CORPORATE GOVERNANCE IN BANKS

[Dr. Sanjiv Agarwal]

Why Corporate Governance in Banks

Banks play a vital role in the economy and the continued strength and stability of the banking system is a matter of general public interest and concern, both in regard to its linkages with the real sector and for providing a payment and settlement system. Banks are highly leveraged organizations. Banks can continue to fund their operations only so long as they enjoy the confidence of the financial markets. Depositors protection and public policy considerations of banks lead to a comprehensive regulatory and supervisory framework. It has been recognized that banks lead to a comprehensive regulatory and supervisory framework. It has been recognized that there is a need to attach importance to qualitative standards such as internal controls and risk management composition and role of the board and disclosure standards.

• Corporate Governance is one of the most critical issues that banks have to pay attention to in all earnest.
• Good corporate governance of banks is the sine qua non of a sound banking system. Corporate governance in banks is of crucial value to the various stakeholders viz, the depositors, creditors, customers, shareholders, employees and society at large.
• Adequate disclosure and transparency are two key pillars of a corporate governance framework in a bank.
• Unlike companies, there is an external dimension to the issue of corporate governance in banks. It is not just shareholders interest, but that of depositors too which is involved.
• Banks are custodians of public wealth, and there must be a system of internal checks and balances to ensure that this interest is safeguarded.

Key to Good Governance in Banks

Following actions and practices contributes to Good Governance in Banks-

(i)    Enhancing the value for all stakeholders, including depositors.

(ii)   A well understood corporate vision/mission statement codifying its values, ethos and culture.

(iii)  A broad-based board, comprising of specialist directors, with independent dispositions.

(iv)   Establishment of relevant committees of the board, with their roles clearly defined, to oversee functions of the bank in critical areas.

(v)    Setting standards for good banking practices to:

         (a)  Ensure a transparent and fair relationship between the customers and the bank.

         (b)  Institute a comprehensive risk management system.

         (c)  Proactively eliminate customer complaints and evolve a scheme for redressed of the grievances (of customers, particularly retail depositors and borrowers), and

         (d)  Institute systems and processes to ensure compliance with the statues and laws concerning banking.

(vi)  A clearly enunciated code of conduct for dealing with all the stakeholders

(vii) Effective systems of internal control, monitoring and vigilance mechanism.

Governance Committees in Banks

The governance  processes revolve around Ghosh Committee report of 1992 and Consultative Group report headed by Dr. Ganguly (2001). The need for corporate governance in banks has also been emphasised by Basel Committee on Banking Supervision (2005) where in it has recognised the benefits of bank boards establishing certain specialized committees.

In a number of countries, bank boards have found it beneficial to establish certain specialised committees to advise the board. In the interest of greater transparency and accountability, where such committees are established, their mandate, composition (including members who are considered to be independent) and working procedures should be well-defined and subject to disclosure. It may be useful to consider occasional rotation of membership and chairmanship of such committees.

According to Basel Committee on Banking Supervision, internationally, it is common for the banks to have the following committees. 

Audit Committee

The audit committee typically is responsible for, providing oversight of the bank`s internal and external auditors (except where appointed by shareholders directly); approving their appointment, compensation and dismissal; reviewing and approving audit scope and frequency; receiving audit reports; and ensuring that management is taking appropriate corrective actions in a timely manner to address control weaknesses, non-compliance with policies, laws and regulations, and other problems identified by auditors. To achieve sufficient objectivity and independence, audit  committee should be comprised of a majority of board members who are not executives of the bank. The audit committee often consists solely of independent, non-executive directors. Where executives do serve on the audit committee, to promote frank discussion it may be beneficial for the non-executive members of the audit committee to meet separately. It may also be beneficial for appointment or dismissal of internal and external auditors to be made only by a decision of the independent, non-executive audit committee members. At a minimum, the chair­man or at least one other member of the audit committee should possess expert knowledge - commensurate with the complexity of the banking organisation and duties performed - in financial reporting, accounting or auditing, and all members should have backgrounds compatible with the duties of the committee. If required, training should be imparted to such members in specialised areas such as risk management etc.

Risk Management Committee- providing oversight of senior management`s activities in managing credit, market, liquidity, operational, legal, compliance, reputational and other risks of the bank. This role should include receiving from senior management periodic information on risk exposures and risk management activities.

Compensation Committee- providing oversight of remuneration of senior management and other key personnel and ensuring that compensation is consistent with the bank`s culture, objectives, strategy and control environ­ment, as reflected in the formulation of compensation or remuneration policy.

Nominations Committee- providing assessment of board effectiveness and directing the process of renewing and replacing board members.

Governance Through Committees of the Board

Good Corporate Governance in banks can only be sustained by a knowledgeable, skilful and well informed board of directors with a proper blend of expertise, professionalism, independence and involvement.

The bank boards also require representation in the areas such as finance, information technology, human resources development, economics and persons with good track record of integrity and experience in managing industrial enterprises.

Thus, it would be observed that  corporate governance in banks, like companies is also practiced through board level  committees.

 

= = = = =