A.M. Naik on what lies ahead for Larsen & Toubro

A.M. Naik of Larsen & Toubro, ranked second in the list of India's best CEOs , speaks to Suman Layak:

When you look back on your working life which moments do you identify as defining moments?
There have been many defining moments. Before I became a CEO I knew one day I was going to be one. Because L&T at the time believed only in seniority driven promotions and by that time in 1999, I was the most senior. And, therefore I had a blueprint. I had been working on what things I needed to change in L&T to make it a highly value creating company - not just a technology company.

There are shareholders who are demanding returns, so being a value creating company is most important. Second, L&T was depending only on one country for business. It was 100 per cent domestic oriented... But today it is 15 per cent geographically diversified. But 15 per cent of a 10 times larger value. Our volume has gone up 10 times from what I had started with - except in cement.  

Therefore implementing that blueprint to become a more value creating company, to acquire more multinational thinking, needed a different mindset. Also making sure that you have the best talent with merit-based promotions and merit-based career planning… as opposed to being highly seniority driven ... that was itself a major mindset change.

One is also very concerned about what a senior person will think if a junior person catches up with him - if the latter is promoted more often. It calls for very careful managing of the situation so that the old-timers who built the company with dedication and devotion should not feel totally cut off.  But at the same time the transition should take place, even if it is a slightly slower process, so that you retain the best of the best talent in the company. And the reforms brought more and more openness. Many multinationals came to India, so the changes were not made only to compete with multinationals outside India. We had all the multinationals inside India to compete against. One hell of a lot of entrepreneurial companies have come up - I doubt if there are any professionally managed, transparent high integrity companies in our field. In most, the major shareholders are industrialists.  

So it has been always been very difficult to get the talent. Where do you get? On the other hand majority of the CEOs in the industry were tapped from L&T. One cannot let frustration build - in L&T - that look it takes a long time in L&T to come up. I think we have come a long way - 70 per cent, but a lot more needs to be done. From a 55-year average age for a general manager it is now 42 -  L&T  has come a long way. At least people do not feel surprised.
 
And if you want the top talent anywhere in the world - merit is the only consideration. This was the defining moment to change the company from a seniority driven one to a merit driven one. Then implementing the entire blueprint with focus now on a highly complex and diversified company, bringing in the value creation concept was entirely new. I think no L&T person even saw the share market before 1999 or worried about what is happening to the L&T share or why is there no trade volume. And today the whole family watches out for the L&T share three times a day because - we gave stock options to employees.  

We did not create much value till 2003, but after the cement demerger our focus became more and more engineering and construction and infrastructure and heavy industry - away from commodity business. That created a multi-fold rise in the value that we created. That is roughly now 25 times of what it was.

Transforming the company and accepting the fact that you have to dissociate from some businesses, redefining the core, reorganising based on the core, finding the right strategy of how to grow the core, while constantly watching that you are creating shareholder value: we have done all this. And also bringing in a mindset that was somewhat multinational.

The cement demerger - was it a blessing in disguise?
No disguise. It was a blessing. We on our own always resist change. I am talking early 1999-2000. And I wanted rapid change. This was an opportunity that came as a threat and then became an opportunity. Then as a sequel to that demerger we were able to form the L&T Employees Foundation, because we bought over the shares of Grasim. After the demerger the engineering shares were bought over. Therefore today, after the government institutions, L&T Employees Foundation is the largest shareholder in the company with 12.5 per cent. However the constitution is such that you cannot sell a single share. It is meant to prevent L&T from anytime being under the threat of hostile takeover.

But is 12.5 per cent enough?
At least there will be an employee voice - earlier there was none. It is more than 12.5 per cent, it is now 17 to 18 per cent - including the personal stock options. And of course you have government financial institutions which have retained 31to 32 per cent. It has been clearly recognised at the highest political levels, including our prime minister and the previous prime ministers, that L&T is strategic for the nation. It is not just for infrastructure, we are in aerospace, we built the nuclear reactor 40 years ago and subsequently we built almost all of them and also participated in the nuclear submarine programme. There are many things L&T does that no other company does. We are among the six or seven companies in the world and these companies in their own countries are also considered strategic. Our prime minister calls this company a national company: one that is neither private, nor public sector nor a multinational. This is in the national sector.

