When Eminence Is Not Enough

There is an old saying in finance: markets lend on confidence and withdraw it on suspicion.

That confidence rests not merely on earnings or capital adequacy. It rests on the belief that if management overlooks a risk, the board will identify it before the regulator does.

The latest disclosure by HDFC Bank therefore deserves attention far beyond its deposit arrangement with the Maharashtra State Road Development Corporation. Announcing the conclusion of an internal review, the board described the conduct involved as “business overreach” rather than mala fide action or personal enrichment. Yet it also referred to “any potential divergence with the applicable RBI Directions”.

Those words are striking.

After deliberation by a Special Disciplinary Committee of Independent Directors, the board still speaks of a “potential divergence”. At some point, the question must resolve into a firmer conclusion: RBI directions were either complied with, or they were not. If the board believes the directions admit multiple reasonable interpretations, that is a position it is entitled to take. Investors are equally entitled to ask why that ambiguity persisted for so long and why it was not resolved with the regulator at an earlier stage.

The irony becomes sharper because this is not a board lacking in experience. Like many leading financial institutions, it includes directors with extensive experience in banking, regulation, public policy and finance. It included a former central banker.

The point is not to single out any individual director.

Board responsibility is collective, and prior regulatory experience does not mean that every compliance issue can be prevented. The presence of such expertise nevertheless raises expectations.

If a board equipped with decades of regulatory and supervisory experience does not express unequivocal clarity regarding the interpretation of RBI directions, investors are entitled to ask whether the problem lies in the regulations or in the effectiveness of board oversight.

This question extends well beyond HDFC Bank. Only recently, IndusInd Bank confronted governance concerns. Earlier, Yes Bank and ICICI Bank faced episodes that prompted searching questions about oversight and accountability. The facts and circumstances differed, but a pattern recurs.

India has invested heavily in the architecture of corporate governance. Boards have become larger, committees more numerous, disclosures more detailed and independent directors more eminent. Yet governance failures continue to emerge with surprising regularity. Somewhere along the way, Indian corporate governance appears to have confused distinguished résumés with effective oversight.

The role of an independent director is not to lend prestige to an annual report. It is to challenge management, ask the uncomfortable question before the regulator does and insist on clarity where ambiguity exists. Eminence matters only when it translates into independent judgement, intellectual scepticism and timely intervention.

The greatest irony is that when governance falters, the consequences are asymmetrical. Management may remain in office, directors continue to receive sitting fees and professional advisers submit their invoices, while shareholders bear the erosion of wealth. That asymmetry should concern regulators as much as investors.

India’s regulatory framework has steadily strengthened over the past two decades, yet repeated governance episodes suggest that merely prescribing board structures and independence criteria is not enough. Perhaps the time has come to examine board effectiveness with the same rigour as financial performance.

The issue is not whether a board contains illustrious names, but whether those names translate into independent judgement, intellectual scepticism and timely intervention. Corporate governance is not measured by the eminence of directors; it is measured by their willingness to prevent problems rather than explain them after the event. That is the standard investors deserve, and India’s banking system should aspire to.