district headquarters hospital where we will put a CT scanner, an MRI unit, a catheterisation lab, and facilities for dialysis. But we will only have 40 critical care beds. Patients will come to our buildings for an angiogram, angioplasty, cardiac surgery, or a brain operation, and recover back in the government hospital.

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major heart surgeries a day and draw patients from

What are the most interesting experiments you are now

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countries. We also have 24 operating rooms and

running in these cities?

300 critical care beds.

We have a 1,000-bed heart hospital, 1,200-bed cancer hospital, a large eye hospital, and a large orthopedic centre. We have four hospitals in one campus and

ISB INSIGHT

We want to reduce the cost of heart operations to $800, without compromising on quality. Our hospital is accredited by the Joint Commission in the US. Today, we are able to do the heart surgery for $1,800, which is our break-even point. But we want to reduce the cost to $800 from the point of admission to the point of discharge. It’s not the surgery cost alone.

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Cover Story

All over the world, there are two levels of health practitioners below the doctor, with various degrees and titles, who can take care of primary healthcare. This is something that should be implemented in India also.

We are going to reach about 50-60 surgeries in a day. It is entirely based on volume. Volume improves the results and the outcomes are better. Surgeons get better; patient’s length of stay comes down, and the cost goes down.

Do your surgical teams specialise in just one type of operation?

Yes they specialise, but not really in one operation. The majority of our senior doctors do only three or four types of operations. Our young surgeons do about 10-15 types of operations.

So it’s economies of scale plus specialisation and focus in a small number of areas?

Yes. Every day, you keep improving. It is a learning process with continual improvement.

Within the health city, are the three or four different specialty hospitals self-contained, or do they share certain services?

We share everything. We have one imaging centre, one blood bank, one clinical laboratory, one finance team, and one management team. Everything is common.

The only thing that is different is the building. There

is one building specialising in heart treatments, one for cancer. The costs will only come down when we share resources.

Have you developed outcomes and quality measure- ments as you’ve built up the volume?

Yes. It’s a part of the Joint Commission requirement. We always evaluate our results. We evaluate our financial performance on a daily basis and our outcomes on a weekly basis. We keep a daily account

of profit and loss. At 12pm, all the senior doctors get

a message on their mobile phone with the facility’s profit and loss for the previous day.

Could you describe the insurance plan you developed for your patients?

Eight years ago, there was a famine and the farmers lost their capacity to get healthcare. So we launched an insurance plan for the farmers with a premium of

only $0.11 a month. It only covered surgery. There are 1,650 varieties of surgery done on the human body, and we covered all those operations for $0.11 per month. We enrolled 1.7 million farmers paying $0.11 each. That programme became very successful. Now we have four million farmers who pay a slightly higher premium of $0.22 a month, and these farmers comprise about 10% of our patient load. That is doing very well. We are trying to work with other state governments to launch a similar scheme in those places.

How do you collect the money?

Through the cooperative societies. They sell milk or sugar cane. That helps manage the administrative costs of collecting money from a large patient base.

What can you tell us about the different health cities you will establish?

Right now, we are in ten cities, but we don’t have big health cities yet in these places. The next health city is coming up in Ahmedabad where we have 37-40 acres of land. We are just starting with the first 500-bed hospital. Overall, we want 5,000 beds, ten hospitals with 500 beds each. In Kolkata, we have about 750 beds. Then we have three more hospitals but they are pretty small hospitals. It’s about 200 to 300 beds. We are also looking at doing something in Delhi.

out of your current operations or do you use private equity?

Approximately 25% of the equity is held by a private equity company; the majority equity is family held. That is not going to change. Now we are looking at some degree of debt and accrual. Some health cities also may be developed as joint ventures with strategic partners. In the last year, the business model has changed dramatically. We have started working with some real estate people to build a hospital, and with a diagnostic equipment company to provide the medical equipment. We will pay them for the use of the building and the equipment, but do not own either. In this way, with very modest cash, we will be able

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to commission large-scale projects and scale them up across the country. We are able to acquire the land from the government for a small amount of money.

What is your strategic vision for the new health city you are building in the Cayman Islands?

The Caribbean region, with over 40 million people, really requires a large hospital with about 2,000 beds and a whole range of medical specialties. Today the entire Caribbean region goes to the US for healthcare, which is very expensive for these people. They are not affluent. Our intention is to create a large-scale hospital for them. We also want to build a medical university as well as an assisted living facility as part of the health city.

What impact do you think that will have on medical tourism to India if you set up something closer by in the Cayman Islands?

We don’t believe there will ever be a fl ood of US patients coming to India. It’s the distance that matters.

Do you want people feeling sick to think they have to travel for 20 hours? We believe they have no problem in getting treated by an Indian hospital; but because of the distance, they are reluctant to come. We feel that if there is a hospital close to them, they will be very happy to come there.

Where will the doctors and nurses come from?

We are likely to develop ties with some western hospitals and will contract with premier doctors and nurses from the US. The staff working below them will come from India.

Are there any other regions of the world like the Caribbean where you might establish a similar health city?

We would like to create about three or four health cities around the US border. After the Cayman Island project is through, we might look at the Bahamas and Virgin Islands. We just want to build one health city and get it going. Then we will see.

We just want to build one health city and get it going. Then we will see.
We just want to build one health city and get it going. Then we will see.
We just want to build one health city and get it going. Then we will see.
We just want to build one health city and get it going. Then we will see.

ISB INSIGHT

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LEADER SPEAK

Cover Story

Cover Story Using Operations Management to Improve Healthcare Access BY MILIND SOHONI AND SARANG DEO networks

Using Operations Management to Improve Healthcare Access

BY MILIND SOHONI AND SARANG DEO

networks in resource-limited countries.

Introduction

A major constraint in tackling diseases with high

socioeconomic burden (e.g., Tuberculosis, Malaria, HIV) in many resource-strapped economies is the unavailability of appropriate diagnostic devices that can inform clinical decisions in a timely manner. Existing devices to diagnose these conditions are usually bulky; require skilled technicians and well- developed infrastructure such as uninterrupted power supply, air conditioning, and sterile environment. These requirements naturally result in formation of centralised diagnostic networks, wherein samples are collected from remote clinics and transported to centralised laboratories and results are communicated back to the clinics. This centralised structure typically

leads to inordinate delays between sample collection and return of results to the facilities (termed as

turnaround time) and consequently to patients, which

in turn leads to poor patient retention and health

outcomes. In response to these challenges, several small and portable devices capable of diagnosing a variety

COVER STORY

of diseases such as Malaria, Tuberculosis and HIV at the point-of-care (POC) targeted at resource-limited settings, are under development at various academic research laboratories around the world 1 . On one hand, these POC devices obviate the need for complex supply chain for samples and results. However, on the other hand, they are less accurate due to technological limitations. They are also not as inexpensive and easy to operate as “strip tests” such as the ones used to monitor blood sugar levels or detect pregnancy.

Our Model:Incorporating Access vs. Accuracy Tradeoff with Resource Limitations Very few studies have conducted rigorous comparative evaluation of POC devices with laboratory-based methods. Moreover, these studies employ conventional cost-effectiveness approach to analyse the trade-off between lower device accuracy and lower operational cost 2 . As a result, they suffer from two main drawbacks with regard to device adoption and implementation within the healthcare network.

ISB INSIGHT

First, they fail to incorporate a key benefit of POC devices – improved access or reduced turnaround time to receive test results – which can lead to increased patient retention, improved treatment efficacy, reduced disease transmission and mortality depending on the disease. Second, the studies do not explicitly account for budgetary constraint, which precludes placement of these POC devices in all facilities in practice. We overcome these drawbacks by developing an operational model for network-level effectiveness of POC devices, which incorporates the trade-off between improved access and potentially reduced accuracy. Quantifying the change in access due to POC devices and understanding the effectiveness of deploying such POC devices in resource-constrained health networks, requires careful attention to network externalities implicitly imposed within healthcare networks. Some of the externalities are as follows:

Firstly, placing a POC device in one facility could significantly affect the turnaround time at other

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understand, and model, the operational dynamics of such healthcare service networks and analyse their interaction with the POC device accuracy. In this research effort, we measure the overall health effectiveness of the network, after placement of POC devices, by the number of quality adjusted life years saved due to treatment, which depends on the number of patients connected to treatment. For clinics with POC devices, we assume that the results are provided with minimal delay and that all patients are connected to care. For clinics that do not get a POC device, i.e., that continue to remain with the centralised laboratory system, we model the number of patients connected to care as a decreasing function of the turnaround time, to capture patient attrition over time. The turnaround time for the centralised laboratory system depends on the operational dynamics of the healthcare network and typically comprises three main components: time to form batches at clinics before dispatching them to the laboratory (i.e., time to collect enough test samples

The policy maker might be better off implementing a lower accuracy device in smaller facilities.

facilities that do not receive the device due to a modified load at the central laboratory. Secondly, for efficient operation, the central laboratory waits to fulfill the minimum requirement in sample numbers before conducting the tests. Consequently, when faced with a budget constraint (in terms of number of facilities that can receive the POC device), healthcare service providers (or a social planner) must carefully select the location of new POC devices to maximise the overall network level effect on accessibility and thus, health outcomes.

Where in the Health Network to Place the POC Device? That is the Question! We study the social planner’s problem of maximising the network-level effectiveness by allocating a fixed number of POC devices among candidate health facilities 3 and develop an optimisation model to characterise the placement decision. This is important because just having a POC device in a location does not automatically translate to increased effectiveness in healthcare delivery because there could still be inordinate delays for clinics associated with the central laboratory To this end, it is necessary to

ISB INSIGHT

21

to be shipped to the centralised lab), transportation time from the facility to the laboratory and back, and the time spent in the laboratory for all the samples to be analysed (typically, samples are collected and processed in large batches at centralised facilities to keep costs low). The main sources of uncertainty in this environment are the patient arrivals to the clinic and the availability of transportation opportunities. These uncertainties, in turn, also induce variability in the laboratory operations thereby further adding to the turnaround time.

We capture the resulting operational dynamics of the laboratory using a complex queuing model with both batching and congestion effects. The time spent in the laboratory should increase with reduced sample load due to the batching effect whereas it should decrease due to congestion effect. We then embed this queuing model in an optimisation model, which aims to maximise the network level effectiveness by deciding the appropriate placement of the POC devices. We introduce several modeling innovations and approximations to gain tractability while still capturing the essential elements of the underlying

COVER STORY

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Blood

Sample

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Figure 1 : Schematic representation of HIV early infant diagnosis network

trade-off between increasing access and maintaining accuracy.