What are you looking ahead to for the company?
There are some disadvantages to being a seven decade old company. There is one way of doing it. When you want to change the course in line with new emerging situation of a highly competitive world, there is a huge amount of change management required. The first three to four years hardly any change was possible. And the transformation journey - how to simplify the structure of this complex conglomerate from the management, value creation and international focus perspective - has just begun. By the time we could settle down we had global challenges, the meltdown. Within India politically it is not the best of situations today. It has its own impact on the economy. Today we are living in a highly challenging situation - from the global economic perspective. There is also the political scene, and the restraint on our long cherished desire to participate in defence. That will require a big change in the government mindset.

These 16 business of L&T which are actually over 64, are so dissimilar in nature - from information technology to financial services to heavy industry to nuclear to metals and minerals to hydrocarbon to power. It is a mind boggling diversity. I have tried to sell off some of the non-core or small businesses. We used to do all sorts of things.

A lot more reforms are needed within the company to be focused on growth. And when these 16 businesses have their leaders - who can create these into individual companies with global benchmarking, there is still a hell of a lot of work to be done. According to me it will take years for L&T to become a truly multi-national value creating company.  

It has taken decades for international companies to be what they are now. GE has a 200 year history. Many companies have a history of globalisation in the international world.  

So the remaining journey is to make sure that L&T acquires a truly international character - makes a major impact in national defence - and makes these 16 companies focus on low cost, highly competitive - value creating - products. If I were to look ahead I would wish that this be carried on from one generation to the next even more vigorously.
 
And your personal goals?
Whatever I can contribute for social well-being - call it CSR as people do. Fortunately two generations before me have contributed to it and they are my role models. My father is my role model. In 1952, when hundreds of thousands of people used to come to Mumbai he left Mumbai and founded a school back in a village and thereafter four to five more schools. There were no schools in more than 22 villages and he made a major impact among the poorest of poor and the backward class and the scheduled castes - relentlessly working seven days a week.

I was in my village the other day and we are now taking care of certain aspects of 40 schools. And there were many principals who had come to talk about how L&T has made a difference in those 40 schools. Then I asked them - one principal was saying that he was not getting quality teachers - I said that we will also need quality leaders who can attract good talent. I know there are restrictions of emoluments etc. You can address it differently, but the fact is the leadership is required.  

I asked them how many classes they take in a week. The principal said 12. I said: my father took 38 periods in a week - although he was the principal. Three subjects - Maths, Science and also Physical Education. Then he would go himself to 10th and 11th classes. After that, when school was over at 5pm, he would run free coaching for needy students: those who felt they are weak and need extra help. He held them in the school itself - call them special classes. And after six, he would call a maximum three to four brilliant students, for personal tuitions to make sure that they stand up in a competition of 20 to 30 schools because the examination of the board was in the city where students of 20 to 30 schools would come. If our students did not come first or second it would pain him. So I gave that example to them. You need to emulate some role models - then only you know what you can achieve.

Fortunately, because of the stock options, I have been able to build a nice school campus, hostels, have contributed to the small village getting a 55-bedded hospital. You won't believe - there is a neo-natology department also at the hospital. When I lost my granddaughter we built a cancer hospital in her memory, the best such hospital between Ahmedabad and Mumbai. I believe whatever we do - having grown up in L&T - has to be of the highest quality. Such activities one must engage in, whatever one can afford, and if you can't afford to contribute money, you contribute your services to the society. As I said: having inherited this from two-three generations, you feel guilty if you feel that you have not done enough.

This country has a lot to do where the poorest of the poor are really poor who do not even get more than food once a day and sometime not even that. So we started this school campus from nursery to secondary - 1800 students. But what it did not cover is what happens to the children who drop out of school. And therefore we started a training programme - trade training, starting with tractor mechanic and wiremen - because they are the most wanted in the village to repair tractor, solve switches and electricity problems. And we picked up those school drop outs and started training them. Some 190 have been trained, 132 have found jobs among the wiremen. Some of them have become mini-entrepreneurs - now they go around with a rate card. They do engine tune up, etc, things like that.
 
