The new world of public interest directors

In his twin interactions with bank boards, RBI governor did not ask them to maximise profits or shareholder value. He instead urged them to prioritise the stability and growth of the financial system

For companies, the best time to borrow money is when they don’t need to. For banks, the best time to accumulate capital and strengthen processes is when times are good. It is this thinking that prompted Reserve Bank of India Governor Shaktikanta Das to hold twin interactions on governance in banks. The first of these was with the boards of public sector banks, and a week later, with the boards of private sector banks. He reminded the boards that “risks often get overlooked or forgotten when things are going well.” Banks currently have a capital adequacy ratio of 16.1 per cent, the highest in a long while, with gross and net non-performing assets, or NPAs, at 4.41 per cent and 1.16 per cent respectively, the lowest in a long while.  This then is the best time to focus on and strengthen the governance process and structures. 

The governor outlined a 10-point charter to ensure the safety and stability of the banking system. He emphasised that the quality of governance and management is critical to a bank’s success. He went on to list seven critical items that should be on the board’s agenda: Business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources.

Speaking about the independence and skills of the independent directors, the governor stressed that the larger purpose of the board is to provide clear and consistent direction to the bank and oversight over the senior management. Additionally, the board is also tasked with overseeing the bank’s corporate values. Setting the correct tone at the top will help build a conducive corporate and risk culture as well as ethical behaviour among the employees.  

As customers deal with the bank, the board should ensure that the banking practices are fair, the customer is paramount, and grievance redress is quick and effective. The Reserve Bank of India (RBI) expects agreements with third parties to ensure that the primary responsibility remains that of the banks and not on the third parties.

There is far more to unpack in the speech than I have listed above. Those on company boards and those hoping to join one — and not just a bank’s board,  must read the full text of the speech as well as the two-by-twos of the deputy governors, including the headline-grabbing one by M R Rao. He asked boards to hold managements “accountable for their actions” and take “suitable action, including replacing the management, to improve the bank’s governance and risk management.”

What is noteworthy in the speeches is the glossing over of the responsibilities of the directors, including shareholder directors, in the very narrow sense. There is no call to maximise profits or return money to shareholders. Reading between the lines, at least to me, the governor is suggesting that board members must view themselves as public interest directors (PIDs) and not as shareholder directors.  

PIDs are appointed to the board to represent the broader public interest rather than just the interests of shareholders. Their primary responsibility is to ensure that the organisation operates in a manner that serves the best interests of the public. 

PIDs are not new to India. They are routinely appointed on the boards of market infrastructure institutions (MIIs) like stock exchanges or clearing corporations. The Securities and Exchange Board of India (Sebi) has been recalibrating the role of PIDs. The board composition of MIIs too reflects this, with the chair of an MII and the majority of directors being PIDs. Further proposals put to the board are approved only if a majority of PIDs support them. Over the years, Sebi has conflated independent directors of MIIs with PIDs. 

The legal imprimatur to this shift has been provided by the Companies Act, 2013. The Act prioritises the primacy of stakeholders—employees, customers, suppliers, and communities in which businesses operate — over those of shareholders. This thinking gained more heft after the sustainable development goals, or SDGs, were rolled out in 2015, which linked corporate purpose with social and green objectives. Further, the various RBI circulars and court judgments, including that of the Supreme Court in 2016, which interpreted the law to include officers of a private bank under the definition of a “public servant” as defined under the Prevention of Corruption Act, 1988. 

Clearly, the role of bank boards has changed since the financial crisis. Today’s banks need to be robust to support what will soon be a $5 trillion plus economy. And in line with this, a bank director’s judgements will need to prioritise the stability and growth of the financial system. Silently, the bank’s boards have stepped into a new world of public interest directors.

The writer  is with Institutional Investor Advisory Services India Limited. The views are personal. @AmitTandon_IN