Corporate Governance and Ethical Aspect of Business

8/7/2019 Corporate Governance and Ethical Aspect of Business

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Centre for Corporate Governance & Citizenship

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Corporate Governance, BankBoards & Directors

______________________________

Prof N Balasubramanian


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"This development has resulted in

incalculable and unjustifiable damage to

Brand India and Brand IT in particular.

What is especially ironic is that Satyam was

started by entrepreneurs who have served as

role models for an entire generation ofyoung Indians."... Anand Mahindra, Vice-chairman and MD, Mahindra Group,


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"The idea of corporate governance has not

sunk in as much as it should. Certainly we

have dynamic, modern companies in which

it has but in many family-owned businesses

it has not. We need truly independent

directors and auditors."3

- T K Bhaumik, Chief Economic Adviser,

JK Organization4, in January 2009.


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This was one of those few companies in Indiathat supposedly had been doing things the

right way - that is, the Western way. Itallegedly had all the checks and balances aU.S. company would want in an overseasbusiness partner. Its financial statementsreceived repeated clean bills of health from a

respected outside auditor,PricewaterhouseCoopers. And still itscorporate governance rotted away from theinside."1

- Matt Kelly, Editor-in-Chief, ComplianceWeek2, in January 2009


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Presentation Outline

Overview of Corporate Governance

Unique Dimensions of Banks Governance

Bank Boards, Directors, & Governance


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Overview of CorporateGovernance


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Some Definitions Corporate Governance is the system by

which companies are directed and

controlled Cadbury Report (UK), 1992

to do with Power and Accountability:who exercises power, on behalf of whom,

how the exercise of power is controlled. Sir Adrian Cadbury, in Reflections on Corporate

Governance, Ernest Sykes Memorial Lecture, 1993


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A Canadian Definition the process and structure..to direct and

manage the business and affairs of the

corporation with the objective of enhancing

shareholder value, which includes ensuring

the financial viability of the business.

W

here were the Directors? Guidelines forImproved Corporate Governance in Canada, TSE,

1994


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An Indian Definition fundamental objective of corporate

governance is the enhancement of the long-

term shareholder value while at the same

time protecting the interests of other

stakeholders.

SEBI (Kumar Mangalam Birla) Report on

Corporate Governance, January, 2000


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A Gandh

ian Definition

Trusteeship obligations inherent in

company operations, where assets and

resources are pooled and entrusted to the

managers for optimal utilisation in the

stakeholders interests.


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Some Furth

er DefinitionsCorporate governance is essentially about

leadership:

leadership for efficiency;

leadership for probity;

leadership with responsibility; and

leadership which is transparent and whichis accountable.

- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH


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Wh

at is Corporate Governance? The Manner in which a Corporation is Run

Achieving its Objectives

Transparency of its Operations

Accountability & Reporting

Good Corporate Citizenship

The Processes & Operating Relationships thatBest Achieve Organisational Goals


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Some Governance Models

Finance or the Principal-Agent Model

Markets for Capital, Managerial Talent and

Corporate Control, Key determinant

In general, profit-maximisation goal is co-

functional with social-welfare-maximisation

Shareholders as Residual Claimants havesuperior control rights


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Exclusive Accountability to

Shareholders Risk-bearing Entrepreneurs

Residual Claimants

Winding-up Ranking: Last in Pecking Order

Boards Appointed by Shareholders

Non-congruence of Stake

holder Interests


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The Stakeholder Case

Firm Objective must be defined more widely than

just shareholder-value-maximisation, since risk

capital is not the only, or even the major input Residual Claimant RightsNotUniversally Valid,

eg, Circumscribed in case of pre-bankruptcy (US

Chapter XI) Situations

Other Such: Employees with Firm-specific

Specialised Skills, Customers/Vendors with

Substantial Stake in the Business, etc


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Towards an Integrated Model

One-Size does notFit All Circumstances

A Combination of Shareholder/Stakeholder

Models Necessary

Some Argue, While Shareholder Claim

Well Established, Stakeholder Claims Need

to be Proved

Tailor Model to Suit Unique Circumstances


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The Corporate Board

Central to Corporate Governance

Juxtaposed between Shareholders on the one

hand, and on the other, Managers of the Entity

(Cadbury)

Follows Distancing between Ownership and

Control (Berle and Means)Trustee for All Shareholders

Loyalty & Commitment Always to Company


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Board Role & Responsibility

Provide/ Exercise

Leadership and Strategic Guidance

Objective Judgement Independent of Management

Control over the Company

Direct and Control the Management of the

Company

Be Accountable at all times to All Shareholders


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Dimensions of Board

Responsibility Direction involves

Formulation & Review of Company Policies,

Strategies, Budgets and Plans, Risk

Management Policies, Top Level HR Policies,

etc

Setting Objectives & Monitoring Performance Oversight of Acquisitions, Divestitures,

