The situation involving the Infrastructure Leasing and Financial Services Limited (IL&FS) has raised a number of questions revolving around corporate governance. Are governance failures to blame for the predicament in which the company finds itself? A lot has been said about the role of independent directors, nominee directors, auditors and credit rating agencies. However, one aspect that is missing in the discourse in the special nature of governance issues affecting banks and financial institutions. The conventional models of corporate governance are inadequate to deal with governance in such companies.
As I argue in a piece in BloombergQuint, the governance considerations in banks and financial institutions are different from other companies because one of the main concerns relates to excessive risk-taking. A shareholder-oriented approach to corporate governance would enable the management to take greater risks in financial institutions. This is coupled with other features such as the larger impact of failure of such institutions and moral hazards surrounding the expectation of a government bailout. All these point towards the need to more robust risk management mechanisms in financial institution, an aspect that appears to have been sorely missed in IL&FS.