Centre for Corporate Governance & Citizenship

Corporate Governance, Bank

Boards & Directors
______________________________
Prof N Balasubramanian

CCG & C

Presentation Outline

Overview of Corporate Governance

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

Centre for Corporate Governance & Citizenship

Overview of Corporate
Governance

CCG & C

Some 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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A 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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An OECD Definition

Corporate governance involves a set of

relationships between a companys 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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An Indian Definition

fundamental objective of corporate

governance is the enhancement of the longterm 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

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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Some 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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What 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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Some Governance Models

Finance or the Principal-Agent Model

Markets for Capital, Managerial Talent and
Corporate Control, Key determinant
In general, profit-maximisation goal is cofunctional with social-welfare-maximisation
Shareholders as Residual Claimants have
superior control rights

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

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Residual Claimant Theory

shareholders residual claimants to the firms 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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The 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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Towards 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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The 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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Board 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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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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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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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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Corporate Governance & Capital Market

Drivers: A Conceptual Framework
CCG & C

REGULATION & LEGISLATION

Regulators
(SEBI/RBI)
Lenders
(Banks/
Depositors)

Market Operators
(Rewards)

Government
Legislation

Stock Exchanges
Listing Agreements

Listed Corporations
(The Board & the Executive)

Shareholders/
Stakeholders

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

Market Operations, Critique & Monitoring

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Centre for Corporate Governance & Citizenship

Is There
More to Business
than just the
Financial Numbers?
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An Enterprises Triple Effect on Society

Sustainable Development

Equal Opportunities

Waste Control

Education &
Culture

Emissions

v
n
E

t
n
e
m
n
iro

Energy Use

Soc
Business
Impact

ial

Community
Regeneration

Human Rights

Economic

Product
Life-cycle

Employee
Volunteers
Product
Value

Wealth
Generation

Productive
Employment

Ethical
Trading

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The Triple-Bottomline Impact

economics

Business Impact

environment

society

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Governance Orientation Matrix

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A
G
E
N
C
Y

Governance Orientation &

Sustainable Profits

SUSTAINABLE
PROFIT LINE

STEWARDSHIP

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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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Unique Dimensions in Bank

Governance

CCG & C

Stakeholder Dimension Very Strong in

Banks

Depositors
Borrowers
Employees
Community
Regulators
Government
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Unique Dimensions in Bank

Governance

Banking Risk Potential

Internal Fraud & External Fraud, Highly Likely,
since cash/cash equivalents closest in grabchain
Employment Practices/ Workplace Safety
Product, Process, Business Practices
Damages to Physical Assets & IPR/Brands
Business Disruption Major Threat
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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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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 Banks Own Governance
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Some Unique Dimensions of Public

Sector Bank Governance in Developing
Economies
CCG & C

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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Some Unique Attributes &

Responsibilities of Bank Boards &
Directors
CCG & C
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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Some 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 MicroManagement
Contribution as Important as Surveillance
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Some 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

Thanks for Your Attention

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