Enhancing corporate governance of financial institutions
Thursday, 6 September 2007
Kazi Md. Mortuza Ali
Corporate governance as a concept has received increasing attention in recent years. The term corporate governance is associated with accountability to a company's equity shareholders or risk-bearing owners. It is the system by which companies are to be directed and controlled. The Board of Directors of a company is in the centre of the governance system. The members of the board are charged with the responsibility of stewarding their company in a just and equitable manner.
The purpose of good corporate governance is to help the board to equip itself to discharge its increasingly onerous responsibilities. Companies that act with foresight in this emerging scenario will be truly better armed for the tough competitive future ahead than those that dismiss such issues as of no immediate relevance. Corporate governance normally rests on sound management system leading to adequate return on investment, refraining from unethical practices and accountability to the people who have entrusted their resources to the Board and the Company.
Those who manage funds and assets of others must be accountable not only for good performance but also for loss or injury that they cause. In the quest for achieving excellence in Board performance, it is prime importance to set out the expectations and to oversee the conduct of the business and supervise the management, which is responsible for the day-to day conduct of the business.
Board of Directors of financial institutions are charged with the responsibility of stewarding the affairs of their companies, in a just and equitable manner that will achieve these desired goals, without impeding the initiatives of the managers. It is necessary that the Board equip itself and discharge its increasingly onerous responsibilities coping with the necessary interface between the Company's Board and its Chief Executive Officer and above all combining business with ethics.
It is, necessary that the company directors, shareholders, investors, policyholders, depositors and senior managers are aware of their roles and responsibilities for enhancing the standards of corporate governance. It is very often said that a sound system of governance can be a catalyst for change, for higher growth and for a more efficient use of resources. In short, this can improve the overall reputation of the organisation.
Good corporate governance ensures fairness for all the stakeholders. In financial institutions, fairness can be achieved through highest degree of transparency and accountability. Ensuring fairness through transparency and accountability for its shareholders and other stakeholders is the prime objective of corporate governance in the financial institutions. Corporate governance is a set of mechanism through which all the stakeholders can protect their interest. The purpose of corporate governance is to earn best confidence of the investors, shareholders and other stakeholders.
Mechanism of Corporate Governance: The main players in the mechanism of corporate governance are Board of Directors, Shariah Board, (for Islamic Financial Organisation) Management team & the employees. The main stakeholders are shareholders. regulatory authority, investors, suppliers, agents, employers of agents, intermediaries and so on. The players as well as the stakeholders have distinct responsibilities, which must be complied with to achieve the purpose of good corporate governance.
The Govt. and or the Regulatory Authority must provide an enabling environment that support corporate governance of financial institutions. There has to be specific and appropriate laws and regulations that caters to the needs of the institutions. Apart from providing supportive guidelines, the regulatory authority should monitor overall operations and provide clear and transparent accounting standards. Based on the laws, rules and guidelines provided by the regulatory authority, the financial institutions such as banks, insurance companies and other non-banking financial institutions should set principles and "code of conduct" for practicing an effective corporate good governance system.
The code of corporate governance should prescribe the principles, procedures and processes through which better governance practices may gradually be introduced. Financial organisations should incorporate the "Code of Conduct" into company procedures and reporting practices. The provision may also be incorporated into their Articles of Association.
In order to protect their right the shareholders should be motivated to participate in the meetings so that the Board of Directors act with prudence and are capable of formulating strategies and policies of the company and can provide direction to the management. Board actions should be in the interests of the company and the public shareholders.
The senior management of the company should implement the policies set by the board in a sound and responsible manner. The management committee should be responsible to operate the institution efficiently by ensuring an ideal work force and maintaining a right balance between risk and return.
An internal audit team should help the management by ensuring that the policies set by Board are followed in its right perspectives. External Auditors should evaluate the accuracy of the quality and quantity of information and whether the accounting standards are complied with.
All the employees of the organisation should contribute to the best of their ability to minimise operational costs and risks and meet the goals set by the management. The employees should have proper skills to perform their job and must work ethically. The Shariah Board of Islamic financial institutions should oversee compliances of its verdicts, and the Shariah Audit Team, should help the Board to ensure compliances.
With the increasing responsibilities of the Board in the context of improved corporate governance, the chief of Finance & Accounts can make a very valuable contribution. Improving the quality and ensuring timeliness of financial reporting is one of the most important tasks of the C.F.O. The Board will need to be briefed about corporate strategies and implementation status, financial results, cash-flow projections and so on, without which they can not hope to discharge their onerous responsibility adequately,
It must be remembered that corporate governance is only a sub-set of overall political and societal standards of integrity and transparency. An age old legal maxim postulates that one who seeks equity must have his hands clear. There is no greater inducement to commit an offence than the frustration of watching known offenders getting away with impunity. Equity, justice and fairplay are the key words for ensuring good corporate governance for adding value in the organisation.
