CFO Leaders: Chief Future Officer?

M&M’s VS Parthasarathy and L&T’s R Shankar Raman discuss new challenges, capital allocation and risk mitigation on CFO Leaders.

M&M’s VS Parthsarathy (left) and L&T’s R Shankar Raman. (Photograph: BloombergQuint)
M&M’s VS Parthsarathy (left) and L&T’s R Shankar Raman. (Photograph: BloombergQuint)

What does a Chief Financial Officer do? Many years ago the answer to that question would have been limited to corporate structuring, accounting and financial reporting. But in the last few years CFOs have a seat on the strategy table, they’re risk assessors, innovation evangelists, technology transformers and governance monitors. So, as somebody aptly put it – is a CFO a Chief Financial Officer or a Chief Future Officer?

In this first of a new series – CFO Leaders – two of India’s leading CFOs, VS Parthasarathy, group CFO and CIO of Mahindra and Mahindra Ltd. and R Shankar Raman, CFO of Larsen and Toubro Ltd. discuss their changing roles and debate central issues such as capital allocation and risk mitigation.

CFO Leaders: Chief Future Officer?

Joining the discussion with their perspectives and questions were several finance leaders from across India inc.

  • Rajeev Newar, Director and CFO, Chalet Hotels Ltd.
  • Kavita Shirvaikar, Director and CFO, Patel Engineering Ltd.
  • Sameer, Kamath, CFO, Avendus Capital Pvt. Ltd.
  • Gaurav Sachdeva, Managing Partner, JSW Ventures
  • Amit Tandon, Founder and Managing Director, IIAS
  • Parag Joglekar, Head – Compliance, Risk and Finance and Accounts at Aditya Birla Sun Life AMC Ltd.
  • Pankaj Thapar, CFO, IndoStar Capital Finance Ltd.
  • S Varadaraj, Head- Finance, Systems and Legal, Godrej Agrovet Ltd.
  • Yogesh Sahu, CEO, Intellect Global Pvt. Ltd.
  • K Chandrasekar, EVP - F&A Group CFO Office, M&M

Watch the full discussion here...

Here is an edited transcript of the discussion.

The Expanding Role Of A CFO

Menaka Doshi: Chief Financial Officer or Chief Future Officer? How has the CFO’s role changed over the decades? The successes and failures that helped define this role for you.

VS Parthasarathy: One of the key things which you look at as CFO, essentially is, that you should come with A-C-E-S. This is how I looked at it. Because I come from an automobile company, I can say it means Autonomous, Connected, Electric and Shared. If you give it a twist, you can clearly see what a CFO has become today or should become. Autonomous, because it is CEO and CFO. It is not CFO only reporting to CEO. There is an independent autonomous reason, but also (involves) working very well with the group. If you look at being connected, it is not just being connected externally, but it is being connected internally. It is being connected as a business partner. But it is also being connected with governance. So, that it brings best of governance to everyone.

Empathetic and energetic is the other one. I always say that you look at a CFO and see how empathetic he is, you know what kind of organisation it is. And, if his shoulder slumps you can kind of know what is happening to the company. So, energetic is very important. Not just made up but, by nature, changing to be energetic and this is a good example of sharing. This is one part.

As for some quick 3-4 examples. One of the first defining examples is when I came in 2013 as CFO I realised that I am no more leading an organisation of experts. I am leading an organisation where all skills will change in time. So, the first thing I went and created was a finance academy. It meant - acumen for all and excellence for the function. This kind of helps create an organisation which partners with others, but also builds skills which are based on - learn, unlearn, not re-learn but again learn - because it involves new kind of skills.

The other one was that I should build a house of passion and excellence. I called it house of excellence where it means ‘mere ghar ka seedhasa itna pata hai, mere ghar ke age mohabbat likha hai’. When everyone sees that, they see excellence being inbuilt - not from the top but from the bottom. And these are the stories which we tell every year, of what each person has done in the organisation, to create this house of excellence.

The other big theme is to create a five-star CFO. I thought if ever I want to leave a legacy then it should be a five-star CFO. One star being bean counter, three star being a business partner or business support and five star is a value creating CFO. So, a future CFO, but not in the future in the present.

And the last point - All this happens only with people.

So, I have a saying because I started as a transformation agent in M&M, the saying is ‘strilling, pulling aur feeling ke siva life me hai kya’. Therefore, all these people in whatever set up, these are the big learnings, they can make magic happen. You take the bow, but you know who the real stalwarts are. They are the real ones so keep them happy. So, I will stop here and that’s my point.

Menaka Doshi: Share one quick example each of the most successful decision you have made and a decision that didn’t go quite as well as you anticipated it to.

VS Parthasarathy: So, the two examples that I gave of success is the finance academy and house of excellence. So, I count those among career successes which, I hope, will leave a legacy. Because even after I go, the finance academy will stand in the organisation and everyone would recognize it.

The failures are not as easy to define as successes are because I have always used failures to define the next level of success. Just to give you an example I came as a head of IT when I joined the organisation, I was head of transformation and IT. I hold that position still. But when I joined nobody believed that technology can do anything for them. I couldn’t convince anybody. I said I am a transformation agent, but I can’t convince anyone. Then I realised the whole thing is all about falling and getting up. First you have storming, and it carries on for a very long time, and then you have norming and then comes performing. So, that is the big learning of the fall which I have had.

Menaka Doshi: Mr Shankar Raman, the way you have seen the CFO role evolve and the defining moments in your career?

