Strengthen board oversight to prevent larger-than-life CEO defeats

They were not very powerful or larger-than-life figures brought in by industry and the media. He was also part of a band of professionals who rode the first wave of the breakout period for executive compensation in India – not just top-dog pay packets but huge stock options as well. And more importantly, they combined the new model of widely dispersed shareholding with the major promoter or shareholders keeping tabs on them and largely diffused accountability. Each of these cases was marked by the surrender of the boards to the superstar CEO.

The recent order of the securities market regulator, SEBI, against the former CEO of India’s top exchange, the National Stock Exchange, takes all these into account.

It has a background. In the years after economic liberalization began in 1991, and the ensuing growth in the Indian capital markets by the entry of foreign investors, with greater participation of local investors, the serious concern was the corporate behavior of family-controlled firms and promoter groups that were listed. And both unlisted firms dominate the landscape.

Growing resistance to such behavior, especially from more knowledgeable investors, fostered an environment that favored companies managed by professionals and those with diverse shareholdings. The logic seemed correct: there was little incentive for the CEOs running such firms to gain control of the company or extort money like some family-owned groups.

Nevertheless, as the original promoters—state-owned banks, financial institutions and insurance firms—in most of the firms mentioned earlier, IL&FS, ICICI Bank and NSE progressively reduced their holdings, on these institutions. There was a virtual capture by their powerful CEO. , Hefty paychecks and stock options were approved by gratuitous boards. This played out during a phase when regulators and the government were reluctant to step in for fear of attracting allegations of interference in professionally run firms.

Arguably, when these rough checks were written—in most cases odd with performance metrics—the government could have stepped in. In all these firms, except Yes Bank, the government could have pushed state-owned banks and insurance firms collectively. The big stake was to justify the CEO’s compensation or reduce the salary package. Ironically, there appears to be no question as to how such a compensation package with stock options worth crores in private banks like Axis and ICICI Bank can be justified, when RBI reported that the assessment of him and his bad debts did not match.

Nor has there been any comparison on executive compensation made with banks and institutions such as State Bank of India, a listed entity, and LIC, whose size and mandate are dwarfed by some of these private banks.

In the case of the NSE, being a systemically important financial market infrastructure institution, and a first-line regulator, it was imperative on the board to function far more effectively in the broader interests of the markets and the economy.

Governance failures like these again highlight the importance of good board oversight with a focus on measuring consistent performance, not just the near-term governance framework and quality of boards. The recent IFC-BSE-IIAS Indian Corporate Governance Scorecard 2021 shows that there is a strong correlation between the quality of the board and the increase in the Governance Score. The report also indicated that well-governed companies with a score of 60 or higher show better performance and lower stock betas or volatility over time.

There are increasing signs that investors are willing to pay a premium for well-governed companies. More than promoters and even professional CEOs, ensuring shareholder value over a sustained period is not only a high-quality management or leader, but a quality board as well.

The recent record of larger-than-life CEOs forces us to re-examine the corporate governance oversight structure. The regulator should strengthen the check and balance framework at the board level.