How Values to be Added?: Ideally, the Board of Directors should be the heart and soul of a company. In the longer term whether on not an institution grows or declines, depends very much upon the sense of purpose and direction, the values, and the drive to achieve, develop and learn that emanate from the Board and the extent to which it is visibly committed to them, Whether or not the managers display leadership qualities depends in turn upon the extent to which they are motivated and empowered by the Board.
The management team is likely to take its cue from the role model behaviour of directors, which can inspire and motivate or rap the management spirit. The role of the Board and the duties and responsibilities of the directors are at the heart of the distinction between direction and management. The directors require a combination of inter-related attributes, which include integrity, objectivity, sensitivity, a sense of accountability and responsibility.
The Board needs to determine the qualities which are required by directors and which distinguish them from managers. This is necessary, because, the effectiveness of the Board can be constrained or enhanced by the limitations or strengths of its individual members. A Board should be open about the extent to which it adds value and should be willing to identify, discover and tackle barriers to its own contribution.
The board members should ask themselves about their own role in adding value for customers, and communicating with customers, employees and the regulator. To enhance their effectiveness. Board should prioritise their activities.
The top priority be given to satisfaction of customers, employees agents, depositors, policyholders, investors and other stakeholders. Stakeholders requirements should be assessed regularly and strategies be formulated to satisfy them.
Role of CEO: In any organisation, whether it is commercial or non-commercial, financial or non-financial, public or private, small or large. despite various activities are departmentalised and are supposed to be manned by specialists. It is the CEO who has to ensure that the organisation as a whole function as coherent unit, maximising stakeholders interests. Such competencies are not easy to come by and in practice really dynamic and highly competent CEOs are a scarce commodity.
A dynamic CEO galvanises an organisation by providing inspiration and drive by induction of fresh talent, by elimination of dead wood, and restructuring the organisation. While he or she makes a significant contribution to an organisations success, one should not have unlimited power, as absolute power may spoil an otherwise good CEO.
It is not reasonable to expect that an efficient CEO will function optimally and always rationally. Even for the most efficient CEOs to function in the overall interest to all the stakeholders, it is necessary to have well functioning Board of directors offering counsel and guidance, correcting and criticising where and when required. The quality of corporate governance is not determined exclusively by the quality of the organisation, or its Board or its CEO in isolation but is influenced by the aggregate contribution of all these elements.
Qualities of a CEO need to be channeled to constructive and effective purpose. A balanced Board consisting of wise and experienced people can be of great help in this task as good governance is the total outcome of the qualities of the members of the board, members of management team and of course of the CEO. In the final analysis, it is individuals who make a difference,
Some people are driven by goals (market share, growth rate, profits) others are more driven by values. While goals will keep changing, values are more steadfast and enduring. For the first group, when values conflict with goals, values are discarded, because the goal is paramount.
For the other group (those driven by values) often time, the values themselves can become goals. If and when business objectives do not conform to their values, it is the business objectives that get discarded.
People who are value driven to them integrity does not come from pious declarations. It has to be earned with difficulty and constant effort. It is the cumulative result of value driven decisions. Every action they take either reinforces or weakens the value position they had built LIP to that moment. Therefore, these people take every precaution to safeguard their values and keep themselves aware of the value related issues around each decision.
Tasks of Management: Management as a team is responsible for the day to day functioning of the organisation, It is accountable before the Board of Directors. It is, therefore, necessary to regulate the behaviour of managers to ensure that they do not act in a way that would hurt the interest of shareholders and other stakeholders. Tasks of management team may be summarised as follows:
1.To recruit best available human resource and to develop human resource by providing appropriate training to meet future challenges.
2. To act honestly as trustee of peoples fund and be fair, transparent in performing their duties.
3. Internal audit department should regularly report to management who should effectively implement the recommendations.
4. To act competently, diligently with regard to all transactions in order to ensure adequate financial resource and effective risk management systems and to ensure that the information is accurate in all material aspects
5. To meet the standards and requirements of the regulatory system and to deal with regulators in an open and cooperative way and keep the regulator promptly informed of significant events.
