Yes Bank and ICICI Bank

There has long been a debate on comparative merits (and of course demerits) of professional managers and promoter managers. The recent controversies involving Yes Bank and ICICI Bank have settled the issue. There isn't much to choose between the devil and the deep sea.

Chanda Kochhar had her bonuses clawed back and deservedly so. Yes Bank is yet to extend a similar treatment to Rana Kapoor. It is difficult to say who has betrayed the bank more. Apart from settling the controversy regarding professional vs promoter, they have also proved there is no gender difference as far as managerial misdemeanours go. Lehman Brothers would have failed had it been Lehman Sisters also!

The Reconstruction scheme of Yes Bank is a bit dicey. It readily attracts legal challenge. Investors in perpetual bonds have two credible grounds to assail the write-down of these bonds. One is that their interests cannot be sacrificed before a similar treatment is meted out to existing equity holders. Secondly, since the bank has come to grief because of reported frauds by the promoter, the bank is liable to compensate the bond holders. The bank cannot gain from misdeeds of its promoter.

ICICI Bank's laughable statement

ICICI Bank's Board has said, "In line with the highest levels of governance and corporate standards, Ms. Chanda Kochhar has decided to go on leave till the completion of the enquiry as announced on May 30, 2018.
The Board has noted and accepted this."

This is indeed funny. The Board continues to be servile to the bank's MD & CEO. Chanda Kochhar has suddenly discovered that there is something like governance and corporate standards.

The Board has lost an opportunity to prove its undying loyalty to Chanda Kochhar by refusing her 'offer' to go on leave. The Board must have responded by reminding her that the bank cannot survive without her at the helm. 

Cost of defending Chanda Kochhar

ICICI Bank continues to pay a heavy price because of its crude attempts to defend its MD. M.K.Sharma whose reputation was uncompromised till he gave (or was forced to give) a clean chit to Chanda Kochhar, is reported to have decided not to seek another term as non-executive Chairman after his present term expires on June 30th.

The Board (or should we say Chanda Kochhar) is actively looking for his replacement. A newly appointed Director, M.D.Mallya seems to be the most likely replacement. This also raises suspicion as to why he was taken in as a Director. Was the intent to make him the Chairman? Is there an undisclosed motive in the recent appointments of Radhakrishnan Nair and M.D.Mallya as 'independent' directors?

The Economic Times reports that many reputed industrialists and former bankers have declined to join the ICICI Bank Board because of the controversy surrounding Kochhar. Is she indispensable to the bank? Is it worth sacrificing governance norms and forgoing services of eminent possible directors in order to enable a person to sustain her position in the bank?

ICICI Bank ought to know that it is an international bank and therefore ethical standards expected of it are way above what we expect from a sole-proprietorship enterprise.

Power of ICICI Bank

ICICI Bank is among the largest private sector banks in India. Its influence in government and related circles seems to be strong and toxic. The Indian Express has reported that all newly-appointed members of BBB barring one have connections with this bank.

Recently in the first week of May, one Mr. Radhakrishnan Nair was appointed by the bank as an additional Independent Director. It remains moot if this was done after coming to know that SEBI was about to question the bank regarding recent developments. Mr.Nair had earlier worked as an Executive Director in SEBI. Wheels within wheels?

Reports suggesting that Chanda Kochhar has been advised by the Board to go on leave created hopes that the bank was perhaps not all that averse to adherence to principles of governance. These incipient hopes were dashed when the bank clarified that the Board has not tendered any such advice. We should have been wiser. How would the Board which is a convenient creation of the MD ask its creator to go on leave? Indications are that we have not yet heard the worst about the bank.

Chairperson and CEO

It is almost unanimously argued that the Chairperson and the CEO  need to be different persons so that corporate governance will not be adversely affected.

The Uday Kotak panel on corporate governance listed six advantages of such a split. These are 1) It provides a structural advantage for the Board to remain independent, 2) it reduces excessive concentration of authority in a single individual, 3) the split clarifies the respective roles of the chair and the CEO, 4) it ensures that Board's tasks are not neglected by lack of time for a single individual, 5)it increases the probability of both persons possessing required skills for their respective positions, 6) it creates a Board environment that is more conducive to debates and is more egalitarian.

If these advantages are absolute, Chanda Kochhar could not have cocked a snook at the Board of ICICI Bank. She has captured the Board despite the presence of a knowledgeable Chairperson. One clear lesson from the ICICI Bank drama that continues to play out is that it could be very risky to have a prima donna as a CEO. Corporate Governance depends on personal ethics of Directors and not necessarily on structural arrangement. Some times, presence of a structural arrangement like separation of two roles only introduces a moral hazard that all stakeholders will be led to assume that governance is intact even when it is already in tatters. If anything, Chanda Kochhar has proved that structural safeguards are at best deceptive and misleading. Having proved that, it is now incumbent on her to move away.

"Chanda Kochhar is not guilty"

I am now convinced that Chanda Kochhar is not guilty of any misdemeanour. We have been barking up the wrong tree for quite some time. Here is why.

Figures speak louder than words. Similarly, statements speak louder than actions. So, I go by statements.
You may remember the three unforgettable statements of the recent past:

1) ICICI: The brother of one's spouse is not a relative according to The Companies Act for the purposes of related party transactions.

2) Deepak Kochhar: I did not inform my wife my business relationship with Venugopal Dhoot.

