Corporate Governance in Banks

CORPORATE GOVERNANCE IN BANKS
I. EXECUTIVE SUMMARY
Corporate governance mechanisms differ as between banks. The

governance mechanism of each bank is shaped by its political,
economic and social history as also by its legal framework. Despite
the differences in shareholder philosophies across all banks, good
governance mechanisms need to be encouraged among all
corporate and non-corporate entities.
Key elements of good corporate governance principles include

honesty, trust and integrity, openness, performance orientation,
responsibility and accountability, mutual respect, and commitment to
the organization.
Both government and RBI need to bring about significant changes in

the corporate governance mechanism adopted by banks and other
financial intermediaries. As a matter of principle, RBI should not
appoint its nominees on the boards of banks to avoid conflict of
interests. Although it is not feasible to have a free market for take-
over in respect banks there is a strong case for recognizing the
rights of the shareholders, especially of public sector banks and
financial institutions. Today the common shareholders are denied
such basic rights as adopting annual accounts or approving
dividends. They cannot also influence composition of the boards in
any way.
As a part of strengthening the functioning of their boards, banks

should appoint a risk management committee of the board in
addition to the three other board committees viz. audit, remuneration
K. C. COLLEGE Page 1
and appointment committees. Since banks and institutions are

highly leveraged entities their failure would pose large risks to the
entire economic system. Their corporate governance mechanisms
should, therefore, be relatively much tighter.
Banks should have clear strategies for guiding their operations and
establishing accountability for executing them. Banks also maintain
high degree of transparency in regard to disclosure of information.
Of importance principles of corporate governance is how directors

and management develop a model of governance that aligns the
values of the corporate participants and then evaluate this model
periodically for its effectiveness. In particular, senior executives
should conduct themselves honestly and ethically, especially
concerning actual or apparent conflicts of interest, and disclosure in
financial reports. This all principles of corporate governance are
explained in this project.
Parties involved in corporate governance include the regulatory

body (e.g. the Chief Executive Officer, the board of directors,
management and shareholders). Other stakeholders who take part
include suppliers, employees, creditors, customers and the
community at large.
Impact has in corporate governance and its mechanisms and

controls are explained below.
In mechanisms and controls: - internal corporate governance

controls monitor activities and then take corrective action to
accomplish organisational goals and External corporate governance
controls encompass the controls external stakeholders exercise
over the organisation.
For the co-operative banks in India these are challenging times are
explained in this. The purpose and objectives of co-operatives
provide the framework for co-operative corporate governance.
Roles and measure taken by regularity bodies towards corporate

governance are also explained.
Indian scenario in corporate governance how they do and how they

are ranks to their services offered are explained in this project.
One case study or live example is taken of ALLAHABAD BANK how

they performed in corporate governance in detailed is explained in
this project.
Moreover, it has guided me to understand this corporate

governance in banks and also increase my knowledge to such
extent. I hope it will prove beneficial to me in developing my further
career.
II. INTRODUCTION & DEFINITION
Corporate governance is the set of processes, customs, policies, laws

and institutions affecting the way a corporation is directed, administered
or controlled. Corporate governance also includes the relationships
among the many shareholders involved and the goals for which the
corporation is governed. The principal stakeholders are the
shareholders, management and the board of directors. Other
stakeholders include employees, suppliers, customers, banks and other
lenders, regulators, the environment and the community at large.
Corporate governance is a multi-faceted subject. An important theme of

corporate governance is to ensure the accountability of certain
individuals in an organization through mechanisms that try to reduce or
eliminate the principal-agent problem. With a strong emphasis on
shareholders welfare, a related but separate thread of discussions
focuses on the impact of a corporate governance system in economic
efficiency. There are yet other aspects to the corporate governance
subject, such as the stakeholder view and the corporate governance
models around the world
―CORPORATE GOVERNANCE is the system by which companies are

directed and controlled by the management in the best interest of the
shareholders and others ensuring greater transparency and better and
timely financial reporting. The Board of Directors are responsible for
governance of their companies.‖
―CORPORATE GOVERNANCE is needed to create a corporate culture

of consciousness, transparency and openness. It refers to combination
of laws, rules, regulations, procedures and voluntary practices to enable
the companies to maximize the shareholders long-term value. It should

lead to increasing customer satisfaction, shareholder value and wealth.‖
―Enough law exists, but corporate governance is considered as one of

the important instrument for investor‘s protection and was rated high in
the priority on the SEBI‘s agenda for investor‘s protection.‖
The basic objective of Corporate Governance would be "enhancement of

the long-term shareholders value while at the same time protecting the
interests of other stakeholders."
3 key constituents of Corporate Governance are:
 Shareholders  Board of Directors  Management
Steps taken by SEBI for strengthening corporate governance through

the amendment of the listing agreement are:
Strengthening of disclosure norms for IPOs
Providing information in directors‘ report for utilization and variation of

funds of the company including the cash flow and fund flow statements
in the annual reports.
Declaration of unaudited quarterly results;
Mandatory appointment of compliance officer for monitoring the share

transfer process and ensuring compliance with various rules,
regulations;
Timely disclosure of material and price sensitive information including

details of all material events having a bearing on the performance of the
company;
Dispatch of one copy of complete balance sheet to every household and

abridged balance sheet to all shareholders.
Issue of guidelines for preferential allotment of shares at market related

prices and
Issue of rules and regulations to ensure a fair and transparent

framework for takeovers and substantial acquisition of shares
In A Board Culture of Corporate Governance business author

Gabrielle O'Donovan defines corporate governance as 'an internal
system encompassing policies, processes and people, which serves the
needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity
and integrity. Sound corporate governance is reliant on external
marketplace commitment and legislation, plus a healthy board culture
which safeguards policies and processes'.
O'Donovan goes on to say that 'the perceived quality of a company's

corporate governance can influence its share price as well as the cost of
raising capital. Quality is determined by the financial markets, legislation
and other external market forces plus the international organisational
environment; how policies and processes are implemented and how
people are led. External forces are, to a large extent, outside the circle of
control of any board. The internal environment is quite a different matter,
and offers companies the opportunity to differentiate from competitors
through their board culture. To date, too much of corporate governance
debate has centered on legislative policy, to deter fraudulent activities
and transparency policy which misleads executives to treat the
symptoms and not the cause.'
It is a system of structuring, operating and controlling a company with a

view to achieve long term strategic goals to satisfy shareholders,
creditors, employees, customers and suppliers, and complying with the
legal and regulatory requirements, apart from meeting environmental

and local community needs.
Report of SEBI committee (India) on Corporate Governance defines

corporate governance as the acceptance by management of the
inalienable rights of shareholders as the true owners of the corporation
and of their own role as trustees on behalf of the shareholders. It is
about commitment to values, about ethical business conduct and about
making a distinction between personal & corporate funds in the
management of a company.‖
The definition is drawn from the Gandhian principle of trusteeship and

