Friday, June 3, 2016

Freeing bank boards: Financial Express March 15, 2016

The creation of the Banks Board Bureau (BBB) is motivated at making PSBs more efficient and free from government interference, as it is believed that, in the current context, their boards are not really independent. By transitivity, the same also holds for the management of banks, which are constrained by similar pressures. Is there a pragmatic way out of this conundrum?
The measures taken so far are to appoint the chairmen of some banks in a non-executive capacity, while certain MD and CEOs have been taken from outside the system—meaning thereby that non-PSB professionals have been placed in these positions. The criteria really cannot be that private bankers are better, because some of the big bank failures have emanated in the private space. Therefore, the approach has to be getting the right people without background consideration.
Having the BBB is one thing, but to make a difference our approach has to change, because if we have only a different set of experts appointing the same set of people, it will not achieve the purpose. A way out is to take a route which, at first sight, may sound heretical.
To begin with, the government must stop having nominee directors on the boards of banks. As we keep talking of interference all the time—and the government has taken a stance that it does not want to interfere—the logical solution is that no one from the government or its nominee should be on the board. Having either of them on the basis of government’s prerogative by virtue of ownership vitiates this objective. It is believed that any nominee director even from outside active government would still act as a messenger of the realm.
Second, the directors which are appointed, including non-executive chairmen, must have qualification and competence. It has become almost axiomatic that a successful MD or CEO, who has retired, automatically qualifies for the post of a director of another bank or company. This may not always be the right assumption to make, and often their involvement is limited as they hold multiple positions in companies and may not really be in a position to add value. So, while these are good names to have in the annual report, they may not be the right persons.
While there can be a qualification for becoming a director in terms of age, experience, etc, subsequently there should be an examination which would be a combination of the UPSC/CAT variety, and which the BBB designs. Ideally, case studies could be a way of testing the ability of a director, while psychometric tests can evaluate whether the person has the aptitude for the same. This may not be palatable, but is essential, as often we do have directors on companies who could well be past the present and not in touch with changing corporate climate. There are CEOs who retire from office and are still less tuned to technology or HR practices and may not be able to comprehend such issues in a company where they are part of the board.
Another way out is for all potential directors to be rated by, say, credit rating agencies (CRAs). Here, the CRA can have a model that is presented and approved by the BBB. The potential directors can then be evaluated by the CRA and graded. While normally such a process involves personal interviews, which may not be forthcoming, interactions with staff of their current/earlier organisation/bank would be an alternative. Here, the BBB can call for applications for potential directors and ask them to make submissions to CRAs. Those who choose not to enter this process can be excluded.
Sometimes people of eminence are approached by companies to join the board based on their past performance or stature. The individual likes to be on board of leading companies, while the company gains with the brand of the individual. Though this is a common practice in the private sector, for the PSBs it has to be altered, to ensure that the process is free of bias. It is not surprising that persons who served successfully as heads of PSBs earlier get appointed as directors, which carries an inherent bias.
While having an effective board is important, the top management, especially MD and CEO, is also critical. Here again, the head tends to be a government appointment and we do generally read of there being 50 eminent persons being considered for five positions which go to the ministry. There is intense lobbying for these posts in all public sector organisations. To get out of this circle of bias and influence, a new system can be devised, including the shortlisting process as well as tenure.
The UPSC-CAT should be the criteria for appointing professionals to the position of executive director, deputy managing director or other board-level designations. This is needed because all executive directors become potential managing directors and should have the ability to own the balance sheet, which does not come easily to everyone. At present, a combination of seniority and lobbying could be influencing such decisions. A transparent screening system can act as a filter, after which the BBB can keep interviewing this sub-set for the position of the head of a bank.
The issue of tenure is also important and it has to be fixed for five years, such that the person can deliver with a renewal prospect of another 3-5 years in case the performance criterion is met. When the tenure is short, the head is not able to do full justice, as one tends to be myopic and may not see the big picture or draw up a long-term strategy. It is also the case that when the tenure is short, the new incumbent tends to reverse the earlier strategy to be different.
It has been observed that in private organisations some of the heads go beyond two terms and run the organisation successfully. But governance principles must ensure that there are opportunities for others and a second line develops—as well as infusion of new ideas which tend to get stunted when the MD remains unchanged. Usually, competent professionals look for jobs outside when the MD and CEO appears entrenched and is not willing to pass on the baton. This, however, holds more in the private space than in public.
While it is challenging to change a system of appointment—given that the shibboleths once established are not malleable—the BBB would hopefully take a fresh view on these appointments, especially since the weak links have been identified. By not taking a different approach, we could just drift into what Milton Friedman would have termed as “tyranny of the status quo.”

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