On June 11, Reserve Bank of India (RBI) issued a discussion paper recommending standards of governance at Commercial Banks. It recommended that bank boards should responsibly maintain the highest standards of governance.
The paper said, “In the context where management plays the role of an agent of a board and the board, in turn, plays the role of an agent of shareholders, governance failures have brought to fore the impact of the quality of governance on efficiency in the allocation of resources, protection of depositors’ interest as well as maintaining financial stability”.
This comes after nation’s two big private banks, ICICI and Yes Bank come under high controversy for failure in governance and management crisis perpetuated by their top board official – Chanda Kochhar and Rana Kapoor respectively.
RBI advised the bank’s board to have oversight over the code of conduct policy which would include issues such as explicitly disallowing illegal activity such as financial misreporting, corruption, etc. It said, “All stakeholders will have the means to raise concerns about ethical and legal issues in the bank. The board will have an oversight including approval of how, by whom legitimate material concerns shall be investigated and addressed. By an objective independent internal or external body or the board itself. Material concerns will be raised with the department of supervision. It added, “The ultimate responsibility for ensuring accountability for misconduct lies with the board. The board shall also oversee compensation that promotes prudent risk-taking, identify tools to address issues of misconduct”.
The paper also said, “The board will have to form a written conflict of interest policy. Review and approval process to ensure that directors are aware of what activities could lead to a conflict of interest. A director should abstain from voting or influencing in any matter where there is a conflict or the director’s objectivity is affected. Adequate procedures to ensure that all the transactions are taken on arm’s length basis”.
RBI advised that there should be a strong internal audit mechanism and vigilance system that would help the board in achieving its goal by ensuring that all transactions are carried out in a proper and legitimate way. It also said that the board should comprise maximum independent directors. And there should be not less than 6 and more than 15 directors on the bank’s board.
The paper said, “The board shall meet at least six times a year and at least once every sixty days. All meetings of the board should have a majority of independent directors and shall meet with a quorum of five members”. Adding, “It must be ensured that the minutes of the meeting of the board, as well as its committees, are so recorded that it shall be possible to appreciate the quality of deliberations including individual directors view on the matter, independence of directors, critical decisions made, dissenting views expressed and discussed within the decision-making process”.