the Directive Principles of the Indian Constitution. Corporate Governance
is viewed as ethics and a moral duty.
III. HISTORY
In the 19th century, state corporation laws enhanced the rights of

corporate boards to govern without unanimous consent of shareholders
in exchange for statutory benefits like appraisal rights, to make corporate
governance more efficient. Since that time, and because most large
publicly traded corporations in the US are incorporated under corporate
administration friendly Delaware law, and because the US's wealth has
been increasingly securitized into various corporate entities and
institutions, the rights of individual owners and shareholders have
become increasingly derivative and dissipated. The concerns of
shareholders over administration pay and stock losses periodically has
led to more frequent calls for corporate governance reforms.
In the 20th century in the immediate aftermath of the Wall Street Crash
of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and
Gardiner C. Means pondered on the changing role of the modern
corporation in society. Berle and Means' monograph "The Modern
Corporation and Private Property" (1932, Macmillan) continues to have a
profound influence on the conception of corporate governance in
scholarly debates today.
Since the late 1970‘s, corporate governance has been the subject of
significant debate in the U.S. and around the globe. Bold, broad efforts
to reform corporate governance have been driven, in part, by the needs
and desires of shareowners to exercise their rights of corporate
ownership and to increase the value of their shares and, therefore,
wealth. Over the past three decades, corporate directors‘ duties have
expanded greatly beyond their traditional legal responsibility of duty of
loyalty to the corporation and its shareowners.
In the first half of the 1990s, the issue of corporate governance in the
U.S. received considerable press attention due to the wave of CEO
dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. CALPERS led
a wave of institutional shareholder activism (something only very rarely
seen before), as a way of ensuring that corporate value would not be
destroyed by the now traditionally cozy relationships between the CEO
and the board of directors (e.g., by the unrestrained issuance of stock
options, not infrequently back dated).
In 1997, the East Asian Financial Crisis saw the economies of Thailand,
Indonesia, South Korea, Malaysia and The Philippines severely affected
by the exit of foreign capital after property assets collapsed. The lack of
corporate governance mechanisms in these countries highlighted the
weaknesses of the institutions in their economies.
In the early 2000s, the massive bankruptcies (and criminal malfeasance)

of Enron and Worldcom, as well as lesser corporate debacles, such as
Adelphia Communications, AOL, Arthur Andersen, Global Crossing,
Tyco, and, more recently, Fannie Mae and Freddie Mac, led to increased
shareholder and governmental interest in corporate governance. This
culminated in the passage of the Sarbanes-Oxley Act of 2002. But, since
then, the stock market has greatly recovered, and shareholder zeal has
waned accordingly.
IV. PRINCIPLES OF CORPORATES GOVERNANCE
Key elements of good corporate governance principles include honesty,

trust and integrity, openness, performance orientation, responsibility and
accountability, mutual respect, and commitment to the organization.
Of importance is how directors and management develop a model of

governance that aligns the values of the corporate participants and then
evaluate this model periodically for its effectiveness. In particular, senior
executives should conduct themselves honestly and ethically, especially
concerning actual or apparent conflicts of interest, and disclosure in
financial reports.
Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: Organizations

should respect the rights of shareholders and help shareholders to
exercise those rights. They can help shareholders exercise their rights
by effectively communicating information that is understandable and
accessible and encouraging shareholders to participate in general
meetings.
Interests of other stakeholders: Organizations should recognize that

they have legal and other obligations to all legitimate stakeholders.
Role and responsibilities of the board: The board needs a range of

skills and understanding to be able to deal with various business issues
and have the ability to review and challenge management
performance. It needs to be of sufficient size and have an appropriate
level of commitment to fulfill its responsibilities and duties. There are
issues about the appropriate mix of executive and non-executive
directors. The key roles of chairperson and CEO should not be held by
the same person.
Integrity and ethical behaviour: Ethical and responsible decision

making is not only important for public relations, but it is also a
necessary element in risk management and avoiding lawsuits.
Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making. It is
important to understand, though, that reliance by a company on the
integrity and ethics of individuals is bound to eventual failure. Because
of this, many organizations establish Compliance and Ethics Programs
to minimize the risk that the firm steps outside of ethical and legal
boundaries.
Disclosure and transparency: Organizations should clarify and make

publicly known the roles and responsibilities of board and management
to provide shareholders with a level of accountability. They should also
implement procedures to independently verify and safeguard the
integrity of the company's financial reporting. Disclosure of material
matters concerning the organization should be timely and balanced to
ensure that all investors have access to clear, factual information.
Issues involving corporate governance principles include:
internal controls and the independence of the entity's auditors
oversight and management of risk
oversight of the preparation of the entity's financial statements
review of the compensation arrangements for the chief executive

officer and other senior executives
the resources made available to directors in carrying out their duties
the way in which individuals are nominated for positions on the

board
dividend policy
―Corporate Governance" despite some feeble attempts from various

quarters has remained ambiguous and often misunderstood phrase.
For Quite some time it was confined to only corporate management. It
is not so. It is something much broader for it must include a fair,
efficient and transparent administration to meet certain well defined
objectives. Corporate governance also must go beyond law. The
quantity, quality and frequency of financial and managerial disclosure,
the degree and extent to which the board of Director (BOD) exercise
their trustee responsibilities and the commitment to run transparent
organization- these should evolve due to interplay of many factors and
the role played by more progressive elements within the corporate
sector. In India, a strident demand for evolving a code of good
practices by the corporate themselves is emerging.
V. ROLE OF INSTITUTIONAL INVESTOR:-
Many years ago, worldwide, buyers and sellers of corporation stocks

were individual investors, such as wealthy businessmen or families, who
often had a vested, personal and emotional interest in the corporations
whose shares they owned. Over time, markets have become largely
institutionalized: buyers and sellers are largely institutions (e.g., pension
funds, insurance companies, mutual funds, hedge funds, investor
groups, and banks).
The rise of the institutional investor has brought with it some increase of
professional diligence which has tended to improve regulation of the
stock market (but not necessarily in the interest of the small investor or
even of the naïve institutions, of which there are many). Note that this
process occurred simultaneously with the direct growth of individuals
investing indirectly in the market (for example individuals have twice as
much money in mutual funds as they do in bank accounts). In mutual
funds, however this growth occurred primarily by way of individuals
turning over their funds to 'professionals' to manage. In this way, the
majority of investment now is described as "institutional investment"
even though the vast majority of the funds are for the benefit of
individual investors.
Program trading, the hallmark of institutional trading, is averaging over

