New Delhi: Independent directors on the board of state-owned banks will soon have a maximum tenure of six years, a move that the government hopes will make them more effective and improve corporate governance.
“The plan to restrict the tenure of directors on bank boards has received the approval of the finance minister,” a ministry official said, requesting anonymity.
P. Chidambaram, after returning to the finance ministry in August, promised public-sector banks more autonomy is making decisions, which also means making their boards stronger and more efficient.
The ministry in July had asked the nationalized lenders to only discuss important issues such as strategic business plans, bad debt management, human resource planning and core business operation in board meetings.
The government’s move is in line with the provisions of the proposed companies law, which restricts the tenure of independent directors to not more than 10 years, according to J.N. Gupta, founder and managing director of Stakeholder Empowerment Services, an advisory.
“Effectiveness of the board is a key part of corporate governance, provided the right people are selected,” Gupta said. “The way the shareholder directors are sometimes appointed shows that there is still a long way to go to ensure that all stakeholders are adequately informed about the consequences of the decisions they are taking.”
The move to restrict tenure would also mean that a director, whether nominated by a shareholder or the government, will be ineligible for further appointment to the board of any public-sector bank, if the person has already served for six years at one of them.
“There have been instances when a person has been on the board of bank for years in some capacity or the other. If the government refuses to appoint a person to a bank’s board, he becomes a shareholder director and joins the board,” said another finance ministry official, who too declined to be named. “By restricting the tenure, we can ensure that one person doesn’t hop from one bank board to another.”
A board of a public-sector lender comprises the chairman and managing director, executive directors, a director nominated by the government (typically a finance ministry official), another one nominated by the RBI, some three appointed by shareholders and a couple of non-official directors. The state-owned banks, depending on size, generally have around 11-14 directors on their boards.
As a majority stakeholder, the Central government constitutes the boards of nationalized banks, with the majority of directors, including the chairman and managing director, being appointed by the finance ministry. The director nominated by the central bank and those representing other shareholders are the only ones not directly appointed by the government.
The government may also insist on banks having directors from different specialized fields to bring in varied expertise. At present, chartered accountants dominate bank boards.
“Bank boards’ should have expertise across fields like economics, finance, human resource and information technology,” the second official said. “It should not be restricted to any particular profession.”