We then apply our model to a case study of POC devices for Early Infant Diagnosis (EID) of HIV. Figure 1 illustrates such a centralised laboratory network for diagnosing HIV infection in infants. We populate our model using operational data on an EID network from an East African country, technical data on a POC device being developed at a US university, and clinical data from secondary sources in the medical literature. We use our modeling framework to evaluate simple rules of thumb for device placement, typically used by healthcare practitioners such as allocating devices to facilities with largest disease prevalence or to those with largest patient load. We find that the relative effectiveness of these thumb rules compared to the optimal solution depends on both the device characteristics (accuracy) and the network characteristics (level of congestion). Specifically, we characterise conditions under which these relatively simple thumb rules are, in fact, optimal. For example, allocating POC devices to facilities with the highest prevalence rate is optimal if the facilities

the highest prevalence rate is optimal if the facilities Sarang Deo is Assistant Professor of Operations

Sarang Deo is Assistant Professor of Operations Management at the Indian School of Business (ISB).

Management at the Indian School of Business (ISB). Milind Sohoni is Associate Professor of Operations and

Milind Sohoni is Associate Professor of Operations and Management Science at the Indian School of Business (ISB).

have similar patient volume and the sensitivity of the POC device is sufficiently high. Similarly, allocating POC devices to facilities with the highest volume rule

is optimal if the facilities have similar prevalence rates and the service rate of the laboratory is sufficiently small. Moreover, our analysis also provides relative ranking of these thumb rules for different device and network characteristics. For instance, placing the POC devices in facilities with the largest patient load outperforms placing them at facilities with the largest prevalence if the accuracy of the device is sufficiently high and vice versa. This implies that the policy-maker might be better off implementing

a lower accuracy device in smaller facilities. Finally,

our model and analysis could also be used to quantify the magnitude of potential welfare loss resulting from implementation of these practice-based thumb rules. Overall, in this research effort we highlight the importance of jointly optimising over-allocation of POC devices and reassignment of remaining health care facilities to the centralised laboratories, i.e., accounting for the network externality imposed when POC allocation decisions are made. While, in our experience, these decisions are not necessarily taken jointly by healthcare practitioners, integrating operational dynamics in such decision-making can vastly improve health outcomes, especially in resource- constrained environments.

COVER STORY

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ISB INSIGHT

ISB INSIGHT  23 Features 24 27 30 HIRING AN OUTSIDER CEO: CHANGE IS NOT

ISB INSIGHT

23

ISB INSIGHT  23 Features 24 27 30 HIRING AN OUTSIDER CEO: CHANGE IS NOT ALWAYS

Features

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ISB INSIGHT  23 Features 24 27 30 HIRING AN OUTSIDER CEO: CHANGE IS NOT ALWAYS

HIRING AN OUTSIDER CEO:

CHANGE IS NOT ALWAYS GOOD

LIFE AFTER M&As

HARNESSING THE POWER OF EMPLOYEE BLOGS

HIRING AN OUTSIDER CEO: CHANGE IS NOT ALWAYS GOOD LIFE AFTER M&A s HARNESSING THE POWER

FEATURES

Features

Hiring an Outsider CEO:

Change is Not Always Good 1

BY NANDINI RAJAGOPALAN

Do firms really benefit when they hire an outsider as the CEO? Professor Nandini Rajagopalan presents her research findings.

More than one-third of Fortune 1000 companies are run by CEOs recruited from outside the firm. Outsider CEOs are often hired based on reasons such as “the firm needs a fresh start” or that the firm needs someone to “shake things up.” Firms favour outside CEO candidates because “outside succession” is equated to “organisational change,” which is further equated to ‘‘better performance.” Generally speaking, CEOs recruited from outside the firm are more likely to make bolder changes than CEOs promoted from within the firm because outside CEOs bring new perspectives and experiences, and they are not constrained by prior commitments, formal or informal, with the firm’s internal stakeholders (especially, its employees). As a result, they are less likely to hesitate to make changes, especially painful changes such as cost-cutting, retrenchment and downsizing. However, the dramatic, bold strategic changes initiated by outsider CEOs are not always beneficial from the viewpoint of firm performance. Too often, bolder changes are applauded because they are equated with adaptability and flexibility. Instead, empirical research shows that bolder changes can be detrimental to the firm’s performance because they may deviate from the firm’s core competences. The disruptive effect of bolder strategic changes can be further amplified if the firm’s leadership lacks a good understanding of the firm’s strengths and weaknesses, which may lead them to initiate large- scale but inappropriate strategic changes. Relative to CEOs promoted from within the firm, those recruited from outside the firm typically lack a good

FEATURES

understanding of the firm’s core competences as well

as its resource constraints and vulnerabilities. While

outside CEOs may indeed initiate bolder changes than inside CEOs, the relative performance consequence

of strategic changes under their leadership are often

unfavourable. Recent, large-sample empirical studies have found that outside CEO successions often lead to inferior post-succession firm performance as compared with inside successions. For example, outside CEO successions are associated with lower post-succession financial performance than inside CEO successions. To make matters worse, because an outside CEO succession is a disruption to the firm, it is usually followed by turnover of other top management team members. The departure of experienced top management team members can deprive the outside CEO – and the firm – of crucial managerial talent, especially during the critical transition period when the new CEO is developing familiarity with the firm’s resources and constraints, and this can further amplify the negative effect of outside CEO succession on firm performance.

The CEO Relay Race One of my earlier 2 empirical examinations of the

effects of new CEO origin compared the performance consequences of relay CEO succession – in which

a newly-appointed CEO has been in the Chief

Operating Officer and/or President position and worked with the predecessor CEO in advance of the actual succession event – with the performance effects of non-relay inside successions (“horse race”)

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and outside successions. We found that relay CEO successions, on average, outperformed non-relay inside CEO succession and outside successions. This effect was particularly stronger when the firm had experienced poor performance in the time prior to succession. The beneficial effects of relay CEO successions may reflect the fact that a relay CEO succession process offers valuable learning benefits to both the firm and to the new CEO. On the one hand, the new CEO has the opportunity (prior to actually assuming the CEO position) to carry out some of the tasks of the CEO position, thereby acquiring and enhancing position-specific knowledge and developing broader leadership skills consistent with the position. On the other hand, the firm can conduct a focused and thorough assessment of the candidate’s cognitive and interpersonal capabilities, and continuously update its evaluation of whether the candidate’s capabilities match the needs of the firm. The firm can then use this evaluation to subsequently decide whether or not to promote the candidate. Thus, a relay CEO succession process can reduce the performance risks after succession, both for the candidate as well as the firm. One could argue perhaps that the relative disadvantage of outside CEOs is temporary and may very well disappear over time. It may also be argued that outside CEOs’ advantage lies in their ability to break from the firm’s past strategies and thus make the firm more adaptive. So, what does our research into the long-term consequences of choosing insiders versus outsiders for the CEO position tell us? In more recent work 3 , we examined the entire tenure histories of nearly two hundred US manufacturing industry CEOs who left their positions (voluntarily or involuntarily) over a six-year time period. We found that in the first three years of tenure, strategic changes under the leadership of an inside CEO and strategic changes under the leadership of an outside CEO yielded essentially the same level of performance in terms of return on assets (ROA). However, after three years, bolder strategic changes initiated by outside CEOs were more disruptive and detrimental to firm performance than similar changes implemented under the leadership of an inside CEO. When it comes to strategic change, outsiders typically are good at rapid cost-cutting and divestment. Also, because an outside CEO is typically brought in when a firm is not performing well, he or she tends to have a walk-in mandate for change. As tenure increases, obvious opportunities for cost-cutting and

Features

divestment dry up. Inside CEOs, presumably due to their deeper knowledge and understanding of the

firm’s strengths and weaknesses, are more likely than outside CEOs to initiate and implement strategic changes that are consistent with the firm’s resources and capabilities and are more likely to enhance the firm’s long-term competitive advantage and growth.

A troubling conclusion from our research is that

the disadvantage of outside CEOs relative to inside CEOs is not temporary, and tends to persist, and even worsen, over time.

More Risk, Fewer Returns Outside succession also poses greater career risk for the CEO than inside succession. In another large- sample, empirical study, my research collaborator 4 examined why some newly-appointed CEOs are fired after a short tenure (i.e., less than three years) and found that under the same performance conditions, outside CEOs on average are nearly seven times more likely to be dismissed with a short tenure than inside CEOs. An important reason, she argued, is that outside CEO successions are associated with a greater level of information asymmetry between the board of directors of the hiring firm and the CEO candidate. In other words, the CEO candidate knows more about his or her true competency than the board of directors. As a result, in an outside succession, the board of directors is more likely to hire the wrong

person, and attempts to rectify the situation by firing the CEO within a short time period following the succession. The greater career risk of outside CEOs has two other related outcomes, with further adverse impact

the firm. First, the hiring firm is generally forced to pay greater compensation and severance packages to outside CEOs in order to compensate them for their greater career risk. Among large US companies, outside CEOs on average earn 30-40% more non-contingent compensation (i.e., salary plus bonus) than inside CEOs. The compensation premium is even greater for outside CEOs without industry

on

premium is even greater for outside CEOs without industry on experience than outside CEOs with industry

experience than outside CEOs with industry experience, because outside CEOs without industry experience face even greater career risk than those with industry experience. To further reduce their career risk, hiring firms need to pay outside CEOs expensive severance

Nandini Rajagopalan is Captain Henry Simonsen Chair in Strategic Entrepreneurship and Professor of Management and Organisation, Marshall School of Business, University of Southern California, and a visiting scholar at the Indian School of Business (ISB).