60% a day in 2007.
Unfortunately, there has been a concurrent lapse in the oversight of

large corporations, which are now almost all owned by large institutions.
The Board of Directors of large corporations used to be chosen by the
principal shareholders, who usually had an emotional as well as
monetary investment in the company (think Ford), and the Board
diligently kept an eye on the company and its principal executives (they
usually hired and fired the President, or Chief executive officer— CEO).
Nowadays, if the owning institutions don't like what the President/CEO is

doing and they feel that firing them will likely be costly (think "golden
handshake") and/or time consuming, they will simply sell out their
interest. The Board is now mostly chosen by the President/CEO, and
may be made up primarily of their friends and associates, such as
officers of the corporation or business colleagues. Since the
(institutional) shareholders rarely object, the President/CEO generally

takes the Chair of the Board position for his/herself (which makes it
much more difficult for the institutional owners to "fire" him/her).
Occasionally, but rarely, institutional investors support shareholder
resolutions on such matters as executive pay and anti-takeover
measures.
Finally, the largest pools of invested money (such as the mutual fund
'Vanguard 500', or the largest investment management firm for
corporations, State Street Corp.) are designed simply to invest in a very
large number of different companies with sufficient liquidity, based on
the idea that this strategy will largely eliminate individual company
financial or other risk and, therefore, these investors have even less
interest in a particular company's governance.
Since the marked rise in the use of Internet transactions from the 1990s,
both individual and professional stock investors around the world have
emerged as a potential new kind of major (short term) force in the direct
or indirect ownership of corporations and in the markets: the casual
participant. Even as the purchase of individual shares in any one
corporation by individual investors diminishes, the sale of derivatives
(e.g., exchange-traded funds (ETFs), Stock market index options, etc.)
has soared. So, the interests of most investors are now increasingly
rarely tied to the fortunes of individual corporations.
But, the ownership of stocks in markets around the world varies; for
example, the majority of the shares in the Japanese market are held by
financial companies and industrial corporations (there is a large and
deliberate amount of cross-holding among Japanese keiretsu
corporations and within S. Korean chaebol 'groups'), whereas stock in
the USA or the UK and Europe are much more broadly owned, often still
by large individual investors.
VI. PARTIES TO CORPORATES GOVERNANCE
Parties involved in corporate governance include the regulatory body

(e.g. the Chief Executive Officer, the board of directors, management
and shareholders). Other stakeholders who take part include suppliers,
employees, creditors, customers and the community at large.
In corporations, the shareholder delegates decision rights to the

manager to act in the principal's best interests. This separation of
ownership from control implies a loss of effective control by shareholders
over managerial decisions. Partly as a result of this separation between
the two parties, a system of corporate governance controls is
implemented to assist in aligning the incentives of managers with those
of shareholders. With the significant increase in equity holdings of
investors, there has been an opportunity for a reversal of the separation
of ownership and control problems because ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is

their responsibility to endorse the organisation's strategy, develop
directional policy, appoint, supervise and remunerate senior executives
and to ensure accountability of the organisation to its owners and
authorities.
The Company Secretary, known as a Corporate Secretary in the US and

often referred to as a Chartered Secretary if qualified by the Institute of
Chartered Secretaries and Administrators (ICSA), is a high ranking
professional who is trained to uphold the highest standards of corporate
governance, effective operations, compliance and administration.
All parties to corporate governance have an interest, whether direct or

indirect, in the effective performance of the organisation. Directors,
workers and management receive salaries, benefits and reputation,
while shareholders receive capital return. Customers receive goods and
services; suppliers receive compensation for their goods or services. In
return these individuals provide value in the form of natural, human,
social and other forms of capital.
A key factor in an individual's decision to participate in an organisation

e.g. through providing financial capital and trust that they will receive a
fair share of the organisational returns. If some parties are receiving
more than their fair return then participants may choose to not continue
participating leading to organizational collapse.
VII. IMPACT
The positive effect of good corporate governance on different

stakeholders ultimately is a strengthened economy, and hence good
corporate governance is a tool for socio-economic development. After
East Asian economies collapsed in the late 20th century, the World
Bank's president warned those countries, that for sustainable
development, corporate governance has to be good. Economic health of
a nation depends substantially on how sound and ethical businesses
are.
VIII. MECHANISMS AND CONTROLS
Corporate governance mechanisms and controls are designed to reduce

the inefficiencies that arise from moral hazard and adverse selection. For
example, to monitor managers' behaviour, an independent third party
(the auditor) attests the accuracy of information provided by
management to investors. An ideal control system should regulate both
motivation and ability.
A. INTERNAL CORPORATES GOVERNANCE CONTROLS:-

Internal corporate governance controls monitor activities and then
take corrective action to accomplish organisational goals. Examples
include:
Monitoring by the board of directors: The board of directors,

with its legal authority to hire, fire and compensate top
management, safeguards invested capital. Regular board
meetings allow potential problems to be identified, discussed
and avoided. Whilst non-executive directors are thought to be
more independent, they may not always result in more effective
corporate governance and may not increase performance.
Different board structures are optimal for different firms.
Moreover, the ability of the board to monitor the firm's
executives is a function of its access to information. Executive
directors possess superior knowledge of the decision-making
process and therefore evaluate top management on the basis of
the quality of its decisions that lead to financial performance
outcomes, ex ante. It could be argued, therefore, that executive
directors look beyond the financial criteria.
Remuneration:-Performance-based remuneration is designed to

relate some proportion of salary to individual performance. It
may be in the form of cash or non-cash payments such as
shares and share options, superannuation or other benefits.
Such incentive schemes, however, are reactive in the sense
that they provide no mechanism for preventing mistakes or
opportunistic behaviour, and can elicit myopic behaviour.
B. EXTERNAL CORPORATES GOVERNANCE CONTROLS

External corporate governance controls encompass the controls
external stakeholders exercise over the organisation. Examples
include:
competition
debt covenants
demand for and assessment of performance information

(especially financial statements)
government regulations
managerial labour market
media pressure
takeovers
IX. SYSTEMATIC PROBLEMS OF CORPORATES GOVERNANCE
Demand for information: A barrier to shareholders using good

information is the cost of processing it, especially to a small shareholder.
The traditional answer to this problem is the efficient market hypothesis
(in finance, the efficient market hypothesis (EMH) asserts that financial
markets are efficient), which suggests that the shareholder will free ride
on the judgments of larger professional investors.
Monitoring costs: In order to influence the directors, the

shareholders must combine with others to form a significant voting
group which can pose a real threat of carrying resolutions or
appointing directors at a general meeting.
Supply of accounting information: Financial accounts form a crucial

link in enabling providers of finance to monitor directors.
Imperfections in the financial reporting process will cause
imperfections in the effectiveness of corporate governance. This
should, ideally, be corrected by the working of the external auditing
process.
X. CORPORATE GOVERNANCE IN EMERGING MARKET BANKS
Contrary to popular belief, corporate governance (CG) does exist in

emerging markets. While it is true that the equivalent of the Sarbanes-
Oxley Act (SOX) is not being enforced on a wide scale in any emerging
market, notable improvements are being made, at least in the banks,
where development of good CG often runs in tandem with progress in
risk management controls and regulation. It is important to note, that,
while good governance in itself does not prevent fraud, it should make it
easier to detect.
CG requires a separation of function between the board, executive

