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Corporate Governance In Banks

EXECUTIVE SUMMARY

Corporate governance mechanisms differ as between banks. The governance


mechanism of each bank is shaped by its political, economic and social history as also
by its legal framework.
Despite the differences in shareholder philosophies across all banks, good
governance mechanisms need to be encouraged among all corporate and noncorporate entities.

Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability, mutual
respect, and commitment to the organization.

Both government and RBI need to bring about significant changes in the corporate
governance mechanism adopted by banks and other financial intermediaries. As a
matter of principle, RBI should not appoint its nominees on the boards of banks to avoid
conflict of interests.
Although it is not feasible to have a free market for take-over in respect banks there is a
strong case for recognizing the rights of the shareholders, especially of public sector
banks and financial institutions.
Today the common shareholders are denied such basic rights as adopting annual
accounts or approving dividends. They cannot also influence composition of the boards
in any way.

Corporate Governance In Banks

As a part of strengthening the functioning of their boards, banks should appoint a risk
management committee of the board in addition to the three other board committees
viz. audit, remuneration and appointment committees.
Since banks and institutions are highly leveraged entities their failure would pose
large risks to the entire economic system. Their corporate governance mechanisms
should, therefore, be relatively much tighter.

Banks should have clear strategies for guiding their operations and establishing
accountability for executing them. Banks also maintain high degree of transparency in
regard to disclosure of information.
Of importance principles of corporate governance is how directors and management
develop a model of governance that aligns the values of the corporate participants and
then evaluate this model periodically for its effectiveness.
In particular, senior executives should conduct themselves honestly and ethically,
especially concerning actual or apparent conflicts of interest, and disclosure in financial
reports. This all principles of corporate governance are explained in this project.

Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and
the community at large and appointment committees.

Corporate Governance In Banks


Impact in corporate governance and its mechanisms and controls are
explained.

In mechanisms and controls- internal corporate governance controls monitor


activities and then take corrective action to accomplish organizational goals and
External corporate governance controls encompass the controls external stakeholders
exercise over the organization.

For the co-operative banks in India challenging times are explained. The purpose and
objectives of co-operatives provide the framework for co-operative corporate
governance.

Roles and measure taken by regularity bodies towards corporate governance are
also explained.

Indian scenario in corporate governance how they do and how they are ranks to their
services offered are explained in this project.

One case study or live example is taken of BANK OF BARODA how they performed in
corporate governance in detailed is explained in this project.

Moreover, it has guided me to understand this corporate governance in banks and


also increase my knowledge to such extent. I hope it will prove beneficial to me in
developing my further career.

Corporate Governance In Banks


INTRODUCTION & DEFINITION
Corporate governance is the set of processes, customs, policies, laws and institutions
affecting the way a corporation is directed, administered or controlled. Corporate
governance also includes the relationships among the many shareholders involved
and the goals for which the corporation is governed. The principal stakeholders are the
shareholders, management and the board of directors. Other stakeholders include
employees, suppliers, customers, banks and other lenders, regulators, the
environment and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. With a
strong emphasis on shareholders welfare, a related but separate thread of discussions
focuses on the impact of a corporate governance system in economic efficiency.
There are yet other aspects to the corporate governance subject, such as the
stakeholder view and the corporate governance models around the world
CORPORATE GOVERNANCE is the system by which companies are directed and
controlled by the management in the best interest of the shareholders and others
ensuring greater transparency and better and timely financial reporting. The Board of
Directors are responsible for governance of their companies.
CORPORATE GOVERNANCE is needed to create a corporate culture of
consciousness, transparency and openness. It refers to combination of laws, rules,
regulations, procedures and voluntary practices to enable the companies to maximize
the shareholders long-term value. It should lead to increasing customer satisfaction,
shareholder value and wealth.
Enough law exists, but corporate governance is considered as one of the important
instrument for investors protection and was rated high in the priority on the SEBIs
agenda for investors protection.

Corporate Governance In Banks

The basic objective of Corporate Governance would be "enhancement of


the long-term shareholders value while at the same time protecting the interests of other
stakeholders."
3 key constituents of Corporate Governance are:

Shareholders
Board of Directors
Management

Steps taken by SEBI for strengthening corporate governance through the


amendment of the listing agreement are:
Strengthening of disclosure norms for IPOs
Providing information in directors report for utilization and variation of funds of the
company including the cash flow and fund flow statements in the annual reports.
Declaration of unaudited quarterly results;
Mandatory appointment of compliance officer for monitoring the share transfer
process and ensuring compliance with various rules and regulations;
Timely disclosure of material and price sensitive information including details of all
material events having a bearing on the performance of the company;
Dispatch of one copy of complete balance sheet to every household and abridged
balance sheet to all shareholders.
Issue of guidelines for preferential allotment of shares at market related prices and
Issue of rules and regulations to ensure a fair and transparent framework
for takeovers and substantial acquisition of shares

Corporate Governance In Banks

In A Board Culture of Corporate Governance business author Gabrielle O'Donovan


defines corporate governance as
'an internal system encompassing policies, processes and people, which serves the
needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity and integrity. Sound
corporate governance is reliant on external marketplace commitment and legislation,
plus a healthy board culture which safeguards policies and processes'.
O'Donovan goes on to say that 'the perceived quality of a company's corporate
governance can influence its share price as well as the cost of raising capital.
Quality is determined by the financial markets, legislation and other external market
forces plus the international organisational environment; how policies and processes
are implemented and how people are led. External forces are, to a large extent, outside
the circle of control of any board.
The internal environment is quite a different matter, and offers companies the
opportunity to differentiate from competitors through their board culture. To date, too
much of corporate governance debate has centered on legislative policy, to deter
fraudulent activities and transparency policy which misleads executives to treat the
symptoms and not the cause.'
It is a system of structuring, operating and controlling a company with a view to
achieve long term strategic goals to satisfy shareholders, creditors, employees,
customers and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local community needs.

Corporate Governance In Banks


Report of SEBI committee (India) on Corporate Governance defines corporate
governance as the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical business
conduct and about making a distinction between personal & corporate funds in the
management of a company.
The definition is drawn from the Gandhian principle of trusteeship and the Directive
Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a
moral duty.