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A troubling conclusion from our research is that the disadvantage of outside CEOs relative to inside CEOs is not temporary, and tends to persist, and even worsen, over time.

packages in case they are dismissed. Indeed, the terms of these severance packages are typically negotiated at the time the CEO is hired! This phenomenon was particularly evident in the well-publicised exit of Carly Fiorina, the former CEO of Hewlett Packard, who walked away with a severance package worth $42 million when she was ousted in 2005. Second, outside CEOs are more likely to be dismissed, especially if they succeed a predecessor who was also dismissed. This may lead to a vicious cycle in the firm’s CEO succession process. Research shows that if a predecessor CEO was dismissed, the successor CEO was two times more likely to be dismissed, as compared with a CEO whose predecessor voluntarily left the CEO position. This is because the dismissal of the predecessor CEO often leads to the bypassing of a normal succession process and forces the board to select another new CEO in an unplanned manner. In addition, dismissing a predecessor CEO usually occurs under pressure from shareholders. As a result, the subsequent succession process is driven by the desire to quickly restore investor confidence rather than by

a careful consideration of the CEO competencies the firm really needs. In conclusion, outside CEO successions, high CEO turnover rate, and short average CEO tenure appear to go hand-in-hand. The bias in favour of outside CEO successions may have directly contributed to the continuing instability in the corporate suite and detrimental effects on firm performance.

1 For a more detailed review of empirical evidence on the CEO succession planning process and its outcomes see the following publication. Zhang,Y., and Rajagopalan, N., “CEO succession planning: Finally at the centerstage of the boardroom,” Business Horizons, 2010, 53, 455-462. This article contains (edited and summarised) excerpts from the original article.

2 Zhang, Y., & Rajagopalan, N. (2004). "When the known devil is better than an unknown god: An empirical study of the antecedents and consequences of relay CEO successions". Academy of Management Journal, 47(4), 483-500.

3 Zhang,Y., & Rajagopalan, N. (2010). "Once an outsider, always an outsider? CEO origin, strategic change, and firm performance". Strategic Management Journal, 31(3), 334-346.

4 Zhang, Y. (2008). "Information asymmetry and the dismissal of newly appointed CEOs: An empirical investigation". Strategic Management Journal, 29(8), 859-872.

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Life After M&As

BY N R PRABHALA

Features

Are M&As about empire-building or are they based on a rational motive? What is the fate of the acquired assets after M&As? This article, based on a research paper "Post-Merger Restructuring and the Boundaries of the Firm" by Professors Gordon Phillips, N R Prabhala, and Vojislav Maksimovic, all from the Robert H Smith School of Business, University of Maryland, explores these questions along with the implications of M&As on the existing assets of the acquirer. The research paper is forthcoming in the Journal of Financial Economics.

Mergers and Growth Mergers are a fast way for firms to grow. Through mergers, firms can rapidly expand market presence, acquire new strategic capabilities, or deploy in-house talent to quickly exploit new business opportunities. Mergers are also one of the most significant investment decisions made by firms. The worldwide M&A volume for 2010 exceeded $2 trillion. The Indian M&A market has also grown rapidly with several multibillion dollar deals such as the Tata-Corus, Tata-British Salt and Hindalco-Novelis acquisitions. Similar growth is also expected for the broader Asia-Pacific region. In a 2010 Bloomberg survey, over 45% of financial markets have picked Asia-Pacific as the major growth hub for M&As in 2011 and beyond.

What Happens After a Merger? Although there exists vast literature on M&As, relatively little is known about what the firms do with the assets acquired in a merger. Questions remain such as: Do acquirers keep most assets, or do they sell and close significant parts of the newly-acquired assets? What kinds of assets do they tend to keep? What is the performance of the kept and sold assets and how does this impact an acquirer’s existing assets? Our study provides insight on these questions using a sample of over 1,300 US M&As in the manufacturing sector from 1980-2000.

Post-Merger Restructuring: Extent and Direction First, we found that acquiring firms do not passively retain assets after a merger. Rather, a merger starts a vigorous restructuring process that involves significant

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sell-offs and closures. 46% of the target’s plants are sold or closed within three years of a merger. These results do not support the view that mergers are driven by acquiring managers’ tastes for large empires. If this were the case, we would expect passive absorption of newly-acquired assets from a target into an acquirer’s existing portfolio. Instead, we see sell-offs and closures of close to half the acquired plants.

Efficient firms appear to acquire efficient targets and generate further improvements in performance

Second, we found that acquirers selectively keep or dispose off assets based on the fit of the assets and an acquirer’s capacity to manage the new assets successfully. For instance, acquirers are more likely to retain target assets if they are related to their own existing businesses or core competency. On the other hand, unrelated assets that do not fit are likely to be sold off. A critical determinant of the asset retention decision is the acquirer’s skill in running peripheral businesses. Acquirers who are less efficient in running their non-core, peripheral businesses are likely stretched. They cannot easily absorb and run new acquisitions efficiently. On the other hand, acquirers who are highly productive in their peripheral businesses have the capacity to take on new businesses. These firms tend to retain more assets after a merger. Industry booms amplify the role of peripheral

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skill. When industry demand surges, both efficient and less-efficient producers benefit. However, the more- skilled firms now have greater comparative advantage compared to their less-skilled counterparts. Thus, plant retention is more likely when an acquirer is skilled and the plant is in an industry that experiences an unexpected shock. The patterns of sell-offs and retention indicate that after acquisitions, firms reset the boundaries of their operations in a manner that exploits their operating side skills at growing and managing their newly-acquired assets. While the above tests show that operating-side skills shape an acquirer’s boundaries after a takeover, one question is whether the financing side matters. We found that the financing side also affects post-merger restructuring. Plants are less likely to be sold when acquirers are cash rich or have lower levels of debt. Financially-constrained firms are more likely to sell target assets to generate scarce resources to pay for the target businesses that they intend to keep. Retention is more likely when acquirers pay for targets in cash and less likely in stock-financed acquisitions.

Post-Merger Performance of Kept and Sold Plants We examine the performance changes of the plants transferred in acquisitions after the merger takes place. Are acquisitions followed by improved or worse performance? To examine this issue, we track plant productivity over three years after an acquisition is consummated. Here, we find sharp differences between plants retained by acquirers and the sold-off plants. Plants transferred in an acquisition and kept by an acquirer show fairly sharp increases in productivity. The performance changes are economically significant. For instance, the average increase in total factor productivity, which is the value of the output minus the inputs required to produce the output per industry norms, increases by 6.3% over the three years after an acquisition. What types of acquisitions result in greater performance improvements? The efficiency changes are greater when both the target and acquirer are relatively efficient. In other words, efficient firms appear to acquire efficient targets and generate further improvements in performance. The performance changes are quite different for plants sold off after the acquisition. The change in total factor productivity of sold plants is 1-2%, only about one-third to one-half of that for kept plants. Thus, acquirers appear to shed assets that they have no comparative advantage in running and only keep

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assets that they can improve operationally. It is worth stressing that while the productivity changes of sold plants are small, they are nevertheless zero or positive on average. There is little evidence of real-side value destruction in these plants. The performance results of sold plants come down against the “bust-up” view of mergers. Under this view, unproductive assets are trapped in targets unwilling to shed these assets. M&As work by liberating

Mergers are not about passive absorption of targets. Rather, an M&A sets in motion a vigorous restructuring process in which a large proportion of the target assets are hived off.

trapped assets. If this were the case, we would see particularly pronounced improved performance for assets acquired and sold off. However, the significant performance improvements are concentrated in kept plants. The evidence is more consistent with acquisitions being driven by acquirers redefining their boundaries and expanding scope to exploit their comparative advantage. We also examine acquisitions conducted by serial acquirers, who may have particularly strong tastes for empire-building with less regard to operational improvements. We find no evidence that repeated acquirers are more prone to empire-building. Their later acquisitions are in fact more likely to be sold off, and the kept plants in later acquisitions show greater improvements in performance. Repeat acquirers appear to learn the acquisition game and improve over time.

Do Acquirers’ Existing Assets Suffer or Benefit from M&As? We consider the existing assets of an acquirer. A common concern with acquisitions is that they distract management and divert attention from their core businesses. Senior managers of acquirers spend a lot of effort in post-merger integration of the newly- acquired assets. This attention to the new acquisitions may result in step-motherly treatment of an acquirer’s old assets, which may suffer declines in performance.

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ISB INSIGHT

These declines could offset the gains from improving the kept plants in an acquisition. On the other hand, the restructuring after a merger could improve the match between the remaining kept assets and the existing assets of an acquirer. We find evidence for

the latter view. The existing assets of an acquirer show

a significant improvement in performance after an

acquisition. Once again, among the existing assets, there is an asymmetry between the kept and sold plants. Although both plants have positive performance changes, the kept plants show greater improvement in productivity compared to the sold plants. The asset complementarities and synergies between the existing and the newly-acquired plants appear to outweigh any effects due to distractions from the acquisitions.

The Bottom Line: What Do Managers Need for Successful M&As? What lessons do the results convey in terms of thinking about mergers and acquisitions? There are two major takeaways. First, successful M&As appear

to be driven primarily about the potential for real side synergies and complementarities. As Amit Kalyani, Executive Director, Bharat Forge, says, “…Each acquisition gave us something new – access to the new passenger car market, to the global market for aluminium components, to the US pick up market,

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to the engine business in Europe… To them, we offer

technology, money, and a strategy to grow their business worldwide.” As Kalyani’s statements indicate, M&As are primarily about expanding firms’ boundaries to exploit organisational skills and capabilities. M&As are not really about expansive empire-building by managers with a taste for large size. Second, the results suggest that managers need a somewhat unexpected skill set to be successful at M&As – skill at restructuring targets. Mergers are not about passive absorption of targets. Rather, an M&A sets in motion a vigorous restructuring process in which a large proportion of the target assets are hived off. Firms tend to retain plants in which they have a comparative advantage and improve their productivity but they tend to sell or close other plants. Given the extensive restructuring that follows mergers, successful acquirers should be skilled at restructuring – in deciding what to keep, what to sell, what to close, and how to extract improvements and synergies from what is kept – all within a short period of time. The more effective

the planning and execution of the post- merger restructuring, the more likely it is that an M&A is successful.

the more likely it is that an M&A is successful. N R Prabhala is Associate Professor

N R Prabhala is Associate

Professor of Finance

at the Robert H Smith

School of Business,

University of Maryland and a visiting faculty

at the Indian School of

Business (ISB).

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Features

Harnessing the Power of Employee Blogs

BY RAM GOPAL

How can companies use employee-blogging to their advantage? This article, based on research conducted by Professors Ramesh Sankaranarayanan and Ram Gopal of University of Connecticut, Professor Rohit Aggarwal of University of Utah and Professor Param Singh of Carnegie Mellon University, examines the positive offshoots of employee-blogging and presents ways in which companies can overcome the challenges associated with such an open forum of dialogue.