R Shankar Raman: I am a CFO by default. I never intended to start as a CFO. I am a qualified chartered accountant alright but got more fascinated by selling financial services. My initial 15 years went in selling financial services and then in setting up an organisation to sell financial services and that’s how I got inducted into L&T. So, it is a strange coincidence that the organisation thought it fit that I would serve them better by getting me in on the other side of the table - consuming financial services and creating need for financial services. In a way, my experience has been on-the-job. It is very strange that in last 15-18 years, we have been speaking about this theme of changing role of CFOs and it is still changing. I don’t know if I am yet qualified to have the last word as to what’s the role of the CFO.

Maybe it builds agility in you because you have to keep discovering new facets of the role and then keep changing along with it. And not only should you change, you need to carry people along. Few things which actually defined this change were not necessarily life changing experiences, but added dimensions to the role. I also started out thinking that as a CFO my job is to ensure resources are made available for businesses to do well, the resources should be cost efficient, the books should be kept reconciled, the reporting should be top class and we should get an unqualified audited report at the end of the day, and then the street is happy.

This is how I approached the job. But as I got into this job, the demands of this job kept pushing me to another corner and then the third corner and then fourth corner. Not to say that the first part of what I said was irrelevant. It is relevant if not more relevant today than it was when I started. But having said that a few things which hit me, and I was not prepared when they hit me, was the whole issue of our company. (I need to contextualise it to my company because my experiences as CFO are in this company). The company began to seek international affiliation, qualification for international jobs. It began to attract investors who are international funds. The way they approached and valuated the company meant that I needed to present the company in a completely different light.

For example, Environment, Safety, Governance (ESG) became a big anchor point for evaluating the company, not only from the point of view of investor acceptance or attracting premium, but also from point of view of gaining customer confidence, as in how do they pre-qualify you. You are out in the world trying to compete with the best and so it is important that there are differentiators. The easiest differentiator would be price. We can say I am quoting the lowest and hence I should get the job. But the more difficult differentiator and sustainable differentiator would be how are you differentiated on your environmental concerns, how do you execute projects taking care of socio-economic environment around you, how do you ensure safe operating conditions...that things shouldn’t blow up. Above all, how do you broadcast bad news first. That is an entire aspect of governance. How do you ensure bad news gets escalated first so that the spirit of disclosures is well addressed. And, you give yourself that much chance to find solutions.

ESG forced us to track things which we never used to track. For example, I never thought the number of safe man hours is a parameter that a CFO needs to track. Many times we are asked how many million hours on a particular project, geography or client have you been able to log in without an accident? First it was just reporting fatalities or near-fatal accidents. Then it started evolving into reportable incidents. We realised the entire organisation hated to report incidents because it sort of indicated that safety standards are low. So, we had to encourage the organisation to start reporting reportable incidents. We had to drop the threshold, so that people don’t feel insecure reporting reportable incidents.

Also, the fact that people’s lifestyle was changing. Let me give you an example which may not sound high tech. When people climb very tall heights to execute projects, they have the habit of carrying their mobile phone with them. And that blessed instrument rings when they are at a height, and it distracts. We have had several instances of a fall from a height, even though they are harnessed. Depending on the height the impacts are varied. You need not fall on the ground but can still hurt yourself even if the harness holds you, and the reasons are the mobile phone. So, we had to change the system and get mobiles deposited before they start traveling heights. We started broadcasting through an application that your family is waiting for you at the end of the day. So, we try to have some kind of story played out which they compulsorily listen to before they go up. The reason why I am dwelling on all these things is because safety has become such an important parameter when we talk about ESG.

As we moved forward, risk became a big demand, ask of CFOs. I was under the impression that CFOs at best have to flag the red flags and say that this is risky. But, the job doesn’t end there. So, what is the mitigation which you will suggest? You turn into a solution provider. The role of flagging the risk doesn’t stop. Not only should you deal with the risks which are thrown at you, but you also have to anticipate, access and price risk. It is the most difficult part – how do you price risk? You wouldn’t be even able to quantify some of these risks. So, that’s the challenging part - how do you build mathematical models to be able to price risk. We are involved in businesses which take 3-4 years to execute. It is not the risk of now and about but the risk ahead aspect.

Then there is whole issue around how do you translate risk into an appetite. How do you define in a balance sheet what’s a risk appetite? How much risk can you afford to take? The job became from accounting for risks to evaluating risks and then to assess and price risk. That is the big change which I found challenging. It continues to be challenging today because the world is getting more complex. Risks which were not there five years ago are risks on the table today. And how you deal with it is the challenge.

As our roles grow the business also expects us to be advocacy leaders. It is not from a narrow sense of getting competitive advantage by shaping policy, but it is a question of how you enable yourselves to perform to the expectation of the client or society depending on the type of projects you are doing. It is important that, be it monetary policy or government’s sectoral policy, it became the ask of CFOs to go out and speak. They were supposed to be, within the organisation context, less self-serving than somebody who is a head of a vertical and talking about that particular policy. The advocacy part became an ask for CFOs.

Finally, of late particularly, since technology has been pushing all of us very hard, we are enabled to define productivity. Today, we are living in such a competitive world, the advantage of getting price for past glory or performance of the company is non-existent. Clients are going to be very demanding. As competition heats up, this will be the scenario. So how do you gain the extra foot room to get ahead? Productivity becomes important. We deploy so much resource - man, machine, money - and how do you make sure that bang for buck is obtained. We didn’t have textbook productivity parameters to start with and so we had to define those. And it is trial and error as there is nothing which is perfectly defined anyway. People have to be measured very differently. You can to some extent relate it to monetary demands but largely it has to be a mindset issue.

