Centre for Corporate Governance & Citizenship

Corporate Governance, Bank

Boards & Directors
______________________________
Prof N Balasubramanian

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 Presentation Outline
CCG & C

Overview of Corporate Governance

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

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Centre for Corporate Governance & Citizenship

Overview of Corporate
Governance

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 Some Definitions
CCG & C

• “Corporate Governance is the system by

which companies are directed and
controlled…”
– Cadbury Report (UK), 1992
• “…to do with Power and Accountability:
who exercises power, on behalf of whom,
how the exercise of power is controlled.”
• Sir Adrian Cadbury, in Reflections on Corporate
Governance, Ernest Sykes Memorial Lecture, 1993

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 A Canadian Definition
CCG & C

• “…the process and structure..to direct and

manage the business and affairs of the
corporation with the objective of enhancing
shareholder value, which includes ensuring
the financial viability of the business….”
– Where were the Directors? Guidelines for
Improved Corporate Governance in Canada, TSE,
1994

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 An OECD Definition
CCG & C

• “Corporate governance involves a set of

relationships between a company’s management,
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.”
– Preamble to the OECD Principles of Corporate Governance,
2004

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 An Indian Definition
CCG & C

• “…fundamental objective of corporate

governance is the ‘enhancement of the
long-term shareholder value while at the
same time protecting the interests of other
stakeholders.”

– SEBI (Kumar Mangalam Birla) Report on

Corporate Governance, January, 2000

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 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.

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 Some Further Definitions
CCG & C

Corporate governance is essentially about

leadership:
– leadership for efficiency;
– leadership for probity;
– leadership with responsibility; and
– leadership which is transparent and which
is accountable.
- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH

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 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

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 Some Governance Models
CCG & C

• Finance or the Principal-Agent Model

– Markets for Capital, Managerial Talent and
Corporate Control, Key determinant
– In general, profit-maximisation goal is co-
functional with social-welfare-maximisation
– Shareholders as Residual Claimants have
superior control rights

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 Exclusive Accountability to
CCG & C Shareholders
• Risk-bearing Entrepreneurs
• Residual Claimants
• Winding-up Ranking: Last in Pecking
Order
• Boards Appointed by Shareholders
• Non-congruence of Stakeholder Interests

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 Residual Claimant Theory
CCG & C

• “…shareholders … residual claimants to the firm’s income.

Creditors have fixed claims and employees’ remunerations
… negotiated in advance of performance .. Gains and
losses from abnormally good or bad performance .. The lot
of shareholders, who stand last in the queue ..
Shareholders make discretionary decisions and bear
consequences .. As such, .. Owners of business with
important control rights…”

– The Economic Structure of Corporate Law, Frank H

Easterbrook and Daniel R Fischel (1991) OUP

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 The Stakeholder Case
CCG & C

• Firm Objective must be defined more widely than

just shareholder-value-maximisation, since risk
capital is not the only, or even the major input
• Residual Claimant Rights Not Universally Valid,
eg, 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, etc
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 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, Stakeholder Claims Need
to be Proved
• Tailor Model to Suit Unique Circumstances

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 The Corporate Board
CCG & C

• Central to Corporate Governance

– Juxtaposed between Shareholders on the one
hand, and on the other, Managers of the Entity
(Cadbury)
– Follows Distancing between Ownership and
Control (Berle and Means)
– Trustee for All Shareholders
– Loyalty & Commitment – Always to Company

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 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

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

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 Dimensions of Board
CCG & C Responsibility
• Control Involves
– Prescribing Codes of Conduct,
– Overseeing Disclosure & Communication
Processes,
– Ensuring Control Systems to Protect Company
Assets
– Reviewing Performance & Realigning Action
Initiatives to Achieve Company Objectives
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 Dimensions of Board
CCG & C Responsibility
• Accountability Involves
– 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

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 Corporate Governance & Capital Market
Drivers: A Conceptual Framework
CCG & C REGULATION & LEGISLATION
Regulators Government Stock Exchanges
(SEBI/RBI) Legislation Listing Agreements

Lenders
Shareholders/
(Banks/ Listed Corporations Stakeholders
Depositors) (The Board & the Executive)

Market Operators Institutional Investors Press/Media

(Rewards) (Pension Funds/Insce Cos) (Opinion Makers)

Market Operations, Critique & Monitoring

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Centre for Corporate Governance & Citizenship

Is There
More to Business
than just the
Financial Numbers?

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 An Enterprise’s Triple Effect on Society

Sustainable Development Equal Opportunities

Waste Control Education &

Culture

n t Soc
e
Emissions
n m ial Community
ir o Regeneration
nv Business
E Impact

Energy Use Human Rights

Economic
Product Employee
Life-cycle Volunteers
Product Wealth Productive Ethical
Value Generation Employment Trading
 The Triple-Bottomline Impact
CCG & C

economics

Business Impact

environment society 24
 Governance Orientation Matrix
CCG & C

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 Governance Orientation &
CCG & C Sustainable Profits

A
G
E
N
C SUSTAINABLE
PROFIT LINE
Y

STEWARDSHIP
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Centre for Corporate Governance & Citizenship

Unique Dimensions of Bank

Governance

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 Unique Dimensions in Bank
CCG & C Governance
• Bank Role in Good Governance Two-fold:
– Governance Within
– Governance at Clients’
• As Fund-Providers, Banks Generate
Multiplier Impact on Economy
• Confidence & Trust Key – Bank Distress,
Failure, Dis-Repute Impacts Economy,
Erodes Country Standing Globally
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 Unique Dimensions in Bank
CCG & C Governance
• Stakeholder Dimension Very Strong in
Banks-
– Depositors
– Borrowers
– Employees
– Community
– Regulators
– Government

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 Unique Dimensions in Bank
CCG & C Governance
• Banking Risk Potential
– Internal Fraud & External Fraud, Highly
Likely, since cash/cash equivalents closest in
grab-chain
– Employment Practices/ Workplace Safety
– Product, Process, Business Practices
– Damages to Physical Assets & IPR/Brands
– Business Disruption Major Threat
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 Unique Dimensions in Bank
CCG & C Governance
• Non-Compliance (Intentionally or
Otherwise) with Laws, Rules, Regulations
• Consequences of (Non) Compliance Risk in
Banks
– Legal or Regulatory Sanctions
– Financial or Reputational Loss

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

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 Some Unique Dimensions of Public
Sector Bank Governance in Developing
CCG & C Economies

• 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
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Centre for Corporate Governance & Citizenship

Bank Boards, Directors, &

Governance

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 Some Unique Attributes &
Responsibilities of Bank Boards
CCG & C &Directors
• Assume Responsibility for Effective & Efficient
Management, through Oversight Mechanisms
• Integrity is Indivisible; Role Model Director is the
Most Persuasive Statement of Ethical values
• Consider Transparency as the Norm.
Confidentiality should not lead to Opacity
– Continued

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 Some Unique Attributes &
Responsibilities of Bank Boards &
CCG & C Directors
• Ultimate Responsibility for True and Fair
Presentation Rests with the Board
• Poor Leadership Infects.

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

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 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 Micro-
Management
• Contribution as Important as Surveillance
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 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

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Centre for Corporate Governance & Citizenship

Thanks for Your Attention

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