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The Legacy of Deveshwar February 7, 2017

Full text of Mr K Vaidyanath's interview, excerpts of which was published in Mint

Mr K Vaidyanath (former executive director of ITC), Photo courtesy: Mint

What was the scene like in ITC when Deveshwar took over as the chairman way back in 1996 ?
He had a very turbulent start to his new innings. I distinctly remember that on the very first day of his taking office as the Chairman, ITC was slapped with an excise duty claim of Rs.803 crores! Later that year, the Enforcement Directorate initiated proceedings against ITC for alleged violations of FERA, and several of our directors and senior managers were detained. Forces inimical to ITC were working overtime to divide and destabilise the Company for their own vested interests. Eventually of course, ITC stood vindicated in all these legal cases.

It was also the time when ITC's growth strategy was crying out for a makeover - our diversification efforts (including the then recent forays into Financial Services and Commodity Trading), after initial success, were beginning to lose steam and the Company was in need of a new growth impetus.

Deveshwar responded with great courage and determination. He mobilised Team ITC to close flanks, set out a bold new vision for the Company and unleashed a slew of corporate strategies that would transform ITC in the next two decades into a FMCG powerhouse. The rest as they say is history.

Having known and worked with Deveshwar closely for so many years, how would you describe the qualities that define him as a business leader?
He has some remarkable qualities which I think have enabled him to succeed as a business leader. Firstly, he combines the mindset of an entrepreneur with the skill sets of a management professional. As an entrepreneur, he is risk taking, has courage of conviction, has great determination and dares to dream. As a management professional, he is a firm believer in good corporate governance, systems for checks and balances, effective financial discipline and control to sustain risk-reward balance and a people centric culture as a source of competitive advantage.

Secondly, he has this unique ability to switch with ease between macro and micro thinking. He would, for example, brilliantly conceptualise strategy, and in the very next moment deep dive into the micro details of its execution. He would always be concerned that a good strategy should not fall by the way side for want of efficient execution. In fact, he saw strategy formulation and execution as an integral part of top management responsibility, and as a corollary, always insisted that managers down the line had clarity on strategies they were helping to execute.

Thirdly, there is an overarching dimension to his leadership profile - he is driven by genuine patriotism. In every strategy and plan, he would look for the ‘nation' angle and ask " how can we leverage this idea to add value to society ?”. He is a true believer in Gandhiji's concept of trusteeship, and never tires of reminding his team that we are here to create both shareholder and societal value. His obsession with the triple bottom line concept would often remind me of the beautiful line from the song by Bryan Adams - "everything I do, I do for you”. The "you” in this context obviously signifies India.

What was the nature of opposition Deveshwar faced for his diversification strategy and how did he overcome it?
Rather than call it opposition, I would say there were multiple voices on the Board on his strategy - like on any mature Board. After all, it is Board diversity that makes for a rich experience in strategic decision making. It was also a time, when globally corporates had returned to ‘focus', having been bitten for straying from core competencies.

Deveshwar carried conviction with the Board by sharing his strategic rationale with great clarity. His arguments in favour of diversification in the FMCG arena were something like this : that it is based on ITC's core competencies (distribution strength, consumer insights , branding skills, etc.); that it was timed with emerging opportunities in the Indian market (the expected explosive growth in consumption in the wake of increasing middle class income); that synergies inherent in ITC's diversity could be leveraged effectively (packaging, paperboard, culinary skills, etc.); that ITC's financial control and discipline will ensure that the new businesses met key milestones on the path to profitability; and finally his personal commitment that ITC would not hang on to a business if it wasn't going anywhere despite best efforts. With that kind of logic and his personal passion, the Board was quite willing to go ahead with Deveshwar's great growth idea.

Has Deveshwar's strategy paid off?
Very clearly it has. The proof of the pudding is right there - if you look at the rapid growth and the size the new FMCG businesses have attained, of more than Rs. 10,000 crores. Even more than the financial numbers, the true value created in these businesses lie in the trusted brands and their market standing, the huge consumer acceptance and appreciation they have received on the back of outstanding quality and variety and the versatile R&D backed product development and manufacturing capabilities. Clearly, an enormous and robust foundation has been laid to scale Deveshwar's ambitious target of generating a turnover of Rs.1lakh crore from the new FMCG businesses in the medium term.

There is a belief that the new FMCG businesses are yet to deliver on the bottom line. How does Deveshwar defend that?
I am afraid that perception in not quite correct. In the growth phase of any business, there are huge outlays on product development, branding and communication and expansion of the distribution bandwidth. The benefits of these costs flow several years into the future. Theoretically it is possible to amortise these costs over the next ten years, which will lead to a better bottom line performance. ITC has chosen to be conservative in its accounting treatment and therefore charged off these significant expenses. In fact within the FMCG fold, some businesses are already generating positive operating profits.

Deveshwar is credited with putting in place a made-to-measure corporate governance system to suit ITC's diversity. Has this worked effectively?
Absolutely. In fact, through this three tiered governance structure Deveshwar has in one stroke addressed the most common criticism of diversification, namely that it is impossible for top management to focus on multiple businesses. The beauty of this structure is that it separates the three distinct parts of governance, namely strategic supervision (by the Board), strategic management (by the Corporate Management Committee) and executive management (by the Divisional Management Committees). The Divisional teams are entirely and dedicatedly focussed on just one business, thereby reaping the benefits of ‘focus'. The Corporate Management Committee headed by Deveshwar himself is engaged in the strategic management of ITC as a whole, consisting of all the businesses. The role of this Committee is to critique Divisional strategy formulation and provide guidance on it, to review strategy execution and business performance, to ensure that ITC culture is sustained across the business spectrum and that the Company's governance systems and policies including its ethical standards are uniformly practised across the Company. The top layer of the governance pyramid in ITC, namely the Board exercises strategic supervision on the management of the Company to maintain the desirable climate of checks and balances and accountability. In the last two decades that this governance model has been in place, all its three parts have worked in unison to support ITC's transformation.

This model that combines the roles of the Chairman of the Board and the CEO of the Company in one person has sometimes come under criticism in several Indian companies. Why do you think Deveshwar opted for this and what do you think are his views on the separation concept?
I know that Deveshwar debated this issue internally while the governance system was being fashioned. While he too believes that the separation of these roles could be the ideal option, he was clear that in the rapid growth phase that he was going to usher in ITC, combining the two roles would be far more effective, especially in terms of speed of decision making and response to market opportunities. What is admirable is that he has brought to the table the desired level of leadership maturity which has ensured that ITC has gained from this model without losing the benefits of the "separated” model. In fact, he has ensured that the necessary checks and balances and Chinese walls are hardwired into ITC's governance policies. The net result is that there is systemic practice of segregation of duties at the apex level.

Also read:

Y.C. Deveshwar's management style, in the words of his colleagues

Y.C. Deveshwar by the numbers