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SUMMARY:
1. CORPORATE GOVERNANCE- AN INTRODUCTION
The subject of corporate governance has attracted worldwide attention with a series of collapse of high
profile companies like Enron, WorldCom, HIH insurance group etc. These failures have shattered the
trust of investors worldwide. Some of the scandals which made headlines all around the world were
somewhere related to poor corporate governance. These include the $18 billion meltdown of Parmalat
Finanziaria, SpA in 2003. Parmalat was among the largest food-based companies in the world .The
Parmalat case was one of the biggest scandals to hit Europe and many analysts called this fraud as
'Europe's Enron'. The company’s corporate governance structure could not keep up to some of the key
existing Italian corporate governance standards of best practice (Melis,2004). Another classic example
of a corporate house collapsing due to poor decision making and weak corporate governance was the
HIH insurance group of Australia. This collapse resulted in a deficiency up to $5.3 billion, “making it
the largest corporate failure” in Australia (Lipton, 2003). The collapse of the China Aviation Oil (CAO)
also created certain doubts regarding the standard of corporate governance in China. This collapse
came at a time when many companies were trying to get internationally listed and foreign investors
were becoming more and more eager to buy them out (Economist Intelligence Unit, 2004).
Poor corporate governance in banks is not a new subject. This inefficiency has been around for a very
long time. Since the beginning of Banking in Nigeria in 1914, almost “75 banks were lost primarily
because of factors related to poor corporate governance”. The banks did not fail due to lack of
customers but due to how they were managed and governed. According to a study by the Nigerian
Deposit Insurance Corporation, the main reason for these failures was interference of board members
(www.allafrica.com). Moreover, the recent subprime crises highlighted many issues of corporate
governance in banks world over. The main issue was that of independent directors. For e.g., UBS, one
of the world’s largest banks was among the biggest losers in the subprime crisis. It suffered a loss of
about $38 billion. As a result it replaced four of its directors. The departing members included “three
outsiders with experience respectively in rail equipment, chemicals and information technology”. This
shows that banks should definitely use experts on their boards (Economic Times, 2008). According to
Zabihollah Rezaee (2005), there may be seven reasons behind these high profile failings. These include
lax regulations, overconfident and egoistic management, inappropriate business conduct by top level
management, deficiency of alert oversight functions, unproductive audit functions, poor financial
disclosures and negligent shareholders. The above frauds adversely affect corporate governance,
auditors’ creditability and the quality of financial statements.
The term governance has been derived from the word gubernare, which means to rule or steer.
Originally this term meant to be a normative framework for exercise of power and acceptance of
accountability used in the running of kingdoms, regions and towns. However, over the years it has
found significant relevance in the corporate world. This is basically due to growing number and size of
the corporations, the widening base of the shareholders, increasing linkages with the physical
environment, and overall impact on the society’s wellbeing as we need a proper administrative system
to regulate so many complex things. The analysis of World Bank definition on corporate governance
seems more appropriate as it analyzes from two different perspectives. From the company’s point of
view, the stress is put on the relations between the various stakeholders such as owners, management,
employees, customers, suppliers, investors and communities. From another perspective in defining
corporate governance is reliable path where the corporate governance structures can be established. So,
a “nation’s system of corporate governance can be seen as an institutional matrix that structures the
relations among owners, boards, and top managers, and determines the goals pursued by the
corporation¨. (World Bank, 2002) The OECDs (1999) original definition is: “Corporate governance
specifies the distribution of rights and responsibilities among different participants in the corporation,
such as the board, managers, shareholders and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, it also provides the structure
through which the company objectives are set, and the means of attaining those objectives and
monitoring performance.
Let us now discuss some of the important definitions of Corporate Governance.
1. “Corporate Governance deals with the ways in which suppliers of finance to corporations
assure themselves of getting a return on the investment.” The Journal of Finance, Shleifer and
Vishny, 1997 (page 737)
2. “Corporate Governance is about promoting corporate fairness, transparency and
accountability.” J.Wolfenson, President of the World Bank as quoted by an article in Financial
Times June 21, 1999
3. “Corporate Governance – which can be defined narrowly as the relationship of a company to
its shareholders, or, more broadly, as its relationship to society …” Financial Times 1997
4. “Corporate Governance is the system by which business corporations are directed and
controlled. The Corporate Governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which the
company objectives are set, and the means of attaining those objectives and monitoring
performance.” OECD April 1999 (OECD’s definition is consistent with the one presented by
Cadbury, 1992)
5. “Corporate Governance is a field in economics that investigates how corporations can be made
more efficient by the use of institutional structures such as contracts, organizational designs
and legislation. This is often limited to the question of shareholder value i.e. how the
corporate owners can motivate and/or secure that the corporate managers will deliver a
competitive rate of return. Mathiesen (1999)
Objectives of Corporate Governance
The fundamental objective of corporate governance is to enhance shareholders' value and protect the
interests of other stakeholders by improving the corporate performance and accountability. Hence it
harmonizes the need for a company to strike a balance at all times between the need to enhance
shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in
the company. Further, its objective is to generate an environment of trust and confidence amongst those
having competing and conflicting interests.
It is integral to the very existence of a company and strengthens investor's confidence by ensuring
company's commitment to higher growth and profits. Broadly, it seeks to achieve the following
objectives:
� A properly structured board capable of taking independent and objective decisions is in place at
the helm of affairs;
� The board is balance as regards the representation of adequate number of non-executive and
independent directors who will take care of their interests and well-being of all the stakeholders;
� The board adopts transparent procedures and practices and arrives at decisions on the strength
of adequate information;
� The board has an effective machinery to subserve the concerns of stakeholders;
� The board keeps the shareholders informed of relevant developments impacting the company;
� The board effectively and regularly monitors the functioning of the management team;
� The board remains in effective control of the affairs of the company at all times.
The overall endeavour of the board should be to take the organisation forward so as to maximize long
term value and shareholders' wealth.
Rationale of Study
Before going into corporate governance of banks in particular, let us recall, just for the sake of context,
why corporate governance is important in general. At its most basic level, corporate governance sets up
the “rules of the game” to deal with issues arising from separation of ownership and management so
that the interests of all stakeholders are protected. Empirical evidence shows that businesses with
superior governance practices generate bigger profits, higher returns on equity and larger dividend
yields. Importantly, good corporate governance also shows up in such soft areas as employee
motivation, work culture, corporate value system and corporate image. Conversely, the failure of high
profile companies such as BCCI, Enron, WorldCom and Parmalat was a clear lesson of the damage bad
corporate governance can inflict.
Here at home we had a corporate scandal of unprecedented dimensions in Satyam Computers where
the company’s CEO admitted to having falsified accounts to the tune of over ` 7000 crore, and that too
spread over several years. Even as the judicial process relating to this alleged fraud is still under way,
the big question is in what ways was this failure of corporate governance and how are we fixing those
lacunae? We had instances of poor governance in the banking sector as well - erosion of standards in
forex derivative transactions and fraud in wealth management schemes - reminding us that we need to
work hard to get to best practice in every area of corporate governance.
No matter what view of the corporate objective is taken, effective governance ensures that boards and
managers are accountable for pursuing it. The role of effective CG is of immense significance for the
society as whole.
At first place it promotes the efficient use of scarce resources both within the organisation and the
larger economy.
Secondly, it makes the resources flow to those sectors or entities where there are efficient production of
goods and services and the return is adequate enough to satisfy the demands of stake holders.
Thirdly, it provides a broad mechanism of choosing the best managers to administer the scarce
resources.
Fourthly, it helps the mangers to remain focused on improving performance, making sure that they are
replaced when they fail to do so.
Fifthly, it pressurizes the organization to comply with the laws, regulations and expectations of society
and last but not the least it assists the supervisors to regulate the entire economic sector without
partiality and nepotism.
In order to overcome the under noted serious concerns within the business community, there is a need to introduce a
system of corporate governance that will ensure the transparency, integrity and accountability of Management including
non-executive directors.
•Concentration of greater financial power and authority in a lesser number of individuals,
•Violations of foreign exchange rules and regulations,
•Large scale diversion of funds to associate companies and risky ventures,
•Unfocussed business decisions leading to losses,
•Preferential allotment of shares to promoters at low prices,
•Exploited the weaknesses in the Accounting Standards to inflate profits and understate liabilities,
•Frequent changes in Board structures,
•Spinning off profitable business operations to subsidiary companies, and
•Charging of royalty for use of brandname by the parent company by leading companies.
In an open financial market, investors choose from a variety of investment vehicles. The existence of a corporate
governance system is likely a part of this decision-making process. In such a scenario, companies that are more open and
transparent, and thus well governed, are more likely to raise capital successfully because investors will have the
information and confidence necessary for them to lend funds directly to such companies. Moreover, well-governed
companies likely will obtain capital more cheaply than companies that have poor corporate governance practices because
investors will require a smaller “risk premium” for investing in well-governed companies. Thus, in an efficient capital
market, investors will invest in companies with better corporate governance frameworks because of the lower risks and
the likelihood of higher returns. Good corporate governance practices also enable Management to allocate resources more
efficiently, which increases the likelihood that investors will obtain a higher rate of return on their investment.
Limitations of corporate governance implementation in India
• If the Board is in awe of the family executive, it makes it difficult for the Board sometimes to ask tough
questions or at other times the right questions at the right time in order to serve the interests of the shareholders
better. As a result truly independent directors are rarely found in Indian companies. Serving on multiple boards is
problematic because doing so can overburden directors, thus hampering their performance, and increase the
potential for directors to experience conflicts of interest between the various corporations they serve.
• It is admitted that contribution of the independent directors is limited because the average time spent in Board
meetings by these directors is barely 14 to 16 hours in a year. In some cases, it has been found that no proper
training and orientation regarding the awareness of rights, responsibilities, duties and liabilities of the directors is
provided to an individual before appointing him/her as a director in the Board. Also there is unseen but the active
participation of political class.
• The directors on the board are largely reliant on information from the management and auditors, with their
capacity to independently verify financial information being quite limited, while auditors, as this case suggests,
have also been equally reliant on management information. The relevant issue here is the extent and the depth of
auditors’ effort in their exercise of due diligence. Excessive reliance on information from the management is
symptomatic of the ownership or control of companies in India by business families, and that poses a particular
challenge for corporate governance in India.
• The greatest drawback of financial disclosures in India is the absence of detailed reporting on related party
transactions. In addition, poor quality of consolidated accounting and segment reporting leads to
misrepresentation of the true picture of a business group.
• Although India's investor-protection laws are sophisticated, litigants must wait a long time before
receiving a judgment. Delays in the delivery of verdicts, high costs of litigation and the lengthy judicial
appointment process in courts make the legal enforcement mechanism ineffective. According to the OECD, “the
c credibility and utility of a corporate governance framework rest on its enforceability.”
• In India, the two audit-related issues which are commonly recognized are that of auditor independence (which is
a problem worldwide) because of the large if segmented market in accounting services, and the perceived
powerlessness of auditors in the face of corporate pressure. In many cases, they are ill-equipped to handle the
needs of large companies, because in the face of an audit failure, it is very difficult to discern whether the auditors
were complacent or they were pressurized by the concerted efforts of the insiders.
