I initially thought of titling this Advice to a Young Director, in the manner of Advice to a Young Scientist by Sir Peter Medawar, the British-Brazilian biologist and writer of Lebanese origin, and Nobel Laureate in Medicine (1960). Writing of Medawar, “The wittiest of all scientific writers,” wrote Richard Dawkins, and “the cleverest man I have ever known,” wrote Stephen Jay Gould. Coming from Dawkins and Gould, there cannot be higher praise. Medawar’s short book, suggested by a Physics Professor at IIT Madras, stayed an inspiration through my research. It is highly recommended for researchers in any discipline including corporate governance.
Better sense prevailed for more reasons than one. Most of my original subscribers, added by me, are much older to me. Some of them are acknowledged experts on the subject. There are also many others who I consider more knowledgeable and experienced than me in the area. Moreover, my direct experience of corporate governance in different banks adds up to just eight years. This is nothing compared to some others who were on ten banks as director or adviser to CMD. Finally, I am no Medawar. I have accordingly scaled down my initial ambition and settled for ‘my experience’.
Why this post
There are many reasons for writing this. First, no other subject has engaged me almost throughout my career, and still does as an occasional speaker. I have had an equally long experience of dealing with frauds, money laundering, regulation and compliance, and operational risk. But, I don’t lecture on these subjects anymore as I do on corporate governance.
Second, one of my co-directors on a bank Board suggested that I write a book for the benefit of independents directors on bank boards (She is also an original subscriber here). This post is a tentative first step in that direction.
Third, I received a request last year to write on my experience for the benefit of bank directors. I never wrote the article for certain reasons. But the thoughts collected during the period stayed with me.
I don’t claim to have always done the right thing. In retrospect, there have been occasions when I felt that I could have done better or differently. The experience of no two directors are same, even if they were in the same bank. Individual approaches to meet similar challenges would also vary. I have known people who refused nomination to bank boards for fear of some issue haunting them later in life. That is one more reason for this post.
My early lessons
Early lessons in corporate governance came really early. In 1971, the term ‘corporate governance’ was not in vogue. It came into use only in the late 70s, and became popular in the early 90s with the Cadbury Committee. But, Board level issues have been there from the days of East India Company in London, widely considered the first stock holding company in the world. In India too, such issues started with the sordid episode of the first Bank of Bombay (a pending post) of the 1860s, when limited liability and company registration were still in its early days in the country.
Management – Kalayum Shastravum
My first lessons on Board conduct came indirectly from my father. Indirect because it was from what he wrote and what somebody wrote on him. In 1971, he wrote for Mathrubhumi, the Malayalam weekly, a series of articles on Management. M.T. Vasudevan Nair, later a Jnanpith Award winner, was then the editor. D.C. Books later published it as Management – Kalayum Shastravum (Management – Art and Science). In 1971, it was probably the first book on Management in any Indian language. The book is grossly outdated. A 20-year old undertaking to D.C. Ravi of D.C. Books to thoroughly revise and update the book is one of my long pending projects.
Written in a humorous style, partly inspired by the richly illustrated Northcote Parkinson series on Management, reading it offered me my first lessons in Management, including Board conduct. M.V. Devan, well-known painter and sculptor, illustrated the series and the book. Written in simple language, even a school student like me could follow it.
Secondly, in my father’s library, books on management outnumbered other subjects with the exception of literature and history. I did not then read Alfred Sloan, Lawrence Appley or Peter Drucker. Nor did I comply with my father’s nudges that I read his prized possession, a first edition copy of Chester Barnard’s classic, The Functions of the Executive (1938). This I did four decades later, during my research. What interested me most then was a delightful book of cartoons on Board functioning. The title was ‘All those in favour’ by Henry Martin, the famous cartoonist with New Yorker and Punch. He died in 2020 aged 94. His “All those in favour” cartoon spawned a genre in itself. A Google search on it will be quite rewarding.
