Chapter B1
Rule 1: The Balance of Personal Power
It’s easy to eat a pakora even if you don’t particularly like pakoras. It’s much harder to become India’s greatest pakora cook unless you really like both pakoras and frying! You simply won’t last long leaning over a sizzling cauldron of some rather evocative blobs of something yellowish and amorphous, sweat dripping off your chin, the crackling oil scalding the back of your hands as you ladle those seething life-forms around in their inky bath of blackened oil. To become an expert, you have to believe that on the other side of this self-flagellation lies a culinary experience worth the pain. To successfully do anything, you have to believe that it is worth doing. This is true of litigation.
This is also true of what comes after the frying. Eating a green chili pakora is an act of conviction, and an act of supreme faith. You have to want to eat that murderously pungent beast but more than that, you have to believe that its Scoville Heat Unit is within your tolerance zone. You never know if you have bitten off more chili pakora than you can chew till after you’ve bitten it. And then it’s too late because as the good Sufi Omar Khayyam nearly said, the moving teeth bites, and having bit, move on! The good Sufi did not say that it’s the tongue that takes the heat. If your tongue is not convinced about the joys of highly pungent pakoras, your pakoras will never be winners. All of this is also true of litigation.
There are three morals to this completely irreverent pakora story. First you have to want to engage in cooking. Second, you have to believe in the fruits of your cooking. Third, those who carry the consequences of your cooking have to believe in the product created by your cooking. This is the essence of Rule 1 about fighting legal wars. Indeed, this is axiomatic about everything you may choose to do or not do in your life. The problem though is to understand what this means. When I say you must believe in cooking, in pokaras as food and in eating it, who is this ‘you’?
If you are just a single guy on your first job away from home taking a decision that impacts no one else, it’s pretty easy to decide what you believe in. If you have a landlord from hell who dishes out crap because he can and basically shoehorns you into pointlessly hostile situations no one needs just to keep you unstable, you can say ‘I’m done with this dung beetle’ and refuse to vacate the room when he asks you to. For you, it’s a simple decision: do I want to get a lawyer and pay him to fight a case? I either want to or I don’t. That’s not rocket science. On the other hand, if you are a law officer in a large corporation dealing with a complex legal issue in a high stakes contract with an old company customer, it’s not so simple. A company is not one person. The owner may think one way, the Managing Director in another and the CFO in a third way. Very likely you don’t even know what you think because like Lord Hanuman on his first visit to Sri Lanka, it’s not your wife and it’s not your fight and it’s not your life but you are hopping all over town with your tail on fire!
Besides, even these hot shot honchos you report to may not know what they truly think. We Indians practically invented analysis paralysis. We are erudite, eloquent, incisive and also frustratingly ambivalent! You could get a series of buck passing “on-the-other-hands” views hammered into the very core of your skull till you feel like an aging Common Indian Langur with a bad case of migraine. In contexts like this, the corporate chain of command is nothing: it’s just a bunch of guys up the ladder who want to preach to you without taking responsibility for decisions they are pushing you to carry responsibility for. This is the key to the problem. It’s not about taking a decision: it’s about implementing the decision. Taking a decision is a process. Implementing a decision is about belief of all those who have to implement it. In practice, any war is fought by many people at many levels of any organization. The boss may believe in the war, but if the foot soldier in the field does not, the Board Decision does not translate to action in the field. That is a disaster unfolding.
When a company sets out to fight a legal war, and you are the guy who has to make it happen, you have to ask if the guys implementing your strategy believe in it. It could be a few people or it could be a lot of people. If it’s a simple court case to recover money or avoid a tax demand, it’s not a lot of people. You could talk to the legal guys and the finance guys and between the two, you can get a buy-in from both the front line and the financier. But when it’s a dog fight on the street between companies, muscle flexing for the market, or two major shareholders fighting over who controls a company, a lot of people get into the mix. Many of these people are now allowed to say what they think. When the evocative amorphous aromatic yellow matter that is not pakora dough hits the fan, the guy who comes out ahead is the guy whose team is delivering on the plan. When we need many people to implement a strategy, we need them – or at least most of them – to believe that they are fighting the good fight.
