CORPORATE GOVERNANCE WITH REFERENCE TO

IN INDIAN BANKS

Submitted by,

Tisha Roshan Thomas

For the LL.B. graduation at JSS Law College

Autonomous, Mysore

Under the supervision and guidance of,

Mr Jagadish A T
 CHAPTER 2

HISTORY OF CORPORATE GOVERNACE AN INDIAN BANKS:

2.1. INTRODUCTION:

Corporate governance is “the system by which companies are directed and controlled”. The
companies, markets and even banks use it for a better regulation of business. It also regulates
relationships between the management, the stakeholders and its board. The regulation of
relations are done in order to have a smooth flow of business matters and to maintain a
healthy relationship between the two.

It is not just a regulatory mechanism it enables a business, market, company or

bank to take better decisions. The key ingredient to the effectiveness of corporate governance
is the flow of information. It is based on the principle that the right information is provided to
the right people at the right time. There are two alternatives that can arise out of have
information in corporate governance, there can either be a lack of information which may
result in deformed decisions whilst too much information may lead to decision that do not
happen to focus on the issue at hand.

The cardinal principle of corporate governance is ethics and transparency. A

company gives utmost importance to its shareholders and corporate governance makes this
more likely so by letting shareholders decide how to run the business. Thus the root of
corporate governance is its stakeholders.

Banks have been introduced to corporate governance and it has been

discovered that the success of a good economy lies on good corporate governance. Corporate
governance is interrelated to good economic development. If done right corporate governance
encourages robust financial systems. Investor protection is key in good corporate governance,
a high level of protection for investor’s leads to a booming stock market and a higher firm
valuation. The banks will be able to allocate resources in an effective manner.

Banks play a crucial role in the flow of capital. The worst case of corporate
governance is when banks fail or deal with monetary loss in course of lending and borrowing
money, this is when banks fail the price of which has to be paid by the shareholders and the
whole economy in turn. In order to prevent such events the banks are imposed with legitimate
restrictions and obligations which leads to cascading effect in order to prevent such failures
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and also to not have the entire economy pay the price for the collapse of a banking institution.
The rules and restrictions are mainly imposed on banks in order for the banks to act in a way
to promote confidence among the shareholders.

2.2. HISTORY OF CORPORATE GOVERNANCE:

The topic of corporate governance is a vast subject that enjoys a long and rich history. It’s a
topic that incorporates managerial accountability, board structure and shareholder rights. The
issue of governance began with the beginning of corporations, dating back to the East India
Company, the Hudson’s Bay Company, the Levant Company and other major chartered
companies during the 16th and 17th centuries.

While the concept of corporate governance has existed for centuries, the
name didn’t come into vogue until the 1970s. It was a term that was only used in the United
States. The balance of power and decision-making between board directors, executives and
shareholders has been evolving for centuries. The issue has been a hot topic among academic
experts, regulators, executives and investors.

Corporate Growth Places Emphasis on Developing Corporate Governance:

After World War II, the United States experienced strong economic growth, which had a
strong impact on the history of corporate governance. Corporations were thriving and
growing rapidly. Managers primarily called the shots and board directors and shareholders
were expected to follow. In most cases, they did. This was an interesting dichotomy, since
managers highly influenced the selection of board directors. Unless it came to matters of
dividends and stock prices, investors tended to steer clear from governance matters.

In the 1970s, things began to change as the Securities and Exchange

Commission (SEC) brought the issue of corporate governance to the forefront when they
brought a stance on official corporate governance reforms. In 1976, the term “corporate
governance” first appeared in the Federal Register, the official journal of the federal
government.

In the 1960s, the Penn Central Railway had diversified by starting

pipelines, hotels, industrial parks and commercial real estate. Penn Central filed for
bankruptcy in 1970 and the board came under public fire. In 1974, the SEC brought

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proceedings against three outside directors for misrepresenting the company’s financial
condition and a wide range of misconduct by Penn Central executives.

Around the same time, the SEC caught on to widespread payments

by corporations to foreign officials over falsifying corporate records. During this era,
corporations started to form audit committees and appoint more outside directors. In 1976,
the SEC prompted the New York Stock Exchange (NYSE) to require each listed corporation
to have an audit committee composed of all independent board directors, and they complied.
Advocates pushed to get governance right by requiring audit committees, nomination
committees, compensation committees and only one managerial appointee.

The 1980s Brought a Corporate Governance Reform Counter-Reaction:

The 1980s brought an end to the 1970s movement for corporate governance reform due to a
political shift to the right and a more conservative Congress. This era brought much
opposition to deregulation, which was another major change in the history of corporate
governance. Lawmakers put forth The Protection of Shareholders’ Rights Act of 1980, but it
was stalled in Congress.

Debates on corporate governance focused on a new project called the Principles of Corporate
Governance by the American Law Institute (ALI) in 1981. The NYSE had previously
supported this project, but changed their stance after they reviewed the first draft. The
Business Roundtable also opposed ALI’s attempts at reform. Advocates for corporations felt
they were strong enough to oppose regulatory reform outright, without the restrictive ALI-led
reforms. Businesses had concerns about some of the issues in Tentative Draft No. 1 of the
Principles of Corporative Governance. The draft recommended that boards appoint a majority
of independent directors and establish audit and nominating committees. Corporate advocates
were concerned that if companies implemented these measures, it would increase liability
risks for board directors.

Law and economic scholars also heavily criticized the initial ALI
proposals. They expressed concerns that the proposals didn’t account for the pressures of the
market forces and didn’t consider empirical evidence. In addition, they didn’t believe that
fomenting litigation would serve a purpose in improving board director decision-making.

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In the end, the final version of ALI’s Principles of Corporate Governance was so watered
down that it had little impact by the time it was approved and published in 1994. Scholars
maintained that market mechanisms would keep managers and shareholders aligned.

The “Deal Decade” Leads to Shareholder Activism:

The 1980s was also referred to as the “Deal Decade.” Institutional shareholders grabbed more
shares, which gave them more control. They stopped selling out when times got tough.
Executives went on the defensive and struck deals to prevent hostile takeovers.

State legislators countered takeovers with anti-takeover statutes at the state level. That,
combined with an increased debt market and an economic downturn, discouraged merger
activity. The Institutional Shareholder Services (ISS) was formed to help with voting rights.
Shareholders struck back with legal defenses, but judges often favored corporate decisions
when outside directors supported board decisions. Investors started to advocate for more
independent directors and to base executive pay on performance, rather than corporate size.

Financial Crisis of 2008:

By 2007, banks had been taking excessive risks and there was growing concern about a
possible collapse of the world financial system. Governments sought to prevent fallout by
offering massive bailouts and other financial measures. The collapse of the Lehman Brothers
bank developed into a major international banking crisis, which became the worst financial
crisis since the Great Depression in the 1930s. Congress passed the Dodd-Frank Wall Street
Reform and Consumer Act in 2010 to promote financial stability in the United States.

