The ICICI Bank board’s decision to treat the exit of its former CEO Chanda Kochhar as a dismissal after an internal probe by Justice B N Srikrishna had found that she had violated the lender’s norms, or code of conduct, marks perhaps a game-changing moment in India’s financial sector. For, the blow is not just in terms of loss of a high-profile office but, more importantly, is monetary. The decision of the bank to claw back bonuses — in other words, get her to repay incentives paid to her since 2009 besides stock options accrued to her while she was CEO — promises to be huge. The Indian Express has calculated that her potential losses could be as high as Rs 9.82 crore as performance bonus between April 2009 and March 2018 while she was CEO, and Rs 221 crore as the current value of her over 57 lakh shares granted by the bank over these nine years.
The big signal
One of the signals for higher executives in the Indian financial sector is that this could be a trigger for greater scrutiny of their performance vis-à-vis their remuneration packages and measured against their governance practices and conduct. And that it may not be easy to get away when the line is breached. The boards of many listed firms, too, should now be under pressure to act rather than hastily defend their CEOs. In India, the regulators do not explicitly prescribe such ethical codes. The ICICI group’s Code of Business Conduct and Ethics, 2018 says these are something that a well-respected institution must have in place and adhere to on an ongoing basis. “We therefore expect a high level of ethical conduct. You must conduct your duties according to the language and spirit of this code and seek to avoid even the appearance of improper behaviour,” it says. ICICI’s decision now, coming after an initial response of denial and backing the CEO then, is likely to build pressure on the boards of many other listed firms to be guided more by the interests of their shareholders rather than the management.
New in India, not in West
The term “clawbacks” gained currency in India after the RBI under then Governor Urjit Patel hit private banks — including ICICI, besides Axis Bank and Yes Bank — hard for divergence between the accounts, or financial information, furnished by them and the one reviewed by the regulator. The RBI stepped in to stop performance-based incentives such as bonuses and stock options in the year in which divergences were found. But instances of such clawbacks are common in the US and Europe, with statutory rules in place to act as as a deterrent against restating of financial statements and to discourage excessive risk-taking and misconduct by corporate leaders. The pitch had been cleared in India before 2014, when the RBI unveiled rules to enable bank boards to act against senior bankers in cases of violation of the Code and governance practices. That was built on by a committee formed by the RBI to review governance in bank boards and headed by P J Nayak, a former chairman of Axis Bank, which in 2015 recommended that the RBI impose penalties through cancellation of unvested stock options and claw back monetary bonuses from officials whenever greening of loans was detected. Interestingly, the committee recommended this at a time when banks were reporting good numbers but when there was anecdotal evidence of funding of accounts.
Rule changes elsewhere
The corporate scandals in the West had, as early as 2002, prompted a change of rules in the US. Provisions on clawback were incorporated in the Sarbanes-Oxley Act to make CEOs and CFOs more responsible for honest financial reporting. It is another matter that even in the country with the world’s deepest financial markets and most powerful regulators, it took considerable time to enforce this. In 2010, one of the Commissioners of the US Securities Exchange Commission (SEC), Luis A Aguilar, in a speech at the University of California conceded that the delay in enforcing this important law deprived investors of the benefit of the law and the accountability that the Congress sought to foster. Fewer companies would have then restated their accounts and fewer investors would have been harmed had the law been enforced, he pointed out. The same could be said of some of the boards of top Indian firms as also the regulators. This law was followed by the Dodd-Frank Wall Street Reform and Consumer Protection Act after the global financial crisis to address incentive-based compensation arrangements with clawback provisions, designed again to prevent excessive risk-taking.
Top-heavy stock options
N R Narayana Murthy, a founder of Infosys which popularised the concept of stock options in the country almost two decades ago, despairs now at the lack of self-restraint by senior managements in rewarding themselves. He wants boards to create a climate for fairness with their actions and to ensure that compassionate capitalism is acceptable to many Indians. Interestingly, Infosys and Axis Bank were two standout firms which fostered a culture of granting stocks to staff-members across the board to ensure that all of them were stakeholders. In some of India’s listed private banks, like Axis Bank for instance, it has been limited to the top deck over the last few years. The last CEO, in fact, ended with over 13 lakh options, raising questions about the link between performance and rewards and board generosity.
In an interview to The Indian Express, Murthy had suggested that firms should consider granting such incentives or stock options over time, to ensure demonstrable commitment over the medium term. That would mean granting it over a much longer period and enabling boards to act swiftly when there is misgovernance. In that 2010 speech, ‘An Insider’s View of the SEC’, Commissioner Aguilar listed instances where the US regulator chose to sit on the sidelines. Rarely do regulators admit that they have not often listened to investors. Aguilar did that, saying “it is important that the SEC learns the lessons from the past”. Indian firms, their boards, management and regulators could also choose to do that.
The clawback now announced by ICICI will be tested legally and the outcome will have a bearing on future action against other chiefs too. There is still work left. India’s financial regulators and the government should come together to work on a design — taking into count global best practices for a law to check abuse of incentive based remuneration by senior corporate executives. A show of greed by some of them should not take away the sheen of stakeholder capitalism.