corporate governance for banks1

8/6/2019 Corporate Governance for Banks1

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CORPORATE GOVERNANCECORPORATE GOVERNANCEFOR BANKSFOR BANKS

ByBy

NARAYANA MURTHY, B.NARAYANA MURTHY, B.

HEADHEAD--TRAINING,EIBFS.TRAINING,EIBFS.1919 thth April to 22April to 22 ndnd April2009.April2009.



A HEARTY WELCOMEA HEARTY WELCOME

PROGRAM OBJECTIVES:PROGRAM OBJECTIVES:To give the participants an insight into theTo give the participants an insight into the

best practices followed by Global banks inbest practices followed by Global banks inCode of Ethics and Corporate GovernanceCode of Ethics and Corporate Governanceand to highlight the importance of enhancingand to highlight the importance of enhancingall the stakeholders value in Banks, and toall the stakeholders value in Banks, and toexplain how the three pillars of Basel IIexplain how the three pillars of Basel IIattempts to ensure compliance onattempts to ensure compliance onGovernance in Banks.Governance in Banks.



PROGRAM TRAININGPROGRAM TRAINING

METHODMETHODTHE TRAININGTHE TRAINING

PROGRAM BLENDSPROGRAM BLENDSCONCEPTS, EXERCISES,CONCEPTS, EXERCISES,HAND OUTS AND CASEHAND OUTS AND CASESTUDIES.STUDIES.



Broad Overview of ContentsBroad Overview of ContentsCorporate Governance ExplanationCorporate Governance ExplanationCorporate Governance International PerspectivesCorporate Governance International Perspectives8 Principles of Corporate Governance8 Principles of Corporate Governance

A Case Stud y A Case Stud y--Barings Bank Bankruptc y.Barings Bank Bankruptc y.

Criteria for Corporate GovernanceCriteria for Corporate Governance --Fundamental AssumptionsFundamental AssumptionsCriteria for Corporate GovernanceCriteria for Corporate Governance --Stakeholder relationshipsStakeholder relationshipsCriteria for Corporate GovernanceCriteria for Corporate Governance --Management Capabilit yManagement Capabilit yGovernance practices and process indicatorsGovernance practices and process indicators

An idealistic corporate governance practice An idealistic corporate governance practice360 degree corporate Governance Evaluation360 degree corporate Governance Evaluation

The Role of Management in Corporate Governance in BanksThe Role of Management in Corporate Governance in BanksPromoting an environment supportive for Corporate GovernancePromoting an environment supportive for Corporate Governancein Banks .in Banks .Handouts and case studies on Bank¶s Corporate Governance .Handouts and case studies on Bank¶s Corporate Governance .



W hat is Corporate Governance?W hat is Corporate Governance?

Corporate Governance is concerned withCorporate Governance is concerned withholding the balanceholding the balance between economic andbetween economic andsocial goals and between individual andsocial goals and between individual and

communit y goals . communit y goals . The corporate governance framework isThe corporate governance framework isthere tothere to encourage the efficient use of encourage the efficient use of resourcesresources and equall y to requireand equall y to requireaccountabilit y for the stewardshipaccountabilit y for the stewardship of thoseof thoseresources . resources . The aim is toThe aim is to allignallign as nearl y as possibleas nearl y as possiblethethe interests of individuals, corporationsinterests of individuals, corporationsand societ yand societ y

-- Sir Adrian Cadbur ySir Adrian Cadbur y



W hat is corporate governance?W hat is corporate governance?

(Continued)(Continued)The primary purpose of corporate leadership

is to create wealth legally and ethically .

This translates to bringing a high level of satisfaction to five constituencies -- customers,

employees, investors, vendors and the

society-at-large .



SOUND CORPORATESOUND CORPORATE

GOVERNANCE PRINCIPLESGOVERNANCE PRINCIPLESPRINCIPLE NO. 1PRINCIPLE NO. 1

Board members should be qualifiedBoard members should be qualifiedfor their positions, have a clear for their positions, have a clear understanding of their role inunderstanding of their role inCorporate Governance and be able toCorporate Governance and be able toexercise sound judgement about theexercise sound judgement about theaffairs of the Bank .affairs of the Bank .



SOUND CORPORATE GOVERNANCESOUND CORPORATE GOVERNANCEPRINCIPLES(Cond)PRINCIPLES(Cond)

PRINCIPLE 2.PRINCIPLE 2.

The Board of Directors shouldThe Board of Directors shouldapprove and oversee the bank¶sapprove and oversee the bank¶sstrategic objectives and corporatestrategic objectives and corporate

values that are communicatedvalues that are communicatedthroughout the Banking organisation.throughout the Banking organisation.



