Friday, September 04, 2015

Axis Bank: Irena Vittal and conflct of interest

Irena Vittal has quit as independent director on the board of Axis Bank. The reason is said to be that her husband is CEO of Bharti Airtel, which won a license for a payments bank to be set up in partnership with Kotak Bank, a competitor of Axis Bank. There was a perception of conflict of interest in this situation.

The implication seems to be that Vittal was placed in a situation where she could share information about Axis Bank with her husband and this would not be in the interests of Axis Bank. This suggestion has drawn fierce criticism from many who see the suggestion as proof of gender bias, implying that we in India cannot believe that a lady can separate her family life from her professional obligations.

What do we make of this situation? Well, I doubt that anybody would want to cast aspersions on Vittal, a professional of repute. But the point is that it is best to avoid a situation that has potential for conflict of interest. There are lots of competent lady professionals out there. If Axis Bank can find somebody who is not placed in a conflict of interest situation, why not do so?

Of course, you could say that since conflicts of interest are par for the course in boardrooms, why get worked up over this one? One situation is where A sits on B's board and B sits on A's board and they happily scratch each other's backs. Independent directors on most private boards are drawn from the same cosy club of CEOs, retired bureaucrats and chartered accountants. Even if there's no technical conflict of interest, independence is the last thing one would expect from the members of this cosy club.

The central issue in boardroom reform is not conflict of interest but having directors who are capable of acting independently of management or the promoter. I have said this before- and I argue at length in my recent book RETHINC (Random House), that the long-term answer is to have proportional representation on boards, with various constituencies other than the promoter and management - institutional investors, minority shareholders, large lenders, emloyees, etc- also been given the right to appoint independent directors.

Then, we have independent directors answerable to those who have put them there, not 'independent' directors who are beholden to  management or the promoter for their seats and fat fees and who will happily nod their heads to whatever management or the promoter wants done.

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