Govt Must Set Clear Objectives, Mandates For PSBs

Public sector banks (PSBs) can advance the corporate governance curve in phases by ensuring that they fully comply with disclosure and transparency norms (including those related to SEBI regulations), their top management gets longer tenure, and the boards function independently, according to top banker Uday Kotak’s recommendations to the Finance Ministry.

Kotak, MD and CEO of Kotak Mahindra Bank, suggested that these banks should fully comply with the existing provisions of Securities and Exchange Board of India (SEBI) regulations, including Listing Obligations and Disclosure Requirements (LODR), and the same must be effectively enforced.

This is aimed at dealing with cases of lapses (some of them pertaining to board of directors composition, limit on number of directorships) in compliance with SEBI regulations by listed PSBs

Calling for a re-look at statutory exemptions to PSBs, Kotak, who headed SEBI’s Corporate Governance Committee, underscored that these bank must abide by the same governance, reporting, control, and audit frameworks as other significant corporate or public interest entities, since they have raised public monies and the investors have a right to information, which is on a par with those they receive from listed entities.

Statutory exemptions

The state-owned banks are provided with certain statutory exemptions, primarily from the Banking Regulation Act, 1949, SEBI Regulations and Companies Act, thereby giving rise to unique corporate governance challenges, unlike their private sector counterparts.

Thus, if the goal of better corporate governance needs to be achieved, there is a need to address these statutory exemptions provided to PSBs, the banker elaborated in a report prepared by the finance ministry. Given that globally state-owned enterprises are run with dual objectives (furthering the state policy and furthering commercial objectives), which may from time-to-time appear to be discordant, Kotak submitted that to enhance transparency, the government must set clear objectives and mandates for the PSBs.

And where there are non-commercial objectives, these should be clearly articulated, quantified, and transparently disclosed to the shareholders on a regular basis so that investors can take informed investment decisions.

Longer management tenure

Kotak, who has been at the helm of his bank since inception in 2003, proposed that the retirement age of PSBs’ top management should be relooked at, in line with that of private sector banks’ whole-time directors. The need of the hour is to appoint them for a longer tenure. This can then achieve the objective of continuity, leading to long-term focus without disrupting the strategic objectives.

The banker observed that the management at PSBs is subject to change every three years, which may not be in the best interest of a commercial enterprise. This leads to a lack in vision and long-term strategy of the PSB, and often leads to decision-making which is short-term in nature.

Presently, bankers get appointed to top management positions in PSBs a little too late in their career for them to have adequately long tenures.

Kotak advocated that senior management compensation be benchmarked against the industry with some transparent adjustments. This will ensure quality talent is attracted and is well compensated.

For senior management, there can also be long-term employee stock option plans (ESOPs) as part of incentives. This can also incentivise employees to think for the long term. Also, the selection to leadership roles must not just be based on seniority, but due consideration should be given to expertise, skill sets, and other factors.

Referring to the recommendations of the World Bank Tool Kit on Corporate Governance of state-owned enterprises, Kotak advocated developing such a framework, which requires common and clearly understood principles of accountability and governance. In many countries, reforms of state-owned enterprises show that effective performance monitoring — a key ownership function of the state as owner — can drive both financial and non-financial improvements.

Board of directors

Emphasising that it is critical that PSBs’ board of directors function independently, Kotak suggested that this independence could be achieved via two routes: constitution and composition of board of directors of PSBs should be brought under the Banking Regulation Act, in line with SEBI regulations, and the current structure of ownership versus the holding company structure should be evaluated.

To attract independent directors, who can add value with their varied skill sets, to the board, the banker stressed that this will require persuasion at the highest levels to attract talent. Having an expert on the board would bring in wider depth in thinking and developing strategies, thereby leading to a more professionally-run bank.

Also, the board should be adequately compensated, in line with the market practices. With this backdrop, steps must be taken to improve board composition by designing a robust policy framework and clear processes for board nominations and appointments.

According to Kotak, the government must cease issuing any regulatory instructions applicable only to PSBs, as dual regulation is discriminatory.