Effective control system for promoting good corporate governance
Saturday, 8 September 2007
Kazi Md. Mortuza Ali concluding his two-part article
IN order to enhance and ensure an effective management system for good corporate governance, the existence of an effective monitoring and control system is indispensable. Internal control system is necessary for ensuring management oversight and developing a healthy culture within the institution.
Financial institutions will require such a system for identifying and assessing risks, detecting problems and correcting deficiencies. Risk management is the responsibility of senior management team, who should develop the procedures of managing all the risks involved in financial institutions. It will not be possible to implement the control system successfully without an effective channel of communication and availability of accounts information.
However, once the problem has been identified, it is the responsibility of management and the Board to take corrective actions immediately. In order to implement the internal control system, the financial institutions should develop a risk management culture in every sphere of their activities.
To ensure that risk management culture is operating well in the organisation, senior management should prepare several reports on a regular basis. These are operational risk reports, liquidity risk reports, market risk and value at risk reports etc. Senior management should utilise risk management models to prepare and submit these reports to Board and to Regulatory Authority.
The emergence of complex financial issues and entities has led to regulatory concerns about risk and solvency. It is generally felt that a risk based capital regime supported management systems and internal controls would help to achieve the desired goals of good corporate governance. The regulatory framework, therefore, has to define the suitable form of capital and set out a threshhold minimum capital requirement for financial institutions. Assets have to be appropriate, sufficiently realisable and objectively valued. The assets also must be sufficiently diversified and spread and should ensure liquidity. Capital adequacy and solvency regimes have to address the matching of assets with liabilities.
It is the responsibility of the Board and senior management to manage its risks. If efficient control systems are not in place to monitor risk exposures, the organisation will not be able to adapt quickly enough to changing market situation. Risk management systems have to be developed by comprehensive monitoring and internal control systems and regulatory framework.
Developing Risk Management Culture: Financial Institutions face both financial and non-financial risks. Financial risks arises from market risk and credit risk. No-financial risks consist of operational risk, legal risk etc. Financial institutions also face liquidity risk. A comprehensive risk management system, therefore, should encompass several measures to develop a risk management culture in the organisation. The board of directors is responsible for outlining the overall objectives, policies and strategies of risk management for any financial institution.
Senior management is responsible to implement the broad specifications approved by the board. To do so, the management should establish policies and procedures that would be used by the institution to manage risk. The organisation should also have regular management information systems for measuring, monitoring, controlling and reporting different risk exposures. The system should establish policies, procedures, and ensure that their adherence are continually reviewed.
A risk management culture needs to be introduced by involving all the departments in the risk management process. The board of directors can create the risk management environment by clearly identifying the risk objectives and strategies. The management needs to implement these policies efficiently by establishing systems that can identify measures and monitor and manage various risk exposures.
The primary responsibility of directors and management is to protect assets. The board may delegate the responsibility to management but they must ensure, through proper supervision that the agreed risk management policies and programmers are being implemented. The starting point is the whole exercise in the existence of risk management policy which should be carefully thought out and thoroughly explained and understood by management and everyone associated with its execution. This is necessary and vital for any financial institution that expects to survive in today's business environment. The credit risk is a major risk which deserves the special attention of the management of financial institutions. The institute must have a written lending (investment) policy and guidelines, which will be revised and reviewed periodically in line with changes in the economic environment and experience gained in the course of business activities.
It is now universally accepted that the quality of the performance of any organisation depends on the quality and competence at its personnel. The easiest way to wreck any organisation is to engage and retain in the organisation staff of dubious character. The personnel risk is the risk of having within the organisation personnel whose competence and integrity are questionable and likely to cause substantial loss. The hazards posed by personal risk can be eliminated by the retention of quality personnel that are professionally competent, reliable, contented and totally committed to the success of the enterprise and working in harmony with board and management.
Cash is one of the most valuable assets and it is the highest risk asset of financial institution. An organisation that is practising good and effective risk management would constantly asses and evaluate all the relevant risks and install efficient controls. Fraud risk is another important risk to which financial institutions are exposed. All necessary actions should be taken to detect and protect all the likely areas through which frauds could occur. Most of the frauds can be predicted and prevented with appropriate checks and with the installation of an efficient risk management and loss control system. A new kind of fraud risk which should be carefully watched is the computer or electronic fraud which generally arises from a fraudulent transfer of fund.