The fallout from the financial crisis has placed a heavier focus on best
practices for corporate governance principles. Boards of directors feel more pressure than
ever before to be transparent and accountable. Strong governance principles encourage
corporations to have a majority of independent directors and to encourage well-composed,
diverse boards.

Advancements in technology have improved efficiency in governance

and they’ve created new risks as well. Data breaches are a new and real concern for
corporations. The first targets were banks and financial institutions. As these institutions have
bolstered their security measures, hackers have turned their efforts to smaller corporations
within a variety of industries, including governments.

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Today’s boards of corporations and organizations of all sizes are finding that the best way for
them to protect themselves, their shareholders and stakeholders is to use technology to their
advantage by taking a total enterprise governance management approach. Diligent, a leader in
board management software, provides for their needs with Governance Cloud, a suite of fully
integrated and highly secure governance tools.

IN INDIA:

At independence, India inherited one of the world’s pooresteconomies but one which had a
factory sector accounting for a tenth of the nationalproduct; four functioning stock markets
(predating the Tokyo Stock Exchange) withclearly defined rules governing listing, trading
and settlements; a well-developed equityculture if only among the urban rich; and a banking
system replete with well-developedlending norms and recovery procedures.In terms of
corporate laws and financialsystem, therefore, India emerged far better endowed than most
other colonies. The 1956 Companies Act as well as other laws governing the functioning of
joint-stock companiesand protecting the investors’ rights built on this foundation.The
beginning of corporate developments in India were marked by the managingagency system
that contributed to the birth of dispersed equity ownership but also gave rise to the practice of
management enjoying control rights disproportionately greater thantheir stock ownership.
The turn towards socialism in the decades after independencemarked by the 1951 Industries
(Development and Regulation) Act as well as the 1956Industrial Policy Resolution put in
place a regime and culture of licensing, protection andwidespread red-tape that bred
corruption and stilted the growth of the corporate sector.The situation grew from bad to
worse in the following decades and corruption, nepotismand inefficiency became the
hallmarks of the Indian corporate sector. Exorbitant tax ratesencouraged creative accounting
practices and complicated emolument structures to beatthe system.In the absence of a
developed stock market, the three all-India development finance institutions (DFIs)– the
Industrial Finance Corporation of India, the Industrial

Development Bank of India and the Industrial Credit and Investment Corporation of India

Together with the state financial corporations became the main providers of long-term credit
to companies. Along with the government owned mutual fund, the Unit Trust of India, they
also held large blocks of shares in the companies they lent to and invariably had
representations in their boards. In this respect, the corporate governance system resembled

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the bank-based German model where these institutions could have played a big role in
keeping their clients on the right track. Unfortunately, they were themselves evaluated on the
quantity rather than quality of their lending and thus had little incentive for either proper
credit appraisal or effective follow-up and monitoring. Their nominee directors routinely
served as rubber-stamps of the management of the day. With their support, promoters of
businesses in India could actually enjoy managerial control with very little equity investment
of their own. Borrowers therefore routinely recouped their investment in a short period and
then had little incentive to either repay the loans or run the business. Frequently they bled the
company with impunity, siphoning off funds with the DFI nominee directors mute spectators
in their boards. This sordid but increasingly familiar process usually continued till the
company’s net worth was completely eroded. This stage would come after the company has
defaulted on its loan obligations for a while, but this would be the stage where India’s
bankruptcy reorganization system driven by the 1985 Sick Industrial Companies Act(SICA)
would consider it “sick” and refer it to the Board for Industrial and Financial Reconstruction
(BIFR). As soon as a company is registered with the BIFR it wins immediate protection from
the creditors’ claims for at least four years. Between 1987 and 1992 BIFR took well over two
years on an average to reach a decision, after which period the delay has roughly doubled.
Very few companies have emerged successfully from the BIFR and even for those that
needed to be liquidated, the legal process takes over 10 years on average, by which time the
assets of the company are practically worthless. Protection of creditors’ rights has therefore
existed only on paper in India. Given this situation, it is hardly surprising that banks, flush
with depositors’ funds routinely decide to lend only to blue chip companies and park their
funds in government securities. Financial disclosure norms in India have traditionally been
superior to most Asian countries though fell short of those in the USA and other advanced
countries. Noncompliance with disclosure norms and even the failure of auditor’s reports to
conform to the law attract nominal fines with hardly any punitive action. The Institute of
Chartered Accountants in India has not been known to take action against erring auditors.
While the Companies Act provides clear instructions for maintaining and updating share
registers, in reality minority shareholders have often suffered from irregularities in share
transfers and registrations – deliberate or unintentional. Sometimes non-voting preferential
shares have been used by promoters to channel funds and deprive minority shareholders of
their dues. Minority shareholders have sometimes been defrauded by the management
undertaking clandestine side deals with the acquirers in the relatively scarce event of
corporate takeovers and mergers. Boards of directors have been largely ineffective in India in

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monitoring the actions of management. They are routinely packed with friends and allies of
the promoters and managers, in flagrant violation of the spirit of corporate law. The nominee
directors from the DFIs, who could and should have played a particularly important role,
have usually been incompetent or unwilling to step up to the act. Consequently, the boards of
directors have largely functioned as rubber stamps of the management. For most of the post-
Independence era the Indian equity markets were not liquid or sophisticated enough to exert
effective control over the companies. Listing requirements of exchanges enforced some
transparency, but non-compliance was neither rare nor acted upon. All in all therefore,
minority shareholders and creditors in India remained effectively unprotected in spite of a
plethora of laws in the books.

Changes since liberalization:

The years since liberalization have witnessed wide-ranging changes in both laws and
regulations driving corporate governance as well as general consciousness about it. Perhaps
the single most important development in the field of corporate governance and investor
protection in India has been the establishment of the Securities and Exchange Board of India
(SEBI) in 1992 and its gradual empowerment since then. Established primarily to regulate
and monitor stock trading, it has played a crucial role in establishing the basic minimum
ground rules of corporate conduct in the country. Concerns about corporate governance in
India were, however, largely triggered by a spate of crises in the early 90’s – the Harshad
Mehta stock market scam of 1992 followed by incidents of companies allotting preferential
shares to their promoters at deeply discounted prices as well as those of companies simply
disappearing with investors’ money. These concerns about corporate governance stemming
from the corporate scandals as well as opening up to the forces of competition and
globalization gave rise to several investigations into the ways to fix the corporate governance
situation in India. One of the first among such endeavors was the CII Code for Desirable
Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee
was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two
committees to look into the issue of corporate governance – the first chaired by Kumar
Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy
three years later. The SEBI committee recommendations have had the maximum impact on
changing the corporate governance situation in India. The Advisory Group on Corporate
Governance of RBI’s Standing.