Actually, even people not implementing the strategy must at some level believe in the fight. When something serious happens in a company, everyone is impacted. If your enemy gets a stay order stopping you from using your trademark, your marketing people cannot close deals and start to lose out on their commissions. You don’t have to be a soldier to have bombs falling on you. If the civilian on the street cracks up under carpet bombing, the whole army comes undone pretty quickly. If you are fighting the government over unfairly levied taxes and the department start sealing your stockyards, your salesmen will be paralyzed and your competitors will bury you. Sometimes, whipping up belief in the war is really about getting the weakest links to become stronger. It’s a mental thing.
It may not even be the company soldiers who are the weakest link. It may be the lawyer. Your lawyer may not believe in the case you want him to fight. When this happens, your enthusiasm doesn’t translate into any action at his end. You may find yourselves stonewalled, unable to get him to do what he agreed needs to be done. That is another disaster unfolding.
More likely though, the problem is not the professional outside lawyer but the company man who handles the lawyer. This person may be the Company Secretary, the accounts department, an in-house lawyer or even the Managing Director’s Mr. Fixit. This person can fracture the communication channel to the outside professionals, making it impossible for these professionals to understand their instructions, leave alone deliver on them. Lawyers need competent company front men to make sure everything gets done, dusted and delivered. When lawyers confront a skeptical client, or payment of their bills get delayed, they lose interest in the case. How often have I seen a perfectly good strategy screwed into the ground because the front man just wouldn’t push it? The whole command control chain has to run smoothly or it’s a disaster unfolding.
Let me simplify the conclusion. Before you set out to fight a legal war, you have to ask ourselves if you have the personal power to fight a legal war. If you don’t have your team’s buy-in, you are best off not starting a fight. If your fight is going to entail some effort from the whole company, you have to have everyone’s buy-in.
Even that is not enough though. It isn’t enough for you to have your own forces primed for battle. This rule is about the balance of personal power. It takes two to make a war. This means that when you take a decision to fight a legal war, you have to see how the balance of personal power stacks up on both sides. On the principle of it, power is not evaluated in a vacuum; it is evaluated in the balance. There is no perfect power in this world: all power is relative. No one is invincible. Everybody suffers from some form of weakness. This weakness is only noticeable when you compare a guy to the other guy. To fight a war, you need to have substantially more power than the other guy. You have to ask yourselves about the state of personal power of your enemy.
I am going to use some illustrations to explain what this calculation is about. Take this case.
The Scantel case
In 1995, the government announced an attractive new telecom policy. Many foreign companies found the opportunity interesting even though they could not own more than 51% of the operating Indian telecom company. Scantel, a telecom player from Europe, was one of them. Because of the cap on foreign shareholding, Scantel hunted around for an Indian partner. They found Indotel, a local wireless equipment manufacturer. Together they bid for paging licenses and won four licenses in four states. To operate these four licenses, the two shareholders incorporated a joint venture company – the Indoscan India Limited, or IIL – and rolled out the paging network.
Actually, IIL was doomed from the start. It was in the interest of every operating company to quickly roll out a network, offer a cheap service and start paying its shareholders back. Scantel, the foreign shareholder had pretty much the same agenda. Unfortunately, the Indian partner Indotel did not have the same agenda. Indotel was a wireless equipment supplier. It saw the operating joint venture as a captive customer who would buy billions of rupees of pagers and paging transmission equipment. That was the mother of all conflicts of interest right there.
And so it proved in practice. As a majority partner in control of the board, Indotel forced IIL to buy stripped down radio paging transmission equipment at fully loaded prices. As a result, IIL build an obsolete network at a very high cost. On the consumer equipment side, Indotel pushed low quality, low specs overpriced pagers into the IIL ecosystem. Bear in mind that as a cross border joint venture company, IIL was manned mainly by Indotel employees. IIL placed order for large quantities of pagers on Indotel on the basis of the most optimistic projections and collected the money immediately. Indotel did not care that IIL was carrying unnecessary inventory, or the wrong type of inventory: it had already been paid for those pagers.