There are several other risks. which need be addressed properly. These are market risk, interest rate (investment return) risk, investment risk, purchasing power risk etc. Appropriate actions should be taken to identify, control and manage these risks effectively. It is obvious that risk management systems strengthen financial institution. Therefore, risk management needs to be assigned as s priority area of research and training programs.
Considering the nature of financial industry, there is a need to develop risk management techniques and organise training programmes to disseminate those among the players in the financial market. Disclosures about risk management systems are extremely important for strengthening the systems. An organisation need to develop risk based management information system, risk-based internal audit system, risk-based accounting system and risk-based asset inventory system. An internal rating system may also be highly effective in filling the gaps in risk management system.
Enhancing Transparency: Financial institutions are lifeblood of any economy. The health of these institutions and public confidence in them are necessary to sustain and expand business. Financial institutions play an important role in Bangladesh where the capital market is small and these institutions are the main source of capital. Financial institutions are beneficiaries, trustees and managers of peoples money, and as such have a unique responsibility to uphold the highest standard of corporate governance. These institutions have an essential social as well as economic function in national life. They have an obligation to observe the highest standard of customer care and efficiency while ensuring their own competitiveness.
Because of its special nature and obligations, all relevant informations should be provided to customers and the public to enable them to adequately judge the strength and health of the organisation, be it a bank, a insurance company or others. These institutions need to formulate and publish code of best practice to customers and a code of corporate social and environmental responsibility. The system of handling complaints should be disclosed to customers and potential customers. They must provide transparent, comprehensive disclosures to shareholders, customers and the public in the standardised format. Disclosures may be hosted in the website and displayed at branches and at the Head Office. The information can be also made available to those who request for information. Financial institutions should provide an accurate, reliable and timely information of following broad categories
a. Risk Exposures,
b. Risk Management System.
c. Management & Corporate Governance System,
d. Accounting Principles and Practices,
e. Financial Position & Business Performance,
Financial statements are the most important source of reflecting business performance and financial position. Formulation of proper accounting and auditing standard is, therefore, critical for improving corporate governance. Accounting standard describes the benchmark treatment (best accounting option) of a particular type of transaction. The standards describe among others, the minimum disclosure levels that are necessary for appreciating the economic reality and to ensure transparency. Enforcement of accounting standard is the professional responsibility of auditors. Auditors by maintaining high standards in performing their function, assure the users of financial statements that the information presented is true, fair and free from material misstatements.
Realisation of Realities: The issues of corporate governance centres around members of the board and their relation ship with the executives specially the Chief Executive Officer (CEO), their roles, responsibilities and expertise. The board members are supposed to act in the larger interests of the company, its shareholders and other stakeholders. However, the reality in Bangladesh, like other developing countries. is that the organisations are almost family controlled. In that case it is observed that qualified and experienced professional is in management positions are a optimal extra. The board in such case is often a collection of family members and celebrities. However, this pattern is not universal, and there are exemplary exceptions. There is nothing wrong in that because, throughout the world business has developed by individuals having entrepreneurial drive and acumen. However, when the company grows and is public by owned, it is for the betterment of the organisation, good corporate governance system be accepted as a rule of business ethics.
In theory, the members of the Board of Directors are elected by a company's shareholders. In this sense boards are accountable to the whole body of shareholders and not only to the controlling or managing group of share holders. This is specially required because shareholders in many companies have little power. Boards of financial institutions in Bangladesh vary greatly in the value they add. Some boards are positive instigators and enablers of change, while others are bystanders or even obstacles to progress.
To be effective and positive, the Board need to review its functions, compositions and operations in order to asses how appropriate are these. The directors must try to consciously develop their directorial skills. The distinction between direction and management need to be realised. The directors need to understand what is expected of them as a team. It must be realised that an effective board composed of a united team of competent directors is a prime necessity to turn their aspirations into concrete achievement.
A particular board may contain different type of directors, such as promoter directors, alternate directors, public shareholders directors. policyholders directors, independent directors, executive directors and so on and each individual director could have multiple and distinct interests. However, one thing is certain that the board is accountable in various ways to a number of different stakeholders and the dissectors are required to achieve a balance between competitive interests. The task of the Board', therefore, should be to determine a distinctive purpose for the organisation. The directors should complement each other to improve the operating dynamics to the Boardroom team. The effectiveness of a board can be constrained or enhanced by the limitations or strengths of its individual members.