And tractor mechanics: we have trained 160 and 142 have found jobs. Whoever wanted to work has found work.

Now we are building a very modern training centre which will cover eight trades. It is under construction right now.  As also staff quarters because we want the best teachers to come. We need to give them accommodation.

And we are thinking about creating a hostel for  more than 200 students for the school drop outs - because they don't come to you. You have to bring them from the villages, which may be 30 or 40 km away. And there is a lot of hard selling required to bring these school drop outs and enable them to make a new life. And our current training centre - we start three trades for the girls. I think there is a lot more to do. I think there is no limit to what there is to do in a country with 1.2 billion people where affordability rests with less than 200 million.

So there is quite a bit to look forward to. Also to an extent I could play a role.. to an extent - to continue our journey to change certain policies of the law makers so society itself benefits and to whatever extent it becomes corruption free  will be the most welcome step for the whole country.  Now if I can make any contribution to that - obviously that is something in our DNA. So there is too much to do for those who want to.

Have you ever taken classes?
I do that in our management development centre where I give talks every now and then, I do that with senior executives. Now we are going to launch the Harvard Management course and I am giving the inaugural talk.

Now whether have I gone and spoken to schools - the answer is no. Have I addressed MBA students? The answer is yes. There are a lot of international institutes who have asked me - to come and speak to their students after they came to know me.

I feel MBAs are least benefitted from people like me. I have not been able to change their mindset. I have been on the board of governors of IIM Ahmedabad and I have gone and talked to them a couple of times on what India needs. Some 37 per cent of the students go abroad and the institute is proud of that. I said we should feel small about that - that our students are not contributing to the well being of the country. And even so those who remain in India are going into financial services, IT, strategic firms, FMCG.  Six years ago when I checked I could see that not a single one has gone to the infrastructure sector. And all the passionate talk that I was giving was appreciated and I could do the face reading, hardly anyone was going to change and go to heavy manufacturing, which was the need of the hour. Even if you bring the money, you still need the talent to build world class infrastructure. How many people want to go into civil engineering? How many people want to go into construction and work at remote sites?  Believe me or not - in this generation it is one in 100. So I would rather talk to the civil engineering students and talk to people who I can convert to bring their commitment to the national interest. L&T, I always say, is the platform and I strongly advocate to all our employees that we have the L&T platform to work on, and ensure while being within the 75 percentile on our emoluments that we have a role to play in building tomorrow's India.  My constant talking to L&T employees - I would want you to hear our anthem - all our major meetings start with the anthem and the core of that is the country in which we were born - we have a lot to give back to it. That is the note on which our meetings start and end. All this is to build the spirit of national interest and patriotism. And hopefully therefore some change. Where people will not only go to IT and I would be more interested in talking to such kind of borderline students, than where I know there will be no change forthcoming and my own efforts will not be necessarily well spent.

By the way I spend nearly eight hours in people related matters - attracting talent, developing leadership. Earlier I spent six hours, now I do eight hours because the need of the hour is to build a new generation to take this company forward without losing its value system in the spirit I talked about.  And still grow in the most competitive environment.

Would you identify some people you have admired as CEOs?
When I was young I hardly knew anybody called CEO. My vision was to become a good engineer. As I graduated my role model was always my father. That was more because of his value system, his nature of helping poor people and imbibing some of his characteristics. There are very successful CEOs and successful entrepreneurs but I do not know them as deeply as I knew my father to call them my role models.  The last management programme I had gone to was in 1975, 36 years ago, one week programme at IIM, so I do not have the advantage of attending a programme like Harvard or Stanford that many of today's generation do. But soon I started to observe smart CEOs. I meet them all over the world. Each time I come out of the room, I start introspecting. He was smarter than me in this, or he was more entrepreneurial in his thinking. So it is constant observation and constant learning.  Continuous change has transformed me from a shop floor engineer  -- someone who spent nearly 20 years in manufacturing - to what I am today.

