Corporate Governance in Banks (1)

8/20/2019 Corporate Governance in Banks (1)

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Corporate Governance In Banks

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.


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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 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 and appointment committees.


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Impact in corporate governance and its mechanisms and controls are

explained.

In mechanisms and controls- internal corporate governance controls monitor

activities and then take corrective action to accomplish organizational goals and

External corporate governance controls encompass the controls external stakeholders

exercise over the organization.

For the co-operative banks in India challenging times are explained. 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 BANK OF BARODA 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.


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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 involvedand 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.


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The basic objective of Corporate Governance would be "enhancement ofthe long-term shareholders value while at the same time protecting the interests of otherstakeholders."

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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 and 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


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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.


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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.

HISTORY OF CORPORATE GOVERNANCE IN INDIA

A. PRE-LIBERALIZATION

When India attained independence from British rule in 1947, the country was poor, with

an average per-capita annual income under thirty dollars. However, it still possessed

sophisticated laws regarding "listing, trading, and settlements." It even had four fully

operational stock exchanges. Subsequent laws, such as the 1956 Companies Act,

further solidified the rights of investors.

In the decades following India's independence from Great Britain, the country turnedaway from its capitalist past and embraced socialism. The 1951 Industries Act was a

step in this direction, requiring "that all industrial units obtain licenses from the central

government." The 1956 Industrial Policy Resolution "stipulated that the public sector

would dominate the economy." To put this plan into effect, the Indian government

created enormous state-owned enterprises, and India steadily moved toward a culture

of "corruption, nepotism and inefficiency." As the government took over floundering

private enterprises and rejuvenated them, it essentially "converted private bankruptcy to

high-cost public debt." One scholar referred to India's economic history as "the

institutionalization of inefficiency."

The absence of a corporate-governance framework exacerbated the situation.

Government accountability was minimal, and the few private companies that remained

on India's business landscape enjoyed free reign with respect to most laws; the

government rarely initiated punitive action, even for nonconformity with basic


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governance laws. Boards of directors invariably were staffed by friends or relatives of

management, and abuses by dominant shareholders and management were

commonplace. India's equity markets "were not liquid or sophisticated enough" to

punish these abuses.

Scholars believe that "takeover threats act as a disciplining mechanism to poorly

performing companies" because as the stock price of poorly governed firms decreases

(because disgruntled investors discard stock), the firms become susceptible to hostile-

takeover attempts. Thus, "the fear of a takeover ... is supposed to keep the

management honest." However, until recently, hostile takeovers were almost entirely

non-existent in India, and therefore, the poorly governed Indian firms had little to worry

about in terms of following corporate laws once they had raised capital through their

initial public offering. Thus, corporate governance in India was in a dismal condition by

the early 1990s.

B. POST-LIBERALIZATION

In 1999, in a defining moment in India's corporate-governance history, the Indian

Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the

interests of investors in securities and to promote the development of, and to regulate

the securities market." In the years leading up to 2000, as Indian enterprises turned to

the stock market for capital, it became important to ensure good corporate governance

industry-wide. Additionally, a plethora of scams rocked the Indian business scene, andcorporate governance emerged as a solution to the problem of unscrupulous corporate

behavior.

In 1998, the Confederation of Indian Industry ("CII"), "India's premier business

association," unveiled India's first code of corporate governance. However, since the

Code's adoption was voluntary, few firms embraced it. Soon after, SEBI appointed the

Birla Committee to fashion a code of corporate governance. In 2000, SEBI accepted the

recommendations of the Birla Committee and introduced Clause 49 into the Listing

Agreement of Stock Exchanges. Clause 49 outlines requirements vis-a-vis corporategovernance in exchange-traded companies. In 2003, SEBI instituted the Murthy

Committee to scrutinize India's corporate-governance framework further and to make

additional recommendations to enhance its effectiveness. SEBI has since incorporated

the recommendations of the Murthy Committee, and the latest revisions to Clause 49

became law on January 1, 2006.