management and audit, and implementation is key. The independence
and authority of each function needs to exist in more than only legal
form. Progress is seen in implementation in most emerging markets over
the past two years. However, economic conditions have been relatively
benign, and the robustness of new CG in practice will only be tested in a
downturn. Weak CG practices at any company are a negative rating
factor and may serve as a cap on how high a rating can go, however
strong its financial profile may seem.
The degree of governance in companies in a country goes hand-in-hand

with the level of political governance. The identification and separation of
powers and responsibilities between three branches of government
create the necessary framework for CG at the company level to function.
The degree of political governance will, to a great extent, be reflected in
the ability of a market economy and companies in it to develop. Before
assessing the degree of CG at an individual bank, it is important to
analyse the checks and balances that exist and those still under
development in the banking system in question.
Oversight of risk management by a bank regulator is highly influential in

a bank's governance structure. For CG to be effective, a banking system
requires the following:
• A functioning legal system;
• Independent regulators;
• Meaningful fines or sanctions and/or market forces that challenge and

punish banks that do not play by the rules.
At all three tiers of governance (political, banking system, bank), the

weaknesses that are most prevalent in emerging markets are:
• A high level of related party influence (a consequence of wealth

and power being concentrated in only a few hands);
• An absence of challenges to the status quo due to lack of

experience and expertise.
State ownership of the banks and/or direct influence on their operations

is a major issue that can taint governance at all levels.
XI. CORPORATE GOVERNANCE IN CO-OPERATIVE BANKS
For the co-operative banks in India these are challenging times. Never
before has the need for restoring customer confidence in the
cooperative sector been felt so much. Never before has the issue of
good governance in the co-operative banks assumed such criticality.
The literature on corporate governance in its wider connotation covers a
range of issues such as protection of shareholders‘ rights, enhancing
shareholders‘ value, Board issues including its composition and role,
disclosure requirements, integrity of accounting practices, the control
systems, in particular internal control systems. Corporate governance
especially in the co-operative sector has come into sharp focus because
more and more co-operative banks in India, both in urban and rural
areas, have experienced grave problems in recent times which have in
a way threatened the profile and identity of the entire co-operative
system. These problems include mismanagement, financial impropriety,
poor investment decisions and the growing distance between members
and their co-operative society.
The purpose and objectives of co-operatives provide the framework for

co-operative corporate governance. Co- operatives are organised
groups of people and jointly managed and democratically controlled
enterprises. They exist to serve their members and depositors and
produce benefits for them. Co-operative corporate governance is
therefore about ensuring co-operative relevance and performance by
connecting members, management and the employees to the policy,
strategy and decision-making processes.
XII. GENESIS OF CORPORATE GOVERNANCE:-

It will certainly not be out of place here to recount how issues relating to
corporate governance and corporate control have come to the fore the
world over in the recent past. The seeds of modern corporate
governance were probably sown by the Watergate scandal in the USA.
Subsequent investigations by US regulatory and legislative bodies
highlighted control failures that had allowed several major corporations
to make illegal political contributions and bribe government officials.
While these developments in the US stimulated debate in the UK, a
spate of scandals and collapses in that country in the late 1980s and
early 1990s led shareholders and banks to worry about their
investments. Several companies in UK which saw explosive growth in
earnings in the ‘80s ended the decade in a memorably disastrous
manner. Importantly, such spectacular corporate failures arose primarily
out of poorly managed business practices.
This debate was driven partly by the subsequent enquiries into

corporate governance (most notably the Cadbury Report) and partly by
extensive changes in corporate structure. In May 1991, the London
Stock Exchange set up a Committee under the chairmanship of Sir
Arian Cadbury to help raise the standards of corporate governance and
the level of confidence in financial reporting and auditing by setting out
clearly what it sees as the respective responsibilities of those involved
and what it believes is expected of them. The Committee investigated
accountability of the Board of Directors to shareholders and to the
society. It submitted its report and the associated ‗code of best
practices‘ in December 1992 wherein it spelt out the methods of
governance needed to achieve a balance between the essential powers
of the Board of Directors and their proper accountability. Being a
pioneering report on corporate governance, it would perhaps be in order
to make a brief reference to its recommendations which are in the
nature of guidelines relating to, among other things, the Board of
Directors and Reporting & Control.
The Cadbury Report stipulated that the Board of Directors should meet
regularly, retain full and effective control over the company and monitor
the executive management. There should be a clearly accepted division
of responsibilities at the head of the company which will ensure balance
of power and authority so that no individual has unfettered powers of
decision. The Board should have a formal schedule of matters
specifically reserved to it for decisions to ensure that the direction and
control of the company is firmly in its hands. There should also be an
agreed procedure for Directors in the furtherance of their duties to take
independent professional advice.
The Cadbury Report generated a lot of interest in India. The issue of

corporate governance was studied in depth and dealt with by the
Confederation of Indian Industries (CII), Associated Chamber of
Commerce and Industry (ASSOCHAM) and Securities and Exchange
Board of India (SEBI). These studies reinforced the Cadbury Report‘s
focus on the crucial role of the Board and the need for it to observe a
Code of Best Practices. Co-operative banks as corporate entities
possess certain unique characteristics. Paradoxical as it may sound,
evolution of co-operatives in India as peoples‘ organisations rather than
business enterprises adopting professional managerial systems has
hindered growth of professionalism in co-operatives and proved to be a
neglected area in their evolution.
XIII. ROLE OF THE GOVERNMENT AND THE REGULATOR
Regulators are external pressure points for good corporate governance.

Mere compliance with regulatory requirements is not however an ideal
situation in itself. In fact, mere compliance with regulatory pressures is a
minimum requirement of good corporate governance and what are
required are internal pressures, peer pressures and market pressures to
reach higher than minimum standards prescribed by regulatory
agencies. RBI‘s approach to regulation in recent times has some
features that would enhance the need for and usefulness of good
corporate governance in the co-operative sector. The transparency
aspect has been emphasized by expanding the coverage of information
and timeliness of such information and analytical content. Importantly,
deregulation and operational freedom must go hand in hand with
operational transparency. In fact, the RBI has made it clear that with the
abolition of minimum lending rates for co-operative banks, it will be
incumbent on these banks to make the interest rates charged by them
transparent and known to all customers. Banks have therefore been
asked to publish the minimum and maximum interest rates charged by
them and display this information in every branch. Disclosure and
transparency are thus key pillars of a corporate governance framework
because they provide all the stakeholders with the information
necessary to judge whether their interests are being taken care of. We
in RBI see transparency and disclosure as an important adjunct to the
supervisory process as they facilitate market discipline of banks.
Another area which requires focused attention is greater transparency in

the balance sheets of co-operative banks. The commercial banks in
India are now required to disclose accounting ratios relating to operating
profit, return on assets, business per employee, NPAs, etc. as also
maturity profile of loans, advances, investments, borrowings and

