Centre for Corporate Governance & Citizenship

Corporate Governance, Bank Boards & Directors
Prof N Balasubramanian


Presentation Outline

Overview of Corporate Governance Unique Dimensions of Banks Governance Bank Boards, Directors, & Governance


Centre for Corporate Governance & Citizenship

Overview of Corporate Governance


Ernest Sykes Memorial Lecture. 1993 4 .´ ‡ Sir Adrian Cadbury. on behalf of whom. 1992 ‡ ³«to do with Power and Accountability: who exercises power. how the exercise of power is controlled.Some Definitions CCG & C ‡ ³Corporate Governance is the system by which companies are directed and controlled«´ ± Cadbury Report (UK). in Reflections on Corporate Governance.

TSE.´ ± Where were the Directors? Guidelines for Improved Corporate Governance in Canada..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value.A Canadian Definition CCG & C ‡ ³«the process and structure. 1994 5 . which includes ensuring the financial viability of the business«.

2004 6 . its board. its shareholders and other stakeholders .also the structure through which objectives of the company are set. and the means of attaining those objectives and monitoring performance are determined..An OECD Definition CCG & C ‡ ³Corporate governance involves a set of relationships between a company¶s management.´ ± Preamble to the OECD Principles of 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.´ ± SEBI (Kumar Mangalam Birla) Report on Corporate Governance. January.

where assets and resources are pooled and entrusted to the managers for optimal utilisation in the stakeholders¶ interests. 8 .A Gandhian Definition CCG & C ‡ Trusteeship obligations inherent in company operations.

± leadership for probity. ± leadership with responsibility. .PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH 9 .Some Further Definitions CCG & C Corporate governance is essentially about leadership: ± leadership for efficiency. and ± leadership which is transparent and which is accountable.

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 .Some Governance Models CCG & C ‡ Finance or the Principal-Agent Model ± Markets for Capital. Key determinant ± In general. Managerial Talent and Corporate Control.

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 .

. Frank H Easterbrook and Daniel R Fischel (1991) OUP 13 . As such.... Owners of business with important control rights«´ ± The Economic Structure of Corporate Law. who stand last in the queue . . The lot of shareholders. Creditors have fixed claims and employees¶ remunerations « negotiated in advance of performance . Gains and losses from abnormally good or bad performance . Shareholders make discretionary decisions and bear consequences ..Residual Claimant Theory CCG & C ‡ ³«shareholders « residual claimants to the firm¶s income.

Circumscribed in case of pre-bankruptcy (US Chapter XI) Situations ‡ Other Such: Employees with Firm-specific Specialised Skills. Customers/Vendors with Substantial Stake in the Business. or even the major input ‡ Residual Claimant Rights Not Universally Valid. etc 14 . since risk capital is not the only.The Stakeholder Case CCG & C ‡ Firm Objective must be defined more widely than just shareholder-value-maximisation. eg.

While Shareholder Claim Well Established. 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.

The Corporate Board CCG & C ‡ Central to Corporate Governance ± Juxtaposed between Shareholders on the one hand. 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.

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 .

Strategies. Top Level HR Policies. etc 18 ‡ Direction involves . Risk Management Policies. Financial and Legal Compliance. Projects. Budgets and Plans.CCG & C Dimensions of Board Responsibility ± Formulation & Review of Company Policies. Divestitures. etc ± Setting Objectives & Monitoring Performance ± Oversight of Acquisitions.

± Overseeing Disclosure & Communication Processes. ± Ensuring Control Systems to Protect Company Assets ± Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives 19 ‡ Control Involves .CCG & C Dimensions of Board Responsibility ± Prescribing Codes of Conduct.

CCG & C Dimensions of Board Responsibility ± Creating. 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 .

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 .

Erodes Country Standing Globally 28 . Dis-Repute Impacts Economy. Banks Generate Multiplier Impact on Economy ‡ Confidence & Trust Key ± Bank Distress.CCG & C Unique Dimensions in Bank Governance ± Governance Within ± Governance at Clients¶ ‡ Bank Role in Good Governance Two-fold: ‡ As Fund-Providers. Failure.

CCG & C Unique Dimensions in Bank Governance ± Depositors ± Borrowers ± Employees ± Community ± Regulators ± Government 29 ‡ Stakeholder Dimension Very Strong in Banks- .

Highly Likely. Process.CCG & C Unique Dimensions in Bank Governance ± Internal Fraud & External Fraud. since cash/cash equivalents closest in grab-chain ± Employment Practices/ Workplace Safety ± Product. Business Practices ± Damages to Physical Assets & IPR/Brands ± Business Disruption Major Threat 30 ‡ Banking Risk Potential .

CCG & C Unique Dimensions in Bank Governance ‡ Non-Compliance (Intentionally or Otherwise) with Laws. Regulations ‡ Consequences of (Non) Compliance Risk in Banks ± Legal or Regulatory Sanctions ± Financial or Reputational Loss 31 . Rules.

Other Terms ± A Measure of Strengthening Protection of Bank Assets.CCG & C Unique Dimensions in Bank Governance ± Prescribing Governance Standards at Borrowers (IFC. Hence Good for Bank¶s Own Governance 32 ‡ Banks as Promoters of Good Governance . Other Terms ± Discourage by Adversarial Lending Rates. FIs) ± Encourage by Preferential Lending Rates. CalPERS.

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 .

& Governance 34 .Centre for Corporate Governance & Citizenship Bank Boards. 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.CCG & C Some Unique Attributes & Responsibilities of Bank Boards &Directors ‡ Assume Responsibility for Effective & Efficient Management. through Oversight Mechanisms ‡ Integrity is Indivisible.

(2003) [OECD-World Bank] Global Corporate Governance Forum. Jonathan Charkham. 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. ± Adapted from Guidance for the Directors of Banks.

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. Less on MicroManagement ‡ Contribution as Important as Surveillance 37 .

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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