The job of a chief executive officer (CEO) of a public sector bank is one of the most difficult in the banking industry. However, the CEO selection process has not kept pace with the rising performance expectations from the CEOs that it selects. The science of CEO selection has evolved internationally, and it is high time the government updated its practice.
Till a few years ago, chief executives of public sector banks could be appointed for very brief tenures. This was counterproductive. The notion of a minimum tenure is now firmly established. It’s time for the next step of reform.
Every year, the finance ministry conducts interviews to appoint people to the posts of chairman and managing director (CMD), and executive director (ED) of the 19 nationalized banks. A list of eligible candidates is drawn up from the pool of career bankers in the nationalized banking industry. State Bank of India (SBI) follows a separate but similar process.
Candidates are called for an interview with a panel that sometimes meets as many as 20 candidates a day. As one would imagine, the interviews are quick. Earnest senior officials in the finance ministry call on many people in the industry to get recommendations about “the few good men” who should be given a chance.
While one respects their intent and judgement, more professional expertise should be introduced into this crucial process.
Being the top executive of a public sector bank is a tough job. These are listed entities, and quarterly performance pressures are no less than in their private sector counterparts. One chairman told me about an activist hedge fund investor who would call him every month to discuss performance. Financial comparisons with private sector banks—which do not have similar constraints as PSBs—are easy and abundant, showing the public sector in an unfavourable light.
Public sector CEOs work with one hand tied. Their controlling shareholder—the government— wants public sector banks to take developmental initiatives according to its political priorities. CEOs receive frequent calls for favours from people claiming to be hand-in-glove with the powerful. These CEOs, unlike their private sector counterparts, do not have the freedom to choose their executive team. The only thing a CMD can do to replace an ED (his second-in-command) is to strongly recommend his promotion so that he gets elevated as CMD of another bank.
CMDs also do not have the monetary levers to incentivize people to perform. They can neither fire an incompetent employee nor hire a promising candidate at will. The general bank staff is unionized; a majority of them are above middle age, and often out of wavelength with today’s young customers. A Central Vigilance Commission (CVC) inquiry or a Right to Information petition is a Damocles’ sword, ever present. Substantive expenditure requires a lengthy request for proposals process that often delays the time to market new ideas. With all these pressures, CEOs at public sector banks have to deliver shareholder returns that are compared by one and all with private sector banks.
This is not everyone’s cup of tea, and candidates need to be assessed carefully. They need to demonstrate five standard CEO traits—(1) leadership capability and vision, (2) people management skills, (3) business knowledge, (4) strategic thinking, and (5) communication skills. Given the special challenges of the job, the CEO assessment for public sector banks needs to look for three more skills.
First is the ability to enable change. For most public sector institutions, transformation is a serious challenge. Since status quo can be fatal, CEOs have to articulate the rationale for change and a vision for the future. They need to address employees’ insecurities and cynicisms about change.
Second is the ability to walk the talk on learning new skills and unlearning old ones. This is often anathema for the public sector CEOs need to demonstrate that they will use email if they want their organizations to reduce paper work. They need to take fast decisions and be accessible if banks are to shun old bureaucratic ways.
Last but not the least, the public sector CEO needs inner strength, convictions of character and a balanced perspective. Executive decisions driven by ego or vested interests can wreak damage that takes years to repair. Given the many pulls and pressures, chief executives need to be able to say no without burning bridges. To unleash the organization’s creative energies, genuine business mistakes need to be shielded from CVC inquiries. Standard CEO traits cannot be assessed in a 20-minute interview. The additional traits mentioned above need deeper probing. They require rigorous assessment centres.
As the quality of the selection process improves, so will the quality of the chosen executives. Alongside this, the total pool of eligible candidates needs to be increased to cast the net wider in search of the most appropriate talent. Qualified candidates from the private sector should also be allowed to compete for the top jobs in the public sector. Executive compensation has to be sufficient to attract the best applicants.
Saurabh Tripathi is partner and director, The Boston Consulting Group
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