Leadership Ethics: The Case of Questionable Practices of Some Private Sector Banks in India

This article deals with the latest scam involving money laundering intent of three reputed private sector bank. It delineates the legal position of the sting that was undertaken by a private news channel. It compares the performance of the public sector banks in this regard and tries to explain the reason for the difference in behaviour. It also uses the findings of researchers on concepts such as moral capital, ethics and ethical leadership in support of the contentions. It concludes with a  reference to public reaction to this scam and offers an explanation for it.

The study of ethics has assumed importance in the recent past. The spate of scams, both in the US, and in India, has shifted the focus of society onto the ethics of leadership, especially of top management.

 This revulsion against the unethical behavior of giant corporations can be explained by the ‘intention effect’ and ‘foresight effect’ postulated by Bauman, (2010). According to Bauman, people generally have a tendency to expect more care and foresight from corporations than individuals when harm occurs. This is because of the greater resources, knowledge and power that corporations have at their command which in turn can cause greater harm to society than the acts of less powerful individuals.

Another interesting concept that has been put forth is the concept of moral capital (Sison,2003). Moral capital, according to Sison, are the resources that human virtue represents in a business enterprise and is seen to be crucial for the long-term success of the business. He further argues, “Without moral capital, all other forms of capital could easily turn from the source of a firm’s advantage to the cause of its downfall,” (Sison,2003). Enron in the US and Satyam are examples of this lack of moral capital in an Organization and how this shortfall of moral capital ultimately caused the downfall of these companies.

A sting operation was conducted by Cobra post on three leading private banks viz ICICI, HDFC Bank and Axis Bank. A Cobra Post employee posed as a representative of a politician and enquired whether the bank could handle black money in cash and assist in converting it into white money. Surprisingly, in all the three bank branches that the Cobra Post employee visited, the local bank officials were more than willing to indulge this request despite fully being aware of the illegality of the transactions. Another very damning indictment of the ethical environment in these leading banks is that the officials involved said that they would obtain the approval from their respective higher authorities through email to proceed further with these illegal transactions. The rot clearly spreads right up to the top echelons.

 Apparently the objective behind the sting was to establish that one need not invest furtively in a Swiss bank to stash away unaccounted (non-taxed) money; it could so easily be done here within India.

The Top executives of the three banks predictably issued strong denials reiterating their affirmation of all Indian regulations and that they follow the highest standards of ethics. Further, knowing that mere denials in these times of skepticism are not enough, they ordered full-fledged internal enquiries into the sordid matter and said that they will unearth the truth.

To add to the murky waters, the RBI came out with a strong rebuttal of the sting and gave a certification to the three banks stating that the RBI control systems are very robust and that such illegal acts cannot be done. Ironically, this rebuttal raised more questions .Cobra Post then got into the act once again by strongly rebutting the RBI, Deputy Director’s contention. Be that as it may, the issue is far from over.

Unfortunately, the legal position is that no crime had been committed. All that the sting established was the willingness of certain bank officials in certain branches to indulge in illegal transactions, but no transaction was actually carried out. Hence, no actual crime was committed; it was merely contemplated. Thus banks can always escape by saying that they have reprimanded their executives but no further action is warranted since no actual offence was committed. Even the RBI seems to adopt the same blinkered approach much to the chagrin of the public at large.

The sting threw up an interesting comparison between these high-profile private banks and the more staid public sector banks. The public sector banks conducted themselves with greater responsibility and with a higher degree of ethics. This begs the question—“Why did the so-called highly professional and efficient private sector banks fall prey to this temptation of making profits in an illegal manner when none of the much-maligned public sector banks did not?”

The answer to this is perhaps the high performance culture of the private sector banks which ultimately led to the senior bank executives taking short cuts to improve the bottom line, and more importantly to meet their performance targets which are always set at very high levels to push them to perform more efficiently. This tempts some bank officials to take liberties with due process and indulge in such unethical practices.

This was not the case with the public sector banks which did not have such high targets. This of course is merely hypothesized by Cobra Post. Nevertheless, there is empirical evidence of such a phenomenon. Roberstson & Rymon,(2001) have found that high pressure situations are related to unethical behavior. This perhaps accounts for this unethical behavior by these highly regarded banks. This is further corroborated by senior executives of public sector banks who stated that the target-driven incentive culture in these ‘new generation’ private banks is to blame for the behavior of these private sector banking officials.

 Another reason for the refusal of the public sector banks’ officials to indulge in such questionable practices is the fear of the intervention of internal vigilance departments. Thus this resistance to temptation is probably a combination of the above two factors— the lack of such high performance incentive culture and the active intervention of internal vigilance departments.

Perhaps the private sect
or banks can take a leaf out of the book of the public sector banks.

While doing literature survey on Ethical leadership it was seen that one team of researchers—Rubain, Dierdoff and Brown(2008), have found that while ethical leaders are preferred for senior positions in the long run but in the short term  they do not enjoy any significant preference over others. This again perhaps has relevance in this situation as most of the alleged willingness on the part of the private sector bank officials happened at the middle level at the level of Branch Managers and not at the very top level. This suggests that ethics does not play an important role in the selection of middle-level executives

Another research team-Rubin et.al., (2010) have found that ethical leaders are seen to be having greater potential for promotion to senior management, particularly in situations of high pressure to perform. This also means that at the very top level the managers are imbued with a higher level of ethics, particularly in the public sector banks, because in the public sector to be eligible for promotion the individual has to be cleared y the vigilance department, apart from obtaining the minimum performance grades in assessment. This is not the case in private sector banks.

Another quality in managers which is gaining currency is the quality of being aggressive, particularly in sales/marketing. A passed out student of ISME, during her internship presentation, had stated that her manager had constantly drummed it into them that they must develop aggressive marketing approach. This is required to succeed in such organizations. This is being followed increasingly in many organizations, more so in view of the increased competition. Aggressive approach could also sometimes result in taking such aggressive steps of short circuiting legal processes.

The reaction of the public has surprisingly been very lukewarm to say the least. Consider the behavior of the stock market: The sensex had dipped sharply immediately on the news of the sting being made public. This was of course an expected reaction; but surprisingly, the market recovered just as quickly as it tanked as soon as the three Chairmen said that they would be instituting internal enquiries into the alleged action of the bank executives. Such statements are routine and are more in the nature of platitudes. Yet they had the immediate effect of reviving the stock of these banks just on the basis of such assurances of the Chairmen. The enquiries are yet to be completed and the findings are not known and one does not know whether any executive has been found guilty and whether suitable punitive action has been taken against such defaulters. Yet, the sensex recovered. This, perhaps, is an indication of how inured we are as a people to such scams that they have become routine news for us. Worse still it is an indicator of how impervious we are to scams.

 Bauman, David. C, 2011, Evaluating Ethical Approaches to Crisis Leadership: Insights from Unintentional Harm Research, Journal Of Business Ethics,(2011), 98: 281-295.

Money life 25^thMarch 2013, www.moneylife.in

Rubin, Robert.S, Dierdorff,  Erich.C,  and Brown, Michael.E, 2010, Business Ethics Quarterly, 20:2,(April 2010),pp 215-236.

Times of India dated 15^th March 2013, p-21

The Economic Times, dated 15^th March 2013, p-1 & 5.