Let them Blog! Knowledgeable employees have always been critical to the success of firms. When firms connect the creative energies of such employees with the needs of important stakeholders such as customers, investors and prospective employees, the firms as well as their stakeholders win. Encouraging honest blogging by employees may be an effective way to attain this goal. Jonathan Schwartz, ex-CEO at Sun Microsystems, expresses the importance of employee blogs in these words, “If you want to lead, blog…We talk about our successes - and our mistakes. That may seem risky. But it’s riskier not to have a blog.” IBM and Microsoft, for example, have well over 2000 employee blogs, and about one in ten employees at Sun Microsystems, maintains blogs. In this article, we discuss how firms can enable meaningful interactions between employees and stakeholders by encouraging employee-blogging. The central premise of this article is that firms need to start a dialogue with their key stakeholders, by letting their employees’ knowledge flow to their stakeholders, and by letting stakeholders’ feedback flow back to employees, in a way that fosters trust and is mutually beneficial to the firm and its stakeholders. Employee blogs are a great way to enable this dialogue, and fill

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a void that advertisements and other more formal

means of communication create. Several companies, especially in the technology industry, such as Google, Microsoft, IBM, and Sun Microsystems, are actively engaging their stakeholders by encouraging their employees to blog.

Honesty Still the Best Policy Our research suggests that in order to fully benefit from employee blogs, a firm should encourage honest blogging by employees, even if it results in some criticism of the firm. Such blogs can fulfill a role that conventional advertisements cannot, which is to

carry out a serious dialogue with stakeholders, with

a high degree of trust. Our insights are based on our

empirical research on data about employee-bloggers of Sun Microsystems (as detailed in our paper in Information Systems Research: “Blog, Blogger, and the Firm: Can Negative Posts by Employees Lead to Positive Outcomes?”). Our research builds upon prior research in social psychology in the area of attribution theory, which has been used extensively in understanding consumer behaviour [e.g. Weiner, B. (2000), "Attributional thoughts about consumer behavior," Journal of Consumer Research 27(3): 382].

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Benefits to the Company Encouraging employees to write honest blog posts, some of which may be negative to the company, could have an overall positive payoff to the company. Honest blogs lead to increased credibility for that employee’s

blog, and increased readership of that blog. This creates an effective medium to communicate the company’s positive messages in a credible and timely manner. We draw upon attribution theory from research in social psychology, to present an intuitive explanation of the mechanisms by which honest blogs lead to increased credibility and a larger readership. Firstly, employee blogs that contain honest criticism about the company are perceived to be more credible with readers. If an employee-blogger writes a positive post about the employer, (that is only to be expected of any employee), a reader attributes that to the constraints imposed on the blogger by the employment situation (the “environment effect” or “situational pressures” in attribution theory). If on the other hand, the employee-blogger writes negative posts, that is clearly unexpected behaviour, the reader attributes the action to the employee’s disposition rather than to the environment effect. The reader may be inclined to think that perhaps this particular employee blogs honestly, rather than simply promote the company’s line. Additionally, such a blogger is perceived as being helpful to the reader. Blogs that are perceived to be honest are more likely to draw a higher readership, as our research reveals. We analysed data from the daily blogs of employees of Sun Microsystems over a three-month period and found that blogs with a higher degree of negative content receive more hits, albeit at a decreasing rate. Therefore, negative posts help a blog draw readership, but beyond a certain point, the effect wears and the readership flattens. When employees are permitted to post honest blogs, over a period of time, this is likely to create

a loyal following, as we discovered from the extent

of RSS feed subscriptions of bloggers at Sun Microsystems. Our research suggests that readers who read such honest blogs tend to return to the blogs more often, share the blogs with their friends (or post

a link to that employee blog on their own blog), and

subscribe to RSS feeds of the blog. Our research suggests three reasons for this behaviour: First, a reader who finds an employee blog useful because it provides an honest and unbiased perspective, reciprocates by sharing it with others. Second, readers may take pride in sharing

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their “discovery” with others. Third, honest blog postings are considered interesting because they are unexpected, and consequently, get a wider publicity on the internet. This increases the blogger’s visibility and following.

Enhanced Medium for the Firm’s Messages The company benefits tremendously from having an army of employees who are credible bloggers, with a significant readership. When there are new developments that the company wants to share with its stakeholders (such as a new product launch, a recruitment effort, or a new corporate initiative), it is much easier to get the word out through the blogs of the company employees. While the negative posts by these employees draw readers, those readers are then exposed to several positive and relevant messages from the company. In our research, we find evidence that increased readership could translate to increased

We find evidence that increased readership could translate to increased exposure to the positive postings contained on the employee blog as well, which could result in a net gain in positive exposure to the company.

exposure to the positive postings contained on the employee blog as well, which could result in a net gain in positive exposure to the company. The benefits flow both ways – readers tend to leave valuable feedback that the company can use to improve its product offering, recruiting practices, vendor management, or any other aspect of its business. All of these benefits could translate to a decreased need for advertising and public relations, leading to tangible cost savings.

Wanted: A Blogging Policy However, companies seeking to harness the power of employee blogging need to overcome some key challenges. They need to create an organisational climate that is conducive to blogging, ensure that sensitive or confidential information is not leaked and lastly, ensure that bloggers maintain a high level of professionalism in their blogs. These points are

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expanded upon in the subsequent paragraphs. Companies need to create a climate that is conducive to employee-blogging, by signaling to employees that blogging is viewed as a valuable activity. Employees that wish to blog should be given mentoring, guidance and time to blog. Contributing to in-house wikis, circulating rough drafts among colleagues, and other forms of exchange of ideas among colleagues, should be encouraged. Companies need to ensure that confidential

information is not leaked, and that employees maintain professional standards while blogging. For example, Michael Hanscom, who used to work at a print shop on Microsoft’s main campus, was fired after he shot some pictures of Mac G5 computers being delivered to the Microsoft campus, and posted them on his blog. In order to avoid such situations, companies must ensure that product-related blogs, new product features and plans are not leaked to competitors. The same applies for sensitive financial information such as cost margins. It must also be

ensured that any financial information revelation is in conformity with SEC (US Securities and Exchange Commission) and other regulations. Companies must also ensure that sensitive HR information is protected. For example, an ongoing controversy in the company

For example, an ongoing controversy in the company Ram Gopal is GE Endowed Professor of Business

Ram Gopal is GE Endowed Professor of Business and Head of the Department of Operations and Information Management in the School of Business, University of Connecticut and a visiting scholar at the Indian School of Business (ISB).

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that is currently under investigation, should not be commented upon, etc. Mark Jen, a Google employee, compared Google’s health policies unfavourably to those of Microsoft and suggested that Google provides extensive campus facilities such as free food, car service, dentist, etc., in order to allow employees to work for as many hours a day as possible. He was fired after just 17 days on the job. Employees should be encouraged to maintain professional standards and abstain from posting frivolous, hurtful, or irrelevant material, writing insensitively about their colleagues or anyone else, and posting wrong or misleading information. Companies can overcome these challenges in several ways. The most important task before a company is to articulate a company-wide employee- blogging policy. Such a policy can be embodied in formal statements and internal guidance manuals, and widely disseminated to employees. Another way is to foster a thriving culture of blogging within the company, through informal peer review, guidance, and feedback mechanisms. Colleagues can look over each other’s shoulders and provide guidance and feedback to each other. Finally, it is important to identify ways to reward effective blogging and discourage ineffective or inappropriate blogging, through a combination of monetary incentives and status incentives, for example, awards, recognitions, promotions, committee memberships, and involvement in high- visibility projects.

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Face to Face 34 POST-CRISES FINANCIAL REGULATION 38 DATA ANALYTICS: THE FOUNDATION OF A SUCCESSFUL
Face to Face 34 POST-CRISES FINANCIAL REGULATION 38 DATA ANALYTICS: THE FOUNDATION OF A SUCCESSFUL
Face to Face 34 POST-CRISES FINANCIAL REGULATION 38 DATA ANALYTICS: THE FOUNDATION OF A SUCCESSFUL

Face to Face

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POST-CRISES FINANCIAL REGULATION

38

DATA ANALYTICS: THE FOUNDATION OF A SUCCESSFUL BUSINESS

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TEACHING INDIA TO LEARN

ISB INSIGHT

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Face to Face

Post-Crises Financial Regulation

In the first of this two-part interview, Professor Krishnamurthy Subramanian talks to Anjan Thakor, John E Simon Professor of Finance and Director of the PhD programme, Olin Business School, Washington University in St Louis, on the current financial climate including banking regulations and the corporate bond market.

Research indicates that there is an explicit government guarantee for public sector banks in India, which might have been instrumental in the banking sector not feeling the effect of the financial crisis as much as their western counterparts. But in good times, this can impose significant costs. While the benefits from the entry of private players and the competition is recognised, the competition might lead to the banking sector becoming more fragile. What are your thoughts on this?

The full force of government guarantees behind the banking sector helps reduce its fragility during times of crises. The other advantage of state-owned banking from the standpoint of governments, is that it

is easier to control the allocation of credit to specific sectors in the economy. But there are also substantial costs to this in the good times and during bad times.

One cost is that state-owned banks, for political reasons and other reasons, can end up misallocating credit in the economy. This can cost economic development.

A second cost is that, state-owned banking can create

a false sense of security. You have to allow certain

poorly-managed banks that don’t have good risk management practices to fail if they experience large losses. They have to feel the force of the market to create the right incentives. Unless you do that, you don’t create the necessary market discipline for banks to be efficient in risk management and allocation of credit. By not allowing state banks to fail, this cleansing role of market discipline is removed and you

FACE TO FACE

have a system that is bloated with inefficient players. The third cost is innovation. In private banking, there are incentives for banks to make profits because that is the way to survive and grow. Often, growth comes through financial innovation. We have seen that in Europe and more in the US. Lastly, because the state-owned banking system is not allocating credit based on market signals, it fails to provide valuable signals to the real sector about where productive investments are.

What are your thoughts about the level of conservatism and aggression on the part of banking regulators?