HISTORY OF CORPORATE GOVERNANCE IN INDIA


A. PRE-LIBERALIZATION
When India attained independence from British rule in 1947, the country was poor, with
an average per-capita annual income under thirty dollars. However, it still possessed
sophisticated laws regarding "listing, trading, and settlements." It even had four fully
operational stock exchanges. Subsequent laws, such as the 1956 Companies Act,
further solidified the rights of investors.
In the decades following India's independence from Great Britain, the country turned
away from its capitalist past and embraced socialism. The 1951 Industries Act was a
step in this direction, requiring "that all industrial units obtain licenses from the central
government." The 1956 Industrial Policy Resolution "stipulated that the public sector
would dominate the economy." To put this plan into effect, the Indian government
created enormous state-owned enterprises, and India steadily moved toward a culture
of "corruption, nepotism and inefficiency." As the government took over floundering
private enterprises and rejuvenated them, it essentially "converted private bankruptcy to
high-cost public debt." One scholar referred to India's economic history as "the
institutionalization of inefficiency."
The absence of a corporate-governance framework exacerbated the situation.
Government accountability was minimal, and the few private companies that remained
on India's business landscape enjoyed free reign with respect to most laws; the
government rarely initiated punitive action, even for nonconformity with basic
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governance laws. Boards of directors invariably were staffed by friends or relatives of
management, and abuses by dominant shareholders and management were
commonplace. India's equity markets "were not liquid or sophisticated enough" to
punish these abuses.
Scholars believe that "takeover threats act as a disciplining mechanism to poorly
performing companies" because as the stock price of poorly governed firms decreases
(because disgruntled investors discard stock), the firms become susceptible to hostiletakeover attempts. Thus, "the fear of a takeover ... is supposed to keep the
management honest." However, until recently, hostile takeovers were almost entirely
non-existent in India, and therefore, the poorly governed Indian firms had little to worry
about in terms of following corporate laws once they had raised capital through their
initial public offering. Thus, corporate governance in India was in a dismal condition by
the early 1990s.
B. POST-LIBERALIZATION
In 1999, in a defining moment in India's corporate-governance history, the Indian
Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the
interests of investors in securities and to promote the development of, and to regulate
the securities market." In the years leading up to 2000, as Indian enterprises turned to
the stock market for capital, it became important to ensure good corporate governance
industry-wide. Additionally, a plethora of scams rocked the Indian business scene, and
corporate governance emerged as a solution to the problem of unscrupulous corporate
behavior.
In 1998, the Confederation of Indian Industry ("CII"), "India's premier business
association," unveiled India's first code of corporate governance. However, since the
Code's adoption was voluntary, few firms embraced it. Soon after, SEBI appointed the
Birla Committee to fashion a code of corporate governance. In 2000, SEBI accepted the
recommendations of the Birla Committee and introduced Clause 49 into the Listing
Agreement of Stock Exchanges. Clause 49 outlines requirements vis-a-vis corporate
governance in exchange-traded companies. In 2003, SEBI instituted the Murthy
Committee to scrutinize India's corporate-governance framework further and to make
additional recommendations to enhance its effectiveness. SEBI has since incorporated
the recommendations of the Murthy Committee, and the latest revisions to Clause 49
became law on January 1, 2006.
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PRINCIPLES OF CORPORATES GOVERNANCE

Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability, mutual
respect, and commitment to the organization.
Of importance is how directors and management develop a model of governance that
aligns the values of the corporate participants and then evaluate this model periodically
for its effectiveness. In particular, senior executives should conduct themselves honestly
and ethically, especially concerning actual or apparent conflicts of interest, and
disclosure in financial reports.
Commonly accepted principles of corporate governance include:
1. Rights and equitable treatment of shareholders: Organizations should
respect the rights of shareholders and help shareholders to exercise those
rights. They can help shareholders exercise their rights by effectively
communicating information that is understandable and accessible and
encouraging shareholders to participate in general meetings.
2. Interests of other stakeholders: Organizations should recognize that they
have legal and other obligations to all legitimate stakeholders.
3. Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the
ability to review and challenge management performance.
It needs to be of sufficient size and have an appropriate level of commitment to
fulfill its responsibilities and duties. There are issues about the appropriate mix
of executive and non-executive directors. The key roles of chairperson and
CEO should not be held by the same person.

Corporate Governance In Banks

4. Integrity and ethical behaviour: Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk
management and avoiding lawsuits. Organizations should develop a code of
conduct for their directors and executives that promotes ethical and responsible
decision making. It is important to understand, though, that reliance by a
company on the integrity and ethics of individuals is bound to eventual failure.
Because of this, many organizations establish Compliance and Ethics Programs
to minimize the risk that the firm steps outside of ethical and legal boundaries.
5. Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
shareholders with a level of accountability. They should also implement
procedures to independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the organization
should be timely and balanced to ensure that all investors have access to clear,
factual information.
Issues involving corporate governance principles include:

internal controls and the independence of the entity's auditors

oversight and management of risk

oversight of the preparation of the entity's financial statements

review of the compensation arrangements for the chief executive officer and
other senior executives the resources made available to directors in carrying
out their duties the way in which individuals are nominated for positions on
the board

dividend policy

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PREREQUISITES AND CONSTITUENTS
Today adoption of good Corporate Governance practices has emerged as an integral
element for doing business. It is not only a pre-requisite for facing intense competition
for sustainable growth in the emerging global market scenario but is also an
embodiment of the parameters of fairness, accountability, disclosures and transparency
to maximize value for the stakeholders.
Corporate governance is beyond the realm of law. It cannot be regulated by legislation
alone. Legislation can only lay down a common framework the "form" to ensure
standards. The "substance" will ultimately determine the credibility and integrity of the
process. Substance is inexorably linked to the mindset and ethical standards of
management.
Studies of corporate governance practices across several countries conducted by the
Asian Development Bank, International Monetary Fund, Organization for Economic
Cooperation and Development and the World Bank reveal that there is no single model
of good corporate governance.
The OECD Code also recognizes that different legal systems, institutional frameworks
and traditions across countries have led to the development of a range of different
approaches to corporate governance.
However, a high degree of priority has been placed on the interests of shareholders,
who place their trust in corporations to use their investment funds wisely and effectively
is common to all good corporate governance regimes.

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Also, irrespective of the model, there are three different forms of corporate
responsibilities which all models do respect:

Political Responsibilities: the basic political obligations are abiding by


legitimate law; respect for the system of rights and the principles of
constitutional state.

Social Responsibilities: the corporate ethical responsibilities, which the


company understands and promotes either as a community with shared values
or as a part of larger community with shared values.

Economic Responsibilities: acting in accordance with the logic of competitive


markets to earn profits on the basis of innovation and respect for the
rights/democracy of the shareholders which can be expressed in terms of
managements' obligation as 'maximizing shareholders value'.

In addition, business ethics and corporate awareness of the environmental and societal
interest of the communities, within which they operate, can have an impact on the
reputation and long-term performance of corporations.
The three key constituents of corporate governance are the Board of Directors, the
Shareholders and the Management.

The pivotal role in any system of corporate governance is performed by the


board of directors. It is accountable to the stakeholders and directs and controls
the management. It stewards the company, sets its strategic aim and financial
goals and oversees their implementation, puts in place adequate internal
controls and periodically reports the activities and progress of the company in
the company in a transparent manner to all the stakeholders.

The shareholders' role in corporate governance is to appoint the directors and


the auditors and to hold the board accountable for the proper governance of the
company by requiring the board to provide them periodically with the requisite
information in a transparent fashion, of the activities and progress of the
company.

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The responsibility of the management is to undertake the management of the

company in terms of the direction provided by the board, to put in place


adequate control systems and to ensure their operation and to provide
information to the board on a timely basis and in a transparent manner to
enable the board to monitor the accountability of management to it.
The underlying principles of corporate governance revolve around three basic interrelated segments. These are:
J

Integrity and Fairness

Transparency and Disclosures

Accountability and Responsibility

The Main Constituents of Good Corporate Governance are:

Role and powers of Board: the foremost requirement of good corporate


governance is the clear identification of powers, roles, responsibilities and
accountability of the Board, CEO and the Chairman of the board.

Legislation: a clear and unambiguous legislative and regulatory framework is


fundamental to effective corporate governance.

Code of Conduct: it is essential that an organization's explicitly prescribed


code of conduct is communicated to all stakeholders and is clearly understood
by them. There should be some system in place to periodically measure and
evaluate the adherence to such code of conduct by each member of the
organization.