6. To conduct business with prudence and to keep adequate and orderly records of business
7. To deal with complaints of customers and other stakeholders fairly and effectively
8. To make sure that the whole business are monitored and controlled at senior management level through appropriate mechanism of individual and collective responsibilities
9. To strengthen consumer relationship and provide information about their rights and obligations. (More next)
Corporate governance as a concept has received increasing attention in recent years. The term corporate governance is associated with accountability to a company's equity shareholders or risk-bearing owners. It is the system by which companies are to be directed and controlled. The Board of Directors of a company is in the centre of the governance system. The members of the board are charged with the responsibility of stewarding their company in a just and equitable manner.
The purpose of good corporate governance is to help the board to equip itself to discharge its increasingly onerous responsibilities. Companies that act with foresight in this emerging scenario will be truly better armed for the tough competitive future ahead than those that dismiss such issues as of no immediate relevance. Corporate governance normally rests on sound management system leading to adequate return on investment, refraining from unethical practices and accountability to the people who have entrusted their resources to the Board and the Company.
Those who manage funds and assets of others must be accountable not only for good performance but also for loss or injury that they cause. In the quest for achieving excellence in Board performance, it is prime importance to set out the expectations and to oversee the conduct of the business and supervise the management, which is responsible for the day-to day conduct of the business.
Board of Directors of financial institutions are charged with the responsibility of stewarding the affairs of their companies, in a just and equitable manner that will achieve these desired goals, without impeding the initiatives of the managers. It is necessary that the Board equip itself and discharge its increasingly onerous responsibilities coping with the necessary interface between the Company's Board and its Chief Executive Officer and above all combining business with ethics.
It is, necessary that the company directors, shareholders, investors, policyholders, depositors and senior managers are aware of their roles and responsibilities for enhancing the standards of corporate governance. It is very often said that a sound system of governance can be a catalyst for change, for higher growth and for a more efficient use of resources. In short, this can improve the overall reputation of the organisation.
Good corporate governance ensures fairness for all the stakeholders. In financial institutions, fairness can be achieved through highest degree of transparency and accountability. Ensuring fairness through transparency and accountability for its shareholders and other stakeholders is the prime objective of corporate governance in the financial institutions. Corporate governance is a set of mechanism through which all the stakeholders can protect their interest. The purpose of corporate governance is to earn best confidence of the investors, shareholders and other stakeholders.
Mechanism of Corporate Governance: The main players in the mechanism of corporate governance are Board of Directors, Shariah Board, (for Islamic Financial Organisation) Management team & the employees. The main stakeholders are shareholders. regulatory authority, investors, suppliers, agents, employers of agents, intermediaries and so on. The players as well as the stakeholders have distinct responsibilities, which must be complied with to achieve the purpose of good corporate governance.
The Govt. and or the Regulatory Authority must provide an enabling environment that support corporate governance of financial institutions. There has to be specific and appropriate laws and regulations that caters to the needs of the institutions. Apart from providing supportive guidelines, the regulatory authority should monitor overall operations and provide clear and transparent accounting standards. Based on the laws, rules and guidelines provided by the regulatory authority, the financial institutions such as banks, insurance companies and other non-banking financial institutions should set principles and "code of conduct" for practicing an effective corporate good governance system.
The code of corporate governance should prescribe the principles, procedures and processes through which better governance practices may gradually be introduced. Financial organisations should incorporate the "Code of Conduct" into company procedures and reporting practices. The provision may also be incorporated into their Articles of Association.
In order to protect their right the shareholders should be motivated to participate in the meetings so that the Board of Directors act with prudence and are capable of formulating strategies and policies of the company and can provide direction to the management. Board actions should be in the interests of the company and the public shareholders.
The senior management of the company should implement the policies set by the board in a sound and responsible manner. The management committee should be responsible to operate the institution efficiently by ensuring an ideal work force and maintaining a right balance between risk and return.
An internal audit team should help the management by ensuring that the policies set by Board are followed in its right perspectives. External Auditors should evaluate the accuracy of the quality and quantity of information and whether the accounting standards are complied with.
All the employees of the organisation should contribute to the best of their ability to minimise operational costs and risks and meet the goals set by the management. The employees should have proper skills to perform their job and must work ethically. The Shariah Board of Islamic financial institutions should oversee compliances of its verdicts, and the Shariah Audit Team, should help the Board to ensure compliances.
With the increasing responsibilities of the Board in the context of improved corporate governance, the chief of Finance & Accounts can make a very valuable contribution. Improving the quality and ensuring timeliness of financial reporting is one of the most important tasks of the C.F.O. The Board will need to be briefed about corporate strategies and implementation status, financial results, cash-flow projections and so on, without which they can not hope to discharge their onerous responsibility adequately,
It must be remembered that corporate governance is only a sub-set of overall political and societal standards of integrity and transparency. An age old legal maxim postulates that one who seeks equity must have his hands clear. There is no greater inducement to commit an offence than the frustration of watching known offenders getting away with impunity. Equity, justice and fairplay are the key words for ensuring good corporate governance for adding value in the organisation.
