66 INDIAN MANAGEMENT APRIL 2019

CASE
STUDY

Past is passé?
High leverage ratio has sounded the death knell for many
companies such as Lehman Brothers, Enron, and Kingfisher
Airlines. Companies such as Infrastructure Leasing & Finance
Services Limited (IL&FS), Leela Hotels, Lanco Infratech, ABG
Shipyard, Reliance Naval, and many others are on life support.
All these companies have one commonality—high leverage.

In this case study, we analyse the crisis at IL&FS, one of the

top Indian infrastructure development and finance companies,
which operates through more than nearly 300 subsidiaries. A
crisis brought about by hubris—building a grandiose order
book by pitching for every big project. A culture perpetuated by
an externally powerful chairman with little internal power of
introspection. And a tough external business environment and
easy access to credit further compounded the problems.

High leverage, which has been cited by most business media as the
cause of the debacle is only a symptom and not the disease. The
real causes are behavioural blind spots leading to dysfunctional
learning among successful CEOs and the failure to realise that a
volatile and uncertain business environment requires a different
mindset, models, and tools.

INDIAN MANAGEMENT APRIL 2019 67

 C
ompanies, large and small,
have not yet realised that
what brought success in the
past may not work today,
and the cycle continues.
Technological advances
or economic turbulence
could render us obsolete. Changes are fast,
uncontrollable, and unexpected. The future too
is unpredictable, making our prediction tools
such as those for strategic and financial planning
obsolete. Debt is a fixed cost and is a deadly
poison during such times. When a company takes
on debt, it assumes that the future environment
will be stable and they can pay it off with
increased revenue. Even in the disruptive world,
debt is essential for operations and the future
growth of most companies.
But how much? Past successes
The failure of leaders instill a false sense of confidence
to learn as they moved on companies that they can
up, believing that they sustain operations with an ever-
had acquired a formula increasing debt.
Many companies have
for success, and what been the victims of their
worked in the past own success—the demise of
will work in future too Kodak is a good example. The
is the real cause of erosion of wealth at IL&FS and
the disruption it has caused
the debacle. to the economy have forced
us to question many of their
decisions. What led IL&FS to put all their eggs
in the PPP basket when this model has not
found sustainable success in any part of the
world? Why were warning signals flagged by
financial ratios such as current ratio, operating
cash flow to sales ratio, and debt/equity ratio
ignored? Why did the management fail to
recognise the signs of an imminent collapse?
We believe that the failure of leaders to
learn as they moved up, believing that they
had acquired a formula for success, and what
worked in the past will work in future too is the
real cause of the debacle.
68 INDIAN MANAGEMENT APRIL 2019
CEO worship
The past success record of a leader can lull the
Board into ignoring the morass the Chairman
is leading the Group into. This CEO worship
manifests in different ways—a leading financial
institution giving its leadership a clean chit even
before any preliminary investigation, and CEOs—
under instructions from the Reserve Bank of
India—being asked to leave for padding the
balance sheets. In most cases, the Boards would
have been aware of such misconduct but choose
to overlook it. Even when there is no misconduct
involved, iconic organisational heads have pushed
across their pet projects—despite being loss
making—without much internal dialogue.
Lack of financial discipline
Cash flow is considered a major predictor of
bankruptcy, especially in the construction
industry. According to Construction Financial
Management Association, half of the 400
contracts that went bankrupt, were due to
mismanaged cash flow. We have studied failures
in the Indian corporate sector and found cash
flow to be a major cause of stress (refer No
room for complacency in Indian Management,
November 2016).
In organisations, especially those dealing with
the government and state agencies, the top
management should keep a close eye on the cash
flow as payments are subject to frequent delays
due to poor finances of state governments, ad-
hoc decision-making process, and arbitration.
Many infrastructure companies such as
Lanco, GVK, and GMR as well as real estate
firms like DLF have suffered due to cash
flow problems in the past and lessons should
been drawn from them. All these companies
faced severe operational problems due to
fast expansion and adding new projects to
their kitty without looking at the mismatch
between revenue and expenditure. Well-run
companies keep sufficient cash ready in hand
for deployment for such exigencies.

