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

2. CCG & C 2 Presentation Outline Overview of Corporate Governance Unique Dimensions of Banks Governance Bank Boards, Directors, & Governance

3. Centre for Corporate Governance & Citizenship 3 Overview of Corporate Governance

4. CCG & C 4 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

5. CCG & C 5 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

6. CCG & C 6 An 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

7. CCG & C 7 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

8. CCG & C 8 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.

9. CCG & C 9 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

10. CCG & C 10 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

11. CCG & C 11 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 co- functional with social-welfare-maximisation –Shareholders as Residual Claimants have superior control rights

12. CCG & C 12 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

13. CCG & C 13 Residual 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

14. CCG & C 14 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

15. CCG & C 15 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

16. CCG & C 16 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

17. CCG & C 17 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

18. CCG & C 18 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

19. CCG & C 19 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

20. CCG & C 20 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

21. CCG & C 21 Corporate Governance & Capital Market Drivers: A Conceptual Framework Listed Corporations (The Board & the Executive) Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements Market OperatorsInstitutional Investors Press/Media (Rewards) (Pension Funds/Insce Cos) (Opinion Makers) Lenders (Banks/ Depositors) Shareholders/ Stakeholders REGULATION & LEGISLATION Market Operations, Critique & Monitoring

22. Centre for Corporate Governance & Citizenship 22 Is There More to Business than just the Financial Numbers?

23. Environment Social Economic An Enterprise’s Triple Effect on Society Business Impact Sustainable Development Equal Opportunities Waste ControlEducation & Culture Emissions Community Regeneration Energy Use Human Rights Product Employee Life-cycle Volunteers Product Wealth Productive Ethical Value Generation Employment Trading

24. CCG & C 24 The Triple-Bottomline Impact Business Impact environmentsociety economics

25. CCG & C 25 Governance Orientation Matrix

26. CCG & C 26 Governance Orientation & Sustainable Profits

27. Centre for Corporate Governance & Citizenship 27 Unique Dimensions of Bank Governance

28. CCG & C 28 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

29. CCG & C 29 Unique Dimensions in Bank Governance Stakeholder Dimension Very Strong in Banks- –Depositors –Borrowers –Employees –Community –Regulators –Government

30. CCG & C 30 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

31. CCG & C 31 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

32. CCG & C 32 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

33. CCG & C 33 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

34. Centre for Corporate Governance & Citizenship 34 Bank Boards, Directors, & Governance

35. CCG & C 35 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

36. CCG & C 36 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

37. CCG & C 37 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 Micro- Management Contribution as Important as Surveillance

38. CCG & C 38 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

39. Centre for Corporate Governance & Citizenship 39 Thanks for Your Attention