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Will eminent chairmen at PSU banks make a difference?

Bank of Baroda ,  Punjab National Bank and  Canara Bank have been headless for a while now (6-11 months). Syndicate Bank , Oriental Bank ,  Andhra Bank and  Bank of India can also be added to the list. Post the retirement of their CMDs, the government split this post into MD, CEO and non-executive chairman.

Former finance secretary Sumit Bose could be the new chairman of Punjab National Bank, GC Chaturvedi, who has been a petroleum secretary in the past, is tipped to be the new chairman of Oriental Bank of Commerce.

TN Manoharan, who is on the board of Tech Mahindra, and is one of the key people who were brought on the board of the troubled Satyam Computers by the government, may head the Bangalore-based Canara Bank.

Ravi Venkateshan, the former Microsoft India head and director on the board of Infosys, is likely to be the new Bank of Baroda chairman and G Padmanabhan, who just retired from the board of RBI, may be Bank of India’s next chairman. Former Corporation Bank CMD B Sambamurthy is on the shortlist for Andhra Bank’s chairman post. Bank of India’s former chairman and managing director M Balachandran is being considered for the chairman position in Indian Overseas Bank.

The government is also contemplating more changes largely on the lines of the Nayak Committee’s recommendations. First a competitively selected MD and chairman and then a professional board. The February Budget had provided for setting up of a Bank Board Bureau that will in turn appoint these board members, but all this is yet to happen. But will the changes made so far begin to make a difference to the hard-pressed public sector banks which are now drowning in bad loans.

M Damodaran, Former Chairman, Sebi says the problem with public sector banks has been the perceived lack of empowerment, backseat driving, remote control, inappropriate selection process over the last several years. Those problems can be fixed without tinkering with the structure, he says.

AK Purwar, Former Chairman, State Bank of India , too, says even in the present situation, the organisations will be run and managed by the Managing Directors who are proven professional bankers. He says the problem with the current structure is that most people have very short tenures of just 2-3 years in which they are supposed to have a vision, initiate measures to take the organisation to the next level and provide leadership and make the change happen, which is a lot to achieve given the short duration.

Purwar hopes that these new eminent people with proven integrities are given longish terms.

Below is the transcript of M Damodaran & A K Purwar’s interview with Latha Venkatesh on CNBC-TV18.

Q: Do you think the kinds of chairman whose names are coming out of the government are going to make a difference to the boards as well as to the banks?

Damodaran: Let me make two prefatory statements, the first is that the theory of corporate governance requires that the position of the Chairman and Managing Director (MD) should not reside in the same individual. Secondly is that all the names one has heard, these are persons of proven integrity. These are persons of merit and of competence. That said, is this the right thing to do, I am not so sure.

The problem with the public sector banks has been the perceived lack of empowerment, the backseat driving, the remote control, the inappropriate selection process over the last several years. Those problems can be fixed without tinkering with the structure. That is my initial response.

Q: Don’t you think the chairman of this eminence, chairman who is known people for their integrity and their proven track record would at least be able to prevent too much middling? Middling may still be there, but they may be able to stand up if their Managing Directors came and complained to them that they are under pressure and to use their good office. These gentlemen would at least be some kind of a bulwark?

Damodaran: We are talking about having a part-time Non Executive Chairman. Create that position and man those positions with the imminent individuals that you mentioned. What is going to be the role as a part-time Non Executive Chairman? How much are they going to be able to get involved in their nitty-gritty of banking and to ensure qualitative improvements on a continuing basis?

Secondly, the question that you asked about pressure, I think you need to deal with pressure at the source. Where does pressure come from? I don’t imagine that pressure will seize, it could be less than we have seen in the last decade but there would be phone calls, there would be people that lean on the Managing Director.

Is he like a small school boy going up to the chairman and complaining that he is getting pinched by the person sitting in the desk. Is that the kind of MDs that you are going to select? You must have MDs that standup to pressure or should be asked to go home.

The job of an owner is to select the right management and leave that management to run the organisation. If the management doesn’t deliver, ask them to go home. It is not to look over the shoulder on a continuing basis as has happened some years ago. It is also not to tinker with structures.

What you are doing now is in the name of dealing with a single power structure; single point of power inside the boardroom. You are in a sense disempowering the leader and to think that part-time people will be able to deal with this, I would much rather have these eminent men mentoring middle-level officers in the organisation to groom the leader for the future. That I think is what men of such eminence should be tasked to do.