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PRINCIPLES OF CORPORATES GOVERNANCE

Key elements of good corporate governance principles include honesty, trust and

integrity, openness, performance orientation, responsibility and accountability, mutualrespect, 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:

1. 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.

2. Interests of other stakeholders: Organizations should recognize that they

have legal and other obligations to all legitimate stakeholders.

3. 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.


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4. 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.

5. Disclosure and transparency: Organizations should clarify and make publicly

known the roles and responsibilities of board and management to provideshareholders 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 onthe board

• dividend policy


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PREREQUISITES AND CONSTITUENTS

Today adoption of good Corporate Governance practices has emerged as an integral

element for doing business. It is not only a pre-requisite for facing intense competition

for sustainable growth in the emerging global market scenario but is also an

embodiment of the parameters of fairness, accountability, disclosures and transparency

to maximize value for the stakeholders.

Corporate governance is beyond the realm of law. It cannot be regulated by legislation

alone. Legislation can only lay down a common framework – the "form" to ensure

standards. The "substance" will ultimately determine the credibility and integrity of the

process. Substance is inexorably linked to the mindset and ethical standards ofmanagement.

Studies of corporate governance practices across several countries conducted by the

Asian Development Bank, International Monetary Fund, Organization for Economic

Cooperation and Development and the World Bank reveal that there is no single model

of good corporate governance.

The OECD Code also recognizes that different legal systems, institutional frameworks

and traditions across countries have led to the development of a range of different

approaches to corporate governance.

However, a high degree of priority has been placed on the interests of shareholders,

who place their trust in corporations to use their investment funds wisely and effectively

is common to all good corporate governance regimes.


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Also, irrespective of the model, there are three different forms of corporate

responsibilities which all models do respect:

• Political Responsibilities: the basic political obligations are abiding by

legitimate law; respect for the system of rights and the principles of

constitutional state.

• Social Responsibilities: the corporate ethical responsibilities, which the

company understands and promotes either as a community with shared values

or as a part of larger community with shared values.

• Economic Responsibilities: acting in accordance with the logic of competitive

markets to earn profits on the basis of innovation and respect for the

rights/democracy of the shareholders which can be expressed in terms of

managements' obligation as 'maximizing shareholders value'.

In addition, business ethics and corporate awareness of the environmental and societal

interest of the communities, within which they operate, can have an impact on the

reputation and long-term performance of corporations.

The three key constituents of corporate governance are the Board of Directors, the

Shareholders and the Management.

• The pivotal role in any system of corporate governance is performed by the

board of directors. It is accountable to the stakeholders and directs and controls

the management. It stewards the company, sets its strategic aim and financial

goals and oversees their implementation, puts in place adequate internal

controls and periodically reports the activities and progress of the company in

the company in a transparent manner to all the stakeholders.

• The shareholders' role in corporate governance is to appoint the directors and

the auditors and to hold the board accountable for the proper governance of the

company by requiring the board to provide them periodically with the requisite

information in a transparent fashion, of the activities and progress of the

company.


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• The responsibility of the management is to undertake the management of the

company in terms of the direction provided by the board, to put in place

adequate control systems and to ensure their operation and to provide

information to the board on a timely basis and in a transparent manner to

enable the board to monitor the accountability of management to it.

The underlying principles of corporate governance revolve around three basic inter-

related segments. These are:

Integrity and Fairness

Transparency and Disclosures

Accountability and Responsibility

The Main Constituents of Good Corporate Governance are:

• Role and powers of Board: the foremost requirement of good corporate

governance is the clear identification of powers, roles, responsibilities and

accountability of the Board, CEO and the Chairman of the board.

• Legislation: a clear and unambiguous legislative and regulatory framework is

fundamental to effective corporate governance.

• Code of Conduct: it is essential that an organization's explicitly prescribed

code of conduct is communicated to all stakeholders and is clearly understood

by them. There should be some system in place to periodically measure and

evaluate the adherence to such code of conduct by each member of the

organization.