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2.3. KEY CONSTITUENTS OF CORPORATE GOVERNANCE:

Corporate governance contributes to the efficiency of firms enabling them to compete

internationally in a sustained way. Corporate governance plays an important role in
maintaining integrity in the organization and to manage the risk of the firm. It is a crucial
system which guides, monitors and controls the organizational functions.

The three important constituents of corporate governance are:

1. Board of Directors:
The board of directors, including the general manager or CEO (chief executive officer),
have very defined roles and responsibilities within the business organization. Essentially
it is the role of the board of directors to hire the CEO or general manager of the business
and assess the overall direction and strategy of the business. The CEO or general
manager is responsible for hiring all of the other employees and overseeing the day-to-
day operation of the business. Problems usually arise when these guidelines are not
followed. Conflict occurs when the directors begin to meddle in the day-to-day operation
of the business. Conversely, management is not responsible for the overall policy
decisions of the business.

The board of directors selects officers for the board. The major office is the president or
chair of the board. Next there is a vice-president of vice-chair who serves in the absence
of the president. These positions are filled by board members. Next you usually have a
secretary and treasurer or combined secretary/treasurer. These positions focus on very
specific activities and may be filled by electing someone who is serving on the board of
directors or appointing someone who is not a member of the board of directors. The
selection process is often based on who is willing and who is the most qualified, although
seniority may come into play. Each board may have their own ways of handling those
issues.

The seven points below outline the major responsibilities of the board of directors.

i) Recruit, supervise, retain, evaluate and compensate the manager. Recruiting,

supervising, retaining, evaluating and compensating the CEO or general manager are

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probably the most important functions of the board of directors. Value-added business
boards need to aggressively search for the best possible candidate for this position.
Actively searching within your industry can lead to the identification of very capable
people. Don’t fall into the trap of hiring someone to manage the business because he/she
is out of work and needs a job. Another major error of value-added businesses is under-
compensating the manager. Managerial compensation can provide a good financial
payoff in terms of attracting top candidates who will bring financial success to the value-
added business.

ii) Provide direction for the organization. The board has a strategic function in providing
the vision, mission and goals of the organization. These are often determined in
combination with the CEO or general manager of the business.

iii) Establish a policy based governance system. The board has the responsibility of
developing a governance system for the business. The articles of governance provide a
framework but the board develops a series of policies. This refers to the board as a group
and focuses on defining the rules of the group and how it will function. In a sense, it’s no
different than a club. The rules that the board establishes for the company should be
policy based. In other words, the board develops policies to guide it own actions and the
actions of the manager. The policies should be broad and not rigidly defined as to allow
the board and manager leeway in achieving the goals of the business.

iv) Govern the organization and the relationship with the CEO. Another responsibility of
the board is to develop a governance system. The governance system involves how the
board interacts with the general manager or CEO. Periodically the board interacts with
the CEO during meetings of the board of directors. Typically that is done with a monthly
board meeting, although some boards have switched to meetings three to four times a
year, or maybe eight times a year. In the interim between these meetings, the board is
kept informed through phone conferences or postal mail.

v) Fiduciary duty to protect the organization’s assets and member’s investment. The
board has a fiduciary responsibility to represent and protect the member’s/investor’s
interest in the company. So the board has to make sure the assets of the company are kept

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in good order. This includes the company’s plant, equipment and facilities, including the
human capital (people who work for the company.)

vi) Monitor and control function. The board of directors has a monitoring and control
function. The board is in charge of the auditing process and hires the auditor. It is in
charge of making sure the audit is done in a timely manner each year.

Governance Models:
A board of directors is a collection of individuals trying to operate as a group.
Functioning as a group is something many people are not comfortable with. So each
board evolves with its own culture. Each culture is dictated by the backgrounds of the
individuals on the board. However, there are several governance models of how a board
of directors can function. Examining and choosing the right model is important because
it will impact the success of the value-added business.

Below are four governance models. The board of directors must decide which model is
best for them.

1) Manager Focus – With this model, the manager dominates the board. We can all think
of situations where we have had one dominant individual in a group. In this case the
board functions are an advisory board and reacts to the views of the manager. It is
essentially a “rubber stamp” for the CEO. This model often emerges when you have a
charismatic CEO who is very dominant and proactive in running the organization. In
most cases this is not a good model for a value-added business.

2) Proactive Board – This model is of a proactive board that speaks as one voice. It
speaks as one voice for the board and often has a proactive manager that also speaks with
one combined voice for the organization. This is a good model because the manager and
the board are on the same page and speak with a single voice. This model is proactive in
taking advantage of emerging opportunities and is especially valuable for entrepreneurial
businesses.

3) Geographic Representation – This model focuses on the members/investors whom the

board member represents. With this model, the board member feels that he/she has been

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 elected to the board to represent individuals in a geographic location or special interest
group. To better understand this model, think of an individual running for a political
office and then representing the interests of the individuals located in that geography.
This is often found in large boards, typically of 24 to 50 individuals. With a large group
like this there is a temptation for the directors to represent the interests of the
members/investors in their geographic area or special interest group rather than the best
interests of the company. This is not a model that works well for most value-added
businesses.

4) Community Representation – In this situation the board member is representing the

community rather than the organization. An example of this is a school board where an
individual is elected to represent certain interests within the community.

These four models are ways in which the board and its organization function. Often the
directors who have previously been on boards where they have been chosen to represent
a certain group or have been a rubber stamp for the manager. So it is natural for a
director to think that this is how all boards function. But it is a good practice for boards
to actively investigate and discuss the models presented above and choose the right one
for their situation. This is usually a model where the directors are all active and present a
single voice of what is best for the organization. What is best for the organization will
usually also be good for the various members/investors and the stakeholders in the
community.
2. Shareholders:

Stakeholder vs Shareholder?

The terms “stakeholder” and “shareholder” are often used interchangeably in the
business environment. Looking closely at the meanings of stakeholder vs shareholder,
there are key differences in usage. Generally, a shareholder is a stakeholder of the
company while a stakeholder is not necessarily a shareholder. A shareholder is a person
who owns an equity stock in the company and therefore holds an ownership stake in the
company. On the other hand, a stakeholder is an interested party in the company’s
performance for reasons other than capital appreciation.

Stakeholder vs Shareholder :

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 Shareholder

A shareholder is any party, either an individual, company or institution that owns at least one
share of a company and, therefore with a financial interest in its profitability. Shareholders
may be individual investors who are saving part of their salaries in preparation for retirement
or large corporations and who hope to exercise a vote in the management of a company. If the
company’s share price increases, the shareholder’s value increases, while if the company
performs poorly and its stock price declines, then the shareholder’s value decreases.
Shareholders would prefer the company’s management to take actions that increase the share
price and dividends, and that improve their financial position.