Board Independence: an independent board is essential for sound corporate


governance. It means that the board is capable of assessing the performance
of managers with an objective perspective. Hence, the majority of board
members should be independent of both the management team and any
commercial dealings with the company. Such independence ensures the
effectiveness of the board in supervising the activities of management as well
as make sure that there are no actual or perceived conflicts of interests.

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Board Skills: in order to be able to undertake its functions effectively, the


board must possess the necessary blend of qualities, skills, knowledge and
experience so as to make quality contribution. It includes operational or
technical expertise, financial skills, legal skills as well as knowledge of
government and regulatory requirements.

Management Environment: includes setting up of clear objectives and


appropriate ethical framework, establishing due processes, providing for
transparency and clear enunciation of responsibility and accountability,
implementing sound business planning, encouraging business risk assessment,
having right people and right skill for jobs, establishing clear boundaries for
acceptable behavior, establishing performance evaluation measures and
evaluating performance and sufficiently recognizing individual and group
contribution.

Board Appointments: to ensure that the most competent people are


appointed in the board, the board positions must be filled through the process
of extensive search. A well defined and open procedure must be in place for
reappointments as well as for appointment of new directors.

Board Induction and Training: is essential to ensure that directors remain


abreast of all development, which are or may impact corporate governance and
other related issues.

Board Meetings: are the forums for board decision making. These meetings
enable directors to discharge their responsibilities. The effectiveness of board
meetings is dependent on carefully planned agendas and providing relevant
papers and materials to directors sufficiently prior to board meetings.

Strategy Setting: the objective of the company must be clearly documented in


a long term corporate strategy including an annual business plan together with
achievable and measurable performance targets and milestones.

Business and Community Obligations: though the basic activity of a


business entity is inherently commercial yet it must also take care of
community's obligations. The stakeholders must be informed about the
approval by the proposed and ongoing initiatives taken to meet the community
obligations.

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Financial and Operational Reporting: the board requires comprehensive,


regular, reliable, timely, correct and relevant information in a form and of a
quality that is appropriate to discharge its function of monitoring corporate
performance.

Monitoring the Board Performance: the board must monitor and evaluate its
combined performance and also that of individual directors at periodic intervals,
using key performance indicators besides peer review.

Audit Committee: is inter alia responsible for liaison with management,


internal and statutory auditors, reviewing the adequacy of internal control and
compliance with significant policies and procedures, reporting to the board on
the key issues.

Risk Management: risk is an important element of corporate functioning and


governance. There should be a clearly established process of identifying,
analyzing and treating risks, which could prevent the company from effectively
achieving its objectives. The board has the ultimate responsibility for identifying
major risks to the organization, setting acceptable levels of risks and ensuring
that senior management takes steps to detect, monitor and control these risks.

A good corporate governance recognizes the diverse interests of shareholders,


lenders, employees, government, etc. The new concept of governance to bring about
quality corporate governance is not only a necessity to serve the divergent corporate
interests, but also is a key requirement in the best interests of the corporate
themselves and the economy.

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ORGANIZATIONAL FRAMEWORK
The organizational framework for corporate governance initiatives in India consists of
the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India
(SEBI).
The first formal regulatory framework for listed companies specifically for corporate
governance was established by the SEBI in February 2000, following the
recommendations of Kumarmangalam Birla Committee Report. It was enshrined as
Clause 49 of the Listing Agreement.
Thereafter SEBI had set up another committee under the chairmanship of Mr. N. R.
Narayana Murthy, to review Clause 49, and suggest measures to improve corporate
governance standards.
Some of the major recommendations of the committee primarily related to audit
committees, audit reports, independent directors, related party transactions, risk
management, directorships and director compensation, codes of conduct and financial
disclosures.
The Ministry of Corporate Affairs had also appointed a Naresh Chandra Committee on
Corporate Audit and Governance in 2002 in order to examine various corporate
governance issues. It made recommendations in two key aspects of corporate
governance: financial and non-financial disclosures: and independent auditing and
board oversight of management.
It had also set up a National Foundation for Corporate Governance (NFCG) in
association with the CII, ICAI and ICSI as a not-for-profit trust to provide a platform to
deliberate on issues relating to good corporate governance, to sensitize corporate
leaders on the importance of good corporate governance practices as well as to
facilitate exchange of experiences and ideas amongst corporate leaders, policy makers,
regulators, law enforcing agencies and non- government organizations.

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Legal Framework
An effective regulatory and legal framework is indispensable for the proper and
sustained growth of the company. In rapidly changing national and global business
environment, it has become necessary that regulation of corporate entities is in tune
with the emerging economic trends, encourage good corporate governance and enable
protection of the interests of the investors and other stakeholders.
Further, due to continuous increase in the complexities of business operation, the
forms of corporate organizations are constantly changing.
As a result, there is a need for the law to take into account the requirements of different
kinds of companies that may exist and seek to provide common principles to which all
kinds of companies may refer while devising their corporate governance structure.
The important legislations for regulating the entire corporate structure and for dealing
with various aspects of governance in companies are Companies Act, 1956 and
Companies Bill, 2004.
These laws have been introduced and amended, from time to time, to bring more
transparency and accountability in the provisions of corporate governance. That is,
corporate laws have been simplified so that they are amenable to clear interpretation
and provide a framework that would facilitate faster economic growth.
Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange
Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities
and Exchange Board of India (SEBI), with a view to protect the interests of investors in
the securities markets as well as to maintain the standards of corporate governance in
the country.

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PARTIES TO CORPORATE GOVERNANCE
Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and
the community at large.
In corporations, the shareholder delegates decision rights to the manager to act in the
principal's best interests. This separation of ownership from control implies a loss of
effective control by shareholders over managerial decisions.
A board of directors often plays a key role in corporate governance. It is their
responsibility to endorse the organizations strategy, develop directional policy,
appoint, supervise and remunerate senior executives and to ensure accountability of
the organization to its owners and authorities.

The Company Secretary, known as a Corporate Secretary in the US and often


referred to as a Chartered Secretary if qualified by the Institute of Chartered
Secretaries and Administrators (ICSA), is a high ranking professional who is
trained to uphold the highest standards of corporate governance, effective
operations, compliance and administration.

All parties to corporate governance have an interest, whether direct or indirect,


in the effective performance of the organization. Directors, workers and
management receive salaries, benefits and reputation, while shareholders
receive capital return. Customers receive goods and services; suppliers receive
compensation for their goods or services.

A key factor in an individual's decision to participate in an organization e.g.


through providing financial capital and trust that they will receive a fair share of
the organizational returns. If some parties are receiving more than their fair
return then participants may choose to not continue participating leading to
organizational collapse.

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IMPACT
The positive effect of good corporate governance on different stakeholders ultimately is
a strengthened economy, and hence good corporate governance is a tool for socioeconomic development.
After East Asian economies collapsed in the late 20th century, the World Bank's
president warned those countries, that for sustainable development, corporate
governance has to be good. Economic health of a nation depends substantially on how
sound and ethical businesses are.

MECHANISMS AND CONTROLS


Corporate governance mechanisms and controls are designed to reduce the
inefficiencies that arise from moral hazard and adverse selection. For example, to
monitor managers' behavior, an independent third party (the auditor) attests the
accuracy of information provided by management to investors. An ideal control system
should regulate both motivation and ability.
A. INTERNAL CORPORATES GOVERNANCE CONTROLS
Internal corporate governance controls monitor activities and then take corrective
action to accomplish organizational goals. Examples include:
Monitoring by the board of directors:
The board of directors, with its legal authority to hire, fire and compensate top
management, safeguards invested capital. Regular board meetings allow potential
problems to be identified, discussed and avoided.
Whilst non-executive directors are thought to be more independent, they may not
always result in more effective corporate governance and may not increase
performance. Different board structures are optimal for different firms.
Moreover, the ability of the board to monitor the firm's executives is a function of its
access to information. Executive directors possess superior knowledge of the decisionmaking process and therefore evaluate top management on the basis of the quality of
its decisions that lead to financial performance outcomes, ex ante. It could be argued,
therefore, that executive directors look beyond the financial criteria.

