Bangladesh Bank issued on Wednesday last (March 25) the DFIM Circular No. 02 on appointing CEO in bank and financial institutions. The circular which came into immediate effect, outlines the qualification, experience and competence for the Chief Executive Officer (CEO)/Managing Director (MD) of banks or financial institutions.
In the modern economy, appointment of CEO is an exclusive responsibility of the Board of Directors. But our banking industry is not yet prepared to play its self-regulatory role, so the central bank has to stringently monitor every aspect of commercial banks including the appointment of CEO. In our country, appointment and removal of CEO is subject to the approval of the Bangladesh Bank (BB), the central bank of the country, and as such governed by the circulars time to time issued by it. The underlying objective of this practice is to strengthen the authority of the CEO and thereby maintain the balance between the Board of Directors and the Management. In reality, to what extent the CEOs of the banks have been able to exercise this authority, has remained a debatable issue. Nevertheless, this practice is inevitably required in our country's feeble corporate culture for maintaining check and balance between the owner and the management.
Incidentally, CEOs of some private commercial banks in our country use both designations CEO and MD although these are two different designations. Once upon a time CEO and MD position were used for the chief of the organisation and CEO was used in the American corporate culture while MD was used in the British corporate culture. At the present globalised world, CEO position is used for the chief of the corporate body all over the world and MD position is now used for the head of the Division of the bank, specially as Industry Head who reports to the concerned EVP (executive vice-president). So two designations when used together give very confusing impression about his role.
The position of CEO is very crucial for any organisation, including a financial institution, because growth, success, reputation, image and, above all, stakeholders' interest are attributed much by the CEO's role. In the developed world, appointment of CEO for the bank is viewed with close attention by the interested group, specially the investors and analysts. It is evident that impact of changing CEO is duly reflected through change of share price in the Stock Exchange for which the Board of Directors is accountable to the shareholders. Therefore, utmost care is taken while appointing or removing the CEO of a bank.
In our country there is no such practice and even no hope of introducing this kind of practice in near future. So a guideline from Bangladesh Bank is the main instrument and the recent circular has great importance on CEO appointment. Since Board of Directors will have to follow this circular in appointing CEO, detailed criteria should have been provided on experience and qualification so that the most competent person can be selected as CEO of a bank.
CEO'S QUALIFICATION: Section 2 of BB circular of March 25 has specified minimum educational qualification and practical experience for the CEO position of a bank. Fifteen years' practical experience, including two years' role in 2nd tier position in a bank or financial institution, has been stipulated as the minimum experience for appointing CEO.
However, mere experience for a certain number of years will not serve the purpose of appointing a competent person as CEO because only required experience in the core functional area of a bank can enable the CEO to successfully run the financial institution. Banking business in our country mostly focuses on Loans and Advances (Credit). In addition, the Operation or General Banking is also another crucial area of banking. So, certain years of experience as Head of Credit and Head of Operation should be the minimum criteria of being CEO of a bank. Any CEO without adequate knowledge in Credit faces adversity in every steps of running a bank as he suffers from indecision on Credit. Even in the second-tier role, an aspirant CEO should have experience of heading bank's Credit Division for one year and Operation Division for one year as minimum experience of holding the Chief Executive position of a bank.
In our banking arena, many bankers have become CEO without having adequate knowledge and experience in bank's Credit and Operation department. Last year when I visited Bangladesh, I had an opportunity to meet CEOs of three banks. While discussing, one of them proudly mentioned that he has increased the bank's loan portfolio more than double during last nine months' tenure. When asked whether such huge growth is consistent with the growth of country's business and industry average and, above all, whether the Credit Division has competent bankers to successfully manage this substantially growing loan portfolio, no satisfactory reply came from him. No CEO with background in Credit will take this adventure of doubling the loan portfolio of bank within a short time. Further, one of the important roles of CEO is to formulate policy and implement thereof, so he must have minimum knowledge and experience in the field of policy formulation.
Now-a-days, banking business has become complex, competitive and technology-based and even diversity has come to bank's product and services. So only the banker with versatile knowledge and experience will be able to successfully run a bank. In the globalised world, banking business has been integrated establishing wide connectivity all over the world. Change taken place in banking rules and practice anywhere in the world will have either direct or indirect impact on the overall banking operation from which our banking industry cannot stay away. Decision taken in Basel committee, ICC, ACMLS (Association of Certified Money Laundering Specialist) or any other body will be binding for banks operating anywhere in the world if they intend to remain in international trade. So, CEO must have to be farsighted and well informed about what is happening and what may happen in the international Trade and Finance.