Liquid Investments

The value of investments that shareholder’s hold in a company is usually liquid and can be
disposed of for a profit. Investors typically buy a portion of a company’s shares with the hope
that these shares will appreciate so that they earn a higher return on their investment. The
shareholder may sell part or all of his shares in the company, and then use the money to
purchase shares of another company or use the money in an entirely different investment.

Liability for the Company’s Debts

Although shareholders are owners of the company, they are not liable for the company’s
debts or other arising financial obligations. The company’s creditors cannot auction or hold
the shareholders liable for any debts that it owes them. However, in privately-held
companies, sole proprietorships, and partnerships, the creditors have a right to demand
payments and auction the properties of the owners of these entities.

Rights of Stakeholder vs Shareholder

Although shareholders do not take part in the day-to-day running of the company, the
company’s charter gives them some rights as owners of the company. One of these rights is
the right to inspect the company’s books and financial records for the year. If shareholders
have some concerns about how the top executives are running the company, they have a right
to be granted access to its financial records. If shareholders notice anything unusual in the
financial records, they can sue the company directors and senior officers. Also, shareholders
have a right to a proportionate allocation of proceeds when the company’s assets are sold

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either due to bankruptcy or dissolution. They, however, receive their share of the proceeds
after creditors and preferred shareholders have been paid.

What is a Stakeholder?

A stakeholder is a party that has an interest in the company’s success or failure. A

stakeholder can affect or be affected by the company’s policies and objectives. Stakeholders
can either be internal or external. Internal stakeholders have a direct relationship with the
company either through employment, ownership or investment. Examples of internal
stakeholders include employees, shareholders, and managers. On the other hand, external
stakeholders are parties that do not have a direct relationship with the company but may be
affected by the actions of that company. Examples of external stakeholders include suppliers,
creditors, community and public groups.

Longevity

One of the characteristics of stakeholders in a company is longevity. Stakeholders cannot

easily decide to remove their stake in the company. The relationship between the stakeholders
and the company is bound by a series of factors that make them reliant on each other. If the
company is facing a decline in performance, it poses a serious problem for all the
stakeholders involved. For example, if the company’s operations are terminated, employees
will lose their jobs, and this means that they will no longer receive regular paychecks to
support their families. Similarly, the suppliers will no longer provide the company with
essential raw materials and products, and this results in not only a loss of income but also
forces the suppliers to look for new markets for their products.

Stakeholder vs Shareholder Corporate Social Responsibility

Traditionally, companies were only answerable to their shareholders. However, this scenario
has changed in recent years. Many corporations have started to accept the fact that, apart
from shareholders, the company is also answerable to many other constituents in the business
environment. For example, if a company is involved in business activities that take away the
green space within a community, the company must create programs that protect the social
welfare of the community and the ecosystem. The company may engage in tree-planting
exercises, provide clean drinking water to the community and offer scholarships to members
of the community.

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3. The Management.
Management involves identifying the mission, objective, procedures, rules and
manipulation of the human capital of an enterprise to contribute to the success of the
enterprise. This implies effective communication: an enterprise environment (as opposed
to a physical or mechanical mechanism) implies human motivation and implies some sort
of successful progress or system outcome. As such, management is not the manipulation
of a mechanism (machine or automated program), not the herding of animals, and can
occur either in a legal or in an illegal enterprise or environment. From an individual's
perspective, management does not need to be seen solely from an enterprise point of
view, because management is an essential function to improve one's life and
relationships. Management is therefore everywhere and it has a wider range of
application. Based on this, management must have humans. Communication and a
positive endeavour are two main aspects of it either through enterprise or independent
pursuit. Plans, measurements, motivational psychological tools, goals, and economic
measures (profit, etc.) may or may not be necessary components for there to be
management. At first, one views management functionally, such as measuring quantity,
adjusting plans, meeting goals. This applies even in situations where planning does not
take place. From this perspective, Henri Fayol (1841–1925) considers management to
consist of six functions:
1) Forecasting
2) Planning
3) Organizing
4) Commanding
5) Coordinating
6) Controlling

 The important role in the system of the corporate governance is performed by the
Board of Directors. The board is accountable to the stakeholders and directs and
controls the management. It stewards the company, sets its strategic aim and
financial goals and oversees their implementation, puts in place adequate internal
controls and periodically reports the activities and progress of the company in a
transparent manner to all the stakeholders.
 The important role of the shareholders is to hold the board accountable for the proper
governance of the company by enabling the board to provide them periodically the

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 required information in a transparent manner about the activities and progress of the
company.
 The management has the responsibility to undertake the management of the
organization in terms of the direction provided by the board, to put in place adequate
control systems and to ensure their operation and to provide information to the board
on a timely basis and in a transparent manner to enable the board to monitor the
accountability of management to it.

2.4. OBJECTIVES OF CORPORATE GOVERNANCE

Poor corporate governance may contribute to bank failures, which can pose significant public
costs and consequences due to their potential impact on any applicable deposit insurance
systems and the possibility of broader macroeconomic implications such as contagion risk
and impact on payment systems. In addition, poor corporate governance can lead markets to
lose confidence in the ability of a bank to properly manage its assets and liabilities, including
deposits. Generally, banks occupy a delicate position in the economic equation of any
country such that its performance invariably affects the economy of the country.

Objectives of corporate governance are to:

Establish strategic objectives and a set of corporate values that are communicated
throughout the banking organization.
Setting and enforcing clear lines of responsibility and accountability throughout the
organization.
Ensuring that board members are qualified for their positions, have a clear
understanding of their role in corporate governance and are not subject to undue
influence from management or outside concerns.
Ensuring that compensation approaches are consistent with the bank's ethical values,
objectives, strategy and control environment.

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2.5. THE SIGNIFICANCE OF CORPORATE GOVERNANCE IN THE BANKING
SCENARIO:

The most important factor for any economy’s growth and development is ensuring effective
governance. This is because corporate governance promotes the efficient use of scarce
resources. It also makes these 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. In addition, corporate governance provides a broad mechanism of
choosing the best directors on board to govern these meagre resources. Various corporate
governance structures for banks exist in different countries Appreciating the diversity in
structure of corporate governance mechanisms across the world, the Basel Committee in
1999, recommended four important forms of oversight that should be included in the
organisational structure of any bank in order to ensure the appropriate checks and balances.
They are;

(i) Oversight by the board of directors or supervisory board.

(ii) Oversight by individuals not involved in the day-to-day running of the various business
areas

(iii) Direct line supervision of different business areas

(iv) Independent risk management and audit functions. The committee also emphasizes on
the importance of key personnel being fit and proper for their jobs.

