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The finance ministry is considering splitting the post of chairman and managing director at public sector banks (PSBs), as well as fixed five-year tenures for these posts. These are part of the government’s measures towards providing greater autonomy to PSBs.
“There is a proposal under consideration — we could have separate persons as chairman and managing director, as we have in the case of State Bank of India (SBI). This will help improve governance at PSBs,” said Financial Services Secretary G S Sandhu. He added he was hopeful the proposal would be cleared quickly, as the Financial Stability Development Council, headed by the finance minister, had also recommended this.
At private banks, the posts of chairmen and managing directors are separate. Among government banks, only SBI has one chairman and four managing directors.
“Going by the Companies Act, chairmen and managing directors have different functions. A managing director has powers on the board, as well as executive powers. He is recognised as a person in control. Usually, the post of chairman is a ceremonial one, where a director presides as the head of the board. The government is probably realising there is a lot of pressure on managing directors. This may be an administrative streamlining to get managing directors to concentrate on executive activities,” said Jeet Sengupta, partner, Economic Laws Practice.
In his Budget speech, Finance Minister Arun Jaitley had said the government would examine a proposal to provide greater autonomy to PSBs, while making them accountable. The ministry will also review the criteria for appointing directors and non-official directors to the boards of PSBs.
“We are looking at a five-year timeframe for chairmen and managing directors so that they can be more accountable. When you have a longer timeframe, you can do better, understand the system and the bank better, play a better role, and, at the same time, be accountable. We will also look at other management issues,” Sandhu told Business Standard.
As the retirement age for all public sector executives is 60 years, the term of a chairman and managing director typically varies between a year and five years. A concern in offering five-year terms to bank chiefs is heads of public sector undertakings in other sectors would also seek fixed tenures.
The P J Nayak committee, set up by the Reserve Bank of India to review governance of bank boards, had also given these suggestions. RBI had proposed to the finance ministry to bifurcate the post of chairman and managing director at PSBs, arguing as of now, those appointed to such posts enjoyed absolute powers.
The ministry is also considering the panel’s recommendation of bank consolidation. However, it hasn’t agreed to the committee’s suggestion of diluting government equity in PSBs to less than 51 per cent.
REFORMING GOVT BANKS
Bifurcate post of chairman and MD
Impact
- Eases pressure on MD to perform executive functions
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Curtails “absolute powers” enjoyed by CMD on board
Impact
- Gives enough time to strategise and take action
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Increases level of commitment and accountability
Impact
- More transparency, improves corporate governance
- An efficient board improves working of banks