Scantel, as the minority partner, found it impossible to do anything about any of this. Indotel, the shareholder, became profitable very quickly while IIL, the operating company, started to bleed. Scantel knew that sooner rather than later, these losses would wipe out the capital of the company and Scantel would be asked to inject more cash or be diluted. Indotel was sucking profits out of IIL before IIL made any profits! IIL board meetings were like something out of a Salvador Dali painting. Item one on the agenda: pay for a million pagers. Item 2: approve quarterly budget showing a million unsold pagers. Item 3: approve negotiation for another loan from a bank to pay for more pagers. Item 4: approve purchase of another million pagers.
By the time Scantel decided to argue the point, IIL existed for only two purposes: (a) to buy network equipment from Indotel and (b) to carry large stocks of Indotel pagers purchased without a credit line. In time, IIL also paid in advance for network building equipment and pagers, which were then not delivered for months afterwards. All this occurred even as the overall business environment in India worsened in 1997-8. Curiously, at this point, all paging companies offered subsidized pagers to customers, but not IIL. As a matter of industry practice, manufacturer and service provider generally shared this subsidy. Indotel would not agree to discount their pagers, forcing IIL to bear the entire cost of subsidizing all pagers. IIL’s business and cash flow went to hell.
That wasn’t the worst of it. Every paging company offered every brand of pager to its customers. IIL offered only Indotel brand pagers! Scantel tried to amicably persuade IIL to offer all brands of pagers to its customers. It asked Indotel to share the cost of subsidizing Indotel pagers. It asked for lower pager inventory levels for both pagers and network building equipment. Indotel wouldn’t agree. Partners started to argue. Over the next several months, the relationship between the partners deteriorated. Someone had to quit the venture. Scantel couldn’t run a 100% subsidiary in the telecom business in India at the time. Exit was Scantel’s only option. But who would buy a loss-making company held captive by a equipment manufacturer with a different agenda? For sure, Indotel would never pay a decent price for the minority shareholding in a company it already controlled. Scantel consulted its lawyers.
Would Indotel buy out Scantel at a reasonable price? Indotel had shown bad intentions so far. Scantel had already contributed all its capital into the company. It had already shared its technology and know-how. It had no further role. Indotel had majority control of the Board of Directors and owned the majority shares. It could run the business as it wanted. It did not need Scantel. If Scantel wanted to do better, it had to fight.
Legally, Scantel had a good case under company law. Indotel had bled the joint venture. Indotel had mismanaged IIL’s affairs. It had an even better case under its Shareholders Agreement. Indotel had not acted in the best interest of IIL. It had bled IIL to profit itself. It had engaged in illegal transfer pricing with its controlled subsidiary. In the process, it had ripped off its minor partner. It had forced IIL to buy overpriced obsolete equipment in advance against delayed deliveries. It had stolen Scantel’s confidential information. The list went on and on.
But Scantel did not go to court because it didn’t think it was capable of fighting court cases in India:
(1) Scantel suffered from a problem of cultures. It was a traditional government owned company. In its home country, the compromising culture meant that it had no experience of litigation. It had no skill in fighting cases in a foreign land. Management would not support litigation.
(2) IIL was a small investment for Scantel. Scantel didn’t want to put in the effort or manpower into fighting the case.
(3) Scantel was not structured to support litigation. It had no legal department. It had no archiving procedures which saved correspondence between joint venture partners. Putting together the legal case was going to be a nightmare.
(4) Scantel did not believe in the Indian court system. At the very least, it did not believe that justice delivered in a decade was any kind of justice at all.
(5) Scantel’s Indian managers at the time were not instrumental in coming to India. If the investment went down the toilet, they could blame their predecessors. On the other hand, if they lost the litigation, their careers would be on the line.
Scantel was pretty poor on personal power.
Conversely, Indotel was managed by a great dictator whose employees were frightened of him. Indotel’s CEO had both the board and IIL management under careful and close control. His entire army was as one, totally committed and totally beholden to him. Indotel would fight on home soil. They had the power.