The problems of poor corporate governance are matter of concern in most of the developing
and underdeveloped countries. The situation is same in India where corporate governance can
be useful in providing the appropriate structure in any system by placing right objectives and
goals in front of the organisation and helping the organisation to attain these goals. It helps to
provide a degree of confidence that is necessary for the proper functioning of a market
economy. Corporate governance in banks also boosts the confidence of investors. It reduces
the risk of capital outflow from an economy and at the same time, increases the flow of
capital in the economy. Subsequently, the cost of capital becomes lower for these banks. The
degree of adherence to the basic principles of governance by the banks at the corporate level
enhances the confidence of the investors of those banks as shareholders and potential
investors require access to regular and reliable information in detail for them to assess the

17
management. An adequate and strong disclosure therefore helps to attract capital and
maintain confidence of investors. High-quality communications reduce investors’ uncertainty
about the accuracy and adequacy of information being disseminated and thereby help the
firms to raise adequate capital at a competitive cost. Most countries have adopted financial
deregulation as a means of reform of national financial systems. Even then, banking
continues to be a completely regulated area.

There is no country around the globe that has adopted a complete laissez-
faire approach. The main reason for corporate governance assuming augmented significance
in our country has been globalisation, which has bought with it mounting competition.
Globalisation has made an impact on all companies and banks, public and private. Today,
banks face a more competitive global environment than other organisations. They are
instrumental in providing finance for commercial enterprises. They also provide basic
financial services to a broad segment of the population. Besides, some banks also make credit
and liquidity available in difficult market conditions. The corporate governance of banks is
different and unique from that of the other organisations. This is because the activities of the
bank are less transparent than other organisations. Thus, it becomes difficult for shareholders
and creditors to monitor the activities of the bank. The situation becomes even more difficult
when a major part of the share capital is with government. Additionally, banks also differ
from most other companies in terms of the complexity and range of their business risks, and
the consequences if these risks are poorly managed. The Banking Sector in India has
definitely not remained unaffected to the developments taking place worldwide. Enhancing
the level of corporate governance structure of Indian banks is imperative. The regulatory
bodies in India are the Reserve Bank of India and the Securities Exchange Board India.

The RBI prescribes prudential principles and norms. The RBI performs
the corporate governance function under the Board for Financial Supervision (BFS). The
BFS, in turn, supervises the working of the Department of Banking Supervision (DBS),
Department of non-Banking Supervision (DNBS) and Financial Institutions Division. The
SEBI is a regulatory authority regulating the securities market. Its authority extends up to
only companies listed in the two stock exchanges in India, namely the NSE (National Stock
Exchange) and BSE (Bombay Stock Exchange). The compliance of the corporate governance
code is mandatory for listed banks. The Banking System in India is becoming more and more
complex and open, and hence, it is at this juncture, that a need for qualitative standards is felt.
Qualitative standards include standards such as internal controls, composition and role of the

18
Board, disclosure standards and risk management. Such disclosure standards would put India
on par with international standards.

Recent developments have shown that inadequate corporate governance

standards in banks and financial institutions result into economic susceptibility. Detrimental
developments taking place in one bank or financial institution can generate similar cyclical
effects in other banks or financial institutions. Inadequate corporate governance arrangements
in banking systems include inadequately qualified and experienced bank directors, and
directors with significant conflicts of interest; insufficient understanding of the nature of
banking risks by a bank’ s directors and senior management; inadequate representation of
non-executive and independent directors on the board; inadequate risk management systems,
internal controls and internal audit arrangements; insufficient accountability of directors;
inadequate oversight of senior managers by boards of directors, and poor quality financial
reporting to the board; insufficient rights for shareholders.

Need for corporate governances in bank:

1. Since banks are important players in the Indian financial system, special focus on the
Corporate Governance in the banking sector becomes critical.

2. The Reserve Bank of India, as a regulator, has the responsibility on the nature of
Corporate Governance in the banking sector.

3. To the extent that banks have systemic implications, Corporate Governance in the banks
is of critical importance.

4. Given the dominance of public ownership in the banking system in India, corporate
practices in the banking sector would also set the standards for Corporate Governance in the
private sector.

5. With a view to reducing the possible fiscal burden of recapitalizing the PSBs, attention
towards Corporate Governance in the banking sector assumes added importance.

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 CHAPTER 3

Corporate Governance of Banks:

Banks are different from other corporates in important respects, and that makes corporate
governance of banks not only different but also more critical. Banks lubricate the wheels of
the real economy, are the conduits of monetary policy transmission and constitute the
economy‘s payment and settlement system. By the very nature of their business, banks are
highly leveraged. They accept large amounts of uncollateralized public funds as deposits in a
fiduciary capacity and further leverage those funds through credit creation. The presence of a
large and dispersed base of depositors in the stakeholders group sets banks apart from other
corporates.

Regulation and Corporate Governance of Banks:

Regulation has historically had a significant role in the evolution of corporate governance
principles in the banking industry. However, to believe on this basis that good regulation can
offset bad corporate governance will be patently wrong. Regulation can complement
corporate governance, but cannot substitute for it. The crisis has triggered a swathe of
financial reforms to mitigate some of the known risks revealed by it. Understandably, these
reforms also encompass corporate governance. Several countries have effected major
structural changes to improve the functioning of their financial institutions, to ensure the
robustness of their risk management systems and to make their operations more transparent.
By far the most notable has been the Dodd-Frank Act in the United States which, among
other things, aims to induce greater transparency with regard to the board and the top
management positions and their compensation.

3.1.EVOLUTION OF CORPORATE GOVERNANCE:

There have been several major corporate governance initiatives launched in India since the
mid-1990s. The first was by the Confederation of Indian Industry (CII), India’s largest
industry and business association, which came up with the first voluntary code of corporate
governance in 1998. The second was by the SEBI, now enshrined as Clause 49 of the listing
agreement. The third was the Naresh Chandra Committee, which submitted its report in 2002.
The fourth was again by SEBI the Narayana Murthy Committee, which also submitted its
report in 2002. Based on some of the recommendation of this committee, SEBI revised

20
Clause 49 of the listing agreement in August 2003.Subsequently, SEBI withdrew the revised
Clause 49 in December 2003, and currently, the original Clause 49 is in force. These are
illustrated as follows:

1. The CII Code: More than a year before the onset of the Asian crisis, CII set up a
committee to examine corporate governance issues, and recommend a voluntary code of best
practices. The committee was driven by the conviction that good corporate governance was
essential for Indian companies to access domestic as well as global capital at competitive
rates. The first draft of the code was prepared by April 1997, and the final document
(Desirable Corporate Governance: A Code), was publicly released in April 1998. The code
was voluntary, contained detailed provisions, and focused on listed companies. Those listed
companies should give data on high and low monthly averages of share prices in a major
stock exchange where the company is listed; greater detail on business segments, up to 10%
of turnover, giving share in sales revenue, review of operations, analysis of markets and
future prospects. Major Indian stock exchanges should gradually insist upon a corporate
governance compliance certificate, signed by the CEO and the CFO. If any company goes to
more than one credit rating agency, then it must divulge in the prospectus and issue document
the rating of all the agencies that did such an exercise. These must be given in a tabular
format that shows where the company stands relative to higher and lower ranking.