• There is no proper system to monitor the work of audit firms or to review the accounts prepared by the
company’s statutory auditors. However, in the aftermath of the Satyam case, the SEBI has decided to introduce a
peer review mechanism to review the accounts prepared by a company’s statutory auditor. In addition, the SEBI
has also decided to constitute a panel of auditors to review the financial statement of all BSE Sensex and NSE
Nifty companies.
Also there is no statutory compliance for the companies to obtain a report on Corporate Governance Rating by the Credit
Rating Agencies in India.
2. REVIEW OF LITERATURE
Sarkar and Sarkar (2000) provided evidence on the role of large shareholders in monitoring
company value in the Indian context, whose corporate governance system is a hybrid one. Similar
to other studies, this study also found that after a definite level of block holdings by directors the
company value enhances. But it did not find any substantial proof that institutional investors,
normally mutual funds, are active in corporate governance.
Turnbull, Shann (2000) this paper provides orientation in understanding the topic of corporate
governance to further research, analysis and reform. Limitations in the theories and practices of the
dominant Anglo paradigm are identified. Various viewpoints used in analyzing corporate
governance are described with their cultural specificities.
Becht, Marco, Bolton, Patrick and Röell, Ailsa A (2002) believe that Corporate governance is
concerned with the resolution of collective action problems among dispersed investors and the
reconciliation of conflicts of interest between various corporate claimholders. In this survey they
review the theoretical and empirical research on the main mechanisms of corporate control, discuss
the main legal and regulatory institutions in different countries, and examine the comparative
corporate governance literature.
A significant amount of research has been done on corporate governance practices in the Indian
context. Mukherjee (2002) argues that India has been moving closer to taking on an Anglo-
American (Anglo-Saxon) form of corporate governance. But the author questions the usefulness of
the Anglo-American model. She answers this question through an assessment of the "development
impact" of the new model as pointed out by measures such as growth, employment and respect for
shareholder rights. The results suggest that the Anglo-American model is not very effective in
meeting the objectives of the social system in India.
The study by Mohanty(2003) suggests that companies with good corporate governance measures
are easily able to borrow money from financial institutions as compared to companies with poor
corporate governance measures. Moreover, there is evidence that mutual funds have invested
money in companies with a good corporate governance track record as compared to companies with
a poor CG track record. By making use of a simultaneous equation approach, this study wraps up
by saying that this positive relationship is a result of the mutual funds (development financial
institutions) investing (lent money) in companies with good governance records and also because
their investments have helped to enhance the financial performance of such companies.
Bebchuk, Lucian A., Cohen, Alma and Ferrell, Allen (2004) investigate which provisions,
among a set of twenty-four governance provisions followed by the Investor Responsibility
Research Center (IRRC), are correlated with firm value and stockholder returns. Based on this
analysis, they put forward an entrenchment index based on six provisions - four constitutional
provisions that prevent a majority of shareholders from having their way (staggered boards, limits
to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority
requirements for charter amendments), and two takeover readiness provisions that boards put in
place to be ready for a hostile takeover (poison pills and golden parachutes). They find that
increases in the level of this index are monotonically associated with economically significant
reductions in firm valuation, as measured by Tobin's Q which present suggestive evidence that the
entrenching provisions cause lower firm valuation.
Brown, Lawrence D. and Caylor, Marcus L. (2004) analyzed broad measure of corporate
governance, Gov-Score, based on a new dataset provided by Institutional Shareholder Services.
Gov-Score is a composite measure of 51 factors encompassing eight corporate governance
categories: audit, board of directors, charter/bylaws, director education, executive and director
compensation, ownership, progressive practices, and state of incorporation. They relate Gov-Score
to operating performance, valuation, and shareholder payout for 2,327 firms, and find that better-
governed firms are relatively more profitable, more valuable, and pay out more cash to their
shareholders.
Rajesh Chakrabarti (2005) said that the problem of corporate in India is different from that of the
Anglo-Saxon environment. In India, the problem is the exploitation of minority shareholders by the
dominant shareholders, whereas in the Anglo-Saxon environment, it is exploitation of shareholders
by the managers. The author argues that in the Indian context, the capital market is more capable of
disciplining the majority shareholders than the regulators. The regulator can just facilitate the
market to ensure corporate governance. It cannot enforce corporate governance effectively, since it
involves micro-management.
Kamal, Yousuf, Pervin, Tahura and Alam, Samsul (December1, 2007) Given the bank’s
intermediary role in providing stability to the financial system, Bangladesh as well as many
emerging economies has implemented policies to develop and restructure the banking sector. An
important feature of these policies was to design guidelines for ‘best practices’ known as,
‘corporate governance of banks’. The unique feature of banking industry which deals with the
money of the depositors conveys the inevitability to implement corporate governance in this sector.
This paper in early part deals with the concept and evolution of corporate governance in this sector
and argued the importance of a broader view of corporate governance, which encapsulates both
shareholders and depositors. The penultimate section examines the corporate governance of banks
in Bangladesh in the context of ongoing banking reforms. The final section provides a set of
measures for both micro and macro level to strengthen corporate governance in this sector.
Biswas, Pallab Kumar and Bhuiyan, Md. Hamid Ullah (2008) this paper is an attempt to give a
short description of the theoretical literature focusing on different conceptual models of corporate
governance and empirical studies relating to whether good corporate governance leads to better
firm performance. Majority of the literature has been found to focus on the relationship between
shareholders, directors, and management. The findings of these empirical studies are mixed and as
a result, it is often difficult for users to draw any firm conclusion on the relationship. On the other
hand, studies undertaken considering the overall corporate governance mostly provide evidence of
significant relationship between corporate governance and firm performance. However, whether
better corporate governance causes higher firm performance still remains a valid research question
for reasons like ambiguity regarding the direction of causality.
Balasubramanian, Bala N., Black, Bernard S. and Khanna, Vikramaditya S (July2, 2008)
provide an overview of Indian corporate governance practices, based primarily on responses to a
2006 survey of 370 Indian public companies. Compliance with legal norms is reasonably high in
most areas, but not complete. They identify areas where Indian corporate governance is relatively
strong and weak, and areas where regulation might usefully be either relaxed or strengthened. On
the whole, Indian corporate governance rules appear appropriate for larger companies, but could
use some strengthening in the area of related party transactions, and some relaxation for smaller
companies. Executive compensation is low by U.S. standards and is not currently a problem area.
They also examine whether there is a cross-sectional relationship between measures of governance
and measures of firm performance and find evidence of a positive relationship for an overall
governance index and for an index covering shareholder rights. They find an overall association,
which is stronger for more profitable firms and firms with stronger growth opportunities. A sub
index for shareholder rights is individually significant, but sub-indices for board structure (board
independence and committee structure), disclosure, board procedure, and related party transactions
are not significant. The non-results for board structure contrast to other recent studies, and suggest
that India's legal requirements are sufficiently strict so that over compliance does not produce
valuation gains.
Afsharipour, Afra, (July 14, 2010) This Article examines India’s initial corporate governance
reform efforts as well as reforms adopted in the aftermath of the Satyam scandal. An evaluation of
India’s corporate governance reforms demonstrates that although extensive reforms have been
instituted, there remain significant lapses in implementation and enforcement. This Article
expresses concerns that these challenges may prevail because they have been shaped by unique
political and social forces. These forces include the traditional closed ownership structures of
Indian firms, an ineffective institutional framework to support enforcement efforts, weaknesses in
investor access to the courts, and political pressures related to government ownership of certain
industries.
Vrajlal K. Sapovadia and Kandarp V. Patel (2010) Governance is system and process of
organised entities, whether private or public, whether for profit or not. Governance relates with
defining objectives, powers, duties, obligations & disabilities of various stakeholders. Corporates
are for profit and they get fund from shareholders. Governments are generally for Sovereign
functions and citizen elects the leaders. Therefore their governance differs substantially.
Fan, Steve Z. and Yu, Linda Q (August 2011) They develop an index to capture the deviation of
a firm's governance structure from the common practice of its home country and show that the
Corporate Governance Deviation (CGD) index can distinguish firms that are indifferent under the
conventional Equal Weighted Sum (EWS) index. They document a strong impact of the CGD index
on firm valuation and provide robust evidence that the EWS index is more appropriate for the US
firms, while the CGD index works better in civil law countries. Their results indicate that a global
metric is inadequate to gauge the quality of governance across the world.
Hopt, Klaus J.(August 29, 2011) Corporate governance of banks differs considerably from general
corporate governance. For banks the scope of corporate governance goes beyond the shareholders
(equity governance) to include debt holders (debt governance). From the perspective of bank
supervision debt governance is the primary governance concern.
Sanan, Neeti and Yadav, Sangeeta (April, 2011) The main objective of this study is to evaluate
the impact of corporate governance reforms brought out by Securities and Exchange Board of India
(SEBI), Clause 49 of the Listing Agreement (2006), on the level of financial disclosures of the
Indian firms. The current research has been carried out with 30 Indian listed companies which form
part of Bombay Stock Exchange (BSE) index for the pre-reform period (2001-02 to 2004-05) and
post-reform period (2005-06 to 2008-09). A Corporate Governance Transparency and Disclosure
Score (CGS) has been constructed for the sample companies based on the attributes drawn from the
Standard and Poor’s (S&P) Transparency and Disclosure Survey (2008). The study indicates that
despite impressive corporate governance reforms, there is only a moderate level of financial
disclosures by the Indian firms. It emphasizes a need for improved enforcement of legal and
regulatory structures to enhance financial reporting quality.
Heremans, Dirk and Bosquet, Katrien (April 28, 2011) In tribute to the lifetime achievements of
Dr. Thomas S. Ulen, this Article addresses the topic of the future of law and finance within the
broader context of the future of law and economics. After highlighting some of the differences
between the U.S. and European approaches to law and finance, it focuses on specific law and
finance issues that were involved in the financial crisis (including the regulation of financial
institutions) and draws some tentative lessons for the future development of new research
paradigms in law and finance. Finally, this Article advocates a more risk-based approach of
corporate governance for banks as well as the need for specific corporate governance models. Far
from having a declining impact on legal reforms and scholarship, the impact of law and finance is
on the rise.
Schmid, Markus M., Sabato, Gabriele and Aebi, Vincent,(October 11, 2011)The recent
financial crisis has raised several questions with respect to the corporate governance of financial
institutions. This paper investigates whether risk management-related corporate governance
mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive
board and whether the CRO reports to the CEO or directly to the board of directors, are associated
with a better bank performance during the financial crisis of 2007/2008. They measure bank
performance by buy-and-hold returns and ROE and control for standard corporate governance
variables such as CEO ownership, board size, and board independence. Most importantly, their
results indicate that banks, in which the CRO directly reports to the board of directors and not to the
CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and
ROE during the crisis. In contrast, standard corporate governance variables are mostly
insignificantly or even negatively related to the banks’ performance during the crisis.
Aguilera, Ruth V. and Desender,Kurt A(January 2012)This paper discusses the role that indices
of corporate governance have had in comparative corporate governance research. To do so, they
begin with a short discussion of what corporate governance is and its main debates. Then, they
review the main indices highlighting their strengths and limitations as well as describing some of
the findings that emanate from them.
