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Corporate Governance

Corporate Governance

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CORPORATE GOVERNANCE FOR BANKS INDEVELOPING ECONOMIES
(An analytical study conducted in Indian Banks)
Amita Charan*Assistant Professor University of Delhi
1.0 INTRODUCTION
The subject of corporate governance is a relatively new discipline and subject of significance for both public policy and marketers. It is useful to recognise that it is adynamic concept, in terms of scope, thrust and relevance. East- Asian crisis gave a newdimension to corporate governance in the context of financial stability. This has attractedworldwide attention, particularly since the 1990s, due to the totally unexpected collapseof a few giant corporations in the United States such as world energy leader Enron andother biggies like WorldCom, Adelphia, Tyco, Global Crossing, etc. Earlier, the UnitedKingdom had also witnessed several cases of corporate corruption and collapse, whichled to setting up of Cadbury (1996), Greenbury, and Hampel (1997) committees duringthe latter half of the 90s. the terms of references of all these committees differed fromeach other, but the core objectives of all of them was to find out the root causes of corporate corruption and frauds and suggest suitable remedies to drastically minimize,nay, eliminate such corporate scams as far as possible. This debate was driven partly bythe subsequent enquiries into corporate governance (Cadbury Report) and partly byextensive changes in corporate structure. In May 1991, the London Stock Exchange setup a Committee under the chairmanship of Sir Arian Cadbury to help raise the standardsof corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved andwhat it believes is expected of them. The Committee investigated accountability of theBoard of Directors to shareholders and to the society. It submitted its report and theassociated ‘code of best practices’ in December 1992 wherein it spelt out the methods of governance needed to achieve a balance between the essential powers of the Board of Directors and their proper accountability. Being a pioneering report on corporategovernance, it would perhaps be in order to make a brief reference to itsrecommendations which are in the nature of guidelines relating to, among other things,the Board of Directors and Reporting & Control. The OECD set out its corporategovernance in 1999 but revised them in 2004. Basal Committee on Banking Supervision published guidelines on corporate governance in banks in 1999. As an updated in July2005, the Basal Committees has issued a Consultative Document on enhancing corporategovernance for banking organisations, seeking comments by the end of October 2005.Dr. Y. V. Reddy, Governor RBI strongly recommended this document should be acompulsory reading for all the regulators concerned and all the directors on the boards of the banks. The paper will describe necessary sequential steps to be taken by the banks for good governance in developing economies. Therefore the corporate governance should be viewed as an on going process subjected to rapid changes based on experiences,developments and policy setting.
1.1 NEED FOR CORPORATE GOVERNANCE IN BANKS:
 
The basic need for corporate governance arose due to need of good governance,establishing ethical business organisation and agency costs. In the case of public limitedcompany, the shareholders are the owners of the company. Although the subject of corporate governance in developing economies has recently received a lot of attention but the corporate governance of banks in developing economies has been almost ignored by researchers. Even in developed economies, the corporate governance of banks hasonly recently been discussed in the literature. There is considerable divergence in theunderstanding and practice of corporate governance in general, and in respect of banks,in particular but there is also an increasing tendency towards convergence. Differencescan be noticed even amongst the industrialised countries- say between Anglo-Saxon,European and Japanese situations. At the same time the trend towards greateconvergence is for several reasons. The corporates are getting listed in multiple stock exchanges in different countries and carry out corporate operations in several jurisdictions while the cross-border financial flows seek an assurance of some commonlyunderstood standards of governance, especially in view of their fiduciary role. Thecorporate governance of banks in developing economies is important for several reasons.First, banks have an overwhelmingly dominant position in developing-economy financialsystems, and are extremely important engines of economic growth. Second, as financialmarkets are usually underdeveloped, banks in developing economies are typically themost important source of finance for the majority of firms. Third, as well as providing agenerally accepted means of payment, banks in developing countries are usually themain depository for the economy’s savings. Fourth, many developing economies haverecently liberalised their banking systems through privatisation/disinvestments andreducing the role of economic regulation. Consequently, managers of banks in theseeconomies have obtained greater autonomy to run their banks.
Indian
 
