Ensuring sound corporate governance in banks, FIs

During the last couple of years after global financial debacle, a lot of talks, seminars, training sessions and symposiums on corporate governance took place across the world. Swindling of bank money and capital market disaster also happened in Bangladesh. All these atracted attention of regulators and think-tanks. Considering all these, the Bangladesh Bank (BB) took a number of steps to strengthen control mechanism and capacity building. It took initiatives to reshape its two decades-old Bank Companies Act in 2013 incorporating and addressing different issues to make it timely.
In the meantime, Bangladesh Securities & Exchange Commission (BSEC) also issued notifications/orders and reshaped Corporate Governance Guidelines (CGG) in 2012. Moreover, ownership and trading rights (TREC) of Stock Exchanges (SEs) were separated (demutualised) with an objective of establishing good governance and vibrant in addition to making it profitable for the sake of encouraging strategic investment.
On the other hand, the SEs and the BSEC are working together for updating laws/regulations in line with demutualised exchanges. All such initiatives were taken to regain the confidence of investors. The recent steps taken by the regulators are obviously appreciable and it is hoped that these will help ease/minimise any future scams by establishing continuous scanning/developing/updating laws/regulations on regular interval after gathering information/technological evolvement from developed world and neighbours.
This writer feels, the regulators' capacity may be enhanced by hiring and/or outsourcing sufficient number of experts/officials from related fields (such as financial/technical experts) with competitive and lucrative pay packages/ compensation/remuneration having opportunity of getting training from local and global institutions. Visible, remarkable and continuous surveillance process has to be initiated by procuring software(s). Provision has to be made for stern/punitive monetary/or non-monetary punishment in case of any departure from laws/regulations/compliance etc.  
Moreover, emphasis on the following areas may be given:
1. Raising efficiency of the Board:
* Leadership of Chairman: Professional knowledge (in business/ finance/technical/practical), integrity, honesty, entrepreneurial capacity of the person(s), leadership quality needs to be examined before appointment. This may be ensured by the regulators instead of only by Articles of Association. In this respect, highest focus/priority may be given on integrity, honesty, entrepreneurial capacity of the person(s) and leadership quality.
* Power of the Chairman may be enhanced depending on leadership quality, capacity, impartiality, business outlook/acumen, honesty, visible prospect of business growth etc. during his/her tenure(s). However, any departure should be taken into cognisance.
* Provision of electing the Chairman from among non-Executive Directors (NED)/Independent Directors (ID)/ Executive Directors (ED) may be incorporated.
* Performance of the Chairman may be evaluated on half-yearly/yearly basis by the NED/ED as well as by the regulators.
* A focus group may be constituted to formulate policy in this respect, which was earlier formed by the regulators that covered all segments and was highly appreciable.
2. Role of non-Executive/ Independent Directors:
* Well defined and specific Terms of Reference (TOR) may be developed and set by the regulators with independence of direct reporting in case of any departure, which has already been incorporated in a recent law.
* Further amendment is needed for incorporating provision of submitting compliance report to the regulators on monthly/quarterly/half-yearly and yearly basis.
* Any deviation/departure due to intentional concealment (other than ignorance/pressing circumstances beyond his/her/their capacity) of facts should be treated as a severe offence having penalty clause.
* The management's intentional failure has to be accounted for imposing penal clause depending on severity or repetition/willful default.
* Performance of the Chairman has to be evaluated on half-yearly/yearly basis by the ED/NED as well as by the regulators.
* NED should serve the interests of stakeholders instead of own interest or interest of Sponsor Directors.
* Undertaking from Sponsors Directors may be taken to the effect that they have no relationship (whether monetary/pecuniary/family relationships/employees/advisors/consultants) with the NEDs (vice versa) and regulators may, on sample basis, examine such relationship.  
3. Size, composition and  TORs of Board and its committees:
* The Board's size needs not to be larger for efficient/effective operation.
* One-third of the Board members may be NED/IDs (which was incorporated in the draft CGG issued by BSEC).
* Only person(s) having professional/academic knowledge (members of ICSB, ICAB, ICMAB, ISACA or other related/similar professional bodies, university teachers having Accounting/Finance/Business/Economics background) be appointed. They should have at least 15 years of professional experience/expertise of which at least 5 years in senior management level (in case of Chairman of Audit/Risk Management Committee (AC/RMC) should be qualified professional from any of the abovementioned Institutes having experience in senior management level of at least 5 years in any listed companies/partners of professional firms etc. Otherwise, similar professional (s) may be offered to attend AC/RMC meetings to share valuable professional advice for betterment. In this respect, the BB has recently issued a circular which is within the purview of international best practices. It is timely and appreciable. It would be also appreciable to include at least one NED/ID to be certified ICT professional or have sufficient experience /knowledge in MIS/ICT.  
* Regulators may set criteria and publish list/panel of such Directors from whom every listed company must have to choose for appointing/re-appointing NED(s).
* Mandatory inclusion of at least one third of such Directors to be appointed/re-appointed from among high officials of bank/non-bank financial institutions (NBFI), but, such person(s) cannot be eligible/co-opted if he/she/they has/have retired/resigned within preceding 3 years in same bank(s)/FI(s).
