Centre for Corporate Governance & Citizenship 1 Corporate Governance, Bank Boards & Directors ______________________________ Prof N Balasubramanian.

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Centre for Corporate Governance & Citizenship

Corporate Governance, Bank Boards & Directors

______________________________Prof N Balasubramanian

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CCG & CPresentation Outline

Overview of Corporate Governance

Unique Dimensions of Banks Governance

Bank Boards, Directors, & Governance

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Centre for Corporate Governance & Citizenship

Overview of Corporate Governance

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CCG & CSome Definitions

• “Corporate Governance is the system by which companies are directed and controlled…”

– Cadbury Report (UK), 1992

• “…to do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.”

• Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993

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CCG & CA Canadian Definition

• “…the process and structure..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business….”

– Where were the Directors? Guidelines for Improved Corporate Governance in Canada, TSE, 1994

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CCG & CAn OECD Definition

• “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

– Preamble to the OECD Principles of Corporate Governance, 2004

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CCG & CAn Indian Definition

• “…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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CCG & CA Gandhian Definition

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

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CCG & CSome Further Definitions

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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CCG & CWhat is Corporate Governance?

• The Manner in which a Corporation is Run– Achieving its Objectives– Transparency of its Operations– Accountability & Reporting– Good Corporate Citizenship

• The Processes & Operating Relationships that Best Achieve Organisational Goals

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CCG & CSome Governance Models

• 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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CCG & C

Exclusive Accountability toShareholders

• Risk-bearing Entrepreneurs

• Residual Claimants

• Winding-up Ranking: Last in Pecking Order

• Boards Appointed by Shareholders

• Non-congruence of Stakeholder Interests

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CCG & CResidual Claimant Theory

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

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

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CCG & CThe Stakeholder Case

• Firm Objective must be defined more widely than just shareholder-value-maximisation, since risk capital is not the only, or even the major input

• Residual Claimant Rights Not Universally Valid, eg, Circumscribed in case of pre-bankruptcy (US Chapter XI) Situations

• Other Such: Employees with Firm-specific Specialised Skills, Customers/Vendors with Substantial Stake in the Business, etc

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CCG & CTowards an Integrated Model

• 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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CCG & CThe Corporate Board

• 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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CCG & CBoard Role & Responsibility

• 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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CCG & C

Dimensions of Board Responsibility

• Direction involves– Formulation & Review of Company Policies,

Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc

– Setting Objectives & Monitoring Performance– Oversight of Acquisitions, Divestitures,

Projects, Financial and Legal Compliance, etc

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CCG & C

Dimensions of Board Responsibility

• Control Involves– Prescribing Codes of Conduct, – Overseeing Disclosure & Communication

Processes,– Ensuring Control Systems to Protect Company

Assets– Reviewing Performance & Realigning Action

Initiatives to Achieve Company Objectives

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CCG & C

Dimensions of Board Responsibility

• Accountability Involves– Creating, Protecting and Enhancing Company

Wealth and Resources– Timely and Transparent Reporting– Good Corporate Citizenry including Discharge

of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal

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CCG & C

Corporate Governance & Capital Market Drivers: A Conceptual Framework

Listed Corporations(The Board & the Executive)

Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements

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

Lenders(Banks/

Depositors)

Shareholders/Stakeholders

REGULATION & LEGISLATION

Market Operations, Critique & Monitoring

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Centre for Corporate Governance & Citizenship

Is ThereMore to Business

than just theFinancial Numbers?

Environmen

t Social

Economic

An Enterprise’s Triple Effect on Society

BusinessImpact

Sustainable Development Equal Opportunities

Waste Control Education & Culture

Emissions Community Regeneration

Energy Use Human Rights

Product EmployeeLife-cycle Volunteers

Product Wealth Productive Ethical Value Generation Employment Trading

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CCG & CThe Triple-Bottomline Impact

Business Impact

environment society

economics

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CCG & CGovernance Orientation Matrix

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CCG & C

Governance Orientation & Sustainable Profits

A G E N C Y

STEWARDSHIP

SUSTAINABLE PROFIT LINE

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Centre for Corporate Governance & Citizenship

Unique Dimensions of Bank Governance

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CCG & C

Unique Dimensions in Bank Governance

• Bank Role in Good Governance Two-fold:– Governance Within– Governance at Clients’

• As Fund-Providers, Banks Generate Multiplier Impact on Economy

• Confidence & Trust Key – Bank Distress, Failure, Dis-Repute Impacts Economy, Erodes Country Standing Globally

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CCG & C

Unique Dimensions in Bank Governance

• Stakeholder Dimension Very Strong in Banks-– Depositors– Borrowers– Employees– Community– Regulators– Government

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CCG & C

Unique Dimensions in Bank Governance

• Banking Risk Potential– Internal Fraud & External Fraud, Highly

Likely, since cash/cash equivalents closest in grab-chain

– Employment Practices/ Workplace Safety– Product, Process, Business Practices– Damages to Physical Assets & IPR/Brands– Business Disruption Major Threat

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CCG & C

Unique Dimensions in Bank Governance

• Non-Compliance (Intentionally or Otherwise) with Laws, Rules, Regulations

• Consequences of (Non) Compliance Risk in Banks– Legal or Regulatory Sanctions– Financial or Reputational Loss

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CCG & C

Unique Dimensions in Bank Governance

• Banks as Promoters of Good Governance– Prescribing Governance Standards at Borrowers

(IFC, CalPERS, FIs)– Encourage by Preferential Lending Rates, Other

Terms– Discourage by Adversarial Lending Rates, Other

Terms– A Measure of Strengthening Protection of Bank

Assets, Hence Good for Bank’s Own Governance

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CCG & C

Some Unique Dimensions of Public Sector Bank Governance in Developing

Economies

• Political & Bureaucratic Interventions• Banking as a Policy Instrument• Supervisory Interventions, Micro-Managing • Captive Resource of First Resort• Suspect Independence of Supervisory Institutions• Lack of Accurate/ Timely Accounting &

Disclosure Practices

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Centre for Corporate Governance & Citizenship

Bank Boards, Directors, & Governance

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CCG & C

Some Unique Attributes & Responsibilities of Bank Boards

&Directors

• Assume Responsibility for Effective & Efficient Management, through Oversight Mechanisms

• Integrity is Indivisible; Role Model Director is the Most Persuasive Statement of Ethical values

• Consider Transparency as the Norm. Confidentiality should not lead to Opacity

– Continued

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CCG & C

Some Unique Attributes & Responsibilities of Bank Boards &

Directors

• Ultimate Responsibility for True and Fair Presentation Rests with the Board

• Poor Leadership Infects.

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

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CCG & CSome Closing Thoughts

• Right-Size the Board and its Composition

• Complementary Skill-Sets & Financial Acumen Essential

• Fit & Proper Criteria for Membership

• More Focus on Oversight, Less on Micro-Management

• Contribution as Important as Surveillance

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CCG & CSome Closing Thoughts

• Minimise Conflict of Interest Potential

• Respect Minority / External Shareholders’ Rights (Listed Public Sector Banks)

• Bank Boards to Go That Extra Mile: Go Beyond What is Prescribed to What is Appropriate – That Way lies Greater Valuations & Better Reputations

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Centre for Corporate Governance & Citizenship

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