Murugesan Selvam,John Raja,Arumugan Suresh Kumar The impact of banks’ organization
structure on performance and corporate governance practices has been discussed for a number of
years, mainly in developed countries such as UK and US. This paper chooses to address above-
mentioned issue in Indian context. It investigates two category of banks namely government banks
and private banks. This paper adopts the Tobin’s Q, and Return on Capital Employed (ROCE) as
bank performance indicators. The following board governance variables are used such as Board
Committees, Board Directors, CEO as a chairman, Board meetings, and Women Executive and
Executive-Director ratio. Multiple regression analysis results show that board governance variables
like board committees, board directors and women director are statistically significant to
performance for banks where government has considerable stake. In addition, government banks
are older and also have better market valuation than private banks.
Christina James-Overheu, Julie Cotter This paper investigates whether the quality of a firm’s
corporate governance practices and its sustainability disclosures are inversely related to its assessed
default risk. It is expected that high reported standards of corporate governance will reduce the
assessment of a company‟s default risk by lenders, underwriters and ratings agencies, and therefore
reduce the cost of debt for such companies. A corporate governance index based on annual report
disclosures was developed to rate each company‟s corporate governance quality. Derivation of this
index was centred on corporate governance indicators suggested by prior research and best practice;
particularly the Australian Stock Exchange “Principles of Good Corporate Governance and Best
Practice Recommendations”. It is similarly expected that the voluntary disclosure of sustainability
information (Corporate Social Reporting or CSR) will enhance a firm‟s management reputation.
The assessment of default risk is captured by a firm‟s individual credit rating supplied by Standard
and Poor’s. their results indicate that neither annual report disclosures about corporate governance
practices nor sustainability disclosures are significantly related to assessed default risk when firm
size is controlled.
3. RESEARCH METHODOLOGY
Objectives of the study The present study has been undertaken with the main objective of making a comparative analysis of the
Corporate governance disclosure practices of the public and the private sector banking companies and
foreign banks in India for the year 2006-07 to 2010-11. More specifically, the following are the
objectives of the study:
1. To study and analyse the contents of the Corporate governance report in the annual reports of
the public and the private sector banking companies of India during the period under study.
2. To evaluate the adoption of disclosure norms by the Public and Private banks under study.
3. To make an analytical study of different codes for corporate governance recommended by
different committees in India and their implementation.
4. To examine the disclosure practices, board structure, procedures adopted and board
committees of the sample organizations to assess the adherence to good corporate governance by them.
5. To study and compare the extent to which corporate governance codes are being implemented by
the public and the private sector banking companies of India during the period under study.
6. To examine the impact on the overall value of the bank (Private banks, public banks or foreign
banks) from the view point of corporate governance with respect to the perception of its investors.
7. To critically evaluate the key elements of corporate governance to unearth their strengths and
weaknesses
8. To provide suggestions to increase the pace of growth in the area under study.
Research Questions
The proposed research will ask some fundamental questions on corporate governance in banking sector
and will try to identify how it helps banks to ensure transparency and growth.
The questions are:
• How the attributes of corporate governance help banking sector to create a situation, which
can minimize fraud/malpractices in financial matter in banking sector?
• Whether ownership pattern influences the effective governance and functioning of a bank?
• Does the declaration of corporate governance in annual report bring more transparency in
their business and how it pays in terms of business?
• Does the proper implementation of corporate governance principles create more public trust
and acceptability of a bank as a result give boost to share price?
• Is there any difference in corporate governance practices between Private sector and Public
sector banks?
• To what extent Indian Banking sector has accepted/implemented corporate governance
principles compared to international norms?
• What are the suggestions to banking industry with respect to corporate governance?
Scope of the study As the aim is to examine the major corporate governance practices adopted by all the Public, Private
and Foreign Banks in India, at present only 40 banks are listed in the Indian stock markets, out of
which I have taken total 35 banks, where 19 banks belong to public sector and remaining 16 banks in
the private sector category. In India, the implementation of corporate governance practices is directly
linked with Security Exchange Board India (SEBI) under clause 49 listing agreement. According to
SEBI, the corporate governance practices are applicable only to banks that are listed in the Indian stock
exchanges hence the foreign banks lay outside the purview of study. I have ignored the SBI associate
banks in my research since I have taken SBI, the parent organization. At the end of March 2011, the
following banks were listed in BSE or NSE:
List of banks considered in Research Study
S. NO Private Banks Public Banks
1. Dhanalakshmi Bank UCO Bank
2. Axis Bank Union Bank
3. South Indian Bank Vijaya Bank
4. Karur Vysya Bank Dena Bank
5. Jammu & Kashmir Bank Central Bank
6. ING Vysya Bank Bank of Maharashtra
7. Yes Bank Corporation Bank
8. HDFC Bank Syndicate Bank
9. Indus Ind Bank Indian Overseas Bank
10. ICICI Bank Indian Bank
11. Federal Bank State Bank Of India
12. City Union Bank Oriental Bank
13. Laxmi Vilas Bank IDBI Bank
14. Kotak Bank Allahabad Bank
15. Development Credit Bank Canara Bank
16. Karnataka Bank Bank Of India
17. Andhra Bank
18. Punjab National Bank
19. Bank Of Baroda
In order to make the inter period analysis of the corporate governance disclosure practices in both the
public and the private sector banking companies, a period of five years i.e. from 2006-07 to 2010-11
has been selected because it became mandatory for all the listed firms through revised clause 49 to
implement corporate governance disclosure in the annual reports w.e.f. 31st December 2005, before that
since it was not mandatory, many banks therefore never disclosed the corporate governance in their
annual reports. Hence the research is meaningful only after 31st Dec 05’.
Data Collection The research study is based on both the primary as well as secondary data. A sample of 500 investors
was taken from National Capital Region, Delhi on the basis of simple random sampling in order to
know their perception about implementation of Corporate Governance practices.
For the secondary research, the annual reports of the selected banking companies from both the public
and the private sector were the major source of data collection. All the annual reports were downloaded
from reportjunction.com, almost all the reports were obtained from there except a few.
Analysis of Data
For the purpose of analyzing the corporate governance disclosure practices of the public and the private
sector banking companies, primary research was undertaken wherein a simple random sampling was
done, a simple random sample is meant to be an unbiased representation of a group. The questionnaire
was filled by 500 respondents who happen to be the general investors.
As the aim is to examine the major corporate governance practices adopted by all the Public, new
Private sector and Foreign Banks (at present only 40 banks are listed in the Indian stock markets, out of
which I have taken total 35 banks, where 19 banks belong to public sector and remaining 16 banks in
the private sector category), I have tried to direct my research towards discovering firstly, how well the
corporate disclosure norms are being followed by the respective public, private banks and after the
analysis have depicted the same, then secondly if there is any impact/relation between corporate
governance disclosure and performance (through return on capital employed ROCE and Tobin Q
method). Certain items of information were identified after scanning the annual reports of the banking
companies of both the sectors as well as the review of literature. I have divided the corporate
governance codes into four major heads namely, procedure, disclosure, audit committee and board
structure. These major heads have several corporate governance disclosure variables as discussed
throughout in this paper which are drawn out of the codes described in Clause 49 of SEBI Act. For this
purpose corporate governance index was prepared.
Hypotheses
With reference to review of literature of corporate governance, and different types of banks, this paper
develops the following hypotheses for study to test the relationships between corporate governance
practices and performance:
H0 Firms’ performance is not positively related to the quality of its corporate governance practices
H1 Firms’ performance is positively related to the quality of its corporate governance practices
Independent variables
The various corporate governance indicators suggested by “Clause 49 of the listing agreement by Sebi”
are the independent variables which have bee explained later, wherein TDL is total disclosure, TBS is
total board structure, TAC is total audit committee, TPRO is total procedures, NBM is no. of board
meetings ,BS is board size, NAM is no. of audit meetings ,ACS is audit committee size ,NOC is no. of
committees and Tobin’s Q is market value of equity over book value of total asset. ROCE is calculated
by dividing earnings before interest and taxes (EBIT) by capital employed, where capital employed is
equity plus reserves and surplus, the latter two happen to be the dependent variables.
Development of a Corporate Governance Index
A corporate governance index based on annual report disclosures was developed to rate each bank’s
corporate governance quality. Derivation of this index was centered on corporate governance indicators
suggested by “Clause 49 of the listing agreement by Sebi”. The corporate governance index framework
is shown below. The maximum possible score was 20 (10 disclosure, 3 board structure, 3 audit
committee, 4 procedures). Each bank’s CG SCORE was calculated by dividing their total score by this
maximum possible score, to express it as a proportion for ease of comparability.
DISCLOSURE Maximum
Annual statements contain a statement addressing
corporate governance
If YES, 1 point. If no, 0. 1
Basis of related party transactions disclosed
if Yes,1 point.If NO,0 1
Appointment of a new director or re-appointment
of a director is disclosed
If YES, 1 point. If NO, 0. 1
Members attendance at meetings disclosed
If YES, 1 point. If NO, 0. 1
Bank puts annual financial statements on web
If YES, 1 point. If NO, 0. 1
Bank puts Directors report on web
If YES, 1 point. If NO, 0. 1
Bank puts Annual report on web
If YES, 1 point. If NO, 0. 1
Compensation of Directors (including non-
executives) disclosed
If YES, 1 point. If NO, 0. 1
The disclosures of the compliance with mandatory
requirements and adoption (and compliance)/non
adoption of the non-mandatory requirements shall
be made
If YES, 1 point. If NO, 0. 1
A director is not a member in more than 10
committees or act as Chairman of more than five
committees across all companies in which he is a
director
If YES, 1 point. If NO, 0 1
TOTAL DISCLOSURE 10
BOARD STRUCTURE
CEO not the same person as Board Chairman
If YES, 1 point. If NO, 0. 1
50% independent directors if Chairman is Executive
Director or 33% independent directors if Chairman
is a Non-Executive Director
If YES, 1 point. If NO, 0,Not disclosed 0. 1
3) Number of meetings
Atleast 4 - 1 point
No meetings - 0 point
Not disclosed - 0 point 1
TOTAL BOARD STRUCTURE 3
AUDIT COMMITTEE
Atleast three directors
If YES, 1 point. If NO, 0. 1
2/3 must be independent
If YES, 1 point. If NO 0, Not disclosed 0 1
Number of meetings during the year
4 or more - 1 point
Less than 4 - 0 point
Not disclosed - 0 point 1
TOTAL AUDIT COMMITTEE 3
PROCEDURES
The Bank has laid down procedures to inform board
members about the risk assessment and
minimization procedures
If YES, 1 point. If NO, 0. 1
Company has Code of Conduct (Ethics)
If YES, 1 point. If NO, 0. 1
Auditor or company secretary compliance with
corporate governance
If YES, 1 point. If NO, 0. 1
Does CEO / CFO certify financial statements
If YES, 1 point. If NO, 0. 1
TOTAL PROCEDURES 4
TOTAL SCORE 20
Organization of the Study The organization of the present research follows conventional chapter plan. The study is divided into
following six chapters:
1. Corporate Governance – An Introduction, Chapter one highlights introduction of corporate
governance, conceptual discussion, objectives, need, benefits and limitation of Corporate governance.
2. Review of Literature, Chapter two narrates the academic literature on corporate governance
and especially corporate governances in banking sector.
3. Research Methodology, Chapter three describes the research problems, methodology of the
research and limitation of the research.
4. Corporate Governance disclosure practices of Banking Companies in India, Chapter four deals
with the current scenario of governance of banks, the principles and committee recommendations for
the implementation of CG practices in Indian banking sector.