An effective and confident board should be open about the extent to which it adds value and tackles barriers to its own contribution. All the directors should be firmly committed to an agreed and realistic strategy for the achievement of the vision of the company and for that matter, the board should maintain a balance between getting through next year and securing the longer term future of the organisation. Short term pressure should under no circumstances be allowed to drive out longer term considerations. An effective board should, therefore, prioritise its activities considering business environment and corporate goals.
It must be realised that cross functional role in the board room have become a necessity. Alert and effective boards need to monitor economic, political, social and technological developments and asses their impact upon the company as well as how they affect customers, suppliers and competitors. A board needs to understand the power of each group of stakeholders and the sanctions available to them. The expectations of management, customers and other stakeholders need to be clarified and understood. Corporate strategy need to be assessed as a whole. Single solution to a particular problem should not be sought.
Concluding remarks: Corporate governance is the set of policies and procedures affecting the ways an institution is directed. administered and controlled. It also includes the interrelationship of all the stakeholders. Most of laws and regulations affect issues of corporate practice and mechanism. A fundamental component in the perfect competition framework of free market economy is the information symmetry pertinent to the interest of the organisation. Pertinent informations to be made freely and uniformly available all concerned. Corporate governance is the centre of information symmetry.
Recently, the Securities and Exchange Commission (SEC) of Bangladesh issued a notification on Corporate Governance Guidelines for the publicly listed companies of Bangladesh. The SEC has issued the Guidelines on a "comply or explain'" basis. These guidelines appears not mandatory and does not have scoring systems that help investors to asses the effectiveness of corporate governance. It is no denying the fact that corporate governance practices in Bangladesh are almost absent in most companies including financial institutions. Therefore, it is necessary to enact appropriate laws and strengthen professionalism in financial institutions. The regulatory bodies may also formulate and enforce "Code for Good Corporate Governance" in order to implement required accounting and auditing standard and enforce quality of financial reporting. (Concluded)
IN order to enhance and ensure an effective management system for good corporate governance, the existence of an effective monitoring and control system is indispensable. Internal control system is necessary for ensuring management oversight and developing a healthy culture within the institution.
Financial institutions will require such a system for identifying and assessing risks, detecting problems and correcting deficiencies. Risk management is the responsibility of senior management team, who should develop the procedures of managing all the risks involved in financial institutions. It will not be possible to implement the control system successfully without an effective channel of communication and availability of accounts information.
However, once the problem has been identified, it is the responsibility of management and the Board to take corrective actions immediately. In order to implement the internal control system, the financial institutions should develop a risk management culture in every sphere of their activities.
To ensure that risk management culture is operating well in the organisation, senior management should prepare several reports on a regular basis. These are operational risk reports, liquidity risk reports, market risk and value at risk reports etc. Senior management should utilise risk management models to prepare and submit these reports to Board and to Regulatory Authority.
The emergence of complex financial issues and entities has led to regulatory concerns about risk and solvency. It is generally felt that a risk based capital regime supported management systems and internal controls would help to achieve the desired goals of good corporate governance. The regulatory framework, therefore, has to define the suitable form of capital and set out a threshhold minimum capital requirement for financial institutions. Assets have to be appropriate, sufficiently realisable and objectively valued. The assets also must be sufficiently diversified and spread and should ensure liquidity. Capital adequacy and solvency regimes have to address the matching of assets with liabilities.
It is the responsibility of the Board and senior management to manage its risks. If efficient control systems are not in place to monitor risk exposures, the organisation will not be able to adapt quickly enough to changing market situation. Risk management systems have to be developed by comprehensive monitoring and internal control systems and regulatory framework.
Developing Risk Management Culture: Financial Institutions face both financial and non-financial risks. Financial risks arises from market risk and credit risk. No-financial risks consist of operational risk, legal risk etc. Financial institutions also face liquidity risk. A comprehensive risk management system, therefore, should encompass several measures to develop a risk management culture in the organisation. The board of directors is responsible for outlining the overall objectives, policies and strategies of risk management for any financial institution.