Alind and Hitachi
A third and more important lesson came from a report in Kerala Kaumudi, the Malayalam newspaper. My father never discussed office matters at home. So, the newspaper was my source. The year was 1973 or 1974. As Industries Secretary, my father was on the Board of Alind (Aluminium Industries Ltd., Kundara, near Kollam). It was established in 1946 at a time when Travancore saw the largest number of industries being established.
In one Board meeting, only the quorum of three directors were present: the Chairman (a retired civil servant from pre-independence Travancore days), my father as Industries Secretary, and a representative of Hitachi, Japan, with which the company had a tie-up. An item involving a financial transaction with Hitachi came up for discussion. My father objected as he said that being an interested party, the Hitachi representative should not be present, and in which case the quorum was not complete. He suggested deferring the matter. It did not go down well with the then ruling dispensation, especially the industries minister, T.V. Thomas, though known to the family through other ways for about four decades.
There were a few repercussions details of which are not relevant here. Suffice to say that the government transferred my father overnight and withdrew him with immediate effect as government nominee from all Boards. This included HMT and Premier Tyres that I can remember. The story, and the core lesson of ‘conflict of interest’ and general Board conduct, remained with me.
Perusing Board notes
At the Reserve Bank of India, I was posted to the Chennai Office of the regulatory department in 1990. One of the first assignments was to peruse the Board papers coming to the local Manager (now Regional Director) who was on the Board of Indian Bank. Late Sanjay Mishra, posted to one of the sections in the department, did most of the work. Mishra did an excellent job of going through each set of Board papers and meticulously preparing detailed notes. Mishra went on to do outstanding work inspecting Global Trust Bank flagging its grave NPA issues in the process. Unfortunately, he passed away soon thereafter. I got to share the work with Mishra in between my inspection assignments.
As is well known, Indian Bank was going through a difficult period, and the department then assigned top priority to this work. Going through these Board papers prepared me to understand the functioning of a Board and what all were discussed there.
Other inspection experience
My bosses in banking regulation then were people who spent almost their entire career in the department. They had the wisdom to move me around different sections so that I get an all-round experience covering various aspects of banking regulation and supervision. On inspection, they put me with people who had the right experience. During inspection, areas assigned to me were rotated so that over a period I could see all areas of a bank functioning. This included functions generally seen by an officer one level junior. Among these miscellaneous areas were internal inspection, audit, housekeeping, frauds, and so on. Many in those days would have protested against the de facto downgrade. But, I realized that this was deliberate keeping in view my own and the Bank’s long term interests. These experiences stood me in good stead as a bank director later in my career.
While inspecting banks, perusal of Board papers by the Principal Inspecting Officer is a way of getting to know what happened in the bank during the year under review. It is also a great way to prepare for a role on bank boards. While perusing board papers over the years, one gets to know how decisions are taken in banks. One also learns what to look for, and what to ignore. By perusing board papers across banks, one learns their comparative strengths and weaknesses. What to expect in a public sector bank (more of credit and vigilance issues?), and what in a private sector bank (more of risk and governance issues?)
Corporate governance lessons
So, here are a few learnings from my experience, which are way different from the usual do’s and don’ts in regulatory instructions to bank directors:
Never proactively seek a Board position
Seeking a Board position, proactively or otherwise, even following up on an offer, places a future director in a position of obligation. I never did this with anybody, whether a colleague or anybody else. That made me more free, independent and confident in my interactions as and when Board level positions came my way.
Know your company (or bank)
It is rare that one comes to a company or bank with sufficient knowledge about it. But, one needs to acquire this as early as possible. Not just about the bank/company, but also about the industry and all other related aspects.
For a bank, this would include its history, organizational structure, key personnel and their backgrounds, financials, risk profile, vision and strategy documents, major policy documents, details of committees of the Board and their working, key Reserve Bank of India inspection findings, and so on.
One of the first things I did after joining a Board in 2008 was to start a Google alert for the bank. That way I kept getting news even before the bank reported to the Board. It is good to let them know that you are alert. For instance, I could ask what happened in that attempted robbery in Moradabad. Much to the annoyance of some officials.