When you don’t have private banks competing with each other, innovation incentives and incentives to take risks get muted. In a very perverse sense, you may end up sacrificing economic growth rather than facilitating it. It is true that a competitive system can become overly aggressive. But that is where market discipline works. In the short run, excess competition leads to more risk and fragility but in the long run, it actually promotes stability. An analogy is the human immune system. If a child, who is not vaccinated against chicken pox gets the disease, it is fairly harmless and a lifelong immunity is developed. However, the people who do not get chicken pox when they are young, as adults, they often end up getting shingles, which is a more deadly disease. The same applies to the financial system. If you don’t allow a small number of failures or expose the system

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Face to Face

Face to Face Anjan Thakor (left) in conversation with Krishnamurthy Subramanian (right) to short-term fragility, in

Anjan Thakor (left) in conversation with Krishnamurthy Subramanian (right)

to short-term fragility, in the long run you have big

banks to get bigger, they are economies of scope.

crises. The temptation to resist bailouts has been

But I think that the lesson we have learnt is that you cannot let banks get too big or too important. So it

difficult even in the United States, which is sort of

is

both. By too big, it is not only in terms of the size

the benchmark for market discipline. How credible

of

the balance sheet but also the inter-connectedness

is it that such discipline will work in an emerging

of

the bank. There is a new definition in the US of

market context where political forces might be much stronger compared to market forces?

systemically important financial institutions (SIFIs). You want to be able to monitor your SIFIs and intervene in an orderly manner.

You have to allow certain poorly-managed banks that don’t have good risk management practices to fail if they experience large

What are your thoughts on advocates who say that corporate bond markets will not develop unless there are stronger laws and institutions, because arms- length lending depends on the strengths of laws and institutions? Is there a way to leapfrog this process and activate a corporate bond market?

losses. They have to feel the force of the market to create the right incentives.

Well, many of the institutions are important for the functioning of markets, as you mentioned. I

think informal institutions and self-regulation often substitute for formal institutions and government- based laws. So, if there is a strong perceived demand for the corporate bond market to develop, which

I think there is no silver bullet here. In a state in which it seems expedient to bail out banks, it is

is

relatively small outside the US, this is because

very hard for politicians to be able to resist doing that. But the consequences are adverse. To me, the

banking is much more important in the other countries. In the US, bank loans have substituted

only protection against it is a strong regulatory body, staffed by economists, not lawyers or politicians.

for corporate debt. But to the extent that one wants the corporate bond market to develop, if there is

With independence from politicians, you must

a

perceived demand, then I think self-regulation

let these regulators do the right thing. The other measure is to not allow institutions to become too big and important. This comes at a cost. By allowing

should and can work effectively. Even if you think about the US context, it has really built the sequence because typically markets and institutions come up

ISB INSIGHT

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FACE TO FACE

Face to Face

with their own laws. The exchanges on which bonds are traded come up with their own laws. If you do not have traded bonds, then you have implicit rules that govern bilateral transactions. But whether it

worked with them a lot and I think this is a pretty good model. Now, I am not a big fan of the fact that they have GSE status but I don’t think that that is crucial. But even if you do give GSE status to reduce

Inclusion must be encouraged using a different approach – one where you can facilitate and encourage the development of lending cooperatives.

is the private placement market or the public debt market, exchanges and other players can develop their own laws. I would call that self-regulation. If you observe the development of regulation, even in the US, you typically have self-regulation first. Often government regulation steps in when self-regulation fails or when you run into capacity constraints, such as with clearing houses in the US providing de facto (not founded on law) guarantees. When that capacity was exceeded, it was realised that we needed formal deposit insurance by the government. So you could certainly think of self-regulation as one way in which you can get there before formal legal institutions are established by the government.

For India, financial inclusion is a burning issue. Since both priority sector lending and market-based solutions, such as microfinance, have their own problems, what do you think will give a strong push to this process?

Inclusion must be encouraged using a different approach – one where you can facilitate and encourage the development of lending cooperatives. In the US there is something that most finance professors don’t know about – the Farm Credit System (FCS), initially sponsored by the US government. The whole idea was to ensure that the agricultural, fishing and gaming sectors, which were not served adequately by commercial banks, were able to get credit. Commercial banks had little interest in loans to these customers. So it existed as a cooperative and there are now almost 100 such lending institutions called “associations,” which are effectively banks. But they are all cooperatives and are backed by system banks that provide funding. System banks get funded by capital market issues, by the FCS using the Government Sponsored Enterprise (GSE) status. Then, they channel funds to the system. It works pretty well. I have

channel funds to the system. It works pretty well. I have Krishnamurthy Subramanian is Assistant Professor

Krishnamurthy

Subramanian is Assistant

Professor of Finance

at the Indian School of

Business (ISB).

FACE TO FACE

the cost of funding and provide some insurance to the market, that is alright. But I think in India, there are numerous opportunities in these sectors to develop local cooperatives. But local cooperatives have the disadvantage that they don’t have enough financial depth and can easily fail. You need to create a national system like the FCS, so you can create an analogous Indian credit system with many cooperatives. But the pricing of credit here is market-driven, because these are not government-owned institutions. So they have to survive in the market place. They are subject to the risks that normal banks are subject to. They have to do risk management. They have their own board which is basically their customers. The system can then flourish.

On the issue of corporate governance, we found that post Satyam fiasco, there were large scale exits by independent directors because of the perceived risk in the role. If we do believe that independent directors have a role to play as monitors and as advisors then this is possibly a negative outcome. There are costs that have been documented even in the context of Sarbanes-Oxley. For example, small firms have found the cost of complying with Sarbanes-Oxley exorbitantly higher. Given this, is there a regulatory solution?

There are elements of Sarbanes-Oxley that are very good, but I think it went too far. There is some evidence that it has led to fewer IPOs in the US and firms converting to private ownership because they did not want to comply with its expensive reporting. I think that in the Indian context, I am a firm believer that more transparency is good and board independence is very important. We need more board independence in the US than we have at present. You don’t want to enact legislations, regulations or laws that impede their participation. That is why I am a big fan of the business judgment rule. In the US, the courts are very unwilling to rule against a company just because it made a mistake. Basically the

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ISB INSIGHT

courts defer to the independent business judgment of the board and firms that you really have to show deliberate wrongdoing, criminal conduct to be able to pursue legal action successfully against the firm or its directors. I think it is a very wise rule. You have to balance the need for transparency against the cost of excessive disclosure.

In the US and developed markets, there is this issue of de jure independence versus de facto independence. Even independent directors often tend to have social connections. So they may not be really independent. They are appointed by the CEO. These issues are even more exacerbated in the context of an emerging market, where a new relationship matters more than arms-length contracts. Should this be regulated? Or is regulatory failure worse than market failure?

As much as I like independence of the board, there isn’t an easy solution to that problem. So for this notion that we should just make it easier for

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Face to Face

shareholders to appoint directors to board, there is

a counterpoint to that which, if you talk to CEOs,

they will say, “If you give me a hostile board, I cannot function.” Putting people on the board who have an adversarial relationship with the CEO just doesn’t help. You can’t function if you have a board that is constantly playing the role of a policeman as opposed to a partner. And if you look at the governance of the firm, 99% of the time, the partnership is what

is important. But I think that if you take the heavy

hand of regulation and say that the government is going to appoint certain directors, I think you might end up creating this adversarial relationship between the CEO and the board. I don’t think I want to go that far. I understand the other side of the argument that it opens the door for the union to start putting people on the board and then you have problems. So again, I think it is a delicate- balancing act.

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Face to Face

Data Analytics:

The Foundation of a Successful Business

Professor Ram Gopal talks to Galit Shmueli, tenured Associate Professor of Statistics and Information Systems and SRITNE Chaired Professor of Data Analytics at the Indian School of Business (ISB).

There is some confusion regarding the terminologies:

data analytics, data mining, business analytics and business intelligence. Can you clarify if they are synonyms or if they have different meanings?

When I was growing up, there were no such words as there was hardly any data. The term “data mining” started creeping in only as more data started coming in. That is when computer scientists took up data mining, which involved writing more algorithms for sifting through the data. With progress occurring in data mining, the business community began to wonder about what they could do with all the data they had with them. This led to the coining of terms such as “business analytics” and “business intelligence”. Traditionally, data analytics encompassed fields such as statistics, data mining, artificial intelligence, and related areas. The area of business analytics brings all these fields together in a manner that relates directly to businesses and how to add value to them. If we look at “Google Insights for Search” and search these terms over the last few years, we find some very interesting trends. The first thing you will find is that basically, the terms “business intelligence” and “data mining” fluctuate almost together. Both these terms are also very highly searched. Other terms such as “business analytics” and “data analytics”, which are less popular, are also increasingly searched today. Geographically, India is number one in online search for these terms. Singapore takes the second spot. The United States has already got its feet into data

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analytics. There is huge potential in Asia because there is a lot of data that you can sift through and not too many people are doing that yet.

One debate that I see in the literature and in the community is that there seem to be two classes: One, the business intelligence, which is more backward-looking as it is based on understanding what has transpired in the past, whereas business analytics is more forward- oriented as it tells us how we can improve our business processes in terms of strategy and operations. Is that a distinction that you see?

It is indeed a big distinction both in the academic world and in the practical world. For instance, if you think about the tools that are out there, for example, software tools, and those that are geared more towards exploration – they are used to find descriptions of what is going on and for reporting the findings. In businesses at present, if you ask people what kind of analytics they use in their companies, 99% of them will say Excel tables and graphs. So reporting has been there for a long time. But there is a lot more that you can do even just at the level of describing what is going on. This is definitely one part of data analytics or business analytics. The other part is about making predictions, and that is where the term “predictive analytics” comes in. A lot of software vendors use “predictive analytics” when they are incorporating data mining and statistical methods. Statistics actually started with people asking

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Face to Face

Face to Face Ram Gopal (left) in conversation with Galit Shmueli (right) questions about “what causes

Ram Gopal (left) in conversation with Galit Shmueli (right)

questions about “what causes what?” and how we can figure out which factors cause which outcome. This was the focus of statistics for a very long time. As we move into data analytics, we not only want stronger tools to ask these questions but we also want predictive tools for asking, for example, what the next best movie is going to be. A very interesting

denote modeling data from one sample of people to make predictions about another sample. This is called a cross-sectional data set. Since the data sets are of such different nature, we must have different types of algorithms and methods to carry out the prediction or the forecasting. Although forecasting and prediction may require the same approach since

Statistics is about proving what you expect. Visualisation, business analytics and data mining, etc., are about discovering what you didn’t expect.

quote talks about this distinction. “Statistics is about proving what you expect. Visualisation, business analytics and data mining, etc., are about discovering what you didn’t expect.”

One thought that comes to my mind is about the emerging trends of prediction. Is prediction somewhat different from forecasting? What is the relationship between the two?

