On Board with Corporate Governance

Amitabha Guha

Non-Executive Chairman

The South Indian Bank Limited

Amitabha Guha has been the Non-Executive Chairman of The South Indian Bank Ltd. since November 2, 2010. Earlier he served as the Managing Director of State Bank of Hyderabad Ltd and the Deputy Managing Director of State Bank of India. With vast expertise in finance and banking spanning 4 decades, he has held directorships at Xpro India Ltd, BSCPL Infrastructure Ltd, Andhra Pradesh State Financial Corporation, Gangavaram Port Limited, Vijayasri Organics Limited and The Oudh Sugar Mills. He is a Member of the Indian Banks Association (IBA Finance) and is on the Advisory board of ICFAI Business School, Hyderabad Management Association and the School of Management Studies, University of Hyderabad. Sri Guha holds a Master Degree in Science from University of Calcutta.

I was introduced to the domain of Corporate Governance (CG), in early 1994, by an article on the ‘Cadbury Committee Report’. Internationally, it was then an emerging concept. As a mid-level officer of State Bank Group, frankly I neither comprehended the criticality and importance of the subject then nor did I visualize the catalytic role it would be playing in the sphere of governance. The report was generated by a committee set up essentially as a response to certain serious developments in the market. It was not a proactive action aimed at enunciating some guidelines.

The committee was constituted in May’ 1991 by the Financial Reporting Council of the London Stock Exchange and the Accounting Profession. The trigger was the failure of Maxwell Communications and the Mirror Group of Companies. It was widely perceived that the failure was attributable to diversion of pension funds; a diversion pegged at 440 Million Pound Sterling. At the same time, Bank of Credit and Commerce (BCCI) also went bust losing billions of dollars belonging to customers, employees and other stakeholders. Responding to public outcry the committee was constituted with a fact finding mandate. Chaired by Mr. Andrian Cadbury it submitted the draft report in May‘ 1992 and the final report in Dec’1992. It was followed up by issuance of a set of guidelines, in U.K., bringing listed companies under its ambit and made effective with effect from 30.06.93. The chain of events attracted global attention and various economies and countries realized the need for good governance. They then took it forward with varied time lags, factoring local ethos, culture and legal frame works. India was no exception and joined this group of countries.

At this juncture it would be relevant to devote some time on the definition of CG. There are multiple definitions but broadly the core theme is ''CG deals with law, procedure, processes, practices and the implicit rules that determine the ability of a company to take informed managerial decisions vis-a- vis its claimants - in particular its shareholders, customers, employees and the State”. Though there was universal consensus on what is good CG, at the implementation level, we encountered various models. However a common thread of preserving the core objective cut across all of them.

During April 1998, the Confederation of Indian Industry (CII) articulated and introduced a set of CG codes. In 1999 the Securities and Exchange Board of India (SEBI) constituted the Kumar Mangalam Birla Committee. It was instrumental in articulating clause 49 to the listing agreements with the Stock Exchange; a quantum leap in the evolution of CG in India. Subsequent Committees such as the Naresh Chandra Committee of 2002 and N.R. Narayanmurthy of 2003 added significant values to the CG model in India. These recommendations set new and higher benchmarks, comparable to global standards.

While such developments were taking place at home, advanced economies and their collective forum widened the scope of CG. The U.S.A legislated the Sarbanes-Oxley Act in 2002 and in 2004 OECD framed guidelines outlining the important features of CG, which inter-alia include ensuring right and equitable treatment of shareholders, Protection of non-shareholding stakeholders, employees, customers, creditors, local communities and policy maker’s ethical trade practices, code of conduct for the Directors and Executives, disclosures and transparent mode of communications to the shareholders ensuring accessibility to all material information. Thus the scope of the Board as envisaged by OECD broadly related to:

• To act as a think tank to assist the management in articulating strategies
• To oversee performance against the goals so as to maintain the financial health of the company, covering the dimension of risk management architecture involving an adequate and sound system of internal control
• Selection of the CEO and other key executives and fixation of compensation
• To ensure integrity and transparency in the accounting and financial reporting system aided by an independent auditing mechanism. Thus also addressing the issue of disclosures and communications to the shareholders.

