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Corporate Governance, Bank Boards & Directors
Prof N Balasubramanian
CCG & C
Overview of Corporate Governance Unique Dimensions of Banks Governance Bank Boards, Directors, & Governance
Centre for Corporate Governance & Citizenship
Overview of Corporate Governance
Some Definitions CCG & C ³Corporate Governance is the system by which companies are directed and controlled«´ ± Cadbury Report (UK). in Reflections on Corporate Governance. Ernest Sykes Memorial Lecture. 1993 4 . how the exercise of power is controlled. on behalf of whom. 1992 ³«to do with Power and Accountability: who exercises power.´ Sir Adrian Cadbury.
which includes ensuring the financial viability of the business«. TSE. 1994 5 ..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value.´ ± Where were the Directors? Guidelines for Improved Corporate Governance in Canada.A Canadian Definition CCG & C ³«the process and structure.
2004 6 . its shareholders and other stakeholders . its board..An OECD Definition CCG & C ³Corporate governance involves a set of relationships between a company¶s management.also the structure through which objectives of the company are set. and the means of attaining those objectives and monitoring performance are determined.´ ± Preamble to the OECD Principles of Corporate Governance.
January.´ ± SEBI (Kumar Mangalam Birla) Report on Corporate Governance. 2000 7 .An Indian Definition CCG & C ³«fundamental objective of corporate governance is the µenhancement of the longterm shareholder value while at the same time protecting the interests of other stakeholders.
8 .A Gandhian Definition CCG & C Trusteeship obligations inherent in company operations. where assets and resources are pooled and entrusted to the managers for optimal utilisation in the stakeholders¶ interests.
Some Further Definitions CCG & C Corporate governance is essentially about leadership: ± leadership for efficiency. and ± leadership which is transparent and which is accountable.PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH 9 . ± leadership for probity. . ± leadership with responsibility.
What is Corporate Governance? CCG & C The Manner in which a Corporation is Run ± ± ± ± Achieving its Objectives Transparency of its Operations Accountability & Reporting Good Corporate Citizenship The Processes & Operating Relationships that Best Achieve Organisational Goals 10 .
profit-maximisation goal is cofunctional with social-welfare-maximisation ± Shareholders as Residual Claimants have superior control rights 11 . Managerial Talent and Corporate Control.Some Governance Models CCG & C Finance or the Principal-Agent Model ± Markets for Capital. Key determinant ± In general.
CCG & C Exclusive Accountability to Shareholders Risk-bearing Entrepreneurs Residual Claimants Winding-up Ranking: Last in Pecking Order Boards Appointed by Shareholders Non-congruence of Stakeholder Interests 12 .
. As such..Residual Claimant Theory CCG & C ³«shareholders « residual claimants to the firm¶s income.. Frank H Easterbrook and Daniel R Fischel (1991) OUP 13 . Gains and losses from abnormally good or bad performance .. Creditors have fixed claims and employees¶ remunerations « negotiated in advance of performance .. . Owners of business with important control rights«´ ± The Economic Structure of Corporate Law. who stand last in the queue . The lot of shareholders. Shareholders make discretionary decisions and bear consequences .
eg.The Stakeholder Case CCG & C Firm Objective must be defined more widely than just shareholder-value-maximisation. or even the major input Residual Claimant Rights Not Universally Valid. etc 14 . Customers/Vendors with Substantial Stake in the Business. Circumscribed in case of pre-bankruptcy (US Chapter XI) Situations Other Such: Employees with Firm-specific Specialised Skills. since risk capital is not the only.
Stakeholder Claims Need to be Proved Tailor Model to Suit Unique Circumstances 15 .Towards an Integrated Model CCG & C One-Size does not Fit All Circumstances A Combination of Shareholder/Stakeholder Models Necessary Some Argue. While Shareholder Claim Well Established.
Managers of the Entity (Cadbury) ± Follows Distancing between Ownership and Control (Berle and Means) ± Trustee for All Shareholders ± Loyalty & Commitment ± Always to Company 16 . and on the other.The Corporate Board CCG & C Central to Corporate Governance ± Juxtaposed between Shareholders on the one hand.
Board Role & Responsibility CCG & C Provide/ Exercise ± Leadership and Strategic Guidance ± Objective Judgement Independent of Management ± Control over the Company Direct and Control the Management of the Company Be Accountable at all times to All Shareholders 17 .
CCG & C Dimensions of Board Responsibility ± Formulation & Review of Company Policies. Budgets and Plans. Top Level HR Policies. etc ± Setting Objectives & Monitoring Performance ± Oversight of Acquisitions. etc 18 Direction involves . Strategies. Divestitures. Financial and Legal Compliance. Risk Management Policies. Projects.
± Overseeing Disclosure & Communication Processes.CCG & C Dimensions of Board Responsibility ± Prescribing Codes of Conduct. ± Ensuring Control Systems to Protect Company Assets ± Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives 19 Control Involves .