5. Foreign Banks in India, chapter five discusses the framework for presence of foreign banks
in India and the Corporate Governance Guidelines for Foreign Banks to Protect Domestic Interest
6. Analysis and interpretation, Chapter five presents the outcome of primary and secondary
research analysis.
7. Conclusion and Suggestions, Chapter six gives concluding remarks on the research analysis
and recommendation to improve corporate governance practices in Indian Banking sector.
4. ANALYSIS OF DATA
Methodology of Index Construction
To construct the Disclosure Index, Board structure Index, the Audit Committee Index and the
Procedure Index we take the attributes within a specified governance mechanism and score each
attribute as 0 for NO and 1 for YES. We then aggregate the score across all the attributes within that
specific governance mechanism, divide it by the maximum possible score i.e 20. Note that though the
maximum value for each sub index is thus set to 20, none of the sample banks may earn the maximum
score. In other words, we normalize the maximum score to 20 rather than normalizing the best bank in
the sample to 20. This ensures that improvements over time in a particular governance mechanism will
be adequately captured by the index.
We use the standards specified in the Clause 49 regulations as well as insights from various academic
studies to score each attribute within a particular corporate governance mechanism. For example, with
respect to percentage of independent directors, we penalize companies that do not meet the Clause 49
requirements of having at least one third of its board members as independent directors (in case the
company has non-executive chairman) or 50 percent (in case the company has an executive/promoter
chairman). For scoring attributes that do not have specified standards in the Clause 49 regulations, we
take help of existing academic studies.
After analyzing the annual report of each of the 16 private banks and 19 public banks individually and
preparing a separate Corporate Governance index(CG Index) for each private and public banks, below
is the summarized comprehensive CG index score of all the private banks over the last five years:
Table 1: CG Index Score of Private Banks
CG Index Score for Private Banks
DISCLOSURE 2011 2010 2009 2008 2007
Annual statements contain a statement addressing
corporate governance
If YES, 1 point. If no, 0. 0.75 0.733333 0.6875 0.642857 0.692308
Basis of related party transactions disclosed if Yes,1
point.If NO,0 0.875 0.933333 0.9375 0.928571 0.923077
Appointment of a new director or re-appointment
of a director is disclosed
If YES, 1 point. If NO, 0. 0.375 0.466667 0.5 0.5 0.538462
Members attendance at meetings disclosed
If YES, 1 point. If NO, 0. 1 1 1 1 1
Bank puts annual financial statements on web
If YES, 1 point. If NO, 0. 1 1 1 1 1
Bank puts Directors report on web
If YES, 1 point. If NO, 0. 1 1 1 1 1
Bank puts Annual report on web
If YES, 1 point. If NO, 0. 1 1 1 1 1
Compensation of Directors (including non-
executives) disclosed
If YES, 1 point. If NO, 0. 1 0.933333 1 1 0.923077
The disclosures of the compliance with mandatory
requirements and adoption (and compliance)/non
adoption of the non-mandatory requirements shall
be made
If YES, 1 point. If NO, 0. 0.6875 0.666667 0.625 0.571429 0.538462
A director is not a member in more than 10
committees or act as Chairman of more than five
committees across all companies in which he is a
director
If YES, 1 point. If NO, 0 0.75 0.8 0.75 0.714286 0.615385
TOTAL DISCLOSURE
8.4375 8.533333 8.5 8.357143 8.230769
BOARD STRUCTURE
CEO not the same person as Board Chairman
If YES, 1 point. If NO, 0. 0.5625 0.533333 0.3125 0.285714 0.384615
50% independent directors if Chairman is Executive
Director or 33% independent directors if Chairman
is a Non-Executive Director
If YES, 1 point. If NO, 0,Not disclosed 0. 0.9375 0.933333 0.9375 0.928571 1
3) Number of meetings
Atleast 4 - 1 point
No meetings - 0 point
Not disclosed - 0 point 1 1 1 1 1
TOTAL BOARD STRUCTURE
2.5 2.466667 2.25 2.214286 2.384615
AUDIT COMMITTEE
Atleast three directors
If YES, 1 point. If NO, 0. 1 1 1 1 1
2/3 must be independent
If YES, 1 point. If NO 0, Not disclosed 0 0.8125 0.733333 0.75 0.857143 0.923077
Number of meetings during the year
4 or more - 1 point
Less than 4 - 0 point
Not disclosed - 0 point 1 1 1 1 1
TOTAL AUDIT COMMITTEE
2.8125 2.733333 2.75 2.857143 2.923077
PROCEDURES
The Bank has laid down procedures to inform board
members about the risk assessment and
minimization procedures
If YES, 1 point. If NO, 0. 1 1 1 0.857143 0.923077
Company has Code of Conduct (Ethics)
If YES, 1 point. If NO, 0. 1 0.933333 0.875 0.857143 0.846154
Auditor or company secretary compliance with
corporate governance
If YES, 1 point. If NO, 0. 0.9375 0.933333 0.9375 0.928571 0.923077
Does CEO / CFO certify financial statements
If YES, 1 point. If NO, 0. 0.4375 0.466667 0.375 0.428571 0.307692
TOTAL PROCEDURES
3.375 3.333333 3.1875 3.071429 3
TOTAL SCORE 17.125 17.06667 16.6875 16.5 16.53846
We observed from the Table 1, for private banks, the Total disclosure (TDL) ranged almost same each
year between 8.3 and 8.5 out of 10 whereas there is a slight improvement in the Total board structure
(TBS) from 2.3 till 2.5 out of 3, Total audit committee (TAC) remained almost constant, whereas Total
procedures (TPRO) showed again a slight improvement from 3 to 3.3 out of 4.
What is noteworthy is the improvement in the overall Corporate Governance Score (CG score) from
16.53 to 17.1, this reflects that there is a conscious improvement amongst private banks while making
Corporate governance disclosures.
Table 2: CG Index Score of Public Banks
CG Index Score for Public Banks
DISCLOSURE 2011 2010 2009 2008 2007
Annual statements contain a statement
addressing corporate governance
If YES, 1 point. If no, 0. 1 1 1 1 1
Basis of related party transactions
disclosed if Yes,1 point.If NO,0 1 0.947368 0.894737 0.947368 0.944444
Appointment of a new director or re-
appointment of a director is disclosed
If YES, 1 point. If NO, 0. 0.736842 0.736842 0.789474 0.789474 0.833333
Members attendance at meetings
disclosed
If YES, 1 point. If NO, 0. 1 1 1 1 1
Bank puts annual financial statements on
web
If YES, 1 point. If NO, 0. 1 1 1 1 1
Bank puts Directors report on web
If YES, 1 point. If NO, 0. 1 1 1 1 1
Bank puts Annual report on web
If YES, 1 point. If NO, 0. 1 1 1 1 1
Compensation of Directors (including
non-executives) disclosed
If YES, 1 point. If NO, 0. 0.894737 0.894737 0.894737 0.894737 0.888889
The disclosures of the compliance with
mandatory requirements and adoption
(and compliance)/non adoption of the
non-mandatory requirements shall be
made
f YES, 1 point. If NO, 0. 0.789474 0.789474 0.789474 0.789474 0.666667
A director is not a member in more than
10 committees or act as Chairman of
more than five committees across all
companies in which he is a director 0.421053 0.473684 0.631579 0.526316 0.5
TOTAL DISCLOSURE
8.842105 8.842105 9 8.947368 8.833333
BOARD STRUCTURE
CEO not the same person as Board
Chairman
If YES, 1 point. If NO, 0. 0.210526 0.210526 0.210526 0.210526 0.222222
As per Table 2, for public banks, the TDL, TBS, TAC, TPRO seem to be almost same in all the five
years without any remarkable changes. The same is reflected in CG score which again happens to be
the same i.e. was 16 out of 20 in year 2007 whereas 16.1 out of 20 in 2011.
50% independent directors if Chairman is
Executive Director or 33% independent
directors if Chairman is a Non-Executive
Director
If YES, 1 point. If NO, 0,Not disclosed 0. 0.263158 0.263158 0.263158 0.368421 0.277778
3) Number of meetings
Atleast 4 - 1 point
No meetings - 0 point
Not disclosed - 0 point 1 1 1 1 1
TOTAL BOARD STRUCTURE
1.473684 1.473684 1.473684 1.578947 1.5
AUDIT COMMITTEE
Atleast three directors
If YES, 1 point. If NO, 0. 1 1 1 1 1
2/3 must be independent
If YES, 1 point. If NO 0, Not disclosed 0 0.210526 0.210526 0.210526 0.263158 0.333333
Number of meetings during the year
4 or more - 1 point
Less than 4 - 0 point
Not disclosed - 0 point 1 1 1 1 1
TOTAL AUDIT COMMITTEE
2.210526 2.210526 2.210526 2.263158 2.333333
PROCEDURES
The Bank has laid down procedures to
inform board members about the risk
assessment and minimization procedures
If YES, 1 point. If NO, 0. 0.947368 0.947368 0.947368 0.947368 0.944444
Company has Code of Conduct (Ethics)
If YES, 1 point. If NO, 0. 0.947368 0.947368 0.947368 0.947368 0.833333
Auditor or company secretary compliance
with corporate governance
If YES, 1 point. If NO, 0. 1 1 1 1 1
Does CEO / CFO certify financial
statements
If YES, 1 point. If NO, 0. 0.684211 0.578947 0.631579 0.631579 0.555556
TOTAL PROCEDURES
3.578947 3.473684 3.526316 3.526316 3.333333
TOTAL SCORE 16.10526 16 16.21053 16.31579 16
Table 3: CG Index of Private Banks (in percentage)
CG Index of Private Banks (in percentage)
DISCLOSURE 2011 2010 2009 2008 2007
Annual statements contain a statement addressing
corporate governance
If YES, 1 point. If no, 0. 75 73.33333 68.75 64.28571 69.23077
Basis of related party transactions disclosed if Yes,1
point.If NO,0 87.5 93.33333 93.75 92.85714 92.30769
Appointment of a new director or re-appointment
of a director is disclosed
If YES, 1 point. If NO, 0. 37.5 46.66667 50 50 53.84615
Members attendance at meetings disclosed
If YES, 1 point. If NO, 0. 100 100 100 100 100
Bank puts annual financial statements on web
If YES, 1 point. If NO, 0. 100 100 100 100 100
Bank puts Directors report on web
If YES, 1 point. If NO, 0. 100 100 100 100 100
Bank puts Annual report on web
If YES, 1 point. If NO, 0. 100 100 100 100 100
Compensation of Directors (including non-
executives) disclosed
If YES, 1 point. If NO, 0. 100 93.33333 100 100 92.30769
The disclosures of the compliance with mandatory
requirements and adoption (and compliance)/non
adoption of the non-mandatory requirements shall
be made,if YES, 1 point. If NO, 0. 68.75 66.66667 62.5 57.14286 53.84615
A director is not a member in more than 10
committees or act as Chairman of more than five
committees across all companies in which he is a
director 75 80 75 71.42857 61.53846
TOTAL DISCLOSURE
BOARD STRUCTURE
CEO not the same person as Board Chairman
If YES, 1 point. If NO, 0. 56.25 53.33333 31.25 28.57143 38.46154
50% independent directors if Chairman is Executive
Director or 33% independent directors if Chairman
is a Non-Executive Director
If YES, 1 point. If NO, 0,Not disclosed 0. 93.75 93.33333 93.75 92.85714 100
3) Number of meetings
Atleast 4 - 1 point
No meetings - 0 point
Not disclosed - 0 point 100 100 100 100 100
TOTAL BOARD STRUCTURE
AUDIT COMMITTEE
Atleast three directors
If YES, 1 point. If NO, 0. 100 100 100 100 100
2/3 must be independent
If YES, 1 point. If NO 0, Not disclosed 0 81.25 73.33333 75 85.71429 92.30769
Number of meetings during the year
4 or more - 1 point
Less than 4 - 0 point
Not disclosed - 0 point 100 100 100 100 100
TOTAL AUDIT COMMITTEE
PROCEDURES
The Bank has laid down procedures to inform board
members about the risk assessment and
minimization procedures
If YES, 1 point. If NO, 0. 100 100 100 85.71429 92.30769
Company has Code of Conduct (Ethics)
If YES, 1 point. If NO, 0. 100 93.33333 87.5 85.71429 84.61538
Auditor or company secretary compliance with
corporate governance
If YES, 1 point. If NO, 0. 93.75 93.33333 93.75 92.85714 92.30769
Does CEO / CFO certify financial statements
If YES, 1 point. If NO, 0. 43.75 46.66667 37.5 42.85714 30.76923
TOTAL PROCEDURES
TOTAL SCORE
According to Table 3, the CG factors like putting annual report, directors report, and annual financial
statements score 100% in all the five years, similarly the factors like attendance in meeting, minimum
no. of audit members and minimum no. of audit and board meetings again score 100% in all the five
years which is commendable. However, the CEO seems to be the same person who is the chairman of
the bank in most cases and also CEO/CFO certifications seem improper as they have really low
disclosure percentages in all the five years.
