The relative (un)-importance of different stakeholders...

My younger sister has been feeling pretty disheartened lately. Ever since graduating with a Master's in Technology degree from the prestigious Indian Institue of Technology, Delhi in December, 1999, she has worked for one firm. One firm...which in less than 8 years, has been sold twice, resulting in three different names...three different identities.

It was Hughes Software Systems until 2004. Flextronics, a global electronics design & manufacturing company picked up a controlling stake in HSS in 2004 and named it such. And just last year KKR, the global Private Equity player, made its first investment in the Indian market by picking up HSS aka Flextronics Software for US$ 900 million. After a much-publicized opportunity to erstwhile employees to coin a name for the new entiry, Hans Juergen Leicht's response was eventually chosen and the entity was christened Aricent.

Now, I've talked in some of my earlier posts about the different stakeholders in a corporate organization, often with subtly conflicting interests. Consider the interests of the owners versus that of employees. Senior management's priority numero uno is to generate shareholder value, i.e., generate high returns for the firm's owners. Employees, of course, have a set of expectations as well that dont always coincide with those of the owners. In the long-run, management's job is to ensure that these 2 sets of expectations coincide as much as possible. ESOPs were essentially born out of this thinking. Nonetheless, when times are hard, cracks appear.

To my mind, the entry of a celebrated (some would say ruthless) PE firm into the Aricent equation coupled with the current macroeconomic scenario in India (rising rupee hitting earnings) has accentuated this conflict. Aricent is not a public company but its owner, KKR, is probably more demanding than any public institutional investor would be, particularly in terms of its Return on Invested Capital (ROIC) demands.

To meet these demands, KKR no doubt is driving efforts to ensure that Aricent operates with the maximum efficiency possible. Depending on the firm's positioning, this often boils down to streamlining cost structures, particularly variable costs, as these restrict scale and eat into ROIC margins. "Soft" perks visible to the employee suffers first. So earlier, while working long hours, my sister could pop into the cafeteria at 10 pm and get a quick snack virtually free, today she needs to get such a 'perk' pre-approved. Earlier, she could have availed of a taxi anytime after 9 pm, today she has to wait till 10 pm for the sole service. Morale suffers, frustrattion fosters and with time, a sense of betrayal creeps in.

In a country with a socialist economic background, where today's professionals grew up with their parents working for 1 firm all their lives, loyalty to a firm (and a firm's loyalty to its employees) still means something. And in this pursuit of higher margins, employee discontent does not get the attention it deserves for 1 simple reason: the losses are initially intangible and manifest themselves only in the long-run. And for KKR, who only made this deal to leverage on Aricent's upside potential, and convert every $10 invested to $15 (hypothetical) in a 2 - 3 year timeframe, such long-term considerations merit no action. Pity.

I wish I could consign this to a PE-limited problem. Publicly owned companies tend to obsess over short-term numbers just as much. It takes a brave, honest set of leaders to resist this temptation. Jack Welch provides perhaps the best model when he famously refused to give out obscene Wall Street I-bank-type bonuses to GE's banking subsidiaries. The rest of us though must continue to dream...