What is Corporate Governance?

What is corporate governance?

Corporate governance is the system of governing the organization in such a way that all the stakeholders feel the inclusiveness, equitable treatment, transparency in operation or degree of overall satisfaction on the working procedure of that organization. It is the relative term that can be felt but not found in corporate governance.

Principles/Elements/Dimensions of corporate governance

• Acceptance of law of land
• Disclosure & transparency
• Principle of consumer protection
• Principle of effective competition
• Principle of decentralization
• Principle of stakeholder satisfaction
• Principle of protection of minority of interest
• Principle of BOD oversight
• Principle of internal control

Factors Affecting Corporate Governance

Internal Factor

• Internal working procedure
• Fair remuneration and punishment
• Internal control/Dual control

External Factor

Various external factors affect the effective implementation and maintaining corporate governance.

Issues in External Contol of Corporate Governance 

Following issues are external control of corporate governance.

• No real-time supervision. The frequency of supervision should be increased so as to strengthen corporate governance.
• Lack of mass media literacy
• No inclusiveness
• Lack of public awareness

To maintain corporate governance effectively, internal control plays a vital role. In order to make sustainable B&FIs, internal factor should be improved.

Why corporate governance of bank and financial institutions is significantly important than other institutions?

• Banking sector stability is based on the other economic stability of the country.
• The banking industry is the catalyst to maintain the corporate governance of other entity as well.
• The banking industry is directly associated with international trade. The failure of the banking industry will negatively impact the import and export of the country.
• One of the pillars of the BASEL is corporate governance disclosure, transparency, and market discipline. That is why this corporate governance of B&FIs should be sound.
• There are multiple stakeholders in B&FIs such as a regulator, deposit holder, landholder among others. To balance the conflict of investment between theme is crucial which is possible only through sound corporate governance of the B&FIs.
• The bank works with other people’s money. A small risk or loss of goodwill may lead the bank towards bankrupt. That is why corporate governance soundness is essential for its sustainable goal.
• To control insider lending, related party lending, evergreening of loan and window dressing of balance sheet, corporate governance is a panacea.

Panacea – solution for all difficulties 

Why is the banking industry is the catalyst to other sectors?

Ans – The banking industry can be taken as a catalyst to maintain corporate governance of other entities because of

• While bank gives the loan to other entity, it demands TAX clearance, certificate, registration certificate, MOA, AOA among others. Which is the principle of acceptance of law of land by that company. Due to this bank indirectly impose those entities to accept the principle of corporate governance.
• While lending by bank it demands audit report, accounting practice, disclosure of the entity to which bank is lending. Which is the principle of transparency and disclosure of corporate governance.
• B&FIs use KYC, goAML software, anti-money laundering provision, threshold transaction reporting, suspicious transaction reporting, due to which corruption, money laundering and sources of the fund can be identified.
• While B&FIs accept the deposit or provide the loan, they demand decision minute of the company or entity. Which is the principle of participation of corporate governance.
• Besides the above factors B&FIs support to corporate governance of other industry by following corporate social responsibility, financial literacy, creating employment maintaining the rational use of fund that is lent by B&FIs among others.

So, we can conclude that B&FIs are an indirect catalyst to maintain the corporate governance of other entity and state as well.

What are the challenges of corporate governance in the banking industry?

Ans – Corporate governance is the system of governing the organization in such a way that all the stakeholders feel the inclusiveness, equitable treatment, transparency in operation or degree of overall satisfaction on the working procedure of that organization.

In the baking industry, the following challenges are taken as main challenges –

1. Policy relates challenges 

There are conflicts in the different policy act by law among others. For e.g the meeting of BoD of the bank from the provision of company act should be 6 times in a year and the gap between two meetings should be not more than 3 months. Whereas some issue set by BAFIA is at least twelve times in a year and the gap between two meetings should not be more than 2 months.

In some circumstances, policy corruption by external influences is the next challenges.

The weak transmission mechanism of meeting policy and other due to the less developed financial market, level of financial literacy among others.

2. Structural Challenges 

To develop the sound monitoring system with the best alignment in the federal system of B&FIs structure with the best alignment.

To return the current structure of classwise B&FIs in best alignment with sectoral economic policy.

To develop MIS based real-time supervision.

3) Regularity Challenges 

• To maintain corporate governance over the regulator itself.
• To segregate the owner of the bank user of the loan. i.e currently businessman and bankers are almost the same.
• To develop supervision information system of real-time.
• Empowering the supervision to know the all core banking system that is in practice in the banking industry.

4) Assess Quality 

• To control insider lending, related party lending, evergreening of loan to make B&FIs sustainable.
• To implement the practical provision of “not allowing the loan to family members having more than 1% share”.

5) Technical Challenges

• Implementing the provision of governance.
• Developing the mechanism of controlling IT risk during the implementation of the monitoring system.
• Implementing system audit regularity.

6) Other Challenges 

• Increasing financial access, inclusion, and literacy.
• Protecting the deprived people and consumer protection from bank discrimination, over-pricing of banking products.
• Maintaining financial awareness ar university and school level curriculum among others.