HDFC Bank Succession: Sumo Wrestling Is a Spectator Sport for the Board

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SOURCEHKH Research

EXECUTIVE SUMMARY. In a shocking development at HDFC Bank reported by Reuters, the bank selected Egon Zehnder, the global executive search firm, to shortlist external candidates to succeed Aditya Puri. The six-member internal search committee set up in November has been unable to reach a consensus to select a successor.

According to Reuters, Aditya Puri was rooting for one of the executive directors to be anointed as his successor, while Deepak Parekh, non-executive chairman, HDFC (the institution which promoted the bank) was canvassing for Paresh Sukthankar, Puri’s former number 2, to be the next CEO. In HDFC Bank, as long as HDFC maintains a minimum equity stake of 20%, it can nominate the bank’s chairperson and the CEO.

Unfortunately, the dispute between these two titans to determine who will succeed Puri undermines corporate governance practices at India’s largest bank by market capitalisation and raises serious questions about the competence of the bank’s board of directors. It also reveals how, in a supposedly blue-chip professionally-managed bank, one or two individuals drive critical decision-making. Pertinently, Deepak Parekh is not on the HDFC Bank board, and is a non-executive chairman at HDFC, and yet, as per the Reuters story, he exerts considerable influence on selecting the next CEO. In a professionally-managed company, the selection of the CEO is undertaken by the powerful nominations and remuneration committee (NRC) of the board. In HDFC Bank, the NRC has been a failure, as, over the years, it should have selected a bench of senior management personnel to be groomed to take over as CEO. It appears that only Paresh Sukthankar was groomed to take over, and with his abrupt departure in late 2018, succession planning disintegrated. If the board had nurtured a bench of senior executives instead of relying only on a single individual, this critical situation would not have developed.

Not only has the NRC failed, but it also appears that the board is divided into two camps, one favouring Puri, the other supporting Parekh. The shareholders and the rest of the board will be spectators in this game of thrones.

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