Table 4: CG Index of Public Banks (in percentage)
CG Index of Public Banks (in percentage)
DISCLOSURE 2011 2010 2009 2008 2007
Annual statements contain a statement
addressing corporate governance
If YES, 1 point. If no, 0. 100 100 100 100 100
Basis of related party transactions
disclosed if Yes,1 point.If NO,0 100 94.73684 89.47368 94.73684 94.44444
Appointment of a new director or re-
appointment of a director is disclosed
If YES, 1 point. If NO, 0. 73.68421 73.68421 78.94737 78.94737 83.33333
Members attendance at meetings
disclosed
If YES, 1 point. If NO, 0. 100 100 100 100 100
Bank puts annual financial statements on
web
If YES, 1 point. If NO, 0. 100 100 100 100 100
Bank puts Directors report on web
If YES, 1 point. If NO, 0. 100 100 100 100 100
Bank puts Annual report on web
If YES, 1 point. If NO, 0. 100 100 100 100 100
Compensation of Directors (including
non-executives) disclosed
If YES, 1 point. If NO, 0. 89.47368 89.47368 89.47368 89.47368 88.88889
The disclosures of the compliance with
mandatory requirements and adoption
(and compliance)/non adoption of the
non-mandatory requirements shall be
made
f YES, 1 point. If NO, 0. 78.94737 78.94737 78.94737 78.94737 66.66667
A director is not a member in more than
10 committees or act as Chairman of
more than five committees across all
companies in which he is a director 42.10526 47.36842 63.15789 52.63158 50
TOTAL DISCLOSURE
BOARD STRUCTURE
CEO not the same person as Board
Chairman
If YES, 1 point. If NO, 0. 21.05263 21.05263 21.05263 21.05263 22.22222
50% independent directors if Chairman is
Executive Director or 33% independent
directors if Chairman is a Non-Executive
Director
If YES, 1 point. If NO, 0,Not disclosed 0. 26.31579 26.31579 26.31579 36.84211 27.77778
3) Number of meetings
Atleast 4 - 1 point
No meetings - 0 point
Not disclosed - 0 point 100 100 100 100 100
TOTAL BOARD STRUCTURE
AUDIT COMMITTEE
Atleast three directors
If YES, 1 point. If NO, 0. 100 100 100 100 100
2/3 must be independent
If YES, 1 point. If NO 0, Not disclosed 0 21.05263 21.05263 21.05263 26.31579 33.33333
Number of meetings during the year
4 or more - 1 point
Less than 4 - 0 point
Not disclosed - 0 point 100 100 100 100 100
TOTAL AUDIT COMMITTEE
PROCEDURES
The Bank has laid down procedures to
inform board members about the risk
assessment and minimization procedures
If YES, 1 point. If NO, 0. 94.73684 94.73684 94.73684 94.73684 94.44444
Company has Code of Conduct (Ethics)
If YES, 1 point. If NO, 0. 94.73684 94.73684 94.73684 94.73684 83.33333
Auditor or company secretary compliance
with corporate governance
If YES, 1 point. If NO, 0. 100 100 100 100 100
Does CEO / CFO certify financial
statements
If YES, 1 point. If NO, 0. 68.42105 57.89474 63.15789 63.15789 55.55556
TOTAL PROCEDURES
TOTAL SCORE
As per Table 4, the CG factors like putting annual report, directors report, annual financial statements
score 100% in all the five years, similarly the factors like attendance in meeting, minimum no. of audit
members and minimum no. of audit and board meetings again score 100% in all the five years of the
public banks which are same as that of private banks. Moreover two new factors like auditor/company
secretary compliance and annual statements contain CG report are the two new factors which score
100%, which was not the case in Private Banks.
Table 5: Comparison of CG Index Score (in percentage) of Public and Private Banks in India
Comparison of CG Index Score (in percentage) of Public and Private Banks in India
DISCLOSURE Private Public
Annual statements contain a statement addressing corporate governance
If YES, 1 point. If no, 0. 70.11 100
Basis of related party transactions disclosed if Yes,1 point.If NO,0 91.9 94.7
Appointment of a new director or re-appointment of a director is disclosed
If YES, 1 point. If NO, 0. 47.6 77.7
Members attendance at meetings disclosed
If YES, 1 point. If NO, 0. 100 100
Bank puts annual financial statements on web
If YES, 1 point. If NO, 0. 100 100
Bank puts Directors report on web
If YES, 1 point. If NO, 0. 100 100
Bank puts Annual report on web
If YES, 1 point. If NO, 0. 100 100
Compensation of Directors (including non-executives) disclosed
If YES, 1 point. If NO, 0. 97.2 89.4
The disclosures of the compliance with mandatory requirements and adoption
(and compliance)/non adoption of the non-mandatory requirements shall be
made
if YES, 1 point. If NO, 0. 61.8 76.5
A director is not a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director 72.6 51.1
TOTAL DISCLOSURE
BOARD STRUCTURE
CEO not the same person as Board Chairman
If YES, 1 point. If NO, 0. 41.6 21.3
50% independent directors if Chairman is Executive Director or 33%
independent directors if Chairman is a Non-Executive Director
If YES, 1 point. If NO, 0,Not disclosed 0. 94.7 37.1
3) Number of meetings
Atleast 4 - 1 point
No meetings - 0 point
Not disclosed - 0 point 100 100
TOTAL BOARD STRUCTURE
AUDIT COMMITTEE
Atleast three directors
If YES, 1 point. If NO, 0. 100 100
2/3 must be independent
If YES, 1 point. If NO 0, Not disclosed 0 81.5 24.6
Number of meetings during the year
4 or more - 1 point
Less than 4 - 0 point
Not disclosed - 0 point 100 100
TOTAL AUDIT COMMITTEE
PROCEDURES
The Bank has laid down procedures to inform board members about the risk
assessment and minimization procedures
If YES, 1 point. If NO, 0. 95.6 94.7
Company has Code of Conduct (Ethics)
If YES, 1 point. If NO, 0. 90.2 92.5
Auditor or company secretary compliance with corporate governance
If YES, 1 point. If NO, 0. 93.2 100
Does CEO / CFO certify financial statements
If YES, 1 point. If NO, 0. 40.3 61.6
TOTAL PROCEDURES
However, ‘Independence of directors’ seem to be an issue consistently with the public banks as the
percentage is very low i.e. 26% and around 21% is the case with ‘CEO the same person as chairman’,
the same results are shown in Table 5 at a glance wherein comparison of CG Index Score (in
percentage) of Public and Private Banks in India is shown.
Table 6: Year Wise Comparison of CG Score of Private Banks in India
Year Wise Comparison of CG Score of Private Banks
in India
2011 2010 2009 2008 2007
DCB 18 19 18 NA 18
Dhanalakshmi 16 17 17 NA NA
Axis 16 15 15 15 15
South Indian 17 18 17 16 16
Laxmi Vilas 17 16 15 15 NA
Kotak 17 16 17 17 16
Karur Vysya 16 17 16 15 14
Karnataka 16 16 15 15 15
J&K 17 17 16 16 16
ING VYSYA 19 19 18 18 18
YES 19 17 18 19 18
HDFC 17 16 17 18 18
Indus Ind 19 19 19 19 19
ICICI 17 17 17 17 16
Federal 17 17 17 17 16
City Union 15 NA 15 14 NA
Table 6 shows the CG score calculated for each private bank in each year out of 20 for the period 2007
till 2011, wherein we observe that amongst the private banks it is IndusInd bank which has scored the
highest and consistently in all the five years i.e. 19 out of 20 in each year, whereas City Union is the
bank which has scored the least CG Score amongst all the private banks.
Table 7: Percentage Change in CG Score from 2007 till 2011 in Private Banks
Table 7 shows the comparative percentage change of each bank from the year ended 2007 till 2011
from where we can make out that out of 16 private banks it is the Karur Vysya Bank which has shown
maximum improvement of 14.29% in their CG score thus displaying better CG disclosure practices
adopted by the over the years whereas HDFC has shown a downfall in their CG score of around 5.56%.
Below is Table 8 which shows the CG Score for each public bank out of 20 over the five years i.e. 2007
till 2011. As per the table, it is the Bank of India which scores best amongst all the public sector banks
whereas Dena Bank seems to be the least scorer. A further comparison between public and private CG
Scores would highlight this fact that private banks surprisingly are more consistent and better in
Corporate Disclosure Practices.
Percentage Change in CG Score
from 2007 till 2011 in Private Banks
DCB 0
Dhanalakshmi NA
Axis 6.67
South Indian 6.25
Laxmi Vilas NA
Kotak 6.25
Karur Vysya 14.29
Karnataka 6.67
J&K 6.25
ING VYSYA 5.56
YES 5.56
HDFC -5.56
Indus Ind 0
ICICI 6.25
Federal 6.25
City Union NA
Table 8: Year Wise Comparison of CG Score of Public Banks in India
Year Wise Comparison of CG Score of Public Banks in
India
2011 2010 2009 2008 2007
Uco 15 15 15 15 14
Union 17 15 17 17 15
Vijaya 16 17 17 17 16
Dena 14 14 15 15 15
Central 14 16 16 14 NA
Bank of
Maharashtra 16 15 15 15 15
Corporation 17 17 17 18 18
Syndicate 16 16 16 16 16
India Overseas Bank 17 17 17 17 17
Indian Bank 16 16 16 18 18
SBI 15 14 15 15 16
Oriental 16 16 17 17 15
IDBI 16 17 16 16 15
Allahabad 17 15 15 17 17
Canara 16 16 16 17 17
Bank of India 19 19 19 19 18
Bank of Baroda 17 17 17 16 15
Andhra 16 16 16 16 15
PNB 15 15 15 15 16 And as per Table 9, the maximum improvement shown by the public sector banks amongst all the 19
public sector banks is of Bank of India and UCO Bank around 13.33%, whereas it is the Indian Bank
that showed the maximum decrease around 11.11%.
