corporate governance in banking

8/9/2019 Corporate Governance in Banking

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Corporate Governance: Need & Significance

in Nepalese Banking System

Paper to be presented to the International Conference on

‘Challenges of Governance in Soth !sia" in #athmand$ Nepal

%ecember '()$ *++,

Presented by:

Rajan Bikram Thapa

Deputy Director

Bank Supervision Department.

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Corporate Governance: Need & Significance in Nepalese Banking System

-eaning and General Concept

Corporate governance is a combination of corporate policies and best practices adopted bythe corporate bodies to achieve its objectives in relation to their stakeholders. It is also the field of

economics, which studies the many issues arising from the separation from ownership and control.

The fundamental objective of corporate governance reforms is to enhance transparency andtransparency enhances accountability. It is widely recognized that transparency enhances trustamong the major players within the governance framework. arious definitions and principles

have been introduced to stabilize the corporate governance among corporate entities. The

definition presented by some institution is presented below.

Corporate governance is the system by which companies are directed and controlled

!Cadbury "eport#$%%&'

(et of relationships between a company)s management, its boards, its shareholders and

other stake holders !*+C -rinciples'

In brief, corporate governance is a set of process a entitys culture, policies, laws and

institutional value that affect the way a corporation is directed, administrated or controlled. It is a

combination of corporate policies and best practices adopted by corporate bodies in achieving itsobjectives in relation to their stakeholders. It aims to protect shareholder)s rights, to enhance

disclosure and transparency, to facilitate effective functioning of the board and to provide an

efficient legal and regulatory enforcement framework. It addresses the principal/agency problemthrough a mi of company law, stock echange rules and sub regulatory codes. It arises from high

profile corporate scandals, globalization and increased investor activism.

Significance of Corporate Governance in Banking Sector

Corporate governance is e1ually significance to all types of corporate institution.2urthermore it is very crucial and essential element for the banking system because bank and

financial institutions depends on the *ther -eoples 3oney !*-3'. There may be a gap among

major stakeholder like owners, depositors and management. ery limited people have a right toaccess in resources and decision. ue to the lack of transparency and ade1uate control mechanism,

there may be the chance of vested interest and moral hazard problems. It is a universal fact that the

higher degree of transparency contributes towards the maimizing shareholders value andensuring the fairness to rest of the shareholders. Corporate governance also enhances performance

of the corporation by motivating manager to maimize returns on investment, raising operational

efficiencies and ensuring long# term productive growth. 2ollowing key points help to emphasis thesignificance of corporate governance especially in the banking sector.

$. 4anking system stability is important for economic growth,

&. 5ood corporate governance !C5' is re1uired in banks to achieve good C5 in other firms.6. 4anks have wider stakeholders#government, regulators and most importantly depositors.

7. -romotes market confidence, helps to attract additional capital, and fosters market

discipline through good disclosure and transparency.

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8. 9elps ensure that company takes into account the interest of not only of a group of people

but also of the communities within which they operate. Those actions in turn help to ensurethat 2Is are operating for the benefit of society as a whole.

:. 5ood corporate governance practices can strongly contribute to financial market

development and financial stability.

;.

uly in banking sector and good corporategovernance forms important part of 4asel II. Therefore for complying the provision under 4asel II is very essential for banking sector. Basel Committee has introduced principles on

Enhancin Corporate !overnance "or Bankin #rani$ations %&''( revised version o" the principles

introduced in )***+

Principles of Corporate Governance In Banking Sector

4I( !4ank for International (ettlement' *+C !*rganization of +conomic Co#operation

and evelopment' and other different financial institutions has developed and presented the

various guidelines on enhancing corporate governance in banking sector but they do not divergefrom each other, *+C focus on the following critical elements of desirable corporate

5overnance for the banks.

$. 4oard members should be 1ualified for their positions, have a clear understanding of their

role in corporate governance and be able to eercise sound judgment about the affairs of

the bank.

&. The board of directors should approve and oversee the bank)s strategic objectives andcorporate values that are communicated throughout the banking organization.

