Comments
The recalling of a bonus of ₹1.44 crore paid to the co-founder and former MD and CEO, YES Bank for the two-year period, 2014-16, speaks about the standards of corporate governance in the private bank.
Its scrip lost value, eroding wealth of its stakeholders. The reasons behind the move — divergence in asset quality, diminishing capital base and stress in the balance sheet — have obviously been built over a period of time and not a sudden development. Similarly, the board of ICICI Bank, a domestic systemically important bank (D-SIB), decided to claw back all bonuses paid to Chanda Kochhar, former Managing Director and CEO, for the period between April 2009 and March 2018 based on the findings of an independent enquiry.
But what is surprising is the fact that such signs of deterioration must have manifested themselves over a period of time under the watchful eyes of its key stakeholders. The audit/credit committee of the board should have been able to capture such early signs and take appropriate preventive steps. Not to take cognisance of early stress in the balance sheet is a sure sign of weakness in systemic controls and risk management.
The basis for imposing penalty on whole time directors and key management functionaries is the principles laid down for sound compensation policy — put forth by Financial Stability Board (FSB) based on the experience of Global Financial Crisis, 2008.
Subsequently, these prudential principles were endorsed by G-20 Countries and Basel committee for Banking Supervision (BCBS) in 2011. Accordingly, the RBI too prescribed a set of compensation guidelines in 2012 for implementation by private/foreign banks from the year 2012-13.
In order to implement them, the board of directors of banks should constitute a ‘Nomination and Remuneration Committee’ (NRC) of the Board to oversee the framing, review and implementation of compensation policy of the bank on behalf of the board.
The NRC should have a minimum of three members and should include at least one member from Risk Management Committee of the Board, and the others should be independent non-executive directors. The policy incorporates claw back clause, adequate disclosures and supervisory oversight. But payment of such compensation needs regulatory approval of the central bank under section 35B of the Banking Regulation Act 1949.
Such rigour in compensation policy is intended to encourage alignment of risk, return and its far-sighted intent, to set the right risk appetite in pursuing business policies. But the incidents of claw back and resultant deterioration in the value of their share prices reflects upon the state of corporate governance practices and its enforcement at the bank levels.
RBI guidelines
Keeping in view the need to better regulate compensation policy, the RBI guidelines are under further review since February 2019 when a discussion paper was published seeking stakeholder views. The compensation policy is intended to be further fine tuned to the evolving FSB principles and implementation standards to come into force from the current fiscal. These new guidelines when enforced will bring equity stock options too under the purview of variable pay, that does not form part of it now.
It may not be possible for the central bank to work as sleuths in banks to safeguard stakeholders.
The board governance should be able to monitor the business models and risk appetite to apprehend any adversity. Mere claw back of benefits of key people may not be the panacea against the deficiencies that have far reaching implications on the wealth of stakeholders and overseas confidence.
It also brings to focus the rating agencies that opt to downgrade banks well after the damage is done. Their professional expertise and surveillance should be able to forewarn the stakeholders about the impending crisis.
Hence, looking beyond recalling bonuses or withholding them, it will be necessary to go into the rigour of systemic risk controls and enhance offsite monitoring of board functions.
The training and inclusive participation of board members and encouraging and disclosing dissent in the conduct of board functions should be able to avoid recurrence of deficiencies in the management calling for such desperate action reflecting on the image of the financial system.
The writer is Director, National Institute of Banking Studies and Corporate Management. Views expressed are personal
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.