Secondly, resources, thanks to the global banking system, we have a situation where resources are available, but they are also very selective. In April 2019, we are going to have Basel norms kicking in where the whole definition of resources available to a group or single borrower is going to change. The idea of government or policy makers is, it appears, to stretch the resources which are available in system to reach to as many corners as possible. To let the concentration risk go away. Companies which are already large, sufficiently diversified, this is going to be pulling the rug from under their feet on a given day. So, the preparatory path towards resource allocation and managing the transition has recently become a big task and it is still work in progress because we have not yet solved the problem completely.

We employ, in our business a lot of machinery. These machineries have their own parameters for productivity. The tendency would be to secure yourself by investing in the machineries, which is an easy decision. But given the facility of IoT today the intelligence in machines has increased. They are no more just hardware. How to use this intelligence to make sure that you are competitive, and you are able to get value out of that investment, has also become a big challenge. Every machinery has its own unique parameter. After complaining about lack of data, CFOs today have too much data. How do you manage to intelligently steer the organisation and function in this maze of data? They say, more than what to do, you should know what not to do. The data distraction actually becomes a challenge for data utilisation.

If you look at all of these as my personal experiences, I find we are still a distance to go before we say this is the path which CFOs will take - as long as businesses continue to be dynamic and the challenges continue to abound, our roles will keep forming and reforming. The task however is that the basics cannot be forgotten. You cannot be carried away by all of these and forget what you are basically hired in for in the organisation - which is to maintain financial hygiene, to make sure that the books are kept clean, to make sure that accounting policies are sustainable, the internal control systems and procedures work for you.

Menaka Doshi: What was the most successful decision you made and the one which didn’t work at all?

R Shankar Raman: In terms of most successful decision, it was to get out of my comfort zone. I could have been selling financial services till today and I hope I would have got employed. To get on the other side of table, I think, was the most rewarding decision which I took. I did that when I was 40 and it is not the easy age to take such a call and to switch.

Menaka Doshi: And the decision which you don’t want to remember ever?

R Shankar Raman: Some of the investments which I recommended for the organisation. For example, we got into thermal power at a time when it looked very promising. Every Tom, Dick and Harry had plans to put up thermal plants. So as an EPC contractor we thought that there is huge opportunity available. We didn’t realise the nuances around making a thermal plant work efficiently. We didn’t bargain for fuel shortage, disputes around the PPA (power purchase agreement) that promoters will have. We definitely didn’t bargain for the financial collapse around thermal power plant projects. So, today we are fully geared and invested in the thermal power plant business but we don’t see the environment supporting investment today. When we look back, I didn’t anticipate this environment.

Navigating Leadership Change

K Chandrasekar: This is to Shankar Raman. You also went through a leadership change. What did you do at this point of time to make it work for you and for the organisation?

R Shankar Raman: It is very important to connect in this transition. The biggest challenge would be to not be seen as belonging to camp A or camp B. If you are able to, get a common objective between two styles of leadership. Actually, this transition (AM Naik to SN Subrahmanyan), in our case was little easier because it was from within the organisation. So, it was happening between people with whom you have worked for long years. So, adjustments to respective temperaments have (already) been made.

It is very important that the space which you need to perform the role that you have to do is provided consistently. If the transition lead to shrinkage of that space or redefinition of that space, you have a problem. Fortunately, these announcements are made not the day prior but few months ahead and that gives you an opportunity to realign yourself and work through all means.

One of the tips which I used well was get to know the person beyond the official relationships. Begin to have a drink with him. Just get to know that person. Also, announce yourself. I am sure you will find common ground. There may not be many but even if they are a couple, hold on to them and build from there. Ultimately, it is like an arranged marriage. You work to its success.

VS Parthasarathy: There is a difference. In arranged marriage, at least you have some say in arrangement. But with boss you can never have.

Capital Allocation

Menaka Doshi: How do you approach capital allocation? Do you have certain metrics which you work with? You have variety of different businesses, strategic business units, joint venture companies as well as subsidiaries of L&T. What is defining principle you apply to capital allocation?

R Shankar Raman: The fundamental remains the same - that you have to get returns in excess of the cost of capital.

Menaka Doshi: Sure - what should that return be? Do you have hurdle rates internally which you hold each business to? Do you hold all businesses to the same hurdle rate?

R Shankar Raman: The challenge we have been having is - in the past capital had a certain cost and capital was a common resource to all the businesses. I come from a group which has multiple claimants of that capital. The approach, earlier, was to allocate capital on even-cost basis. But the returns that were coming in for businesses were very inconsistent. Some were high returns, and some were not so high returns, and some were poor returns. It is also a fallacy that the guys who are returning poor actually had chances of improving the return if you allocate more.

So, we have whole concept in the company of - can we risk-adjust the returns and hence price the cost of capital differently? If it is a business which gives predictable returns, annuity cash flows, you can afford to give it a lower cost of capital because the risk that you take is low. If there is a business which will be volatile and cyclical, then the capital that you allocate has a greater degree of risk and hence you need to price that risk and allocate capital at a higher cost. So, the thresholds that we have for the services business, for manufacturing businesses, for project businesses, are varied.

The challenge is to make all the consumers of this capital accept this theory. The guys who are priced a high cost of capital are going to say why are you discriminating against me? What do I do if the business is cyclical? Why are you in business if you don’t want to give capital? This is the typical response from business.But it is also important for them to know that capital comes with responsibility and not just with interest cost. You need to service the capital. Just because the company’s balance sheet can afford to take few knocks it doesn’t take away the responsibility to return.

Menaka Doshi: Can you illustrate this? Many companies put business divisions or portfolio companies into market lifecycle divisions - development stage, growth stage or maturity stage and accordingly allocate them capital.

