How does a country from being at the fountainhead of philosophy, mathematics, science, astronomy and intelligentsia find itself on a slippery slope (no pun intended) - This is story of Greece, as its economy along with its plethora of knowledge seems to be heading towards an abyss.
This is not the first financial crisis in the past couple of decades to impact Europe but the very magnitude and the lack of initiative on the part of Greece primarily and the European Union is in itself very baffling. One does not begin firefighting when the raging fire has burnt everything in its path.
Corporates across the world have to learn from this crisis as there are many parallels here.
1) When the writing is on the wall - Read.
Many corporates like Greece are in denial of the looming threat but ignore it at their own peril. Call it arrogance or ignorance but many a wildfire have been stopped in its tracks by pouring just a cup of water at the right time. Corporates should have a risk recognition and mitigation mechanism that puts out these small fires as soon as they manifest.
Performance measurement is the key - Countries should watch their GDPs and Corporates their fiscal, operational and financial performance.
2) There is no such thing called over governance.
There is either governance or no governance anything in between doesn't make any sense. Setting policies, procedures, practices that work and realistic are critical. A vision statement that endears itself to the masses but cannot be practically executed or implemented makes no sense. Same goes with an Operation Manual or Standard Operating Procedures that are neither standard or operational. The good-to-have feeling, whether it is from a Corporate Governance or governance of a nation, has no place in the real world.
3) Pay attention to your finances.
Greece like many corporates of the day would definitely have planned to change the world but did they have enough gas in the tank to go the distance or for that matter knew who would be funding them at the pit stops is a key question.
The CFO and the Finance team are the last people to abandon ship but if there is a sudden flight of talent from this team the warning bells should sound.
Another important point to note is not to raise or take money more than you can spend - this in my opinion is the real funny money. Corporates that are not fiscally intelligent do not know what to do with this excess cash - they land up buying a whole amusement park when all they needed were two passes. Thrift, frugality and spending within limits are not necessarily bad terms.
Bloomberg Business had this to say in 2004 - "With public debt totaling €168 billion in 2004, it’s clear that the Olympics alone did not bring about an economic collapse. Yet the Athens Games epitomized the structural problems that bedeviled the country for decades. It’s not just a question of how much money was spent on the Olympics, it’s also how it was spent and where it came from. After a period of austerity to tighten up its finances and qualify for euro entry in 2001, the Greek government loosened the purse strings once it entered the single currency. The games were just one of several areas where public spending was unchecked and funded by unsustainable borrowing"
And just for the record the Games cost them - €9 billion
4) Don't anticipate a bail out package.
Much to the chagrin of the European Union, Greece always believed that they would be bailed out yet another time. The very word "bail out" is temporary in nature and is not a permanent solution. One does not borrow more to make the situation any better. Corporate policy measures should be austere by design so that austerity measures are not warranted.
When you borrow either via the debt or equity route, the responsibilities are greater. Any country or corporate that does not have a repayment schedule in mind as well as a methodology to do that is plain irresponsible.
5) Imprudence is also globalized.
Gone are the days where a country's economy was insulated and did not impinge the economy of the other. In a globalized economy, the smallest of financial imprudence or misfeasance has a cascading effect. The bourses outside of the European Union are also impacted.
The sub prime crisis brought out a very interesting facet of the banking mechanism - I have a loan but do not really know who the lender is. The IMF and European Banking System are the first in the list that would go after Greece but where did they in turn borrow the money to fund Greece in first place is the key question - This is where the Asian, US and other economies are impacted.
Just as banks have their Know Your Customer (KYC) norms, corporates should have instill a parallel Know your Lender norms - a transparent process where the Board is aware the quality of the lender and the money, how integrated they are with the business and how much is their desire to facilitate growth - These are key parameters in mitigating the risk associated with raising and utilizing funds.
Another key aspect is for corporates to learn from the peers in the same vertical. Repeating a mistake that caused a loss to a peer is unpardonable as it just means that the company is so obsessed with itself that it ignored something that the competition burnt its fingers with.
6) Then there is the stakeholder - who generally finishes last.
Greece forbade its citizens from withdrawing more that €60/day initially and in a sweeping stroke then shut shop of its banking system for 6 days. So the stakeholders, in this case the citizens are bearing the brunt of fiscal and economic stupidity of the country's leaders. And at the end of the day - who's money it is anyway - the people's.
Corporates on the other hand, when they choose to resort to similar tactics, generally lose its customers, the confidence of its investors and shareholders and has a far reaching impact of its very existence. Corporates in these instances literally get away with murder and the stakeholders are left holding a bag - all because they chose to back the organization that they believed was destined for greater glory.
These situations are best avoided by adopting a combination of prudent policies, transparency, proper governance and fair fiscal and financial practices. In summation there is no substitute for common sense - Well at least there is no app for that as of now.
(This blog post is authored by Venkatesh Nagarajan, Co-founder at SansPareil - www.sp-cag.com)
