Corporate governance & art of recusal

When the Nirav Modi scandal broke, the media bristled with outrage about lax public sector governance standards. But two recent controversies suggest that private sector governance isn’t what it’s cracked up to be either. ICICI-Videocon hogs the headlines today; it is no different from the scandal that shook Infosys through 2017. 

In both institutions, respectively, India’s largest private bank and second largest software services provider, investigations were started to examine allegations of irregularities by the chief executive — interestingly, both originated from whistle-blowers. And, in neither case, did the chief executive step aside when the investigations were underway. 

Vishal Sikka stayed stubbornly on board, robustly declaring himself a “Kshatriya warrior” even as an external investigation examined possible irregularities in the $200-million acquisition of the Israeli company Panaya. Likewise, Chanda Kochhar has remained in charge through an internal probe of a nexus between a bank loan to Videocon and a seeming sweetheart deal involving the industrial group and her husband.

The short point is this: Mr Sikka should have recused himself from running Infosys for the duration of the internal investigation probing the Panaya deal and related controversies. Ms Kochhar should do the same now. 

Recusal is not the same as a resignation, nor an admission of guilt. On the contrary, it would serve as a powerful signal of the chief executive’s confidence in her own integrity. No law demands a recusal in these circumstances but conflict-of-interest ethics certainly warrant it. In both cases, it would have offered reassurance to customers and shareholders, and spared the companies turmoil. More so when the boards of both companies chose to be less than transparent in issuing their clean chits. 

Knowing what we do about the vigilance of corporate boards after Satyam, should stakeholders be content to take the company’s word for the CEO’s probity? And can an investigation be considered genuinely independent when the executive head who is at the centre of the problem remains in situ?

Consider Infosys’ crisis last year. In June, the management declared that the independent agency that was hired to investigate the two whistle-blowers’ allegations — that too after former mentor and promoter N R Narayana Murthy publicly raised a stink — had cleared the management of charges of wrongdoing. A summary statement of the findings was put up on the company’s website. But the company declined to make the full report public, on the pretext that doing so would “impair” the candour of the whistle-blowers in future investigations. 

Mr Sikka may well have been guilty of little more than bad judgement, not wilful dishonesty. But the veracity of the investigation would have been immeasurably strengthened had he stepped aside while it was being conducted; indeed, the strident insistence on fuller disclosure may not have arisen. Mr Murthy was convinced the board was “hiding something”. All of this played into all the other “faults” — some of them quite illusory — that Mr Murthy and other founder-shareholders discovered in Mr Sikka’s performance. After months of relentless turmoil, Mr Sikka and most of the board resigned to make way for the return of Nandan Nilekani as non-executive chairman. 

Note, however, that even the Nilekani-led board has declined to make the report public for the reasons stated earlier. This has not provoked fresh shareholder tantrums because Mr Sikka, who was in the eye of the storm, is no longer on board.

At ICICI Bank, so far, we only have Chairman M K Sharma’s wooden statement that an internal investigation had ruled out a quid pro quo between the bank’s loan to Videocon and Ms Kochhar’s husband’s business dealings. But his anodyne testimonial that Ms Kochhar was making all disclosures “in accordance with regulations” only stokes the doubts (about the spirit and letter of the law and all that). His assertion that there was no need for Ms Kochchar to recuse herself didn’t help. Ms Kochhar, once so accessible to the press that we know where she buys her exquisite saris and how she regularly chants the Hanuman Chalisa, is deafeningly silent even as she continues to helm the bank. 

Now we have former chairman and managing director N Vaghul, a man of unimpeachable reputation, vouching for Mr Sharma and Ms Kochhar, the latter his protégé. But he, too, has suggested that ICICI Bank should put everything in the public domain to clear confusion (in fact, his own enquiries have proved more reassuring than the board’s statements). It may even have spared Ms Kochhar’s husband the hassle of a preliminary enquiry by the Central Board of Investigation (just why the CBI needs to investigate a private deal, however irregular it may appear, when a serious frauds office is doing the same thing is unclear). 

All told, the inadequate disclosures and Ms Kochhar’s continuance in office have left stakeholders asking a variation of that famous question raised by a US Congressman during Watergate: What did the board members know and when did they know it? Ms Kochhar will discover that these queries won’t go away anytime soon.