• Board Independence: an independent board is essential for sound corporate

governance. It means that the board is capable of assessing the performance

of managers with an objective perspective. Hence, the majority of boardmembers should be independent of both the management team and any

commercial dealings with the company. Such independence ensures the

effectiveness of the board in supervising the activities of management as well

as make sure that there are no actual or perceived conflicts of interests.


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• Board Skills: in order to be able to undertake its functions effectively, the

board must possess the necessary blend of qualities, skills, knowledge and

experience so as to make quality contribution. It includes operational or

technical expertise, financial skills, legal skills as well as knowledge of

government and regulatory requirements.

• Management Environment: includes setting up of clear objectives and

appropriate ethical framework, establishing due processes, providing for

transparency and clear enunciation of responsibility and accountability,

implementing sound business planning, encouraging business risk assessment,

having right people and right skill for jobs, establishing clear boundaries for

acceptable behavior, establishing performance evaluation measures and

evaluating performance and sufficiently recognizing individual and groupcontribution.

• Board Appointments: to ensure that the most competent people are

appointed in the board, the board positions must be filled through the process

of extensive search. A well defined and open procedure must be in place for

reappointments as well as for appointment of new directors.

• Board Induction and Training: is essential to ensure that directors remain

abreast of all development, which are or may impact corporate governance and

other related issues.

• Board Meetings: are the forums for board decision making. These meetings

enable directors to discharge their responsibilities. The effectiveness of board

meetings is dependent on carefully planned agendas and providing relevant

papers and materials to directors sufficiently prior to board meetings.

• Strategy Setting: the objective of the company must be clearly documented in

a long term corporate strategy including an annual business plan together with

achievable and measurable performance targets and milestones.• Business and Community Obligations: though the basic activity of a

business entity is inherently commercial yet it must also take care of

community's obligations. The stakeholders must be informed about the

approval by the proposed and ongoing initiatives taken to meet the community

obligations.


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ORGANIZATIONAL FRAMEWORK

The organizational framework for corporate governance initiatives in India consists of

the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India

(SEBI).

The first formal regulatory framework for listed companies specifically for corporate

governance was established by the SEBI in February 2000, following the

recommendations of Kumarmangalam Birla Committee Report. It was enshrined as

Clause 49 of the Listing Agreement.

Thereafter SEBI had set up another committee under the chairmanship of Mr. N. R.

Narayana Murthy, to review Clause 49, and suggest measures to improve corporategovernance standards.

Some of the major recommendations of the committee primarily related to audit

committees, audit reports, independent directors, related party transactions, risk

management, directorships and director compensation, codes of conduct and financial

disclosures.

The Ministry of Corporate Affairs had also appointed a Naresh Chandra Committee on

Corporate Audit and Governance in 2002 in order to examine various corporate

governance issues. It made recommendations in two key aspects of corporate

governance: financial and non-financial disclosures: and independent auditing and

board oversight of management.

It had also set up a National Foundation for Corporate Governance (NFCG) in

association with the CII, ICAI and ICSI as a not-for-profit trust to provide a platform to

deliberate on issues relating to good corporate governance, to sensitize corporate

leaders on the importance of good corporate governance practices as well as to

facilitate exchange of experiences and ideas amongst corporate leaders, policy makers,

regulators, law enforcing agencies and non- government organizations.


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Legal Framework

An effective regulatory and legal framework is indispensable for the proper and

sustained growth of the company. In rapidly changing national and global business

environment, it has become necessary that regulation of corporate entities is in tune

with the emerging economic trends, encourage good corporate governance and enable

protection of the interests of the investors and other stakeholders.

Further, due to continuous increase in the complexities of business operation, the

forms of corporate organizations are constantly changing.

As a result, there is a need for the law to take into account the requirements of differentkinds of companies that may exist and seek to provide common principles to which all

kinds of companies may refer while devising their corporate governance structure.

The important legislations for regulating the entire corporate structure and for dealing

with various aspects of governance in companies are Companies Act, 1956 and

Companies Bill, 2004.

These laws have been introduced and amended, from time to time, to bring more

transparency and accountability in the provisions of corporate governance. That is,

corporate laws have been simplified so that they are amenable to clear interpretation

and provide a framework that would facilitate faster economic growth.

Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange

Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities

and Exchange Board of India (SEBI), with a view to protect the interests of investors in

the securities markets as well as to maintain the standards of corporate governance in

the country.


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PARTIES TO CORPORATE 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 andthe 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.

A board of directors often plays a key role in corporate governance. It is their

responsibility to endorse the organization’s strategy, develop directional policy,appoint, supervise and remunerate senior executives and to ensure accountability of

the organization 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 organization. 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.

• A key factor in an individual's decision to participate in an organization e.g.

through providing financial capital and trust that they will receive a fair share of

the organizational returns. If some parties are receiving more than their fair

return then participants may choose to not continue participating leading to

organizational collapse.


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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.

MECHANISMS AND CONTROLS

Corporate governance mechanisms and controls are designed to reduce theinefficiencies that arise from moral hazard and adverse selection. For example, tomonitor managers' behavior, an independent third party (the auditor) attests theaccuracy of information provided by management to investors. An ideal control systemshould regulate both motivation and ability.

A. INTERNAL CORPORATES GOVERNANCE CONTROLS

Internal corporate governance controls monitor activities and then take corrective

action to accomplish organizational 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.


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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 behavior, and can elicit myopic

behavior.

B. EXTERNAL CORPORATES GOVERNANCE CONTROLS

External corporate governance controls encompass the controls external stakeholdersexercise over the organization. Examples include:

• Competition

• debt covenants

• demand for and assessment of performance information (especially

financial statements)

• government regulations

• managerial labor market

• media pressure

• takeovers


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MECHANISMS AND CONTROLS

• 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.

BENEFITS AND LIMITATIONS

The concept of corporate governance has been attracting public attention for quite

some time. It has been finding wide acceptance for its relevance and importance to the

industry and economy.

It contributes not only to the efficiency of a business enterprise, but also, to the growth

and progress of a country's economy. Progressively, firms have voluntarily put in place

systems of good corporate governance for the following reasons:

Several studies in India and abroad have indicated that markets and investorstake notice of well managed companies and respond positively to them. Suchcompanies have a system of good corporate governance in place, which allowssufficient freedom to the board and management to take decisions towards the


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progress of their companies and to innovate, while remaining within theframework of effective accountability.

In today's globalised world, corporations need to access global pools of capital aswell as attract and retain the best human capital from various parts of the world.Under such a scenario, unless a corporation embraces and demonstrates ethicalconduct, it will not be able to succeed.

The credibility offered by good corporate governance procedures also helpsmaintain the confidence of investors – both foreign and domestic – to attractmore long-term capital. This will ultimately induce more stable sources offinancing.

A corporation is a congregation of various stakeholders, like customers,employees, investors, vendor partners, government and society. Its growthrequires the cooperation of all the stakeholders. Hence it imperative for acorporation to be fair and transparent to all its stakeholders in all its transactionsby adhering to the best corporate governance practices.

Good Corporate Governance standards add considerable value to theoperational performance of a company by:

1. improving strategic thinking at the top through induction of independentdirectors who bring in experience and new ideas;

2. rationalizing the management and constant monitoring of risk that a firmfaces globally;

3. limiting the liability of top management and directors by carefullyarticulating the decision making process;

4. assuring the integrity of financial reports, etc.


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It also has a long term reputational effects among key stakeholders, both internally andexternally.

Also, the instances of financial crisis have brought the subject of corporategovernance to the surface. They have shifted the emphasis on compliance with

substance, rather than form, and brought to sharper focus the need forintellectual honesty and integrity. This is because financial and non-financialdisclosures made by any firm are only as good and honest as the people behindthem.

Good governance system, demonstrated by adoption of good corporategovernance practices, builds confidence amongst stakeholders as well asprospective stakeholders. Investors are willing to pay higher prices to thecorporate demonstrating strict adherence to internally accepted norms of

corporate governance.