3) Venugopal Dhoot: When ICICI sanctioned loans to Videocon, I was not aware that Chanda Kochhar was associated with ICICI Bank.

If these statements do not convince you of Chanda Kochhar's innocence, you may want to question her yourself. What would be her reply to you?

Q: Are you aware of Rajiv Kochhar benefitting from your bank's clients?

A: Who is Rajiv Kochhar? I don't know anything about him.

Q: When did your husband tell you about his business deals with the promoter of Videocon?

A: My husband never told me anything about this. In fact, we do not speak to each other. We are a deaf-mute couple.

Q: Did you personally know Venugopal Dhoot when your bank sanctioned loans to his group?

A: Who is Venugopal Dhoot? When I studied the loan papers of Videocon group, I looked at the names of companies only. I was not distracted by irrelevant information like who was the promoter. We are a focused bank.

You may think these are imaginary. Yes, they are. If you really ask Chanda Kochhar these questions, you may get even more surprising answers. If she speaks, that is.

Chanda Kochhar: Flattered only to deceive?

Nobody expected Padma Bhushan Chanda Kochhar to place herself in a situation reeking of quid pro quo, nepotism and conflict of interest all in one. M.Damodaran, formerly of SEBI, was at his sarcastic best when he told an interviewer yesterday (Tuesday, April 10) that he never thought the Padma Bhushan Bank would descend to such depths of depravity. He calls ICICI Bank as the Padma Bhushan Bank for it produced the Padma Bhushan Trimurti, namely K.V.Kamath, N.Vaghul and Chanda Kochhar. He added poignancy to his observation by reminding that Ramesh Gelli, the creator and destroyer of Global Trust Bank had been awarded Padma Shri.

It is now reported that ICICI Bank is waiting for a direction from the regulator, RBI before deciding on the tenability of Chanda Kochhar continuing in office. Coming from ICICI Bank, this is a bit rich because this bank is not shy of violating RBI guidelines on various matters and has been penalised by RBI on several occasions. It is not clear why Chanda Kochhar does not realise that it is better to quit with whatever respect is left than to get the sack from RBI. It is a race to the bottom between ICICI Board and its MD.

M.K.Sharma, Chairman of ICICI Bank and N.Vaghul, a former chairman have sullied their reputation by rushing to pronounce that Chanda Kochhar is innocent. Chanda Kochhar herself has maintained a disturbing silence. Her husband has claimed that she is not aware of his business relationship with Venugopal Dhoot. If this is indeed true, it is too dangerous to have such a non-involved person as CEO of the bank. There ought to be a limit to spinning stories.

Shikha Sharma has acted with greater celerity in opting out of CEOship ahead of planned schedule. She has not allowed herself to become a butt of Governance jokes. Shikha's response has been welcomed, among others, by the stock market.

Chanda Kochhar's departure from ethical behaviour sets a bad example to thousands of bankers who held her in high esteem. She has miserably failed the Bagavad Gita test which says,

"Whatever action is performed by a great man, common men follow in his footsteps. And whatever standards he sets by exemplary acts, all the world pursues. (3:21) ( as translated by Srila Prabhupada)"

"Whatever a great man or woman does, others also do. Eminent people must in the public interest put forth their best virtues. Then ordinary people try to rise to that level." (Jack Hawley's translation.)

It will be in the fitness of things if the Padma Bhushan awarded to Chanda Kochhar is withdrawn and if the whistle-blower Arvind Gupta is suitably recognised.

Should Chanda Kochhar take a break?

Chanda Kochhar must be having horrendous times these days thanks to disclosures by the whistleblower, Arvind Gupta. She is only 56 years old and in the normal course she may continue as ICICI Bank's CEO and MD for some more years. (She became CEO and MD in 2009.)

Though the bank is not known for squeaky clean governance, nobody seriously suspected nepotism and blatant violation of ethical practices, save Arvind Gupta. He wrote to the PM, FM, SEBI and RBI two years ago. These authorities seem to have woken up suddenly now.

There are indications that all is not well in Axis Bank also. Shikha Sharma has come in for adverse notice by RBI. She was appointed the CEO and MD of Axis Bank around the same time as Chanda Kochhar became ICICI Bank's CEO. Both these persons were groomed and mentored by K.V.Kamath in ICICI Bank.

Nine years as CEO is an adequately long period to become accountable for any managerial misdemeanour. It is now worth asking if the private sector banks are mismanaged because their CEOs have a much longer tenure than desirable just as public sector banks are suffering from their CEOs' shorter than necessary tenure.

This philosophical question apart, Chanda Kochhar is verily facing an existential crisis in the bank. The bank's Board has expectedly and dutifully thrown its weight behind her. Yet, the fact remains that Chanda Kochhar has willy-nilly to spend a lot of her time agonising over various governance issues that are now talk of the town. The allegations may or may not prove her guilt, ethical or legal. But the damage is done for the bank and her.

Even if Chanda Kochhar cannot ultimately be faulted for any lapses which again may or may not be proved, she cannot now be in a position to do full justice to her role as leader of the bank. In these trying circumstances, she will do well for herself and the institution to quit her position at least temporarily till all enquiries are completed. The Board may hesitate to suggest this to her. But she has an opportunity to prove that she considers bank's interests to be more important than her own.

ICICI Bank claims that its culture ensures organic growth of leaders within the organisation. So there should be no dearth of managers within the bank who can easily fill up the void that Chanda Kochhar's exit may create.