Give them a fair chance

Reasons why new CEOs of old private sector banks should be given more time to turnaround their fragile finances

Private sector banks, the old-generation ones in particular, tend to appoint high-profile bankers as CEOs expecting them to improve their fragile finances almost from day one. Not many have been successful – not always because of their inability but many a times due to several externally imposed constraints.

Old private banks that escaped the nationalisation of the 1960's and 1970's typically began as community banks with ownership and management tightly controlled by a dominant religious or caste group to which the promoters belong. Naturally, promoter groups wield too much power in many of these banks.

While they often try to imitate new private banks by bringing in diversified boards and appointing high-flying bankers in senior management positions, the community hold largely remains intact – either tacit or explicit.

 

It leads to creation of so called 'promoter director' in these banks. This is not a designation which is recognised by the Reserve Bank of India (RBI), nevertheless it is commonly used in such banks.

These promoter directors derive authority from being part of the founding promoters' family. They have the support of other shareholders, generally close to the founders, and control voting in shareholder meetings. Promoter directors also influence lending decisions on many occasions. Sometimes factions develop between rival groups. In one bank, things have become so acrimonious that the dispute has been in court for several years.

The result: CEOs become disempowered, get frustrated and hopes of turnaround fade quickly.
 
There have been suggestions that the banking regulator should attempt to diversify boards in banks where independence is not visible. The central bank should also probably mandate its prior approval for director appointments in such banks and create a separation between board oversight and executive autonomy.
 
Promoters' interference in day-to-day functioning, however, is only a part of the problem. Often employee unions play hardball as they feel threatened that their importance will be undermined after a new management takes charge. Sometimes, the wide compensation differences between new and old employees create a rift.

 
There are, however, instances where a new CEO has failed to live up to the expectations as he tried to imitate the way of functioning of his previous institutions without recognising the strengths and weaknesses of the bank he joined. Sometimes, CEOs tend to alienate themselves and their new management team from the old employees of the bank disrupting smooth functioning of the bank.
 
Experts believe that new CEOs should make an effort to recognise the culture of the bank and reach out to old employees making them feel a part of the new style of functioning. But it takes time, and new CEOs certainly deserve that.