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EXECUTIVE SUMMARY
Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability, mutual
respect, and commitment to the organization.
Both government and RBI need to bring about significant changes in the corporate
governance mechanism adopted by banks and other financial intermediaries. As a
matter of principle, RBI should not appoint its nominees on the boards of banks to avoid
conflict of interests.
Although it is not feasible to have a free market for take-over in respect banks there is a
strong case for recognizing the rights of the shareholders, especially of public sector
banks and financial institutions.
Today the common shareholders are denied such basic rights as adopting annual
accounts or approving dividends. They cannot also influence composition of the boards
in any way.
As a part of strengthening the functioning of their boards, banks should appoint a risk
management committee of the board in addition to the three other board committees
viz. audit, remuneration and appointment committees.
Since banks and institutions are highly leveraged entities their failure would pose
large risks to the entire economic system. Their corporate governance mechanisms
should, therefore, be relatively much tighter.
Banks should have clear strategies for guiding their operations and establishing
accountability for executing them. Banks also maintain high degree of transparency in
regard to disclosure of information.
Of importance principles of corporate governance is how directors and management
develop a model of governance that aligns the values of the corporate participants and
then evaluate this model periodically for its effectiveness.
In particular, senior executives should conduct themselves honestly and ethically,
especially concerning actual or apparent conflicts of interest, and disclosure in financial
reports. This all principles of corporate governance are explained in this project.
Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and
the community at large and appointment committees.
For the co-operative banks in India challenging times are explained. The purpose and
objectives of co-operatives provide the framework for co-operative corporate
governance.
Roles and measure taken by regularity bodies towards corporate governance are
also explained.
Indian scenario in corporate governance how they do and how they are ranks to their
services offered are explained in this project.
One case study or live example is taken of BANK OF BARODA how they performed in
corporate governance in detailed is explained in this project.
Shareholders
Board of Directors
Management
Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability, mutual
respect, and commitment to the organization.
Of importance is how directors and management develop a model of governance that
aligns the values of the corporate participants and then evaluate this model periodically
for its effectiveness. In particular, senior executives should conduct themselves honestly
and ethically, especially concerning actual or apparent conflicts of interest, and
disclosure in financial reports.
Commonly accepted principles of corporate governance include:
1. Rights and equitable treatment of shareholders: Organizations should
respect the rights of shareholders and help shareholders to exercise those
rights. They can help shareholders exercise their rights by effectively
communicating information that is understandable and accessible and
encouraging shareholders to participate in general meetings.
2. Interests of other stakeholders: Organizations should recognize that they
have legal and other obligations to all legitimate stakeholders.
3. Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the
ability to review and challenge management performance.
It needs to be of sufficient size and have an appropriate level of commitment to
fulfill its responsibilities and duties. There are issues about the appropriate mix
of executive and non-executive directors. The key roles of chairperson and
CEO should not be held by the same person.
4. Integrity and ethical behaviour: Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk
management and avoiding lawsuits. Organizations should develop a code of
conduct for their directors and executives that promotes ethical and responsible
decision making. It is important to understand, though, that reliance by a
company on the integrity and ethics of individuals is bound to eventual failure.
Because of this, many organizations establish Compliance and Ethics Programs
to minimize the risk that the firm steps outside of ethical and legal boundaries.
5. Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
shareholders with a level of accountability. They should also implement
procedures to independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the organization
should be timely and balanced to ensure that all investors have access to clear,
factual information.
Issues involving corporate governance principles include:
review of the compensation arrangements for the chief executive officer and
other senior executives the resources made available to directors in carrying
out their duties the way in which individuals are nominated for positions on
the board
dividend policy
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In addition, business ethics and corporate awareness of the environmental and societal
interest of the communities, within which they operate, can have an impact on the
reputation and long-term performance of corporations.
The three key constituents of corporate governance are the Board of Directors, the
Shareholders and the Management.
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Board Meetings: are the forums for board decision making. These meetings
enable directors to discharge their responsibilities. The effectiveness of board
meetings is dependent on carefully planned agendas and providing relevant
papers and materials to directors sufficiently prior to board meetings.
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Monitoring the Board Performance: the board must monitor and evaluate its
combined performance and also that of individual directors at periodic intervals,
using key performance indicators besides peer review.
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Remuneration:
Performance-based remuneration is designed to relate some proportion of salary to
individual performance. It may be in the form of cash or non-cash payments such as
shares and share options, superannuation or other benefits.
Such incentive schemes, however, are reactive in the sense that they provide no
mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic
behavior.
B. EXTERNAL CORPORATES GOVERNANCE CONTROLS
External corporate governance controls encompass the controls external stakeholders
exercise over the organization. Examples include:
Competition
debt covenants
government regulations
media pressure
takeovers
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Several studies in India and abroad have indicated that markets and investors
take notice of well managed companies and respond positively to them. Such
companies have a system of good corporate governance in place, which allows
sufficient freedom to the board and management to take decisions towards the
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Also, the instances of financial crisis have brought the subject of corporate
governance to the surface. They have shifted the emphasis on compliance with
substance, rather than form, and brought to sharper focus the need for
intellectual honesty and integrity. This is because financial and non-financial
disclosures made by any firm are only as good and honest as the people behind
them.
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RBIs approach to regulation in recent times has some features that would
enhance the need for and usefulness of good corporate governance in the cooperative sector.
In fact, the RBI has made it clear that with the abolition of minimum lending rates
for co-operative banks, it will be incumbent on these banks to make the interest
rates charged by them transparent and known to all customers.
Banks have therefore been asked to publish the minimum and maximum interest
rates charged by them and display this information in every branch.
Disclosure and transparency are thus key pillars of a corporate governance framework
because they provide all the stakeholders with the information necessary to judge
whether their interests are being taken care of.
Another area which requires focused attention is greater transparency in the balance
sheets of co-operative banks.
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The commercial banks in India are now required to disclose accounting ratios
relating to operating profit, return on assets, business per employee, NPAs, etc.
as also maturity profile of loans, advances, investments, borrowings and
deposits.
Auditors are therefore expected to be well-versed with all aspects of the new
guidelines issued by RBI and ensure that the profit & loss account and balance
sheet of cooperative banks are prepared in a transparent manner and reflect the
true state of affairs.
Auditors should also ensure that other necessary statutory provisions and
appropriations out of profits are made as required in terms of Co-operative
Societies Act / Rules of the state concerned and the bye-laws of the respective
institutions.
Training the directors and keeping them abreast of the latest developments
Capital Adequacy: All the Indian banks barring one today are well above the
stipulated benchmark of 9 per cent and remain in a state of preparedness to
achieve the best standards of CRAR as soon as the new Basel 2 norms are
made operational. In fact, as of 31st March 2004, banking system as a whole
had a CRAR close to 13 per cent.
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Prompt corrective action has been adopted by RBI as a part of core principles
for effective banking supervision. As against a single trigger point based on
capital adequacy normally adopted by many countries, Reserve Bank in keeping
with Indian conditions have set two more trigger points namely Non-Performing
Assets (NPA) and Return on Assets (ROA) as proxies for asset quality and
profitability. These trigger points will enable the intervention of regulator through
a set of mandatory action to stem further deterioration in the health of banks
showing signs of weakness.
The identification and separation of powers and responsibilities between three branches
of government create the necessary framework for CG at the company level to function.
The degree of political governance will, to a great extent, be reflected in the ability of a
market economy and companies in it to develop.
Independent regulators;
Meaningful fines or sanctions and/or market forces that challenge and punish
banks that do not play by the rules.
At all three tiers of governance (political, banking system, bank), the weaknesses
that are most prevalent in emerging markets are:
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Corporate governance especially in the co-operative sector has come into sharp
focus because more and more co-operative banks in India, both in urban and
rural areas, have experienced grave problems in recent times which have in a
way threatened the profile and identity of the entire co-operative system.
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The purpose and objectives of co-operatives provide the framework for cooperative corporate governance. Co- operatives are organized groups of people
and jointly managed and democratically controlled enterprises.
They exist to serve their members and depositors and produce benefits for them.
Co-operative corporate governance is therefore about ensuring co-operative
relevance and performance by connecting members, management and the
employees to the policy, strategy and decision-making processes.
GENESIS OF CORPORATE GOVERNANCE:The Cadbury Report stipulated that the Board of Directors should meet regularly, retain
full and effective control over the company and monitor the executive management.
There should be a clearly accepted division of responsibilities at the head of the
company which will ensure balance of power and authority so that no individual has
unfettered powers of decision.
The Board should have a formal schedule of matters specifically reserved to it for
decisions to ensure that the direction and control of the company is firmly in its hands.
There should also be an agreed procedure for Directors in the furtherance of their
duties to take independent professional advice.
The Cadbury Report generated a lot of interest in India. The issue of corporate
governance was studied in depth and dealt with by the Confederation of Indian
Industries (CII), Associated Chamber of Commerce and Industry (ASSOCHAM) and
Securities and Exchange Board of India (SEBI).
These studies reinforced the Cadbury Reports focus on the crucial role of the Board
and the need for it to observe a Code of Best Practices.
Co-operative banks as corporate entities possess certain unique characteristics.
Paradoxical as it may sound, evolution of co-operatives in India as peoples
organizations rather than business enterprises adopting professional managerial
systems has hindered growth of professionalism in co-operatives and proved to be a
neglected area in their evolution.
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These banks have begun to list their equity on the domestic bourses, and have
needed to comply with disclosure and good CG guidelines stipulated by the stock
exchanges, which focus on the rights of minority shareholders.
The signs are that intervention by the state in state-owned banks' credit
operations is declining. Direct intervention in decisions is being replaced by
"policy directed" lending aimed at achieving the broader social objectives of the
government in power.
In sharp contrast, the old private sector banks have the weakest level of
governance. These banks are controlled by a few families or by communities,
with non-bank interests. While these banks might have outside directors and
various board committees, these tend to be passive with real decision-making
concentrated with the large shareholders - increasing the chance of related
party lending.
The Reserve Bank (RBI), India's central bank, is focused on governance issues
both from the perspective of improving the quality of its oversight and from
securing the interests of depositors through transparency, off-site surveillance
and prompt corrective action.
The RBI has established two major committees to look into governance at the
banks and benchmark international best practices of implementation. These
committees have made recommendations directed at the independence and
autonomy of the board and focused on harmonizing the OECD/Basel/SOX
recommendations with local regulations and practices followed in the domestic
Indian market.
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This is a concern, given what Fitch has seen in the international market place i.e. reliance on staff from other audit firms to complete an audit for large
international groups has resulted in errors going unnoticed. This is a resource
issue in the audit firms, given the scale of the large state-owned banks'
operations.
For example, State Bank of India has 9,000 branches, Punjab National Bank
has over 5000, and Bank of Maharashtra, although smaller, still has over
1,000 branches.
Typically, these audit firms form a "central committee" that looks at the audit
reports that come in from the branches and the regions and then discusses
these jointly with the chief financial officer of the bank.
As these banks appoint auditors for only a three-year period, it has not been
feasible for one audit firm to build the necessary infrastructure in terms of people
and offices to audit these banks on its own.
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BANK OF BARODA
(1) OVERVIEW
Bank of Baroda (BoB) (BSE: 532134) is the third largest bank in India, after the State
Bank of India and the Punjab and ahead of ICICI Bank. BoB is ranked 763 in Forbes
Global 2000 list. BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583
billion, a network of over 3,409 branches and offices, and about 1,657 ATMs.
It plans to open 400 new branches in the coming year. It offers a wide range of banking
products and financial services to corporate and retail customers through a variety of
delivery channels and through its specialized subsidiaries and affiliates in the areas of
investment banking, credit cards and asset management. Its total business was Rs.
5,452 billion as of June 30.
As of August 2010, the bank has 78 branches abroad and by the end of FY11 this
number should climb to 90. In 2010, BOB opened a branch in Auckland, New Zealand,
and its tenth branch in the United Kingdom.
The bank also plans to open five branches in Africa. Besides branches, BoB plans to
open three outlets in the Persian Gulf region that will consist of ATMs with a couple of
people.
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B. Conflict of Interest
Conflict of interest occurs when personal interest of any member of the Board of
Directors and of the Core Management interferes or appears to interfere in any way with
the interests of the Bank. Every member of the Board of Directors and Core
Management has a responsibility to the Bank, its stakeholders and to each other.
Although this duty does not prevent them from engaging in personal transactions and
investments, it does demand that they avoid situations where a conflict of interest might
occur or appear to occur.
They are expected to perform their duties in a way that they do not conflict with the
Banks interest such asEmployment / Outside Employment - The members of the Core Management are
expected to devote their total attention to the business interests of the Bank. They are
prohibited from engaging in any activity that interferes with their performance or
responsibilities to the Bank or otherwise is in conflict with or prejudicial to the Bank.
Business Interests - If any member of the Board of Directors and Core Management
considers investing in securities issued by the Banks customer, supplier or competitor,
they should ensure that these investments do not compromise their responsibilities to
the Bank.
Many factors including the size and nature of the investment; their ability to influence
the Banks decisions; their access to confidential information of the Bank, or of the other
entity, and the nature of the relationship between the Bank and the customer, supplier
or competitor should be considered in determining whether a conflict exists.
Additionally, they should disclose to the Bank any interest that they have which may
conflict with the business of the Bank.
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Spouse
Father
Mother (including step-mother)
Son (including step-son)
Sons wife
Daughter (including step-daughter)
Fathers father
Fathers mother
Mothers mother
Mothers father
Sons son
Sons sons wife
Sons daughter
Sons Daughters husband
Daughters husband
Daughters son
Daughters sons wife
Daughters daughter
Daughters daughters husband
Brother (including step-brother)
Brothers wife
Sister (including step-sister)
Sisters husband
If such a related party transaction is unavoidable, they must fully disclose the nature of
the related party transaction to the appropriate authority. Any dealings with a related
party must be conducted in such a way that no preferential treatment is given to that
party.
In the case of any other transaction or situation giving rise to conflicts of interests, the
appropriate authority should after due deliberations decide on its impact.
C. Applicable Laws
The Directors of the Bank and Core Management must comply with applicable laws,
regulations, rules and regulatory orders. They should report any inadvertent noncompliance, if detected subsequently, to the concerned authorities.
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Acting on behalf of the Bank in any transaction in which they or any of their
relative(s) have a significant direct or indirect interest.
2. Other Confidential Information The Bank has many kinds of business relationships with many companies and
individuals. Sometimes, they will volunteer confidential information about their products
or business plans to induce the Bank to enter into a business relationship.
At other times, the Bank may request that a third party provide confidential information
to permit the Bank to evaluate a potential business relationship with that party.
Therefore, special care must be taken by the Board of Directors and members of the
Core Management to handle the confidential information of others responsibly.
Such confidential information should be handled in accordance with the agreements
with such third parties.
The Bank requires that every Director and the member of Core Management,
General Managers should be fully compliant with the laws, statutes, rules and
regulations that have the objective of preventing unlawful gains of any nature
whatsoever.
Directors and the members of Core Management shall not accept any offer,
payment promise to pay, or authorization to pay any money, gift, or anything of
value from customers, suppliers, shareholders/ stakeholders, etc. that is
perceived as intended, directly or indirectly, to influence any business decision,
any act or failure to act, any commission of fraud, or opportunity for the
commission of any fraud.
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Study the Board papers thoroughly and enquire about follow-up reports on
definite time schedule.
Be familiar with the broad objectives of the Bank and the policies laid down by
the Government and the various laws and legislations.
(b) Donts
Do not reveal any information relating to any constituent of the Bank to anyone.
* Do not display the logo / distinctive design of the Bank on their personal visiting
cards / letter heads.
VI. Waivers
Any waiver of any provision of this Code of Conduct for a member of the Banks
Board of Directors or a member of the Core Management must be approved in
writing by the Board of Directors of the Bank.
The matters covered in this Code of Conduct are of the utmost importance to the Bank,
its stakeholders and its business partners, and are essential to the Bank's ability to
conduct its business in accordance with its value system.
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More diverse stakeholders (many depositors and often more diffuse equity
ownership, due to restrictions): makes for less incentives for monitoring
Heavily regulated: given systemic importance, as failure can lead to large output
costs, more regulated
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Banks, as they are of systemic importance, get support, i.e., deposit insurance,
LOLR, and other (potential) forms of government support
Costs of support provided often paid for by government, i.e., in the end taxpayers
As for any firm, bank shareholder value can come from increased risk-taking
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FUTURE PROSPECTS
The issues of governance, accountability and transparency in the affairs of the
company, as well as about the rights of shareholders and role of Board of Directors
have never been so prominent as it is today. The corporate governance has come to
assume a centre stage in the Board room discussions.
India has become one of the fastest emerging nations to have aligned itself with the
international trends in Corporate Governance. As a result, Indian companies have
increasingly been able to access to newer and larger markets around the world; as well
as able to acquire more businesses.
The responses of the Government and regulators have also been admirably
quick to meet the challenges of corporate delinquency. But, as the global
environment changing continuously, there is a greater need of adopting and
sustaining good corporate governance practices for value creation and building
corporations of the future.
It is true that the 'corporate governance' has no unique structure or design and is
largely considered ambiguous. There is still lack of awareness about its various
issues, like, quality and frequency of financial and managerial disclosure,
compliance with the code of best practice, roles and responsibilities of Board of
Directories, shareholders rights, etc.
There have been many instances of failure and scams in the corporate sector,
like collusion between companies and their accounting firms, presence of weak
or ineffective internal audits, lack of required skills by managers, lack of proper
disclosures, non-compliance with standards, etc. As a result, both management
and auditors have come under greater scrutiny.
But, with the integration of Indian economy with global markets, industrialists and
corporate in the country are being increasingly asked to adopt better and
transparent corporate practices.
Quality of corporate governance primarily depends on following factors, namely:integrity of the management; ability of the Board; adequacy of the processes;
commitment level of individual Board members; quality of corporate reporting;
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Since this is an important element affecting the long-term financial health of companies,
good governance framework also calls for effective legal and institutional environment,
business ethics and awareness of the environmental and societal interests.
Hence, in the years to come, corporate governance will become more relevant and a
more acceptable practice worldwide.
This is easily evident from the various activities undertaken by many companies in
framing and enforcing codes of conduct and honest business practices; following more
stringent norms for financial and non-financial disclosures, as mandated by law;
accepting higher and appropriate accounting standards; enforcing tax reforms coupled
with deregulation and competition; etc.
However, inapt application of corporate governance requirements can adversely affect
the relationship amongst participants of the governance system. As owners of equity,
institutional investors are increasingly demanding a decisive role in corporate
governance.
Individual shareholders, who usually do not exercise governance rights, are highly
concerned about getting fair treatment from controlling shareholders and management.
Creditors, especially banks, play a key role in governance systems, and serve as
external monitors over corporate performance. Employees and other stakeholders also
play an important role in contributing to the long term success and performance of the
corporation. Thus, it is necessary to apply governance practices in a right manner for
better growth of a company.
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That is, it is necessary to provide the corporate desired level of comfort in compliance
with the code, principles and requirements of corporate governance; as well as provide
relevant information to all stakeholders regarding the performance, policies and
procedures of the company in a transparent manner.
There should be proper financial and non-financial disclosures by the companies, such
as, about remuneration package, financial reporting, auditing, internal controls, etc.
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WEBLIOGRAPHY
www.wikipedia.org
www.bankofbaroda.com
www.nfcgindia.org
www.financialexpress.com
rbidocs.rbi.org.in
www.biecco.gov.in
www.iba.org.in
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