deposits. The issue before us now is how to adapt similar disclosures
suitably to be captured in the audit reports of co-operative banks. RBI
had advised Registrars of Co-operative Societies of the State
Governments in 1996 that the balance sheet and profit & loss account
should be prepared based on prudential norms introduced as a sequel to
Financial Sector Reforms and that the statutory/departmental auditors of
co-operative banks should look into the compliance with these norms.
Auditors are therefore expected to be well-versed with all aspects of the
new guidelines issued by RBI and ensure that the profit & loss account
and balance sheet of cooperative banks are prepared in a transparent
manner and reflect the true state of affairs. Auditors should also ensure
that other necessary statutory provisions and appropriations out of
profits are made as required in terms of Co-operative Societies Act /
Rules of the state concerned and the bye-laws of the respective
institutions.
XIV. BOARD OF DIRECTORS AND THEIR COMMITTEES
At the initiative of the RBI, a consultative group, aimed at strengthening

corporate governance in banks, headed by Dr. Ashok Ganguli was set
up to review the supervisory role of Board of banks. The
recommendations include the role and responsibility of independent
non-executive directors, qualification and other eligibility criteria for
appointment of non-executive directors, training the directors and
keeping them current with the latest developments. Private sector
banks, etc. it is unanimously accepted that the most crucial aspect of
corporate governance is that the organisation have a professional board
which can drive the organisation through its ability to perform its
responsibility of meeting regularly, retaining full and effective control
over the company and monitor the executive management. Some of the
important recommendations on the constitution of the Board are:
Qualification and other eligibility criteria for appointment of non-

executive directors,
Defining role and responsibilities of directors including the
recommended ―Deed of Covenant‖ to be executed by the bank and
the directors in conduct of the board functions.
Training the directors and keeping them abreast of the latest
developments.
XV. MEASURES TAKEN BY BANKS TOWARDS IMPLEMENTATION

OF BEST PRACTICES
Prudential norms in terms of income recognition, asset classification,

and capital adequacy have been well assimilated by the Indian banking
system. In keeping with the international best practice, starting 31st
March 2004, banks have adopted 90 days norm for classification of
NPAs. Also, norms governing provisioning requirements in respect of
doubtful assets have been made more stringent in a phased manner.
Beginning 2005, banks will be required to set aside capital charge for
market risk on their trading portfolio of government investments, which
was earlier virtually exempt from market risk requirement.
Capital Adequacy: All the Indian banks barring one today are well
above the stipulated benchmark of 9 per cent and remain in a state of
preparedness to achieve the best standards of CRAR as soon as the
new Basel 2 norms are made operational. In fact, as of 31st March 2004,
banking system as a whole had a CRAR close to 13 per cent.
On the Income Recognition Front, there is complete uniformity now in

the banking industry and the system therefore ensures responsibility
and accountability on the part of the management in proper accounting
of income as well as loan impairment.
ALM and Risk Management Practices – At the initiative of the
regulators, banks were quickly required to address the need for Asset
Liability Management followed by risk management practices. Both
these are critical areas for an effective oversight by the Board and the
senior management which are implemented by the Indian banking
system on a tight time frame and the implementation review by RBI.
These steps have enabled banks to understand measure and anticipate
the impact of the interest rate risk and liquidity risk, which in deregulated
environment is gaining importance.
XVI. MEASURES TAKEN BY RE G U L AT O R TOWARDS

CORPORATE GOVERNANCE
Reserve Bank of India has taken various steps furthering corporate

governance in the Indian Banking System. These can broadly be
classified into the following three categories:
A. Transparency
B. Off-site surveillance
C. Prompt corrective action Transparency and
D. disclosure standards
Transparency and accounting standards in India have been enhanced
to align with international best practices. However, there are many gaps
in the disclosures in India vis-à-vis the international standards,
particularly in the area of risk management strategies and risk
parameters, risk concentrations, performance measures, component of
capital structure, etc. Hence, the disclosure standards need to be further
broad-based in consonance with improvements in the capability of
market players to analyse the information objectively.
The off-site surveillance mechanism is also active in monitoring the

movement of assets, its impact on capital adequacy and overall
efficiency and adequacy of managerial practices in banks. RBI also
brings out the periodic data on ―Peer Group Comparison‖ on critical
ratios to maintain peer pressure for better performance and governance.
Prompt corrective action has been adopted by RBI as a part of core

principles for effective banking supervision. As against a single trigger
point based on capita adequacy normally adopted by many countries,

Reserve Bank in keeping with Indian conditions have set two more
trigger points namely Non-Performing Assets (NPA) and Return on
Assets (ROA) as proxies for asset quality and profitability. These trigger
points will enable the intervention of regulator through a set of
mandatory action to stem further deterioration in the health of banks
showing signs of weakness.
XVII. THE INDIAN SCENARIO
CG among Indian banks is discussed across three broad categories -

the state-owned banks, the "new" private sector banks (i.e. those that
were given a banking licence in 1993), and the "old" private sector
banks. At the risk of over simplifying, Fitch has drawn conclusions
regarding banks in each of these groups, although standards of
individual banks might be better or lower than the "median" governance
practices discussed.
There are 27 state-owned banks in India, accounting for 75% of

banking-system assets. Government ownership varies from 51%-100%.
The state-owned banks are governed by the Banking (Acquisition and
Transfer of Undertakings) Act, which gives sweeping powers to the
government. These banks have begun to list their equity on the domestic
bourses, and have needed to comply with disclosure and good CG
guidelines stipulated by the stock exchanges, which focus on the rights
of minority shareholders. It is worth mentioning that boards, including
executive chairmen and "independent" directors, are still determined by
the government; and power is concentrated with the executive chairman,
who is generally appointed on account of seniority.
The signs are that intervention by the state in state-owned banks' credit
operations is declining. Direct intervention in decisions is being replaced
by "policy directed" lending aimed at achieving the broader social
objectives of the government in power. Increasingly decisions are based
on commercial considerations, partly stemming from the bank's public
listings and partly because of more investment in technology that brings
greater transparency and is helping to standardize decision making.
Foreign ownership of some shares in some banks and frequent
interaction with large institutional investors has maintained pressure on
these banks to adopt more progressive CG standards. Summing up,

although there has been an improvement in the governance practices of
these banks, the ownership overhang still remains, and they still comply
more with the letter of governance practices than the spirit.
In India, CG standards are the highest among new private sector banks.
Two of these, HDFC Bank (rated on Fitch's national scale for India at
‗AAA(ind)', with an individual rating of 'C') and ICICI Bank (IDR 'BB+' on
Fitch's international scale and also with an individual rating of 'C'), are
listed on the New York Stock Exchange, and UTI Bank (rated 'AA+(ind)'
and 'C/D') is listed on the London Stock Exchange. These banks adhere
to the governance practices and disclosures expected by international
investors. The boards of these banks are reasonably broad based, with
independent directors of wide-ranging experience.
Anecdotally, the various board committees (compliance, audit, risk,

compensation) are vocal, particularly in the internationally listed banks.
All this has had a knock-on effect on the other domestic banks. In sharp
contrast, the old private sector banks have the weakest level of
governance. These banks are controlled by a few families or by
communities, with non-bank interests. While these banks might have
outside directors and various board committees, these tend to be
passive with real decision-making concentrated with the large
shareholders - increasing the chance of related party lending.
The Reserve Bank (RBI), India's central bank, is focused on governance

