We the Corrupt

safalniveshak.com/we-the-corrupt/

June 28,
2019

Disclaimer: I am not in a bad mood today, and this is not an anti-national post. I love my
country and its people. These are just some thoughts on my general observations over the
years, so please don’t take any of what you read below personally. And if you do take it
personally, please keep it personal.

As I boarded my return flight to India recently, I heard some noises coming from near the
back rows of the airplane. It appeared that two middle-aged men and their wives were
shouting at each other.
The reason? One of the Indian couples had occupied the luggage rack above the seats of
the second couple. As was visible from my seat, there were empty racks close to the one
these guys were fighting for, but this was seemingly a prized one for which they were
shouting at the top of their voices.

As I was taking my seat, a similar hustle, though relatively more civilized happened just
next to me. This time it was two aunties who were at loggerheads about their spaces.

Anyways, flights to India, and in India, are a sight to watch when the plane lands and
stops at the parking lot. Passengers get up from their seats in such a hurry as if the flight
would take off again in the next few seconds and they would miss getting out!

Like in this specific flight, while I was comfortably sitting and waiting for the pilot to ask
us to unfasten the seat belts, my co-passenger nudged on my shoulder, “Can you please
get up? I need to take my luggage.”

I looked at him, surprised. This guy seemed to be running against time. But the sad part
was that he wasn’t alone. By now, almost all the passengers had gotten up and were
happily taking out their luggage.

This, apart from the incidents at the start of the journey, made me wonder why do we
Indians behave in such a manner almost all the time, and at almost all the places?

I have seen local train passengers in Mumbai falling over one another to enter even the
empty compartments! Look at the way most people drive on our roads. Someone is
always overtaking someone else.

We live a real-life version of the video game called Road Rash where the idea is not just
to finish first in the race, but also to kick others on the way so they fall by the wayside.

Consider how we have been raised – and raise our kids – in an environment where
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mistakes and failures are unacceptable. Every child must be accomplished and is
expected to be the best in everything, especially in scoring grades in school. And if like
me, you were average in school, you must remember the sour taunt of “Look at
Sharmaji’s son! He is a topper in school…and you?”
I was shocked to read a Wall Street Journal report recently that suggested how parents in
the US, mostly non-resident Indians, are bypassing the normal route to the final rounds
of the coveted Spelling Bee competition by paying money to the organizers! In fact, this
year, the “paying” contestants outnumbered those who fought their way to the final
rounds.

Of course, every nation and its citizens have their flaws, but why do you think India
continues to rank amongst the most corrupt countries in the world or one where
most people would happily cut corners to beat others at the game?

The answer may not be simple, but my assumption is this. Apart from the divide
between the rich and poor that is one of the key causes of corruption, I think we
have grown up in a society that has mostly taught us, and then allowed us, to be
intolerant of others in places it shouldn’t matter (like in the airplane) and cut
corners in places that matter to everyone.

Whether it’s in an airplane, or in offices, or on roads, in classrooms, at homes, and while

dealing with others. Even if you were to believe the International Cricket Council, the
most corrupt bookies in international cricket are Indians.

Consider corporate India. You will find more founders and CEOs touching greater heights
in corruption than capital allocation. I think, over the years, wealth destroyed by Indian
companies whose top guys played around with shareholders’ money may not be far
behind wealth destroyed by investors making other kinds of mistakes in investing.

From top to bottom, whether it’s companies from banking and finance, or real estate,
public sector, infrastructure and construction, energy, power, telecom, airlines,
healthcare, or education, corruption, and corporate mis-governance is deeply ingrained
in the way most managers operate. Not to forget the insider dealings that have made so
many rich investors rich over the years.

The biggest irony is the everyone does it, because everyone is doing it ( social proof).
Second, it’s easy to get away because those creating and managing the laws are often
hand-in-glove with the culprits on the other side of the table. Whistleblowers are rare,
and they are often silenced through muscle or money power.

Of course, as investors, some of the blame lies on us too. The aim to grow their
company rapidly, at least faster than the competition, is one of the key reasons why
corporate managers cut corners. And that seed of fast growth is often created by
investors willing to pay up for companies who show such growth.

Talk about our much-loved word ‘moat.’ Moats, profit margins, and return on capital are
often created on the graves of competitors that failed to match a company’s might and
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capabilities. And the longer the moat survives, the higher are the stakes to keep it that
way, which can create the ground for financial window dressing and unethical practices.

After all, we all suffer from deprival super-reaction syndrome, which simply means that if
someone takes away our freedom, status, money or anything we value, we will over-
react in a negative manner. Managers of companies with moats that are shrinking often
react (or should be expected to react) in a similar fashion.

Then, a system where leverage is so easy to get (forget paying it back!) also creates its
problems, often of monstrous proportions. Leverage, and too much of it, like a drug,
screws the mind of the borrower. And leverage, again, is often a result of one,
companies chasing to grow faster, and two, of not worrying about the negative
consequences (because you have examples of people getting away with it, some towards
London!).

“Vishal sounds hopeless today!” you may be wondering. I may think otherwise.

I try to see reality as it is, and that’s what I try to share with you through my posts. The
thought of writing this post came during my discussion with a close friend over morning
walk yesterday. We were talking about the investment-worthy universe within the listed
space in India. And the discussion veered towards what is happening in corporate India
these days, and the swarm of cockroaches that are spilling out of the cupboards of so
many companies.

The realization that struck was that India does not have more than a handful of
companies worth investing into from the ethics and corporate governance
perspective.

The muck is so deep that it seems sensible to just consider the businesses that have
proven their cleanliness over decades, however obvious names they may be, than search
for those hidden, unknown-to-other, gems that may generate you an alpha for some
time and then potentially lose you everything because the CEO or Chairman decided to
get up from the other side of bed one day.

I have always believed that investors must not aim to find saints among CEOs in
Indian companies. All they should try to do is to find the lesser evils – managers
who have been the least corrupt over the years.

One way to find such managers is to look for companies with no or small debt and
which are not growing too rapidly. For large debt and rapid growth are the biggest
incentives for managers to mess up the governance standards in their operations.

Before I end, I must say that I am an optimist on India’s economic growth, which shows in
my high allocation to Indian companies within my total portfolio. But my universe
remains small, and like in my dealings with people in life, ethics and integrity remain my
biggest non-negotiables when I am looking at managers to entrust my money with.

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Life becomes simpler this way, for you end up saying no to most companies, people, and
their actions.

“It’s a brutal, competitive world out there,” many parents would tell their kids, like their
parents told them. “And fight it like your final war!”

We are already seeing the side-effects of such blind competition all around us. But the
rot needs to be contained if we are to leave some meaningful legacy for our kids.

“Have courage, but always be kind and honest,” is the most frequent reminder I have
offered to my kids. And I am glad that they seem to have taken this seriously, at least so
far.

If companies need to really flourish sustainably in the future, I see no other way than for
the corporate managers to become honest, compassionate, and respectful towards the
society at large. Rather than getting drowned in their own selfishness and self-obsession,
very much like most of us do in our lives and at most places (go back to my airplane
experiences), managers could build great cultures by simply having the utmost amount
of integrity and empathy in the way they go about their business.

And that would, I believe, help investors create great wealth from the companies whose
managers choose to follow such path. Elsewhere, without doubt, wealth will keep getting
destroyed.

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