scenario
: India also experienced some financial scandals during 1950s (LIC),eighties and ninties and post 2001 periods such as Mundhras scam involving (LIC), RajSethia scandal involving (PNB), Harshad Mehta case involving UTI, SBI and other institutions, Ketan Parekh’s fraud involving Bank of India and Gujrat Cooperative Bank,Telgi’s Stamp Paper Scam , Global Trust Bank’s scam etc. Against the above backdropand also based on the experience of UK and USA, a number of committees were set upin India to study and examine the causes of such scams and suggest effective measuresfor improving the corporate governance rules and practices for the companies operatingin India. The Cadbury Report also generated a lot of interest in India. The issue of corporate governance was studied in depth and dealt with by the Confederation of IndianIndustries (CII), Associated Chamber of Commerce and Industry (ASSOCHAM) andSecurities and Exchange Board of India (SEBI). These studies reinforced the CadburyReport’s focus on the crucial role of the Board and the need for it to observe a Code of Best Practices. Co-operative banks as corporate entities possess certain uniquecharacteristics. Paradoxical as it may sound, evolution of co-operatives in India as peoples’ organisations rather than business enterprises adopting professional managerialsystems has hindered growth of professionalism in co-operatives and proved to be aneglected area in their evolution. The banking sector is not necessarily totally corporate.Some part of it is, of course, but a segment of banks is mostly government owned asstatutory corporations or run as cooperatives – just like your bank. Banking as a sector has been unique and the interests of other stake holders appear more important to it than
 
in the case of non-banking and non-finance organisations. In the case of manufacturingcorporations, the issue has been maximising the shareholders’ value but in case of  banking, the risk involved for depositors and the possibility of contagion assumes greater importance. Further, the involvement of government is discernibly higher in banks due toimportance of stability of financial system and the larger interests of the public. Since themarket control is not sufficient to ensure proper governance in banks, the governmentdoes see reason in regulating and controlling the nature of activities, the structure of  bonds, the ownership pattern, capital adequacy norms, liquidity ratios,
etc.
Public policyframework involves multiplicity of agencies in all countries. India has Department of Company affairs, SEBI to regulate and harmonise their policies in a dynamic setting. InIndian banking sector the ownership of government is dominant. Hence government isaccountable to political institutions in terms of broader socio-economic objectives.
1.2 RESEARCH DESIGN AND METHODOLOGY
This paper is an effort to discuss various factors associated with corporate governance in banks. This paper will also analyse, present and discuses various dimensions of corporategovernance in banks especially in the context of developing economies. The presentstudy utilises secondary data which was collected from websites of LIC, UTI, SEBI,RBI, ASSOCHAM, CII, SBI, PNB, Value Research. The reference period of this studyranges from 1980-2008. The growth of concept of corporate governance is described briefly in this paper in the context of developing economies. To render the analysis more precise, useful and focused the secondary data is gathered and analysed carefully by theresearcher.
1.3 BOARD OF DIRECTORS AND THEIR COMMITTEES IN BANKS:Corporate governance and its mechanism:
a relationship among stakeholders that is used to determine and control thestrategic direction and performance of organizations
concerned with identifying ways to ensure that strategic decisions aremade effectively
used in corporations to establish order between the firm’s owners and itstop-level managers
Mechanism of corporate governance1.Internal Governance Mechanisms:Board of DirectorsManagerial Incentive CompensationOwnership Concentration2.External Governance Mechanisms:1.4 RBI’S
 
APPROACH
: At the initiative of the RBI, a consultative group, aimed atstrengthening corporate governance in banks, headed by Dr. Ashok Ganguli was set upto review the supervisory role of Board of banks. The recommendations include the roleand responsibility of independent non-executive directors, qualification and other eligibility criteria for appointment of non-executive directors, training the directors andkeeping them current with the latest developments. Private sector banks,
etc.
it isunanimously accepted that the most crucial aspect of corporate governance is that the

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