“Disappointed, hurt and shocked” – Chanda Kochhar (former MD and CEO, ICICI Bank)
Widely heard these words are spoken by one of the most iconic banking leaders India had. While there are many other cases that have raised our brows several times due to corporate governance lapses, classic cases like one of ICICI Bank- Chanda Kochhar, PNB scam, IL&FS, Yes Bank have taken deep roots in our memory.
So what went wrong?
All of these companies had a robust corporate governance mechanism; also they fully complied with the law. But still they had the worst downfalls in corporate history, which brings us to our first issue in CG.
#1 Spirit of the law: many organisations follow the law for a tick in the checkbox. The spirit of the law is completely lost while it still holds true on paper.
Just a top management issue?
Chanda Kochhar missed to reveal her associations with her husband’s company and several other intertwined relations between ICICI Bank’s loan given to Nupower Renewables & the Videocon group. But what about the operator at PNB office who silently approved Letter of Undertaking (LOU’s) for Nirav Modi ?
#2 Tone from the top: While the law is set by the top management it is crucial that the same law has to be absorbed by all levels off hierarchy in the company. The top level will set the tone and culture, but for it’s true effectiveness it has to be well integrated in the organisation.
But only the CEO was at fault!
Only Chanda Kochhar had conflict of interest for the loan granted by ICICI bank. Yes Bank’s CEO Mr. Rana Kapoor was denied an extension for poor regulatory compliance and several loan divergence cases which were not fully disclosed by the bank. So only the top has to be penalized?
#3 Getting the Board right: If the CEO is unfavorably making a decision which is not ethically correct, it is the responsibility of the Board to prevent it from going ahead. The whole purpose for having an broad Board of Directors including Independent, Non executive and women directors is to make the board more accountable & transparent in situation of crisis. If the Board was to simply “nod” to the CEO’s decision every time then the essence of having BoD’s to protect the interest of investors is completely lost.
Money makes matter worse
Most of the corporate governance failures are financial in nature which makes it even more important to have multiple layers of checks and balances. In the case of IL&FS default on debt obligations due to a business model where short-term loans were taken to pay for long-term projects. But the long-term projects did not earn enough or fast enough to pay off the short-term loans.
#4 Risk Management: For a governance model to be effective, a robust risk management policy which spells out key guiding principles and practices for mitigating risks in day-to-day activities is imperative.
When the music stops!
Many management officials dance along with the music as long as their pockets get filled. Therefore, it is imperative to tag a clause to what happens when the music stops?
#5 Executive compensation: It was not so shocking when ICICI Bank decided to impose the Clawback clause to retrieve Chanda Kochhar’s bonuses and benefits. Executive compensation needs to stand the test of stakeholders’ scrutiny.
Stakeholder management and investor engagement plays a crucial role in ensuring corporate governance is truly present in any organisation. There needs to be better crisis management by boards. There were several events that unfolded and some boards either reacted poorly or went into a huddle. Boards must be trained and prepared to instill greater investor confidence at crucial moments. Independent directors role has been clearly laid out but still the impact of such independent directors has not been felt. Perhaps, the focus needs to shift to limiting promoter’s powers in matters relating to in independent directors.
#corporategovernance #ILFS #riskmanagement #boards #crisismanagement #topmanagement
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