issues both from the perspective of improving the quality of its oversight
and from securing the interests of depositors through transparency, off-
site surveillance and prompt corrective action. The RBI has established
two major committees to look into governance at the banks and
benchmark international best practices of implementation. These

committees have made recommendations directed at the independence
and autonomy of the board and focused on harmonizing the
OECD/Basel/SOX recommendations with local regulations and practices
followed in the domestic Indian market.
The Individual ratings of banks in India generally correspond to Fitch's

views on CG, although they incorporate all of the other factors that
influence a bank's financial position as well. New private sector banks
typically have relatively high individual ratings for the region ('C'), and
those of the old private sector banks are at the lowest end of the scale
('D/E', 'E'). For the state owned banks, individual ratings are typically
between the two at 'C/D', 'D'.
One feature about financial reporting in the Indian banking system worth
mentioning is that some of the large state-owned banks have a number
of different auditors. This is a concern, given what Fitch has seen in the
international market place - i.e. reliance on staff from other audit firms to
complete an audit for large international groups has resulted in errors
going unnoticed. This is a resource issue in the audit firms, given the
scale of the large state-owned banks' operations.
For example, State Bank of India has 9,000 branches, Punjab National
Bank has over 5000, and Bank of Maharashtra, although smaller, still
has over 1,000 branches. In addition to the geographical spread, the
regulatory requirement for results to be audited within three months of
the year end also means that several firms have to be hired to ensure
that the audits are completed.
Typically, these audit firms form a "central committee" that looks at the
audit reports that come in from the branches and the regions and then
discusses these jointly with the chief financial officer of the bank. As
these banks appoint auditors for only a three-year period, it has not been
feasible for one audit firm to build the necessary infrastructure in terms
of people and offices to audit these banks on its own.
XVIII. CASE STUDY

ALLAHABAD BANK
1) OVERVIEW
The Oldest Joint Stock Bank of the Country, Allahabad Bank
was founded on April 24, 1865 by a group of Europeans at
Allahabad. At that juncture Organized Industry, Trade and
Banking started taking shape in India. Thus, the History of the
Bank spread over three Centuries - Nineteenth, Twentieth and
Twenty-First.
2) CODE OF CONDUCT
i. Need and objective of the Code- Clause 49 of the Listing
agreement entered into with the Stock Exchanges,
requires, as part of Corporate Governance the listed
entities to lay down a Code of Conduct for Directors on
the Board of an entity and its Senior Management. The
term "Senior Management" shall mean personnel of the
company who are members of its core management team
excluding the Board of Directors. This would also include
all members of management, one level below the
Executive Directors including all functional heads.
ii. Bank's Belief System - This Code of Conduct attempts to

set forth the guiding principles on which the Bank shall
operate and conduct its daily business with its
multitudinous stakeholders, government and regulatory
agencies, media and anyone else with whom it is
connected. It recognizes that the Bank is a trustee and
custodian of public money and in order to fulfill fiduciary
obligations and responsibilities, it has to maintain and
continue to enjoy the trust and confidence of public at

large. The Bank acknowledges the need to uphold the
integrity of every transaction it enters into and believes
that honesty and integrity in its internal conduct would be
judged by its external behavior. The bank shall be
committed in all its actions to the interest of the countries
in which it operates. The Bank is conscious of the
reputation it carries amongst its customers and public at
large and shall endeavor to do all it can to sustain and
improve upon the same in its discharge of obligations.
The Bank shall continue to initiate policies, which are
customer centric and which promote financial prudence.
iii. Philosophy of the Code-

The code envisages and expects-
a. Adherence to the highest standards of honest and

ethical conduct, including proper and ethical procedures in
dealing with actual or apparent conflicts of interest
between personal and professional relationships.
b. Full, fair, accurate, sensible, timely and meaningful

disclosures in the periodic reports required to be filed by
the Bank with government and regulatory agencies.
c. Compliance with applicable laws, rules and regulations.
d. To address misuse or misapplication of the Bank's

assets and resources.
e. The highest level of confidentiality and fair dealing

within and outside the Bank.
3) General Standards of conduct

The Bank expects all Directors and members of the Core
Management to exercise good judgements, to ensure the
interests, safety and welfare of customers, employees and other
stakeholders and to maintain a cooperative, efficient, positive,
harmonious and productive work environment and business
organization. The Directors and members of the Core
Management while discharging duties of their office must act
honestly and with due diligence. They are expected to act with
that amount of utmost care and prudence, which an ordinary
person is expected to take in his/ her own business. These
standards need to be applied while working in the premises of
the Bank, at offsite locations where business is being conducted
whether in India or abroad, at Bank-sponsored business and
social events, or at any other place where they act as
representatives of the Bank.
4) Conflict of Interest
A "conflict of interest" occurs when personal interest of any
member of the Board of Directors and of the Core management
interferes or appears to interfere in any way with the interests of
the Bank. Every member of the Board of Directors and Core
Management has a responsibility to the Bank, its stakeholders
and to each other. Although this duty does not prevent them
from engaging in personal transactions and investments, it does
demand that they avoid situations where a conflict of interest
might occur or appear to occur. They are expected to perform
their duties in a way that they do not conflict with the Bank's
interest such as:
 Employment /Outside Employment - The members of the

Core Management are expected to devote their total
attention to the business interests of the Bank. They are
prohibited from engaging in any activity that interferes with
their performance or responsibilities to the Bank or otherwise
is in conflict with or prejudicial to the Bank.
 Business Interests - If any member of the Board of

Directors and Core Management considers investment in
securities issued by the Bank's customer, supplier or
competitor, they should ensure that these investments do not
compromise their responsibilities to the Bank. Many factors
including the size and nature of the investment; their ability to
influence the Bank's decisions, their access to confidential
information of the Bank, or of the other entity, and the nature
of the relationship between the Bank and the customer,
supplier or competitor should be considered in determining
whether a conflict exists. Additionally, they should disclose to
the Bank any interest that they have which may conflict with
the business of the Bank.
 Related Parties - As a general rule, the Directors and

members of the Core Management should avoid conducting
Bank‘s business with a relative or any other person or any
firm, Company, association in which the relative or other
person is associated in any significant role. Relatives shall
include :
• Father
• Mother (including step mother)
• Son's Wife
• Daughter (including step daughter)
• Father's father
• Father's mother
• Mother's mother
• Mother's father
• Son's son
• Son's son's wife
• Son's daughter
• Son's daughter's husband
• Daughter's husband
• Daughter's son
• Daughter's son's wife
• Daughter's daughter
• Daughter's daughter's husband
• Brother (including step brother)
• Brother's wife
• Sister (including step sister)
• Sister's husband
If such a related party Transaction is unavoidable, they must

fully disclose the nature of the related party transaction to the
appropriate authority. Any dealings with a related party must be
conducted in such a way that no preferential treatment is given
to that party.
In the case of any other transaction or situation giving rise to

conflicts of interests, the appropriate authority should after due
deliberations decide on its impact.
5) Applicable Laws
The Directors of the Bank and Core Management must comply
with applicable laws, regulations, rules and regulatory orders.
They should report any inadvertent non - compliance, if
detected subsequently, to the concerned authorities.
6) Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful
disclosures in the periodic reports required to be filed with
Government and Regulatory agencies. The members of Core
Management of the bank shall initiate all actions deemed
necessary for proper dissemination of relevant information to
the Board of Directors, Auditors and other Statutory Agencies,
as may be required by applicable laws, rules and regulations.
7) Use of Bank's Assets and Resources

