Banks are considered special, but Kotak Mahindra Bank (KMB) and its high profile founder-CEO, Uday Kotak are extraordinarily special (here and here). Ever since KMB was granted a banking license in 2003, Uday Kotak has been its CEO. As per the Reserve Bank of India’s directive, he will have to step down at the end of 2023. But Kotak has always found a way around RBI directives; and so he has found one this time too.
To control the influence of founder-CEOs in private sector banks, the RBI deliberately framed a policy capping the CEO’s tenure at 12 years; with the RBI’s permission it could be increased to a maximum of 15 years. Pertinently, after 15 years, the banking regulator prohibited the CEO from being reappointed as the CEO for a minimum cooling period of 3 years and in that period the individual could not be associated with the bank or its group companies in any capacity directly or indirectly.
Extract from Resolutions to be approved by KMB Shareholders on April 20, 2023
Although the RBI policy did not forbid a departing CEO from continuing as a director on the bank after completion of his/her tenure, the RBI has to date not approved a former CEO continuing as a director in the same bank. This has not deterred the board of directors of KMB from approving (at its board meeting on March 18, 2023) Uday Kotak’s appointment as a non-independent, non-executive director from January 1, 2024. The voting by shareholders on this resolution will end on April 20, 2023.
There are important implications of KMB’s decision to appoint Uday Kotak as a non-independent, non-executive director after he steps down as the CEO. It is a concerted move to defeat the spirit of the RBI directive, which aimed to control the influence of a founder-CEO after the individual’s tenure had ended.
Having Uday Kotak continue as a board member will effectively nullify the relevance of the new CEO, and even of the chairman of the board, as, in this analyst’s opinion, it makes the founder the backseat driver. Allowing a founder-CEO, who has been in charge for two decades, to continue now as a non-executive, non-independent director will make him the de facto CEO, albeit with none of the responsibilities. This is why the RBI did not allow Rana Kapur to stay on as a director at Yes Bank after it had declined to renew his term as a CEO. Such a practice is also not healthy from a corporate governance perspective, as it creates a powerful rival centre of power on the board, undermining the authority of the CEO and the chairman.
The board’s decision to create a backdoor entry for Uday Kotak on the board of KMB is also indicative of its failure in succession planning. One of the key responsibilities of the board is succession planning at all levels in the organisation, and in particular for key posts such as the CEO, ensuring that the organisation is bigger than any individual. The brazen excuse of needing Uday Kotak’s continued expertise to assist the bank during the “present volatile economic scenario” and to take the “institution forward” reveals the abject failure of the board, and in particular the bank’s Nomination and Remuneration Committee (NRC), to groom successors over two decades of the bank’s existence. In effect, the board of directors of KMB is publicly declaring that Uday Kotak is indispensable to the bank. This is the strategic fault line created by the bank’s board, for which stakeholders have to hold it accountable.
Kotak Mahindra Bank’s Nomination and Remuneration Committee
Hemindra Hazari, is a commentator with over 25 years’ experience in the Indian capital markets. He has specialized in research on banking and the macro-economy. He has managerial experience of establishing profitable equities business, leading and mentoring analysts.