The polling results of IndusInd Bank Ltd, announced on 5 October 2023, come as a shot in the arm for those seeking a more active role by the institutional shareholders in exercising their franchise boldly and independently and not blindly toeing the management (promoter) line.
One of the resolutions that the institutions voted to defeat was for the reappointment of an incumbent independent director (ID) for a fresh term of four years.
The candidate concerned is the senior partner in one of the best-known law firms in the country and the reason for voting against the candidate cannot be anything to do with the merit and suitability of the individual to the said post.
Why should the appointment of a highly suitable candidate be opposed?
The reason for the rejection that can be speculated is that the candidate is already a director in six other listed companies and, with the Bank added, will be exhausting the quota of the seven permitted in the law.
Though seven is permitted as the maximum, clearly the institutional investors realise the extent of involvement and commitment a busy professional in a top law firm with six other directorships can provide to the job of an independent director in a major bank.
Bank directorship is extremely onerous, going by the number of meetings held each year. Even the board meetings are averaging more than one a month and the number of the RBI (Reserve Bank of India)-mandated committees add to the work load making it challenging for any professional.
The maximum sitting fees earned by any director in IndusInd Bank is Rs53 lakh. The maximum fee per meeting is Rs1 lakh. It is not that all committee meetings earn the fee of Rs1 lakh. So, mathematically, the number of meetings in a year is a minimum of say 53 and possibly many more. A diligent reader can browse through the secretarial audit report and total it to get the figures accurately.
As another parallel, in the case of HDFC Bank Ltd, one of the directors earned Rs70 lakh in sitting fees alone, again the arithmetic will show a minimum of 70 meetings in the year!
To revert to the issue on hand, the signal sent by the institutional shareholders in this case should not be lost on the corporate sector and the regulators. Clearly, the institutions seek active IDs and not mere attendance.
The RBI governor had, on more than one occasion, emphasised the need for a board that is vibrant and participative, and specifically pointed out the malaise of just one or two directors being dominant and the others, passive.
Bank boards have a role that may be not comparable to other corporate boards, however big the business is. Banks deal with public funds of an order that exceeds the promoter and shareholder funds by multiple times.
There is a recent history of major governance gaps and systemic failures in leading private sector banks that were assumed to be well governed, and showed the inadequacy of the existing governance framework of an independent part-time chairman, the number of IDs being more than the executive board, big audit firms being engaged to audit and, most of all, a regulator that was supposed to exercise its vigil, 24x7!
Aligned with the workload is the aspect of the remuneration in large private banks to the IDs. Besides, the sitting fees that, in most cases cross Rs50 lakh due to the number of meetings in a year, a fixed commission of about Rs20 lakh to Rs25 lakh is paid in such banks.
Thus, an independent director would have a remuneration of about Rs70 lakh in a year. The chairman and MD (managing director) of the biggest bank in the country, State Bank of India (SBI), received a salary of Rs37 lakh in FY22-23.
While the abysmal salary of PSU bank executives needs a separate discussion, it sets in context the level of remuneration in private banks to the IDs and, therefore, impliedly, the expectations.
It is difficult to comprehend how a busy lawyer with six other public board responsibilities can do justice to a bank directorship. Certainly, the bank can use the expertise of such a talented professional as a retainer or a consultant. That is completely different. But not as an ID.
In fact, there is a prevailing myth that boards should have lawyers, accountants and IT (information technology) experts (the latest being ESG—environmental, social and governance), to make it wholesome and diverse. This needs more debate as professional expertise can be bought for a fee.
The real need would appear to be persons with experience in diverse fields rather than specific professionals who are already engaged in a full-time service like the present case. The ability to understand the big picture and balance the needs of the diverse stakeholders is more key for an ID than being an expert with deep domain knowledge in law or other fields.
This also brings to the fore the role of the nomination committee that has clearly slipped in this case and been a rubber stamp.
While this case where the ID had a bucket full of directorships is an extreme one, in IndusInd Bank itself there is another ID with four additional directorships and one with two directorships.
ICICI Bank Ltd has three of the eight IDs having four additional directorships and one with two. Kotak Mahindra Bank’s part-time chairman has five additional directorships. One of the IDs has three and another has one listed entity and nine unlisted ones.
HDFC Bank is perhaps an exemplary board where no ID has more than one extra directorship and about three of them have no directorship outside the Bank.
It is time for RBI to step in with a rule that a bank ID cannot be a full-time professional like a lawyer, CA, etc, and should not, at a maximum, hold more than two other directorships.
There is a large pool of talent in the country and to believe that directors can be found only within a small population of high-profile individuals with the right social standing is something that is seriously harming the governance framework.
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies)