Leverage
Using high-debt leverage to expand is a highly
unprofessional and indisciplined conduct in a
VUCA world, especially when you have only the
government as the customer. Debt is a fixed cost.
Kingfisher Airlines and more recently, the Leela
Group’s problems multiplied due to compounded
interest burden. The apparent
failure of Lehman Brothers
Using high-debt leverage was also due to its very high
to expand is a highly leverage of 44:1, leaving it no
unprofessional and manoeuvring flexibility as the
indisciplined conduct in a business environment changed
suddenly. IL&FS’s debt-equity
VUCA world. ratio of 17 left it without
agility to make any mid-course
correction to manage in an environment when
revenue dropped suddenly. The Leela Group
took on huge debt to construct their Delhi
hotel, whose opening coincided with the advent
of recession, reducing hotel bookings, and
consequently the owner was unable to service the
debt. Leela operates in a different industry and a
much smaller scale, but the principle remains the
same—keep debt low during uncertain times.
CASE
STUDY
© Shutterstock.com
The leader’s unchecked appetite for ever-
bigger and riskier projects, dismantling of
internal checks and balances, and a pliable Board,
ratings agencies, and statutory auditors cleared
the deck for a massive fall. This has happened
before, in India and abroad.
Weak internal systems and processes
In IL&FS, the Risk Committee, a vital function in
finance companies, met only once in four years
between 2014 and 2018. It is not surprising
that during this period, the total debt doubled
to $13billion and so did the interest payment.
The pronouncement of some board members
that there was no need for a risk committee
as they themselves were monitoring this vital
function is absurd. The Board should have learnt
lessons from Lehman Brothers where the risk
management function was downgraded leading
to its bankruptcy.
Madelyn Antonsic, Chief Risk Officer who
was crowned Risk Manager of the Year by Risk
magazine in 2006, was fired in 2007 for warning
the Lehman Brothers board about its ‘too risky
adventure’. On the contrary, Richard Fuld was
INDIAN MANAGEMENT APRIL 2019 69
 appointed, with no formal background in risk
management or training. At IL&FS too, the
Chairman and his acolyte CEO, an associate of
over 28 years took bigger and bigger risks and
they would not leave a single opportunity to
bid for ultra-big projects. With each award, the
Chairman’s voracious appetite increased further.
Over confidence lead to heavy debts in the
expansion journey.
Poor success history of PPP Model
The public-private partnership model, except
in rare cases, has not worked in India and in
most of the developing world. Companies
should have taken cognisance of this fact and
not put all their eggs in such a basket. This is an
experimental field and should have been treated
as such. Governmental agencies
have been known to modify
Listening to diverse contracts post bidding and this
viewpoints and carefully alone should be a cause for
weighing in evidence vigilance. These companies
should have drawn valuable
are essential aspects of lessons from the case of change
critical thinking. in norms for merchant power.
Many power plants were set
up on the premise of selling merchant power and
sold as a commodity in the spot market. Initially,
it was encouraged but not later. Funding stopped
and soon the projected revenues dried up. This
led to a liquidity crisis, which impacted power
generation companies, and those like Lanco faced
huge losses.
Lack of critical thinking skills
Speed is the enemy of critical thinking.
Functioning in the VUCA environment requires
ABOUT THE AUTHOR that the organisation develops skills to capture
Dr Aseem
even feeble signals that represent opportunity
Chauhan is a or threat. Listening to diverse viewpoints and
Founding Trustee, carefully weighing in evidence are essential
Amity Education
Group and serves aspects of critical thinking. And this requires
as Chancellor, Amity slow decision-making. When leaders surround
University.
themselves with a coterie of ‘yes men’, they
70 INDIAN MANAGEMENT APRIL 2019
lose this perspective. They become victims of
their success, and their pride makes them take
unnecessary risks. These leaders are action-
oriented and do not want their pace to be
moderated by data or advice, which is contrary
to their own opinion or thinking. Slowly, they
ease out contrarians in their organisations. People
in the lower rungs of the hierarchy observe
these blind spots and start padding reports they
transmit upwards. Adani’s Australian coal project
is a case in point. The reason for over 35 of
world’s top banks refusing to provide funds is not
environmental but economic. The project was
conceived in 2006 when coal prices were $130
per ton, the highest ever. Even at that time, there
were clear indications from various studies that
this price cannot be sustained. Today, the price is
$60 and the break-even cost of the project is $90.
Today, Arctic explorer Ernest Shackleton is
viewed as a great leader, who brought back every
single crew member after his ship was stuck and
marooned in a sea of ice for over two years, in
1914. He is a towering figure of endurance and
his leadership is lauded in bschool case studies,
several books, and movies. But nobody pauses
to ask why he ventured at all when at a whaling
station close to his destination, where his ship
halted to take supplies, he was warned by
experienced Arctic natives to go back as winter
had approached early. Shackleton’s ego came in
the way of critical thinking, which did not allow
him to retreat; he moved forward, taking riskier
decisions and ultimately got stuck in ice that
crushed his ship in due course. It is a similar lack
of critical thinking that led to the bankruptcy of
Lehman Brothers and now IL&FS.
In 1989, Japanese consultant Sidney Yoshida
produced his study, The Iceberg of Ignorance, based
on his observation at a Japanese company. He
discovered that the higher you go in a hierarchy,
the less information you have about the problems
within the company.
It is not surprising that IL&FS Board, which
oversaw the operations of a complex structure