How Values to be Added?: Ideally, the Board of Directors should be the heart and soul of a company. In the longer term whether on not an institution grows or declines, depends very much upon the sense of purpose and direction, the values, and the drive to achieve, develop and learn that emanate from the Board and the extent to which it is visibly committed to them, Whether or not the managers display leadership qualities depends in turn upon the extent to which they are motivated and empowered by the Board.
The management team is likely to take its cue from the role model behaviour of directors, which can inspire and motivate or rap the management spirit. The role of the Board and the duties and responsibilities of the directors are at the heart of the distinction between direction and management. The directors require a combination of inter-related attributes, which include integrity, objectivity, sensitivity, a sense of accountability and responsibility.
The Board needs to determine the qualities which are required by directors and which distinguish them from managers. This is necessary, because, the effectiveness of the Board can be constrained or enhanced by the limitations or strengths of its individual members. A Board should be open about the extent to which it adds value and should be willing to identify, discover and tackle barriers to its own contribution.
The board members should ask themselves about their own role in adding value for customers, and communicating with customers, employees and the regulator. To enhance their effectiveness. Board should prioritise their activities.
The top priority be given to satisfaction of customers, employees agents, depositors, policyholders, investors and other stakeholders. Stakeholders requirements should be assessed regularly and strategies be formulated to satisfy them.
Role of CEO: In any organisation, whether it is commercial or non-commercial, financial or non-financial, public or private, small or large. despite various activities are departmentalised and are supposed to be manned by specialists. It is the CEO who has to ensure that the organisation as a whole function as coherent unit, maximising stakeholders interests. Such competencies are not easy to come by and in practice really dynamic and highly competent CEOs are a scarce commodity.
A dynamic CEO galvanises an organisation by providing inspiration and drive by induction of fresh talent, by elimination of dead wood, and restructuring the organisation. While he or she makes a significant contribution to an organisations success, one should not have unlimited power, as absolute power may spoil an otherwise good CEO.
It is not reasonable to expect that an efficient CEO will function optimally and always rationally. Even for the most efficient CEOs to function in the overall interest to all the stakeholders, it is necessary to have well functioning Board of directors offering counsel and guidance, correcting and criticising where and when required. The quality of corporate governance is not determined exclusively by the quality of the organisation, or its Board or its CEO in isolation but is influenced by the aggregate contribution of all these elements.
Qualities of a CEO need to be channeled to constructive and effective purpose. A balanced Board consisting of wise and experienced people can be of great help in this task as good governance is the total outcome of the qualities of the members of the board, members of management team and of course of the CEO. In the final analysis, it is individuals who make a difference,
Some people are driven by goals (market share, growth rate, profits) others are more driven by values. While goals will keep changing, values are more steadfast and enduring. For the first group, when values conflict with goals, values are discarded, because the goal is paramount.
For the other group (those driven by values) often time, the values themselves can become goals. If and when business objectives do not conform to their values, it is the business objectives that get discarded.
People who are value driven to them integrity does not come from pious declarations. It has to be earned with difficulty and constant effort. It is the cumulative result of value driven decisions. Every action they take either reinforces or weakens the value position they had built LIP to that moment. Therefore, these people take every precaution to safeguard their values and keep themselves aware of the value related issues around each decision.
Tasks of Management: Management as a team is responsible for the day to day functioning of the organisation, It is accountable before the Board of Directors. It is, therefore, necessary to regulate the behaviour of managers to ensure that they do not act in a way that would hurt the interest of shareholders and other stakeholders. Tasks of management team may be summarised as follows:
1.To recruit best available human resource and to develop human resource by providing appropriate training to meet future challenges.
2. To act honestly as trustee of peoples fund and be fair, transparent in performing their duties.
3. Internal audit department should regularly report to management who should effectively implement the recommendations.
4. To act competently, diligently with regard to all transactions in order to ensure adequate financial resource and effective risk management systems and to ensure that the information is accurate in all material aspects
5. To meet the standards and requirements of the regulatory system and to deal with regulators in an open and cooperative way and keep the regulator promptly informed of significant events.
6. To conduct business with prudence and to keep adequate and orderly records of business
7. To deal with complaints of customers and other stakeholders fairly and effectively
8. To make sure that the whole business are monitored and controlled at senior management level through appropriate mechanism of individual and collective responsibilities
9. To strengthen consumer relationship and provide information about their rights and obligations. (More next)