2. Kumar Mangalam Birla committee report and Clause 49: While the CII code was well-
received and some progressive companies adopted it, it was felt that under Indian conditions,
a statutory rather than a voluntary code would be more purposeful, and meaningful.
Consequently, the second major corporate governance initiative in the country was
undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to
promote and raise the standards of good corporate governance. In early 2000, the SEBI had
accepted and ratified key recommendations of this committee, and these were incorporated
into Clause 49 of the Listing Agreement of the Stock Exchanges. The committee has
identified the three key constituents of corporate governance as the Shareholders, the Board
of Directors and the Management. Along with this the committee has identified major 3
aspects namely accountability, transparency and equality of treatment for all shareholders.
Crucial to good corporate governance are the existence and enforceability of regulations
relating to insider information and insider trading. Corporate Governance has several
claimants – shareholders, suppliers, customers, creditors, the bankers, employees of company
and society. The committee for SEBI keeping view has prepared primarily the interests of a

21
particular classes of stakeholders namely the shareholders this report on corporate
governance. It means enhancement of shareholder value keeping in view the interests of the
other stack holders. Committee has recommended CG as company„s principles rather than
just act. The company should treat corporate governance as way of life rather than code.

3. Naresh Chandra Committee Report: The Naresh Chandra committee was appointed in
August 2002 by the Department of Company Affairs (DCA) under the Ministry of Finance
and Company Affairs to examine various corporate governance issues. The Committee
submitted its report in December 2002. It made recommendations in two key aspects of
Corporate Governance: financial and nonfinancial disclosures: and independent auditing and
board oversight of management.

4. Narayana Murthy Committee report on Corporate Governance: The fourth initiative on

corporate governance in India is in the form of the recommendations of the Narayana Murthy
committee. The committee was set up by SEBI, under the chairmanship of Mr. N. R.
Narayana Murthy, to review Clause 49, and suggest measures to improve corporate
governance standards. Some of the major recommendations of the committee primarily
related to audit committees, audit reports, independent directors, related party transactions,
risk management, directorships and director compensation, codes of conduct and financial
disclosures. 5. Confederation of Indian Industry (CII) Taskforce on Corporate Governance:
History tells us that even the best standards cannot prevent instances of major corporate
misconduct. This has been true in the US - Enron, WorldCom, Tyco and, more recently gross
miss-selling of collateralized debt obligations; in the UK; in France; in Germany; in Italy; in
Japan; in South Korea; and many other OECD nations. The Satyam-Maytas Infra-Maytas
Properties scandal that has rocked India since 16th December 2008 is another example of a
massive fraud.

6. Corporate Governance voluntary guidelines 2009: More recently, in December 2009, the
Ministry of Corporate Affairs (MCA) published a new set of Corporate Governance
Voluntary Guidelines 2009, designed to encourage companies to adopt better practices in the
running of boards and board committees, the appointment and rotation of external auditors,
and creating a whistle blowing mechanism.

The guidelines are divided into the following six parts:

i) Board of Directors

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ii) ii) Responsibility of Board

iii) iii) Audit Committee,

iv) iv) Auditors

v) v) Secretarial Audit

vi) vi) Whistle Blowing mechanism

3.2. DEBUT OF CORPORATE GOVERNANCE IN INDIAN BANKS:

As a prelude to institutionalize Corporate Governance in banks, an Advisory Group on

Corporate Governance was formed under the chairmanship of Dr. R.H. Patil. Following its
recommendations in March 2001 another Consultative Group was constituted in November
2001 under the Chairmanship of Dr. A.S. Ganguly: basically, with a view to strengthen the
internal supervisory role of the Boards in banks in India. This move was further reinforced by
certain observations of the Advisory Group on Banking Supervision under the chairmanship
of Shri M.S. Verma which submitted its report in January 2003. Keeping all these
recommendations in view and the cross-country experience, the Reserve Bank of India
initiated several measures to strengthen the corporate governance in the Indian banking
sector.

Indian banking system consists of Public/Private sector banks having a basic difference
between them as far as the Reserve Bank‟s role in governance matters relevant to banking is
concerned. The current regulatory framework ensures, by and large, uniform treatment of
private and PSBs in so far as prudential aspects are concerned. However, some of the
governance aspects of PSBs, though they have a bearing on prudential aspects, are exempted
from applicability of the relevant provisions of the Banking Regulation Act, as they are
governed by the respective legislations under which various PSBs were set up. In brief,
therefore, the approach of RBI has been to ensure, to the extent possible, uniform treatment
of the PSBs and the private sector banks in regard to prudential regulations.

In regard to governance aspects of banking, the Reserve Bank prescribed its policy
framework for the private sector banks. It also suggested to the Government the same
framework for adoption, as appropriate, consistent with the legal and policy imperatives in
PSBs as well. Hence the endeavor is to maintain uniformity in policy prescriptions to the best
possible extent for all types of banks. Since role of Independent Directors form the basis for
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effective implementation of corporate governance in banks, it is necessary to reproduce the
code of conduct prescribed under SCHEDULE IV [section 149(7)] as prescribed in
Companies Bill 2012 for the guidance to the companies.

History of sorts was made late on the evening of 8th August 2013 when the Rajya Sabha
(India‟s Upper House of Parliament) passed the Companies Bill, 2012; Lok Sabha (the
Lower House) had passed it earlier in December 2012. With this, India now has “a modern
legislation for growth and regulation of corporate sector in India,” which is expected to
“facilitate business-friendly corporate regulation, improve corporate governance norms,
enhance accountability on the part of corporates / auditors, raise levels of transparency and
protect interests of investors, particularly small investors.” This bill is applicable to
companies with a net worth of Rs. 500 crore or more; a turnover of Rs 1,000 crore or more;
and a net profit of Rs 5 crore or more during any financial year. Schedule VII of the Act,
which lists out the CSR activities, suggests communities to be the focal point.

On the other hand, by discussing a company’s relationship to its stakeholders and integrating
CSR into its core operations, the draft rules suggest that CSR needs to go beyond
communities and beyond the concept of philanthropy.

