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  • Empower managers who take controlled risk

    Article by Rajeev Thakkar in Mint, December 29, 2016

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    A lot of newsprint, ink and airtime has been spent on the recent demonetization action of the government. The jury is still out on the success or failure of this action, and I will not add to the din

    Empower managers who take controlled riskistockphoto

    Tom Russo, a well known investor, talks about the need for investors as well as companies to have a capacity to suffer. This is not about deriving pleasure or satisfaction from the pain. It is about undertaking activities that are painful in the near term for longer-term gain. This is true for individuals, companies, societies and governments in fields ranging from health, business, environment, human rights, and so on.

    A lot of newsprint, ink and airtime has been spent on the recent demonetization action of the government. The jury is still out on the success or failure of this action, and I will not add to the din.

    My point here is that when we are evaluating managers or decisions, it is important to remember that taking the near-term easy path is not always in the best interests. Just like exercising in the gym is painful as opposed to spending an evening out with friends, but beneficial for good health, similarly, managers must take painful actions for longer-term benefit.

    For corporate managers, this may take the form of higher budget for research and development, higher investments in customer service and marketing, setting up infrastructure for entering new markets or new product categories, and so on.

    Not undertaking these activities is an easy and low-risk decision in the near term. Quarterly earnings will go up and there won't be any embarrassing questions to answer from directors or shareholders about missed deadlines, failed product launches and other such subjects.

    However, companies that have relied on status quo, too, often have many a times ceased to be relevant in the market place and have been overtaken by competitors or new entrants.

    What is true for companies is also true for individuals. Spending time studying, exercising, practicing a sport or an art rigorously may be boring and even painful. Saving money and investing are also painful while spending time and money on leisure activities, swiping a card to easily pay is pleasing. But it is the painful activities that are necessary and have to be undertaken.

    Bitter medicine

    Society similarly introspects and undertakes painful reforms. Abolition of sati and child marriage or outlawing dowry and discrimination based on caste, were painful reforms for the time. Ending racial discrimination and giving women the right to vote were radical steps in the West for that time.

    In the political sphere, irrespective of political leanings, we have seen radical and short-term painful steps in the past. Abolition of industrial licensing, cutting of customs duties, moving to market determined exchange rates and interest rates, freeing up ways to raise capital, or even the experiment with odd-even vehicle numbers in Delhi to reduce congestion and pollution, are radical and painful ideas.

    It is important to understand that demonetization is not the first and will not be the last idea which causes pain.

    It is also to be kept in mind that simply passing laws does not suffice. Habit and custom formed over the years do not change easily. A lot of follow-up monitoring, and to an extent, coercion is required to make people adhere to the new norms. For instance, it will not be easy to get people in the unorganized sectors to account for all their revenue and then pay proper taxes due.

    There is also debate on whether the change should be gradual or sudden. But regardless of the pace of change, it will be painful.

    Of course, from a psychological perspective, giving advance notice of change coming is better and wherever possible, it should be indicated in advance to the people affected. Change in tax rates, licensing policies, health regulations and others are best conveyed in advance.

    If we think long and deep enough, we will come across various areas of our personal, business, societal or political life where we want to see significant changes. We are sure that once those changes happen, we will be in a better situation. We also have some ideas that could help in achieving those changes.

    As individuals, citizens and investors we have a choice. Do we want to wallow in status quo even though we know it is not a good situation to be in or do we want to support and empower managers who take controlled risk in order to try to move us to a better place?

    P.S: All the cheerleaders of the goods and services tax (GST) reform should note that its introduction will also cause pain and discontinuity.

    The original article could be seen here.

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