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Remuneration:
Performance-based remuneration is designed to relate some proportion of salary to
individual performance. It may be in the form of cash or non-cash payments such as
shares and share options, superannuation or other benefits.
Such incentive schemes, however, are reactive in the sense that they provide no
mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic
behavior.
B. EXTERNAL CORPORATES GOVERNANCE CONTROLS
External corporate governance controls encompass the controls external stakeholders
exercise over the organization. Examples include:

Competition

debt covenants

demand for and assessment of performance information (especially


financial statements)

government regulations

managerial labor market

media pressure

takeovers

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MECHANISMS AND CONTROLS

Demand for information: A barrier to shareholders using good information is


the cost of processing it, especially to a small shareholder. The traditional
answer to this problem is the efficient market hypothesis (in finance, the efficient
market hypothesis (EMH) asserts that financial markets are efficient), which
suggests that the shareholder will free ride on the judgments of larger
professional investors.

Monitoring costs: In order to influence the directors, the shareholders must


combine with others to form a significant voting group which can pose a real
threat of carrying resolutions or appointing directors at a general meeting.

Supply of accounting information: Financial accounts form a crucial link in


enabling providers of finance to monitor directors. Imperfections in the financial
reporting process will cause imperfections in the effectiveness of corporate
governance. This should, ideally, be corrected by the working of the external
auditing process.

BENEFITS AND LIMITATIONS


The concept of corporate governance has been attracting public attention for quite
some time. It has been finding wide acceptance for its relevance and importance to the
industry and economy.
It contributes not only to the efficiency of a business enterprise, but also, to the growth
and progress of a country's economy. Progressively, firms have voluntarily put in place
systems of good corporate governance for the following reasons:

Several studies in India and abroad have indicated that markets and investors
take notice of well managed companies and respond positively to them. Such
companies have a system of good corporate governance in place, which allows
sufficient freedom to the board and management to take decisions towards the

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progress of their companies and to innovate, while remaining within the
framework of effective accountability.

In today's globalised world, corporations need to access global pools of capital as


well as attract and retain the best human capital from various parts of the world.
Under such a scenario, unless a corporation embraces and demonstrates ethical
conduct, it will not be able to succeed.

The credibility offered by good corporate governance procedures also helps


maintain the confidence of investors both foreign and domestic to attract
more long-term capital. This will ultimately induce more stable sources of
financing.

A corporation is a congregation of various stakeholders, like customers,


employees, investors, vendor partners, government and society. Its growth
requires the cooperation of all the stakeholders. Hence it imperative for a
corporation to be fair and transparent to all its stakeholders in all its transactions
by adhering to the best corporate governance practices.

Good Corporate Governance standards add considerable value to the


operational performance of a company by:
1. improving strategic thinking at the top through induction of independent
directors who bring in experience and new ideas;

2. rationalizing the management and constant monitoring of risk that a firm


faces globally;

3. limiting the liability of top management and directors by carefully


articulating the decision making process;

4. assuring the integrity of financial reports, etc.


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It also has a long term reputational effects among key stakeholders, both internally and
externally.

Also, the instances of financial crisis have brought the subject of corporate
governance to the surface. They have shifted the emphasis on compliance with
substance, rather than form, and brought to sharper focus the need for
intellectual honesty and integrity. This is because financial and non-financial
disclosures made by any firm are only as good and honest as the people behind
them.

Good governance system, demonstrated by adoption of good corporate


governance practices, builds confidence amongst stakeholders as well as
prospective stakeholders. Investors are willing to pay higher prices to the
corporate demonstrating strict adherence to internally accepted norms of
corporate governance.

Effective governance reduces perceived risks, consequently reduces cost of


capital and enables board of directors to take quick and better decisions which
ultimately improves bottom line of the corporate.

Adoption of good corporate governance practices provides long term sustenance


and strengthens stakeholders' relationship.

A good corporate citizen becomes an icon and enjoys a position of respects.

Potential stakeholders aspire to enter into relationships with enterprises whose


governance credentials are exemplary.

Effectiveness of corporate governance system cannot merely be legislated by law


neither can any system of corporate governance be static.
As competition increases, the environment in which firms operate also changes and in
such a dynamic environment the systems of corporate governance also need to evolve.
Failure to implement good governance procedures has a cost in terms of a significant
risk premium when competing for scarce capital in today's public markets.

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Corporate Governance In Banks

ROLE OF THE GOVERNMENT AND THE REGULATOR


Regulators are external pressure points for good corporate governance. Mere
compliance with regulatory requirements is not however an ideal situation in itself.
In fact, mere compliance with regulatory pressures is a minimum requirement of good
corporate governance and what are required are internal pressures, peer pressures
and market pressures to reach higher than minimum standards prescribed by
regulatory agencies.

RBIs approach to regulation in recent times has some features that would
enhance the need for and usefulness of good corporate governance in the cooperative sector.

The transparency aspect has been emphasized by expanding the coverage of


information and timeliness of such information and analytical content.
Importantly, deregulation and operational freedom must go hand in hand with
operational transparency.

In fact, the RBI has made it clear that with the abolition of minimum lending rates
for co-operative banks, it will be incumbent on these banks to make the interest
rates charged by them transparent and known to all customers.

Banks have therefore been asked to publish the minimum and maximum interest
rates charged by them and display this information in every branch.

Disclosure and transparency are thus key pillars of a corporate governance framework
because they provide all the stakeholders with the information necessary to judge
whether their interests are being taken care of.
Another area which requires focused attention is greater transparency in the balance
sheets of co-operative banks.

24

Corporate Governance In Banks

The commercial banks in India are now required to disclose accounting ratios
relating to operating profit, return on assets, business per employee, NPAs, etc.
as also maturity profile of loans, advances, investments, borrowings and
deposits.

The issue before us now is how to adapt similar disclosures suitably to be


captured in the audit reports of co-operative banks.

RBI had advised Registrars of Co-operative Societies of the State Governments


in 1996 that the balance sheet and profit & loss account should be prepared
based on prudential norms introduced as a sequel to Financial Sector Reforms
and that the statutory/departmental auditors of co-operative banks should look
into the compliance with these norms.

Auditors are therefore expected to be well-versed with all aspects of the new
guidelines issued by RBI and ensure that the profit & loss account and balance
sheet of cooperative banks are prepared in a transparent manner and reflect the
true state of affairs.

Auditors should also ensure that other necessary statutory provisions and
appropriations out of profits are made as required in terms of Co-operative
Societies Act / Rules of the state concerned and the bye-laws of the respective
institutions.