Table 10 finally summarizes what has been explained above in a nutshell that it is the Private banks which are far
better than the Public sector banks as far as implementation of Corporate Governance disclosure is concerned
which states from the year 2007, 62.5% of private banks have increased in implementing better disclosure norms
thus fairing higher CG score in the later years, whereas only 42.1% of the public sector banks have shown that
improvement. Similarly its only 6.25% of private banks against 31.6 % in case of public banks whose CG Score
has decreased over these years. Also the CG Score for only 12.5% of private sector banks remain same for these
five years as compared to 21.1% of public banks.
Table 9: Percentage Change in CG Score from 2007 till 2011 in Public Banks
Percentage Change in CG Score
from 2007 till 2011 in Public Banks
Uco 7.14
Union 13.33
Vijaya 0.00
Dena -6.67
Central NA
Bank of Maharashtra 6.67
Corporation -5.56
Syndicate 0.00
India Overseas Bank 0.00
Indian Bank -11.11
SBI -6.25
Oriental 6.67
IDBI 6.67
Allahabad 0.00
Canara -5.88
Bank of India 5.56
Bank of Baroda 13.33
Andhra 6.67
PNB -6.25
Table 10: Comparative percent change in CG Score of Public and Private Sector Banks from
2007 till 2011
Comparative percent change in CG
Score of Public and Private Sector
Banks from 2007 till 2011
Private Public
Increased 62.5 42.1
Decreased 6.25 31.6
Same 12.5 21.1
NA 18.75 5.2
100 100
Table 11: Comparison of Descriptive Statistics of CG Score of Public and Private Banks
Comparison of Descriptive Statistics of CG Score of Public and Private Banks
Min Max Mean Standard Deviation
Private Public Private Public Private Public Private Public
2011 15 14 19 19 17.0625 16.05263 1.181454 1.17727
2010 15 14 19 19 17.06667 15.94737 1.222799 1.223551
2009 15 15 19 19 16.6875 16.15789 1.25 1.067872
2008 14 14 19 19 16.5 16.31579 1.60528 1.293257
2007 14 14 19 18 16.53846 16 1.506397 1.236694
Table 12: Year wise scores for the Public Sector Banks from 2007 till 2011
Year wise scores for the Public Sector Banks from 2007 till 2011
2011 2010 2009 2008 2007
TDL 8.84211 8.84211 8.94737 8.94737 8.83333
TBS 1.42105 1.47368 1.47368 1.57895 1.50000
TAC 2.21053 2.15789 2.21053 2.26316 2.33333
TPRO 3.57895 3.47368 3.52632 3.52632 3.33333
NBM 13.73684 12.52632 13.00000 12.15789 13.11111
BS 11.89474 11.52632 13.89474 12.15789 12.05556
NAM 10.15789 9.89474 9.10526 8.89474 9.00000
ACS 6.10526 5.78947 6.36842 6.00000 5.88889
NOC 10.57895 10.15789 9.73684 9.05263 8.38889
percentage of CG report in the
annual report 14.35620 14.09672 14.33340 15.02198 17.63090
Tobin’s Q 0.01157 0.01530 0.00558 0.00585 0.00682
ROCE 0.31964 0.31474 0.31505 0.30378 0.32554
Where in: TDL is total disclosure NBM is no. of board meetings
TBS is total board structure BS is board size NOC is no. of committees
TAC is total audit committee NAM is no. of audit meetings
TPRO is total procedures ACS is audit committee size
Tobin’s Q is market value of equity over book value of total asset.
ROCE is calculated by dividing earnings before interest and taxes (EBIT) by capital employed, where
capital employed is equity plus reserves and surplus
In the above Table 11, we have calculated the descriptive statistics, which shows that in year 2011 the
minimum CG SCORE was 15 in case of private bank whereas it is 14 in case of public banks; however
the maximum score is same for both. The mean CG Score is higher of private banks compared to
Public banks with almost the same standard deviation in both sectors. The same trend is observed in
year 2010, however in year 2009 both public as well as private banks have same minimum and
maximum CG score but a higher mean and standard deviation in case of private banks. The same trend
could be observed in the remaining years till 2007 wherein the mean score and standard deviation of
private is higher than public banks
In Table 12 we have further factors whose descriptive statistics has been calculated for the public
banks. A bank performance indicator consists of two variables namely Tobin’s Q, and Return on Capital
Employed. Most of the past literature on financial institutions has used accounting measure as a proxy
for performance. In this paper, both accounting and market valuation measure are used to account
corporate governance practices intervention. In Table 12, the TDL (Total disclosures) have remained
almost consistent for these five years, TBS (Total board structures) and TAC (Total audit committee)
have shown a slight negative change from 1.5 to 1.4 and from 2.3 to 2.2 respectively. TPRO (Total
procedures) however have shown slight improvement along with the no. of board meetings from 3.33
to 3.5 and 13.11 to 13.73 respectively. Board size score has gone down from 12 to 11.89 whereas audit
committee size and no. of committees score has improved. The performance as indicated by Tobin Q
and ROCE does not show any significant improvement over the years where Tobin Q has gone up from
.006 to .011.We have also taken this new factor into account that what percentage of annual report is
actually dedicated to corporate governance report. In case of public banks the results are again
disappointing as the percentage instead of going up has gone down from 17.63% to 14.35%
Table 13: Descriptive Statistics for Public Sector Banks
Descriptive Statistics for Public Sector Banks
MIN MAX MEAN Std DEV
TDL 7.2 10 8.88 0.76999
TBS 1 3 1.48 0.67434
TAC 1.8 3 2.23 0.42302
TPRO 2.2 4 3.49 0.56575
No. of board meetings 8.6 15.6 12.92 1.8247
Board Size 10 16 12.34 1.83019
No. of audit meetings 7.2 11.4 9.41 1.18598
Audit Committee Size 4.8 8.2 6.03 1.05717
No. of committees 3 15 9.59 2.49
Percentage of CG report in the annual report 5.43 22 14.97 4.50923
Tobin's Q 0.00072 0.07583 0.00905 0.01658
ROCE 0.13218 0.38419 0.31495 0.0589
In Table 14, where the scores are reflected for the private banks, we find out that TDL ,TBS and TPRO,
no .of audit meetings, audit committee size and no. of committees show some slight improvement over
Table 14: Year wise scores for the Private Sector Banks from 2007 till 2011
Year wise scores for the Private Sector Banks from 2007 till 2011
2011 2010 2009 2008 2007
TDL 8.43750 8.53333 8.50000 8.35714 8.23077
TBS 2.50000 2.46667 2.25000 2.21429 2.38462
TAC 2.81250 2.73333 2.75000 2.85714 2.92308
TPRO 3.37500 3.33333 3.18750 3.07143 3.00000
no. of board meetings 11.06250 10.26667 11.12500 12.07143 11.23077
board size 10.37500 11.13333 10.31250 10.28571 10.46154
no. of audit meetings 8.18750 8.13333 8.00000 8.35714 7.92308
audit committee size 4.62500 4.53333 4.56250 4.28571 4.46154
no. of committees 9.75000 9.60000 9.12500 9.07143 8.76923
percentage of CG report in the
annual report 12.15114 12.03554 13.46369 13.89312 16.44961
Tobin’s Q 0.00585 0.00699 0.00719 0.00648 0.00945
ROCE 0.25018 0.23160 0.25709 0.23330 0.26165
the years, whereas TAC, no. of board meetings, board size reflect small negative changes since 2007
till 2011. The performance as indicated by Tobin Q and ROCE does not show any significant
improvement over the years where Tobin Q has gone up from .009 to .005. But again it was
disappointing to see that the percentage of annual report dedicated to CG report has gone down instead
of going up from 16.44% to 12.15%.
Table 15: Descriptive Statistics for Private Sector Banks
Descriptive Statistics for Private Sector Banks
MIN MAX MEAN Std DEV
TDL 6.8 9.8 8.41 0.93298
TBS 1 3 2.32 0.53259
TAC 2.2 3 2.81 0.28119
TPRO 2 4 3.19 0.65132
No. of board meetings (NBM) 4.2 26.6 11.23 5.52106
Board Size(BS) 7.67 15.6 10.45 1.87658
No. of audit meetings(NAM) 6 12.67 8.2 2.08795
Audit Committee Size(ACS) 3.2 7 4.54 1.0062
No. of committees (NOC) 6.33 12.2 9.24 1.69145
Percentage of CG report in the annual
report 7.47 19.67 13.6 3.53118
Tobin's Q 0.00131 0.02928 0.00735 0.00696
ROCE 0.11795 0.3405 0.24441 0.06644
If we compare Table 15 and Table 13, we find that the minimum score of total disclosures of public
banks is higher than the private banks i.e. 7.2 and 6.8 respectively out of 10 whereas public sector
banks even score full points unlike private banks, thus fetching a higher mean than the private banks,
thus having better disclosure practices. However the minimum and maximum score are same for the
total board structure in both the sectors, same is the case of total procedures. However what is
appreciable that TBS, TAC, TPRO the maximum score is the full points scored out of 3, 3 and 4
respectively by both the sector banks. Number of board meetings show that there has been higher
number of meeting in case of private banks as compared to public banks whereas public sector banks
are better when it comes to the board size. Public banks have better audit committee size and the
number of audit meetings is relatively same in both sectors. It is also very clear that the public sector
banks have constituted more number of committees so we can assume a better management of
activities. There is not much of a difference when we look at the percentage of CG report in the annual
report in both the sectors. Performance and profitability indicators such as Tobin’s Q reflects that
Public sector banks have a higher score whereas ROCE seems to be almost same in both the sectors.