comprising over 138 subsidiary companies, was
either ignorant of looming financial problems
or misled by the executives. At the time of crop
failure, which struck USSR in the ’60s, the
politburo was under the impression that there
is no shortage of grain because harvest reports
which moved up the bureaucracy were padded a
little at every level, giving a positive picture.
In times of looming crisis, leaders really need
urgent and accurate information from the front-
line to survive. Chefs who mingle with the guests
and welcome feedback know more about their
business, especially what is not working than
those who shut themselves up in their kitchen.
So, what are the various methods for avoiding
ABOUT THE AUTHOR failure and creating a future-proof organisation?
Suhayl Abidi is
co-author, TThe High debt is a killer in VUCA
VUCA Company and The first lesson is not to have a large debt
The VUCA Learner.
exposure. As already mentioned, interest
CASE
STUDY
payment is a fixed cost and in future times, if
revenues dip substantially and the company starts
on the road of default, it can kill it. On the other
hand, companies with cash reserves can take
advantage of unexpected opportunities to buy
distressed assets.
Stressing the importance of cash reserves
in times of uncertainty, management guru
Ram Charan said, “Cash is King. Cash is Blood
Supply.” Importance of cash in the short term
cannot be ignored. It is important to learn
that restructuring a debt can be based on the
volume of cash generated (the supply), while
revamping is in process. One needs to stay
focussed. However, neither IL&FS nor ADA
Group was listening.
Welspun Enterprises is a company operating in
the same infrastructure space, though not of the
same size as IL&FS, but its functioning provides
some learning on how infrastructure companies
should manage under volatility and uncertainty.
It has a robust balance sheet and was able to turn
around from a high-debt-laden firm to a cash-rich
enterprise. Today, it is sitting on a `7 billion cash
reserve, which it can deploy as opportunities
arise. The company intends to monetise its assets.
This is a possible model for an infrastructure
company in a VUCA world. Keep debts low,
have strong cash-flow, and keep monetising
completed projects. Strong cash reserves and
low debts not only provide a cushion for an
unexpected future but also provide resources to
take up new opportunities.
This essentially means to go slow on expansions
and diversifications in unrelated lines. Learning
is a slow activity and the expansion must keep
pace with embedding of learning within the
organisation, especially the top management.
Develop in-depth critical thinking abilities at both
top and middle management levels to enable
all aspects to be thoroughly studied and various
outcomes identified. Are enterprises under the
influence of VUCA, ready to start deep thinking
on managing cash-vs-debt scenario?
INDIAN MANAGEMENT APRIL 2019 71
Leaders have to learn from Fixed mindset and a know- First is for the leaders to develop insight into
all culture their own behaviour through reflection. How
the past, present, and many of us do so? This essentially means the
First, leaders must understand
the future and encourage that they are not the model leader exercises humility and accepts that he is
others to do the same. of the infallible, visionary, not a ‘know-all’ but an ignorant person who still
and confident leader who can has a lot to learn. This starts a journey towards
single-handedly steer the ship to its destination. a learn-all leader who instils the same culture
When leaders have been in positions of power in the organisation. Mindset by Carol Dweck
for decades—as in the case of IL&FS—their has further classified people in two classes—
past successes creates a fixed mindset, which fixed mindset and learning mindset, thereby
percolates down and embeds in the culture. strengthening the proposition of learning
The leadership at IL&FS created a know- abilities. Is it not high time to change the
all culture—people at the top did not listen, mindset? Leaders have to learn from the past,
ABOUT THE AUTHOR learn, and improve and this attitude percolated present, and the future and encourage others to
downwards. They continued practices that do the same.
Dr Manoj Joshi
is Professor of brought them success in the past. People with Learning from the past – Learn from your
Strategy and
different perspectives or contrary views were, own and others’ past experiences. Hitler’s
Director, Centre
for VUCA Studies, over a period of time, either asked to leave victories in Western Europe bringing the mighty
Amity University. He or learned to suppress their opinions. Only France and England to their knees made him
is the co-author of
The VUCA Company people of a certain mindset remained and the insular to sound advice from his generals, and
and The VUCA organisation became a victim of the Iceberg also the experiences of Napoleon 200 years
Learner. back, when he decided to invade Russia. He
of Ignorance.
made an identical mistake and the campaign
was a disaster, marking the end of his fall. Past
successes often make know-all leaders discount
hazards and start taking excessive risks, bringing
ruin to themselves and their organisations. They
do not share responsibility for failures, which in
their mind is always the fault of others. Lanco
Infratel is just one of the many examples, which
can alert a learn-all leader to the perils of fast and
indiscriminate growth. The entire infrastructure
sector has serious macro issues from land
acquisition to cost overruns to failure of PPP
model to unpredictable decision-making. IL&FS
should have been aware of these and learn from
those who failed earlier. Instead, they walked in
the same shoes. Some companies are better at
execution of projects rather than running them.
IL&FS should have studied their strengths and
© Shutterstock.com