Each member of the Board of Directors and the Core
Management has a duty to the Bank to advance its legitimate
interests while dealing with the Bank's assets and resources.
Members of the Board of Directors and Core Management are
prohibited from:
Using Corporate property, information or position for

personal gain,
Soliciting, demanding, accepting or agreeing to accept

anything of value from any person while dealing with the
Bank's assets and resources,
Acting on behalf of the Bank in any transaction in which

they or any of their relative(s) have a significant direct or
indirect interest.
8) Confidentiality and Fair Dealings

i. Bank's confidential Information-
The Bank's confidential information is a valuable asset.
It includes all trade related information, trade secrets,
confidential and privileged information, customer
information, employee related information, strategies,
administration, research in connection with the Bank
and commercial, legal, scientific, technical data that are
either provided to or made available each member of
the Board of Directors and the core Management by
the Bank either in paper form or electronic media to
facilitate their work or that they are able to know or
obtain access by virtue of their position with the Bank.
All confidential information must be used for Bank's
business purposes only.
This information includes the safeguarding, securing

and proper disposal of confidential information in
accordance with the Bank's policy on maintaining and
managing records. The obligation extends to
confidential of third parties, which the Bank has
rightfully received under non-disclosure agreements.
To further the Bank's business, confidential information

may have to be disclosed to potential business
partners. Such disclosures should be made after
considering its potential benefits and risks. Care should

be taken to divulge the most sensitive information, only
after the said potential business partner has signed a
confidentiality agreement with the Bank.
Any publication or publicly made statement that might

be perceived or construed as attributable to the Bank,
made outside the scope of any appropriate authority in
the Bank, should include a disclaimer that the
publication or statement represents the views of the
specific author and not the Bank.
(ii) Other Confidential Information-
The bank has many kinds of business relationships with

many companies and individuals. Sometimes, they will
volunteer confidential information about their products or
business plans to induce the Bank to enter into a business
relationship. At other times, the Bank may request that a
third party provide confidential information to permit the Bank
to evaluate a potential business relationship with the party.
Therefore, special care must be taken by the Board of
Directors and members of the Core Management to handle
the confidential information of others responsibly. Such
confidential information should be handled in accordance
with the agreements with such third parties.
The Bank requires that every Director and the member

of Core Management, General Managers should be
fully compliant with the laws, statutes, rules and
regulations that have the objective of preventing
unlawful gains of any nature whatsoever.
Directors and members of Core Management shall not

accept any offer, payment, promise to pay or
authorization to pay any money, gift or anything of
value from customers, suppliers, shareholders/
stakeholders etc that is perceived as intended, directly
or indirectly, to influence any business decision, any
act or failure to act, any commission of fraud or
opportunity for the commission of any fraud.
Good Corporate Governance Practices
Each member of the Board of Directors and Core

Management of the Bank should adhere to the following so
as to ensure compliance with good Corporate Governance
practices.
i. Dos –
Attend Board meetings regularly and participate in the
deliberations and discussions effectively.
Study the Board papers thoroughly and enquire about

follow-up reports on definite time schedule.
Involve actively in the matter of formulation of general

policies.
Be familiar with the broad objectives of the Bank and

policies laid down by the Government and the various
laws and legislations.
Ensure confidentiality of the Bank's agenda papers,

notes and minutes.
ii. Don‘ts
Do not interfere in the day to day functioning of the
Bank.
Do not reveal any information relating to any

constituent of the Bank to anyone.
Do not display the logo / distinctive design of the Bank

on their personal visiting cards / letter heads.
Do not sponsor any proposal relating to loans,

investments, buildings or sites for Bank's premises,
enlistment or empanelment of contractors, architects,
auditors, doctors, lawyers and other professionals etc.
Do not do anything, which will interfere with and/ or be

subversive of maintenance of discipline, good conduct
and integrity of the staff.
o Waivers
Any waiver of any provision of this Code of Conduct for a

member of the Bank's Board of Directors or a member of the
Core Management must be approved in writing by the Board
of Directors of the Bank.
The matters covered in this Code of Conduct are of the

utmost importance to the bank, its stakeholders and its
business partners, and are essential to the Bank's ability to
conduct its business in accordance with its value system.
XIX. CONCLUSION
A Narrow Definition-Corporate governance can be defined as ―the

system for direction and control of the corporation.‖
- Sir Adrian Cadbury, The Report on the Financial Aspects of

Corporate Governance, 1992
In the years to come, the Indian financial system will grow not only in
size but also in complexity as the forces of competition gain further
momentum and financial markets acquire greater depth. I can assure
you that the policy environment will remain supportive of healthy growth
and development with accent on more operational flexibility as well as
greater prudential regulation and supervision. The real success of our
financial sector reforms will however depend primarily on the
organisational effectiveness of the banks, including cooperative banks,
for which initiatives will have to come from the banks themselves. It is
for the co-operative banks themselves to build on the synergy inherent
in the cooperative structure and stand up for their unique qualities. With
elements of good corporate governance, sound investment policy,
appropriate internal control systems, better credit risk management,
focus on newly-emerging business areas like micro finance,
commitment to better customer service, adequate automation and
proactive policies on house-keeping issues, co-operative banks will
definitely be able to grapple with these challenges and convert them into
opportunities.
Why care about corporate governance?
Corporate governance matters for development
1. Increased access to financing investment, growth, employment
2. Lower cost of capital and higher valuation investment, growth
3. Better operational performance better allocation of resources,

better management, creates wealth
4. Less risk, at the firm and country level fewer defaults, fewer
financial crises
5. Better relationship with stakeholders improved environment,

social/labor
6. All of these relationships matter for growth, employment, poverty

reduction
7. Empirical evidence has documented these relationships
- At the level of country, sector and individual firm and

from investor perspective using various techniques
8. Quite strong relationships
- But so far mainly documented for non-financial

corporations that are listed on stock exchanges
What is special about CG of banks?
• Banks are ―special,‖ different from corporations
o Opaque, financial information more obscure: hard to assess

performance and riskiness
o More diverse stakeholders (many depositors and often more

diffuse equity ownership, due to restrictions): makes for less
incentives for monitoring
o Highly leveraged, many short-term claims: risky, easily

subject to bank runs
o Heavily regulated: given systemic importance, as failure can

