SBI downgrade: Paying the price for the transition ?

Yesterday's downgrade of SBI's standalone rating ( signifying financial strength) , from C- to D+, by Moody's is , in my opinion, a culimination of the transition unleashed by Pratip Choudhury on taking over as Chairman. The erosion of almost 2% in its Tier-1 capital in Q4 FY 2011, due to higher provisioning was the starting point of the analysts questioining the asset quality of the Bank, and the end-result is yesterday's downgrade.

As the largest shareholder, the Government of India should ask the management to clarify the reasons for the sudden and significant increase in provisioning during Q4. Whether the asset book and  accounting norms really warrant this provisioning, which led to a 99% drop in its net profit for that quarter ? Ot was it motivated solely by the new Chairman's desire to show the inefficiencies of the previous regime, and the vigilence and pro-activeness of the incumbent one? Mainstream media has reported widely on this phenomenon, especially in PSU banks, where each top management transition is followed by a significant fall in performance, ostensibly to lower the bases with which the incumbent management would be compared going forward.

The loser in this game are the shareholders, with Governemt of India (and hence the citizens of India) being the largest block. The management continues make statements such as " the downgrade is not a downgrade per se" ( http://www.moneycontrol.com/news/business/moody39s-downgrade-notdowngrade-per-se-sbi-chairman-_593931.html).

Principal-agent problem in Corporate Governance

The principal - agent problem in Corporate Governance manifests itself in different ways. This problem arises because the owners of the corporaion ( the shareholders) , delegate the management and to a large extent, control, to the managers of the business, who are supposed to act as agents of the shareholders ( principals) in running the business and safegaurding its assets. The role of the Board of Directors is to control and supervise the agents to ensure that this principal - agent arrangement remains effective.

The problem arises when the agents start self-dealing and mis-manage the affairs of the business, either out of greed or out of sheer incompetence.

(On a lighter vein) - Of course, most of the businesses in India have eliminated this problem by fusing ownership and control very tightly.

A Pune-based company ( which used to be a darling of the investors but has been into problems in the recent past, largely due to its overseas acquisitions and consequent debt burden) has been advertising in various media recently. The advertisements / communications is focussd on a forthcmiong brand campagain and is in form of a advertorial / special feature.  What is surprising is , that the pictures of Global Head of Brand Management for this company features prominently in the ads( which are otherwise text-only).  As a result, these ads appear to be like the ones PSUs and Government bodies are known to come out with. In the past, the company has done some quality brand campaigns, using environment as the theme. However, the couple of examples of the current ads I have seen so far seem to facilitate profiling of the said manager, and do not at all suit the stature the company has projected in the past. An example of the principal-agent problem, even though the scale / scope is not significant beyond a point?

The point is - problems in corporate governance have myraid sources and can take different forms and shapes. Also, it is wrong to assume that only the promoters are responsible for such mis-governance. Professionals and career executives are no less fallible, as we have seen in Enron and other corporate scandals.