Insights Into Oversight

India’s central bank, the Reserve Bank of India (RBI), has, in its nine decades of existence, emerged as a respected and mature organisation, discharging its varied responsibilities with success and credibility. It has been in charge of monetary policy, banking regulation, foreign exchange management, currency management, and several other activities, including being the banker to banks and to the Union Government. On occasion, there has been criticism on the ground that it has been very conservative, and not kept pace with the changes in the economy, as also with geo-political developments. In recent times, some high-profile casualties in the banking sector have also called into question the ability of the RBI to ensure orderly conduct in a timely manner in the banking sector.

It is in this background that one needs to examine the reported move of the RBI to “intensify its oversight” (emphasis supplied) of boardroom discussions in banks. According to available information, recent events at IndusInd Bank have prompted the RBI to consider issuing specific directives, aimed at enhancing governance standards. RBI’s intervention in boardrooms is expected to be through the medium of Senior Supervisory Managers (SSMs), who are either Deputy General Managers or General Managers in RBI’s Department of Supervision.

Normally, when things go wrong in any corporate entity, the question often asked is “What was the Board doing?”. RBI has also decided to ask this question, possibly later than it ought to have done. IndusInd Bank is not the first instance of the Board of a bank having seemingly underperformed in regard to the expectations from it. Both in the private sector banking space, and in the public sector banking space, there have been a number of existence-threatening developments that banks have had to confront. There have been in the past, measures such as Prompt Corrective Action (PCA), but even these have not been as effective or as timely as they were originally intended to be. The related question which cannot be brushed aside is whether with every failure such as IndusInd Bank, the RBI will come up with a new set of directions, guidelines or regulations. Kneejerk responses are best avoided, especially in the banking space. It is necessary to take a holistic view of the sector and the constituent banks to see whether there are systemic issues that need to be addressed, rather than resort to tactical interventions in individual banks through the medium of the SSMs.

What does “intensifying of the oversight of the boardroom discussions mean”? The first item which the SSMs are expected to go into is whether all the relevant subjects have been included in the agenda, and whether they have been adequately discussed in Board meetings. The number of items that RBI has, from time to time, stipulated for discussions and/or decisions by a bank Board will require several hours if they are to be meaningfully gone into. The SSMs are expected to see how much time is spent on individual topics. Is there a norm going to be prescribed for the time to be spent for different types of topics? Is there a likelihood that the entire meeting will become a box-ticking exercise, with inadequate time for more important topics, so as to leave enough time for other topics that might be contextually less relevant in the pecking order.

The proposed move reflects a complete lack of confidence in the Boards of Directors of banks. Discrepancies, if any, between the audio recordings of Board meetings and the written minutes are to be gone into. What happens if there is no requirement for a recorded meeting, with all Directors being physically present at the venue? Some topics will merit detailed discussions, with divergent views being expressed. Often all of these views cannot be captured in the minutes of the meeting. While the minutes cannot be a skeletal record of decisions, it should also not be a transcript of every word said at the meeting. The purpose of the minutes is to capture the flavour of discussions, and the decisions arrived at during the meeting. What happens if something that is a part of the audio recording does not figure in the minutes because it is not considered significant enough? Will it then be the judgement of the Board, as against the judgement of SSMs, who might want more of the discussions captured in the minutes?

Available information states that the RBI is looking into the functioning of Board-level “sub-committees”. Why these committees are called sub-committees is not clear since both the law and regulations provide for Board committees, and not for sub-committees. A sub-committee by definition is a subset of a committee, and cannot arrogate to itself the status of a Board committee. This however is the lesser problem. The real issue is that the participation of individual members is to be looked into. This would mean that everything which is in the minutes has to be attributed to one or more Directors. Considering that the Board is a collective entity, expected to function in a cohesive manner, will the recording of minutes by attribution be the appropriate course? Further, while some members may hold forth in detail on some topics, others might either indicate a brief agreement, or say nothing at all if their thoughts are in sync with that of the Director who has expressed himself/herself. Will the silent Director be frowned upon for not pitching in with his/her valuable opinions? Those that have studied Boards in some detail know that there are 2 types of Directors in the boardroom. The first kind are the Directors who speak when they have something to say. The second, and clearly the disruptive element in the boardroom, are Directors who have to say something on every subject. Will the assessment of individual Directors depend on how much they spoke in the boardroom, because that would amount to undervaluing the sane and relatively silent voices, while endorsing the loud and needlessly articulate Directors on the Board.

