Indian Spring

Dr. Manmohan Singh, an Oxford-educated economist, won the long, drawn out Indian election for Prime Minister. Some 700 million voters gave a majority in Parliament to the Congress Party, the party of the country's first Prime Minister, Jawaharlal Nehru. The Hindu nationalist BJP Party's rhetoric, which would have served to inflame the unstable situation in Pakistan, was pushed aside by voters.

India's economic development has been misguided since the 1950's, when teams of Harvard and MIT development economists were relentless advocates for heavy industrial development. Today, the new mantra is to develop the Internet infrastructure. We're told that 30% of the population now live in urban areas. However, that means 70% of the population still live in villages, and Silicon Valley expats not withstanding, India is still a nation of villages.

Clean water, sanitation and reliable power are keys to sustainable economic growth. In the villages, people need simple, low cost and reliable ways to use sustainable fuels for cooking meals, and foodstuffs that don't rely on high cost inputs. Power, water and sanitation are large-scale public works projects, and the government has to find a way to become more effective at delivering these needs.

On the "appropriate technology" front, lots of private companies, international agencies, and family foundations are developing simple, but really useful items like a solar oven that burns fuel cakes made from animal and plant waste. It's not glamorous, but it would truly deliver high economic and social returns.

Here's hoping that Prime Minister Singh sets off a wave of energy and commitment to the needs of the 714 million people who elected him.

All's Well With Wells?

Back in January we were uneasy about Wells Fargo's acquisition of Wachovia because it violated a long-standing discipline that had served them admirably through scores of acquisitions. In the fourth quarter, it looked like Wells took a "kitchen sink" loan loss provision, against which the first quarter 2009 provision looked small. The worst is over, right?

So then Wells previewed the first quarter earnings which were a "surprise" and stocks took off. Now, we find out after all the mysterious stress tests have been completed that Wells Fargo needs to raise some $15 billion in additional capital, second only to the hapless Bank of America at $34 billion. Citigroup, which seemed to be the patient getting pennies on its eyes, needs to raise only $6 billion in new capital.

What is anyone to make of all this? Shouldn't the stress test analysis be a matter of public disclosure to shareholders? Isn't it material to their investment decisions? What happened to transparency? It does give me some comfort to know that even experienced banking analysts like Simon Johnson are confused by the torrent of misinformation being foisted on the markets by the Fed/White House/Treasury spin meisters.

Although banks are enjoying robust margins, it seems as if the credit engine of the traditional banking system is still seized up and not ready to become an agent of economic recovery.

A One Man Band?

I just happened to look at the Wall Street Journal online to see the inevitable announcement about Chrysler entering a bankruptcy process. The accompanying photo is a bit startling. Where you expect to see the Chrysler CEO spinning a chrysalis yarn, there is the President of the United States. In the background are a bunch of politicos, including the increasingly omnipresent Tim Geithner and Larry Summers.

Within twelve hours, President Obama assured the nation that he himself is assiduously and continuously monitoring the worldwide spread of the swine flu while now simultaneously solving the previously intractable problems of Chrysler. Perhaps he is receiving Tweets to his Blackberry. By the way, I haven't included many of the President's other personal projects, such as monitoring Pakistan, making progress in Iraq, and maintaining a vigilant eye on the poppy fields of Afghanistan. What happened to his Vice President? Better yet, what happened to his Cabinet? Secretary of State Clinton is off "dialoguing" somewhere, but her workload seems tame by comparison to that of the President.

It's good to have a confident self-belief. However, we know from the world of know-it-all, self-absorbed CEO's (pick a name, any name: Welch, Greenberg, Fuld, Cayne..) that there is a razor's edge between self-belief and hubris. It is always good for a real leader to delegate to trusted lieutenants who are expert in their areas. I forget, do we have a Car Czar?

Green Shoots in Governance

Shareholders at Bank of America were able to carry a vote to separate the roles of CEO and Chairman of the Board of Directors. This is a very encouraging sign. Although separating the roles is not sufficient to guarantee superior performance or governance, it allows the board and management to concentrate on their distinct roles, avoids conflicts of interest, and permits the exercise of comparative advantage between executives and directors.

The less encouraging news is that the Board Chair is a college president. Academic institutions are not known for transparency, effective cost management, providing value for their student customers, or for maximizing returns. However, it is possible that the new Chair is someone who can bring a fractious board together into an effective governing unit.

