The ICICI Bank board has belatedly asked Chanda Kochhar to go on leave while retired Justice B.N. Srikrishna conducts an independent inquiry into the possible conflict of interest in the case of the 3,250 crore loan given to the Videocon Group by the private sector lender in 2012. It has also appointed Sandeep Bakhshi as chief operating officer. He will report directly to the board rather than to chief executive officer Kochhar.

Bakhshi comes from ICICI Prudential Life Insurance Co. Ltd, and by choosing him rather than an insider, the board has perhaps indicated that a leadership transition has begun at ICICI Bank.

Also read: ICICI Bank CEO Chanda Kochhar’s fully paid indefinite leave raises questions

Kochhar should have stepped aside once the details of the case tumbled out—but the board should also have used its powers to ask her to do so when a voluntary response was not forthcoming. It instead chose to put out a hasty defence in its 28 March statement, in the wake of what were breezily dismissed as unfounded and malicious rumours: “The board has come to the conclusion that there is no question of any quid pro quo/ nepotism/ conflict of interest as is being alleged in various rumours. The board has full confidence and reposes full faith in the Bank’s MD and CEO Ms. Chanda Kochhar."

The ICICI Bank board has clearly failed in its main fiduciary responsibility of protecting investor interest. That is basically what boards are appointed to do. It then claimed to have found no evidence of any wrongdoing. This was only a few weeks ago. It is no surprise that the reputation of the ICICI Bank board is now in tatters. It needs to be overhauled as well.

What now?

Bakhshi will have three main tasks. First, he will have to face a battery of investigations from the Securities and Exchange Board of India (Sebi), the Central Bureau of Investigation (CBI), the Enforcement Directorate and, perhaps, the US Securities and Exchange Commission.

Also read: Will Sandeep Bakhshi do a PruLife at ICICI Bank?

Second, he will have to deal with the issue of reputational risk. ICICI Bank continues to be a strong organization with a wide consumer franchise, but there is no doubt that its investors have borne the costs of the recent controversy. The possibility of a class action suit cannot be ruled out in case the Srikrishna investigation reveals a deeper rot.

Third, the mounting bad loans at ICICI Bank show that it made too many bad lending decisions over the past decade. Bakhshi comes from an insurance company that is more focused on the retail business, so it will be worth watching if he strategically reorients ICICI Bank towards retail rather than corporate lending.

Bakhshi has his work cut out for him. It seems to be a cruel rule of recent history that new leaders take charge of ICICI Bank only in moments of crisis. Kochhar rose to the helm of ICICI Bank in the aftermath of the global financial crisis, when unfounded fears of its solvency led to rumours about a run on the bank. She had big shoes to fill, since her predecessors were N. Vaghul and K.V. Kamath. Vaghul ran a traditional development finance institution. Kamath smartly converted it into a commercial bank.

Also read: Finally, Chanda Kochhar did what she should have done earlier

Kochhar stabilized ICICI Bank before joining a lending spree that led to a mountain of bad debts across the Indian banking industry. She also miscalculated by not voluntarily ordering an independent investigation on whether she had met internal disclosure norms on a possible conflict of interest. The fact that ICICI Bank shares rallied after the board asked her to go on leave shows that she had lost the confidence of investors.

The ICICI Bank saga also has a deeper lesson. Corporate boards are clearly not independent enough. Few act as if they represent shareholders rather than senior management. The ICICI Bank case is telling because there is no dominant promoter group, the usual suspects in episodes of bad corporate governance. The lender is managed by professionals, rather than a family. Yet, the board has a clubby feel to it. The same situation can be seen in several other Indian companies that are dominated by professionals rather than promoters.

Also read: Dear ICICI Bank board, giving a red card to Chanda Kochhar is not enough

Corporate governance experts have to think about the depressing reality that even companies without dominant investor families do not do their job—as the ICICI Bank episode has revealed over the past few weeks.

How should the ICICI Bank board have responded to the Chanda Kochhar controversy? Tell us at views@livemint.com

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