R Shankar Raman: For example, if I break up allocation of capital for a project. Projects which have greater uncertainty, we keep the threshold returns higher. If I am bidding for a project, let’s say, with a back-ended cash flow, 60 percent of money comes from supply at client’s premises. Now, you run working capital until you reach 60 percent, the work done until the equipment goes. Now, there is greater risk. What happens when the equipment does not reach on time? What happens when the equipment malfunctions? So, the kind of capital you put to build the asset to that level has to be at higher threshold.

When we bid for a project, let’s say we work on 18 percent ROCE on the project, it has segments. It has a construction phase, engineering phase, equipment manufacturing phase... So, the allocation of capital goes in three different directions. While the blended return could be 18 percent, we try to tweak the individual return, so that pricing of that particular segment is appropriate to the risks which we carry. Overall ultimately, we need to be competitive. At the end of the day, we need to be L1 to get the projects. But having said that, when we allocate capital within that framework, we just want owners to that capital to realise that there is a certain commitment that they have given to organisation. So, we have a robust pre-bid process where these segments are given weighted capital and there is commitment by each of these segments, so that they say this is what they will deliver within this time. Sum total of all this is what I take to the board as to what we take out of the project.

Menaka Doshi: Mr Parthasarathy, you run a conglomerate as complex if not more.

VS Parthasarathy: You said it right - that we invest in businesses and not projects. But we do invest in projects as well...most of them are in the business. We are in 21 industries.

The taste of the pudding is in the eating. The whole thing is what do you get out of it. When you invest, I have invested for about 74 years and the debt is 0. In a sense that, we are being able to generate out of investment enough for us to fund everything and not borrow a single penny. This is both - a hallmark of conservatism, and taking risk in right measure. We have nurtured 21 industries but the debt is zero.

Tech Mahindra is greater than 10,000 times return. Mahindra Finance is more than 100 times return. Swaraj Finance is 250 times return.

So, how do you think about this when you are investing? You don’t only look at financial metrics.

One of the first things - is it going to lead to a leadership position in the marketplace of whatever you are doing?

Second, is are you globally competitive, your global reach? It doesn’t mean go to any country. But even if all competition comes to the country, will we be able to compete against them.

The third one, is in terms of customer centricity. Can you be customer centric?

Fourth, is financial return - how we grade financial return.

Fifth one is interesting - is the arbitrage of company based on labor or innovation. We say innovation arbitrage is the fifth leg. Show me the innovation arbitrage you have. Because in India it is very easy to get labor arbitrage. But two years down the line it will go away. Therefore, show me innovation arbitrage. If I am able to sell a car, can I make a car 1/10th price of global measure because my volumes are lesser?

It is easy to say this at the time of investing as everyone makes rosy pictures. Then two years down the road, what do we do?

Menaka Doshi: Have there been instances where you have been over-conservative? Say there is a project where the risks are much higher, they don’t meet these 5 criteria, but you had probably bet on it the rewards would have been higher. Can capital allocation sometimes get too boxed in and too conservative?

VS Parthasarathy: That is why we don’t put a hurdle rate, a single hurdle rate. I have a funny theory which is not easy to replicate. I call this 50-25-0.

50 percent ROCE for companies which have gone through a particular cycle give me enough cash to invest in others. The 25 is a benchmark I want people who I have invested in to get over a 5-7-year period. So, I will say show me when are you getting at 25. The zero is where I am investing now - its getting no return.

Let me give you a clear risk area. 7-8 years back, I saw Mahindra Electric as a company called Mahindra Reva. I went and invested in it. What you think the IRR would have been? Un-risk weighted. Forget the risk. Nobody thought what is the future of EV in India. I call it real options. So, don’t take everything into saying you are going to give ROCE. You are saying these are real options. Technology changes.

If you train a person and he leaves then it is difficult. But if you don’t train a person and he stays, it is worse. So, if you don’t take this bet and the world changes then where will I be?

Menaka Doshi: Let me put another example to you. Your two wheeler business. You started off with a mass market approach and found that it didn’t necessarily work as it was a very competitive market place. You tried several times and now you have decided to invest in Java to take a far more niche, specialised approach to the two-wheeler market. Through the course of this decision making for this kind of business or market how did your views change on how much to invest, how much more to put in? Where do you draw the line and when the Java proposal came to the table, did you wonder that - we have already put so much money down should we be relooking at it?

VS Parthasarathy: Absolutely, I’ll take a minute to digress. When we invested in auto components, we invested about 800 million, got a topline of 800 million, bottom line of zero and suddenly 2009 hit. The IRRs were negative 40-50 percent on that entire deal. When you nurse through this, you say here, what makes sense? So, strategic alliance makes sense. So, up comes CIE. CIE made huge money. They deserve every penny of it as they were the architects of a new auto component thing. But we made IRR from -40 to +22. So, it changed the entire game. So picture abhi baaki hai...

When we take two wheelers, and it happened (mis-steps), two years later how do you look at it? We are not financial investors. We don’t have a 3-4-year time frame. We have a longer time frame. However, every time we have to ask this question, are we putting good money after bad money? This is a very important question to ask. How do you ask it in a real situation?

So, I asked three questions, and this has come through board leadership.

  • Is the mega trend continuing?
  • Is our right to win and right to play intact?
  • And is it the right leadership?

If first two questions are asked, then the third question you have to ask rightly. You keep asking these questions...

Menaka Doshi: Is there a ‘comfortable’ level of cash in a business? You seem to have more cash than you need, Mr Shankar Raman. You did attempt to do a buyback. I would assume it came from the fact that a buyback or returning money to shareholders was better use of your capital at that point in time than investing it elsewhere. The buyback didn’t get approval - what do you do with that cash now?

