Bad corporate governance impacts negatively on a company's integrity and transparency — and directly hurts customer trust and subsequently the company’s financial health.
Good governance is the soul of any sustainable successful corporate enterprise. Enterprises have to achieve their vision by sticking to legal as well as ethical foundations. Hallmark of well-governed enterprise is that it would be inclusive in the way it deals with all its stakeholders, be accountable, transparent in its dealings, ethical in its dealings, responsive in its communication, and importantly equitable.
The fundamental objective of corporate governance is to enhance shareholders’ value while protecting the interests of other stakeholders.
Corporate governance is a fair blend of rules and regulations which govern how the businesses are operated. The term encompasses the internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators and management.
A company’s board of directors is the primary force influencing corporate governance. In most instances of well-governed companies, the board takes up on itself, obligations which extend beyond the financial goals of the company. They also take up concerns on how the company would work towards larger social, human, and environmental concerns.
The board is expected to approve the strategies to develop long-term value and appoint an appropriate candidate as the CEO. It is also tasked with overseeing the performance of the CEO and the value system in which the CEO operates. In today’s volatile corporate world, the board has an important role of overseeing the CEO succession planning as a planned process and not an accident.
Bad corporate governance impacts negatively on a company's integrity and transparency — and directly hurts customer trust and subsequently the company’s financial health.
The financial services sector in India contributes over 36% of the GDP. The sector employs large number of skilled and semi-skilled workforce, across Tier 1/2/3 geographies. The sector includes commercial banks, non-banking finance companies (such as micro finance, NBFCs, HFCs), insurance companies, mutual funds, pension funds, stock exchanges, rating agencies, advisory firms amongst others.
For the past many years, BFSI (banking, financial services and insurance) companies have had the luxury of being Day-0 recruiters and hence attract the brightest of students. The industry compensates its employees well and the wealth-creation plans like ESOPs are attractive for its leadership professionals.
Sadly, the BFSI industry seems to be short of leadership talent, as succession planning has failed in the private financial institutions in India. Some of the CEOs have held onto their roles for 15 years and above. It either showcases the sector’s inability to groom leaders or the “banyan tree” syndrome where the current leader does not allow other leaders to grow.
If we take leaf from the dispensation allowed for banking leaders, then even the bureaucracy in India must have the ability of using their well-honed leadership talent to continue working in executive capacity till 70 years age. And similarly in the judiciary where the judges of HC/SC have to compulsorily retire at 62/65 years of age. Even the regulatory chiefs get only a fixed tenor for their leadership.
Some of the board members in BFSI sector sit on the boards of competing companies too. Regulatory norms around this need to be tightened to ensure that conflict of interest and the sanctity of board discussions are respected.
The regulatory policies typically insist on risk committees for the BFSI companies. Few examples of aspects that could theoretically go wrong in the BFSI sector, in cases of prolonged leadership position are held:
In lending institutions, prudent practice is to rotate the geographic base of mid/junior-level managers like branch managers, credit managers, so that fraudulent practices are avoided. Somehow regulations or board metrics don’t use the same measure for Senior management roles in the same entity.
Similarly if we apply the same yardstick, we can avoid potential mismanagement or accidental blind-spotting of SOPs/risk management measures/accounting/favouritism to specific-borrower groups, etc. Also this would avoid use of “promotions and compensation decisioning” as a tool to coerce juniors to “toe the line.” Similar analogies can be drawn to other non-lending BFSI segments too.
Around this topic, is an example of good governance at Market Infrastructure Institutions (MIIs) which includes the stock exchanges, depositories and clearing corporations.
Regulatorily, the MD/CEOs of MIIs can serve only 2 terms of fixed duration or until age 65 years, whichever is earlier. Though this rule is as recent as the year 2018, this should force the entities in this space to groom fresh talent and have practices that are auditable by the successive leadership teams.
The Credit Rating agencies (CRA) are very critical to the overall financial markets. Their analytical capability and risk management practices are expected to above par and above board to withstand any scrutiny.
As late as November last year, the regulator SEBI brought in the rule that CEO of a CRA could not be a member of the rating committee. SEBI also brought in changes to the board composition of CRAs to bring in more independent directors and to have them head certain board committee.
And yet the some of the positions like head of research/rating seem to be stagnant with incumbents running those roles for a long time. An issue that can arise from longer stint could be personal bias (both positive or negative bias) creeping in for specific companies or sectors. Or the worry of the need to defend a rating decision, in case of any issue later and hence marking it a notch lower than needed. It would be prudent to bring in oversight on these aspects.
A look at career graph of mid to senior management personnel in the insurance or asset management sectors will make the sector feel almost “incestuous.” While specialisation is needed, these two segments of BFSI have not been able to or have not willingly looked at attracting talent from outside of its own domain. While it is acceptable that specialised competence like actuarial skills might not be easily available currently, the rest of the corporate functions talent are available in abundance.
RBI has recently proposed a regulatory suggestion for commercial banks to cap the term of promoter-CEO to 10 years and other CEOs for 15 years. It might be appropriate to treat them all as same category.
It would be useful if the example of MII regulation around MDs/CEOs service tenor extends to the wider BFSI sector, and to the wider KMP base. All the regulators of BSFI companies could have a unified regulation around KMPs and ensure coverage of all fiduciary-role-based-institutions with the same rule. Probably then the industry will be inclined to groom talent and let meritocracy play an aspect. The basis of regulations is to build stable institutionalised framework that could withstand systemic shocks and to bring process-led orientation and not a ‘person-dependent’ one. There are no paragons.
That’s what good board governance is also about. If a board cannot build succession for the company leader during her/his two-terms of five years each, then hasn’t it failed?
And this does not argue about the case of non-KMPs influencing decisions from the outside, which the industry sure does have. That’s another one for the regulators to tighten.
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