Strengthen board oversight to check larger-than-life CEO debacles – Mint

A common theme runs through the exits in the past three years of some of India’s most high-profile CEOs. These include IL&FS’ Ravi Parthasarathy, ICICI Bank’s Chanda Kochhar, Yes Bank’s Rana Kapoor and NSE’s Chitra Ramkrishna.

They were not just very powerful or larger-than-life figures feted by industry and the media. They were also part of a band of professionals who rode the first wave of what turned out to be a breakout period for executive compensation in India – with not just top-dog pay packets but hefty stock options too. And importantly, they gamed the new model of a widely dispersed shareholding with the dominant promoter or shareholders keeping tabs on them and largely diffused accountability. Each of these cases was marked by the surrender of the boards to superstar CEOs.

The recent order of the securities market regulator, Sebi against the former CEO of India’s top exchange, the National Stock Exchange, returns all these episodes into focus.

There is a backdrop to this. In the years after economic liberalization was started in 1991, and the entry of foreign investors led to the ensuing growth in the Indian capital markets, with greater participation by local investors, serious concern was the corporate behaviour of family-controlled firms and promoter groups that dominated the landscape of both listed and unlisted firms.

Growing resistance to such behaviour, especially on the part of more informed investors fostered an environment, which favoured companies managed by professionals and those with diversified shareholdings. The reasoning appeared sound: There was little incentive for CEOs running such firms to seek to acquire control of the company or to siphon off money like in some of the family-owned groups.

Yet, as the original promoters—state-owned banks, financial institutions and insurance firms—in most of the firms mentioned earlier, IL&FS, ICICI Bank and NSE, diluted their holdings progressively, there was a virtual capture of these institutions by their powerful CEOs. Fat paycheques and stock options were approved by indulgent boards. This played out during a phase when the regulators and the government were sort of reluctant to step in for the fear of attracting charges of intervention in professionally-run firms. 

Arguably, when these fat cheques were written—in most cases out of whack with performance metrics—the government could have stepped in. In all these firms, except Yes Bank, the government could have nudged the state-owned banks and insurance firms that collectively had sizeable holdings to either justify the CEO compensations or trim the pay packages. Ironically though, it does appear that no questions were asked how such compensation packages with stock options worth crores could be justified in private banks such as Axis and ICICI Bank when the RBI had reported that its and their assessments of their bad loans did not match.

Nor does there seem to have been any comparison on executive compensation made with banks and institutions such as the State Bank of India, a listed entity, and LIC, whose size and mandates dwarf that of some of these private banks.

In the case of the NSE, being a systemically important financial market infrastructure institution, and a first-line regulator, it was incumbent on the board to act far more effectively in the broader interests of the markets and the economy.

Governance failures like these highlight yet again the importance of good board oversight with a focus on measuring sustained performance and not just near-term governance framework and quality of boards. The recent IFC—BSE-IiAS Indian corporate governance scorecard 2021 shows that there is a strong correlation between the quality of the board and an increase in governance scores. The report also indicated that companies that were well governed with a score of 60 or more tend to show better performance and lower stock beta or volatility over a period of time.

There are growing signs that investors are willing to pay a premium for companies that are well-governed. More than promoters and even professional CEOs, ensuring shareholder value over a sustained period is not just high-quality management or leaders but also quality boards too.

The recent record of larger-than-life personality CEOs forces us to re-examine the corporate governance oversight structure in place. The regulator should strengthen the framework of checks and balances at the board level.

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