ICICI Bank, Axis Bank crises revives focus on private sector boards' judgment and independence

At ICICI Bank, the board gave a clean chit to MD & CEO Chanda Kochhar who is battling allegations of nepotism on the loan to the Videogroup group. Subsequent media reports suggest the board is divided on the matter.

Banking sector experts say that both the private banks have seen a deterioration in their asset quality while the boards have continued to reward their respective chiefs with heavy increments, bonuses and incentives. Hence, it shows that even when both the banks were penalized by the Reserve Bank of India for under reporting of bad loans, their boards did not punish them for under par performance.

“It is strange that you renew a CEO’s tenure despite a sharp deterioration in asset quality, poor operational risks management, two consecutive years of misreporting of accounts and collapse in performance,” Hemindra Hazari, an independent banking analyst told Moneycontrol.

“And to top it, the increments, stock options and bonuses approved by the board keeps going up each year. If a Board is incapable of such a basic function of performance appraisal of a bank and its CEO, the Board itself becomes dysfunctional,” Hazari says, adding that most independent directors are independent only in name.

Both Kochhar and Sharma are serving their third term and have been rewarded consistently by their banks with bonuses in most years. According to media reports, RBI has not yet approved the payout of bonuses for private sector bank bosses for FY18.

For FY17, ICICI’s board had approved a bonus of Rs 2.2 crore (NIL for FY16) for CEO Chanda Kochhar with total remuneration of Rs 5.64 crore, up from Rs 4.79 crore in FY16, while Axis Bank’s Shikha Sharma received total pay of Rs 5.7 crore (up from 5.4 crore) with a bonus of Rs 1.35 crore (up from Rs 1.13 crore).

Previously, the role of boards of IT companies such as Satyam and Infosys have also come under shareholder and regulatory fire. Among other things, the Satyam scam highlighted the failure of independent directors.

The Infosys Board also defended its former CEO Vishal Sikka when allegations of severance pay to its former key executives and irregularities in the Panaya acquisition were raised by Infosys co-founder N R Narayana Murthy.

Says J.N. Gupta, MD at Stakeholders Empowerment Services, “It exposes the entire evaluation process in our corporate sector. If the Axis Bank Board had found her capable for heading the bank for next four years, there was no reason for them to succumb to the RBI pressure in three months...So either the Board was wrong in its initial decision or it is wrong now.”

Echoing somewhat similar views, M Damodaran, ex-SEBI chairman says when RBI asked the Axis Bank board to reconsider Sharma’s appointment, the board should have had a strong argument as to why it thought that Sharma should continue.

On the ICICI Bank issue, Damodaran said the lender’s board should have sought independent opinion.

“The board should have appointed an independent inquiry authority, not do its own inquiry, because there are stakeholders, there is reputation management,” he said in an interview to CNBC-TV18.

"This can be done only by conducting an impartial inquiry, and that is what everyone does whether in India or outside,” he said.