The SSMs are also expected to examine how dissenting views are handled. The rush to dissent is a fatal flaw in boardroom discussions. Dissent should be the last step. It should be preceded by deliberations, discussions, debate and discourse. It is only when there are irreconcilable positions, that dissent gets expressed. Divergent views during discussions do not constitute dissent. It would be unfortunate if Regulators nudge Directors to dissent because that would undermine the decision-making ability of the Boards.

A circular of May 14, 2015 eliminated the traditional calendar of reviews, a standard checklist of 21 agenda items for Board meetings. The RBI had then noted that such a checklist led to too much time being consumed by routine matters, and preventing Boards from spending time on strategic and financial matters. Banks were urged to set their own Board agenda, and meeting frequency. It is an appropriate moment for RBI to reflect on whether Board agendas are presently crowded by items stipulated by the RBI, negating the well-intentioned stand taken in May, 2015.

There is also a reference to a committee headed by a private sector banker in 2014 advocating a sharper focus on 7 key governance areas. It would be interesting to see whether the private sector banks, which have had near existential challenges since then, had complied with this prescription. Pointing a finger at public sector banks alone is not going to improve governance quality in the banking sector.

It is time to revisit some conceptual aspects. The Board of Directors is at the apex of the decision-making process in any corporate entity. This should apply equally to banks as well as to other sectors. Having a duly constituted Board, it is necessary to task that Board with the responsibilities normally attached to Boards, namely, superintendence, direction and control. Some of the prescriptions over time by the RBI have led to Boards, or at least some members of the Board, being tasked with operational responsibilities, which are inconsistent with their roles as Board members. If the functions of the Board and the management are merged, intentionally or otherwise, the ability of the Board to guide and counsel the management will be severely impacted.

While on the subject, it is useful for the RBI and the Government to examine whether all the committees that have been set up from time to time in the banks, especially in the public sector banks, are necessary. There is clear evidence of overlap of functions between committees. Further, the limited number of Directors on the Board cannot contribute to the extent necessary if they are on a large number of committees, some of whom have identical membership.

If the distrust of Board members is premised on a few instances of their being caught napping, is it necessary to prescribe a sector-wise scrutiny by outsiders such as SSMs? Can persons who are not a part of the Board decide how Boards should perform when their interaction with Boards is not on a continuing basis, and their firsthand experience of commercial banking, as also of being Directors is minimal, if not non-existent? There was a time when middle level officers were deputed to public sector banks for a couple of years to get an understanding of commercial banking before they were given positions in the Departments of Supervision and Regulation. It might be worthwhile to consider deputing the SSMs for 2 years to public sector banks so that they have experience of what commercial banking is all about. If SSMs are required to ensure that bank Boards practise good governance, it would be legitimate to ask what the Government and the RBI nominees are/were doing on those Boards. Do the constituencies which send them to the Board not expect that their representatives will ensure that Boards discuss what needs to be discussed, and arrive at decisions that are legitimate? To ensure this the first step would be to ensure such nominees attend Board meetings regularly.

The 2015 circular was a positive and a productive intervention in the way bank Boards should decide the agenda and conduct their affairs. 10 years later (2025), it might be worthwhile to go back to the 2015 circular and breathe some contextually new life into it so that bank Boards function with a sense of ownership and responsibility, and do not have to be handheld or spoon fed while discharging the responsibilities.

Depositions in writing do not capture the demeanour of the witness in the witness box. Will the next step be to get SSMs to attend Board meetings so that they not only assess the contributions of Directors to discussions, but also get to know how they said what they said?

Tailpiece

A recent news item states that across 12 public sector banks, only 115 out of 190 sanctioned Board-level positions have been filled. Should we not begin by getting Boards properly composed, before looking at boardroom discussions?

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