If CEO Lewis is in fact a good operating executive, he is now free to concentrate on what needs to be done on the business side, and he can leave all the other issues to the Board Chair. He should be thankful and he should be relieved. If he and his supporters take the move in the wrong way and look on it as a "vote of confidence," then he will lose his focus and probably needs to be monitored closely by the board.

Some measures for shareholder non-binding "say on pay" resolutions were defeated, but there are a few green shoots in this proxy season.

Say (What) On Pay?

Directors of Chesapeake Energy have managed to thumb their noses at investor dissatisfaction over outrageous executive pay packages by ponying up $112 million to its CEO, which included a bonus equal to more than 75 times the CEO's base pay and $33 million in stock awards. Please note that the stock price declined during the measurement period; imagine the bonus if the stock price had risen!

Just to make sure that investors got a finger in both eyes, the board also did business with some CEO-affiliated companies and bought the CEO's collection of maps and artwork for $12 million.

So for all the talk about proxy access and "say on pay," some boards manage to remain tone deaf to their fiduciary duties and to any kind of business common sense.

The Future for GM Shareholders

Today, the Federal Government announced the latest version of the GM bailout plan. A small note in this version has GM retaining the GMC division and shedding Pontiac, which is a much better idea than the original proposal that would have sent GMC into a "bad company," along with Saturn. So somewhere in the discussion, the Administration learned something about GM's light truck business and the value of the GMC nameplate and products.

The proposed exchange offer would have bondholders getting $0.38 on a dollar versus versus $0.10 that is reflected in the secondary markets for the bonds; however, according to the Wall Street Journal and Morgan Keegan, they would get only a 10% interest in GM after the restructuring.

What's more troubling is the fact that the Government will be a much larger equity holder than in earlier proposals. The role of independent trustee directors who represent the taxpayers has always been without precedence and legal guidance. Legitimate questions are raised about the objectives of these independent trustees. It seems reasonable that their minimal duties should be to ensure that the taxpayer injections of funds are repaid, and that they company is run to generate a commensurate return without taking undue risks. Now, however, comes the inevitable discussion from observers like Robert Reich that these directors should have other, broader social objectives.

Finally, I wouldn't be surprised to see proxy access proposals coming from minority shareholders like the UAW to achieve their own ends. Would the government's trustee directors owe loyalty to proposals from politically-motivated minority shareholders? I suspect there would be pressure on them to be beholden to special interests like these.

So, where would that leave an institutional shareholder? In the short-run, there may be a quick trade for hedge funds in the shares, if the economy is beginning to turn. However, this plan will have unintended consequences that are not visible yet to downstream players like the parts suppliers and the surviving dealer network.

I would guess that the most bullish analysts would rate GM shares a "Hold."

What Does Pakistan Have to Do With BRICs?

Brazil, Russia, India and China are the so-called BRIC countries, deemed to be future global leaders because of their natural resource, technology, and human capital advantages over other emerging countries.

The news from Pakistan continues to be grim, and the news coverage is extremely poor, which is a byproduct of the breathless, callow and superficial coverage accorded to international affairs by well-coiffed cable news reporters in fatigues. It seems as if the central Government of the Pakistani state is either on radio silence or on the verge of collapse. Either scenario is very bad for world business and should be covered by business reporters rather than obsessing about a meaningless first quarter earnings report by a bank.

If the Pakistani state is collapsing, the immediate question is "Who's in charge?" The answer may not be consoling. Now with India embroiled in its own election process, it is unclear how some of the extremist viewpoints that are part and parcel of parties and coalitions will react to developments in Pakistan. If extremists view a state collapse as an opportunity to settle long-standing grudges, that will be very bad for human rights, civilians, and for business.

So, India will have its own issues going forward, in addition to the glacial pace of true economic and social reform in the country. So, we don't know if this BRIC belongs in the wall of fame yet.

Related developments in Afghanistan shouldn't be surprising either, as US commanders are now citing the deterioration in the southern Afghan Taliban strongholds. Great progress has been made with limited resources, but the insurgencies in Afghanistan and Pakistan are very closely related. Developments in both countries bear much more in-depth, thoughtful dialogue and foreign policy initiatives. In the long-run, that would be good politics and good business.