R Shankar Raman: It is question of a point-in-time call that we take, because opportunities keep emerging all the time. We changed track as a strategy from investing in infrastructure, into very asset-heavy, long gestation projects, and we moved to asset-light which is EPC-oriented. This is only working capital. Cash to cash cycle is maybe 180 days. The EPC business is doing well, generates cash. We are light geared in our balance sheet. So, consequently we have little debt to retire and the cash was not going to heavy investments. So, we approached the regulator for a buyback. It did not happen.

Menaka Doshi: What do you do with that cash now? Are you comfortable with that cash on books? Do you have to force-find somewhere to put it?

R Shankar Raman: I don’t think we should be under pressure to deploy cash. The pressure of excess cash will make you do wrong thing. It is important to stay slim when it comes to cash resources. One thing that we have done is the corporate has seized the cash from the businesses. We have not allowed the cash to lie in businesses which generated the cash. The businesses continue to run thin on cash budgets that they have.

As far as the corporate is concerned, we will have to take a portfolio approach. As a conglomerate which has presence in manufacturing, services, EPC business, in projects, we have a bouquet to look at. We have 15-16 verticals. And each vertical has a growth opportunity. Now that return to shareholders (buyback) has not come through, we are examining as to which businesses deserve an expansion.

We have been a very organic company all this while. Today there is an opportunity, now that we have cash, to look at inorganic opportunities. Had I not had cash and had to raise money for investing, I would have thought little more deeply as compared to the openness to look at opportunities. This doesn’t mean irresponsible investing, throwing around cash. But it is a great comfort that should an opportunity come by there is money in bank which can be invested. I am looking at mega trends which are going to shape the next 5-7 years. If there are value chains missing in what we do, we are trying to see whether we could invest for competency. Very clearly, as a company we said we will not invest for scale. We don’t have to invest money to get an X contract or asset of people. We need to invest for competency.

In April 2019, soon after this discussion was recorded, L&T made a Rs 10,700 crore bid for a controlling stake in IT services company Mindtree Ltd.. If it succeeds it may merge Mindtree with L&T Infotech Ltd. sometime in the future.

Blind Spots Or The Cost Of Non-Allocating Capital

Gaurav Sachdeva: How do you measure cost of not allocating capital in all the things, you think which can wait, trends that are not visible, or markets that are not ready or teams not ready?

VS Parthasarathy: A blind spot is something which you can’t even figure out. When you put your two by two metrics, if there are opportunities and trends which you are not able to see, it is not a question of capital allocation anymore. It is a question of sharpening the organisation’s ability to have more periphery vision. Once you have the opportunity, if Uber came to me today and I passed it then I have missed the opportunity. If Uber happened through a cycle, which cycle I missed, then it is a missed business periphery issue. Organisations have to learn from venture capitalists, startups.

We have capital allocation in three layers. The first layer is corporate allocation - it could be the 22nd industry (M&M enters) as we speak.

The second level is a venture capital fund that we have floated - which is like a virtual fund - called Mahindra Partners. Their job is to look at periphery. They have to full time scan the environment (for opportunities).

(Menaka Doshi: But they don’t have that expertise that your line businesses would have. The ability of those business people to spot the right opportunity can’t be duplicated in a venture fund.

VS Parthasarathy: That’s why it is a virtual fund. They are called Mahindra Partners and the funding is done by Mahindra. (It) is a mix of people from the venture capitalist industry and people from our industry. But full time looking at this, asking what is the next industry or mega trend I can invest in. They have a front office in California.)

Third is, we still may not know where we want to collaborate. So, the third is venture capital kind of funds in three major businesses, auto and farm, finance and IT. I am part of this three ICs - we look at how do we collaborate with startups, we do many of these early term investments.

R Shankar Raman: It is a little antithesis in our case. We have been trying hard to make people focus and deepen the verticals that they are in. Our experience in allowing people to get into adjacencies, without a fit business case but more out of hope, has actually hurt us. We have been telling them that you are not a venture fund. You have chosen to be in certain defined businesses. Get deeper there and get scale of global size into those business and get those competencies. Scale and competency within the chosen vertical is what we do. I need to worry more about missed opportunity to invest in a value chain or technology which will enable me to disrupt and get ahead of competition. I am in a mode, through our own experiences, to narrow the vision and look sharper.

When To Plug The Capital Plug?

Amit Tandon: Shankar Raman spoke about minimum threshold return. Parthasarthy spoke about 50-25-0. On the other hand, we have seen large groups like Tatas - they have taken huge write offs whether it comes to JLR or telecom. We see the struggle the Birlas are facing in the joint venture with Vodafone. At what stage, would you want to pull the plug on some of these various investments you have made?

R Shankar Raman: We had invested in a shipyard which had a port attached to it that came as an adjunct. We realised after building the port and trying to run it for about two years that the business is a completely different business. The kind of connect you need to have to make ships call on your port in preference to nearby ports, and the mechanisation that you need to achieve, and the volume you need to achieve is a completely different ball game. It is not connected with what we generally do.

When you get into a project or investment which stretches you, I think you need to have the maturity as an organisation to say if it's something you cannot manage. There comes a point in time when people connected to that venture will be emotional about it and they will always say we will manage and find a solution. So, we (CFOs) need to have that step-back attitude to make the judgmental call and move away. At the end of the day, every organisation has a unique cash flow cycle and it has its own bandwidth to see how much of incubation it can do to a business. There comes a point where if it is not going to make financial sense or the ‘right to win’, then you need to pull the plug, because things change. We have been able to do it.

