Bank CEOs And The Difficulty Of Being ‘Above Board’

The unique positioning of the chief executive of an organisation received a rousing re-statement in the United Kingdom on May 11, at the hands of the Financial Conduct Authority, a regulatory body charged with overseeing the behaviour of essentially all the financial entities in the U.K. The occasion was the issuance of a final notice of findings and punishment in a case involving the chief executive officer of the Barclays Group, an international banking and financial conglomerate. The CEO, James Edward Staley, was fined over £300,000. He was also penalised a similar sum by another sister-body of the Authority in the same case. What was the CEO’s crime? He had tried to establish the identity of a whistle blower who had complained against him and others.

While handing out this order, the Authority spelled out the role and expectations of the CEO in four core principles:

• First, being the most senior executive director on the board, the CEO has a crucial role to ensure the company meets the standards expected of it. Identify conflicts of interest and be alert to potential whistle-blowing situations. The CEO should demonstrate the highest standards of integrity and act with due skill, care, and diligence in carrying out their functions.
• Second, along with the responsibility of proposing a strategy to the board and delivering on the strategy as agreed; a CEO has the responsibility for setting an example to the firm’s employees and communicating to them the board’s expectations in relation to the firm’s culture, values, and behaviour.
• Third, the applicable Individual Conduct Rule—quite clearly generic to CEOs everywhere—that he should act with due skill, care diligence at all times in performing his role as any reasonable CEO would have done in like circumstances.
• Fourth, and probably the most important, the aforesaid rule compliance behaviour would be informed by, among other things, the specific nature of the incumbent’s role and experience. In this context, expectations of a CEO will be more exacting than of other employees. When faced with circumstances that might undermine impartiality in judgement, the CEO needs to ensure that appropriate standards of probity and governance are maintained, The CEO’s behaviour will be seen as an example worthy of emulating by other employees in the company. Recall the axiomatic Indian statement: yatha raja thatha praja, roughly translated, as the king behaves, so the people do.

As the iconic former CEO of General Electric, Jack Welch used to say, it is probably necessary to repeatedly communicate even the basic requirements to ensure they are understood. This is true for governance too, so as not to risk it disappearing from the supervisory and regulatory radar of the system.

The Case Of ICICI Bank

India’s banking sector has recently been subject to close attention and scrutiny in terms of its conduct at the highest levels of management and direction. Leaving aside for the moment the massive non-performing assets of public sector banks built over time, even banks in the private sector seem to have been dogged by indiscreet behaviour (putting it mildly, pending detailed investigations) on the part of top management and boards of directors.

The recent ICICI Bank episode is a case in point, involving the grant of loans and/or facilities which had allegedly benefitted—albeit indirectly—close relatives of the CEO. When loans were being granted to an entity which had links to the CEO’s husband’s business, is it acceptable practice for the CEO to be present at and participating in the discussions? All cannons of objectivity and conflict of interest would suggest the CEO should have excused herself from the decision-making process. It is another story that even then, other decision-making members mostly subordinate to the CEO may not have been able to take an objective call, given the superior-subordinate equations, but that is something of a cultural weakness commonplace in the country we may have to live with. One could argue that the CEO and her subordinate officers may not have known about the conflict.

It is no one’s story that the experienced officers of one of India’s top commercial banks were babes-in-the-wood believing without scrutiny everything said by an applicant seeking a loan. Judging by the Barclays analogy, could one conclude that the behaviour of the CEO in the ICICI Bank case was beyond reproach?

Granted, some investigation is underway and in India no one is deemed guilty unless proven. But given the seniority of the CEO in the organisational hierarchy—with the board also, in unseemly haste, endorsing the CEO being above board in this instance—would not the ends of justice be better served if the CEO were to step aside for a while till the investigations are concluded? Maybe a three-to-six-month sabbatical outside the country? With her name cleared, she can return and resume her position with renewed reputation. At the time of this writing, ICICI Bank has said the CEO is on her annual leave after a newspaper report suggested that she was asked to go on leave.

Shouldn’t there be an overseeing authority with some teeth, like the FCA in the U.K., which can ensure best-practice behaviour on the part especially of banks because of their sensitive position in the financial system?

The RBI governor is on record telling a parliamentary panel recently that the powers of the regulator were, as of now, inadequate and needed to be augmented.

This also concerns banks’ boards of directors and their objective and independent oversight of management behaviour and performance. In Axis Bank’s case, the CEO’s extension of service came under question after subsequently expressed doubts on the suitability credentials of the incumbent. These cases would seem to suggest that perhaps bank boards also need to introspect a bit more and gear themselves up to meet increasing expectations of effective oversight and stewardship.

N Balasubramanian has been a company director, author, adjunct professor and independent researcher on corporate governance matters.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.