Acasual flip through this book can initially intrigue as graphs, tables and allied statistical devices normally associated with books on ‘finance’ are missing and instead entirely replaced by discussions involving names such as James Joyce, Leo Tolstoy and Jane Austin and many others. The title can also intrigue as it is not often that the word ‘wisdom’ is used while talking about the practitioners or the issues associated with ‘Finance’. It is only when you start reading the book that you realize that Mihir Desai, a Professor at Harvard Business School and the Harvard School of Law has created what could well be a prose equivalent of a communication form more associated with music: the Fugue, a musical composition, such as that popularized by the compositions of Johann Sebastian Bach, in the eighteenth century as also by Ludwig Van Beethoven and others. Fugues open with a short main theme, or the subject, which then sounds successively in each voice (after the first voice has finished stating the subject, a second voice repeats the subject at a different pitch, and then other voices repeat in the same way); after the various voices have entered a continuous interweaving of the voice parts into a musical tapestry completes the exposition.
In the book, examples from literature as also problems associated with everyday life are interwoven to delineate the central concepts of some of the central challenges studied in a ‘Finance’ programme, in an erudite yet lucidly simple exposition aimed not only at the practitioners of the financial world but also the lay person.
To illustrate, one of the issues which bedevils modern society is the ‘Principal-Agent’ problem or the challenge of Corporate Governance or in other words the uneasy tango between the aspirations of the owners and those of their managers who actually run or manage the day-to-day affairs of a large organization. Readers would recall that two prominent Indian institutions, the Tata group as also Infosys Ltd., were recently witness to what could best be termed as unseemly battles between the promoters and the very CEOs handpicked by them after considerable effort. Similarly it would also be recalled that a year or so previously, an activist minority shareholder group had threatened legal battles with Coal India Ltd., for attempting to subserve social objectives rather than safeguarding shareholder returns. Such battles are routine in most markets but are often voiced from one or another perspective more often than not by demonizing the opposing side. In reality, the issues involved are usually more disputed and complex than what an individual raconteur may present. The author illustrates the nuances involved by recounting the problems that he and his sister, who lived close by, experienced in trying to make living arrangements for their recently widowed mother. She was refusing to relocate to be near them despite her heightened loneliness and consequent vulnerability as she ‘saw’ their father
every day in her old home. Was forcing her to shift being
contemplated to safeguard her interest or that of the siblings? As a prelude, a variety of ‘voices’ first introduce the topic. There is a
discussion of a Mel Brookes runaway hit Musical comedy mocking an archetypical capitalist. It depicts the agonized tangles a smooth tongued Broadway producer gets into while attempting to defraud his investors. He plans a deliberate production of a highly capitalized but actually low cost fraud flop show. However, instead of closing on the very first night, it perversely gets perceived to be a hilarious parody and becomes a runaway ‘hit’. Then there is the case history of a well known US listed company which witnessed a perverse rise in share prices on the unexpected news of the death of its long standing CEO.
The discussions bring out how differently various stakeholders may experience an otherwise common reality. An activist minority shareholder may want quicker or higher returns which can be generated by mechanization or shifting production to a low cost centre but what of the workers who lose jobs or of communities which these workers sustain by spending their wages? Also is the activist shareholder a principal or an agent? These are usually hedge or maybe mutual funds. It could be that the fund managers while proclaiming activism are actually wanting to increase their current year personal compensation by showing a higher income through ‘churn’ at the cost of the actual fund investors desirous of longer term stable return growth. This may not even be hypocritical. The side of the fence often colours the view. The author brings in EM Foster with his A Room with a View, to explain why it isn’t always clear even to us why we are choosing what we choose: because we want it or because society expects us to want it. As the ‘voices’ in this composition flit from story to story and character to character, thoughts arise in the reader how this analytical framework of ‘Principal-Agent’ dichotomy
could also be useful elsewhere. Say for analysing why better funded state owned institutions, though manned by outstanding individuals, are more often than not found to be more decrepit than a less elaborate private competitor in fields as diverse as education or healthcare or banking. Could the ineptly devised outlook expectations be a cause?
But this is taking the story ahead. The book should come first. It arose in 2015 when the author was asked to give the ‘Last Lecture’ to the graduating batch of Harvard Business School. This is a tradition which allows professors to offer words of wisdom to their students on the eve of their graduation, returning, in the words of the author, to an antiquated notion of a University that acknowledged, as John Henry Newman put it 150 years ago, ‘the general principles of any study you might learn at home; but the detail, the colour, the tone, the air, the life which makes it live in us, you must catch all these from those in whom it lives already.’
It has eight chapters, though they could well be called compositions, and the book an album, as each can be read independently of the other. The first three chapters deal with the omnipresence of risk and fundamentals of asset pricing, how to manage risk and the relationship between risk and return and how that relationship dictates conditions for creating value. However, often asset pricing models ignore messiness created by the uneven diffusion of resources and information, complexities underlying actual individual behaviour as also those created by lumpiness or size of organizations or companies. The next four chapters deal with this ‘messiness’. The ‘Principal-Agent’ problem discussed earlier is followed by one on Mergers and why they more often than not fail, and then on to the discussion of the power but also the perils of leverage and bankruptcy caused by excessive levels of debt.
While the book started with the intent to demonstrate how humanities can illuminate the central ideas of finance to the practitioner, it may well be equally useful for the determinedly non-finance person to read the book to understand how the ideas of finance can provide surprising insights on day-to-day living. When you are living in a complex world full of risk and change and uncertainty, adapting risk management systems such as ‘options’ or by ‘diversification’, just as Violet of Phineas Finn did, may well be the most appropriate advice. While Aristotle acknowledged Thales of Miletius to be the father of Greek philosophy, it is often not realized that he might well have ‘written the first Option transaction’ when he took advantage of his ability to forecast a good harvest, and after raising a small sum of money, he secured the right of first refusal on all the oil presses of the island by placing round deposits in the off season. When the season arrived and there was a sudden demand for the oil presses he could rent them out for whatever sum he wanted.
Then again, all those who view with acute dislike all of finance and the resultant persisting inequalities of income and wealth, could well profit from revisiting the Gospel and the parable of talents in the Book of Mathew, ‘For to everyone who has will more be given and he will have abundance. But from one who has not, even what he has will be taken away.’ They will find themselves in the company of John Wesley, the founder of Methodism, and Samuel Johnson and John Milton.
Alternatively they could read this book. Preferably, since it is a slim book, simply written, on a lazy Sunday afternoon or on a longish flight, with Bach or Beethoven playing in the background (though Dhrupad will do equally well for those not inclined to
western classical). Those that still wish to remain abstentious may well be warned that Fugue, in psychiatry, is used to define a disturbed state of consciousness in which the one affected seems to perform acts in full awareness but upon recovery cannot recollect the acts performed. Far better to read the book. It could equip you to deal with the real world.
TCA Ranganathan, an alumni of the Delhi School of Economics and a former CMD of Exim Bank, is currently a freelance writer.