InvestorQ : What is the reason for some very critical top level management changes at gigantic institutions like ICICI Bank, Yes Bank and at Flipkart?
Dia Deshpande made post

What is the reason for some very critical top level management changes at gigantic institutions like ICICI Bank, Yes Bank and at Flipkart?

Ria Jain answered.
1 year ago

In the last year, some serious shifts have happened in the top managements of some of India’s marquee companies. ICICI Bank saw the sudden exit of its CEO Chanda Kochhar while the RBI refused to extend the tenure of Rana Kapoor, founder and CEO of Yes Bank. Something similar happened at Axis Bank too. At the same time, there was a virtual shift in the top management at Flipkart post the acquisition of a majority stake by Wal-Mart. Let us look at each of these cases individually.

ICICI Bank appears to be a clear conflict of interest

The ICICI story was more of a story of conflict of interests where the CEO’s personal interests were alleged to have come into direct conflict with the interests of the bank as a whole. It was alleged that the group had lent big money to dubious corporates like the Videocon Group which eventually turned into bad debts. That would not have been a real problem if it was just about a business decision going bad. The problem in this case was the allegation that the company had actually paid money to the spouse of the CEO as a quid pro quo for getting these loans, considering that the Videocon Group had shaky financials even back in 2012 when the loan was extended. While the linkage has not yet been proved and the investigation is still underway, the bigger concern in this case was that of poor disclosure practices.

It has emerged that the CEO of ICICI Bank continued to be part of the decision making committee in this particular loan despite her spouse having business dealings with the group. Under the basic rules of corporate governance, this would have classified as conflict of interest. The CEO should have done one of the two things; either withdrawn from the decision making committee considering conflict of interest or made a clear disclosure of the same to the board. The problem was that the CEO did neither, which is why it became a big corporate governance issue. The matter came to light only when the whistleblower made a detailed disclosure of the case. Eventually the board had no choice but let the CEO go to avoid the issue from escalating. The resignation of the CEO has, at least, addressed the perception issue for now.

There were clear lapses in corporate governance at Yes Bank

Banking has always been a business of trust and that is exactly what the bank seemed to violate. Yes Bank had faltered on two fronts. Firstly, there was a huge discrepancy between the RBI classification of bad loans and the classification that Yes Bank itself had done. This dichotomy was brought out sharply by the RBI observations. Secondly, the allegation was that the bank had a lot of dubious loans in its books which were apparently being ever greened to present a good picture of the level of NPAs in the company.

RBI’s view was that letting the current management continue at the helm would compromise the balance sheet and corporate governance further. Although the board made a representation to the RBI about letting Kapoor continue for some more time, the RBI has rejected the request. There were also concerns that the bank had a major exposure to the IL&FS group that were not fully reflected in the books of accounts. The big worry for Yes Bank came when some marquee names in the board including Ashok Chawla, decided to step down over governance issues.

Flipkart underlined the risk that promoters diluting could end up losing their business

With both the founders exiting the top management of Flipkart, it is now a true-blue professionally-run company. Wal-Mart took a controlling 76% stake in Flipkart earlier this year for a princely consideration of $16 billion. But the original promoters virtually lost control of the ecommerce pioneer. While one of the promoters was a case of sexual harassment at the workplace, the other promoter had officially excused himself from the day to day management after the stake sale. Flipkart is one more case of an Indian company where the promoters have gradually diluted stake in their companies as they found it increasingly difficult to sustain the business in a competitive and a fund-intensive business environment.

Management changes at the highest level are reflective of the largely volatile environment that Indian companies are operating today.