Learning Quintessence of Corporate Governance from ICICI Bank

Today's Fitch Report on Corporate Governance failure at India's third largest bank could mean billions of dollars worth of tangible and intangible value loss for it and its shareholders. Is the Corporate Governance failure so serious? What went wrong ? Should the CEO in question be held responsible for it ?

It is the clear that an institution of that size with such high public importance need to set benchmarks higher than gold standards in Corporate Governance. But even if one goes by basic tenets of Corporate Governance there seems to be criminal failure on part of the Bank, the Board and its CEO. The Bank and its Board have issued statement that the loan was given as a part of consortium and that the CEO was not in the position to influence the decision of credit committee and 'there is no quid pro quo' in the transaction. Is that enough ? Someone has given me an argument that a Bank of that size will deal with almost every corporate in the country and if the doubts have to be raised it would mean that relatives of its management staff cannot do business with anyone in the country. Sound argument but clearly this gentlemen like the Board and CEO is missing the nuances of Corporate Governance.

The strong structure of Corporate Governance rests on few strong pillars. Fortunately, the main substance with goes into erecting those pillars is one only - Disclosure, Disclosure and more Disclosure. It is difficult to prove quid pro quo in commercial transactions since it entirely depends on estimation of arm's length value (ALV). ALV is an estimation and not a computation i.e., its a range of values and not a precise value. A small deviation from mean is allowed within acceptable limits but which also means that in large transactions the acceptable deviation could itself be the 'proceeds of crime'. The conduct of the parties is therefore important. An advance and abundant disclosure strongly goes in favour of bonafides than malafides.

So in instant case, while there were disclosure requirements under the Companies Act itself, the CEO and the Board should have gone steps ahead in making a detailed disclosure including the circumstances and the capabilities of the CEO's spouse which led to him earning this JV with such large corporate. A Board Committee ( hope they have one for related party transactions ) should have done a detailed study of ALV and should have periodically monitored the JV business and the Loan in question. Some more disclosures were warranted on the loan turning NPA. Since the public interest is much larger than shareholder's interest here, it would not have been harmful to include a small note on these endeavors in the Annual Report and the public Website. They should have done the same for the Spouse's brother as well if he had any links with the business of the Bank. Obviously if so done, the whistle-blower, CBI and ED would not have been spared of some efforts and the 3 individuals in questions from earning the Look-out Notices.

So is'nt it a colossal failure. Now, in my opinion, the agencies are wasting their time. The verdict is clear from the facts available in the public domain. Its a monumental Corporate Governance failure which has much larger implications than the amount of NPA involved. Nothing more needs to be proved. Its difficult to track 'proceeds of crime' which they generally chase. Have they been able to do in any of the cases till now. If taken to court, it may result in acquittal and no corrective action would be taken.

I think the corrective action should be the Bank admitting the Corporate Governance failure, ask the CEO to respectfully step down and pledge to completely overhaul its Corporate Governance practices, a report of which it should submit to the Government and publish to the public also. They have put an statement on their website which is in my opinion is an act of furthering their failure. The statement conveniently stays away from the answering the question of whether the Board had knowledge of the JV between the spouse and the delinquent borrower and what steps did they take to ensure no 'quid pro quo'.

If they do not do so and continue to run with current state of Corporate Governance, the Government may use its power under Companies Act to takeover the management of the Bank since public interest there is much higher than shareholders interest. The PSB cases were result of internal control failure but this is a case of failure at the highest level. This will be an opportunity for them to prove that Government can do few things better than private sector and shut their political rivals.

Disclaimer - The content of above article is purely an opinion of the author which has been derived from the information available in public domain and the author's knowledge of corporate governance practices. It does not intend to cause direct or indirect harm to the reputation of any individual or institution.