Governance questions

Independent directors are doing little to enhance their reputation

The infirmities embedded in the institution of the independent director in India Inc were highlighted dramatically over the past week with no less than three of them exiting YES Bank. Thus far, the bank’s independent directors had displayed a lax approach to governance that has characterised this institution across Indian companies, with IL&FS, Fortis and ICICI Bank offering examples over 2017 and 2018 alone. First came the exit of Ashok Chawla, the bank’s non-executive chair, and Vasanth Gujrati, the head of the board’s audit committee. These exits alone saw the stock price fall 14 per cent in two days. Five days later came the exit of R Chandrashekhar, citing lack of a “conducive atmosphere”, dissatisfaction at the way recent issues had been handled, and suggesting that the company had misstated the reasons for his resignation as “personal”. The critical point about all these resignations is that they come after the bank, which has been under the RBI’s lens for some time for failing to fully declare sticky loans on its books under the new standards, is at a crossroads and urgently needs the steadying hand of a strong board of directors.

Each independent director who has resigned this week was, however, responsible in some way for the predicament in which the bank finds itself today. In June, all of them had endorsed Rana Kapoor’s continuation as managing director and chief executive officer for three years, even though he had presided over the organisation that had, according to the central bank, questionable accounting practices for two years. Mr Kapoor’s leadership came into question after the regulator pointed out discrepancies in the way the bank reported its bad loan numbers in 2016 and 2017. Mr Gujrati headed the board’s audit committee and his sudden realisation of “personal commitments” at a time when the bank is in trouble over leadership issues is strange. Mr Chawla resigned after he was named in a charge sheet by the Central Bureau of Investigation for a controversy involving his time as a bureaucrat. The problem is that the charge sheet was issued in July. It is unclear what prompted him to wait for four months and then cite “personal reasons” for his resignation.  The government has been planning to put in place a stricter disclosure framework for independent directors, including providing details about their resignation. That process needs to be expedited. The delay by the bank’s nomination and remuneration committee to write to the Reserve Bank of India, seeking its opinion on Mr Chawla’s continuation at the bank amid corruption charges against him, is also inexplicable.

The timing of all these resignations now suggests that they are conforming to type in exiting in quick succession as the crisis deepens. Between January 2017 and June 2018, the data showed that more than 1,000 independent directors have resigned from corporations on the back of rising scrutiny and greater accountability. At YES Bank, the narrative of a possible rapprochement between the warring founding family factions has not convinced the markets, not least because the appointment of a little-known chartered accountant-cum-local politician to the board has raised many questions. All in all, governance appears to have been a major casualty in corporate India this year, and YES Bank's exiting independent directors have done little to enhance it.