Thus, the balance of personal power did not favor Scantel at all. If Scantel wanted a fight, it would have to first address its five weaknesses. Scantel did not want to address these weaknesses so it did not start a fight.
Scantel is a great example of a war that shouldn’t be fought. The case was good. But a good case is never enough. You have to have what it takes to fight it. Scantel did not have the ability to fight. The lesson here is clear. If the balance of power had not been considered, Scantel would have run head first into a court and then collapsed under the weight of indecision, self-doubt and personal contradictions.
The postscript to this case also teaches us something. Scantel announced its exit and then started a price negotiation with Indotel. The result was disastrous. Scantel wanted a ‘net present’ valuation. Indotel asked for a valuation on a ‘net asset’ basis. Indotel argued that if Scantel was not ready to share the risk and realize shareholder’s value, it had no business to encash a future value. Eventually, Scantel sold its shares for whatever it could get and left.
There is a larger message here. Scantel was right not to litigate in the circumstances. But could it have changed its circumstances instead? It did not ask this question and it did not answer it. If trusting in the good intentions of Indotel was not a solution, Scantel could have done what needed to be done to make sure it was able to fight a war. Here is a deeply pro-active process which didn’t bring full benefit because the big question was never asked.
Let’s now look at another case where the balance of personal power was examined and the client found it did not have the ability to fight. Yet, the company decided that it was going to fix its weaknesses, rather than give up.
The Weizmann Case
Weizmann was an engineering multinational with ventures in 40 countries. It had a huge technology edge in the auto component manufacturing business. When the Indian auto market opened in the early 1990s, Weizmann was slow off the line. By the time it arrived in India, the big boys had already found their joint venture foreign partners. Weizmann could either partner with a minor player or it could start a green field project and ‘learn’ the local market all by itself.
Weizmann decided to go slumming instead. It acquired a sick listed company protected by the Board of Industrial and Financial Reconstruction (BIFR). This company was owned by a maverick called Gupta. Gupta was flamboyant, he had superb PR and his charm was irresistible. He claimed his business had failed because he didn’t have the technical know-how to survive the bad market of the 1980s. We don’t know if this is true. He did have a state-of-the-art production line in his factory and Weizmann wanted that production line.
Weizmann made the deal, signing a joint venture agreement by which it purchased majority shares and got the right to appoint the majority of the directors of the company. They then submitted a rehabilitation scheme to BIFR and had the bargain rubber stamped.
Weizmann’s directors joined the board and appointed a professional deputy managing director to assist Gupta in running the company. Within days, Weizmann realized that it had been ripped off. Gupta had perpetrated an accounting fraud if ever there was one, hiding losses that were four times larger than what had been revealed to public shareholders. Weizmann panicked and immediately authorized an independent audit. The results were scary. In a nutshell:
(I) Ten years of producing third rate products meant ten years of accumulated market rejects. The Company never reflected this in its accounts because the share price would have collapsed. Besides, Gupta argued, with such losses now revealed, BIFR would have liquidated the company. He trivialized the fraud, claim that ‘non-reconciliation of debtor accounts’ wasn’t that big a deal and besides the company was too busy nursing itself back to health to worry about accounting fine print! As far as Weizmann was concerned, it has purchased a grossly overvalued company.
(II) To hide losses, Gupta had up-valued inventory, showing junk as stock in trade. Gupta had another name of this accounting fraud: he called it ‘non-reconciliation of inventory’. Yet, again, Weizmann had purchased a company with junk for assets.
(III) To paint a more optimistic picture for BIFR, Gupta had shown fictitious production and sales. To this category of accounting fraud, he gave the name ‘Pre-booking of sales’. He argued that he had shown this year’s production in the previous year for accounting purposes. He didn’t think this was strange: after all the orders had been verbally received in this year and only dispatched in the subsequent year!