BOARD OF DIRECTORS AND THEIR COMMITTEES


At the initiative of the RBI, a consultative group, aimed at strengthening corporate
governance in banks, headed by Dr. Ashok Gangly was set up to review the
supervisory role of Board of banks.
The recommendations include the role and responsibility of independent nonexecutive directors, qualification and other eligibility criteria for appointment of non25

Corporate Governance In Banks


executive directors, training the directors and keeping them current with the latest
developments.
Private sector banks, etc. it is unanimously accepted that the most crucial aspect of
corporate governance is that the organization have a professional board which can
drive the organization through its ability to perform its responsibility of meeting
regularly, retaining full and effective control over the company and monitor the
executive management.
Some of the important recommendations on the constitution of the Board are:

Qualification and other eligibility criteria for appointment of non-executive


directors,

Defining role and responsibilities of directors including the recommended


Deed of Covenant to be executed by the bank and the directors in conduct
of the board functions

Training the directors and keeping them abreast of the latest developments

MEASURES TAKEN BY BANKS TOWARDS IMPLEMENTATION OF BEST


PRACTICES
Prudential norms in terms of income recognition, asset classification, and capital
adequacy have been well assimilated by the Indian banking system. In keeping with
the international best practice, starting 31st March 2004, banks have adopted 90 days
norm for classification of NPAs.
Also, norms governing provisioning requirements in respect of doubtful assets have
been made more stringent in a phased manner. Beginning 2005, banks will be
required to set aside capital charge for market risk on their trading portfolio of
26

Corporate Governance In Banks


government investments, which was earlier virtually exempt from market risk
requirement.

Capital Adequacy: All the Indian banks barring one today are well above the
stipulated benchmark of 9 per cent and remain in a state of preparedness to
achieve the best standards of CRAR as soon as the new Basel 2 norms are
made operational. In fact, as of 31st March 2004, banking system as a whole
had a CRAR close to 13 per cent.

On the Income Recognition Front: There is complete uniformity now in the


banking industry and the system therefore ensures responsibility and
accountability on the part of the management in proper accounting of income as
well as loan impairment.

ALM and Risk Management Practices: At the initiative of the regulators,


banks were quickly required to address the need for Asset Liability Management
followed by risk management practices. Both these are critical areas for an
effective oversight by the Board and the senior management which are
implemented by the Indian banking system on a tight time frame and the
implementation review by RBI. These steps have enabled banks to understand
measure and anticipate the impact of the interest rate risk and liquidity risk,
which in deregulated environment is gaining importance.

MEASURES TAKEN BY REGULATOR TOWARDS CORPORATE


GOVERNANCE
Reserve Bank of India has taken various steps furthering corporate governance
in the Indian Banking System. These can broadly be classified into the following
three categories:
A. Transparency
B. Off-site surveillance
C. Prompt corrective action Transparency and
D. disclosure standards

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Corporate Governance In Banks

Transparency and accounting standards in India have been enhanced to


align with international best practices. However, there are many gaps in the
disclosures in India vis--vis the international standards, particularly in the area
of risk management strategies and risk parameters, risk concentrations,
performance measures, component of capital structure, etc. Hence, the
disclosure standards need to be further broad-based in consonance with
improvements in the capability of market players to analyze the information
objectively.

The off-site surveillance mechanism is also active in monitoring the movement


of assets, its impact on capital adequacy and overall efficiency and adequacy of
managerial practices in banks. RBI also brings out the periodic data on Peer
Group Comparison on critical ratios to maintain peer pressure for better
performance and governance.

Prompt corrective action has been adopted by RBI as a part of core principles
for effective banking supervision. As against a single trigger point based on
capital adequacy normally adopted by many countries, Reserve Bank in keeping
with Indian conditions have set two more trigger points namely Non-Performing
Assets (NPA) and Return on Assets (ROA) as proxies for asset quality and
profitability. These trigger points will enable the intervention of regulator through
a set of mandatory action to stem further deterioration in the health of banks
showing signs of weakness.

CORPORATE GOVERNANCE IN EMERGING MARKET


Contrary to popular belief, corporate governance (CG) does exist in emerging markets.
While it is true that the equivalent of the Sarbanes-Oxley Act (SOX) is not being
enforced on a wide scale in any emerging market, notable improvements are being
made, at least in the banks, where development of good CG often runs in tandem with
progress in risk management controls and regulation. It is important to note, that, while
good governance in itself does not prevent fraud, it should make it easier to detect.
CG requires a separation of function between the board, executive management and
audit, and implementation is key. The independence and authority of each function
28

Corporate Governance In Banks


needs to exist in more than only legal form.
Progress is seen in implementation in most emerging markets over the past two years.
However, economic conditions have been relatively benign, and the robustness of new
CG in practice will only be tested in a downturn.
Weak CG practices at any company are a negative rating factor and may serve as a
cap on how high a rating can go, however strong its financial profile may seen.
The degree of governance in companies in a country goes hand-in-hand with the level
of political governance.

The identification and separation of powers and responsibilities between three branches
of government create the necessary framework for CG at the company level to function.
The degree of political governance will, to a great extent, be reflected in the ability of a
market economy and companies in it to develop.

Before assessing the degree of CG at an individual bank, it is important to analyze the


checks and balances that exist and those still under development in the banking system
in question.

Oversight of risk management by a bank regulator is highly influential in a bank's


governance structure. For CG to be effective, a banking system requires the following:

A functioning legal system;

Independent regulators;

Meaningful fines or sanctions and/or market forces that challenge and punish
banks that do not play by the rules.

At all three tiers of governance (political, banking system, bank), the weaknesses
that are most prevalent in emerging markets are:
29

Corporate Governance In Banks

o A high level of related party influence (a consequence of wealth and


power being concentrated in only a few hands);
o An absence of challenges to the status quo due to lack of
experience and expertise.
State ownership of the banks and/or direct influence on their operations is a major issue
that can taint governance at all levels.
CORPORATE GOVERNANCE IN CO-OPERATIVE BANKS
For the co-operative banks in India these are challenging times. Never before has the
need for restoring customer confidence in the cooperative sector been felt so much.
Never before has the issue of good governance in the co-operative banks assumed
such criticality.
The literature on corporate governance in its wider connotation covers a range of
issues such as protection of shareholdersrights, enhancing shareholdersvalue, Board
issues including its composition and role, disclosure requirements, integrity of
accounting practices, the control systems, in particular internal control systems.

Corporate governance especially in the co-operative sector has come into sharp
focus because more and more co-operative banks in India, both in urban and
rural areas, have experienced grave problems in recent times which have in a
way threatened the profile and identity of the entire co-operative system.

These problems include mismanagement, financial impropriety, poor investment


decisions and the growing distance between members and their co-operative
society.

30

Corporate Governance In Banks

The purpose and objectives of co-operatives provide the framework for cooperative corporate governance. Co- operatives are organized groups of people
and jointly managed and democratically controlled enterprises.

They exist to serve their members and depositors and produce benefits for them.
Co-operative corporate governance is therefore about ensuring co-operative
relevance and performance by connecting members, management and the
employees to the policy, strategy and decision-making processes.

GENESIS OF CORPORATE GOVERNANCE:The Cadbury Report stipulated that the Board of Directors should meet regularly, retain
full and effective control over the company and monitor the executive management.
There should be a clearly accepted division of responsibilities at the head of the
company which will ensure balance of power and authority so that no individual has
unfettered powers of decision.
The Board should have a formal schedule of matters specifically reserved to it for
decisions to ensure that the direction and control of the company is firmly in its hands.
There should also be an agreed procedure for Directors in the furtherance of their
duties to take independent professional advice.
The Cadbury Report generated a lot of interest in India. The issue of corporate
governance was studied in depth and dealt with by the Confederation of Indian
Industries (CII), Associated Chamber of Commerce and Industry (ASSOCHAM) and
Securities and Exchange Board of India (SEBI).
These studies reinforced the Cadbury Reports 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 unique characteristics.
Paradoxical as it may sound, evolution of co-operatives in India as peoples
organizations rather than business enterprises adopting professional managerial
systems has hindered growth of professionalism in co-operatives and proved to be a
neglected area in their evolution.