Know your mandate
All non-executive directors act as guide and mentor to a bank. But, every director comes with a specific mandate. A shareholder director would be interested in maximising shareholder value. A nominee director of the regulator would have the depositor interests in mind. The government director would similarly have a different viewpoint. The independent director should independently of other different objectives, bring together the different perspectives to ensure the continued, viable and stable existence of the company/bank. Perhaps, an independent director’s interests are aligned closest to that of the depositor.
Your mandate includes the system
There was once a case involving some shady transactions the nature of which escape my mind now. But, it was clear that though our bank was not affected, a fraud had been committed on another bank. I asked the bank to report it to the Reserve Bank as a case of attempted fraud, as this bank could also have been affected. It was gratifying to be informed later that our bank was the first to report it, even though the Delhi-based bank where this extraordinarily large and much discussed case of fraud took place could not pick it up on time.
Not everybody is a crook
Indian banking sector has many outstanding people working out there. At the same time, there are many who approach Board work with a prejudgement that people running companies and banks are up to no good. Those who are from a regulatory or investigative background are particularly prone to this. It is necessary to have an open mind.
Not every proposal is shady
Not all loan proposals can be AAA-rated. That way the bank may not earn much income as there will be many banks vying for such accounts and your ability to charge a rate far higher than the risk free rate is practically nil. It will therefore be necessary to take informed and calculated risks which are inherent in banking.
Insist on propriety
On two separate occasions, two directors, each with over 30 years’ standing on the Board, and from prominent families in the city, stayed back in the Board room when items they were interested in were being discussed. It was the usual practice that the Board minutes would record that they left the room but in reality they would be present and participate in discussions. I insisted on their leaving the room for the sake of propriety and they complied. To their credit, they did not hold it against me as they knew I was only doing my job. That brings me to my next point.
Don’t be afraid of speaking your mind
It was my first Board meeting at a bank. Everyone around have not yet heard you, and are waiting to judge. One of the first items was a compliance note on RBI inspection findings. The bank had divided the observations into what was acceptable and what was not acceptable. I told them that the supervisory report is prepared after discussion at various levels including the CEO. Thereafter, they cannot sit in judgement on the report and treat inspection observations as not acceptable. To the bank’s credit, it immediately agreed and changed the format in the next meeting. It was apparently the legacy of a previous MD’s tenure.
Don’t get provoked or lose your cool
People have different temperaments. I confess to having lost my cool on one or two occasions. But, I improved over the years. I suspect that at least on one occasion the provocation was deliberate to get me to say something unseemly so that I could be misquoted out of context. Fortunately, nothing like that happened.
Don’t get overawed by names, reputation or background
This relates to not just bank/company executives, officials, and senior executives, but also borrowers.
I was on the Board of small banks. I persuaded them not to target the corporate high table. Big corporates tend to dictate terms to small banks. When they are desperate to borrow from a small bank and seek even minor financial concessions, it is a red flag of some incipient problem. Often a sixth sense is a better guide than financial statements. In retrospect, it is gratifying that in almost all cases where I suggested scaling down exposure or declining fresh sanction, I stood vindicated.
Once, a director representing a private equity firm brought to bear his impressive credentials and clipped accent to question why the Reserve Bank nominated us on the Board. I told him calmly that his job as a director was to seek clarifications from the management regarding items submitted to the Board and not to question other members. Though not bound to respond to his question, I reassured him that we owed our positions on the Board to the Governor, Reserve Bank of India, under a law duly enacted by the Parliament of the country, and not to backroom machinations. We later became friends jointly solving ET crossword during breaks.
On another occasion, a leading industrial group was seeking an enhanced facility for discounting bills drawn on their sister concerns. Such accommodation bills amounted to raising money just for the asking with no security. I objected. Such a big group seeking such accommodation was a sign of trouble. The bank already had some exposure, and we decided to scale it down. In 2021, the company went into liquidation after an NCLAT judgement.
