By Madan Sabnavis
The Reserve Bank of India (RBI) has stirred the proverbial hornet’s nest through what appears to be a fairly innocuous statement: private bank CEOs can continue till the age of 70. This, at a time when the government is antagonistic towards its own seniors. The age factor has always been an issue for discussion. Often, CEOs are reluctant to leave and the boards are pleased with the status quo. Technically, there is nothing amiss as this is permitted by Companies Law.
The question that comes up is that if the RBI is happy to have CEOs continue until 70 for private banks, why should the same not be permitted for public sector banks (PSBs)? A bank, after all, is a bank, and all the arguments that support the former should hold for the latter. But we appear to be fairly strict when it comes to PSBs, and there are absurd cases of heads getting only a couple of years once the age factor kicks in.
Globally, there is no rule, as the decision is taken by the organisation. If one looks at names like Jamie Dimon, James Gorman and Michael Corbat, they would all be less than 60 years. However, at the central bank level, the ages can really go up. America Federal Reserve chief Janet Yellen is 68 while European Central Bank president Mario Draghi is a year younger. Alan Greenspan went on as Fed chairperson till 80 and Mervyn King was in his mid-60s as governor, Bank of England. So, when you are heading a central bank, it doesn’t really matter.
The RBI has made an announcement, but it is left to the boards to decide. What are the arguments for extending the term of a bank CEO? First, the stability factor is important for banks that are considered to be staid organisations. This is unlike investment banks that need to have more dynamism and it is felt that with age, one’s risk appetite decreases. Just like how treasury dealers become ‘old’ once they touch 30, investment banks need youth. But for commercial banks, having someone who has been around for a long time gives the comfort of continuity and stability.
Second, experience matters. As the CEO gets older, the experience gained adds up over the years. The last 20 years have been phenomenal, for instance, for Indian banking where there have been myriad changes. Such an experience helps someone to guide the bank better.
There are compelling arguments on the other side too. First, extending the tenure smacks of the absence of imagination and a reflection of the conservative nature of the board. Second, doing so creates resentment down the line as the so-called second line also loses interest, which can lead to stagnancy.
Third, keeping the same person for alonger period would mean less innovation as there are limits to what any individual can create. They may not really be prepared to bring about the ‘big deltas’ in vision. Fourth, retaining or extending the tenure also helps to cement the cliques that tend to build within the organisation, with the same people being favoured all the time. This invariably leads to the senior and middle management sending their CVs outside.
At an ideological level, a disparity between the retirement ages for CEOs and that of employees is odd because if one is supposed to retire because one is not fit for the task, then there’s an inbuilt CEO-employee contradiction. This becomes stark as the RBI has a different rule for PSBs. While it is true that the RBI is going by the book, the inconsistencies in our rules that guide appointment for government positions and private offices need to be repaired.
At the end of the day, it would be the board’s decision. But we need to ask whether this anomaly should continue. In fact, often, even government officials who retire from service get to run other institutions on a contract basis with their experience used as the clinching argument.
Some of our esteemed public institutions have had experts older than 70 being in charge. But we need to draw the line somewhere, given that positions are limited and it should not end up being the old boys’ club forever sipping on their cocktails.
(The writer is chief economist, CARE Ratings)
The Reserve Bank of India (RBI) has stirred the proverbial hornet’s nest through what appears to be a fairly innocuous statement: private bank CEOs can continue till the age of 70. This, at a time when the government is antagonistic towards its own seniors. The age factor has always been an issue for discussion. Often, CEOs are reluctant to leave and the boards are pleased with the status quo. Technically, there is nothing amiss as this is permitted by Companies Law.
The question that comes up is that if the RBI is happy to have CEOs continue until 70 for private banks, why should the same not be permitted for public sector banks (PSBs)? A bank, after all, is a bank, and all the arguments that support the former should hold for the latter. But we appear to be fairly strict when it comes to PSBs, and there are absurd cases of heads getting only a couple of years once the age factor kicks in.
Globally, there is no rule, as the decision is taken by the organisation. If one looks at names like Jamie Dimon, James Gorman and Michael Corbat, they would all be less than 60 years. However, at the central bank level, the ages can really go up. America Federal Reserve chief Janet Yellen is 68 while European Central Bank president Mario Draghi is a year younger. Alan Greenspan went on as Fed chairperson till 80 and Mervyn King was in his mid-60s as governor, Bank of England. So, when you are heading a central bank, it doesn’t really matter.
The RBI has made an announcement, but it is left to the boards to decide. What are the arguments for extending the term of a bank CEO? First, the stability factor is important for banks that are considered to be staid organisations. This is unlike investment banks that need to have more dynamism and it is felt that with age, one’s risk appetite decreases. Just like how treasury dealers become ‘old’ once they touch 30, investment banks need youth. But for commercial banks, having someone who has been around for a long time gives the comfort of continuity and stability.
Second, experience matters. As the CEO gets older, the experience gained adds up over the years. The last 20 years have been phenomenal, for instance, for Indian banking where there have been myriad changes. Such an experience helps someone to guide the bank better.
There are compelling arguments on the other side too. First, extending the tenure smacks of the absence of imagination and a reflection of the conservative nature of the board. Second, doing so creates resentment down the line as the so-called second line also loses interest, which can lead to stagnancy.
At an ideological level, a disparity between the retirement ages for CEOs and that of employees is odd because if one is supposed to retire because one is not fit for the task, then there’s an inbuilt CEO-employee contradiction. This becomes stark as the RBI has a different rule for PSBs. While it is true that the RBI is going by the book, the inconsistencies in our rules that guide appointment for government positions and private offices need to be repaired.
At the end of the day, it would be the board’s decision. But we need to ask whether this anomaly should continue. In fact, often, even government officials who retire from service get to run other institutions on a contract basis with their experience used as the clinching argument.
Some of our esteemed public institutions have had experts older than 70 being in charge. But we need to draw the line somewhere, given that positions are limited and it should not end up being the old boys’ club forever sipping on their cocktails.
(The writer is chief economist, CARE Ratings)
