Banks, bankers and bonkers

Last week the ICICI Bank sacked the former CEO Chanda Kochhar with retrospective effect and made it public that her exit from the band would be treated at termination from the service of the bank. This is undoubtedly dramatic and has caused a lot of turbulence in the banking sector in particular and the business circles in general. Thereafter, institutions like the Enforcement Directorate (ED), and Central Bureau of Investigation (CBI) have tightened their grips on the case and the scrutiny is intense on the role of other bankers, especially at the top levels of decision making.

Banks are also companies – though a banking company with certain special features as different from any other company – and hence are artificial legal persons, incorporated as distinct legal entities which are inanimate, and thus cannot do anything on their own. They work on the principle of principal – agent relationship, which gives limited authority to each and every individual working for them. The most fundamental duty of each of these individuals is to work in the interest of the principal, and keeping the broad framework of law in mind so that at any point in time there was no transgression so as to be on the wrong side of the law. This legal framework is dynamic in nature and can change with time, or place, or both. The higher one goes in the hierarchy of a bank, the higher is the duty towards the bank, which is called fiduciary duty, typically for higher management. This duty primarily is the duty of loyalty and duty of care.

Therefore, the bankers at the top level of management are expected to work in the interest of the bank, and in case there is, at any point in time, a conflict between the bank's interest and their own personal interest, these individuals must take the necessary precautions of recusing themselves from important decision-making, and if such incidents have happen very often, then ensuring that either such situations do not arise, or walk away from the position, howsoever coveted that may be, once and for all. The steps are necessary to keep the air clear about transactions made and also to maintain one's reputation. Being lackadaisical in approach in such cases can lead to confusions in the minds of observers and may possibly create a suspicion of promoting one's self interest at the cost of the bank's interest. Prudent business leaders keep themselves at a very safe distance from any such possibly conflicting situations. It is not very difficult to anticipate the likelihood of occurrence of any such reputation-wrecking moments.

Rather than withdrawing from a possible conflict of interest decision making process, if a banker insists to be part of the process, it clearly gives the impression that there might be some vested interest, though it is not always the case. The worse happens when even after an objection is made by certain persons at responsible positions, who are duty-bound to oversee the proceedings and make relevant observations at the appropriate moment, the concerned banker refuses to withdraw, takes an active part in the proceedings, and the decision finally is made which aligns with the personal interest of the banker, whether directly or indirectly. The decisions thus made do not remain objective and get coloured. The situations are truly avoidable and an astute banker must definitely avoid them.

In so many cases which have been in the news of late for all the wrong reasons – Punjab National Bank, Bank of Maharashtra, Axis Bank, ICICI Bank, etc. – it appears quite simple, from the media reports, that the bankers had not been cautious enough to take care of the simple principles guiding the conduct of a banker in conflicting situations. The real facts will only surface after thorough investigation and following the process of law. There is, to a large extent, trust deficit about the way the situations have been handled both by individual bankers and collectively by their respective boards. It is quite surprising, rather shocking, that boards have very easily taken U-turns and tried to justify their varying stands unconvincingly.

Propriety demands that the boards should stick to their decisions, which expectedly should be arrived at after due diligence and following the due process.

The author is a professor at IIM-A, akagarwal@iima.ac.in