Forecasting is basically a fancy word for prediction into the future. When we look at time series or

a series of events over time or some particular

measurements over time, we are trying to predict

into the future. This would be termed “forecasting.” How forecasting differs from prediction is in the structure of the data, because in forecasting we are looking at a single, or sometimes, multiple series

of measurements over time and predicting into the

future. In contrast, “prediction” is typically used to

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both fall under the same hat, the methodologies are going to be slightly different, taking into account the different nature of data.

I think in the business community and also amongst business students, there is a realisation that moving forward, data is going to be one of the key business resources. In fact, I have read reports that in most organisations, data is the most important resource after human resources. I see that the business community and business students see a lot of value in business analytics. The question that often comes up is whether these skills are technical skills that require companies to hire or consult with some technical experts, or are these business skills that business students and leaders need to have some knowledge of?

In the old days, you would have statisticians sitting in-house and collaborating with the local domain experts. But it was the statistician who took care

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Face to Face

of the data, especially in terms of analysis. That has been changing over time. In spite of all the rankings

saying that statistics is one of the most desired jobs in the world, what businesses look for are people on the interface – who can basically see the analytics part and also understand the whole business context of things. From my experience with students at the University of Maryland, MBA students, who have taken a few courses in data analytics and data mining, are seen as unique in interviews, since they have business knowledge and familiarity with data analytics. Technical ability is required in data analytics but not the hard-core computer science type of technical ability. What is more crucial is an understanding of when things are going to work, what is out there, what are the options, etc. MBAs and business

students can definitely gain a lot from taking data analytics courses – not the old paper-and-pencil type of courses but applied courses that involve real data sets and work on real projects. Through this, students will understand where their own limitations lie and the value they can

where their own limitations lie and the value they can Ram Gopal is GE Endowed Professor

Ram Gopal is GE Endowed Professor of Business and Head of the Department of Operations and Information Management in the School of Business, University of Connecticut and a visiting scholar at Indian School of Business (ISB).

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bring to organisations with some knowledge in data analytics.

Essentially what you are saying is that students need to understand the domain so that they know how to leverage upon the analytics tools and figure out what kind of business issues can be dealt with using these tools. My follow-up question to that is are there particular job functions, organisations and industries where these skills are particularly useful or is the need more widespread?

I would say that today, almost every business, whether medium or large, in every possible area, has data. If you have the data, then it is worth seeing whether the data can bring value to the organisation. With that in mind, if you look at the types of jobs that are being offered in almost every industry, they are looking for data-savvy people. So I think it does not really matter which sector you are going into. It could be the government agencies, private sector, NGOs, etc – there is no distinction there. All these sectors have interesting data and there is almost always knowledge to be gained from the data, given that you have the skills. Because data by itself is not knowledge – it is a lot of noise and a little bit of signal.

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Face to Face

Teaching India to Learn

Shaheen Mistri, Founder, Teach for India and Akanksha Foundation, spoke to the ISBInsight team on the role of teachers in educating India and her vision for improving the country’s education system.

The Indian government initiated “Right to Education” in 2009 that was mainly geared towards educating elementary school children, but there have been many challenges in its implementation. What do you think are the main hurdles?

I think the government has played a positive role in

the area of access. There has been a huge push in the last decade to ensure that through the SSA (Sarva

Shiksha Abhiyan), that children have access to a school building. Today, children go to school but the quality of instruction is so poor that there are alarming dropout rates. We lose more than half of our children by Class 5 and more than 90% of them by Class 10. We need to look at all the factors that contribute to the quality of education, from the quality of teachers

to assessing the proficiency of the children – we still

don’t have national or state-level standards across the country. There are many challenges embedded under the umbrella of quality education. And to me, it starts and ends with the teacher. Whatever you do, however much you improve curriculum and resources, if you have the wrong person in the classroom, the children will not get a good quality education. We look for all these solutions in education but I think what really needs to be fixed is: How do we get seven million strong teachers into classrooms?

training

programmes?

I think teacher preparation and the professional

development for teachers is a critical area that needs

attention. We need to change the mindset of teachers

and also of how they are viewed. Currently, the bottom 20% of college graduates choose this profession. But,

What

about

do

you

think

the

teacher

if you look at Singapore, it is the top 10% of college

graduates who want to be teachers. So how do you flip

that? In our country, the brightest young Indians want

to go to the IIMs. There are very limited pathways that

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they aspire to pursue. So how do you make education and teaching one of those pathways?

In conferences and panel discussions we frequently hear panelists bemoan the inability of our schools to encourage the children to think out of the box. How can we encourage the children to innovate as opposed to rote learning and just gearing up for exams?

I think it just goes back to defining the quality and goal of education. Today, our children are taught not to ask questions. They are taught to think within the box. Students are afraid to take risks. And it really does come back to what we want for our children. What are those learning standards? It is learning to innovate, to think out of the box. Are the teachers even told that these are the goals? And once the goals

It is interesting to note that the quality of education doesn’t seem to be higher in schools that pay higher salaries necessarily.

have been agreed upon then the teachers need to be equipped to teach so that they are able to communicate the goals to the students. This is very difficult. In the Indian classroom, where you have 40-60 children in a class, it is easier to write something on the board and say, “Copy it.” It is much harder to teach in a way that encourages innovation and empowerment.

Recently, education has mushroomed into a lucrative business. Schools are now profit-driven franchises. Do you feel that this takes away from learning?

When you look at the reality, there isn’t really any difference. So, even in schools that are not profit-

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Face to Face

driven, the quality of education is terrible. So I don’t think being profit-driven is a problem. I think when profit becomes the only driving motive, then clearly the motivation is wrong and that will eventually impact the children. But I also feel that if schools are more commercial and professional, perhaps they will attract better teachers and may pay them better. So

I am not entirely opposed to the idea of privatising

education, but I think all the sectors of schools must improve. So rather than having a definite view on whether we should have more government schools or more private schools, I just think that all schools need to improve and they need to improve primarily by having a different kind of person involved.

One of the key elements to success, in integrating what

a child learns in school would be the role of a parent.

How important do you think it is to involve parents in helping the child learn? Do you involve the parents in some way in your programmes?

I think it is really important to involve parents and we

very actively involve them. But I think, so many of our children are first generation learners and their parents are not educated. So they can’t help their children at

home with homework, etc. I think it is very easy to start using that as an excuse for our children not learning.

I found that a strong teacher can compensate for that.

It is more difficult and puts a greater responsibility on

the teacher because the academic support does not exist at home. But I think you can cultivate another kind of support. Parents, even if they are illiterate, if they show interest in their child’s learning and motivate them, it makes a big difference. This is certainly something that we work on. If you look at our private schools, more education happens at home than in the school between the tuition teacher and the parent. In fact, I think there is the opposite problem where the responsibility is shifting off the school and on to the tuition teacher and the parent.

Most schools in your programme are in urban centres.

Is this a conscious decision? Don’t you think there is a

greater need for good schools in rural India?

Firstly, I think the problem is everywhere. I think clearly, the majority of children are in rural India and that makes the problem starker in rural India. But, if you look at the issue of inequity, we are not just focusing on quality education in general. We are also specifically looking at how we can bridge the gap between children with a very poor quality education and their wealthier peers who have a better quality of

FACE TO FACE

education. Inequity is probably most glaring in our urban centres. In metros, there is a stark contrast between the quality of education that children in IB and ICSE schools get to the education that children in government schools get. Unfortunately, that is the reality of our country. We chose urban India because we wanted to have a better impact sooner. This is only our third year. It is hard enough to have impact in urban centres that it will be much tougher to support and train our Fellows in rural India. Basically, we have taken a decision to start with what is simpler and then gradually add complexity to the model. So you will see us in rural India eventually.

to the model. So you will see us in rural India eventually. Shaheen Mistri Whatever you

Shaheen Mistri

Whatever you do, however much you improve curriculum and resources, if you have the wrong person in the classroom, the children will not get a good quality education.

Is there a connection between low teacher salaries and the quality of people the industry attracts? How can we encourage smart people to take up this profession?

Yes, clearly if you want to attract the brightest people, then you need to pay them more. Also, in teaching, you don’t grow into something very different two to three years from now. Most teachers make a lifetime in teaching. Definitely, finances are an issue in terms of attracting people but I think it is also interesting to note that in the 6 th pay commission, the salaries have gone up significantly. So the starting salary in a Mumbai primary school is R20,000 today, which

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may not be great but it is pretty equivalent to some other starting level jobs. So it is possible for people to teach for a few years and then move on. However, it is interesting to note that the quality of education doesn’t seem to be higher in schools that pay higher salaries necessarily. In rural UP (Uttar Pradesh), I have visited government schools, where the teachers are paid around R 15,000 as starting salary. But at the private school down the road, teachers get a thousand rupees a month. It is that stark a difference. The quality of education is better in the private school! So it seems to me that there are other factors. I think salary is an entry barrier but once you are in, there are other factors such as accountability that contribute to how good the teacher is and the retention of the teacher.

Your work involves interacting with the youth of this nation. What impression do you have about their commitment to education?

I don’t really see young people who are not interested

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Face to Face

in India. I am just amazed continually at the number of young Indians that are so invested in making India better. I have been to countless companies and campuses and met young people and I am unbelievably inspired not just by the vision of doing something but by what they are willing to commit to actually bring about change. I think there needs to be more of it. Our problems are so huge that I think unlike twenty years ago or forty years ago when if you did something good for the world it was sort of a nice-to-do thing. I think today the world has so many problems that it is just a responsibility. Every one of us just needs to do something otherwise I don’t know what is going to happen to our world. Between the environment and education and the whole gamut of issues, I really feel like everybody needs to contribute something because the world is not in a good place. We have created it and we have made it like this and we need to now fix it. But I think that now, there is so much more interest from young people than twenty years ago when I started.

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Knowledge Sessions 45 OUT OF AFRICA: A STORY OF HOPE AND RECONCILIATION 46 FOSTERING INNOVATION
Knowledge Sessions 45 OUT OF AFRICA: A STORY OF HOPE AND RECONCILIATION 46 FOSTERING INNOVATION
Knowledge Sessions 45 OUT OF AFRICA: A STORY OF HOPE AND RECONCILIATION 46 FOSTERING INNOVATION
Knowledge Sessions 45 OUT OF AFRICA: A STORY OF HOPE AND RECONCILIATION 46 FOSTERING INNOVATION
Knowledge Sessions 45 OUT OF AFRICA: A STORY OF HOPE AND RECONCILIATION 46 FOSTERING INNOVATION

Knowledge Sessions

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OUT OF AFRICA: A STORY OF HOPE AND RECONCILIATION

46

FOSTERING INNOVATION

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SUSTAINABLE GROWTH: A PIPE DREAM?

