re for Corporate Governance & Citizenship

Corporate Governance, Bank Boards & Directors

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Prof N Balasubramanian

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Presentation Outline

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

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Overview of Corporate Governance

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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
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

Corporate governance involves a set of

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An 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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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 9

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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

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

Finance or the Principal-Agent Model

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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

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

Central to Corporate Governance

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Board Role & Responsibility

Leadership and Strategic Guidance Objective Judgement Independent of Management Control over the Company

Provide/ Exercise

Direct and Control the Management of the Company Be Accountable at all times to All Shareholders
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Dimensions of Board Responsibility

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

Direction involves

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Dimensions of Board Responsibility

Prescribing Codes of Conduct, Overseeing Disclosure & Communication Processes, Ensuring Control Systems to Protect Company Assets Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives

Control Involves

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Dimensions of Board Responsibility

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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Accountability Involves

Corporate Governance & Capital Market Drivers: A Conceptual Framework

REGULATION & LEGISLATION Government Legislation Stock Exchanges Listing Agreements
Shareholders/ Stakeholders

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

Listed Corporations (The Board & the Executive)

Market Operators (Rewards)

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

Market Operations, Critique & Monitoring

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Is There More to Business than just the Financial Numbers?

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An Enterprises Triple Effect on Society

Sustainable Development Waste Control Equal Opportunities Education & Culture

Emissions

nv E
Energy Use Product Life-cycle Product Value

on ir

nt e m
Business Impact

Soc ia l

Community Regeneration

Economic
Wealth Generation Productive Employment Ethical Trading

Human Rights Employee Volunteers

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The Triple-Bottomline Impact

economics

Business Impact

environment

society

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Governance Orientation Matrix

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Governance Orientation & Sustainable Profits

A G E N C Y

SUSTAINABLE PROFIT LINE

STEWARDSHIP

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Unique Dimensions of Bank Governance

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Unique Dimensions in Bank Governance

Governance Within Governance at Clients

Bank Role in Good Governance Two-fold:

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

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

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Unique Dimensions in Bank Governance

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

Banking Risk Potential

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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

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

Banks as Promoters of Good Governance

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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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Bank Boards, Directors, & Governance

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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

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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Thanks for Your Attention

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