About two weeks ago, the Reserve Bank of India handed out another term to Sumant Kathpalia as Managing Director and CEO of IndusInd Bank. But there was a catch; the Board had approved his reappointment for three years whereas the regulator gave him only two years at office, until March 2025. This saw the stock price of the bank take a knock on the bourses.
This is not the first time that the RBI cut short the tenure approved by the Board for a bank’s Managing Director and CEO. We’ve seen it in the past with Axis Bank, Federal Bank, and ICICI Bank.
In fact in RBL Bank’s case, it is believed that its former CEO who was eligible for longer tenure getting only a year’s extension was the tipping point for the bank’s troubles.
Not rubber-stamping Board decisions regarding CEO appointments or reappointments is not bad from a regulatory perspective.
It’s an indication that performance matters and no one can take their office for granted. This may keep every bank official on his or her toes, whether CEO or an employee at the branch.
The flip side
But there is a flip side to banks facing prolonged uncertainty on whether their leadership or succession plans will get the RBI’s green light. Uncertainty about tenure can impact a CEO’s ability to initiate innovations or strategic changes, and impede his or her ability to see the final outcomes of past strategic decisions.
The uncertainty may prevent leaders (given how increasingly top jobs at banks are becoming men’s domain) from taking strategic calls, the outcomes of which aren’t immediately predictable, as the person will not be around to see them come to fruition.
In fact this is cited as one of the key reasons why PSU banks are so loath to embrace change or take drastic decisions. The short terms of their CMDs reward a “play it safe, why rock the boat” behaviour.
Certainly, no one should take power or authority for granted, but not being able to take professional ownership at office with reasonable certainty can be equally bad.
The other logical question one may ask is that if the regulator thinks somebody is good enough to occupy the position of MD and CEO at a bank, then why not three years or longer? After all, for top bank officials a maximum tenure of 15 years is permitted under regulations.
Attrition rates in the banking sector have been in double digits for a few years. Attracting, retaining and nurturing talent is becoming a big deal for banks.
At a time like this if the RBI is going to call all the shots on key managerial appointments, it’s perhaps only fair that it explains the thought process behind awarding a two-year tenure to some MD and CEO candidates, and three to others.
There are a lot of stakeholders involved in the process and appointing CEO is no longer just an internal affair. It sends a message to the world including the investor community.
For the longest time, private banks enjoyed an edge over their PSU peers for their predictable and decisive leadership. By bringing in the element of suspense, the regulator shouldn’t take away this edge from private banks.