Almost everybody who has ever interacted with Dr PJ Nayak will profess enormous respect for him, vouch for his uncompromising integrity and admire his professionalism and business acumen. He was an extremely well-regarded IAS officer and, later, an exceptional banker. What is more, he is among those rare individuals who is hero-worshipped by his colleagues and subordinates to the point that they made quality banking a mission. And yet, his hugely eventful career came to an abrupt, disappointing and ugly end when he simply got up and walked out of a board meeting on 20th April after every other director, without exception, voted to bring in Shikha Sharma as the Bank’s CEO.
This is not the first time Dr Nayak has walked out of the Bank. In 2001, he went on leave when media leaks reported that the Joint Parliamentary Committee had made negative references to him in connection with an aborted merger of Axis Bank (then UTI Bank) with Global Trust Bank. The final report contained no such reference and he returned to head the Bank. In December 2004, he almost became victim of a crude boardroom manoeuvre to eject him from the Bank when there was a proposal to split the post of chairman and managing director, as is the case with private banks. The finance ministry’s drastic intervention ensured a reversal of that decision. In April 2007, when his term came up for renewal, the Reserve Bank of India (RBI) demanded a split in the post as a condition for renewing his term. Dr Nayak chose to quit instead; later, the RBI agreed to hold off the demand until Dr Nayak’s tenure.
On the fourth occasion, however, it was a different story. In 2009, Dr Nayak was completely isolated on the succession issue and made a sad exit from the institution that he had built and nurtured twice over. Why wasn’t Dr Nayak able to carry the board with him? Was his choice of the successor so unsuitable? Why was the board so overwhelmingly in favour of bringing in Shikha Sharma, an outsider, as managing director? There is no easy answer, except to say that Dr Nayak got it all wrong this time.
Dr Nayak says that he clearly failed to convince the board about his strong view that Axis Bank had excellent internal leadership and, although its senior executives may be low-profile and probably lacked the ‘spit and polish’ of better-known outsiders, they were well grounded in their roles and had demonstrated their capability by their excellent performance. When the entire board disagreed with this view, he walked out “to make the point” more powerfully instead of retiring as scheduled on 31 July 2009.
Unfortunately, the time for making that point was not the last board meeting. Dr Nayak should have made it clear much earlier that he favoured only an insider for his chair when he agreed to create a ‘nominations committee’ to find a successor. According to the various strands of the episode pieced together, at that time, Dr Nayak decided that good governance required him to stay out of the committee. He was also against advance succession planning and frequently voiced the view (to the board) that public sector banks have no succession planning and they do well enough without it. Many board members disagreed and had been asking Dr Nayak to ensure a clear succession plan for over two years. Also, contrary to Dr Nayak’s stand, a key director says that the chairman & managing director ought to have been on the nominations committee to guide the choice of successor and ensure smooth transition. It is hard to disagree with this view. In fact, given the love and respect that he commands across every segment, he owed it to Axis Bank’s employees to ensure a graceful departure. What is worse, the abruptness of Dr Nayak’s exit has also left his two preferred candidates for the top job in an awkward, if not untenable, position. It was also extremely unfair to Shikha Sharma, who was chosen through an open selection process by a competent board of directors.
Who then was Dr Nayak’s chosen successor? Contrary to popular perception, it wasn’t Hemant Kaul, who headed the retail portfolio, but MM Agarwal, who was in charge of international banking, finance and corporate banking.
Why did they lose out despite the Bank’s excellent performance and high service quality, which was a result of the efforts of a superb senior management team? Well, the two executive directors were part of the selection process and, quite simply, the committee found them less impressive than Shikha Sharma. The board also felt that Dr Nayak was being stubborn and uncooperative. One director says, “He threatened to walk out whenever we announced a successor; so we left the decision right until the end.” He also says that when the board decided to consider the two internal candidates, they suggested that he swap their portfolios to give the nominations committee another perspective on their suitability for the top job. Dr Nayak flatly refused this suggestion. He felt that judging them on the short-term performance in these new portfolios was unfair to both Mr Agarwal and Mr Kaul. In the end, that attitude only hurt rather than helped these two managers because of Dr Nayak’s misjudgement about what the board would do. In the final stages, Dr Nayak even offered to continue as a non-executive chairman and mentor his successor, if the board chose an internal candidate but, by then, it was too late. As he is quick to admit, the board has always been extremely supportive of him, except this time.
Moreover, in contrast to Dr Nayak’s arguments, the board attributes Axis Bank’s powerful growth, financial performance, excellent service quality and strong corporate ethics to his own guidance and strategic direction. Consider this: internally, Axis Bank has always benchmarked its performance with that of HDFC Bank. But in the past six months, it has beaten HDFC Bank on a few key parameters. Its net NPAs (non-performing assests) are significantly lower and Axis is also ahead in terms of return on assets. As the charts show, Axis Bank has done superbly over the past five quarters.
Indeed, under Dr Nayak’s leadership, Axis Bank has a great deal of camaraderie among senior executives and none of the jealousy and personal rivalries and animosity that prevails at other organisations with very competitive, purely target-oriented financial cultures. But that too was entirely because of the powerful influence of Dr Nayak’s own persona. Funnily enough, had he set in motion the succession planning process earlier and been an active participant, one of the internal candidates could well have been chosen by the board. As one director told me, “It is never easy to predict what will work and what won’t. Who would have guessed that PJ Nayak, an IAS officer with an academic bent of mind, would turn out to be such a brilliant and charismatic banker? Dr Nayak argues that Shikha Sharma does not have relevant banking experience; but does that matter? It certainly didn’t in his case. On the other hand, we did not favour the internal candidates, but who knows, they may have also turned out to be brilliant. When we insisted that succession should be a planned move, if only he had listened to us and taken us into confidence about what he had in mind, we may well have supported his candidate. But to mandate a nominations committee to select a successor, to stay out of the process and then insist at the last moment that we accept his view was not fair.”
Couldn’t the board have found a way to ensure that Dr Nayak’s exit was more graceful? Why does that last meeting have all the signs of a boardroom coup? Were the board members really unaware of Dr Nayak’s extraordinarily strong preference for an internal candidate – especially when he has earned the right to have such a preference, since he has virtually rebuilt this Bank twice over? How much of truth is there in the rumour that one particular board member lobbied incessantly to swing board opinion in favour of an outsider? Or did Dr Nayak mess up the succession because he did not want to be seen as choosing between Mr Agarwal and Mr Kaul until the very last minute? After all, everybody had thought that Hemant Kaul was his chosen man but he actually rooted for Mr Agarwal at the last board meeting. All these suspicions and questions are bound to reverberate in banking circles for months to come.
What happens next at Axis Bank? A committee of four executive directors has been constituted to handle the day-to-day business and a three-member executive committee of the board will oversee its functioning, not only until Shikha Sharma takes over, but for another six months thereafter. In theory, key board members agree that Axis Bank must retain its culture, which commands strong customer loyalty. This would mean that its growth must not be based on aggressive sales models with large financial budgets, but on strong operational models which focus on service delivery as well as profits.
Meanwhile, one question will not go away. While Dr Nayak may easily claim that Axis Bank has done far better than ICICI Bank, if ICICI Bank could plan and announce its succession five months in advance and ensure a dignified transition, why couldn’t Dr Nayak have done the same? For all his sterling qualities and superlative performance as a banker, did Dr Nayak finally let down his beloved Bank and his colleagues by an abrupt and indecorous exit?
Ms Dalal is the Consulting Editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal @yahoo.com