weaknesses and taken decisions accordingly.

Learn from the present – Humble leaders
accept that they and their senior colleagues
do not have all the answers. They encourage

72 INDIAN MANAGEMENT APRIL 2019


their employees, especially those who interact
with the outside world such as vendors, and
customers, to keep their eyes fixed on the
horizon and alert them of green shoots of
changing trends. They set up systems through
which information on probabilities and insights
is collected, collated, discussed, and insights
are passed on to the management. In short,
they develop an anticipatory organisation as per
Daniel Burrus.
These organisations
encourage both top and
Learn-all leaders know middle level individuals to
that the future is uncertain keep a hawk’s eye on risks
and they do not know instead of relying only on risk
management specialists. The
how to navigate. They risk management systems
believe in and encourage (ERMS) presently in use
experimentation and may be flawed as they can
develop various options only visualise risks that have
emerged in the past but not
and prototypes.
the ones that may emerge.
This can be considered to be
an improvised version on agility. Firms with
healthy cultures challenge their assumptions on
a continuous basis. What went wrong should
be assessed and rethought, rather than stating ‘I
know all’. Leaders should become
active listeners.
Jeff Bezos, CEO of Amazon, is known for
surrounding himself with smart people and that
is what differentiates him and the enterprise.
He constantly is on the lookout for those who
admit their mistakes and are ready to change
their views. Bezos has observed that the
smartest people are constantly revising their
ABOUT THE AUTHOR understanding, reconsidering a problem they
Dr Ashok Kumar thought they had already solved. They are open
has 47 years of to new points of view, new information, new
experience as
Professor, IIM ideas, contradictions, and challenges to their
Indore and Amity own way of thinking. He says, “Consistency is the
University, and
General Manager hobgoblin of little minds.”
at SAIL. He is also At the peak of its success, by 1976,
an author.
Kodak enjoyed 90 per cent market share for
CASE
STUDY
photographic films and 85 per cent camera
sales in the United States with 60 per cent gross
margin. Until the ’90s, it was among the five
most valuable brands. Fuji Film enjoyed a similar
success in Japan. Success had made Kodak a
complacent monopolist. It was unwilling to let
go a business that was bringing in such a high
margin. On the contrary, Fuji’s saw the coming
demise of its film business and started a painful
transition to new business lines. It was a stark
choice—either reconstruct the business or die.
Today, Kodak is insolvent, while Fuji is thriving.
A learn-all leader keeps asking:
 What else should be considered?
 Who else needs to be part of this decision?
 Who has the expertise that we might leverage?
 What have we learned from past mistakes/
successes?
 What is the contemporariness of the business
and its periphery where we exist?
 What is the future?
Learn from the future – Know-all leaders
fear new ideas and methods. They continue
with a rigid command-and-control hierarchy.
They judge the future by the past. Know-it-
alls did it right last time. They choose to avoid
mistakes, but innovation thrives where failures
are encouraged.
IL&FS should have treated PPP as an
experimental model, a work in progress, and
not as a matured working model, which can be
applied indiscriminately.
Learn-all leaders know that the future is
uncertain and they do not know how to navigate.
They believe in and encourage experimentation
and develop various options and prototypes.
They know that some will fail. They do not have
a single roadmap but develop future scenarios.
In short, they develop an experimental or an
‘explorer’s mindset’. The future belongs to
learn-it-alls.
Reference
Princeton, N.J, 2007 https://www.ecmweb.com/ops-amp-
maintenance/credit-crunch
INDIAN MANAGEMENT APRIL 2019 73