(IV) The Company had large volumes of unsupported expenses. Gupta and his executive Directors drew itsy bitsy salaries but claimed large cash expenses on the company account. The accounting department was awash with fake vouchers towards travel, miscellaneous expenses, foreign trips, foreign exchange withdrawals, entertainment and so on. As far as Weizmann was concerned, Gupta was a thief.
(V) Gupta also re-routed creditor payments to his personal accounts. He had a large number of unpaid creditors on the street. Gupta paid them by bearer cheque and pocketed the money himself. To Weizmann, this was immoral.
(VI) Finally, Gupta advanced loans to lowly employees and round tripped the money to himself. He then put this money back as promoter’s capital contribution. In this way, he satisfied BIFR that he was committed to his company and was prepared to keep putting money into it. Weizmann could not see any message in this except that they had a devious and unscrupulous partner.
Weizmann was sitting on a time bomb. This was a listed company. To be silent was to become party to the fraud and join Gupta in perpetrating it upon the lenders, BIFR and public shareholders. If Weizmann did not speak, Gupta would soon be in a position to blackmail Weizmann. What was Weizmann to do? It could not clean out the toxic accounts without perpetrating another cluster of frauds. About the only thing it could do was come clean, inform the world, remove Gupta from the Board of Directors and restate its accounts. This meant war.
In early discussions, Weizmann decided that it was not ready for war. It had spent a lot of money and entered a third world market. It had done so because it believed it was buying a company. It could not explain back home why it had purchased a litigation instead. It was not structured to fight a war in a distant exotic eastern land. It had no legal department at home. It was a trans-national corporation. It did not understand India leave alone Indian law, Indian lawyers, or Indian courts. It barely knew its own Indian management and it did not know its labor force.
By way of comparison, Gupta was the Managing Director of the company. The company was full of ‘his men’. He knew all the workmen. He knew the bankers. He was the face of the company for the public shareholders. He may be the minor shareholder, but he had the executive power from the Board of Directors and he controlled the company. Clearly, the balance of personal power favored Gupta.
But Weizmann did have other things going for it. It had money, which Gupta did not. It had employees around the world, lots of them, and it could hire more Indian managers to run the litigation and the company. Its problem was psychological, not logistical. Weizmann didn’t want to quit and make a deal with Gupta. Sweeping the accounting crookery under the carpet was the same as getting into bed with a crook. If you sleep in muck, some of it is bound to stick. It had to fight, whether it wanted to or not. It made more sense to fix its weaknesses. How was Weizmann to fix its weaknesses?
To fight any kind of war at all, it had to get management control of the Board of Directors. Weizmann had appointed the majority of directors but Gupta was the Managing Director. When the battle opened, removing the Managing Director would have to be the first action. This wasn’t that much of an ask. It’s hard to kick out a director in India, but you can take his executive powers away without breaking a sweat. The sweat comes afterwards when he goes to court but if you have the paperwork to prove he is a crook, it isn’t that big a deal.
Gupta’s network of contacts and quick decision making was his strength and Weizmann’s second weakness. The only way around it was to get a lot of consultants and get ready to pay a lot of fees. If Weizmann could hire lawyers and liaison men in every relevant town, Gupta’s plans – whatever they were – could be thwarted.
BIFR was the third big issue. The company was still sick and it was still implementing a BIFR rehabilitation package. BIFR would be horrified to hear that Weizmann had entered the company and then violated the rehabilitation scheme. BIFR would expect Weizmann to talk to them before they did anything at all. If Weizmann did this, Gupta would immediately paralyze the company with stay orders. The only way around this was to take the company out of BIFR’s jurisdiction. This could be done if it put a lot of money into the company so that it wasn’t sick any more.
As we shall see in subsequent chapters, this assessment was critical to the battle as it then developed.
The Weizmann case is a pretty good example of what the personal power test can do for you if you want to fight a legal war. It’s a sure shot way of unearthing your strengths and weaknesses. It also an equally sure shot way of finding the enemy’s strengths and weaknesses. When you make such an analysis, you are able to develop strategies that bring out the best in you and exploit the worst in the enemy. In short, the analysis of personal power will reveal to you how to win the war.