* Executive Committee may be constituted by appointing /re-appointing at least one member each from finance and ICT professions respectively. Other members may also be chosen having expertise/business acumen in commerce/trade/international businesses etc.
* An elaborate charter/TOR may be set by the BB to be adopted by the banks/FIs in line with the guidelines or the BB may seek such charters/TORs from banks/FIs for monitoring and further guidance(s)/ improvement(s).
* AC plays pivotal roles towards establishing good governance/ sound internal control system. Responsibilities shouldered on this Committee may be examined/scrutinised by the regulators thoroughly on monthly/quarterly/half yearly/yearly basis (some of which are now frequently reviewed by the BB). In this respect, the BB may incorporate additional features in reporting format (specially automated online reporting) with regard to implementation status of suggestions/recommendations/policy matters disseminated by the Committee from time to time.
* Re-appointment of members of the Committee may be confirmed from regulators according to assessment of individual performance on yearly basis with penal provision.
* Regulators' initiatives regarding creating scope of forming a new Committee namely RMC is obviously appreciable. The TOR/ Charter/automated reporting on regular intervals may be inserted. A separate team may be constituted to oversee the functions of those Committees with provision of software generated reporting to limit/reduce the scope of information/data manufacturing.
* To establish good governance, constituting an effective AC and RMC is to be considered. To make it strengthened, workable and play a pivotal role, at least one former bank high official and one reputed qualified professional having wide range of experience in banking may be appointed.
* In addition to existing provision, the BB may monitor the activities of AC/RMC by way of off-site and/or on-site supervision periodically, enhancing responsibilities with penal clause for any departure(s)/ failure(s).
* Meeting of the Committees is to be held effectively, which may be beneficial and a compulsory provision has to be made for sitting at least once in a month. The effectiveness of the meetings has to be overviewed by the regulators .
* Key Performance Indicators (KPI) for Executive Directors (ED)/non-Executive Directors (NED) are to be evaluated on half yearly/annual basis by the Board. Here, a provision may be kept to form another Committee to evaluate the KPIs of NED by the ED and vice-versa.
* KPIs of top executives are to be reviewed by the Board on monthly basis. In this regard, a framework may be provided by the BB and the BSEC to form Remuneration Committee (which was incorporated in the BSEC's draft CGG) to oversee performance, fix up remuneration of the Executive Directors and pay packages/compensations/enhancement of packages, duration etc. Promotions/increments/renewals of top executives are also to be placed before this Committee. In this respect, appointment of at least one member/Chairman has to be ensured from among the former CEO/HR Director for effective functioning of such Committee except ex-CEO or other high official(s) of said bank(s).
* Steps may be taken against any Director(s) by the Board only upon NOC of regulators after inspection.
* Mandatory formulation as well as implementation of code of conducts/ethics of Directors, Independent Directors and top executives (in a booklet form) has to be ensured which would be duly approved/monitored by the regulators.
* Preservation of audio visual recording of all meetings has to be made mandatorily for record and examination/scrutinisation purpose.
* Provision on adoption/review/ modification/alteration/update of policies on bi-monthly basis has to be incorporated mandatorily, where comprehensive discussion and decision on implementation status, requirements of modification in line with prevailing laws/regulations have to be made.
* Policy on effective succession plan of Board members (including IDs) and management has to be introduced. In this respect, a policy guideline/framework may be issued by the regulators.
* Regulators may arrange training/workshop/seminar on monthly/ quarterly basis to educate/provide ideas/share views/update improvements of local and global governance, process of mitigating risks, establishing sustainable and congenial business atmosphere.
* Employment of close relatives of Directors/top management personnel may be prohibited/discouraged or may be appointed upon qualifying competitive aptitude test.
4. Selection/appointment/retirement/removal/continuation of Chief Executive Officer (CEO)/Managing Director (MD):
* Regulators may review the total process of selecting/appointing CEO/MD such as application received, educational/professional qualifications, previous experiences, achievements/awards, punishments/ disciplinary actions/legal obligations (with rationality of such actions), discharging duties at diverse capacities, reputation, behaviour, training, extra curricular activities etc. for newly-appointed personnel.
* Regulators may review the qualifications of CEO/MD having previous experience in the same position considering his/her/their earlier bank(s)' performance, CAMELS and other ratings during his/her/their tenure(s), expansion of bank's business, sustainability, assets quality etc. In this respect, a standard selection criteria/KPIs may be prepared by the regulators by forming a focused group consisting of reputed ex-CEOs/MDs (some of which are already in the BB's guideline).
* Any coercion or uneven compression should be reported to the regulators directly (which was incorporated in BB guideline). Otherwise, he/she/they would be liable for any adverse financial performance of the bank(s).
 CEO/MD's performance has to be reviewed by the Board as well as by the regulators on regular intervals.
* Code of conduct/code of ethics may be framed/monitored by the regulators.
Implementation of good governance practices requires combined efforts of the Board, management and other stakeholders. The Board and the management have a very critical and significant role in controlling failures and regulatory mishaps. Now-a-days, we have a lot of opportunity to learn more from the advanced world's regulators and their central banks.
The writer is Executive
Vice President, Mutual
Trust Bank Limited.
[email protected]