Corporate Governance, Bank Boards Directors by cnu54265

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									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
                      Some Definitions
CCG & C

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


                                                                   4
                A Canadian Definition
CCG & C

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



                                                                5
                    An OECD Definition
CCG & C

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


                                                                                6
                   An Indian Definition
CCG & C

          • “…fundamental objective of corporate
            governance is the „enhancement of the long-
            term shareholder value while at the same
            time protecting the interests of other
            stakeholders.”

                  – SEBI (Kumar Mangalam Birla) Report on
                    Corporate Governance, January, 2000


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                 A Gandhian Definition
CCG & C



          • Trusteeship obligations inherent in
            company operations, where assets and
            resources are pooled and entrusted to the
            managers for optimal utilisation in the
            stakeholders‟ interests.


                                                        8
               Some Further Definitions
CCG & C

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



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           What is Corporate Governance?
CCG & C

          • The Manner in which a Corporation is Run
            –   Achieving its Objectives
            –   Transparency of its Operations
            –   Accountability & Reporting
            –   Good Corporate Citizenship
          • The Processes & Operating Relationships that
            Best Achieve Organisational Goals

                                                           10
               Some Governance Models
CCG & C

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


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



                                                     12
                 Residual Claimant Theory
CCG & C

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

             – The Economic Structure of Corporate Law, Frank H
               Easterbrook and Daniel R Fischel (1991) OUP


                                                                  13
                   The Stakeholder Case
CCG & C

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

          • One-Size does not Fit All Circumstances
          • A Combination of Shareholder/Stakeholder
            Models Necessary
          • Some Argue, While Shareholder Claim
            Well Established, Stakeholder Claims Need
            to be Proved
          • Tailor Model to Suit Unique Circumstances

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                  The Corporate Board
CCG & C

          • Central to Corporate Governance
            – Juxtaposed between Shareholders on the one
              hand, and on the other, Managers of the Entity
              (Cadbury)
            – Follows Distancing between Ownership and
              Control (Berle and Means)
            – Trustee for All Shareholders
            – Loyalty & Commitment – Always to Company
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              Board Role & Responsibility
CCG & C

          • Provide/ Exercise
             – Leadership and Strategic Guidance
             – Objective Judgement Independent of Management
             – Control over the Company


          • Direct and Control the Management of the
            Company
          • Be Accountable at all times to All Shareholders

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

                                                          18
                  Dimensions of Board
CCG & C             Responsibility
          • Control Involves
            – Prescribing Codes of Conduct,
            – Overseeing Disclosure & Communication
              Processes,
            – Ensuring Control Systems to Protect Company
              Assets
            – Reviewing Performance & Realigning Action
              Initiatives to Achieve Company Objectives
                                                        19
                  Dimensions of Board
CCG & C             Responsibility
          • Accountability Involves
            – Creating, Protecting and Enhancing Company
              Wealth and Resources
            – Timely and Transparent Reporting
            – Good Corporate Citizenry including Discharge
              of Stakeholder Obligations and Societal
              Responsibilities without Compromising the
              Shareholder Wealth Maximisation Goal

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

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


     Market Operators        Institutional Investors   Press/Media
       (Rewards)           (Pension Funds/Insce Cos) (Opinion Makers)

                Market Operations, Critique & Monitoring
                                                                           21
Centre for Corporate Governance & Citizenship



                      Is There
                 More to Business
                    than just the
                Financial Numbers?

                                                22
                  An Enterprise’s Triple Effect on Society

                 Sustainable Development     Equal Opportunities

Waste Control                                              Education &
                                                               Culture


Emissions                                                          Community
                                       Business                    Regeneration
                                       Impact

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

                     economics




                  Business Impact


  environment                       society   24
          Governance Orientation Matrix
CCG & C




                                      25
          Governance Orientation &
CCG & C      Sustainable Profits


     A
     G
     E
     N
     C       SUSTAINABLE
             PROFIT LINE
     Y




                      STEWARDSHIP
                                     26
Centre for Corporate Governance & Citizenship




         Unique Dimensions of Bank
                Governance



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             Unique Dimensions in Bank
CCG & C             Governance
          • Bank Role in Good Governance Two-fold:
            – Governance Within
            – Governance at Clients‟
          • As Fund-Providers, Banks Generate
            Multiplier Impact on Economy
          • Confidence & Trust Key – Bank Distress,
            Failure, Dis-Repute Impacts Economy,
            Erodes Country Standing Globally
                                                      28
                Unique Dimensions in Bank
CCG & C                Governance
          • Stakeholder Dimension Very Strong in
            Banks-
            –   Depositors
            –   Borrowers
            –   Employees
            –   Community
            –   Regulators
            –   Government

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             Unique Dimensions in Bank
CCG & C             Governance
          • Banking Risk Potential
            – Internal Fraud & External Fraud, Highly
              Likely, since cash/cash equivalents closest in
              grab-chain
            – Employment Practices/ Workplace Safety
            – Product, Process, Business Practices
            – Damages to Physical Assets & IPR/Brands
            – Business Disruption Major Threat
                                                               30
             Unique Dimensions in Bank
CCG & C             Governance
          • Non-Compliance (Intentionally or
            Otherwise) with Laws, Rules, Regulations
          • Consequences of (Non) Compliance Risk in
            Banks
            – Legal or Regulatory Sanctions
            – Financial or Reputational Loss



                                                  31
             Unique Dimensions in Bank
CCG & C             Governance
          • Banks as Promoters of Good Governance
            – Prescribing Governance Standards at
              Borrowers (IFC, CalPERS, FIs)
            – Encourage by Preferential Lending Rates,
              Other Terms
            – Discourage by Adversarial Lending Rates,
              Other Terms
            – A Measure of Strengthening Protection of Bank
              Assets, Hence Good for Bank‟s Own
              Governance
                                                         32
           Some Unique Dimensions of Public
          Sector Bank Governance in Developing
CCG & C                Economies

      •   Political & Bureaucratic Interventions
      •   Banking as a Policy Instrument
      •   Supervisory Interventions, Micro-Managing
      •   Captive Resource of First Resort
      •   Suspect Independence of Supervisory Institutions
      •   Lack of Accurate/ Timely Accounting &
          Disclosure Practices
                                                             33
Centre for Corporate Governance & Citizenship




           Bank Boards, Directors, &
                 Governance


                                                34
                Some Unique Attributes &
              Responsibilities of Bank Boards
CCG & C                &Directors
          • Assume Responsibility for Effective & Efficient
            Management, through Oversight Mechanisms
          • Integrity is Indivisible; Role Model Director is the
            Most Persuasive Statement of Ethical values
          • Consider Transparency as the Norm.
            Confidentiality should not lead to Opacity
                                                       – Continued




                                                               35
              Some Unique Attributes &
           Responsibilities of Bank Boards &
CCG & C                Directors
          • Ultimate Responsibility for True and Fair
            Presentation Rests with the Board
          • Poor Leadership Infects.

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




                                                                                                  36
                Some Closing Thoughts
CCG & C

          • Right-Size the Board and its Composition
          • Complementary Skill-Sets & Financial
            Acumen Essential
          • Fit & Proper Criteria for Membership
          • More Focus on Oversight, Less on Micro-
            Management
          • Contribution as Important as Surveillance
                                                        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



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