So in a way you can say that I am pretty much a self made man. Now who am I thankful to? I am thankful to an Englishman, Mr Baker who hired me. Against his boss's wishes, who felt I was not good enough because I'm not an IITIan. Mr Baker saw something in me and I got the job. It was my dream always to work in L&T. But I was initially denied because the entry point was only IIT. I joined this company 18 months later; otherwise I would have been in my 49th year in the company.

You were hired as a junior engineer?
Yes. From junior engineer to assistant engineer B to assistant engineer A to covenanted officer - then of course to assistant manager to manager to production manager to works manager to deputy general manager and so on. And by the way - I will explain what I meant by 'seniority driven'. Up to 1974, the founder was there. The Europeans were there. In 1974 they went away. And a new management came in. I am a very proud Indian but I have to say that - the new management was very seniority conscious. Because the members all came from trading and marketing backgrounds and no manufacturing had started. So there was no recognition for the true value of a technology driven management person.

Under the British management I was hardly 34 when I became DGM. And that too I was the slowest promote. But then it took six and a half years for me to become GM. Until 1974, I had seven promotions in almost nine years.  From being the fastest, I became the slowest promote in the next 12 years. Now imagine anyone else in my place: would he have stayed? By principle I have never gone - never - to ask why I am not being promoted, because I thought it was beneath me. I never asked a single salary rise. I said one day the work that I am doing will prevail. But in the bargain if you had gone by the old norms, I could have achieved something at 40 which I could do only at 48. So even then I had faith and the faith was in my father's thinking that you find a platform in your own profession through which you can do larger good for the society and the nation.  Which is what I chose and that is why I stayed on. The majority of people left.  For the organization had became more seniority driven, age driven, to such a point that people were asking before offering a job - are you a 1967 graduate or a 1968 graduate? And invariably the 1967 graduate would get the job.

From that - to convert back to a merit-based organization has taken a long two and a half decades. And remember one thing - that is a part of the problem in today's succession planning. If those meritorious people had stayed they would have deep roots into L&T. And then when the economy opened up, and the world of opportunities came, they would not have gone away.

If you stay in the same company, there will be many comparisons made, and you cannot break the queue. And that is what I have been facing since I came into this position. We have changed our compensation structure four times in the last 10 years. But there is always someone who pays more.

An L&T man is always more sought after. Any multinational that comes here wants that their country manager is either an Indian brought from their own company abroad or they recruit from a company like L&T and why? Because we are in all the businesses.

Did you ever consider leaving L&T?
Only twice in my life have I applied for jobs. Before I joined L&T. I was called by the Who's who of the industry and also from abroad. Now I am going back to 1976 to 1980 - those four years. But my mind was very clear that I will not leave L&T. And nobody would have known that I was feeling a little frustrated and unhappy internally, because for me work was still worship. And I was still keeping myself engaged: 16-18 hours a day. You will be surprised that when I became the CEO in 1999 April, in August or September I got a call from a head hunter in Hong Kong, an international head hunter. He said: We have a position for a very senior person to take charge for the whole of Asia. Would I be interested. I said, I hope you know that only four months back I have become a CEO - right? Of course that has put a lot of responsibility on me to find top talent. While I will never be interested, when you are in Mumbai come and see me - if you can help me to find people. That was the last call I got, for people realized that you cannot dissociate Mr Naik from L&T.

And the second person I am grateful to is a person, who took over from Mr Baker. He was an Indian. But his mind was like my mind - he felt you should recognise merit. If you don't you are going to lose some very good people. But that person, whose name was Mr Pherwani, also left in 1986. He went to the World Bank. So he also felt that he could not wait any longer - he was already 55 or 56 and he left. I am grateful to him because those five or six quick promotions - all of them came during Mr Baker and Mr Pherwani's time. They all could recognise - and the moment these two went, I moved the slowest in my 47 years career. I worked with Pherwani from 67 to 74.