Therefore the overall picture as per the analysis of the secondary data is:
Analysis:
The following model (Model 1) and (Model 2) was used to test hypotheses that a firms’ performance is
positively related to the quality of its corporate governance practices and the disclosure of CG factors,
in equation form, multiple regression models are expressed:
Tobin’s Q/ ROCE = α + β1TDL + β2TBS+β3TAC + β4TPRO +β5NBM + β6BS+β7NAM +
β8ACS+β9NOC + µ
Table 16: Correlation Matrix Analysis of Indian Private Banks
1 2 3 4 5 6 7 8 9 10 11
1.TDL 1
2. TBS 0.001 (0.991)
1
3. TAC
-0.186 (0.112)
-0.112 (0.342)
1
4. TPRO -0.231* (0.047)
0.373** (0.001)
0.008 (0.947)
1
5. No of board meetings
-0.224 (0.055)
-0.153 (0.193)
-0.406** (0.000)
-0.367** (0.001)
1
6. Board Size
-0.388** (0.001)
0.220 (0.059)
0.032 (0.787)
0.249* (0.032)
-0.029 (0.809)
1
7. No of audit meetings
-0.056 (0.637)
-0.560** (0.000)
0.174 (0.139)
-0.380** (0.001)
0.078 (0.510)
-0.140 (0.234)
1
8. Audit Committee size
-0.107 (0.366)
-0.189 (0.107)
-0.394** (0.001)
0.067 (0.571)
0.556** (0.000)
0.016 (0.896)
-0.124 (0.292)
1
9. No of committees
-0.033 (0.778)
-0.021 (0.861)
0.241* (0.039)
0.211 (0.071)
-0.071 (0.546)
-0.106 (0.368)
0.166 (0.157)
-0.185 (0.114)
1
10.Tobins Q
0.303** (0.009)
0.192 (0.101)
0.194 (0.097)
0.133 (0.260)
-0.335** (0.003)
-0.162 (0.167)
-0.369** (0.001)
-0.202 (0.084)
0.039 (0.740)
1
11. ROCE -0.146 (0.215)
-0.219 (0.061)
-0.132 (0.262)
-0.109 (0.353)
0.307** (0.008)
-0.101 (0.391)
0.374** (0.001)
0.171 (0.144)
-0.209 (0.073)
-0.484** (0.000)
1
Notes: *significant at <0.05, ** significant at <0.01, the p values are shown in parenthesis The correlation matrix results do not present any multicollearity problem among the independent variables. Though, few of the variables are having statistically significant relationship, but none of the variables carrying correlation coefficient of more than 0.8. The significance of this analysis is to fulfill the condition of multiple regression models, where all independent variables should be independent of each other
Table 17: Multiple Regression Analysis of Indian Private Banks
Parameters
Tobin’s Q
(Model I)
Return on Capital Employed (Model
II)
Beta t test p value Beta t test p value
Constant -0.101 0.920 0.844 0.402
1. TDL 0.257 1.928 0.058 -0.027 -0.203 0.840
2. TBS -0.038 -0.277 0.783 0.011 0.081 0.935
3. TAC 0.244 1.872 0.066 0.007 0.053 0.958
4. TPRO .054 0.339 0.736 0.344 2.184 0.033*
5. No of board meetings
-0.084 -0.486 0.629 0.405 2.348 0.022*
6. Board Size
-0.135 -1.175 0.244 -0.156 -1.364 0.177
7. No of audit meetings
-0.423 -3.165 0.002** 0.507 3.815 0.000**
8. Audit Committee size
-0.091 -0.616 0.540 -0.078 -0.530 0.598
9. No of committees
0.010 0.084 0.933 -0.371 -3.167 0.002**
F test 3.833* 3.950**
R^2 0.350 0.357
Adjusted R^2 0.259 0.267
Number of banks 16 16
*significant at <0.05, ** significant at <0.01 level
For the Private banks, as per Table 16, we observe that many variables share a significant or highly
significant correlation with each other. However none of these correlations are high enough to induce
multi-collenearity problems into the model. What we observe is that Tobin Q i.e the market related
profitability measure is highly positively correlated with the Total disclosures (TDL) and negatively
correlated with the Number of Board meetings (NBM) and Number of Audit Meetings (NAM), also
ROCE i.e. the measure linked to performance by the organization shows a highly significant positive
correlation with NBM and NAM.
From Table 17, it is understood that the multiple regression Model I is statistically significant, where F
test is 3.833 and is significant at 5 percent level. The independent variable NAM i.e. number of audit
meetings has a highly significant negative influence on Tobin Q. As per Model II, the F test is highly
significant at 1% level at 3.950, which signifies that majority of the independent factors have
significant relationship with ROCE. There are three independent variables, i.e. the number of board
meetings, number of audit meetings and the total procedures which have a positive impact on the
ROCE of the bank, however number of committees show a negative significant influence over the
ROCE of the private banks.
In case of Public sector banks, as per Table 18, given below we observe that many variables share a
significant or highly significant correlation with each other. However none of these correlations are
high enough to induce multi-collenearity problems into the model. What we also observe is that
Tobin’s Q is highly positively correlated with the Total Procedures (TPRO) and negatively correlated
with the number of Board meetings (NBM) and Total disclosures (TDL).
Below is Table19, it is understood that the multiple regression Model I is statistically significant, where
F test is 3.016 and is significant at 5 percent level. The number of board meetings has significant
negative influence with bank performance. The total audit committees (TAC) however have a positive
influence over Tobin’s Q. In model II, the F test is not statistically significant and it prevents further
interpretation of the results.
Table 18: Correlation Matrix Analysis of Indian Public Banks
1 2 3 4 5 6 7 8 9 10 11
1.TDL 1
2. TBS -0.083 (0.429)
1
3. TAC -0.197 (0.058)
0.645** (0.000)
1
4. TPRO -0.012 (0.909)
-0.433** (0.000)
-0.378** (0.000)
1
5. No of board meetings
0.096 (0.356)
-0.072 (0.492)
-0.253 (0.014)
-0.138 (0.185)
1
6. Board Size
0.270** (0.008)
0.061 (0.560)
-0.018 (0.862)
-0.009 (0.933)
0.112 (0.281)
1
7. No of audit meetings
0.029 (0.779)
-0.009 (0.342)
-0.118 (0.258)
0.065 (0.534)
0.121 (0.247)
-0.091 (0.381)
1
8. Audit Committee size
0.334** (0.001)
-0.360** (0.000)
-0.264* (0.010)
0.138 (0.186)
-0.013 (0.903)
0.213* (0.039)
0.091 (0.386)
1
9. No of committees
0.011 (0.914)
-0.512** (0.000)
-0.329** (0.001)
0.223* (0.031)
0.206* (0.046)
-0310**. (0.002)
0.226* (0.029)
0.084 (0.418)
1
10. Tobins Q
-0.267** (0.009)
0.099 (0.342)
0.304** (0.003)
0.122 (0.241)
-0.333** (0.001)
-0.107 (0.306)
-0.022 (0.833)
-0.175 (0.091)
-0.081 (0.436)
1
11. ROCE 0.200 (0.053)
-0.069 (0.511)
-0.190 (0.067)
-0.123 (0.239)
0.191 (0.065)
-0.042 (0.690)
0.190 (0.067)
0.216 (0.037)
0.189 (0.069)
-0.612** (0.000)
1
Notes: *significant at <0.05, ** significant at <0.01, the p values are shown in parenthesis The correlation matrix results do not present any multicollearity problem among the independent variables. Though, few of the variables are having statistically significant relationship, but none of the variables carrying correlation coefficient of more than 0.8. The significant of this analysis is to fulfill the condition of multiple regression models, where all independent variables should be independent of each other.
Table 19: Multiple Regression Analysis of Indian Public Banks
Parameters
Tobin’s Q
(Model I)
Return on Capital Employed
(Model II)
Beta t test p value Beta t test p value
Constant 0.578 0.565 1.553 0.124
2. TDL -0.1452 -1.441 0.153 0.111 1.014 0.314
2. TBS -0.104 -0.700 0.486 0.177 1.144 0.256
3. TAC 0.324 2.412 0.018* -0.213 -1.526 0.131
4. TPRO 0.185 1.676 0.097 -0.188 -1.645 0.104
5. No of board meetings
-0.218 -2.037 0.045* 0.076 0.691 0.491
6. Board Size
-0.010 -0.089 0.930 -0.078 -0.691 0.491
7. No of audit meetings
0.039 0.395 0.694 0.119 1.166 0.247
8. Audit Committee size
-0.104 -0.943 0.348 0.205 1.790 0.077
9. No of committees
-0.026 -0.210 0.834 0.166 1.303 0.196
F test 3.016* 2.180
R^2 0.244 0.189
Adjusted R^2 0.163 0.102
Number of banks 19 19
*significant at <0.05, ** significant at <0.01 level .
Perception of investors with respect to CG disclosures
The primary research was conducted through an interview process from the investors in general, in
order to elicit their valuable opinions on the attributes of corporate governance and to know their
perception about corporate governance disclosure practices adopted by the banks (463 out of 500
invested in bank) and other firms. A sample of 500 investors was taken from National Capital Region,
Delhi on the basis of simple random sampling, a simple random sample is meant to be an unbiased
representation of a group.
The outcome of this research would corroborate the findings from secondary research analysis.
However, without the qualitative analysis, the objectives of the research cannot be fulfilled. Hence, an
interviews method was used to make this research outcome authentic and justifying. The outcome of
the interviews was presented through bar graphs. A likert scale (1 to 6) was used from question1 to
question6 6 and a likert scale of (1-4) from question7to question 10, to measure the importance of each
attribute of corporate governance practices. Rank 1 was given for maximum importance and 6 is given
for minimum importance. The respondents were requested to tell regarding each attribute, average
score was calculated, and presented through bar graphs. Whereas in order to know the investor
perception about corporate governance on the basis of which they make investment decision, few
questions were put up from question 11 to question 19 whose response is depicted through pie charts
below.
Based on literature review and secondary research analysis, Interviews of respondents were conducted
meticulously. The primary motive behind interview method was to draw opinions on those attributes by
the respondent who happen to be the investors, who have invested their valuable money in the
stocks/mutual funds/bonds etc. of the firms and majority of them (463 out of 500) were the investors in
bank and what is their perception about how far the banks in specific, adhere to the requirements of
corporate governance disclosure practices and what according to them are most important and desirable
attributes with regard to corporate governance . Since banks and financial institutions occupy very
important role in financial system of a country, attributes of corporate governance has a solidifying
effect that ensures governance of banks.
Considering the paucity of time and convenience of interviewee, the format of interview was prepared
in a systematic manner so that the opinions of the investors were correctly depicted. Later on it was
converted into mean score (based on likert’s scale), that could be presented in a suitable bar diagram.
The outcomes of the interviews were connected with research objectives and research questions.
Since time allotted by interviewee was limited, interview procedure was organized in some specific
question format based on literature survey. Interviewees were requested to score on those attributes
after giving their valuable opinion.
The outcome of the interview with the investors helped in the analysis as their views helped me to
know what are the most desirable and important attributes with regard to implementation of CG
practices, they would expect in any firm to have, before they make investment it and in return the firm
builds trust and confidence in them.
Here is the analysis of the responses of the questions that were asked from the respondents:
1. We asked the respondents to Score good corporate governance on some key attributes in Indian
Banking Sector where they emphasized on transparency of financial statement clearly indicating that
transparency of financial statements will repose faith on banks from governance point of view. The
misgivings of fraud and malpractice will automatically erase from the mind of investors and will lead
to increase shareholders’ value. In addition, the respondents were very much positive about the other
attributes of corporate governance practices like ethical practice, legal compliance.
All these attributes certainly creates an environment of trust and confidence of shareholders and public
at large. Since banks are characterized by repository of finance, bank’s executives consider it very
much important to maintain transparency of financial statements and compliance with corporate
governance principles.
2. Among all the committees audit committee, remuneration committee, investors’ grievance
committee are some of the mandatory requirements, the outcome of this question support the efforts of
banks in implementing this decision through various committees. However the respondents perceive
that management committee needs all the importance, where the average score is around 4.However all
the committees except remuneration and risk monitoring score fairly well with regard to the perception
of the respondents. Thus, it can be correctly said that formation of those committees are very much
important for effective implementation of corporate governance practices.
3. Respondents were asked to score the concerns from the point of view of the management, which
necessitates implementation of Corporate Governance in banking sector. Practice of insider trading,
unethical practices adopted by banks and deviation from standard accounting practices in public sector
banks are some of major problems highlighted by respondents in banking sector. The banking scams in
Asian countries are some of the glaring examples. From the above results, we analyze that the
respondents who are the investors in a bank score ‘unethical practices adopted by the banks’ as a key
concern which further necessitates the implementation of corporate governance practices by the banks.