SOUND CORPORATE GOVERNANCESOUND CORPORATE GOVERNANCEPRINCIPLES (Cond)PRINCIPLES (Cond)

Principle 3.Principle 3.

The Board of Directors should set and enforceThe Board of Directors should set and enforce

clear lines of responsibility and accountabilityclear lines of responsibility and accountabilitythroughout the organisation.throughout the organisation.

Principle 4.Principle 4.

The Board should ensure that there isThe Board should ensure that there isappropriate oversight by senior managementappropriate oversight by senior managementconsistent with Board policy.consistent with Board policy.




Principle 5:Principle 5:The Board and senior management shouldThe Board and senior management shouldeffectivel y utilise the work conducted b y theeffectivel y utilise the work conducted b y the

internal audit function, external auditors andinternal audit function, external auditors andinternal control function .internal control function .

Principle 6:Principle 6:The Board should ensure that compensationThe Board should ensure that compensationpolicies and practices are consistent with thepolicies and practices are consistent with theBank¶s corporate culture, long term objectives,Bank¶s corporate culture, long term objectives,strateg y and control environment .strateg y and control environment .




Principle 7:Principle 7:The Bank should be governed in aThe Bank should be governed in a

transparent manner .transparent manner .

Principle 8:Principle 8:The Board and the senior ManagementThe Board and the senior Managementshould understand the Bank¶s operationalshould understand the Bank¶s operationalstructure, i .e ., ³Knowstructure, i .e ., ³Know -- your your --Structure .´ Structure .´



CriteriaCriteria ± ± FundamentalFundamentalassumptionsassumptions

Stakeholder relationships are strengthened b y givingStakeholder relationships are strengthened b y givingstakeholders what the y value . Thus, stakeholder relationships arestakeholders what the y value . Thus, stakeholder relationships aremeasured b y :measured b y :

Determining what a particular stakeholder valuesDetermining what a particular stakeholder valuesBenchmarking the extent to which the compan y has been ableBenchmarking the extent to which the compan y has been ableto deliver such value to that stakeholder to deliver such value to that stakeholder

Fairness of W ealth distribution across shareholder classes to beFairness of W ealth distribution across shareholder classes to bedetermined holisticall y to assess sustainabilit y of business modeldetermined holisticall y to assess sustainabilit y of business model

and of s ystems and processesand of s ystems and processes



CriteriaCriteria ± ± Stakeholder Stakeholder relationshipsrelationships

ShareholdersShareholdersReturn on invested capital compared to weightedReturn on invested capital compared to weightedaverage cost of capital, pa yout ratio etc . average cost of capital, pa yout ratio etc .

Debt HoldersDebt HoldersHigh debt protection measuresHigh debt protection measures ± ± credit rating;credit rating;upgrades in ratings etc .upgrades in ratings etc .

CustomersCustomersMarket Share; Assessment of Customer Market Share; Assessment of Customer satisfaction; Cost savings passed on tosatisfaction; Cost savings passed on tocustomers etc .customers etc .



CriteriaCriteria ± ± Stakeholder Stakeholder relationships (Cond)relationships (Cond)

EmployeesEmployees Absolute Salar y levels, adjusted growth in average annual Absolute Salar y levels, adjusted growth in average annual

salaries; ESOPs; Attrition rates; Intangibles etc .salaries; ESOPs; Attrition rates; Intangibles etc .SuppliersSuppliers

Relative change in credit terms;Support/Intangibles toRelative change in credit terms;Support/Intangibles tosuppliers; supplier attrition rates;etc .suppliers; supplier attrition rates;etc .

SocietySocietyTotal direct taxes paid; Emplo yment generated; ExpenditureTotal direct taxes paid; Emplo yment generated; Expenditureon social infrastructure; Environmental/Social impact cost;on social infrastructure; Environmental/Social impact cost;Fair practices followed etc .Fair practices followed etc .



CriteriaCriteria ± ± ManagementManagementCapabilit yCapabilit y

Management ReputationManagement ReputationExperience of management etc .Experience of management etc .Process Qualit yProcess Qualit yConsistenc y of past performanceConsistenc y of past performanceSuccess of past strategiesSuccess of past strategiesTrack record on innovationTrack record on innovation



Equitable Treatment of ShareholdersEquitable Treatment of ShareholdersDisclosure of shareholding patternDisclosure of shareholding pattern

Ownership concentration and equitable treatmentOwnership concentration and equitable treatmentDisclosure of disproportionate control provisionsDisclosure of disproportionate control provisions

Anti insider trading mechanism Anti insider trading mechanismOwnership rights of shareholdersOwnership rights of shareholders

Articulation and documentation of basic ownership rights Articulation and documentation of basic ownership rights