What happened at your first interview at L&T?
In our housing society there was a guy was working in L&T Switchgear. I showed him the letter - I had got interview call from Mr Baker - and he said, 'O My God - he is a terror'. He does not believe in engineers. He thinks engineers have ornamental value in the office. You need practical guys who can weld, who can fit, who can assemble. They were known as foremen. Secondly, he gives a lot of importance to discipline - so if you go in a navy dress and a navy cap and as soon as you enter you be in attention and give him a navy salute - you are almost hired. Of course that was a joke. I went the next day at 9 o clock,\.

So Mr Baker called me - and we went through three or four questions. He did not have an engineering background. So when he asked me I also asked counter questioned, and finally our dialogue could not go further, so he called the chief design engineer and he told him: please ask him some questions and let me know. But at the end of the day he saw the necessary fire in the belly, the dynamism, I always had.

My English was poor. I must tell you that - because I grew up in a village. I studied in a college where outside class people spoke not in English but in Hindi or Gujarati. But I worked extremely hard. I bought all the cassettes to learn English. I heard all those, practiced in front of a mirror, lasted with a handicap for five or six years but ultimately got over it.

That was required to be competitive at L&T. Mr Baker said, Ok, I will take you as assistant engineer, 760 rupees and supervisory B. Now he says I have to take you to the old man for the final interview. Old man is Mr Hansen, a Dane. Not much older than him, but old man means boss.

So Mr Hansen was talking a singsong kind of English and among the many questions he asked was: 'How many people report to you?' I said, '350. I am in charge of the work shop.' He said: 'Oh that's a lot. It will take many, many years in Larsen & Toubro to get that kind of responsibility."

Now, not being convent educated, I was not able to tell him 'Sir, I will work very hard'. Instead I just translated Gujarati into English and said: Who knows, time will tell."

Within five seconds after that he asked me to go. After another 30 seconds Baker came out fuming. He took me back to the room, and said: My sonny boy, please sit down. The old man thinks you are over confident. So now I can give you junior engineer, not assistant; I can give you Rs 670 and basic plus dearness allowance, and unionized category. So, on all three fronts I was downgraded. And I do tell this to the HR fraternity that - today if anyone said the same thing - you would do two more referral checks. Everything we have reduced to half an hour's interview.

Do you know for 21 years I have never taken a day off. Seven days a week.

Seven days a week?
Yes. I used to go to Hazira from Thursday to Saturday. On Sunday morning I would report at Powai. If there was nothing to do, I would go around the plant. I was a hard core manufacturing man - someone who has changed himself every few months to find new ways of doing business. Continuous change is the only way.

Who do you think was your competition?
There is constant competition. One road project and there are 22 applicants. Today there is constant competition because India has become more and more open.

I cannot go to other countries because they want more and more local companies. Malaysians have taken away $1.2 billion worth of contracts from ONGC at zero duty. But I am not able to participate in Malaysia. You have to be a company that is majority owned by locals. That is a Bumi, and the website clearly says that - meant only for local companies. Now who will question? Are they violating WTO? No.

They said they are giving opportunity to people who come to our country, set up shop, giving majority shares to locals - they are giving equal opportunity. Import duty doesn't come in as anyway outsiders are not allowed. Very few projects are notified as international.

We acquired a Malaysian company. As soon as we took it over, the company lost its Bumi status. Why did we lose? I did not change a single employee. Nothing changed and company is now twice its size. More employment is generated - yet just because we own 100 per cent of the company, we lost out. This is what countries are doing.

In China, there is 30 per cent duty on imported power equipment. Here everything is imported from China. That is why there is a $100 billion trade deficit with China. Nobody wakes up. Saudi Arabia last year announced that up to $1 billion projects will only be given to companies with local partners. So the whole world is going there to find local partners - including us.

So while the world has become more careful about protecting local industry in the current economic scenario, India continues to be more open than United States.

I had said last year that growth would be coming down to seven per cent this year but everyone else said it would be nine per cent. Now the government's own estimate has come down, and I can see if some measures are not taken it can come down to even six per cent. And this is not because of global economic scenario. For that, it can come down from nine per cent to eight per cent, but not down to seven or six. So we have to set our own house in order.