New Business Vs Return To Shareholders?

Amit Tandon: When do you ask this question - should I return money to shareholders rather than start one new business? That is one of the question investors would be asking you.

VS Parthasarathy: We made life easy for everybody. When we invested in any business, we first told them that you have to go and list. Once they list then there is no question of capital allocation between each other. Now they have a board which is responsible to shareholders of that company. Nine of our listed companies, capital allocation is what they have to look downstream. And if it makes sense for Tech Mahindra to return, they will return the money.

Menaka Doshi: Let me add... would you continue to spend money in the two-wheeler business or return money to shareholders through higher dividend or the buyback route?

VS Parthasarathy: When you find yourself in a position where you don’t expect the return to be higher or you don’t have enough things to do with the money then you can certainly return. It is not only one. I told you about auto components, Mahindra Electric. There will be many opportunities like this. There is never ‘more’ cash in balance sheet. The times are so volatile, to keep the powder dry is doing business a great favor.

B2B, B2C Fine. What About B2G?

K Chandrasekar: In capital allocation, B2B and B2C are easier projects. How do you deal with B2G? For example, defense. There is huge promise, huge scale but you don’t know what is happening. How much do you invest and when do you invest? Or should you invest?

R Shankar Raman: It depends on the government and its policies. It is the biggest risk a business can take. We had instances where businesses were formed out of tax benefits. The tax benefits disappeared, and businesses became unviable. Lot of leasing companies, many years ago, had this problem.

When it comes to getting into businesses on the back of government’s initiative - In the same spirit of being candid, at a time when we got into the thermal power business the government was in active discussion with us to say that the country requires capacity much beyond BHEL could then deliver. No disrespect to BHEL, but they have limitations on what they could deliver. There we were willing to put capital to work and today I’m saying that I shouldn’t have done it as enthusiastically.

The second point - When one of the earlier governments signed the nuclear deal with U.S., the government started talking to us, as we were in nuclear engineering for many years, to put up a nuclear power facility. Especially for materials which government technically were importing from Europe or Japan and they were very expensive. They needed someone in the country to have an alternate manufacturing capacity. We put up a shop in collaboration with the government. The government had financial stake in it. Today the government is finding it difficult to route orders to that unit because there the PSUs are saying their capacities need to be fed, and it was also becoming a quasi-political issue where labor unions were involved. So, capacities that have been created, capital that have been put in, including government capital, is remaining idle. So, somewhere the lack of clarity between good economics and good anything else just disappears. We realised that anything which is enshrined on just governmental orders or their policies is very risky.

The public private partnership - we have been one of the guys which for the last 20 years (have been) investing in toll roads. We have realised that the partnership ends with concession. Thereafter you are left alone. So, the private stays and public disappears. The kind of issues that private can handle in public infrastructure, unless you go through this experience you won’t be able to relate as to how difficult it is to put up a facility and collect money for its usage without the government’s active involvement, be it land acquisition, clearances, public interest litigation...

Including instances like, whoever thought that the country will declare drive for demonetisation. And for 30 days, none of the toll booths were supposed to collect toll. What happens to that money which got invested? Who is accountable for the returns which are lost? It’s no solution saying 30 days will be added. At the tail end of the 36th year to add one more month into the 37th year does not compensate for the loss of money today. The sense of present value of money disappears. Doing business with government and government dependence is something which we need to be very thoughtful (about). Unless there is sufficient risk mitigation at play, it is not worthwhile. I wouldn’t advise private capital to blindly put money because government cites an opportunity for you.

Green Capital Allocation

K Chandrasekar: On green capital allocation. How do you select it?

V S Parthasarathy: My strong belief is that for the new set of CFOs, we need to relate not to integrated reporting but to integrated operations. So, green is not outside but an integral part of how we look at our business. Carbon neutrality, water positivity is no more a social objective. It is an integrated business objective.

Mapping, Measuring Risk

Menaka Doshi: How do you map risk? Are there mathematical models which work across all businesses? Is there a focus, in your office, to mitigate risk or harness the value of risk?

VS Parthasarathy: We have learned an important thing over the period - you don’t manage risks. The philosophy is - the biggest risk is not taking risk. If you look at that, then it is not risk management. I have coined a term called ‘risk reward paradigm’. You look each risk in terms of the reward that it gives and therefore the trade off there.

Menaka Doshi: Give me an illustration of a risk you have taken on gladly and a risk you have said no to.

VS Parthasarathy: Mahindra Electric falls into that category of risk, where the reward was unknown but necessary for you to take it. So, you are taking risks beyond what spreadsheets can tell you. That is an example of a ‘risk reward paradigm’.

The other one is to say - what do I do as a future of mobility? For example, Uber in cars has already happened. So, can I get an equivalent of that shared mobility in tractors? Should I wait or do it now? So, we have created a platform called Trringo and we have put it outside (the company) to compete. That is risk reward.

Am I missing another mega trend? Maybe this time it will not come out to be the same (as Uber). Maybe it will be very different in tractors as compared to auto. This is the balance between risk and reward. Investing is easy when it has quick and big returns.

Menaka Doshi: How do you measure risk?

VS Parthasarathy: There is an almost mathematical, reasonably strong model to measure risk. The first one - what we do is create a budget with clear assumptions. Once we have done that, we map risks in two folds. All operational risks, and I am taking the auto example, this will apply little differently to every company, whether volume risk, margin risk, cost risk, inflation risk, you map them and with relation to the budget you need to create a 2/2 matrix of impact and probability. So, high probability and high impact is there but even medium probability and high impact will be extreme risk. But low probability and even high impact will be medium or low risk. So, we created this matrix.