Projects, Financial and Legal Compliance, etc


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Dimensions of Board

Responsibility Control Involves

Prescribing Codes of Conduct,

Overseeing Disclosure & Communication

Processes,

Ensuring Control Systems to Protect Company

Assets Reviewing Performance & Realigning Action

Initiatives to Achieve Company Objectives


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Dimensions of Board

Responsibility Accountability Involves

Creating, Protecting and Enhancing Company

Wealth and Resources

Timely and Transparent Reporting

Good Corporate Citizenry including Discharge

of Stakeholder Obligations and SocietalResponsibilities without Compromising the

Shareholder Wealth Maximisation Goal


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Corporate Governance & Capital Market

Drivers: A Conceptual Framework

Listed Corporations

(The Board & the Executive)

Regulators Government Stock Exchanges

(SEBI/RBI) Legislation Listing Agreements

Market Operators Institutional Investors Press/Media

(Rewards) (Pension Funds/Insce Cos) (Opinion Makers)

Lenders

(Banks/

Depositors)

Shareholders/

Stakeholders

REGULATION & LEGISLATION

Market Operations, Critique & Monitoring


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IsTh

ereMore to Business

than just the

Financial Numbers?


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Economic

An Enterprises Triple Effect on Society

BusinessImpact

Sustainable Development Equal Opportunities

Waste Control Education &

Culture

Emissions Community

Regeneration

Energy Use Human Rights

Product Employee

Life-cycle Volunteers

Product Wealth Productive Ethical

Value Generation Employment Trading


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The Triple-Bottomline Impact

Business Impact

environment society

economics


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Governance Orientation Matrix


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Governance Orientation &

Sustainable Profits

G

Y

STEW S IP

S STAI ABLE

P O ITLI E


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Unique Dimensions of BankGovernance


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Unique Dimensions in Bank

Governance Bank Role in Good Governance Two-fold:

Governance Within

Governance at Clients

As Fund-Providers, Banks GenerateMultiplier Impact on Economy

Confidence &

Trust Key Bank Distress,Failure, Dis-Repute Impacts Economy,

Erodes Country Standing Globally


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Governance Stakeholder Dimension Very Strong in

Banks-

Depositors Borrowers

Employees

Community

Regulators

Government


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Governance Banking Risk Potential

Internal Fraud & External Fraud, Highly

Likely, since cash/cash equivalents closest ingrab-chain

Employment Practices/ Workplace Safety

Product, Process, Business Practices Damages to Physical Assets & IPR/Brands

Business Disruption MajorThreat


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Governance Non-Compliance (Intentionally or

Otherwise) with Laws, Rules, Regulations

Consequences of (Non) Compliance Risk in

Banks

Legal or Regulatory Sanctions

Financial or Reputational Loss


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Governance Banks as Promoters of Good Governance

Prescribing Governance Standards at

Borrowers (IFC, CalPERS, FIs) Encourage by Preferential Lending Rates,

OtherTerms

Discourage by Adversarial Lending Rates,

OtherTerms A Measure of Strengthening Protection of Bank

Assets, Hence Good for Banks OwnGovernance


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Some Unique Dimensions of Public

Sector Bank Governance in Developing

Economies

Political & Bureaucratic Interventions

Banking as a Policy Instrument

Supervisory Interventions, Micro-Managing

Captive Resource of First Resort

Suspect Independence of Supervisory Institutions Lack of Accurate/ Timely Accounting &

Disclosure Practices


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Bank Boards, Directors, &

Governance


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Some Unique Attributes &

Responsibilities of Bank Boards

&Directors Assume Responsibility for Effective & Efficient

Management, through Oversight Mechanisms

Integrity is Indivisible; Role Model Director is theMost Persuasive Statement of Ethical values

ConsiderTransparency as the Norm.

Confidentiality should not lead to Opacity Continued


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Some Unique Attributes &

Responsibilities of Bank Boards &

Directors

Ultimate Responsibility forTrue and Fair

Presentation Rests with the Board

Poor Leadership Infects.

Adapted from Guidance for the Directors of Banks, Jonathan Charkham, (2003)

[OECD-World Bank] Global Corporate Governance Forum, Washington


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Some Closing Thoughts

Right-Size the Board and its Composition

Complementary Skill-Sets & Financial

Acumen Essential

Fit & Proper Criteria for Membership

More Focus on Oversight, Less on Micro-

Management

Contribution as Important as Surveillance


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Some Closing Thoughts

Minimise Conflict of Interest Potential

Respect Minority / External Shareholders

Rights (Listed Public Sector Banks)

Bank Boards to Go That Extra Mile: Go

Beyond What is Prescribed to What is

Appropriate That Way lies GreaterValuations & Better Reputations


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Corporate Governance and Ethical Aspect of Business

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