Effective governance reduces perceived risks, consequently reduces cost ofcapital and enables board of directors to take quick and better decisions whichultimately improves bottom line of the corporate.

Adoption of good corporate governance practices provides long term sustenance

and strengthens stakeholders' relationship.

A good corporate citizen becomes an icon and enjoys a position of respects.

Potential stakeholders aspire to enter into relationships with enterprises whosegovernance credentials are exemplary.

Effectiveness of corporate governance system cannot merely be legislated by lawneither can any system of corporate governance be static.

As competition increases, the environment in which firms operate also changes and insuch a dynamic environment the systems of corporate governance also need to evolve.Failure to implement good governance procedures has a cost in terms of a significantrisk premium when competing for scarce capital in today's public markets.


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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.

Another area which requires focused attention is greater transparency in the balance

sheets of co-operative banks.


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• 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.

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 Gangly 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-


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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 organization have a professional board which can

drive the organization 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-executivedirectors,

• 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

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


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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.

MEASURES TAKEN BY REGULATOR 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


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• 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 analyze 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

capital 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 througha set of mandatory action to stem further deterioration in the health of banks

showing signs of weakness.

CORPORATE GOVERNANCE IN EMERGING MARKET

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


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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 seen.

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 analyze 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:


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o A high level of related party influence (a consequence of wealth and

power being concentrated in only a few hands);

o

An absence of challenges to the status quo due to lack ofexperience 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.

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.


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• The purpose and objectives of co-operatives provide the framework for co-

operative corporate governance. Co- operatives are organized 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.

GENESIS OF CORPORATE GOVERNANCE:-

The Cadbury Report stipulated that the Board of Directors should meet regularly, retainfull 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’organizations 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.


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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 license 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 isconcentrated 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.


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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.

The 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.

• 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 andautonomy of the board and focused on harmonizing the OECD/Basel/SOX

recommendations with local regulations and practices followed in the domestic

Indian market.


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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.


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CASE STUDY : BANK OF BARODA

(1) OVERVIEW

Bank of Baroda (BoB) (BSE: 532134) is the third largest bank in India, after the State

Bank of India and the Punjab and ahead of ICICI Bank. BoB is ranked 763 in Forbes

Global 2000 list. BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583

billion, a network of over 3,409 branches and offices, and about 1,657 ATMs.

It plans to open 400 new branches in the coming year. It offers a wide range of banking

products and financial services to corporate and retail customers through a variety of

delivery channels and through its specialized subsidiaries and affiliates in the areas of

investment banking, credit cards and asset management. Its total business was Rs.

5,452 billion as of June 30.

As of August 2010, the bank has 78 branches abroad and by the end of FY11 this

number should climb to 90. In 2010, BOB opened a branch in Auckland, New Zealand,

and its tenth branch in the United Kingdom.

The bank also plans to open five branches in Africa. Besides branches, BoB plans to

open three outlets in the Persian Gulf region that will consist of ATMs with a couple of

people.

(2) Code of Conduct

I. Need and objective of the Code

Clause 49 of the Listing Agreement entered into with the Stock Exchanges, requires, aspart of Corporate Governance the listed entities to lay down a Code of Conduct forDirectors on the Board of an entity and its Senior Management. Senior Managementhas been defined to include personnel who are members of its Core Management andfunctional heads excluding the Board of Directors.

Accordingly the Bank has laid down this Code for its Directors on the Board and its Core

Management. The composition of Core Management will be all Functional Heads(irrespective of grade/scale) and all General Managers.

http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532134http://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/Lakhhttp://en.wikipedia.org/wiki/Croreshttp://en.wikipedia.org/wiki/Croreshttp://en.wikipedia.org/wiki/Lakhhttp://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/Forbes_Global_2000http://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532134http://en.wikipedia.org/wiki/Bombay_Stock_Exchange


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II. Bank’s belief system

This Code of Conduct attempts to set forth the guiding principles on which the Bankshall 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 andin order to fulfill its fiduciary obligations and responsibilities, it has to maintain andcontinue to enjoy the trust and confidence of public at large.