It seemed to be a big list and an enormous responsibility. If a culture of compliance is created within the organization with ownership at various managerial levels, I trust that the momentum thus created will take care of sustenance. It is obvious that the Board has to play a pivotal role and in a sense, if I am permitted to say so, it is the "Nucleus" of CG. To highlight the role of the Board Mr. John G. Smale, Chairman of the Board of Directors, General Motors, observed, “The Board is responsible for the successful perpetuation of the corporation. This responsibility cannot be relegated to the Management". Now the question arises, if that is expectation of the board, what type of people would qualify to be its members? While skill and experience is very important, the value orientation in terms of ownership and commitment has to be of an absolute nature. Is there a deficit in the Indian context? Is compliance ritualistic in nature, betraying a tendency of “tending to satisfy the letter” more than the spirit, when it should be both? If CG is to be beneficial for all stakeholders, promoters included, we need to raise the bar of selection of the Board Members to realize the true long term reward arising out of CG.

I have been associated with the Indian Banking system for more than 40 years of which more than 10 years have been at the Board level. So I am tempted to share some of my thoughts and experiences about CG in banking in general and the Public Sector domain in particular.

We have witnessed progressively successful adoption of CG, in India, in the non-banking entities. But the degree of implementation in Banking has not been at par with non-banking companies. I am afraid that the observation might be construed as misleading unless the issue is discussed in its entirety.

a. Banking business is unique because of its deposit taking activities along with working as a financial intermediary. The relationship with depositors is fiduciary and this has a flavor of trusteeship; a core element in CG.
b. Major ownership of the banks rest with the State! Such ownership demands socially oriented commitments on the part of the banks.
c. Appointment of key executives and the members of the Board are responsibilities of RBI and the GOI.
d. Regulatory architecture of RBI and expectations of the owner (the State) are the drivers of Banks' operations.

Therefore the principle of "Maximization of Wealth" for shareholders/stakeholders perhaps does not fit in here as it does in the case of non-banking entities. In India Public Sector Banks collectively account for: 75+% of total bank deposits,76% of the total loan book, 90% of the branch network and 78.4% of the personnel employed by the industry. Residual business is principally contributed by Foreign and Private Sector Banks - both old and new generation. Further, various provisions of legislations of the GOI and regulatory guidelines of RBI as detailed below govern various dimensions of a Bank’s functioning:

• Banking regulation Act, 1949
• State Bank of India Act, 1955
• State Bank of India (Subsidiary Banks Act) 1959.
• Subsequently these banks are called Associate Banks
• Banking companies, Acquisition and Transfers of Undertakings Act, 1970/1980. Amendment in the said Acts was carried out in 2006. RBI in the meanwhile, introduced “Fit and Proper” criterion for elected directors contained in section 9 (3) (i).
• Reserve Bank of India Act,1934.

Subsequently the scope was enlarged to the State Bank Group. The applicability of Clause 49 of the Listing Agreement was already operative as done in case of Non-Banking companies. In addition there are nominee directors of RBI and GOI in the Boards of the PSBs. Regulatory framework of RBI stipulates - offsite surveillance, onsite examination – at macro and granular levels, independent in-house audit mechanisms overseen by a committee (ACB) of the Board. Structures and provisions detailed above are expected to take care of healthy system and procedures, risk management and sustained profitable performance of the bank safeguarding the interest of the shareholders/stakeholders. In a realistic sense, the compliance of elements of CG is well overseen.

I must qualify here that I am neither advocating the non-application of the principles of CG in banks nor undermining the role of the board and its director in the pursuit of excellent governance through the platform of CG. The limited point I wish to make is the model of CG for banks needn’t be a mirror image of the model articulated for non-banking companies.

If the board has to deliver effectively and as expected, the selection of directors assumes paramount importance. There is scope for refinement of the process to get the right mix of skills and values. Skill or values as standalone elements are inadequate.

If the board has to deliver effectively and as expected, the selection of directors assumes paramount importance. There is scope for refinement of the process to get the right mix of skills and values. Skill or values as standalone elements are inadequate.

We have experienced the unfortunate episode of Satyam Computers where the best of experts, were members of the board. It was fairly obvious that commitment and ownership of responsibilities are as essential as the skills to qualify to be a director. I believe that the creation of a pool of such experts and their utilization would be of great use. A related example from the financial sector is that of the Global trust Bank Ltd.

The quantum of fees paid to the directors of PSBs need to be made attractive to attract the best of talent. Implementation of the revised provisions of the Companies Act, may perhaps addresses the issue adequately.

Before I conclude, I would like to state that my observations should not be generalized to include the entire population of Directors of PSBs. Further, the opinions expressed are my personal views. I have referred to the book- Corporate Governance in Banks edited by Prof. R.K Mishra et al. My sincere thanks to the editors and also to the authors who have contributed articles to the book.