Hard knocks for board reputation

Corporate governance at private banks is generally considered to be stronger than at state-owned banks as the former have better-qualified board members and more professional management. A large and diversified investor base also encourages greater management accountability. This conventional wisdom, however, has taken some hard knocks over the last few days, going by the recent conduct of the boards of two of India’s largest private sector banks — ICICI Bank and Axis Bank. Some of the most formidable names in Indian industry and financial world surely could have given a better account of themselves when crisis hit their respective organisations. 

Take the case of ICICI Bank. It’s nobody’s case as yet that there is some wrongdoing as nothing has been proved, and all that we have are a set of allegations. But these are serious charges and have the potential of damaging the reputation of the bank, calling for maturity in handling the situation. The bank’s board, however, seems to believe offence is the best defence in such cases.

A day after The Indian Express published what was till then a subject of whisper, the board came out with its final judgement — Chanda Kochhar, the managing director and chief executive officer, did no wrong. This might well be true, but the board could have done better than adopting an over-aggressive stand. The bank’s chairman did everything: He summarily dismissed all allegations, questioned the timing of the media report and generally asked everybody to take a walk.

What he perhaps forgot was that a perception battle couldn’t be won merely by floating conspiracy theories. No one knows, for example, the nature of the internal investigations that made the board so sure about its verdict. No response was forthcoming on whether the audit committee looked into the matter. Equally baffling was the board’s refusal to go in for an independent external investigation into the matter, which was anyway the best way to arrest the negative perception. In fact, the enquiry should have been ordered when the allegations first surfaced in 2016 itself.

Rating agency Fitch is right when it says the presence of the CEO on the credit committee and the bank’s reluctance to support an independent probe have created doubts over the strength of the bank’s corporate governance practices. It’s not only the investors who find themselves at the receiving end; the bank owes an explanation to its employees as well, as the image of the bank they work for is being tarnished for issues relating to ethics and conflict of interest.

The board of Axis Bank has not covered itself in glory either. It’s good that the board defended Shikha Sharma so strongly — right from her entry into the bank as CEO in June, 2009 when it fought then chairman P J Nayak who went public with his opposition to her candidature. The board obviously continued to have full faith in her leadership and proposed to give her a fourth three-year term from July 2018 to 2021. In fact, the announcement of her continuation came in July 2017, a full year before Ms Sharma’s second term was due to expire. Apparently, Ms Sharma herself wasn’t too keen to continue but allowed herself to be persuaded by the board.

The same board, however, was quick to accept her request to quit, after the Reserve Bank of India (RBI) raised questions about her performance. Shouldn’t the board give reasons for its new-found realisation about the competence of the CEO? Stakeholders of Axis Bank have the right to know the detailed reasons for this sharp difference in the board’s assessment of the CEO’s performance and that of the RBI. It’s not a question of joining issue with the regulator; if the bank board had so much faith in her leadership, it should give the reasons. 

Ms Sharma’s track record in recent years has not been inspiring. After all, the bank’s bad loans jumped by over five-fold between March 2015 and 2017. Recently, the RBI had also penalised the bank for incorrectly reporting bad loans. At the end of FY17, the bank classified loans worth Rs 212 billion as non-performing assets. The RBI, however, pegged bad loans at Rs 269 billion. The resultant divergence stood at Rs 56 billion. For FY16, Axis Bank reported an even higher divergence of Rs 94.8 billion — 156 per cent more than the reported amount. And during demonetisation, Axis Bank was in the news for alleged involvement of its staff for suspected money laundering activities and illegal note conversions. Last year, the Securities and Exchange Board of India also ordered Axis Bank to conduct an internal probe to fix responsibility for leakage of price sensitive financial information.

Some disclosures on the reasons for its earlier touching faith in the CEO and then the sudden about-turn in its leadership plans would do no harm to the board’s reputation. That is where the market regulator’s new rules would come in handy — these are aimed at strengthening boards, including a reduction in the number of director positions that can be held at once, and enhancing the role of board-level committees.