Corporate governance is the system by which companies are directed and controlled. Corporate governance in banks is particularly important as banks are important constituent of economy. The collapse of banks results in monetary loss for the depositors. Thus it is imperative that the interests of depositors be protected. Poor corporate governance in banking can result into bank failures. It can also affect the ability of a bank to properly manage its assets and liabilities. Thus it can result into a liquidity crisis. The ‘Cadbury Committee’ was set up in May 1991 by Financial Reporting Council of London Stock Exchange which recommended various measures to raise standards in Corporate Governance. The Basel Committee on Banking Supervision published guidelines on corporate governance in banks in 1999. The OECD formed its corporate governance principles in 1999 which were again revised in 2004. An advisory group on corporate governance was formed under the chairmanship of Dr. R.H. Patil which submitted its report in March 2001. A Consultative Group was then constituted in November 2001 under the chairmanship of Dr. A.S. Ganguly.
OECD Principles of Corporate Governance
The Organization of Economic Cooperation and Development released its first set of corporate governance principles in 1999. A revised version was then released in 2004. The six OECD principles of corporate governance are:
- Ensuring the Basis for an Effective Corporate Governance Framework
The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities. Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfil their duties in a professional and objective manner
- The Rights of Shareholders and Key Ownership Functions
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.
- The Equitable Treatment of Shareholders
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights
- The Role of Stakeholders in Corporate Governance
The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises
- Disclosure and Transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company
- The Responsibilities of the Board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders
These six principles can be elaborately read at OECD site.
Corporate Governance in Banking
Given the important financial intermediation role of banks in an economy, their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors’ funds, corporate governance for banking organisations is of great importance to the international financial system and merits targeted supervisory guidance. The Basel Committee on Banking Supervision released guidance Enhancing corporate governance for banking organisations in 2006 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organisations in their countries.
- Board members should be qualified for their positions, have a clear understanding of their role in corporate governance and be able to exercise sound judgment about the affairs of the bank
- The board of directors should approve and oversee the bank’s strategic objectives and corporate values that are communicated throughout the banking company.
- The board of directors should set and enforce clear lines of responsibility and accountability throughout the organisation
- The board should ensure that there is appropriate oversight by senior management consistent with board policy
- The board and senior management should effectively utilise the work conducted by the internal audit function, external auditors, and internal control functions
- The board should ensure that compensation policies and practices are consistent with the bank’s corporate culture, long-term objectives and strategy, and control environment
- The bank should be governed in a transparent manner
- The board and senior management should understand the bank’s operational structure, including where the bank operates in jurisdictions, or through structures, that impede transparency
- A role of supervisors to promote strong corporate governance by reviewing and evaluating a bank’s implementation of the sound principles set forth
- To Promote an environment supportive of sound corporate governance
RBI Guidelines for Corporate Governance in Banks
The RBI performs the corporate governance function under the Board for Financial Supervision (BFS). The Reserve Bank had constituted at least three committees/ working groups to assess and make appropriate recommendations. These are:
- A Standing Committee on International Financial Standards and Codes was constituted to, inter alia, assess the status in India vis-à-vis the best global practices in regard to standards and codes. An Advisory Group on Corporate Governance (Chairman: Dr. R. H. Patil) made detailed assessment and gave recommendations of which those relating to PSBs is an important component
- The Advisory Group on Banking Supervision (Chairman : Mr. M.S. Verma) has also made some recommendations on corporate governance
- A Consultative Group of Directors of banks and financial institutions (Chairman Dr. A.S. Ganguly) was constituted to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency, disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective
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