Corporate Governance Guidelines for Banks:

Effective corporate governance practices are essential to achieving and maintaining public
trust and confidence in the banking system, which are critical to the proper functioning of the
banking sector and economy as a whole. Poor corporate governance may contribute to bank
failures, which can pose significant public costs and consequences due to their potential
impact on any applicable deposit insurance systems and the possibility of broader
macroeconomic implications. In addition, poor corporate governance can lead markets to lose
confidence in the ability of a bank to properly manage its assets and liabilities, including
deposits, which could in turn trigger a bank run or liquidity crisis. Indeed, in addition to their
responsibilities to shareholders, banks also have a responsibility to their depositors.

Good corporate governance should provide proper incentives for the board and management
to pursue objectives that are in the interests of the company and its shareholders and should
facilitate effective monitoring. From a banking industry perspective, corporate governance

24
involves the manner in which the business and affairs of banks are governed by their boards
of directors and senior management, which affects how they function:

Set corporate objectives;

1. Operate the bank‟s business on a day-to-day basis.

2. Meet the obligation of accountability to their shareholders and take into account the
interests of other recognized stakeholders.

3. Align corporate activities and behavior with the expectation that banks will operate in a
safe and sound manner, and in compliance with applicable laws and regulations; 4. Protect
the interests of depositors.

Good governance is decisively the manifestation of personal beliefs and values, which
configure the organizational values, beliefs and actions of its Board. The Board as a main
functionary is primary responsible to ensure value creation for its stakeholders. The absence
of clearly designated role and powers of Board weakens accountability mechanism and
threatens the achievement of organizational goals. Therefore, the foremost requirement of
good governance is the clear identification of powers, roles, responsibilities and
accountability of the Board, CEO, and the Chairman of the Board. The role of the Board
should be clearly documented in a Board Charter.

To sub-serve the above discussion, the following are the essential elements of good corporate
governance:

1. Transparency in Board‟s processes and independence in the functioning of Boards. The

Board should provide effective leadership to the company and management for achieving
sustained prosperity for all stakeholders. It should provide independent judgment for
achieving company's objectives.

2. Accountability to stakeholders with a view to serve the stakeholders and account to them at
regular intervals for actions taken, through strong and sustained communication processes.

3. Fairness to all stakeholders.

4. Social, regulatory and environmental concerns.

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5. Clear and unambiguous legislation and regulations are fundamentals to effective corporate
governance.

6. A healthy management environment that includes setting up of clear objectives and

appropriate ethical framework, establishing due processes, clear enunciation of responsibility
and accountability, sound business planning, establishing clear boundaries for acceptable
behavior, establishing performance evaluation measures.

7. Explicitly prescribed norms of ethical practices and code of conduct are communicated to
all the stakeholders, which should be clearly understood and followed by each member of the
organization.

8. The objectives of the company must be clearly documented in a long-term corporate

strategy including an annual business plan together with achievable and measurable
performance targets and milestones.

9. A well composed Audit Committee to work as liaison with the management, internal and
statutory auditors, reviewing the adequacy of internal control and compliance with significant
policies and procedures, reporting to the Board on the key issues.

10. Risk is an important element of corporate functioning and governance, which should be
clearly identified, analyzed for taking appropriate remedial measures. For this purpose the
Board should formulate a mechanism for periodic reviews of internal and external risks.

11. A clear Whistle Blower Policy whereby the employees may without fear report to the
management about unethical behaviour, actual or suspected frauds or violation of company‟s
code of conduct. There should be some mechanism for adequate safeguard to employees
against victimization that serves as whistleblowers.

3.3. EVOLUTION OF CORPORATE GOVERNANCE OF BANKS IN

INDIA:

The researcher has sketched the evolution of corporate governance of banks in India.

In the pre-reform era, there were very few regulatory guidelines covering corporate
governance of banks. This was reflective of the dominance of public sector banks and
relatively few private banks. That scenario changed after the reforms in 1991 when public
sector banks saw a dilution of government shareholding and a larger number of private sector

26
banks came on the scene. These were the changes that shaped the post reform standards of
corporate governance:

First: The competition brought in by the entry of new private sector banks and their growing
market share forced banks across board to pay greater attention to customer service. As
customers were now able to vote with their feet, the quality of customer service became an
important variable in protecting, and then increasing, market share.

Second: Post-reform, banking regulation shifted from being prescriptive to being prudential.
This implied a shift in balance away from regulation and towards corporate governance.
Banks now had greater freedom and flexibility to draw up their own business plans and
implementation strategies consistent with their comparative advantage. The boards of banks
had to assume the primary responsibility for overseeing this. This required directors to be
more knowledgeable and aware and also exercise informed judgment on the various strategy
and policy choices.

Third: Two reform measures pertaining to public sector banks - entry of institutional and
retail shareholders and listing on stock exchanges - brought about marked changes in their
corporate governance standards. Directors representing private shareholders brought new
perspectives to board deliberations, and the interests of private shareholders began to have an
impact on strategic decisions. On top of this, the listing requirements of SEBI enhanced the
standards of disclosure and transparency.

Fourth: To enable them to face the growing competition, public sector banks were accorded
larger autonomy. They could now decide on virtually the entire gamut of human resources
issues, and subject to prevailing regulation, were free to undertake acquisition of businesses,
close or merge unviable branches, open overseas offices, set up subsidiaries, take up new
lines of business or exit existing ones, all without any need for prior approval from the
Government. All this meant that greater autonomy to the boards of public sector banks came
with bigger responsibility.

Fifth: A series of structural reforms raised the profile and importance of corporate
governance in banks. The structural‘ reform measures included mandating a higher
proportion of independent directors on the boards; inducting board members with diverse sets
of skills and expertise; and setting up of board committees for key functions like risk

27
management, compensation, investor grievances redressal and nomination of directors.
Structural reforms were furthered by the implementation of the Ganguly Committee
recommendations relating to the role and responsibilities of the boards of directors, training
facilities for directors, and most importantly, application of fit and proper norms for directors.

Mandatory Recommendations of the SEBI’s Committee on Corporate Governance:

The Securities and Exchange Board of India (SEBI) had constituted a Committee on
Corporate Governance and circulated the recommendations to all stock exchanges for
implementation by listed entities as part of the listing agreement vide SEBI’s circular
SMDRP/Policy/CIR-10/2000 dated February 21, 2000.

A summary of the mandatory recommendations of the SEBI Committee as applicable to

banks is furnished here under:

1. The Committee recommends that a qualified and independent audit committee should be
set up by the board of a company.

2. The Committee recommends that the audit committee should meet at least thrice a year.
One meeting must be held before finalization of annual accounts and one necessarily every
six months.

3. The quorum should be either two members or one-third of the members of the audit
committee, whichever is higher and there should be a minimum of two independent directors.
4. Being a committee of the board, the audit committee derives its powers from the
authorization of the board.

The Committee recommends that such powers should include powers:

 To investigate any activity within its terms of reference.