This matrix is arrived by saying what is the inherent risk and what is the residual risk. Between them is the risk mitigation plan. For each of the line items, there is a risk mitigation plan which is made. It is not rocket science and it is not made at the top. It is for each line item and for each division level and at the smallest unit level, planned level, sales operation level...and it is built up to each business unit and built up to a company. Then it rises. All high risk and extreme risk come to the central risk committee to look at and extreme risks goes to the board.

This is only about the volume, etc. You cannot do environmental risk in a mathematical formula. We have created a stempel and we qualitatively put high, medium and extreme (tags). The decision matrix depends on what kind of risk is there in those elements in order to take it.

Pricing Risk

Menaka Doshi: Mr Shankar Raman - you have inherent geo-political risk in your projects. You have infrastructure projects where the government involvement is even higher, so you are not just relying on a consumer trend. Currency risk as a result of it. Environment and accidental risks are there. How do you price risk and at what point do you stop pricing risk because it may make you uncompetitive at some level?

R Shankar Raman: First is to understand the inherent risk. We use a risk dashboard where key risks as perceived are put in project-wise and bid-wise. Our business is unique that we sit today and forecast the outcome four years forward and a lot can change in four years. We concede that we are not able to predict the outcomes successfully. We start with that assumption. Each of the projects will have X number of risks as we can identify, and depending on severity of risk we use a similar matrix in terms of probability and severity.

Depending on severity and weighted factors, we assign a senior person as risk owner. Unless the project has risk owners defined, we don’t get into the project and we don’t allow the bidding to be done.

That person is from operations. Risks are created by operations and risks are managed by operations. The finance part comes in terms of commodity prices, currency prices, procurement... Those are the things the finance (team) has to own and possibly the finance leader in that group will have to own it.

The idea to put a person’s neck on the block, so that you know who is accountable. Having identified the risk and person, we then try to measure it as we go along. We have a moving dart board where some risks move from the outer circle to inner circle and some move the other way. At any point in time depending on concentration of risk, you would know you are at the periphery or if a lot of things have converged.

For example, when we got into projects in Oman and we got into a four-year project. Midway in the project, may be 1.5-2 years, the laws of the land changed. They said that minimum 30 percent should be Omanis, in terms of engaging resources. They realised quickly that there is no skilled labor which will account for 30 percent. How many car drivers and office assistance will you have? You need people to work on projects live. So, they gave concessions saying you can engage local sub-contractors. At a point in time, when there are so many foreign companies who are doing (business) on assumptions that they will move their resources and their machinery in, when you have this kind of change of law, everybody scampers to the few available sub-contractors and the demand of supply changes. Then the cost becomes prohibitively high. What looked profitable, the labor arbitrage in one instance, became a disadvantage. This kind of risk is very difficult to price or even anticipate. There are certain contingencies that are built for things that could change beyond your anticipation today.

When we try to price risk once we know that there is a certain owner at seniority and there are certain mitigants possible we try to put probability and price it. There is (also) the unknown unknown - where there is a global contingency. We add all of it and see in our judgment, given the competition, whether it is good enough to win the bid. Then the chiseling starts - of what risk you can manage. Is there something that we are being conservative about? That chiseling happens. But it comes to a point where there is a cut-off, beyond which no more (chiseling risk). (Through) trial and error we try to find that ideal price and go in (for the bid). The fact that we win one out of four projects shows that we are reasonably there.

Once in 3-4 years, there happens to be a blow up. Hopefully the backlog of good projects is sufficient to absorb this kind of blow up. I have not seen a period of 3-4 years go past without blow ups.

Regulatory/Compliance Risk

Rajeev Newar: One bucket of risk is legal risk and law is always evolving. So, at any point of time you would have identified all of the risks and next day probably you add couple of them. Many companies have a compliance tool to monitor where they are on these compliances. Since the law is always evolving, how do you manage ensuring that the template is comprehensive and relevant?

R Shankar Raman: It is a big challenge and it is segue to governance. One of the challenges is, since we are a very largely spread company and fairly empowered, to make sure that the compliance does not get reduced to ticking the box. We have very interesting instances where people have signed off at the unit level for complying with law with which they are not required to comply, and to which the law doesn’t apply. There is a tendency to be little thoughtless about it and treat it as a chore, based on which somebody certifies and based on it somebody else certifies and the entire system works on the presumption that all is well. The acid test comes when you are held accountable for a breach. Whether there is enough awareness about what a breach means. One of the biggest challenges we have as a company is how do we make sure that governance is well understood in a uniform manner and what constitutes it.

For example, when you work with sub-contractors. As a principal contractor, if the sub-contractor does not cut PF from the worker (payment) then the principal contractor is obligated to pay and do whatever to recover the money later. But how does a principal contractor get to know in the first place? Who is going to stand up and say PF is not being paid?

The way laws have evolved, and compliance has been put together, has a certain opaqueness around it at various points, blind spots if you will. We need to make sure we are not trapped in all of that. Unless it is constantly monitored. We have started doing governance audit, in terms of groups of people employed by company whose job is to visit several of these establishments and check out (compliance). We first thought that we don’t have to do it. But we realised that how is the awareness getting spread? We are living in world where the average (job) duration of a person is 5 years. People change. The attrition catches up. Every now and then you need to train somebody. Even educate people.

Let me give you an example of our security dealing core. There is a period where if you own shares of L&T or want to buy shares of L&T, if you are an L&T employee, as a designated official, you are not supposed to buy. But somebody sitting in some corner of the country doing a project has no clue as to what SEBI says. We broadcast it and it is assumed everybody reads. But there are enough instances which have come out saying that this person has bought without taking prior approval or sold without reporting. Very innocent breaches but breaches, nevertheless.