Q: Would you agree that they will make some difference to the situation? There are some people who think that ex-administrators, ex- IAS officers must be very good men, but can they run a commercial organisation? Will they think profit and loss?

Purwar: Let us look at it little differently. These eminent people of proven integrity have been selected to provide part-time Chairmanship to a different organisation. My personal belief is that even in this situation the organisations will be run and managed by the Managing Directors who are proven professional bankers.

Now what is happening in the banking system is that lot of people have very small-term of twp to five years. Four to five years is rather an exception, mostly two to three years. Within these limited timeframe, a person is supposed to have a vision, supposed to initiate measures to take the organisation to next level, provide leadership and make the change happen. Unfortunately, in organistaions history shows that two to three years period is a very small period. I hope these people will have longish-term.

Q: At the movement, it is advertised just for 3 years term for the MDs.

Purwar: I am talking about Chairman and I hope that these people have longish term. If you ask me can they provide a visionary leadership to these banks and institution, I think it is a question to be debated – very difficult and too early to say.

Q: Good Chairman who are Non-Executive don’t really lie eyes with the organisation much you think?

Purwar: They do lay eyes, but whether they would be perceived as visionary leaders, provide effective leadership to the institutions to take it to next level, , look at 21st century banking, I don’t know.

Q: Not even a marginal difference you think?

Purwar: Are we looking for marginal difference?

Q: I agree. Are we at least moving forward is what I am asking?

Purwar: I would simply look at the present arrangement as something which is being attempted. Perhaps this is being tried and the system is getting evolved. Government is perhaps thinking that let us give this chance.

Q: Here you don’t have a complaint with them being administrators? You wouldn’t want them to be men from industry like more of the Venkatesan’s and more of the Manoharan’s rather than more of IAS officers? Would that be an argument?

Purwar: Banking is an extremely sophisticated business. People having spent their lifetime, even at every stage, have to learn.

Q: Is this good enough start?

Purwar: I would say it is a start and let us give it a fair chance. Let us see how things evolve. However, if we are looking for taking the banking system to developed countries levels, there are issues and challenges.

Q: The more important selection as we have been talking would be of the MD’s. At the moment, in the second round of advertisements, the eligibility criteria has been expanded to 45-57 years. 15 years experience in the banking industry itself and one year board level experience. Do you think that this start to make the selection itself competitive and not just a normal ED being promoted as MD is a good start? Will we get at least competent of competent people with this process?

Damodaran: Let me respond to your first question which you asked some time ago which is would generalist IAS officers make good chairman? One of the much lauded governors, for good reasons, governors of the RBI in recent times was a former IAS officer called Dr. YV Reddy. Therefore, let us not, because of some prejudice, believe that persons who come from a certain background are necessarily under qualified for any important job.

That said, to get to your question on the selection process for managing directors, let’s try and understand what the problem is with the public sector banks? The first problem is they suffer from a lack of level playing field. Because they suffer from a lack of a level playing field and because of the additional restrictions imposed on their leadership, they are not able to manifest whatever leadership qualities reside in them to an adequate extent.

I do not believe that given the size of public sector banks, you cannot find enough leaders to manage them and that you have to look outside to the private sector. It is not as if the private sector is the repository of all efficiency because efficiency is ownership neutral and you have seen a number of private sector banks and other private sector institutions come to grief.

Is governance very high in private sector banks? I can give you any number of examples that will keep us here till tomorrow including people that walked out on the boards because they were unhappy with the recommendations of the nomination and remuneration committee. So, let’s not go there.

What we need to do is invest time and money. We haven’t done is to have a proper selection process, which identifies good potential in public sector banks and brings them up to leadership positions sooner rather than later. Look at the way people have been selected over the last few years with interviews for executive directors on occasion taking two or three minutes with half the selection committee absent, some were interviewed with reportedly lists prepared in advance of the meetings. That is not the way to select leaders and you believe that the public sector cannot throw up leaders, I don’t buy into that.

I am hoping that this selection will throw up some good names, but I do not imagine a private sector banker, who was seeing a career progression in his or her bank, will willingly migrate to a public sector bank. So, are we looking at less than the best moving from private sector to the public sector? These are the things that worry me.

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