A top-class board is important from a systemic point of view, more so at a time when the wider financial world and India Inc is chasing the same talent as banks.
IMAGE: Reserve Bank of India Governor Shaktikanta Das, left, and Sanjiv Chadha, MD and CEO, Bank of Baroda, at the Bank of Baroda’s Annual Banking Conference 2022, in Mumbai, July 22, 2022. Photograph: ANI Photo
Conventional wisdom has it that being on a bank board is an honour few will pass up given the perks and social status that go with it.
That may be true for some. But those who have both in plenty may well decline the opportunity given the headaches associated and the low level of compensation on offer.
The struggle to get top-class directors on board found indirect mention in the first-of-its-kind interaction between the Reserve Bank of India’s top brass and the boards of State-run banks in New Delhi last month.
A plea was made that Mint Road’s stress should be on the strategic role of boards and increasing the remuneration for independent directors.
A big off-record talking point in recent times has been that boards are now burdened with matters that should be in the domain of banks’ professional management.
In the case of private banks, it is said annual inspections routinely raise questions as to why a matter was not referred to the board.
Often, board meetings are almost full-day affairs, and independent directors have expressed the view that they have day-jobs too and it’s not worth their time to get involved in ‘executive’ matters.
These issues are not new. They were raised in the P J Nayak Committee to ‘Review Governance of Boards of Banks in India’ back in May 2014.
The committee noted that the Companies Act (2013) permits up to one per cent of a firm’s profit to be paid as directors’ fee.
However, other than for the non-executive chairman, RBI does not permit part-time directors of banks to be paid any remuneration other than sitting fees.
Private sector banks argue that they face difficulties in persuading highly talented people from accepting membership of their boards because board remuneration in well-run non-banks is superior.
Public sector banks also do not permit remuneration to directors other than sitting fees, and these are at more modest levels than those paid in private sector banks.
So why do people sign up for the job?
The workload of an independent director has changed over the past three years, following RBI’s June 2020 discussion paper on ‘Governance in Commercial Banks in India’.
After the governance blowouts at a couple of private banks, RBI turned up the burner knob.
The pain points are that the nomination and remuneration committee, audit committee, and the risk management committee are to have only non-executive directors.
A few private banks had also sounded out Mint Road on their struggle to get suitable independent directors; and sought extended timelines to get appointees.
It rankled corner-room occupants as well. Said one: “Either we are CEOs, or we are not.”
Another was more charitable: “In European banks, you have a supervisory board for governance and another for management of business. We are somewhere mid-way.”
Short point: Just about everybody on the board appears to be hassled.
Even professional managers are unhappy. Chief risk officers (CROs) and the chief compliance officers (CCOs) report to the risk management committee of the board (RMCB) on which CEOs find no place.
And CROs and CCOs are to have equivalence at one level below whole-time directors (WTDs) and CEOs.
This, it was pointed out, has upset the pecking order within banks, given that other business verticals heads also aspire for a similar rank.
When it comes to compensation, RBI’s circular of April 26, 2021, said in addition to sitting fees and expenses related to attending meetings of the board and its committees according to extant statutory norms/practices, the bank may compensate non-executive directors (NED) by way of a fixed remuneration commensurate with an individual director’s responsibilities and demands on time, and which is considered sufficient to attract qualified competent individuals.
‘However, such fixed remuneration for an NED, other than the Chair of the board, shall not exceed Rs 20 lakh per annum,’ the rule says.
Yet another sticking point is Section 10A of the Banking Regulation Act (1949).
It says, ‘The board of directors of a banking company shall consist of persons, who (a) shall have special knowledge or practical experience in respect of one or more of the following matters, namely: (i) accountancy, (ii) agriculture and rural economy, (iii) banking, (iv) co-operation, (v) economics, (vi) finance, (vii) law, (viii) small-scale industry, (ix) any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company’.
Further, directors ‘shall not have substantial interest in, or be connected with, whether as employee, manager or managing agent: (i) any company, not being a company registered under Section 25 of the Companies Act, 1956 (1 of 1956), or (ii) any firm, which carries on any trade, commerce or industry and which, in either case, is not a small-scale industrial concern, or (2) be proprietors of any trading, commercial or industrial concern, not being a small-scale industrial concern’.
The issue here is that it’s not only hard to get good directors, but widening the inter-connected aspect to their other independent board positions adds another layer of complexity.
It is one thing to say an independent director should not have a direct conflict of interest; another that it will be treated as such even if the person happens to hold a similar position in the wider corporate world.
This precludes many from joining a board. It may be time to relook this provision with mandated disclosure of pecuniary relationship between the bank and entities with which a director is involved. This will bring transparency in the public domain.
A top-class board is important from a systemic point of view, more so at a time when the wider financial world and India Inc is chasing the same talent as banks — whether as independent directors or those who can fit into the senior management at far better compensation packages.
It would also be opportune to widen the debate to include the low payouts at state-run banks, in general; and also at Mint Road — they are poorly paid when compared to what’s on offer at the central banks of economies of like scale as India’s.
Feature Presentation: Rajesh Alva/Rediff.com
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