“Corporate governance is 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 and corporate funds in the management of a company.”
- Report of the Committee on Corporate Governance of the Securities and Exchange Board of India, 2003
- INTRODUCTION
Corporate governance is of great consequence for markets all around the world. This is because financial and economic development revolves around good corporate governance practices. Research studies have proved that financial development in a country depends on investor protection in that country. A high quality of investor protection leads to more developed stock markets. Corporate governance and economic development are inter- linked. Efficient corporate governance systems encourage the development of robust financial systems. Efficient corporate governance practices provide increasing returns to investors by lowering cost of capital by reducing risk. This creates superior firm valuation. Secondly, with effective corporate governance mechanisms in place, banks can ensure better allocation of resources.
Banks play a crucial role in the flow of capital. Banks are an imperative constituent of any economy. Hence, the proper governance of banks is very crucial for growth and development of the economy and the country as a whole. The banking system in a country tends to be heavily regulated with restrictions and prudential requirements. This is because failure of one institution may have a cascading effect resulting in the failure of other institutions leading to significant costs to the economy. Fundamentally, banks must act in a way that promotes “confidence” to its stakeholders. Good corporate governance and supervisory actions harmonize one another. Administrators have to depend on the skills and competence of the board.
Banks engage in the business of accepting deposits and giving loans. They lend money borrowed from depositors to customers who apply for loans. Thus, the collapse of banks will result in monetary loss for the depositors. It is imperative that the interests of depositors be protected. This is also one of the main reasons for corporate governance assuming greater importance.
Poor corporate governance practices can result into bank failures. These mean significant costs to all stakeholders and also the economy in general. There is also possibility of broader macroeconomic implications. Poor corporate governance can also affect the ability of a bank to properly manage its assets and liabilities. This can result into a liquidity crisis. The fact remains that corporate governance approaches will differ among different banking institutions. However, a bank must have a reasonable level of corporate governance taking various aspects into consideration such as its size, activities and the nature of its business.
Good corporate governance standards include
- Establishing standards of conduct and ethical behaviour for directors, senior management and other employees.
- Conducting proper regular checks to get acceptable and satisfactory assurance that the bank has an effective corporate governance mechanism in place for ensuring observance to these pre-determined standards
- Setting up the responsibilities and also accountability requirements of the board.
- Setting up terms for appointment of qualified and capable individuals to senior management positions.
- Conducting checks on a regular basis to evaluate the effectiveness and of senior management in managing the operations of the bank.
- Supervising strategic management and oversee risk management by establishing appropriate procedures for managing risks.