The King has retired. Long live the King

The ostensible reason for Uday Kotak's abrupt resignation was to stagger leadership succession.

The unexpected resignation of a stalwart promoter-CEO of Indian banking four months before his term expired has put the cat among the pigeons. The ostensible reason for the abrupt resignation was to stagger leadership succession, as the terms of the bank's chairman and deputy CEO are also set to expire at the same time.

It has, however, set tongues wagging, with speculation that it was also prompted by a desire to facilitate an internal succession to leadership from within the bank. The bank has recommended two names to the banking regulator, the Reserve Bank of India (RBI), to choose one as the outgoing CEO's successor. The suggested names are, however, not in the public domain. The abrupt departure of the stalwart CEO has also prompted many to question the RBI rule that limits continuous bank CEO tenure to 15 years, questioning its wisdom and applicability in this specific case, keeping in mind the stellar track record. On the cynical end of the speculation spectrum, the move is seen as lining up three ducks: internal succession, public debate-sympathy and potential pressure, and the uncontested continuation as non-executive director/chairman of the board (an aspect on which RBI guidelines on CEO tenure limits are silent). According to them, successfully realizing any or all of the ducks represents an upside over an alternate course of inaction.

Undoubtedly, the promoter-CEO deserves all of the accolades and praise. And more. Over nearly four decades, he has successfully built and guided a non-banking finance company, an investment bank, and then a commercial bank through difficult and treacherous waters, ensuring his rightful place among the pantheon of great bankers and the hall of fame of Indian banking. The debate, however, is not about the promoter-CEO being a great, even legendary, banker. Because that is not even a question.

Regulated Entity

The central issue in this saga is the model of bank ownership and control. Banks, as opposed to corporations, are licensed businesses that accept public deposits at lower costs and then lend them out at a profit. The bank regulator issues the banking licence and imposes a set of regulations and conditions on their operations to ensure the safety, continuity, and growth of the banking system, which is central to the financial economy. Depositors and the general public trust these banks with their money in part because they are backed by the bank regulator's licence, supervision, and regulation, which derives its own legitimacy and powers from the sovereign government. Because of this banking licence from the regulator, banks are permitted to borrow up to 90 percent of the loans they make while contributing only 9 percent of their own funds. It is also because of this banking licence that the majority of these deposits are low-cost (in banking parlance, CASA - Current and Savings Accounts), giving it an advantage over other lenders. 

If one of the touchstones of governance and control of an entity is skin-in-the-game, surely the RBI speaks for the public interest as the banker of last resort, bank licensor, and fiduciary of 90 percent of the public funds lent and at risk? Even with the remaining 10 percent of owner funds, RBI regulations limit individual promoter/group ownership to 26 percent in order to prevent control concentration over banks. As a result, promoter/group ownership is effectively limited to only 2.34 percent of total loaned funds. All discussions of CEO succession, board composition, regulations, management control, and family legacies at fiduciary banking entities should be viewed through this lens.

Decisions Based On Principles

Concerning the RBI regulation that caps uninterrupted CEO tenure at 15 years, it should be noted that the RBI is obligated to take a long-term view of both banking institutions and the banking sector. And principles, rather than circumstances or exceptions, should drive its decision-making. Overlong tenures in power have been widely observed around the world to entrench an unquestioned view and group think of a behaviourally dominant individual, endangering the institution's long-term sustainability and survival. In the corporate version of the "Banyan Tree syndrome," little independent or diverse talent grows under the tutelage of a monochromatic, successful, celebrated, but unquestioned CEO who, despite his or her best intentions, frequently fosters groupthink and sycophancy. While JP Morgan is frequently cited as a successful example of a family legacy bank that saw many Morgans lead it before transitioning to professional leadership, few cite the many more failures—of second and third generation family or internal leadership succession disasters. While there are notable exceptions, the old Chinese proverb of family succession, "The first generation creates wealth, the second generation keeps it, and the third generation destroys it," has long been generally true. For the reasons stated above, the RBI, as custodian of the public interest, regulator, and licensor, must address normative patterns and risks rather than exceptions.

That is not to say that this is always the case. Or that internal candidates are in any way less meritorious or qualified than external candidates or pose a greater risk to long-term institutional stability or sustainability. It is only to reiterate that succession at a bank, for the numerous reasons stated above, must be carefully considered and deliberated upon with gravitas, consultation, and balance. And, from a long-run perspective, the regulator must have the preponderance of the decision due to the unique nature of the licensed business and the public interest characteristic of banking.

As for moving on, as Ashish Nehra of the Indian cricket team, a colleague of the great Sachin Ramesh Tendulkar, said at the time of his own retirement, “It is always good to leave when people are asking why rather than why not”. It has been a fantastic innings, one of the best in Indian banking history. Strong foundations have been laid for the future. Both legacy and family wealth have been secured. Perhaps it is time to let it chart its own future course and look forward to making additional personal contributions to the Indian financial sector and the nation. Onwards and upwards.

Sandeep Hasurkar is an ex-investment banker and author of `Never Too Big To Fail: The Collapse of IL&FS’. Views are personal, and do not represent the stand of this publication.