Corporate governance: Is media activism desirable?

The board of ICICI Bank has instituted an enquiry into the allegation against Chanda Kochhar (CEO) that she misused her position for benefitting herself and/or her family (spouse) by granting favour to two business houses (Videocon and Essar group) in granting loan and that she failed to comply with disclosure norms. The Serious Fraud Investigation Office, the Central Bureau of Investigation (CBI) and the Income Tax Department are investigating into the alleged fraud and/or non-compliance by the company in which Kochhar’s husband has substantial financial interest. The media has created the perception that two unrelated issues — one investigation by government agencies into the alleged fraud/non-compliance by the company, in which Kochhar’s husband has substantial financial interest, and the alleged impropriety by Kochhar — are linked. This has created suspicion about bank’s corporate governance standards and built pressure on the board to act in the manner desired by the commentators and the media. The board has taken the decision for an external investigation at the insistence of independent directors and pressure from regulators (eg Sebi notice), large investors and the media.

Earlier the board gave a clean chit to Kochhar based on an internal investigation, details of which were not disclosed by the board. This was strongly criticised by many commentators. They said that it was too early to give a clean chit to Kochhar, the board should have made public the details of the internal investigation, an external independent investigation was essential and Kochhar should step down, at least temporarily, during the investigation.

We still remember the Infosys saga. There are a lot of similarities between the Infosys story and how the ICICI bank story is unfolding. Both the companies are managed by a professional manager (CEO) under the supervision of an independent board, which is chaired by a non-executive independent director. In both the cases, a whistle blower alleged impropriety on the part of the CEO. In both the cases, the media created an uproar (in the case of Infosys, Narayana Murthy, the most prominent joint promoter, used the media to place his displeasure in public) to pressure the board to act against the CEO. In both the cases, the board supported the

CEO initially, but ultimately gave up under pressure.

The events that happened in Infosys and the events unfolding in ICICI Bank demonstrate how difficult it is for the board to respond and react to the charges against the CEO made in public. Boards, which are full of eminent members, often do not respond and react in a manner that is considered most appropriate by commentators and sometimes (and not always) by investors.

A company board's responsibilities include protecting the capable and honest CEO from the media and public pressure, even at the risk of being labelled inept. The board’s decision cannot be driven by media trial. The board weighs the dysfunctional effects (eg demoralisation of the CEO, officers and staff) of alternative actions and decides what is best for the company. The board’s decision often does not satisfy the media, as it looks into the whole episode with suspicion.

In the case of Infosys, the allegation against the then CEO (Vishal Sikka) was not established and the reconstituted Infosys board decided not to publish the full investigation report, although that was an important demand of Narayana Murthy. In the case of ICICI Bank, we have to wait for the findings of the independent external investigation into the alleged impropriety by Kochhar. But it is hard to believe that the board of the bank gave a clean chit to Kochhar without a proper investigation.

Media activism is desirable but has the potential to create turbulence and hurt stakeholders’ interest, as we have seen in case of Infosys. Moreover, the media focuses only on those companies, which are large and are deemed to be well-governed, because the general public has no interest in rest of the companies. Therefore, media activism does not help in improving the average corporate governance quality.

Both Infosys and ICICI bank stories show the general public perception is that the power is always tilted towards the CEO, even in a company where the controlling or a dominant shareholder does not manage the company and the board is an independent board.

Research supports this perception. In May 2018, the Securities and Exchange Board of India (Sebi) has tightened the corporate governance rules by amending the SEBI (LODR) rules 2015. Stringent rules do not necessarily improve corporate governance because it is difficult to check ‘ticking the box’ approach being adopted by companies. They increase the compliance cost. Some of the new rules will be applicable to top 2,000 companies from 2020. The Sebi should consider relaxing the rules for smaller companies, which are not in the top 500 list.

There are a lot of similarities between the Infosys story and how the ICICI bank story is unfolding