4. Since transparency and disclosure are two important pillars of corporate governance measures the
investors in the banks (respondents) were requested to score on those variables. This question is aimed
at taking the viewpoint to ensure transparency and disclosure. From the response, it is clear that proper
disclosure of information in annual report, proper means of communication to interested parties and
high quality of MDA are some important variables which can bring more transparency in governance.
The mean score of these three variables is around 4, justifying their opinion about those variables.
5. Since audit committee is considered as an important and mandatory committee to be set up with
certain powers and duties, it was important to know the opinion of our respondent investors as to which
characteristic is considered by them as most important from the audit committee practices point of
view. It seems it was difficult for the respondents to say any one or two characteristics of the audit
committee as important one except for’ external auditor providing non audit service, whereas the
minimum number of members and the number of meetings of the audit committee is an important
concern for the investors to make sure that the audit committee practices and processes are going fine.
6. Next we wanted to know what according to the investors are the most desirable characteristics of the
Board of Directors.’ Expertise in accounting and finance’ is a but natural choice of the respondents who
happen to be the investors in a bank which gets the highest mean score i.e. 4.26 of all the six
characteristics. Needless to say, that expertise in accounting and finance can really help the
minimization of frauds and losses. Election of the BOD under shareholder agreement also seems to be
another important concern of the respondents.
7.As per the clause 49, the company has to comply with the provisions such as, a statement in summary
form of transactions with related parties in the ordinary course of business and shall be placed
periodically before the audit committee, details of material individual transactions with related parties
which are not in the normal course of business shall be placed before the audit committee and details of
material individual transactions with related parties or others, which are not on an arm’s length basis
should be placed before the audit committee, together with Management’s justification for the same.
The same seems to be the most desirable characteristic related to RPTs by our respondents who have
given highest mean score of 2.70 to ‘audit committees to approve all RPTs’.
8. What according to the investors is the most desirable characteristics of the Board practices and
procedures, the respondents have given highest mean sore of 2.79 to ‘regular system required for
evaluating CEO and other executives, as they believe that if there is some fair and regular procedure for
evaluating the CEO and other executives, there shall be more transparency in the system and financial
dealings hence there is a better and higher chance of the corporate governance implementation.
9. This was one of the very important questions, whose reply rests only with the current and the
prospective investors who are really concerned about what the banks regularly provide on their
websites to keep them updated, on the basis of which they have to take financial decisions. The
response was again interesting, where almost all the attributes were scored almost on the same level, if
however we have to tell the most important attribute, the respondents believe that financial information
i.e. annual and quarterly financial information is the most important, scoring a mean score of 2.77 out
of 3, which the banks need to provide on their websites.
10. In order to get a Score about the most desirable characteristics of Shareholder rights, as an
investor, our respondents gave maximum score and importance to the rights of the shareholders i.e. the
shareholders can vote by postal ballot and Shareholders can request SEBI or Tribunal to investigate
oppression. This definitely is going to help bring better corporate governance execution.
11.From the above analysis we find that maximum investors (respondents) find that the bank in which
they have invested has a written code of corporate governance which covers the rights of shareholders,
whereas a comparatively less number of respondents find that their bank in which they have made the
investment does have a written code of conduct wherein the duties of the board are mentioned and
almost same number of respondents believe that their bank specifies its rules of disclosure in the
written code of conduct of their bank. So again it seems that the investors lookout for ‘the rights of
shareholders’ as an important attribute while judging the corporate governance of a bank.
12. Question 10 to 15 are the basic questions as to Corporate Governance put up by the respondents
which gives the idea to an investor about how well the corporate governance norms are being followed
by a bank and accordingly they take investment decision. The response is quite mixed in this case as it
seems that no majority of banks follow a particular pattern rather almost 50% of the respondents are of
the view that their banks distribute their code of conduct to their employees and almost the same
percentage believe that they distribute it to the shareholders.
13. Again a very close result is what we observe, no particular option seems to be the choice of most of
the banking companies, as at least what the data shows is that almost same percentage of respondents
feel that the banks in which they have invested, their policies are easily available to regulators as well
as employees and public.
14. We asked the investors that their bank’s code of conduct takes which issues into account,as per the
survey results, the maximum number of respondents chose ‘Ethical standards in dealing with
customers, vendors and other relevant parties’ which they find in their respective bank’s code of
conduct policy. This is a positive sign from the corporate governance point of view, which reinstates
that banks make deliberate effort in ensuring that ethical standards are followed by them while dealing
with their customers, investors, vendors and other relevant parties, which in itself is a sign of relief for
the investors that they are investing their money in safe hands of the banks.
15. We asked the respondents if they go through Corporate Governance report /norms of the bank
before taking investment decision in it. The response to this question again reflects a big positive
picture about the investors, with as many as 268 out of 500‘YES’ responses of the investors who are
now more alert, better informed and who make sure to go through the annual report of the bank and
specifically its Corporate governance report mentioned there in it, before they finally decide which
banking sector and particularly in which bank they should invest in.
16. Next we wated to explore if the Bank has revealed a code of conduct / ethics clearly or not,the
maximum ‘Yes’ response of 258 out of a total of 500 respondents, reflects a positive side of most of
the banks, who ensure to reveal their ‘code of conduct’ policy clearly and are making a conscious effort
to bring in more transparency and ethical ways of dealing and thereby ensuring a better implementation
of corporate governance in their bank.
17. A question was asked just to get an idea in general about how much a person is planning to convert
his savings into investment annually. The results were on expected lines, that is most of the investors
invest somewhere in between one to ten lakhs , which is actually a mediocre path adopted by him
inorder to minimize his risk by not investing huge sums of money, rather he follows conservative
approach and obviously expects a fair return out of it.
18.The purpose of asking this question from our respondents (investors) was to get an idea how much
experienced he is as an investor, in other words since how long he has been an investor in the stock
market, the result was a little surprising to find that majority of my respondents are there for more than
twenty years.
19. This question ultimately answers for all the above questions, where has the investor finally made a
choice i.e. in which banking sector he has invested. In my survey I find that majority of them have
chosen Public sector banks(260 out of 500) over private sector banks(203 out of 500) for the
investment purpose, the rest(44 out of 500) have invested in some other non banking organizations, out
of which I can thus make an inference that the maximum number of respondents have chosen the
Public sector banks over the Private sector because it matches most of the criteria if not all with regard
to Corporate governance disclosure and consider it as a more safer option.
Based on the primary survey
CONCLUSION
The findings from primary research were quite satisfactory because the respondents were quite
categorical in highlighting the attribute of good corporate governance. It was a qualitative analysis that
reflects the prevalence of corporate governance practices in Indian Banking sector. The outcome of
secondary research analysis has already established the fact that good corporate governance is a reality
and Indian Banking sector has left no stone unturned to achieve this. Corroborating this outcome of
secondary research, primary research was aimed at to draw significant insight into it. The outcome of
primary research also reflected the sheer sincerity of senior bank’s executive to take this mission
forward to the zenith of success. However, the results were a little conflicting because as per the
secondary research analysis, we deduced that Private sector bank are much better when it comes to
implementation of corporate governance disclosure practices but as per the primary research, the result
is different where we observe that majority of investors chose public sector banks over private for the
investment purpose. What I can infer about it is that the investors still believe Government controlled
banks are a more safe option for the investment, it reflects the conservative approach of any investor
where he wants to bear the minimum risk and keep his funds safe.
Therefore if we look at a broader picture we find that it is the Private sector banks whose performance
is majorly influenced by the corporate disclosure as reflected by correlation and multiple regression vis
a vis Tobin’s Q and ROCE, wherein larger number of CG factors leave an impact on the overall
performance of the private sector banks in comparison to Public sector banks. What is noteworthy is
the improvement in the overall Corporate Governance Score (Table 1) from 16.53 to 17.1, this reflects
that there is a conscious improvement amongst private banks while making Corporate governance
disclosures. The same is reflected in CG score (Table 2) which again happens to be the same i.e. was 16
out of 20 in year 2007 whereas 16.1 out of 20 in 2011. A further comparison between public and
private CG Scores would highlight this fact that private banks surprisingly are more consistent and
better in Corporate Disclosure Practices.
This also makes us reject our null hypothesis H0 and accept the alternate hypotheses H1 i.e. Firms’
performance is positively related to the quality of its corporate governance practices seems to be
statistically correct since there are many independent factors like total procedures (TPRO), number of
board meetings, number of audit meetings and total audit committees (TAC) which are significantly
positively related and influence the bank performance.
SUGGESTIONS:
1. Since the hypothesis has been proved correct, which we also see above that how the CG factors
like number of board meetings and audit meetings, total disclosures in case of Private banks and
factor like total procedures in case of Public banks positively affect the profitability, therefore
stress should be laid continuously on these factors along with the others.
2. Since it seems that number of audit meetings have an adverse influence on the market value
profitability (Tobins Q) in case of private banks, therefore it is advisable to restrict the number
of the same and to ensure the quality of audit that is at the root of effective corporate governance by making
the Auditor accountable for the disclosure of financial information and to form an appropriate system in order to
monitor the work of Audit firms undertaken in its meetings.
3. Large number of committees seems to have a negative impact on the profitability of the private
banks which is a strange thing to understand, therefore efforts should be made to probe the
reasons of the same and take necessary action accordingly.
4. In case of public banks, number of board meetings have an adverse effect on the profitability
therefore I would suggest that not too many board meetings should be conducted and should try
to restrict the same as it may hamper the qualitative time of the directors I discharge of their
duties.
5. Since we also find that Private banks are more consistent and better than Public banks when it
comes to CG disclosure practices, therefore in order to bring overall better CG disclosure
practices should try to establish a clear mandate for each regulatory Authority for the enforcement of Clause
49 of the Listing Agreement, thereby improving India’s corporate governance enforcement mechanism.
6. To make a statutory compliance for the listed companies to compulsorily obtain a report on Corporate
Governance Rating (CGR) from a Credit Rating Agency in India.
Other notable findings from secondary research analysis reflect that corporate governance in banks is in
a formative state. It is fast evolving and long way to go. While setting accountability standards for
Board, there is need for enhanced transparency and disclosure in respect of various aspects of board
constitution and functioning. Both private and public sector banks are not practicing completely the
corporate governance code inspite being mandatory in nature. Still, the outcome is very much
satisfactory.
Limitations of the study: The present study suffers from the following limitations:
1. The study required annual reports of the public and the private sector banking companies for a
period of five years. However as per Table 4, the annual reports for all the five years could not
be obtained for the five banking companies of the private sector.
2. Items of information included in the CG index for various categories were selected keeping in
view the mandatory requirements, but there may still be certain relevant items, which may not
be selected while constructing the index, which may prove to be as important for CG disclosure
and implementation.
4. SEBI issued revised clause 49 in October 2004, when it became mandatory for all the listed firms
to implement corporate governance disclosure in the annual reports w.e.f. 31st December 2005,
before that since it was not mandatory, many banks therefore never disclosed the corporate
governance in their annual reports. Hence, I could undertake the study for only five years i.e.
after Dec 2006 therefore; the study of corporate governance has been restricted to 2006-2007 to
2010-11 only.
5. A sampling error can occur with a simple random sample if the sample doesn't end up
accurately reflecting the population it is supposed to represent.
6. According to SEBI, the corporate governance practices are applicable only to banks that are
listed in the Indian stock exchanges hence the foreign banks lay outside the purview of study, so
I have not done the detailed analysis by using statistical tools or preparing Corporate
governance index for the foreign banks unlike public and private sector banks.
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