Senior management is responsible to implement the broad specifications approved by the board. To do so, the management should establish policies and procedures that would be used by the institution to manage risk. The organisation should also have regular management information systems for measuring, monitoring, controlling and reporting different risk exposures. The system should establish policies, procedures, and ensure that their adherence are continually reviewed.
A risk management culture needs to be introduced by involving all the departments in the risk management process. The board of directors can create the risk management environment by clearly identifying the risk objectives and strategies. The management needs to implement these policies efficiently by establishing systems that can identify measures and monitor and manage various risk exposures.
The primary responsibility of directors and management is to protect assets. The board may delegate the responsibility to management but they must ensure, through proper supervision that the agreed risk management policies and programmers are being implemented. The starting point is the whole exercise in the existence of risk management policy which should be carefully thought out and thoroughly explained and understood by management and everyone associated with its execution. This is necessary and vital for any financial institution that expects to survive in today's business environment. The credit risk is a major risk which deserves the special attention of the management of financial institutions. The institute must have a written lending (investment) policy and guidelines, which will be revised and reviewed periodically in line with changes in the economic environment and experience gained in the course of business activities.
It is now universally accepted that the quality of the performance of any organisation depends on the quality and competence at its personnel. The easiest way to wreck any organisation is to engage and retain in the organisation staff of dubious character. The personnel risk is the risk of having within the organisation personnel whose competence and integrity are questionable and likely to cause substantial loss. The hazards posed by personal risk can be eliminated by the retention of quality personnel that are professionally competent, reliable, contented and totally committed to the success of the enterprise and working in harmony with board and management.
Cash is one of the most valuable assets and it is the highest risk asset of financial institution. An organisation that is practising good and effective risk management would constantly asses and evaluate all the relevant risks and install efficient controls. Fraud risk is another important risk to which financial institutions are exposed. All necessary actions should be taken to detect and protect all the likely areas through which frauds could occur. Most of the frauds can be predicted and prevented with appropriate checks and with the installation of an efficient risk management and loss control system. A new kind of fraud risk which should be carefully watched is the computer or electronic fraud which generally arises from a fraudulent transfer of fund.
There are several other risks. which need be addressed properly. These are market risk, interest rate (investment return) risk, investment risk, purchasing power risk etc. Appropriate actions should be taken to identify, control and manage these risks effectively. It is obvious that risk management systems strengthen financial institution. Therefore, risk management needs to be assigned as s priority area of research and training programs.
Considering the nature of financial industry, there is a need to develop risk management techniques and organise training programmes to disseminate those among the players in the financial market. Disclosures about risk management systems are extremely important for strengthening the systems. An organisation need to develop risk based management information system, risk-based internal audit system, risk-based accounting system and risk-based asset inventory system. An internal rating system may also be highly effective in filling the gaps in risk management system.
Enhancing Transparency: Financial institutions are lifeblood of any economy. The health of these institutions and public confidence in them are necessary to sustain and expand business. Financial institutions play an important role in Bangladesh where the capital market is small and these institutions are the main source of capital. Financial institutions are beneficiaries, trustees and managers of peoples money, and as such have a unique responsibility to uphold the highest standard of corporate governance. These institutions have an essential social as well as economic function in national life. They have an obligation to observe the highest standard of customer care and efficiency while ensuring their own competitiveness.
Because of its special nature and obligations, all relevant informations should be provided to customers and the public to enable them to adequately judge the strength and health of the organisation, be it a bank, a insurance company or others. These institutions need to formulate and publish code of best practice to customers and a code of corporate social and environmental responsibility. The system of handling complaints should be disclosed to customers and potential customers. They must provide transparent, comprehensive disclosures to shareholders, customers and the public in the standardised format. Disclosures may be hosted in the website and displayed at branches and at the Head Office. The information can be also made available to those who request for information. Financial institutions should provide an accurate, reliable and timely information of following broad categories
a. Risk Exposures,
b. Risk Management System.
c. Management & Corporate Governance System,
d. Accounting Principles and Practices,
e. Financial Position & Business Performance,
Financial statements are the most important source of reflecting business performance and financial position. Formulation of proper accounting and auditing standard is, therefore, critical for improving corporate governance. Accounting standard describes the benchmark treatment (best accounting option) of a particular type of transaction. The standards describe among others, the minimum disclosure levels that are necessary for appreciating the economic reality and to ensure transparency. Enforcement of accounting standard is the professional responsibility of auditors. Auditors by maintaining high standards in performing their function, assure the users of financial statements that the information presented is true, fair and free from material misstatements.