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ON ENHANCING SHAREHOLDER CONTROL:

A (DODD-) FRANK ASSESSMENT OF PROXY ACCESS

ON ENHANCING SHAREHOLDER CONTROL: A (DODD-) FRANK ASSESSMENT OF PROXY ACCESS COVER STORY FACE TO FACE
ON ENHANCING SHAREHOLDER CONTROL: A (DODD-) FRANK ASSESSMENT OF PROXY ACCESS COVER STORY FACE TO FACE

COVER STORY

FACE TO FACE

ON ENHANCING SHAREHOLDER CONTROL: A (DODD-) FRANK ASSESSMENT OF PROXY ACCESS COVER STORY FACE TO FACE

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ISB INSIGHT

ON ENHANCING SHAREHOLDER CONTROL: A (DODD-) FRANK ASSESSMENT OF PROXY ACCESS COVER STORY FACE TO FACE

Knowledge Sessions

Out of Africa: A Story of Hope and Reconciliation

His Excellency Williams Nkurunziza, High Commissioner of Rwanda to New Delhi, was at the Indian School of Business (ISB) to talk to students about Rwanda’s political and economic turnaround after the genocide in 1994.

From witnessing the genocide of a million people to being rated by the Royal Commonwealth Society as the second best country in Africa for a girl to be born, Rwanda has come a long way in under two decades. The twist in Rwanda’s rehabilitation story is that the 3.5 million culprits, who had fled to neighbouring Congo after committing the genocide, were recalled to rebuild the country. They were told, “You are not going to be killed because you killed – you are going to have to explain and accept a punishment that the law will deem necessary,” explained H E Nkurunziza.

the law will deem necessary,” explained H E Nkurunziza. H E Williams Nkurunziza According to him,

H E Williams Nkurunziza

According to him, “The return of those refugees into the country was a very fundamental decision that formed the basis of the re-constitution of the country and the beginning of the process of healing.” The Rwandan Patriotic Front (RPF), which came

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into power after the genocide in 1994, recognised that most of the culprits were peasants, who had been manipulated into committing the genocide. It was, thus, important to separate them from the actual architects and perpetrators of the horror. Since Rwanda was dealing with an astounding number of culprits, the process of delivering justice posed great challenges. Thus, the RPF decided to initiate Gacaca (Ga-CHA-cha), a system of Restorative Justice, based on the traditional Rwandese community practice of resolving disputes, where the onus of the crime is placed on its perpetrator. Thus, the family of a genocide victim recovers by receiving help from the culprit. The diplomat attributes Rwanda’s turnaround to the choices his country made in its path toward recovery. “We had to think right, act right and act fast to save ourselves,” he asserted. Post-1994, the country’s first priority was to secure itself and heal the people. Only when this aspect was stable, did the process of restoring institutions begin. Subsequently, the focus then shifted to reconstructing the economy. Also critical to Rwanda’s future was the drafting of an inclusive constitution that allowed people to share power. This was especially necessary since the country had witnessed a genocide that was a culmination of “bad politics revolving around competition for power.” Based on the new constitution, the presidents of the senate and the national assembly have to come from a party other than the ruling party, regardless of whether they are a minority in parliament. Today, Rwanda is seeing the outcome of these reforms and is on its way to developing its tertiary industries such as the Financial Services and Telecommunications sectors.

KNOWLEDGE SESSIONS

Knowledge Sessions

Fostering Innovation

The panel discussion on “Fostering Innovation in the Next Decade,” organised in Chennai as part of the 10 th anniversary celebrations of the Indian School of Business (ISB), featured industry stalwarts including B Muthuraman, Vice Chairman, Tata Steel, Lakshmi Narayanan, Vice Chairman, Cognizant Technology Solutions and member of the ISB’s Executive Board, and Vellayan Subbiah, Managing Director, Cholamandalam Investment & Finance Company. ISB Dean Ajit Rangnekar moderated the discussion.

Company. ISB Dean Ajit Rangnekar moderated the discussion. From left to right: Vellayan Subbiah, B Muthuraman,

From left to right: Vellayan Subbiah, B Muthuraman, Lakshmi Narayanan, Ajit Rangnekar

The panelists stressed the importance of business environment on innovation. According to Vellayan Subbiah, unlike their western counterparts, the company leaders in India did not give the people enough freedom to innovate. “To drive innovation, Indian companies need to follow the more authoritative style of setting the broad direction and stepping back,” pointed Subbiah. Quoting marketing guru Michael Porter to illustrate how companies innovate to stay ahead, Lakshmi Narayan asserted, “Do not run the same race, run a different race in a competitive world.” He illustrated this by giving examples from his company, Cognizant. While all other companies had used agreement clauses to retain employees in their organisations, Cognizant had decided not to enforce these clauses. These decisions, taken during the company’s infancy, have shaped Cognizant’s culture and set the stage for its success today. “We did some different things; since they worked, it is called innovation today,” highlighted Narayan. The speakers also called for the need to create a culture that celebrates failures as this would motivate individuals to stretch their potential. B Muthuraman spoke about Tata Group’s “Innovista,” an event that celebrates innovative ideas, which also has a category for “successful” failures. Individuals are appreciated for their attempt to experiment boldly. He recounted

KNOWLEDGE SESSIONS

how, in the first year, no one had applied for the award out of fear, but admitted that that has changed in recent times. Muthuraman brought a historical perspective to the subject of innovation. He explained that while the term “innovation” might be recent, the activity itself had existed since time immemorial. “Every decade for the last several centuries has been an innovation decade,” he asserted. He talked about how, just 300 years ago, Napoleon Bonaparte drank wine from aluminium cups while everyone else in his court drank out of gold. At present, the trend has reversed – the status of aluminium has fallen considerably. This reversal can only be attributed to the last three centuries of innovation in metallurgy, thus affirming that the concept of innovation is not new. Besides the corporate environment, Subbiah also spoke on the importance of competition in fostering innovation. “Competition creates an environment that causes you to want to innovate. It gives people ambitious goals to go out and achieve – that forces people to think out of the box.” To illustrate his point, he cited the example of how the financial sector in India is 23 times more productive than the agricultural sector – this, despite 60% of India’s workforce working in the agriculture sector. For productivity to increase in this sector, he believes, it must be opened up to competition.

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Knowledge Sessions

Sustainable Growth:

A pipe dream?

The Indian School of Business (ISB) hosted the World Economic Forum (WEF) Young Global Leaders South Asia Meet recently. The two-day event was graced by distinguished personalities including Siddhartha Lal, Managing Director and CEO, Eicher Motors Limited, Ajit Mohan, Ex-Team Lead and Co-Author, McKinsey Urbanization Report, Srini Raju, Chairman of the Board, Sri City, Alok Kshirsagar, Director and Senior Partner, McKinsey & Company and Tanya Dubash, Executive Director and President (Marketing), Godrej Industries Limited, who debated on issues spanning from urbanisation and public policy, to economics of the poor.

urbanisation and public policy, to economics of the poor. Panelists at the World Economic Forum Young

Panelists at the World Economic Forum Young Global Leaders South Asia Meet

The steep pace of urban migration is a concern for India. About 500 million people are expected to migrate to cities in the next three to four decades but the current infrastructure is inadequate to sustain this surge. According to Siddhartha Lal, the root cause for urban migration is the search for better opportunities. However, restricted access to basic amenities such as public transport prevents most people form participating in the transformation of the country. To cope with these problems, the government policy, previously, was to stem urbanisation. However, this has changed. It is now widely accepted that urbanisation aids economic growth, which in turn, improves the net income of citizens. To ensure that India’s urban explosion is sustainable, the government needs to build frameworks for the next 30 to 40 years. “They need to think long-term rather than short-term, and have this fundamental thought embedded while deciding on the frameworks,” opined Ajit Mohan. There are several hurdles in the path towards urbanisation in India. First, there are inordinate delays in obtaining the relevant permissions to start building new cities, especially with regard to land acquisitions. As a result of this, “new cities are almost dead,”

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said Srini Raju. Second, is the lack of availability of long-term funds. “The government has to provide mechanisms for long-term loans with tenures up to 20 years,” added Raju. The panelists also spoke about accountability and transparency in the public sector. This can be achieved by allowing public sector employees to continue in their roles so that they can specialise in their respective areas. Currently, there is a lack of accountability because employees are rotated internally or transferred before they can see their work to fruition. “There is a need to identify individuals who are truly making a difference and to understand their constraints,” articulated Alok Kshirsagar. India is set to grow but in order to accelerate this timeline of change and ensure that it is sustainable, it is important to understand the problems of the current institutions and work on fixing them rather than creating new institutions. “We will grow but we need to evaluate the opportunities of not carrying out the reforms,” was an apt summation by Tanya Dubash.

Hemchandra Kurra, PGP Class of 2012, was a key contributor for this report for ISBInsight.

KNOWLEDGE SESSIONS

Knowledge Sessions

On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access

This article is a brief summary of the paper “On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access” by Jonathan Cohn, University of Texas (Austin), Stuart Gillan, Texas Tech University and Jay Hartzell, University of Texas (Austin). The paper won the "Citi Best Paper" award at the Centre for Analytical Finance (CAF) Summer Research Conference 2011 out of over 140 submissions.