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Corporate Governance In Banks


THE INDIAN SCENARIO
CG among Indian banks is discussed across three broad categories - the state-owned
banks, the "new" private sector banks (i.e. those that were given a banking license in
1993), and the "old" private sector banks.
At the risk of over simplifying, Fitch has drawn conclusions regarding banks in each of
these groups, although standards of individual banks might be better or lower than the
"median" governance practices discussed.

There are 27 state-owned banks in India, accounting for 75% of banking-system


assets. Government ownership varies from 51%-100%. The state-owned banks
are governed by the Banking (Acquisition and Transfer of Undertakings) Act,
which gives sweeping powers to the government.

These banks have begun to list their equity on the domestic bourses, and have
needed to comply with disclosure and good CG guidelines stipulated by the stock
exchanges, which focus on the rights of minority shareholders.

It is worth mentioning that boards, including executive chairmen and


"independent" directors, are still determined by the government; and power is
concentrated with the executive chairman, who is generally appointed on
account of seniority.

The signs are that intervention by the state in state-owned banks' credit
operations is declining. Direct intervention in decisions is being replaced by
"policy directed" lending aimed at achieving the broader social objectives of the
government in power.

Increasingly decisions are based on commercial considerations, partly stemming


from the bank's public listings and partly because of more investment in
technology that brings greater transparency and is helping to standardize
decision making.
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Corporate Governance In Banks


Foreign ownership of some shares in some banks and frequent interaction with large
institutional investors has maintained pressure on these banks to adopt more
progressive CG standards.
Summing up, although there has been an improvement in the governance practices of
these banks, the ownership overhang still remains, and they still comply more with the
letter of governance practices than the spirit.
The banks adhere to the governance practices and disclosures expected by
international investors. The boards of these banks are reasonably broad based, with
independent directors of wide-ranging experience.

In sharp contrast, the old private sector banks have the weakest level of
governance. These banks are controlled by a few families or by communities,
with non-bank interests. While these banks might have outside directors and
various board committees, these tend to be passive with real decision-making
concentrated with the large shareholders - increasing the chance of related
party lending.

The Reserve Bank (RBI), India's central bank, is focused on governance issues
both from the perspective of improving the quality of its oversight and from
securing the interests of depositors through transparency, off-site surveillance
and prompt corrective action.

The RBI has established two major committees to look into governance at the
banks and benchmark international best practices of implementation. These
committees have made recommendations directed at the independence and
autonomy of the board and focused on harmonizing the OECD/Basel/SOX
recommendations with local regulations and practices followed in the domestic
Indian market.

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Corporate Governance In Banks


One feature about financial reporting in the Indian banking system worth mentioning is
that some of the large state-owned banks have a number of different auditors.

This is a concern, given what Fitch has seen in the international market place i.e. reliance on staff from other audit firms to complete an audit for large
international groups has resulted in errors going unnoticed. This is a resource
issue in the audit firms, given the scale of the large state-owned banks'
operations.

For example, State Bank of India has 9,000 branches, Punjab National Bank
has over 5000, and Bank of Maharashtra, although smaller, still has over
1,000 branches.

In addition to the geographical spread, the regulatory requirement for results to


be audited within three months of the year end also means that several firms
have to be hired to ensure that the audits are completed.

Typically, these audit firms form a "central committee" that looks at the audit
reports that come in from the branches and the regions and then discusses
these jointly with the chief financial officer of the bank.

As these banks appoint auditors for only a three-year period, it has not been
feasible for one audit firm to build the necessary infrastructure in terms of people
and offices to audit these banks on its own.

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Corporate Governance In Banks


CASE STUDY

BANK OF BARODA

(1) OVERVIEW
Bank of Baroda (BoB) (BSE: 532134) is the third largest bank in India, after the State
Bank of India and the Punjab and ahead of ICICI Bank. BoB is ranked 763 in Forbes
Global 2000 list. BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583
billion, a network of over 3,409 branches and offices, and about 1,657 ATMs.
It plans to open 400 new branches in the coming year. It offers a wide range of banking
products and financial services to corporate and retail customers through a variety of
delivery channels and through its specialized subsidiaries and affiliates in the areas of
investment banking, credit cards and asset management. Its total business was Rs.
5,452 billion as of June 30.
As of August 2010, the bank has 78 branches abroad and by the end of FY11 this
number should climb to 90. In 2010, BOB opened a branch in Auckland, New Zealand,
and its tenth branch in the United Kingdom.
The bank also plans to open five branches in Africa. Besides branches, BoB plans to
open three outlets in the Persian Gulf region that will consist of ATMs with a couple of
people.

(2) Code of Conduct


I. Need and objective of the Code
Clause 49 of the Listing Agreement entered into with the Stock Exchanges, requires, as
part of Corporate Governance the listed entities to lay down a Code of Conduct for
Directors on the Board of an entity and its Senior Management. Senior Management
has been defined to include personnel who are members of its Core Management and
functional heads excluding the Board of Directors.
Accordingly the Bank has laid down this Code for its Directors on the Board and its Core
Management. The composition of Core Management will be all Functional Heads
(irrespective of grade/scale) and all General Managers.

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Corporate Governance In Banks


II. Banks belief system
This Code of Conduct attempts to set forth the guiding principles on which the Bank
shall operate and conduct its daily business with its multitudinous stakeholders,
government and regulatory agencies, media, and anyone else with whom it is
connected. It recognizes that-the Bank is a trustee and custodian of public money and
in order to fulfill its fiduciary obligations and responsibilities, it has to maintain and
continue to enjoy the trust and confidence of public at large.
The Bank acknowledges the need to uphold the integrity of every transaction it enters
into and believes that honesty and integrity in its internal conduct would be judged by its
external behavior. The Bank shall be committed in all its actions to the interest of the
countries in which it operates. The Bank is conscious of the reputation it carries
amongst its customers and public at large and shall Endeavour to do all it can to sustain
and improve upon the same in its discharge of obligations. The Bank shall continue to
initiate policies, which are customer centric and which promote financial prudence.
III. Philosophy of the Code
The Code envisages and expects a. adherence to the highest standards of honest and ethical conduct, including
proper and ethical procedures in dealing with actual or apparent conflicts of
interest between personal and professional relationships.
b. Full, fair, accurate, sensible, timely and meaningful disclosures in the periodic
reports required to be filed by the Bank with government and regulatory
agencies.
c. Compliance with applicable laws, rules and regulations.
d. To address misuse or misapplication of the Banks assets and resources.
e. The highest level of confidentiality and fair dealing within and outside the Bank.
A. General Standards of conduct
The Bank expects all Directors and members of the Core Management to exercise good
judgment, to ensure the interests, safety and welfare of customers, employees, and
other stakeholders and to maintain a cooperative, efficient, positive, harmonious and
productive work environment and business organization.
The Directors and members of the Core Management while discharging duties of their
office must act honestly and with due diligence. They are expected to act with that
amount of utmost care and prudence, which an ordinary person is expected to take in
his/her own business.

