We want to have board members who add value: Uday Kotak
7 min read 14 Dec 2012, 12:35 AM ISTThe executive VC and MD, Kotak Mahindra Bank, talks on how critical governance is for banks
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Mumbai: Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank, spoke in an interview about how critical governance is when it comes to banks. Edited excerpts:
You are the dominant shareholder. How do you ensure a board that’s impartial and well-managed?
You go back to the first principles of governance. There is a shareholder, there is a board and there is governance. When I wear the hat of management, it is important that our management behaves and conducts as management accountable to the board. We have a well-balanced board of directors which is very independent, so it is consultative, there is deep trust and we have been able to ensure that over time we do what is right for the institution.
We are also meeting all the requirements in a sense of RBI, which helps from a governance point of view. For example, compensation of CEO and the whole-time directors is approved by RBI. No independent board member other than the chairman and whole-time directors can be on the board for more than eight years. We think that’s an excellent governance mechanism set down by the banking regulation Act as well. Therefore, combination of the spirit of governance with adherence to rules which effectively execute the spirit of good governance is, I think, what we have followed. I do believe that banks are special—they are very leveraged institutions by nature, therefore it’s even more critical to ensure that the governance and the process of running a banking company are well-organised, managed and regulated.
What are the two or three parameters that you look for while constituting the board?
I think the key parameters are independence, integrity, knowledge and the ability to have a good conduct and trust. We are not obsessed by necessarily having board members who are on 20 companies. We want to have board members who add value, and who will demonstrate commitment to building and governing the institution. The average age of the board members will be around 57-58.
Are there occasional boardroom disagreements?
We encounter very healthy boardroom debates and pretty diverse views, so we have always had the benefit of diversity of opinion and expression before we take some important calls.
What kind of compensation do you offer?
Board members, as per the banking regulation Act, other than board fees are not entitled to anything else. The chairman Shankar Archarya gets an additional compensation because he is expected to spend more time and even that is subject to RBI approval.
But even these board fees are not fixed?
The board fees are capped by the Companies Act at a maximum ₹ 20,000 per meeting. We meet about six times a year, in addition to committee meetings.
One of the key parameters for any corporate entity is the succession plan. What is the thinking on that count?
We have a very deep management team and it is pretty clear that we have quite a few choices available to the board should something happen to me or the board decides differently. We are in an institution-building process and in a way the fact that we as promoters have had a high stake in the development of this institution which gradually comes down over time is a very appropriate way of institutionalizing over time.
Having said that, I have a view about very diversified shareholding where you see some perverse behaviour particularly as you have seen in the international financial institutions which have very little skin in the game of anyone called as promoter. My view is there has to be reasonable skin in the game, particularly in highly leveraged institutions, to ensure good behaviour and conduct over a period of time.
Coming back to succession, you belong to the old school which believes in grooming people from inside and loyalty is a critical factor. Is that perception right?
I belong to a school of just using common sense. Do what is right, let management flower within the firm. We do import management from outside but selectively. But they must spend reasonable time within the firm to really get trust in their conduct and behaviour and it is not loyalty for loyalty’s sake. There has to be loyalty, there has to be delivery and of course, high quality of execution and skill for a person to build his name in the firm.
The proposed Companies Bill covers a lot of new ground on board constitution in terms of age and how long members can be on the board. What is your view?
My view is that at a certain age, and we can debate whether that age is 70-72 or 75, members need to step off boards. As per the banking guidelines, that age for the director on a board today is 70.
Is there anything which you think is detrimental to the proper functioning of the board?
In many ways, some of the stuff which the Companies Act is proposing, the banking regulation Act already had—like eight years for a board member. I think the Companies Act is talking about six years. Compensation of whole-time management is becoming a bigger issue in India and on that banks in India have been pretty sober, helped by the fact that you have a central bank which oversees it.
The rotation of auditors is something which is required of banks in India. The whole area about voting and kind of details about governance is monitored by the central bank in case of banks. So (there is) far greater levels of governance if boards and managements of banks follow it in letter and spirit. Very often we find that many banks follow the letter, not necessarily the spirit.
How critical is the role of independent directors?
I think independent directors are important. They are vital aspects of the overall governance framework but that has to be in addition to good management. You have to have good management and independent directors working together in harmony.
How do you ensure corporate governance? Does it come from the management or is it imposed by the board?
I think corporate governance finally is in the hearts of all the players involved in the stakeholders’ responsibility. It is not something which is only ticking the rule box. I am a believer that in any company, the moment you don’t own 100% and therefore it’s not your sole proprietary firm, you have to govern in the interest of all shareholders and not a select part of shareholders. The key to corporate governance is all 100% must be treated fairly and equitably as the basis of the bedrock of corporate governance.
Can you give us some examples of the best practices that you feel proud of and that makes you different?
There are quite a few of them—for example if we have to take a decision on how we will deal with corporate groups where we have concerns about their governance. We will be cautious as management, which is going well beyond the scope of our governance because we believe that sooner or later problematic governance practices will reflect in risk to counter parties.
I used to, in the period 2003 to 2008, hear many investors tell me that they invest in ABC company because they can ‘manage’ the system. I would tell these institutional investors that if they could manage the system be careful because tomorrow they can manage you as well and not give you your fair returns as well and we have been careful in our counter-party exposure as a bank to some of these companies.
Similarly, on many issues when we are in doubt, we would ask the regulator for clarifications rather than just rushing into convenient legal opinions.
How do you see corporate governance in India?
I think you got to ask what is right and I will give you an example. We have been very uncomfortable with restructuring of standard loans and if you look at our numbers they are both in absolute and percentage terms the lowest in Indian banking, at ₹ 12 crore absolutely and 0.03% as a percentage. If you feel that there is a stress on a particular borrower, we believe it is better to take it through the NPA (non-performing asset) route and even if we have to restructure it from the point of view of his cash flows, do it after making it as an NPA but many banks do not agree with that.
A restructuring enables a bank to postpone provisioning as well as continue to accrue interest as long as it’s a standard loan. We think that if the underlying restructuring is a stressed account, it’s not correct and that’s something which we as a management have believed and implemented.
Are regulators doing enough for corporate governance?
I think there is significant effort from both the MCA (ministry of corporate affairs) and Sebi (Securities and Exchange Board of India) to focus on corporate governance as a key issue in our financial markets. But I believe there is room for more, there is room for focus but at the end of it you can take the horse to the water, drinking the water has to be done by the horse. Therefore, corporate governance has to start in the hearts of the managements, boards and shareholders of different companies.
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