The Bank acknowledges the need to uphold the integrity of every transaction it entersinto and believes that honesty and integrity in its internal conduct would be judged by itsexternal behavior. The Bank shall be committed in all its actions to the interest of thecountries in which it operates. The Bank is conscious of the reputation it carriesamongst its customers and public at large and shall Endeavour to do all it can to sustainand improve upon the same in its discharge of obligations. The Bank shall continue toinitiate 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, includingproper and ethical procedures in dealing with actual or apparent conflicts ofinterest between personal and professional relationships.

b. Full, fair, accurate, sensible, timely and meaningful disclosures in the periodicreports required to be filed by the Bank with government and regulatoryagencies.

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.

A. General Standards of conduct

The Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, employees, and

other stakeholders and to maintain a cooperative, efficient, positive, harmonious andproductive work environment and business organization.

The Directors and members of the Core Management while discharging duties of theiroffice must act honestly and with due diligence. They are expected to act with thatamount of utmost care and prudence, which an ordinary person is expected to take inhis/her own business.


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These standards need to be applied while working in the premises of the Bank, at offsitelocations where the business is being conducted whether in India or abroad, at Bank-sponsored business and social events, or at any other place where they act asrepresentatives of the Bank.

B. Conflict of Interest

“Conflict of interest” occurs when personal interest of any member of the Board ofDirectors and of the Core Management interferes or appears to interfere in any way withthe interests of the Bank. Every member of the Board of Directors and CoreManagement has a responsibility to the Bank, its stakeholders and to each other.

Although this duty does not prevent them from engaging in personal transactions andinvestments, 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 theBank’s interest such as-

Employment / Outside Employment - The members of the Core Management areexpected to devote their total attention to the business interests of the Bank. They areprohibited from engaging in any activity that interferes with their performance orresponsibilities 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 investing in securities issued by the Bank’s customer, supplier or competitor,they should ensure that these investments do not compromise their responsibilities tothe Bank.

Many factors including the size and nature of the investment; their ability to influencethe Bank’s decisions; their access to confidential information of the Bank, or of the otherentity, and the nature of the relationship between the Bank and the customer, supplieror competitor should be considered in determining whether a conflict exists.

Additionally, they should disclose to the Bank any interest that they have which mayconflict with the business of the Bank.


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Related Parties - As a general rule, the Directors and members of the CoreManagement should avoid conducting Bank’s business with a relative or any otherperson or any firm, Company, Association in which the relative or other person isassociated in any significant role. Relatives shall include:

Spouse Father Mother (including step-mother) Son (including step-son) 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 ofthe related party transaction to the appropriate authority. Any dealings with a relatedparty must be conducted in such a way that no preferential treatment is given to thatparty.

In the case of any other transaction or situation giving rise to conflicts of interests, theappropriate authority should after due deliberations decide on its impact.

C. 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.


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D. Disclosure Standards

The Bank shall make full, fair, accurate, timely and meaningful disclosures in theperiodic reports required to be filed with Government and Regulatory agencies. Themembers of Core Management of the Bank shall initiate all actions deemed necessary

for proper dissemination of relevant information to the Board of Directors, Auditors andother Statutory Agencies, as may be required by applicable laws, rules and regulations.

E. Use of Bank’s Assets and Resources:

Each member of the Board of Directors and the Core Management has a duty to theBank to advance its legitimate interests while dealing with the Bank’s assets andresources. Members of the Board of Directors and Core Management are prohibitedfrom:

using corporate property, information or position for personal gain;

soliciting, demanding, accepting or agreeing to accept anything of value from anyperson while dealing with the Bank’s assets and resources;

Acting on behalf of the Bank in any transaction in which they or any of theirrelative(s) have a significant direct or indirect interest.

Confidentiality and Fair Dealings

1. Bank’s Confidential Information

The Bank's confidential information is a valuable asset. It includes all traderelated information, trade secrets, confidential and privileged information,customer information, employee related information, strategies, administration,research in connection with the Bank and commercial, legal, scientific, technicaldata that are either provided to or made available to each member of the Boardof Directors and the Core Management by the Bank either in paper form orelectronic media to facilitate their work or that they are able to know or obtainaccess by virtue of their position with the Bank. All confidential information mustbe used for Bank’s business purposes only.