6. The board of directors should set and enforce clear lines of responsibility throughout the

organization.7. The board should ensure that there is appropriate oversight by senior management

consistent with board policy

8. The board and senior management should effectively utilize the work conducted by theinternal audit function, eternal auditors, and internal control functions.

:. The board should ensure that compensation policies and practices are consistent with the

bank)s corporate culture, long#term objectives and strategy, and control environment

;. The bank should be governed in a transparent manner.=. The board and senior management should understand the bank)s operational structure,

including where the bank operates in jurisdictions, or through structures, that impede

transparency !?know#your structure@'

./isting 0a1s and 2eglation

4anking system of


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which provide necessary guidelines to maintain corporate governance in the bank and financial

institutions.

$. 4anks and 2inancial Institutions Act &0:6

&. irective : issued by the


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Companies Act &0:6

3i4 Conflict of Interest and 5ransparency

"e1uirement to give beneficial interest on the shares!s.7;'

Information re1uired to be given on becoming substantial shareholder !s.80'

(hareholders having conflict are not 1ualified to vote in general meetings!s.;0'

irector re1uired to give information about transaction between company and him/her or

close relatives !s. %&'

Approval of general meeting re1uired to enter transaction between company anddirector/its close relatives !s.%6' "estriction on power of board to enter certain transaction !s. $08'

"estriction to give loans to directors and officers !s.$0$'

2inancial disclosures to the shareholders !s.$0%'

3ii4 %irectors

irectors are made personally liable for any breach of the Act

irectors have fiduciary duty to act in the best interest of the company !s.%%'

irectors are specific duty not to eceed their powers !s.$06'

"e1uirement to appoint independent directors by public companies !s. =:'

irectors who breach reporting re1uirement under the Act are dis1ualified to become

director !s.=%'

3iii4 !dit

isted companies having paid up capital of more than "s. 6 crores need to have audit

committee

An auditor is dis1ualified to be appointed for three consecutive years.!$$$'

A person working full time, or his/her partners are dis1ualified to be appointed as auditor

!$$&'

3iv4 Shareholders" Protection.

(hareholder have right to inspect books of the company

(hareholders can sue on behalf of the company.!s.$70'

(hareholders can re1uest to appoint investigation officer !s.$&$'

Can prevent directors from eceeding their powers.!s.$6='

Challenges4efore discussing the corporate governance of the


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Isses related to 2eglators

ack of institutional capacity for enforcement of laws, regulations

+nforcement authorities themselves lack good governance.

ack of accountability of employees of regulating bodies !need to have internal rules'

ack of resources within regulator

Transparent and scientific licensing policy

ack of political and leadership will

Court have fre1uently intervened in regulatory enforcement

Issues related to 4* 4oard members are interested to use public deposits as their own assets which is against

the 4A2IA &0:6, article 7= 5enerally, 4oard members !non eecutive' are liking to use power like eecutive or,

eecutive director and eecutive chairman in the area of loan sanction, employee selection and

daily office activities which is again the against the 4A2IA, &0:6 article &7. 4oard members are prohibited take loan from own company however, it is general practice

to take loan directly or, indirectly, (imilarly, 4oard members are restricted to provide collateral for loan purpose for own or, for others however, they try to do directly or indirectly

4oard members are inclined to authenticate the minutes after finishing the vested interest

The company enjoying the practice of C+* and Chairperson by the same gentle man are

ahead in noncompliance activities

4ig houses running many same nature business are manipulating public deposits and

transferring the fund within the group in their own interest

4ank, 2Is running by non professional are in severe noncompliance practicesE

Conclsion

In conclusion corporate 5overnance is very crucial for each and every organization. Corporate5overnance framework should ensure the strategic guidance of the company, the effective

monitoring of management by the board and the boards accountability to the company and theshareholders. 5ood corporate 5overnance should provide proper incentives for the board and

management to pursue objectives in the interest of the company and shareholders and should

facilitate effective monitoring. The responsibility for good governance lies within the bank)s and2Is) senior management. "egulators can only facilitate but not ensure improved governance. ast

but not least, I would like to say (+2 "+5FATI*< I( 4+(T "+5FATI*

corporate governance in banking

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