Therefore, considering the importance of modern banking, the minimum required experience should be redefined clearly stipulating that fifteen years of experience must include minimum six years' role as Head of Credit including one year at DMD level, three years' role as Head of Operation including one year at DMD level and one year experience in policy formulation. In the developed world, not to speak of CEO, even a VP (vice-president) requires at least three years' experience in three separate divisions in order to move to SVP position.
SUCCESSION PLAN FOR CEO: Hiring CEO from outside of the bank is not new, it is rather practised all over the world. However, the way CEO is appointed from other bank or the way CEO moves from bank to bank in our country is not usuyally seen elsewhere in the world. In the developed world, long-term succession plan for CEO is in place and nine to twelve months' time is taken to replace an outgoing CEO. The Board of Directors usually tries to appoint CEO from within the bank and if competent person is not found or any unforeseen situation arises for which special expertise is required, the CEO is appointed from outside of the bank.
During the financial turmoil in 2008, one of the largest North American banks was facing a serious problem for which special expertise related to managing hedge fund was necessary. The Board of Directors of that bank, therefore, hired a Hedge Fund chief as CEO. This is, however, a very exceptional situation.
Hiring CEO from outside has many limitations because he is not familiar with the bank's atmosphere and work culture. He is not well aware of the strength and weakness of the bank. Even he does not have a clear picture about bank's asset (loans & advances) quality and liability position. Moreover, he does not know the competence of bank's management team and therefore, can hardly trust his team members. Because of this awkward situation, the newly-appointed CEO would hire some executives from his previous organisation or his known circle which would deprive the existing employees who have made contribution to the bank's growth. This kind of situation usually results in grouping and sub-grouping among the executives and employees which eventually vitiates the working environment. Moreover, this practice impairs the career growth of the potential bankers. Many bright persons with high potential embraces banking as career and many of them are aspirant of reaching the top of the hierarchy of the banking profession but their dream is frustrated when the practice of hiring CEO from outside is established.
Therefore, hiring CEO from outside of the bank should be avoided and there should be practice of promoting bankers internally to the position of CEO. However, if the situation warrants or any unforeseen event arises or no competent person is found within a bank, the CEO may be hired from other organisations. In fact, application for obtaining approval from the Bangladesh Bank for a newly-appointed CEO will be accompanied by the succession plan of the CEO which will clearly state that how the next CEO will be appointed if the present CEO does not continue.
TENURE AND REMOVAL: The section 5 of the BB circular of March 25 has restricted the CEO's tenure to three years only which seems to be inadequate, specially for those hired from outside. The new CEO takes about one year's time to settle down, familiarise with the bank's internal environment and consolidate his position. From the second year when he starts contributing, third and final year comes up leaving him in a dilemma of renewing his term. So out of three-year tenure, a new CEO will have very limited time to contribute and demonstrate his leadership role. Therefore, the minimum tenure of CEO should be five years so that he gets adequate time to demonstrate his competence.
The section 11 of the BB circular of March 25 has described the right of the Bangladesh Bank and Board of Directors to remove a CEO in public interest. This is subjective in nature and has the scope of being abusing. So, the reason of removal should be clearly spelt out in relation to violation of specific rules and regulations.
ROLE AND RESPONSIBILITY: This circular is mostly related to the qualification, experience, competence and remuneration of the CEO of a bank or financial institution. However, there is no clear instruction about the role and responsibility of the CEO which is as important as qualification and experience because the organisation's corporate governance substantially depends on the CEO's role and responsibility.
In our country many CEOs perform all kinds of jobs from appointing/transferring of a teller to the approval of loan which cannot be the role and responsibility of a modern bank's CEO. The Bangladesh Bank should seriously review the importance of the role and responsibilities of the CEO and accordingly issue necessary circulars.
Nironjan Roy, CPA, CMA is a
Toronto-based banker.
nironjankumar_roy@yahoo.com
BB plays proactive role: Guidelines on appointing bank CEOs
Nironjan Roy | Published: April 01, 2015 00:00:00 | Updated: November 30, 2026 06:01:00
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