This responsibility includes the safeguarding, securing and proper disposal ofconfidential information in accordance with the Bank's policy on maintaining and

managing records. This obligation extends to confidential information of thirdparties, which the Bank has rightfully received under non-disclosure agreements.

To further the Bank’s business, confidential information may have to be disclosedto potential business partners. Such disclosure should be made after consideringits potential benefits and risks. Care should be taken to divulge the mostsensitive information, only after the said potential business partner has signed aconfidentiality agreement with the Bank.


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Any publication or publicly made statement that might be perceived or construedas attributable to the Bank, made outside the scope of any appropriate authorityin the Bank, should include a disclaimer that the publication or statementrepresents the views of the specific author and not the bank.

2. Other Confidential Information -

The Bank has many kinds of business relationships with many companies andindividuals. Sometimes, they will volunteer confidential information about their productsor 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 informationto permit the Bank to evaluate a potential business relationship with that party.

Therefore, special care must be taken by the Board of Directors and members of theCore Management to handle the confidential information of others responsibly.

Such confidential information should be handled in accordance with the agreementswith 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 andregulations that have the objective of preventing unlawful gains of any naturewhatsoever.

Directors and the members of Core Management shall not accept any offer,payment promise to pay, or authorization to pay any money, gift, or anything ofvalue from customers, suppliers, shareholders/ stakeholders, etc. that isperceived as intended, directly or indirectly, to influence any business decision,any act or failure to act, any commission of fraud, or opportunity for thecommission of any fraud.


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IV. Good corporate governance practices

Each member of the Board of Directors and Core Management of the Bank shouldadhere to the following so as to ensure compliance with good Corporate Governancepractices.

(a) Dos

Attend Board meetings regularly and participate in the deliberations anddiscussions effectively.

Study the Board papers thoroughly and enquire about follow-up reports ondefinite time schedule.

Involve actively in the matter of formulation of general policies

Be familiar with the broad objectives of the Bank and the policies laid down by

the Government and the various laws and legislations.

Ensure confidentiality of the Bank’s agenda papers, notes and Minutes.

(b) 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 sitesfor 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 ofmaintenance of discipline, good conduct and integrity of the staff.

VI. Waivers

Any waiver of any provision of this Code of Conduct for a member of the Bank’sBoard of Directors or a member of the Core Management must be approved inwriting 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 toconduct its business in accordance with its value system.


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CONCLUSION

Narrow Definition-

“Corporate governance can be defined as ―the system for direction and controlof 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.

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

organizational 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.


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Why care about corporate governance

Corporate governance matters for development

• Increased access to financing - investment, growth, employment

• Lower cost of capital and higher valuation- investment, growth

• Better operational performance- better allocation of resources, bettermanagement, creates wealth

• Less risk, at the firm and country level- fewer defaults, fewer financial crises

• Better relationship with stakeholders- improved environment, social/labor

• All of these relationships matter for growth, employment, poverty reduction

• Empirical evidence has documented these relationships - At the level of country,sector and individual firm and from investor perspective using various techniques

• Quite strong relationships - But so far mainly documented for non-financialcorporations that are listed on stock exchanges

What is special about CG of banks?

Banks are ―special, different from corporations

• Opaque, financial information more obscure: hard to assess performance and

riskiness

• More diverse stakeholders (many depositors and often more diffuse equity

ownership, due to restrictions): makes for less incentives for monitoring

• Highly leveraged, many short-term claims: risky, easily subject to bank

runs

• Heavily regulated: given systemic importance, as failure can lead to large output

costs, more regulated


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Because special, banks more regulated, with regulations covering wide area

• Activity restrictions (products, branches), prudential requirements

(loan classification, reserve reqs. etc)

