Lesson from HDFC Bank contoversy: Boards of companies should not conduct business in haste

An event that set off a series of moves that culminated in the exit of the CEO of the country's most valuable bank has taken a curious turn. A court in Bahrain has thrown out charges of 'negligence and intentional misrepresentation' by HDFC Bank of the AT1 bonds of a once-storied lender, Credit Suisse, which went bankrupt. The court didn't stop there. It imposed costs on those litigators.

Between the time these charges sowed the seeds of Atanu Chakraborty's resignation as non-executive chairman of HDFC Bank and the court ruling, the lender sacked more than a dozen staff, ruining careers over perceived violations, and lost more than $24 bn in market value, inflicting losses on shareholders.

This episode has a lesson for those on boards of companies on how not to conduct business in haste. Rather, they need to act maturely while reacting to wrongdoings without jeopardising reputations built over decades - and destroying shareholder value.


Chakraborty resigned on March 18, citing certain happenings in the bank, which were 'not in congruence with my personal values and ethics'. Subsequently, other charges, such as misselling of a fund that promised abnormal returns, which halted redemptions, and some payments to a state-run road builder misaligned with guidelines also surfaced. All these are attributed to what the outgoing chairman alleged as certain practices not in line with his personal values.\

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With the Bahrain court tossing out the primary charge against the bank, how do 'personal values' of people on the boards of companies, legality, and stability of institutions stack up in the context of various stakeholders' interests?

Businesses are governed by many laws. Banks more so, given that they handle the common man's nest egg and are interconnected in ways that can destabilise the financial system. Just as criminal jurisprudence has evolved, banking regulations, too, have evolved with graded penalties for various levels of transgressions.

Credit Suisse's AT1 bonds were approved by banking regulators across the world and owned by institutions, including West Asian sovereign funds. How would selling the instruments to NRI clients, usually wealthy, be weighed on the same fulcrum as peddling a similarly risky instrument to an innocent account holder in Indian towns and villages with just nominal savings?

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The second publicly known charge was that the bank sold investment funds by a Luxembourg-registered institution, which was showcasing past returns of about 18% and halted redemptions. Wasn't the fund legal? Did HDFC Bank alone peddle that fund? Among the complainants were bankers who appear to have forgotten to read the disclaimer that comes attached with any financial securities: 'Investments are subject to market risks. Please read the offer document carefully.'

Yet another charge was payment to Maharashtra State Road Development Corporation (MSRDC) for a road safety campaign - alleged to be a roundabout way of paying higher interest for bulk deposits. Any personal gratification or corruption charges are absent.

Underlying all these were business practices the regulator has foreseen and prescribed penalties. For such offences, it is mostly a monetary penalty. Excesses and repeated offences are dealt with at individual levels - without putting the institutional reputation at risk, especially by a board member. Not all criminal offences invite extreme punishment.

After the court ruling, the question is whether the board of directors of the country's biggest bank was justified in letting events take the direction they did. Or were there sufficient grounds for a chairman to plunge a public trust institution into chaos?

The CEO is on his way out. But there are lessons for other CEOs and directors on companies' boards:

Guard all interests

Directors are custodians of various interests - shareholders, customers, the state, regulators, industry, employees.... They often encounter executive managers who are overenthusiastic and capable of using shortcuts to enhance value. Deal with them according to rules and law, and don't let personal beliefs dictate actions.

Know limits

Boards sit above the management and can tempt some to assume that directors are super managers. That's not how it is. Interfering in executive decisions and strategy could backfire and take institutions astray.

Supervise, don't manage

Board of directors has a supervisory role, not executive authority. It has as much duty to protect institutions as it has to supervise managements so that companies don't derail in their eagerness to grow. It's not only that directors need to do due diligence on the management, but also vice versa.