 To seek information from any employee.
 To obtain outside legal or other professional advice.
 To secure attendance of outsiders with relevant expertise, if it considers necessary

5. The Committee recommends that the board should set up a remuneration committee to
determine on their behalf and on behalf of the shareholders with agreed terms of reference,
the company’s policy on specific remuneration packages for executive directors including
pension rights and any compensation payment.

28
6. The Committee therefore recommends that board meetings should be held at least four
times in a year, with a maximum time gap of four months between any two meetings. The
minimum information should be available to the board.

7. The committee recommends that a director should not be 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. Furthermore, it is a mandatory annual requirement for every director to
inform the company about the committee positions he occupies in other companies and notify
changes as and when they take place.

8. As a part of the disclosure related to Management, the Committee recommends that as part
of the directors’ report or as an addition thereto, a Management Discussion and Analysis
report should form part of the annual report to the shareholders.

9. The committee recommends that disclosures be made by management to the, board

relating to all material financial and commercial transactions, where they have personal
interest, that may have a potential conflict with the interest of the company at large (for e.g.
dealing in company shares, commercial dealings with bodies which have shareholding of
management and their relatives etc.

10. The Committee recommends that information like quarterly results, presentation made by
companies to analysts may be put on company’s website 6r may be sent in such a form so as
to enable the stock exchange on which the company is listed to put it on its own website.

11. The Committee recommends that a board committee under the chairmanship of a
nonexecutive director should be formed to specifically look into the redressing of shareholder
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared
dividends etc. The Committee believes that the formation of such a committee will help focus
the attention of the company on shareholders’ grievances and sensitize the management to
redressal of their grievances.

12. The Committee further recommends that to expedite the process of share transfers the
board

of the company should delegate the power of share transfer to an officer, or a committee or to
the registrar and share transfer agents. The delegated authority should attend to share transfer
formalities at least once in a fortnight.

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13. The Committee recommends that there should be a separate section on Corporate
Governance in the annual reports of companies, with a detailed compliance report on
Corporate Governance. Non-compliance of any mandatory recommendation with reasons
thereof and the extent to which the non-mandatory recommendations have been adopted
should be specifically highlighted. This will enable the shareholders and the securities market
to assess for themselves the standards of corporate governance followed by a company.

3.4. CORPORATE GOVERNANCE AND THE GLOBAL BANKING

SCENARIO:

Banks are different from other companies in a variety of ways. The main point of difference
is the capital structure of banks and the liquidity creation function. Firstly, deposits made by
the depositors of the bank constitute the liabilities of banks. These are available on demand.
Assets of the bank, on the other, have a comparatively longer maturity period. Therefore,
banks are able to create liquidity. Secondly, banks have very little equity as compared to
other organisations. Many differences in exist in banking corporate governance systems the
world over. Some of them have been elicited below.

1. United States of America

In the United States of America, banking regulation has essentially been the function of
federal and state banking regulators, the main objective being safety and soundness of the
banking system. The main doctrine of American corporate governance is that the duty of
managers and directors is to maximize firm value for shareholders.

2. United Kingdom:

Banking regulation in the United Kingdom is essentially the function of the Financial
Services Authority. It oversees the internal control and compliance systems of all banks. In
May 1991, a committee chaired by Sir Adrian Cadbury was established to make
recommendations to improve corporate control mechanisms for all companies in the United
Kingdom. The Committee published a final report in 1992. On 1 November 2003, a revised
Combined Code came into effect. The FSA follows this code.

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3. United Arab Emirates

The banking sector in this region is characterised by family controlled banks. The main
regulatory bodies in the UAE corporate sector are the Ministry of Economy, the Central
Bank, and the Emirates Securities & Commodities Authority (ESCA). Regulatory authorities
have taken efforts to raise awareness of sound corporate governance practices and non-listed
organisations have also been subject to stringent corporate governance requirements.

4. Germany

The Deutsche Bundesbank is the central bank of the Federal Republic of Germany. Along
with the Federal Financial Supervisory Authority, the Bundesbank is responsible for
continuous oversight of the solvency, liquidity, corporate governance and risk management
systems of the banking sector in Germany.

5. France

The Banque de France (Bank of France) is the regulatory authority in France and ensures the
implementation of the common monetary policy as defined central banks of the eurozone.
The French corporate governance code was first laid down in 1995 by a committee guided by
Marc Viénot.

6. Australia

Australia's banking regulatory authority is the Australian Prudential Regulation Authority

(APRA) Banks also have to provide information under the Anti-Money Laundering and
CounterTerrorism Financing Act 2008. The corporate governance framework is provided by
the Australian Securities Exchange (ASX) Corporate Governance Council.

Application Of Corporate Governance In The Banking Sector The Modern Context:

Corporate governance is evolutionary and ever-changing. Banks must innovate and adapt
their corporate governance practices in order to remain competitive. It may be noted here that
there is a basic difference between the private sector banks and public sector banks as far as
the Reserve Bank’s role in governance matters relevant to banking is concerned. The current
regulatory framework relating to prudential norms set up by the Reserve Bank of India gives
the same treatment to private banks and public sector banks. However, where governance
aspects are concerned, the Reserve Bank prescribes the policy framework only for private

31
sector banks. For public sector banks, it forwards suggestions based on the same framework
to the Government for consideration. The reforms have resulted in many changes to the
banking sector in India, including in the areas of corporate governance. Competition is being
encouraged as more and more banks are being issued licenses. Greater independence is being
given to boards of public sector banks. The nominee directors are being increasingly replaced
by independent directors. This is being done with a view to increase professional
representation on boards of public sector banks to increase the level of competence. Even
though regulatory bodies around the globe define standards for corporate governance, it is the
primary responsibility of the bank to develop sound corporate governance practices for itself.
In India, the need for better corporate governance and disclosure norms was felt due to the
string of scams and scandals that shook the country post 1990. Also, liberalization resulted in
massive international competition. This also forced companies and financial institutions to
adopt best standards. The Securities Exchange Board of India also made it compulsory for
companies to adhere to norms mentioned in the Clause 49 of the Listing Agreement from
April 2001. Listed companies and banks in India are required to follow very strict guidelines
related to corporate governance. Indian corporate governance guidelines are amongst the
best in the world. However, corporate governance in India is followed in letter rather than in
spirit. Rampant corruption and inefficiencies of the legal system to combat and fight this
corruption has resulted in poor performance. However, the establishment of corporate
governance practices in the banking sector has been hindered by an inefficient legal
protection system and inadequate disclosure requirements. Also, in many countries, bank
corporate governance is often influenced by political intervention in the banking system.

In India, the partial divestment of public sector banks has not made any significant change to
the quality of corporate governance in public sector banks. The Government still plays a
major role in appointing members to boards of banks. Furthermore, in spite of greater
autonomy being given to banks, they still follow the directives issued by the government.

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