36

Corporate Governance In Banks


These standards need to be applied while working in the premises of the Bank, at offsite
locations where the business is being conducted whether in India or abroad, at Banksponsored business and social events, or at any other place where they act as
representatives of the Bank.

B. Conflict of Interest
Conflict of interest occurs when personal interest of any member of the Board of
Directors and of the Core Management interferes or appears to interfere in any way with
the interests of the Bank. Every member of the Board of Directors and Core
Management has a responsibility to the Bank, its stakeholders and to each other.
Although this duty does not prevent them from engaging in personal transactions and
investments, it does demand that they avoid situations where a conflict of interest might
occur or appear to occur.
They are expected to perform their duties in a way that they do not conflict with the
Banks interest such asEmployment / Outside Employment - The members of the Core Management are
expected to devote their total attention to the business interests of the Bank. They are
prohibited from engaging in any activity that interferes with their performance or
responsibilities to the Bank or otherwise is in conflict with or prejudicial to the Bank.
Business Interests - If any member of the Board of Directors and Core Management
considers investing in securities issued by the Banks customer, supplier or competitor,
they should ensure that these investments do not compromise their responsibilities to
the Bank.
Many factors including the size and nature of the investment; their ability to influence
the Banks decisions; their access to confidential information of the Bank, or of the other
entity, and the nature of the relationship between the Bank and the customer, supplier
or competitor should be considered in determining whether a conflict exists.
Additionally, they should disclose to the Bank any interest that they have which may
conflict with the business of the Bank.

37

Corporate Governance In Banks


Related Parties - As a general rule, the Directors and members of the Core
Management should avoid conducting Banks business with a relative or any other
person or any firm, Company, Association in which the relative or other person is
associated in any significant role. Relatives shall include:

Spouse
Father
Mother (including step-mother)
Son (including step-son)
Sons wife
Daughter (including step-daughter)
Fathers father
Fathers mother
Mothers mother
Mothers father
Sons son
Sons sons wife
Sons daughter
Sons Daughters husband
Daughters husband
Daughters son
Daughters sons wife
Daughters daughter
Daughters daughters husband
Brother (including step-brother)
Brothers wife
Sister (including step-sister)
Sisters husband

If such a related party transaction is unavoidable, they must fully disclose the nature of
the related party transaction to the appropriate authority. Any dealings with a related
party must be conducted in such a way that no preferential treatment is given to that
party.
In the case of any other transaction or situation giving rise to conflicts of interests, the
appropriate authority should after due deliberations decide on its impact.
C. Applicable Laws
The Directors of the Bank and Core Management must comply with applicable laws,
regulations, rules and regulatory orders. They should report any inadvertent noncompliance, if detected subsequently, to the concerned authorities.

38

Corporate Governance In Banks


D. Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful disclosures in the
periodic reports required to be filed with Government and Regulatory agencies. The
members of Core Management of the Bank shall initiate all actions deemed necessary
for proper dissemination of relevant information to the Board of Directors, Auditors and
other Statutory Agencies, as may be required by applicable laws, rules and regulations.
E. Use of Banks Assets and Resources:
Each member of the Board of Directors and the Core Management has a duty to the
Bank to advance its legitimate interests while dealing with the Banks assets and
resources. Members of the Board of Directors and Core Management are prohibited
from:

using corporate property, information or position for personal gain;

soliciting, demanding, accepting or agreeing to accept anything of value from any


person while dealing with the Banks assets and resources;

Acting on behalf of the Bank in any transaction in which they or any of their
relative(s) have a significant direct or indirect interest.

Confidentiality and Fair Dealings


1. Banks Confidential Information

The Bank's confidential information is a valuable asset. It includes all trade


related information, trade secrets, confidential and privileged information,
customer information, employee related information, strategies, administration,
research in connection with the Bank and commercial, legal, scientific, technical
data that are either provided to or made available to each member of the Board
of Directors and the Core Management by the Bank either in paper form or
electronic media to facilitate their work or that they are able to know or obtain
access by virtue of their position with the Bank. All confidential information must
be used for Banks business purposes only.

This responsibility includes the safeguarding, securing and proper disposal of


confidential information in accordance with the Bank's policy on maintaining and
managing records. This obligation extends to confidential information of third
parties, which the Bank has rightfully received under non-disclosure agreements.

To further the Banks business, confidential information may have to be disclosed


to potential business partners. Such disclosure should be made after considering
its potential benefits and risks. Care should be taken to divulge the most
sensitive information, only after the said potential business partner has signed a
confidentiality agreement with the Bank.
39

Corporate Governance In Banks

Any publication or publicly made statement that might be perceived or construed


as attributable to the Bank, made outside the scope of any appropriate authority
in the Bank, should include a disclaimer that the publication or statement
represents the views of the specific author and not the bank.

2. Other Confidential Information The Bank has many kinds of business relationships with many companies and
individuals. Sometimes, they will volunteer confidential information about their products
or business plans to induce the Bank to enter into a business relationship.
At other times, the Bank may request that a third party provide confidential information
to permit the Bank to evaluate a potential business relationship with that party.
Therefore, special care must be taken by the Board of Directors and members of the
Core Management to handle the confidential information of others responsibly.
Such confidential information should be handled in accordance with the agreements
with such third parties.

The Bank requires that every Director and the member of Core Management,
General Managers should be fully compliant with the laws, statutes, rules and
regulations that have the objective of preventing unlawful gains of any nature
whatsoever.

Directors and the members of Core Management shall not accept any offer,
payment promise to pay, or authorization to pay any money, gift, or anything of
value from customers, suppliers, shareholders/ stakeholders, etc. that is
perceived as intended, directly or indirectly, to influence any business decision,
any act or failure to act, any commission of fraud, or opportunity for the
commission of any fraud.

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Corporate Governance In Banks


IV. Good corporate governance practices
Each member of the Board of Directors and Core Management of the Bank should
adhere to the following so as to ensure compliance with good Corporate Governance
practices.
(a) Dos

Attend Board meetings regularly and participate in the deliberations and


discussions effectively.

Study the Board papers thoroughly and enquire about follow-up reports on
definite time schedule.

Involve actively in the matter of formulation of general policies

Be familiar with the broad objectives of the Bank and the policies laid down by
the Government and the various laws and legislations.

Ensure confidentiality of the Banks agenda papers, notes and Minutes.

(b) Donts

* Do not interfere in the day to day functioning of the bank

Do not reveal any information relating to any constituent of the Bank to anyone.

* Do not display the logo / distinctive design of the Bank on their personal visiting
cards / letter heads.

* Do not sponsor any proposal relating to loans, investments, buildings or sites


for Banks premises, enlistment or empanelment of contractors, architects,
auditors, doctors, lawyers and other professionals etc.

Do not do anything, which will interfere with and / or be subversive of


maintenance of discipline, good conduct and integrity of the staff.

VI. Waivers

Any waiver of any provision of this Code of Conduct for a member of the Banks
Board of Directors or a member of the Core Management must be approved in
writing by the Board of Directors of the Bank.

The matters covered in this Code of Conduct are of the utmost importance to the Bank,
its stakeholders and its business partners, and are essential to the Bank's ability to
conduct its business in accordance with its value system.