The optimal level of shareholder control is a central issue in corporate finance research. Shareholders devolving excessive control to managers can exacerbate the principal-agent problem, which arises when the interests of the shareholders and managers are not perfectly aligned. If the manager has too much control, she might undertake actions which, are in her self-interest but not necessarily in the firm’s. On the flip side, if the shareholders retain too much control, the firm might be unable to take advantage of the managers’ superior information about the firm’s projects. Empirically, establishing a causal link between the level of shareholder control and firm value is tricky. Mere correlation conveys very little. Unobserved characteristics of the firm might lead it to choose a certain level of control and affect the firm’s value. There might even be the problem of reverse causality, where the firm’s value determines division of control between shareholders and managers. Hence, in most

KNOWLEDGE SESSIONS

empirical analyses, the level of control is said to be “endogenous,” and we can’t make a claim of causality with enough certainty. This paper’s strength is that it uses “exogenous” variations in control to test whether the market values an increase in the level of shareholder control. The exogenous variation they exploit is due to three unexpected announcements made by policy makers regarding the rules governing Proxy Access. Historically, in the US, activist shareholders faced substantial barriers in seeking to appoint board members in opposition to the management’s nominees. They had no access to the firm’s proxy statements, and had to file their own proxy materials with the Securities and Exchange Commission (SEC). They also bore the substancial costs of distributing proxy materials to shareholders, and soliciting votes. An activist campaign costs around $10 million, with half attributable to the proxy contest alone. In the last decade, there have been attempts to introduce

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Anjan Thakor (right) presenting the "Citi Best Paper" award to Jonathan Cohn (left) rules that

Anjan Thakor (right) presenting the "Citi Best Paper" award to Jonathan Cohn (left)

rules that would allow dissident shareholders access

a firm’s own proxy materials, thereby substantially

reducing the cost of a proxy contest. These Proxy Access rules may shift the balance of control towards shareholders. These proposed rule changes, alone, aren’t enough. The authors want to see what happens to firm value in response to unexpected changes in the rules governing proxy access. The SEC, which is responsible for framing these rules, consults stakeholders before announcing any proposal. Many of the proposals are probably anticipated by market participants. However, during the summer of 2010, there were three unexpected events that had a material bearing on the proxy access proposals. SEC had been floating a proposal which specified holding period and ownership stake requirements for shareholders to be

eligible for proxy access. Investors would have to hold

at least 1% stake in large firms (Market Capitalisation

> $700 million), 3% in medium-sized firms (Market Capitalisation between $75 and $700 million) and 5% stake in small firms (Market Capitalisation < $75 million), for at least two years. Event 1: On June 16, 2010, during negotiations on the Dodd-Frank Financial Regulation Bill, the bill’s co-sponsor Senator Christopher Dodd proposed a provision whereby the ownership threshold for proxy access would be 5% irrespective of firm size. This announcement was a major shock since proxy access

was not thought to be an issue that would come under the purview of the Dodd-Frank bill. Event 2: On June 24, 2010, Senator Dodd’s proposal was dropped from the bill. Event 3: The SEC passed proxy access on August 25, 2010, requiring shareholders seeking access to the proxy statements to own at least 3% of the stock with

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Knowledge Sessions

a holding period of three years. The major surprise

was the requirement of a longer holding period than anticipated. The empirical strategy relies on identifying the impact of the events on affected firms and comparing with a set of control firms unaffected by the announcement. The difference is the actual impact. The authors look at the stock returns of all US listed firms (except financial firms) on the day of/ following each event. They compare the returns of firms that have activist shareholders to those that do not, with the expectation that an abnormal reaction in stock returns (due to the events) will be much more prominent for firms with activist investors. The activist investors are identified through a database that documents investors most likely to indulge in proxy contests and other activist actions. Senator Dodd’s proposal made proxy access tougher for large and medium-sized firms, by increasing the ownership threshold, but was the same as the SEC’s original proposal in case of small firms. Therefore, the effect of the announcement was expected to impact only large and medium-sized firms. In the sample of small firms, the difference between the returns of firms where activist shareholders hold stock and where they do not, is statistically insignificant. However, in the sample of medium- sized and large firms, they find that the difference is negative and significant. Since Senator Dodd’s proposal made it tougher for dissidents to gain access to the proxy statement, the results indicate that the market believes that less shareholder control destroys firm value. The major feature of the third event is the increased holding period of three years. Compared to firms where activist investors would have held stock for more than three years at the time of the preparation of the firm’s next proxy statement, they find that the effect of the announcement is significantly negative for firms where activist investors would have held stock for between two and three years. This further confirms the hypothesis that the market believes more shareholder control increases firm value. Using three unanticipated changes in the

rules governing proxy access, the authors find strong evidence that the market believes that more

shareholder control is beneficial. In doing so, they go

a long way in informing the debate on the optimal level of shareholder control.

Siddharth Vij, Researcher, Centre for Analytical Finance (CAF) at ISB complied this report for ISB Insight.

KNOWLEDGE SESSIONS

Cover Story In Brief
Cover Story
In Brief
Cover Story In Brief The Ties that Matter: Independence Day celebrated with Bandhan In celebration of

The Ties that Matter:

Independence Day celebrated with Bandhan

In celebration of India’s 65 th Independence Day, the Indian School of Business (ISB) continued the annual tradition of reaching out to the Hyderabad community through “Bandhan.” This event brought together 334 children from organisations including the Naandi Foundation, Kare School, Sphoorti, Ashray Akruti, Don Bosco Navajeevan and Devnar School for the Blind. The children from different backgrounds and with differing physical capabilities engaged in teambuilding games, an art-and-craft workshop, a dance workshop and a cultural show. Sameena, a young student from the Kare School, who is from the first generation in her family to receive formal education, expressed her hopes and aspirations towards educating the country’s poor. As the School marked a day to celebrate independence, her plea to help the less fortunate is a timely reminder of the hundreds of children who are still “slaves of child labour and illiteracy.”

IN BRIEF

still “slaves of child labour and illiteracy.” IN BRIEF Educating India: A panel discussion Good governance

Educating India: A panel discussion

Good governance begins with active citizens and to inculcate participation in civic events, education is critical. This was one of the key ideas that emerged in the panel discussion on “Governance and the Role of Citizenry,” held in New Delhi as part of the ongoing Indian School of Business (ISB) 10 th anniversary celebrations, which saw an august group of speakers. “Education helps you take higher-quality decisions about your life. The higher the quality of our choices and decisions, the better the citizenship or citizenry,” articulated Arun Kapur, Director, Vasant Valley School. He felt that in recent times, education had been subsumed by schooling and this has to change in order for India to progress. The speakers also urged individuals to participate actively in the governance of their neighbourhood as this was the first step before attempting to tackle mammoth issues at the national level.

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ISB INSIGHT

Remembering the Martyrs “12 years ago, this day, this time, I was injured…,” recounted Lieut-Colonel
Remembering the Martyrs “12 years ago, this day, this time, I was injured…,” recounted Lieut-Colonel
Remembering the Martyrs “12 years ago, this day, this time, I was injured…,” recounted Lieut-Colonel
Remembering the Martyrs “12 years ago, this day, this time, I was injured…,” recounted Lieut-Colonel
Remembering the Martyrs “12 years ago, this day, this time, I was injured…,” recounted Lieut-Colonel

Remembering the Martyrs

“12 years ago, this day, this time, I was injured…,” recounted Lieut-Colonel Aditya Kumar on “Vijay Diwas,” a day set aside to honour Kargil War heroes. Each year, the Indian School of Business (ISB) celebrates the Kargil heroes by holding a commemorative event on campus. Lieut-Colonel Kumar, a student in the Class of 2012 at the ISB, had fought one of the last battles of the war. He described with pride, the valiancy of the Indian soldiers, who fought the isolated battle – without food or water – in the icy-cold terrain for three days. On this occasion, the thousands, who have lost their lives in terrorist attacks, were also honoured. “There is a different kind of war being fought today at Nariman Point and in Norway. It is a war less heard of but more widespread,” he said. The event was graced by a candle light march and display by the Army Band.

graced by a candle light march and display by the Army Band. Harnessing the Power Within

Harnessing the Power Within

What are some of the challenges women encounter professionally and personally in realising their potential? Savita Mahajan, Deputy Dean and Chief Executive, Indian School of Business (Mohali) and Jayanti Rajagopalan, Founder, Detours, addressed these issues in a talk organised by the Women in Business Club at the ISB. Mahajanurgedthewomentobemoreforthcoming about their abilities so that they would be rewarded with the right opportunities and compensation hikes. “The default assumption may be that since you are not offering yourself, maybe you have some hesitation about the job,” she added. As an entrepreneur, Rajagopalan spoke about how it was more difficult for successful women to leave their jobs, to pursue something different or start their own ventures. The question that looms in their minds is, “What will happen if I fail?” As a result of this, they delay in executing their ideas. At some point, it is important to stop ideating and just take the plunge.

Cover Story Book Review
Cover Story
Book Review

“How ethical do you think you are compared to the other readers?” challenge the authors in the beginning of this book. The answer to this question forms the core of the book. It appears that most people have an elevated opinion of their ethics and confuse reality with idealism. The authors encourage readers to be aware of such blind spots or “the gap between who you are and who you want to be.” Perhaps this gap can explain the slew of scandals that are being unearthed everyday in every sphere of our lives from the banking industry to the government. Whatever be the motive, the common thread that links the key actors, is their stance of denial and refusal to admit to any wrongdoing. A logical question that follows is why this happens and how we can address such behaviour. The authors explain that such cases are of “bounded” ethicality, where individuals take decisions which, at a later date, seem to be far removed from who they really are or what they actually believe in. A key reason for this is the lack of deliberate and thoughtful decision- making, coupled with lack of awareness about their own thought processes. The book continues to delve deep into the psychology underlying unethical behaviour and discusses various modes of thinking that can lead to such unethical decisions. The authors also highlight how incentivising good behaviour does not have the intended effect – because a moral dilemma is translated into an economic decision. One such example considers the case of a day-care centre that began fining parents who were late in picking up their children. However, after the introduction of the fine, it was found that instances of parents arriving late had increased. The decision to pick up their children was not based on

The decision to pick up their children was not based on BOOK COVER REVIEW STORY Blind

BOOK COVER REVIEW STORY

Blind Spots – Why We Fail to Do What’s Right and What to Do about It

By Max-H Bazerman and Ann E Tenbrunsel

Reviewed by: Shreerang Godbole, PGP Class of 2012

PUBLISHERS: Princeton University Press

moral correctness, but rather, on whether they could pay the fine or not! This scenario explains why certain steps taken by organisations to encourage ethical behaviour are actually counterproductive. While the authors focus on why individuals behave unethically, they do not address the question of the reason underlying unacceptable behaviour and what can be done to prevent such occurrences. Self-awareness and deliberate decision-making can increase people’s consciousness but can they help in reforming a criminal? Can the value systems and personal beliefs of an individual be changed? In addressing the problem of unethical behaviour, these are the questions that need to be answered. Our thinking and perspectives on acceptable behaviour need to change dramatically in order to ensure progress and harmony. The book discusses some baby steps that we could take to initiate this process.

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ISB INSIGHT

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