A Mis-Step Or Two Cannot Make Chanda Kochhar Or Shikha Sharma Bad CEOs
Whatever the ethical or other deficits of the two CEOs who are now under a cloud, bad luck clearly had a larger role to play than just their sins of omission or commission.
It is pity that voices on social media are now questioning the basic competencies of two women who were seen as model CEOs just some time ago.
It is now more than likely that two of India’s best chief executive officers (CEOs), both women, will be eased out for alleged failures that are fiduciary in nature. A newly-awakened Reserve Bank of India (RBI), having slumbered through most of the years when bad loans were being created by the thousands of crores, nudged Axis Bank to rethink the tenure of its CEO Shikha Sharma. The board yesterday (9 April) obliged by announcing that she will leave by the end of this year, and not stay on until 2021 as earlier planned. She came under a cloud for allegedly under-reporting bad loans.
Chanda Kochhar, now in the media doghouse for allegedly failing to avoid conflicts of interest in which ICICI Bank extended a loan of Rs 3,250 crore in 2012 to the Videocon Group around the same time when associates of the group were about to invest Rs 64 crore in Deepak Kochhar’s floundering solar power business, is also likely to have to either step down or move aside until the allegations against her stand disproved. While one report talked of the ICICI Bank board considering the possibility of an interim CEO, another talked about the LIC and the government nominee wanting a quiet chat with the board on “governance issues”. That’s a joke, for one can hardly pretend that the LIC has a stellar governance record, considering just one point: the alacrity with which it bails out failing PSU public offers.
It is a tragedy that we tend to think about governance issues only when the chips are down, and not when things are actually going wrong. If Axis Bank was under-reporting bad loans, it could not have been something that happened over the last few months. If ICICI Bank gave the Dhoots a large loan in 2012, it could not have been the result of any special favours since ICICI Bank’s loans were less than 10 per cent of the total volume of loans given by a consortium of banks. So, the conflict of interest, if any, will never be proven, though suspicions may remain due to the timing of the sweet deal extended by a Dhoot associate company to Chanda Kochhar’s husband’s company, NuPower.
If ICICI Bank’s loan was really a quid pro quo for bailing out her spouse’s company, the board or the RBI could have acted five years ago. That they are acting only now suggests that this is a case of tigers showing their teeth to prove they are tigers for fear of being shown up as toothless now. Most likely, the ICICI Bank would have given Videocon the loan even without the NuPower deal.
The short point to make is this: the two CEOs are being nudged out of office not because they were bad CEOs, but because the bad news with their banks is coming at the wrong time for the regulators and the government right now. It is a case of displaced aggression.
Also, let’s not forget, the RBI, under fire from the government for failing to prevent the Punjab National Bank fraud, has gone on to claim that it had more powers of supervision over private banks than over public sector ones. And so this macho act with Axis Bank may be as much about proving its point than about any new discovery of problems with the bank.
Put another way, bad luck and bad timing rather than bad performance alone may be the real factor behind the pressures to ease out these two CEOs. It is complete nonsense to claim that they were not good CEOs just because of one or two lapses in their judgements or decisions in a long career. No CEO in India can claim perfect scores in terms of judgement or ethics all his life. So, to ridicule Shikha Sharma and Chanda Kochhar for having been hailed as model CEOs in the past now that they are facing questions is hypocritical. Kochhar has been with ICICI Bank since 1984, and has worked hard to rise to the top, having played key roles in the building of the bank’s retail franchise. To now claim that she was not deserving of top honours in the past is wrong. Anyone can make one bad call or two.
A few points are worth making following the ICICI Bank and Axis affairs.
One, boards seldom curtail the powers of CEOs who are doing well otherwise. Both Sharma and Kochhar have been CEOs since 2009, and it is troubling that we are talking governance only now – nearly nine years into their tenure. The simple explanation may be that when things are going fine, few boards challenge the CEO’s decisions. In this context it would be worthwhile to ask a simple question about another bank: can the board of HDFC Bank, which under Aditya Puri has been India’s most successful bank, ever challenge a decision of Puri, given his iconic status? The moral is simple: high-profile CEOs need even stronger boards if they are to deliver on governance.
Two, governance problems exist in both public and private sector banks. In the former, top executives, due to short tenures, have an incentive to push problems under the carpet or kick the can down the road, storing problems for their successor. In the latter, given much longer tenures, the board will assume that since they have a top-notch professional, it is best to back them to clean up any mess rather than blow the whistle prematurely and precipitate a crisis.
Three, there is a clear lesson for top managers: just one mis-step or two can ruin a reputation built over decades. But history will hopefully be kinder to them.
Four, there is an issue with super-star CEOs. Given the market’s obsession with CEOs and the media’s dependence on stars to sell their stories, one tends to forget that the ‘CEO effect’ on a company’s performance is far smaller than that of the industry it is in. Often the timing of the CEO’s entry – whether it is at the point of an industry upturn or downturn – that may make all the difference. Did Infosys start faltering only because N R Narayana Murthy and Nandan Nilekani left the company, or because the industry’s challenges had changed by the time their successors took over? Did GE start underperforming because Jack Welch left, or because the playing field after Welch left had changed?
Is HDFC Bank a super performer only because of Aditya Puri, or because it took the right calls in its initial stages to avoid long-term lending? As a retail bank it has not courted risks in lending to big infrastructure projects. ICICI Bank, on the other hand, had started at the opposite end, as a term lender, which meant it carried huge baggage from project loans that were turning sour in the 1990s. It decided that its future lay in converting itself into a universal bank, but its dalliance with term lending did not end when it became a retail bank. Put Kochhar in HDFC Bank and Puri in the ICICI Bank of the 1990s, and the net results today may not be any different.
A Harvard Business Review (HBR) article on the CEO effect confirms this point about the industry (and its segment) making a bigger difference to a company’s performance than the CEO. Successful CEOs are often just luckier than the less successful ones. Quoting recent papers that studied the parts played by ability, experience and luck in CEO successes, HBR arrived at two conclusions: “first, no single trait or skill seems to explain CEO performance; and second, luck plays a very large role”.
Whatever the ethical or other deficits of the two CEOs who are now under a cloud, bad luck clearly had a larger role to play than just their sins of omission or commission. It is pity that voices on social media are now questioning the basic competencies of two women who were seen as model CEOs just some time ago.
Note the word “best” in the first line of this article with reference to the two CEOs. There is no need to presume they were anything but the best just because their luck ran out. We can do without fair weather judgements on CEO abilities.
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