• Regulations often more important than laws

Government, instead of depositors, debt or equity-holders, takes role of monitoring

banks

• Power lies with government, e.g., supervisor, deposit insurance

agency, central bank

• Raises in turn public governance questions

Banks enjoy benefits of public safety net

• Banks, as they are of systemic importance, get support, i.e., deposit insurance,LOLR, and other (potential) forms of government support

• Costs of support provided often paid for by government, i.e., in the end taxpayers

Same time, banks more subject to CG-risks

• Opaqueness means scope for entrenchment, shifting of risks, private benefitsand outright misuse (tunneling, insider lending, expropriation, etc.) larger than fornon-financial firms

• As for any firm, bank shareholder value can come from increased risk-taking

Shareholder value is residual claim on firm value

• Increased risk-taking raises shareholder values at expenses of debt claimholdersand government


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FUTURE PROSPECTS

The issues of governance, accountability and transparency in the affairs of thecompany, as well as about the rights of shareholders and role of Board of Directorshave never been so prominent as it is today. The corporate governance has come to

assume a centre stage in the Board room discussions.

India has become one of the fastest emerging nations to have aligned itself with theinternational trends in Corporate Governance. As a result, Indian companies haveincreasingly been able to access to newer and larger markets around the world; as wellas able to acquire more businesses.

• The responses of the Government and regulators have also been admirablyquick to meet the challenges of corporate delinquency. But, as the globalenvironment changing continuously, there is a greater need of adopting andsustaining good corporate governance practices for value creation and building

corporations of the future.

• It is true that the 'corporate governance' has no unique structure or design and islargely considered ambiguous. There is still lack of awareness about its variousissues, like, quality and frequency of financial and managerial disclosure,compliance with the code of best practice, roles and responsibilities of Board ofDirectories, shareholders rights, etc.

• There have been many instances of failure and scams in the corporate sector,like collusion between companies and their accounting firms, presence of weakor ineffective internal audits, lack of required skills by managers, lack of proper

disclosures, non-compliance with standards, etc. As a result, both managementand auditors have come under greater scrutiny.

• But, with the integration of Indian economy with global markets, industrialists andcorporate in the country are being increasingly asked to adopt better andtransparent corporate practices.

• The degree to which corporations observe basic principles of good corporategovernance is an increasingly important factor for taking key investmentdecisions. If companies are to reap the full benefits of the global capital market,

capture efficiency gains, benefit by economies of scale and attract long termcapital, adoption of corporate governance standards must be credible,consistent, coherent and inspiring.

• Quality of corporate governance primarily depends on following factors, namely:-integrity of the management; ability of the Board; adequacy of the processes;commitment level of individual Board members; quality of corporate reporting;


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participation of stakeholders in the management; etc.

Since this is an important element affecting the long-term financial health of companies,good governance framework also calls for effective legal and institutional environment,

business ethics and awareness of the environmental and societal interests.

Hence, in the years to come, corporate governance will become more relevant and amore acceptable practice worldwide.

This is easily evident from the various activities undertaken by many companies inframing and enforcing codes of conduct and honest business practices; following morestringent norms for financial and non-financial disclosures, as mandated by law;accepting higher and appropriate accounting standards; enforcing tax reforms coupledwith deregulation and competition; etc.

However, inapt application of corporate governance requirements can adversely affectthe relationship amongst participants of the governance system. As owners of equity,institutional investors are increasingly demanding a decisive role in corporategovernance.

Individual shareholders, who usually do not exercise governance rights, are highlyconcerned about getting fair treatment from controlling shareholders and management.

Creditors, especially banks, play a key role in governance systems, and serve asexternal monitors over corporate performance. Employees and other stakeholders alsoplay an important role in contributing to the long term success and performance of the

corporation. Thus, it is necessary to apply governance practices in a right manner forbetter growth of a company.


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SUGGESTIONS AND OPINIONS

Corporations are the prominent players in the global markets. They are mainlyresponsible for generating majority of economic activities in the world, ranging fromgoods and services to capital and resources.

The essence of corporate governance is in promoting and maintaining integrit

Documents

Corporate Governance in Banks (1)