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Corporate Governance In Banks


CONCLUSION
Narrow DefinitionCorporate governance can be defined as the system for direction and control
of the corporation.
- Sir Adrian Cadbury, The Report on the Financial Aspects of Corporate
Governance, 1992
In the years to come, the Indian financial system will grow not only in size but also in
complexity as the forces of competition gain further momentum and financial markets
acquire greater depth.
The policy environment will remain supportive of healthy growth and development with
accent on more operational flexibility as well as greater prudential regulation and
supervision.
The real success of our financial sector reforms will however depend primarily on the
organizational effectiveness of the banks, including cooperative banks, for which
initiatives will have to come from the banks themselves.
It is for the co-operative banks themselves to build on the synergy inherent in the
cooperative structure and stand up for their unique qualities.
With elements of good corporate governance, sound investment policy, appropriate
internal control systems, better credit risk management, focus on newly-emerging
business areas like micro finance, commitment to better customer service, adequate
automation and proactive policies on house-keeping issues, co-operative banks will
definitely be able to grapple with these challenges and convert them into
opportunities.

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Corporate Governance In Banks


Why care about corporate governance
Corporate governance matters for development
Increased access to financing - investment, growth, employment
Lower cost of capital and higher valuation- investment, growth

Better operational performance- better allocation of resources, better


management, creates wealth
Less risk, at the firm and country level- fewer defaults, fewer financial crises

Better relationship with stakeholders- improved environment, social/labor


All of these relationships matter for growth, employment, poverty reduction

Empirical evidence has documented these relationships - At the level of country,


sector and individual firm and from investor perspective using various techniques

Quite strong relationships - But so far mainly documented for non-financial


corporations that are listed on stock exchanges

What is special about CG of banks?


Banks are special, different from corporations

Opaque, financial information more obscure: hard to assess performance and


riskiness

More diverse stakeholders (many depositors and often more diffuse equity
ownership, due to restrictions): makes for less incentives for monitoring

Highly leveraged, many short-term claims: risky, easily subject to bank


runs

Heavily regulated: given systemic importance, as failure can lead to large output
costs, more regulated
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Corporate Governance In Banks


Because special, banks more regulated, with regulations covering wide area

Activity restrictions (products, branches), prudential requirements


(loan classification, reserve reqs. etc)

Regulations often more important than laws

Government, instead of depositors, debt or equity-holders, takes role of monitoring


banks

Power lies with government, e.g., supervisor, deposit insurance


agency, central bank

Raises in turn public governance questions

Banks enjoy benefits of public safety net

Banks, as they are of systemic importance, get support, i.e., deposit insurance,
LOLR, and other (potential) forms of government support

Costs of support provided often paid for by government, i.e., in the end taxpayers

Same time, banks more subject to CG-risks

Opaqueness means scope for entrenchment, shifting of risks, private benefits


and outright misuse (tunneling, insider lending, expropriation, etc.) larger than for
non-financial firms

As for any firm, bank shareholder value can come from increased risk-taking

Shareholder value is residual claim on firm value

Increased risk-taking raises shareholder values at expenses of debt claimholders


and government

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Corporate Governance In Banks

FUTURE PROSPECTS
The issues of governance, accountability and transparency in the affairs of the
company, as well as about the rights of shareholders and role of Board of Directors
have never been so prominent as it is today. The corporate governance has come to
assume a centre stage in the Board room discussions.
India has become one of the fastest emerging nations to have aligned itself with the
international trends in Corporate Governance. As a result, Indian companies have
increasingly been able to access to newer and larger markets around the world; as well
as able to acquire more businesses.

The responses of the Government and regulators have also been admirably
quick to meet the challenges of corporate delinquency. But, as the global
environment changing continuously, there is a greater need of adopting and
sustaining good corporate governance practices for value creation and building
corporations of the future.

It is true that the 'corporate governance' has no unique structure or design and is
largely considered ambiguous. There is still lack of awareness about its various
issues, like, quality and frequency of financial and managerial disclosure,
compliance with the code of best practice, roles and responsibilities of Board of
Directories, shareholders rights, etc.

There have been many instances of failure and scams in the corporate sector,
like collusion between companies and their accounting firms, presence of weak
or ineffective internal audits, lack of required skills by managers, lack of proper
disclosures, non-compliance with standards, etc. As a result, both management
and auditors have come under greater scrutiny.

But, with the integration of Indian economy with global markets, industrialists and
corporate in the country are being increasingly asked to adopt better and
transparent corporate practices.

The degree to which corporations observe basic principles of good corporate


governance is an increasingly important factor for taking key investment
decisions. If companies are to reap the full benefits of the global capital market,
capture efficiency gains, benefit by economies of scale and attract long term
capital, adoption of corporate governance standards must be credible,
consistent, coherent and inspiring.

Quality of corporate governance primarily depends on following factors, namely:integrity of the management; ability of the Board; adequacy of the processes;
commitment level of individual Board members; quality of corporate reporting;
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Corporate Governance In Banks


participation of stakeholders in the management; etc.

Since this is an important element affecting the long-term financial health of companies,
good governance framework also calls for effective legal and institutional environment,
business ethics and awareness of the environmental and societal interests.
Hence, in the years to come, corporate governance will become more relevant and a
more acceptable practice worldwide.
This is easily evident from the various activities undertaken by many companies in
framing and enforcing codes of conduct and honest business practices; following more
stringent norms for financial and non-financial disclosures, as mandated by law;
accepting higher and appropriate accounting standards; enforcing tax reforms coupled
with deregulation and competition; etc.
However, inapt application of corporate governance requirements can adversely affect
the relationship amongst participants of the governance system. As owners of equity,
institutional investors are increasingly demanding a decisive role in corporate
governance.
Individual shareholders, who usually do not exercise governance rights, are highly
concerned about getting fair treatment from controlling shareholders and management.
Creditors, especially banks, play a key role in governance systems, and serve as
external monitors over corporate performance. Employees and other stakeholders also
play an important role in contributing to the long term success and performance of the
corporation. Thus, it is necessary to apply governance practices in a right manner for
better growth of a company.

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Corporate Governance In Banks


SUGGESTIONS AND OPINIONS
Corporations are the prominent players in the global markets. They are mainly
responsible for generating majority of economic activities in the world, ranging from
goods and services to capital and resources.
The essence of corporate governance is in promoting and maintaining integrity,
transparency and accountability in the management of the company as well as in
manifestation of the values, principles and policies of a corporation.
Many efforts are being made, both at the Centre and the State level, to promote
adoption of good corporate governance practices, which are the integral element for
doing and managing business. However, the concepts and principles of good
governance are still not clearly known to the Indian business set up.
Hence, there is a greater need to increase awareness among entrepreneurs about the
various aspects of corporate governance.
There are some of the areas that need special attention, namely:

Quality of audit, which is at the root of effective corporate governance;

Role of Board of Directors as well as accountability of the CEOs and CFOs;

Quality and effectiveness of the legal, administrative and regulatory framework;


etc.

That is, it is necessary to provide the corporate desired level of comfort in compliance
with the code, principles and requirements of corporate governance; as well as provide
relevant information to all stakeholders regarding the performance, policies and
procedures of the company in a transparent manner.
There should be proper financial and non-financial disclosures by the companies, such
as, about remuneration package, financial reporting, auditing, internal controls, etc.

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BIBLIOGRAPHY AND WEBLIOGRAPHY


BIBLIOGRAPHY
Innovation in banking and insurance
- By Romeo. S. Mascarenhas

WEBLIOGRAPHY
www.wikipedia.org
www.bankofbaroda.com
www.nfcgindia.org
www.financialexpress.com
rbidocs.rbi.org.in
www.biecco.gov.in
www.iba.org.in

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