The way a large organisation, whether in India or else, the way they are spread, how to ensure this flow of information to a central pool which certifies for compliance is a challenge we have not solved.

VS Parthasarathy: Compliance is holy ground and governance is high and holy ground. So, you have to look at it in totality and not one without other. We have created an e-governance portal. First thing is to get compliance in order. Governance is much more than just compliance. The CEO-CFO certificate should come out of this system.

For the last five quarters, we have the CEO-CFO report come out of this system. For every unit, there is a CEO-CFO report which is a compliance report that comes out of the system. In a sense that, there is a back up to whatever you are saying has been complied with. The system allows them to generate a report.

At the end of the day, the report will come to me, Dr Goenka and Anand Mahindra saying all your guys have certified and now can you please certify after reviewing the certificate and seeing all the exceptions? When anybody now has to say no, if there is a no, it comes out of the system. This is only on one portion.

Let’s say governance in higher ways is a contingent liability. How are you looking at it and what kind of risks it throws up? It is not a direct compliance area, but it goes with - are you reporting right? When does contingent liability become a real liability? When will it go to provisioning? All this needs to be reported. We brought that in. We are bringing in all these facets. A cockpit which is available to all the board and very senior management to look at.

Governance Framework

Amit Tandon: How have you gone about building a governance framework in a professionally managed company? You have a large board of 22 directors.

R Shankar Raman: A promoter run company would be more challenging. Professional, in a way, is an advantage because the approach generally is nothing gets approved by a single signature. Fundamentally, two people have to come together for anything. That provides the base architecture.

Being a professional company, the weight of responsibility of taking a decision, if it is shared, is better appreciated. If I have to take a decision on Rs 500 crore, I will worry myself to death. Whereas if I am going to be part of a three-member team which takes the Rs 500 crore decision, it becomes easier. You need to create an environment where you can brainstorm a decision and make it appear as a collective decision. So, we take the face away from decisions as far as possible and try to put a body around it.

We have abolished casting vote as a concept. We said we need to have consensus. All our committees will be even-numbered. We try to have people concur. If we don’t have more than majority we say no, or the decision gets reviewed, delays creep in. One of the pitfalls is you tend to take more time than possibly an entrepreneur could to take a decision like this. There could be a missed opportunity or some consequences. Safety in consensus is what we have gone about.

Right from 1950, we always worked on somebody’s capital. Nobody put capital there. L&T was listed in 1951. So, the mindset of the organisation from 1951 to date has been that you are accountable for somebody’s money. This is an environment that has gotten created. So, generations of professional managers always knew that they need to do something with somebody’s money and return value. Some of this has helped.

The test will come in a promoter-driven company where an entrepreneur keeps professionals with them. Today, even an entrepreneurial driven company is full of professionals. But how to make sure that his voice is not something which the rest implement and how is the dissenting voice heard?

I have worked in an environment (L&T) where I found that committees have always existed. For example, in 1980 we used to have an audit committee. In 1982, we had a nomination and remuneration committee when no laws prescribing that at the time. We did it out of necessity. Nobody wanted to put up his hand and say this is my decision. So, hide behind collective decision.

Amit Tandon: What if the CEO hijacks the full agenda - all the committees, senior appointments... Are there some kind of checks and balances which you should look at?

R Shankar Raman: When you have very powerful people, and CEOs are such otherwise they won’t be where they are, you have to deal with strong opinions and views. This is where the format helps.

For example, in our structure, however powerful the one man could be he has to carry committees with him. Committees, today by law, have big composition of independent directors. The developments in corporate India have made the position of independent directors even more serious than what they thought out to be. The only way to checkmate this- an individual getting carried away and becoming bigger than the institution - is to have institutional processes which help correct decision making. It is very important to give space to the CEO to grow the business and at the same time the right values and right conduct is something that the collective system around him should do, they should be able to contain him. It is a challenge. It is easier said than done.

The Future Role Of CFOs

Menaka Doshi: 10 years down the line, what are the additional things that will be added on to the CFO’s role, maybe which don’t exist today or are not priorities today?

VS Parthasarathy: I will leave five themes. I will call them Yield, Climb, Unmix, Fable and Prime.
Yield is ruthless focus on ROE because, unlike whatever you have seen in the past, the future is going to demand much bigger things. So, I call it - less input, input later and more output, output sooner. It is a very simple way to communicate the ROE need.

Climb is for scaling up and investing in the future. Fail fast and move right.

Unmix is very important - it is simplicity. We have made ourselves very complex now. If we continue (like this), we will die. So, the next 10 years is about simplicity. Look at simplicity. Axe the complex as that slows down the pace dramatically, and the future is of those whose are agile.

The fourth is fable. Think of a CFO as a bard of the company. Each one of you needs to be a bard and sing, not just about the company’s performance but about governance. That is what will get us ahead.

Prime is - compliance as a rulebook and governance as gospel - because that will not change.

R Shankar Raman: The transformational leadership aspect, which always remained very subtle in the CFO’s role, will be in greater demand in the next four years. The domain expertise and all the associated responsibilities will remain. They have to accept the limited shelf life of business models. So, keep scenarios planned for a shorter length of time. That will be biggest challenge. It crashes the pay back time for anything that you do. That will change the mind to invest or take risk.
According to me, crashing timelines and the ability to deal with that and fashion decisions around it and hence transform not only their function themselves but the ecosystem around them, is going to be biggest task.