MBA 843
INTERNATIONAL BANKING
UNIT 5 CORPORATE GOVERNANCE AND BANK
MBA 843
INTERNATIONAL BANKING
people, corporate governance is about ³ the whole set of legal, cultural, and institutional arrangements that determine what corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocaWHG´ (Blair, 1995).
Others narrow the focus of governance to ³the relationship among various participants (chief executive officer, management, shareholders, and employees) in determining the direction and performance of
corporaWLRQV´ (Monks and Minow, 1995). Still others narrow the focus even more and say corporate governance deals with ³the way suppliers
of finance assure themselves of getting a return on their investmeQW´ (Shleifer and Vishny, 1997).
These different definitions of corporate governance reflect different perspectives on what corporate governance is, what it should do, and the problems it should address.
However, for the purpose of this course not withstanding the diversity of the concept, corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way in which a bank is directed, administered or controlled. Corporate governance also includes the relationship among the many players involved (the stockholders) and the goals for which the bank is governed.
Corporate governance implies that the banks would manage its affairs with diligence, transparency, responsibility, and accountability and would maximize shareholdeU¶s wealth.
The term corporate governance in banking sector has come to mean two things; the process by which banks are directed and controlled; and a field in economics, which studies the many issues arising from the separation of ownership and controlled.
The corporate governance structure specifies the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the bank objectives are set, as well as the means of attaining and monitoring the performance of those objectives.
3.2 Parties to Corporate Governance
Parties involved in corporate governance include the regulatory body such as chief executive officer CEO, the Board of directors, management, and shareholders. Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.
MBA 843
INTERNATIONAL BANKING
In banks, the shareholder delegates decision rights to the managers to act in the principals¶ best interests. This separation of ownership from control implies a loss of effective control by shareholders over management decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of
investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the bank¶s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the bank to owners and authorities.
All parties to corporate governance have an interest whether direct or indirect, in the effective performance of the bank. 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 and services. In return these individuals provide value in the form of natural, human, social and other forms of capital.
A key factor in an individual¶s decision to participate in bank or any organization e.g. through providing financial capital and trust that they will receive a fair share of the banks returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.
3.3 Principles of Corporate Governance in Commercial Banks
Key elements of good corporate principles include honesty, trust and integrity, openness, performance orientation, responsibility, accountability, mutual respect and commitment to the organization.
Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectives. In particular senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.
MBA 843
INTERNATIONAL BANKING
Commonly accepted principles of corporate governance are:
Right and equitable treatment of shareholders: Banks should respect the right of shareholders and help shareholders to excise those rights.
They can help shareholders excise their rights by communicating information that is understandable and accessible and encouraging shareholders to participate in annual general meetings. Fairness ensures that shareholders irrespective of the size of their shareholding are treated equally.
Interests of other stakeholders: Banks should recognize that they have legal and other obligations to all legitimate stakeholders. This can be achieve through accountability which requires that two major corporate organs board and management are accountable to the stakeholders in all their actions, inactions or even reactions
Roles 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 fulfil its responsibilities and duties. There are issues about the appropriate mix executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person. Responsibility is ones obligation to discharge the duties assigned to the best of ones ability and in accordance with laid down procedures as well as instruction received.
Integrity and ethical behaviour: Banks should develop a code of conduct for their directors and executives that promotes ethical and responsibility decision-making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure. Because of this many banks establish compliance and ethics programs to minimize the risk that the firm steps outside of ethical and legal boundaries.