On the day Y.C. Deveshwar took office as the chairman of ITC Ltd in January 1996, returning to Virginia House for his second innings at India’s biggest cigarette maker, the company received an excise duty claim of Rs803 crore, which was more than three times its net profit in that fiscal year.
Within months, the Enforcement Directorate (ED) came firing at the company for alleged foreign exchange violations under the draconian Foreign Exchange Regulation Act. Soon, in a body blow to ITC’s public image, ED took into custody several key officials under the now abolished law, which treated almost all violations of forex control as criminal offences.
ITC challenged both the excise duty claim and ED’s charges, but Deveshwar’s journey as the chairman started against “huge headwinds at a very traumatic time for ITC", recalls Krishnamoorthy Vaidyanath, who worked closely with him for 25 years and retired in 2011 after 10 years as one of the company’s executive directors.
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Not many would have seen very far into the future peering into that gloom, but Deveshwar embarked on a journey to transform ITC overcoming resistance from British American Tobacco Plc (BAT), one of the key shareholders which held almost a third of the company’s shares.
BAT’s concerns were not misplaced, said Vaidyanath, whose association with ITC continued until last year when his term as a non-executive director ended in July.
BAT had itself walked the path of diversification much before others did, and had a horrible experience. So BAT wanted ITC to learn from its experience and not repeat the same mistakes. But Deveshwar was very clear in his mind that ITC couldn’t afford to remain invested in only three businesses—cigarettes, paper and hotels—if it were to deal with people giving up smoking.
In the early years, convincing BAT, which was at that time seeking total control over ITC, was difficult. But Deveshwar was guided by his “courage of conviction"—a defining characteristic, according to Vaidyanath—and created the grounds for launching new businesses.
To deal with BAT’s concerns, Deveshwar made changes in the management structure, which allowed the leadership to diversify without losing focus on the core businesses. The spadework took about two years but in the end, he had not only transformed ITC, Deveshwar had even changed mindsets.
BAT is now supportive of ITC’s initiatives, and has even allowed its representation on the board to be whittled down from two to one non-executive director.
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“Whereas previously BAT nominees wouldn’t miss a single board meeting, these days they don’t even readily fill up vacancies," said Vaidyanath, referring to the recent appointment of a BAT nominee on ITC’s board after the position remained vacant for months.
Edited excerpts from an interview:
What are Deveshwar’s greatest gifts?
He has some remarkable qualities which led to his success as a leader. Most importantly, he combines the mindset of an entrepreneur and the skill set of a professional manager. He is ever willing to take risks, has courage of conviction, has great determination and dares to dream.
As a professional manager, he is a firm believer in good corporate governance: always committed to maintaining firm checks and balances, effective financial discipline, and control to sustain risk-reward balance.
Secondly, he has this unique ability to switch with ease between macro and micro thinking. He would, for example, brilliantly conceptualize a strategy, and in the very next moment dive into the micro details of its execution. He always demanded that a good strategy should not fall by the wayside for want of efficient execution.
To him, strategy formulation and execution were integral parts of the top management’s responsibility, and as a corollary, always insisted that managers down the line had clarity on strategies that they were helping to execute.
Thirdly, there is an overarching dimension of patriotism in him, and not just him, ITC as an enterprise was driven by it. In every strategy and plan, he would look for the nation-building angle and ask how it could be leveraged to add value for society at large.
Why did he overhaul ITC’s management structure?
By creating this three-tier governance structure, Deveshwar in one stroke addressed the most common criticism of diversification: that it is impossible for the top management to focus on multiple businesses.
The beauty of this structure is that it splits governance into three distinct parts: strategic supervision, which is the responsibility of the board; strategic management, which is the responsibility of the corporate management committee; and execution management, which is the responsibility of the divisional leadership.
The divisional teams are totally focused 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.
This committee has several roles: to critique divisional strategy formulation and provide guidance; to review strategy execution and business performance; to make sure that there is no departure from ITC’s governance system and culture across the entire spectrum of businesses.
And the board, which is at the top of this governance pyramid, exercises strategic supervision on the management of the company to maintain the desirable climate of checks and balances, and of accountability.
In the last two decades that we have had this governance model, all the three parts have worked in unison to support ITC’s transformation.
But under this model, the roles of chairman and the chief executive officer were combined into one. Why was it so?
While the new governance system was being fashioned, I know that Deveshwar debated this issue internally at length. Though he too believes that these two roles should ideally be kept separate, he was clear in his mind that in the interest of rapid growth, combining the two at that time was a better alternative.
In hindsight, it turned out to 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, from which ITC has gained even without losing the benefits of having a separate chief executive.
He has ensured that the necessary checks and balances, and Chinese walls are hardwired into ITC’s governance policies, the net result of which is that there is systemic practice of segregation of duties at the apex level.
Why did he launch the drive for diversification in the first place?
He had a very turbulent start in 1996 at a time when ITC’s growth strategy was crying for a makeover—after initial success, our financial services and commodity trading businesses were beginning to lose steam. The company was in the need of a new growth impetus, and Deveshwar responded with great courage and determination.
His argument in favour of diversification in the FMCG (fast moving consumer goods) space was something like this: that it is based on ITC’s core competencies such as distribution strength, consumer insights, branding skills; that it was timed with emerging opportunities in the Indian economy where explosive growth in consumption was expected in the wake of increasing middle-class income; that synergies inherent in ITC’s diversity—packaging, culinary skills and so on—could be leveraged effectively.
Apart from these, he made a commitment that ITC, with its strong financial control and discipline, would make the new businesses meet key milestones on the path to profitability. Finally, he gave his personal assurance to the board that ITC would not hang on to any business if it wasn’t going anywhere despite best efforts.
Still the board wasn’t initially convinced. What was the opposition like?
Rather than call it opposition, I would say there were within the board multiple views on his strategy—nothing unusual for a mature board. After all, it is the diversity within the board which makes for a rich experience in strategic decision-making.
It was also a time when globally companies were returning to their core businesses—those on which they were earlier focused—having had bad experiences by straying from core competencies. BAT’s own diversifications had failed, for instance.
Many of the new businesses are yet to turn profitable. Is that a concern?
In the growth phase of any business, there are huge outlays on product development, branding, communication and expansion of the distribution bandwidth. The benefits of these costs start to flow after several years.
Under accounting norms, it is possible to amortize these costs, and charge them to our profit-and-loss account over 10 years. If we did that, our bottom line performance would have been much better. But ITC has chosen to be conservative in its accounting treatment and therefore charged off these significant expenses immediately.
A robust foundation has now been laid to scale up these businesses to Deveshwar’s ambitious target of deriving Rs1 trillion in revenue within a few years.