Friday, June 14, 2013

Government will always call the shots in public sector banks

From time to time, we are fed homilies on how the government here should run public sector banks. Banks should be given 'genuine' autonomy, meaning matters should be left to boards. The finance ministry must not interfere in selection of bank Chairmen. It must stay out of banks' strategic planning. I have always found this unrealistic, however lofty it might sound. As an authority accountable to parliament for the banks under its control, government will always have a say- how much say is desirable can always be debated.

A case in point is the CEO of RBS in the UK being given marching orders. It is generally understood that the Chancellor of the Exchequer, George Osborne wanted him out. The UK government has an 82% equity stake in RBS (greater than the Indian government's stake in SBI0 consequent to the capital infusion it made during the financial crisis.

A commentator, writing in the FT, has strong words on the ouster:
The state, as majority shareholder, clearly has every right to remove the chief executive if it lacks confidence in the strategy, and Mr Osborne had legitimate concerns. From the perspective of a government preoccupied with lending to the UK economy, Mr Hester’s stubborn attachment to the bank’s US arm or its politically toxic trading unit must have seemed puzzling at best.

But what the state must not do is to back-seat drive on day-to-day management issues. It is not the government’s place to intervene directly in questions such as how much employees are paid or to second-guess decisions to invest in specific lines of business. Those are decisions for managers. But Mr Osborne has interfered in both.

Which sounds fine in principle but what is the government to do if the board is ineffective- and the article clearly suggests it was- and if it is obliged to respond to the public on sensitive issues such as managerial pay? The UK government's principal concerns about RBS have been a failure to step up lending and a failure to return to healthy profits. Where a CEO cannot address these concerns, the government has no choice but to intervene, especially given the importance of RBS in the banking sector.

So, you see, it happens not just in India....

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