Centre for Corporate Governance & Citizenship

Corporate Governance, Bank Boards & Directors
______________________________
Prof N Balasubramanian

1

Presentation Outline
CCG & C

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

2

Centre for Corporate Governance & Citizenship

Overview of Corporate Governance

3

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

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

2004 6 .An OECD Definition CCG & C • “Corporate governance involves a set of relationships between a company‟s management.. its board. its shareholders and other stakeholders .” – Preamble to the OECD Principles of Corporate Governance. and the means of attaining those objectives and monitoring performance are determined.also the structure through which objectives of the company are set.

An Indian Definition CCG & C • “…fundamental objective of corporate governance is the „enhancement of the longterm shareholder value while at the same time protecting the interests of other stakeholders. January.” – SEBI (Kumar Mangalam Birla) Report on Corporate Governance. 2000 7 .

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.

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

Managerial Talent and Corporate Control.Some Governance Models CCG & C • Finance or the Principal-Agent Model – Markets for Capital. profit-maximisation goal is cofunctional with social-welfare-maximisation – Shareholders as Residual Claimants have superior control rights 11 . 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 .

Shareholders make discretionary decisions and bear consequences . who stand last in the queue . Gains and losses from abnormally good or bad performance . As such. Frank H Easterbrook and Daniel R Fischel (1991) OUP 13 . Owners of business with important control rights…” – The Economic Structure of Corporate Law. ... The lot of shareholders.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 ...

since risk capital is not the only. 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. eg. etc 14 .The Stakeholder Case CCG & C • Firm Objective must be defined more widely than just shareholder-value-maximisation.

Towards an Integrated Model CCG & C • One-Size does not Fit All Circumstances • A Combination of Shareholder/Stakeholder Models Necessary • Some Argue. Stakeholder Claims Need to be Proved • Tailor Model to Suit Unique Circumstances 15 . While Shareholder Claim Well Established.

and on the other.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 .

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 .

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

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

CCG & C Dimensions of Board 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 20 .

Critique & Monitoring 21 .Corporate Governance & Capital Market Drivers: A Conceptual Framework CCG & C REGULATION & LEGISLATION Regulators (SEBI/RBI) Lenders (Banks/ Depositors) Government Legislation Stock Exchanges Listing Agreements Shareholders/ Stakeholders Listed Corporations (The Board & the Executive) Market Operators (Rewards) Institutional Investors Press/Media (Pension Funds/Insce Cos) (Opinion Makers) Market Operations.

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 A G E N C Y SUSTAINABLE PROFIT LINE STEWARDSHIP 26 .

Centre for Corporate Governance & Citizenship Unique Dimensions of Bank Governance 27 .

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

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

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

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

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

Micro-Managing Captive Resource of First Resort Suspect Independence of Supervisory Institutions Lack of Accurate/ Timely Accounting & Disclosure Practices 33 • • • • • • .CCG & C Some Unique Dimensions of Public Sector Bank Governance in Developing Economies Political & Bureaucratic Interventions Banking as a Policy Instrument Supervisory Interventions.

Directors.Centre for Corporate Governance & Citizenship Bank Boards. & Governance 34 .

CCG & C Some Unique Attributes & Responsibilities of Bank Boards &Directors • Assume Responsibility for Effective & Efficient Management. 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.

Washington 36 . – Adapted from Guidance for the Directors of Banks. Jonathan Charkham. (2003) [OECD-World Bank] Global Corporate Governance Forum.CCG & C Some Unique Attributes & Responsibilities of Bank Boards & Directors • Ultimate Responsibility for True and Fair Presentation Rests with the Board • Poor Leadership Infects.

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 Your Attention 39 .

...9 !74.109 !74/:.88098 !#.0$.2.088 :83088!7.9.475.08 .0894!8.

7.9  W .3/8 :8308887:5943.47%70.33#8!49039. .

0 3903943.488  ..3 4.073.9438 W 43806:03.47 90780 9.0#83 .  &36:020384383.3.947$.8 #:08 #0:.47#0:.0 W 43 425.3.38 0.3.3.9438 3.3.47#05:9.0841 43 425.943.

8:7041$97039033!7490.044/147.8!742490784144/4.4:7.0  W .908  907%0728 8.9 4774078  .94341.4:7.03/3#.7-34.3.3 4.0-/.078.3 8 3 4.073.3.!#$ 8 3.3/.3.908  907%0728 0.7/8.073.03/3#.0$9.0-!70107039.  &36:020384383.7.0 .38.073.0 !708.073.3.3 88098 03.

8.041789#08479 $:850.34.041$:507.434208   W W W W W W !49.90.3907.0#084:7.030..74 .3.33.:7.0453 .039438 .039438 .3897:2039 $:507.8473899:9438 .!4.41.3 . :70.073.3.$420&36:0203843841!:-.:.947.9.59.7.. $0.93/0503/03..8473907.

4:393  8.48:70!7..9.%20..08  .

9478   4.0397014747547.0  .904.073.0 90385 .34.073.3.7/8 70.3.

.3.9.07890..  $420&36:0997-:908  #085438-90841.385.0$9.../94 5.0 11.890472  431/039.02039 974: .9478 W 88:20#085438-9147110.9 4393:0/  .984:/3490.34.3828 W 3907983/..:08 W 438/07%7.902039419.7/8 70.039 .8.947890 489!078:.8-0#404/070.703..

9478 W &92.904.943#08989904.9.590/1742:/./0785310.7 !708039.01479070.7/ W !4470.  $420&36:0997-:908  #085438-90841.947841.2       47/.83943  .7/8  70.047:2 .47547.38 43.3/.3.98  /.7.073.34.3(4-.3.90#085438-9147%7:0.3.

 .0.02039 W 4397-:943.0789 08843.0  .39.7/.:843 ..7$ $098 3.3.74 .3.14702-0785 W 4704.$420483%4:98   W #9 $0904.8$:7.825479. W 9 !745077907.3/9842548943 W 42502039.3.:20388039.

$420483%4:98   W 3280431. W #0850.93479.9413907089!49039.

7/8944%.34.0870.7-0/ 94.9073.9.04 043/.38 W .98!708.9438 09907#05:9.907 '.:.$0.9438  .947.90 %.$.98 557457.997.704/078  #98 890/!:-.

3.904.0 90385 %.073.0397014747547.381474:79903943  .

Sign up to vote on this title
UsefulNot useful