Protecting and Enhancing Company Wealth and Resources ± Timely and Transparent Reporting ± Good Corporate Citizenry including Discharge of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal 20 Accountability Involves .CCG & C Dimensions of Board Responsibility ± Creating.
Corporate Governance & Capital Market Drivers: A Conceptual Framework CCG & C REGULATION & LEGISLATION Government Legislation Stock Exchanges Listing Agreements Shareholders/ Stakeholders Regulators (SEBI/RBI) Lenders (Banks/ Depositors) Listed Corporations (The Board & the Executive) Market Operators (Rewards) Institutional Investors Press/Media (Pension Funds/Insce Cos) (Opinion Makers) Market Operations. Critique & Monitoring 21 .
Centre for Corporate Governance & Citizenship Is There More to Business than just the Financial Numbers? 22 .
An Enterprise¶s Triple Effect on Society Sustainable Development Waste Control Equal Opportunities Education & Culture Community Regeneration Emissions Business Impact Energy Use Product Life-cycle Product Value Wealth Generation Productive Employment Ethical Trading Economic Human Rights Employee Volunteers .
The Triple-Bottomline Impact CCG & C economics Business Impact environment society 24 .
Governance Orientation Matrix CCG & C 25 .
CCG & C Governance Orientation & Sustainable Profits G SUST I P O IT I Y ST W SHIP 26 .
Centre for Corporate Governance & Citizenship Unique Dimensions of Bank Governance 27 .
Failure.CCG & C Unique Dimensions in Bank Governance ± Governance Within ± Governance at Clients¶ Bank Role in Good Governance Two-fold: As Fund-Providers. Banks Generate Multiplier Impact on Economy Confidence & Trust Key ± Bank Distress. Dis-Repute Impacts Economy. Erodes Country Standing Globally 28 .
CCG & C Unique Dimensions in Bank Governance ± Depositors ± Borrowers ± Employees ± Community ± Regulators ± Government 29 Stakeholder Dimension Very Strong in Banks- .
CCG & C Unique Dimensions in Bank Governance ± Internal Fraud & External Fraud. Process. Business Practices ± Damages to Physical Assets & IPR/Brands ± Business Disruption Major Threat 30 Banking Risk Potential . since cash/cash equivalents closest in grab-chain ± Employment Practices/ Workplace Safety ± Product. Highly Likely.
Rules. Regulations Consequences of (Non) Compliance Risk in Banks ± Legal or Regulatory Sanctions ± Financial or Reputational Loss 31 .CCG & C Unique Dimensions in Bank Governance Non-Compliance (Intentionally or Otherwise) with Laws.
Hence Good for Bank¶s Own Governance 32 Banks as Promoters of Good Governance .CCG & C Unique Dimensions in Bank Governance ± Prescribing Governance Standards at Borrowers (IFC. Other Terms ± Discourage by Adversarial Lending Rates. FIs) ± Encourage by Preferential Lending Rates. CalPERS. Other Terms ± A Measure of Strengthening Protection of Bank Assets.
Some Unique Dimensions of Public Sector Bank Governance in Developing Economies CCG & C Political & Bureaucratic Interventions Banking as a Policy Instrument Supervisory Interventions. Micro-Managing Captive Resource of First Resort Suspect Independence of Supervisory Institutions Lack of Accurate/ Timely Accounting & Disclosure Practices 33 .
Centre for Corporate Governance & Citizenship Bank Boards. & Governance 34 . Directors.
Confidentiality should not lead to Opacity ± Continued 35 . Role Model Director is the Most Persuasive Statement of Ethical values Consider Transparency as the Norm. through Oversight Mechanisms Integrity is Indivisible.CCG & C Some Unique Attributes & Responsibilities of Bank Boards &Directors Assume Responsibility for Effective & Efficient Management.
(2003) [OECD-World Bank] Global Corporate Governance Forum. Jonathan Charkham. ± Adapted from Guidance for the Directors of Banks. Washington 36 .CCG & C Some Unique Attributes & Responsibilities of Bank Boards & Directors Ultimate Responsibility for True and Fair Presentation Rests with the Board Poor Leadership Infects.
Less on MicroManagement Contribution as Important as Surveillance 37 .Some Closing Thoughts CCG & C Right-Size the Board and its Composition Complementary Skill-Sets & Financial Acumen Essential Fit & Proper Criteria for Membership More Focus on Oversight.
Some Closing Thoughts CCG & C Minimise Conflict of Interest Potential Respect Minority / External Shareholders¶ Rights (Listed Public Sector Banks) Bank Boards to Go That Extra Mile: Go Beyond What is Prescribed to What is Appropriate ± That Way lies Greater Valuations & Better Reputations 38 .
Centre for Corporate Governance & Citizenship Thanks for our Attention 39 .
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