Impediments to market forces to corporate controlImpediments to market forces to corporate controlEase and effectiveness of shareholder participation at meetingsEase and effectiveness of shareholder participation at meetings

Governance Practice andGovernance Practice and

Processes IndicatorsProcesses Indicators



Functioning of BoardFunctioning of Board

Articulation of roles of board and committees Articulation of roles of board and committees Adequate discharge of role b y the board and Adequate discharge of role b y the board andcommitteecommitteeContribution of independent directorsContribution of independent directors

Governance Practice andGovernance Practice and

Processes Indicators(Cond)Processes Indicators(Cond)



Governance Practice and ProcessesGovernance Practice and ProcessesIndicators (Cond)Indicators (Cond)

Transparency & disclosureTransparency & disclosure ± ± financial and operationalfinancial and operational Adequac y of audit procedures and independence of auditors Adequac y of audit procedures and independence of auditors

Extent and qualit y of disclosures to all stakeholdersExtent and qualit y of disclosures to all stakeholdersTimeliness and ease of access to information to all stakeholders .Timeliness and ease of access to information to all stakeholders .Composition of BoardComposition of Board

Selection process; nominations committee, succession policiesSelection process; nominations committee, succession policiesRelevant competencies at the board/ board compensationRelevant competencies at the board/ board compensation

Independence of board / adequate representation of allIndependence of board / adequate representation of allshareholdersshareholders



An idealistic Corporate An idealistic CorporateGovernance practiceGovernance practice

Looks at µwh y corporate governance¶« .to create wealth for Looks at µwh y corporate governance¶« .to create wealth for allallshareholders.shareholders.

A A globally unique frameworkglobally unique framework ± ± each stakeholder relationshipeach stakeholder relationshiprecognised as contributing to wealth creationrecognised as contributing to wealth creation

Aims at benchmarking a compan y¶s wealth creation capabilities Aims at benchmarking a compan y¶s wealth creation capabilities --due importance to wealth creation record for due importance to wealth creation record for all stakeholders.all stakeholders.

An opinion on An opinion on sustainable wealth creationsustainable wealth creation Appropriate balance of Appropriate balance of qualitative & quantitativequalitative & quantitative parameters;parameters; pastpastperformance &performance & futurefuture expectationexpectationW illW illmonitor monitor governance practices on angovernance practices on an onon--goinggoing basisbasis



360 0

C orporateGovernance

AnalyticalPerspective

Corporate GovernanceCorporate Governance

A 360A 36000

EvaluationEvaluation

Society

Board

Employees

MajorityShareholders

MinorityShareholders

C reditors

C ustomers

Suppliers



What are Work EthicsEthics are the values and behaviors which people feel aremoral.In other words, ³ethics´ is the name we give to our valuesor good behavior.So a positive work ethic is the collection of all the valuesand actions that people feel are appropriate in the work

place.A moderately competent employee who has a positiveattitude, who works well with others, and shows up towork will almost always be chosen over someone elsewho does not possess these qualities.



How to ensure proper Ethics atHow to ensure proper Ethics at

the work placethe work placeAct Honestly and behave with integrity.Be accountable for actions.Treat everyone with respect and courtesy, and without harassment anddiscrimination.Disclose and take reasonable steps to avoid any conflict of interest inconnection with their employment.Maintain confidentiality and privacy during and after theiremployment.Use resources efficiently and effectively and keep appropriate records.Understand any laws and regulations relevant to the work and followlawful and reasonable instructions, policies and procedures.Report and instance of suspected corrupt conduct, maladministrationor serious and substantial waste.Tell the manager if you feel unable to follow any part of this guide orfollow any policies, instructions or procedures.Follow highest level of Corporate Governance.



Work EthicsWork Ethics ± ± 20 BE s20 BE sBe on time to work.Be at work every day.Be interested in your job and BankBe enthusiastic, have a positive mental attitude.Be ready to give 100% effort - do your best.Be honest and trustworthy.Be willing and wanting to learn.Be willing to ask questions.Be drug free, low risk, safety aware and health consciousBe a positive leader.Be loyal.Be willing to make suggestions (put your mind to work) to make the Bank better.Be responsible for your assigned work.Be ready to work with the team (individual performance is important but you must also work withothers to reach agreed upon goals).Be Quality minded and work toward continuous improvement.Be willing to understand that profit is good. Banks are founded and operate as profit centre. Makeyour Bank profitable.Be ready to do things right the first time.Be willing to learn from other people and follow the things that work.Be responsible for making good choices for yourself and your teammates.Be a balanced person and evaluate yourself.



The 10 Traits-Work Ethics

AttendanceCharacter Teamwork

Appearance AttitudeProductivit y

Organizational SkillsCommunicationCooperationRespect

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