lead to large output costs, more regulated
• Because special, banks more regulated, with regulations covering

wide area
o Activity restrictions (products, branches), prudential

requirements (loan classification, reserve reqs. etc)
o Regulations often more important than laws
• Government, instead of depositors, debt or equity-holders, takes

role of monitoring banks
o Power lies with government, e.g., supervisor, deposit

insurance agency, central bank
o Raises in turn public governance questions
• Banks enjoy benefits of public safety net
o Banks, as they are of systemic importance, get support, i.e.,

deposit insurance, LOLR, and other (potential) forms of
government support
o Costs of support provided often paid for by government, i.e.,

in the end taxpayers
• Implies banks less subject to normal disciplines
o Debt-holders less likely to exert discipline
o Bankruptcy is applied differently or rarer
o Competition is less intense as entry restricted
o Public safety net is large, creating moral hazard
• Same time, banks more subject to CG-risks
o Opaqueness means scope for entrenchment, shifting of

risks, private benefits and outright misuse (tunneling, insider
lending, expropriation, etc.) larger than for non-financial firms
• As for any firm, bank shareholder value can come from increased
risk-taking
o Shareholder value is residual claim on firm value
o Increased risk-taking raises shareholder values at expenses

of debt claimholders and government
Studies on CG of banks:
Monitoring and risk
• Banks are indeed more difficult to monitor
• Moody‘s and S&P disagreed on only 15% of all non-financial

bond issues, but disagreed on 34% of all financial bond
issues
• Banks are more vulnerable
• Recessions increases spreads on all bond issues, but

increases spreads on riskier banks more than for non-
financial firms
• Partly result of a flight to safety, but also greater vulnerability

of banks compared to non-financial firms
Bank failings and financial crisis
• In practice, banks with weak corporate governance have failed

more often
• Accrued deposit insurance, good summary measure of risk

in banks, higher for weaker CG
• State-owned banks enjoy even larger public subsidy, that is

often misused: poor allocation, large NPLs, e.g., Indonesia,
South Korea, France, Thailand, Mexico, Russia
• Fiscal costs of government support up to 50% of GDP, large

output losses from financial crises
• Countries with weaker corporate governance and poorer

institutions see more crises
What does this imply for bank CG and regulation and supervision?
• Quality of bank CG interfaces with supervision and regulation
o More effective banks‘ CG can aid supervision since with

better CG, banks can be sounder, valuations higher, thereby
making supervision easier
o Good CG-framework can make bank regulation and

supervision less necessary, or at least, different
• Need to consider therefore bank CG and regulation and

supervision together
• Two approaches to CG and supervision
o Basel: capital standards and powerful supervisors
• Market failures/externalities, so need regulations
o Empower private sector through laws & information
• Market failures, but also government failures
• Approaches not mutually exclusive
o What is best mix of private market and government oversight

of banks? What does this imply for bank CG?
Implications for CG of banks
• Bank ownership
o Be very careful on state ownership: negatively related to

valuation, stability and efficiency
o Consider inviting foreign banks
• Bank governance, regulation and supervision
o Strong private owners necessary, but they need to have their

own capital at stake
o Better shareholder protection laws can improve functioning

of banks
o Supervision/regulation less effective in monitoring banks
XX. BIBLIOGRAPHY AND WEBLIOGRAPHY:-
BIBLIOGRAPHY
Innovation in banking and insurance
- By Romeo. S. Mascarenhas
WEBLIOGRAPHY
www.wikipedia.org
www.allahabadbank.com
www.allahabadbank.com
www.nfcgindia.org
www.financialexpress.com
rbidocs.rbi.org.in
www.biecco.gov.in
www.iba.org.in

Corporate Governance in Banks

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corporate Governance in Banks

Uploaded by

Copyright:

Available Formats

CORPORATE GOVERNANCE IN BANKS

Corporate governance mechanisms differ as between banks. The

Key elements of good corporate governance principles include

Both government and RBI need to bring about significant changes in

As a part of strengthening the functioning of their boards, banks

and appointment committees. Since banks and institutions are

Of importance principles of corporate governance is how directors

Parties involved in corporate governance include the regulatory

Impact has in corporate governance and its mechanisms and

In mechanisms and controls: - internal corporate governance

Roles and measure taken by regularity bodies towards corporate

Indian scenario in corporate governance how they do and how they

One case study or live example is taken of ALLAHABAD BANK how

Moreover, it has guided me to understand this corporate

II. INTRODUCTION & DEFINITION

Corporate governance is the set of processes, customs, policies, laws

Corporate governance is a multi-faceted subject. An important theme of

―CORPORATE GOVERNANCE is the system by which companies are

―CORPORATE GOVERNANCE is needed to create a corporate culture

the companies to maximize the shareholders long-term value. It should

―Enough law exists, but corporate governance is considered as one of

The basic objective of Corporate Governance would be "enhancement of

3 key constituents of Corporate Governance are:

 Shareholders  Board of Directors  Management

Steps taken by SEBI for strengthening corporate governance through

Strengthening of disclosure norms for IPOs

Providing information in directors‘ report for utilization and variation of

Declaration of unaudited quarterly results;

Mandatory appointment of compliance officer for monitoring the share

Timely disclosure of material and price sensitive information including

Dispatch of one copy of complete balance sheet to every household and

Issue of guidelines for preferential allotment of shares at market related

Issue of rules and regulations to ensure a fair and transparent

In A Board Culture of Corporate Governance business author

O'Donovan goes on to say that 'the perceived quality of a company's

It is a system of structuring, operating and controlling a company with a

legal and regulatory requirements, apart from meeting environmental

Report of SEBI committee (India) on Corporate Governance defines

The definition is drawn from the Gandhian principle of trusteeship and

In the 19th century, state corporation laws enhanced the rights of

In the early 2000s, the massive bankruptcies (and criminal malfeasance)

IV. PRINCIPLES OF CORPORATES GOVERNANCE

Key elements of good corporate governance principles include honesty,

Of importance is how directors and management develop a model of

Commonly accepted principles of corporate governance include:

Rights and equitable treatment of shareholders: Organizations

Interests of other stakeholders: Organizations should recognize that

Role and responsibilities of the board: The board needs a range of

Integrity and ethical behaviour: Ethical and responsible decision

Disclosure and transparency: Organizations should clarify and make

Issues involving corporate governance principles include:

internal controls and the independence of the entity's auditors

oversight and management of risk

oversight of the preparation of the entity's financial statements

review of the compensation arrangements for the chief executive

the resources made available to directors in carrying out their duties

the way in which individuals are nominated for positions on the

―Corporate Governance" despite some feeble attempts from various

V. ROLE OF INSTITUTIONAL INVESTOR:-

Many years ago, worldwide, buyers and sellers of corporation stocks

Program trading, the hallmark of institutional trading, is averaging over

Unfortunately, there has been a concurrent lapse in the oversight of

Nowadays, if the owning institutions don't like what the President/CEO is