Table items are bad, sometimes good
‘Table items’ are not uncommon in bank board meetings. These are items submitted to the Board at the last minute on the table. Hence the term, ‘table item.’ But, I also often received ‘airport items’, ‘hotel reception items’, ‘hotel room items’, and ‘next day car’ items. Banks justify this on grounds that their work is time sensitive and that loan, etc., proposals cannot be kept waiting for long. On the contrary, it is the sign of a lack of discipline. The Board Section would have indicated the date of next meeting to various other Sections and given a deadline. But, most wait till the last hour. One should, however, insist on receiving Board papers on time. The bank can send other urgent items in circulation. This is however like the proverbial dog’s tail.
I have however tried to convert this challenge into an opportunity. In my experience, table items invariably contain matters requiring closer scrutiny. So, I have always spent more time on these as compared to the other regular items. This has helped me focus on the right issues. A few instances of what I found as a table item:
a. Compliance with an earlier Board decision which was no compliance at all. If approved, the monitoring would have ended.
b. Information item on a big fraud case which was not identified as fraud.
c. A big bunch of credit proposals with no index or page numbering left me suspicious that it might contain something untoward. I decided to focus on that set. Right in the middle was a bad credit proposal relating to one of the original promoters on the Board. That leads me to the next point.
Reverse the question
Sometimes it is useful to reverse an obvious question. For instance, it is common to find out an adverse feature in a credit proposal and seek the bank’s clarification. Usually, the General Manager in charge of credit will reply. In the above case, I asked them to point out a positive feature in the proposal. The next few minutes the entire credit team went back and forth through the papers as we kept waiting. They couldn’t point out any. The proposal was dropped.
Who to meet, not to meet
In one bank, a senior official official linked to a suspected fraud was desperate to meet me. I was insisting that the bank report the case as fraud. There were suggestions even from former directors that I meet him. But, I refused. My stand was that I was no longer a director outside the Board room and that I will never meet anyone in connection with the bank’s operations. This also leads me to the next point.
Counsel a colleague
There was a director who I chose to go out of the way to counsel. It was not my job to do so. But, the circumstances were different. He was new and I had already put in over two years. This director was joining the Board as an independent director. Before he joined, as a CSR consultant, he had organised an exhibition. The bank knowing that he was going to become a Board member put up a stall there and incurred an expenditure of Rs. 2 lakh.
As the payment was to a Board member, the bank put up the matter to the Audit Committee. The new Board member had to recuse himself at his first meeting. I took the stand that it was not for the Audit Committee to decide but the full Board. Before the Board met the next day, I met the new director over breakfast, and prevailed upon him to forgo the money in the interest of good governance. He agreed.
As things went, I had to object again when it came to the notice of the Board that the same member was meeting the bank’s counterparties, including auditors, in one to one meetings.
Chairing part of meeting
There was one occasion when the government wanted the Board to give an opinion on the MD & CEO. Naturally, he could not chair the meeting when the matter was to be discussed. Despite my reluctance, everyone including the government director suggested that I chair the meeting for discussing that item. I finally agreed.
I understand that it led to some consternation elsewhere. Chairing a part of a meeting was only to facilitate that part. It is not the same as becoming Chairman of a bank which some people thought I had assumed for myself. But, unusual circumstances call for unusual steps. Basic books on banking law and practice clarify this. That is why I strongly recommend the CAIIB examination, or whatever it is called now, for anyone connected with bank regulation or supervision. It is not a great exam. Nevertheless, a pons asinorum, as the Romans would have called it in the days of Euclid, studying his axioms and proving his theorems.
When the bank was placed under Prompt Corrective Action, the MD was away thanks to a dubious case brought against him by the local police. Without waiting for him, I took an informal lead in devising a plan of action to come out of PCA. The ED who was officially in charge always remembered to thank me for this whenever we met or spoke thereafter.
Don’t fall for enticements
My first Board-related meeting was one Board Committee, with the full Board to meet the next day. At the end of the meeting, I was asked whether I would like to visit a famous temple 40 kms away. It would have been a normal courtesy with no other intention. But, I replied that I had received some Board papers only that morning and over the previous few days. I needed to study them. Until I get papers well in advance, I cannot have a peaceful darshan at any temple. They never asked again. Eventually, an old classmate, incidentally a Christian, took me to the temple.
