How to build institutions

This is the last and final part of the three-part series on the captioned subject (the first two appeared on March 11 and 27). To summarise the key message, there is a big difference between a good company and a business institution as illustrated by our three books on TCS, Biocon and L&T.

A good company is run by a competent CEO, but a business institution is crafted by a shaper. The shaper displays a certain drive; a distinct orientation of mindset, behaviour and action (MBA); these transform the company. In the earlier articles, some highlights of TCS and Biocon were described briefly. In this part, a company that makes India proud — L & T — is briefly described.

Former managing director, K Venkataramanan, reflected on L&T’s orbit-changing strategies (he credits AM Naik) by saying, “What is today’s L&T is because we could move from simple fabrication to nuclear, space, defence, oil and gas. Our construction wing moved from simple road construction to complex construction projects like airports and metros.”

While effecting this transformation, then CEO, Anil Naik, demanded “critical thinking” from the leadership team to uncover why L&T was valued poorly compared to blue-chip companies. In 1999, when Naik assumed leadership, L&T was valued at Rs 5,000 crores. Given the complexity and scale of its projects, he wondered why it should not be Rs 2.5 trillion. This required the team to identify the levers of change available to it. Naik was willing to admit that he did not really understand the science and art of share pricing.

He led Project Blue Chip that deconstructed the logic of share pricing. Share pricing is an outcome which reflects the value created by the company. Disassembling the formula for share pricing into its parts brought into full view what levers the management had for positively and constructively influencing the market perception. Such understanding would not leave pricing purely to the whim of the share market.

When the ownership of L&T seemed vulnerable, Anil Naik’s critical thinking led to an unusual insight. He saw a distinction between financial ownership and emotional ownership. “It struck him like a bolt from the blue that L&T was emotionally owned by workers though they were not its financial owners,” our book avers (How Anil Naik built L&T’s remarkable growth trajectory). This changed his mindset, which in turn triggered changes of behaviour and actions to solve the short-term problem with a long-term perspective. The cement business was sold, an L&T Employees’ Welfare Trust was set up, employees got stocks of the company and Naik made his most enduring contribution as a shaper — he aligned the financial ownership and the emotional ownership of the company!
The writer is a distinguished professor of IIT Kharagpur. He was a director of Tata Sons and a vice chairman of Hindustan Unilever. Three co-authored books in a series called ‘Shapers of Business Institutions’ have just been published by RUPA — on TCS, Biocon and L&T

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel