This document discusses how to make bank boards more effective. It notes that banks are different than other companies due to their role in mobilizing financial savings and maintaining systemic stability. Effective bank boards require the right structure, including independent directors with relevant experience, as well as proper conduct around agenda-setting, information sharing, and oversight of business strategy, risk management, and regulatory compliance. The document also summarizes recommendations from the Nayak Committee on comprehensive reforms to improve both public and private bank governance through changes to composition, conduct, and regulations.
TEST BANK For Corporate Finance, 13th Edition By Stephen Ross, Randolph Weste...
How to make Bank Boards more Effective
1. CALP: How to make bank boards more effective?
03 February 2015
2. Topics
•Criticality of effective board in banks – why banks
are different
•Making bank boards effective – key levers
•Some reflections on the Nayak Committee
•Breakout group discussion
3. Key themes for Public Sector reinvigoration
(MoF Presentation – 07 January)
•Autonomy with governance
•Efficiency
•Innovation and inclusion
•Ownership, capital, & consolidation
•Upgradation of HR
4. Bank governance globally, post the financial crisis
•Comprehensive regulatory review of banks and FI
governance
•Competence and capabilities in addition to “fit and proper”
•Board functioning
- Significantly more time
- Overview of operations
- Direct engagement with operating managers, unmediated by the CEO
- Deeper committee deliberations
5. Indian economy is highly bank centric
Note: Excludes Claims on govt.; total household savings data not available for ’91-’03, only split ratios available
Source: RBI
6. Why (Indian) banks are different?
•Only platform to capitalise economy - over 60% of
financial savings mobilised through banking
•Leverage & risk
•Connectedness – contagion, systemic stability
•Govt ownership – capitalisation – fiscal burden
7. Making boards effective
•Structure – Conduct – Performance
•Structure:
- Composition – independent, background and experience, etc
- Tenure
- Roles (Committees, etc)
- Separation of C & MD
•Conduct
- Agenda & Forum (Full board vs committees)
- Information
- Decisions
- Follow up
8. How to improve Board conduct?
•Agenda: getting the right issues
- 7 critical themes – business strategy, risk management, financial
(regulatory) reporting, compliance, customer protection, financial
inclusion, and HR
- Policy versus operational
- For decision vs information
- Committees vs full Board
•Information: Timely and accurate
- “Marked- to-model” MIS
- Relevant to the issue
9. Nayak committee
•Mandate: Comprehensive review of the functioning of bank
boards and other associated issues (ownership, regulations,
compensation, etc)
•Comprehensively covered issues of structure and conduct
•41 recommendations spanning 6 topic areas; covered both
public and private (new and old) bank boards
- Roughly a third each to be acted on by the government, the RBI, and
the board themselves
- Includes institutional changes such as creation of the BBB and the BIC
- 14 step process to create fully empowered boards in PSU banks
- Legislative changes and draft legislation