Realisation of Realities: The issues of corporate governance centres around members of the board and their relation ship with the executives specially the Chief Executive Officer (CEO), their roles, responsibilities and expertise. The board members are supposed to act in the larger interests of the company, its shareholders and other stakeholders. However, the reality in Bangladesh, like other developing countries. is that the organisations are almost family controlled. In that case it is observed that qualified and experienced professional is in management positions are a optimal extra. The board in such case is often a collection of family members and celebrities. However, this pattern is not universal, and there are exemplary exceptions. There is nothing wrong in that because, throughout the world business has developed by individuals having entrepreneurial drive and acumen. However, when the company grows and is public by owned, it is for the betterment of the organisation, good corporate governance system be accepted as a rule of business ethics.
In theory, the members of the Board of Directors are elected by a company's shareholders. In this sense boards are accountable to the whole body of shareholders and not only to the controlling or managing group of share holders. This is specially required because shareholders in many companies have little power. Boards of financial institutions in Bangladesh vary greatly in the value they add. Some boards are positive instigators and enablers of change, while others are bystanders or even obstacles to progress.
To be effective and positive, the Board need to review its functions, compositions and operations in order to asses how appropriate are these. The directors must try to consciously develop their directorial skills. The distinction between direction and management need to be realised. The directors need to understand what is expected of them as a team. It must be realised that an effective board composed of a united team of competent directors is a prime necessity to turn their aspirations into concrete achievement.
A particular board may contain different type of directors, such as promoter directors, alternate directors, public shareholders directors. policyholders directors, independent directors, executive directors and so on and each individual director could have multiple and distinct interests. However, one thing is certain that the board is accountable in various ways to a number of different stakeholders and the dissectors are required to achieve a balance between competitive interests. The task of the Board', therefore, should be to determine a distinctive purpose for the organisation. The directors should complement each other to improve the operating dynamics to the Boardroom team. The effectiveness of a board can be constrained or enhanced by the limitations or strengths of its individual members.
An effective and confident board should be open about the extent to which it adds value and tackles barriers to its own contribution. All the directors should be firmly committed to an agreed and realistic strategy for the achievement of the vision of the company and for that matter, the board should maintain a balance between getting through next year and securing the longer term future of the organisation. Short term pressure should under no circumstances be allowed to drive out longer term considerations. An effective board should, therefore, prioritise its activities considering business environment and corporate goals.
It must be realised that cross functional role in the board room have become a necessity. Alert and effective boards need to monitor economic, political, social and technological developments and asses their impact upon the company as well as how they affect customers, suppliers and competitors. A board needs to understand the power of each group of stakeholders and the sanctions available to them. The expectations of management, customers and other stakeholders need to be clarified and understood. Corporate strategy need to be assessed as a whole. Single solution to a particular problem should not be sought.
Concluding remarks: Corporate governance is the set of policies and procedures affecting the ways an institution is directed. administered and controlled. It also includes the interrelationship of all the stakeholders. Most of laws and regulations affect issues of corporate practice and mechanism. A fundamental component in the perfect competition framework of free market economy is the information symmetry pertinent to the interest of the organisation. Pertinent informations to be made freely and uniformly available all concerned. Corporate governance is the centre of information symmetry.
Recently, the Securities and Exchange Commission (SEC) of Bangladesh issued a notification on Corporate Governance Guidelines for the publicly listed companies of Bangladesh. The SEC has issued the Guidelines on a "comply or explain'" basis. These guidelines appears not mandatory and does not have scoring systems that help investors to asses the effectiveness of corporate governance. It is no denying the fact that corporate governance practices in Bangladesh are almost absent in most companies including financial institutions. Therefore, it is necessary to enact appropriate laws and strengthen professionalism in financial institutions. The regulatory bodies may also formulate and enforce "Code for Good Corporate Governance" in order to implement required accounting and auditing standard and enforce quality of financial reporting. (Concluded)