Such offers are best politely turned down. If it might cause an offence, finding an excuse to turn it down is not difficult.
Should you accept gifts
I am not squeamish about accepting gifts as long as they are not expensive, refusal can cause offence or embarrassment, and if you are confident that it will not interfere with your professional judgement or conduct in any manner.
At the same time, I consider gifts of any kind a nuisance. Even if it were a tie, I have my strong preferences on what kind and type I would wear. Or if it were a show piece, I have my views on what I would like to display in my house. Why would anyone even imagine that he or she can decide for another. Otherwise it has to be someone who knows your tastes well. That is usually not the case in a Board setting. So, I usually end up passing on whatever gifts come my way.
The Reserve Bank rules forbid accepting gifts beyond a monetary value which used to be Rs 500 for long. I don’t know what it is now. The practical difficulty here is that one cannot open a gift packet and assess the value before deciding whether to accept. A more practical solution is full transparency. Not to have any restrictions, make declarations and surrender beyond a certain value mandatory, periodically auction the gifts or donate suitably, and publicly announce on website with full details.
Some central banks, as part of proactive declaration under their country’s Freedom of Information Acts, declare gifts on their website along with details on what they did with it. So, there are instances where when someone receives an expensive bottle of champagne, she may choose to donate, distribute among staff, or keep the item and donate an equivalent value to charity. The Bank of England has a well drafted Entertainment and Gifts Policy.
Your time, my time
I rarely attended pre- or post-meeting dinners. Not because I meant any offence or was being fastidious about maintaining distances. My principle was that I was already spending several hours at the meeting which also invariably included a lunch. The evenings were for myself to do my stuff. It is possible that I have my friends to meet or other things to do, exercise routie not to be missed, diet restrictions, or just wanted to get back to my hotel or city as early as possible. Whether one attends dinners or not, one should never linger around two days prior or two days after at company expense.
Saying no without saying no
KPS Menon, Sr.’s famous dictum on diplomacy goes as follows (again thanks to my father): When a diplomat says yes, he means perhaps. When he says perhaps, he means no. When he says no, he ceases to be a diplomat.
In the Indian context, it is common for directors to receive various requests. These mainly relate to donations, transfers, and promotions.
Requests for donations, whether to a temple trust where your boss might be an office bearer, or to a trust run by your colleague’s wife, are to be ignored. Even if it comes directly from your immediate boss. I have done that.
If a request is persistent, and some people do not know that a ‘perhaps’ is a ‘no’, there is help at hand. Nitishastra sanctions minor distortion of reality for a legitimate cause. I bluffed that the bank contributed its entire budget for donations to the Prime Minister’s Relief Fund. That was the end of that.
Transfer requests are difficult to ignore. If a case is genuine, the ideal way is to ask the employee to make an application in the normal course and then offer to follow up. But, even that, I used to only mention once, and refuse further follow up. I once burnt my fingers, on somebody else’s behalf, when I was told that the employee concerned was transferred because he was involved in a fraud.
Promotion requests are never entertained as it involves harming another, perhaps more deserving, candidate.
I have received funny requests for arranging visits to temples where the bank apparently had some arrangements. These were summarily refused. Also disposed of, the KPS Menon way, was one request to examine whether I could interfere in a compromise proposal or loan waiver.
The advantage about learning to say no early on is that such requests don’t recur.
Take it in your stride
At the end of your tenure, if either the Bank which nominated you, or the bank on whose board you were, takes time off to inform you that your term has ended, and thank you for your efforts, you are lucky. I have known people who got the news from the media or internet. My last bank gave me a warm farewell. The MD was new.
Do what you think is right. Do not expect any rewards. Enjoy the journey.
This is a quick and preliminary draft, and will undergo further changes. I would have overlooked adding a few points. Suggestions and comments are welcome.
© G. Sreekumar, February 2022. Last revised 14 February 2022.
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