Good Corporate Governance-Its Importance for Banks and Challenges

Definition

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance deals with issues of accountability and fiduciary duty, essentially advocating the implementation of policies and mechanisms to ensure good behavior and protect shareholders. Another key focus is the economic efficiency view, through which the corporate governance system should aim to optimize economic results, with a strong emphasis on shareholders welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view, which calls for more attention and accountability to players other than the shareholders (e.g.: the employees or the environment).

Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board, regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority. The corporate governance structure specifies the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives.

Corporate governance is used to monitor whether outcomes are in accordance with plans and to motivate the organization to be more fully informed in order to maintain or alter organizational activity. Corporate governance is the mechanism by which individuals are motivated to align their actual behaviors with the overall participants.

How do we define “good” corporate governance?

Good corporate governance is about compliance and performance. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently. Studies have found that firms with better corporate governance characteristics tend to perform better. Stock returns of firms with “good” corporate governance practices are significantly greater than returns for firms with “bad” corporate governance practices. It also reduces expropriation of corporate resources by managers and lenders and investors are more willing to provide funds leading to lower costs of capital. Good corporate governance can be pointed as:

• Board members act in the best interest of shareholders.

• The company acts in a lawful and ethical manner in all their dealings.

• All shareholders have the same right to participate in company governance and are treated fairly by the Board and management.

• The board and committees act independently of management

• All relevant company information is provided in a timely manner

Objective of the good corporate governance

The primary objective of sound corporate governance is to contribute to improved corporate performance and accountability in creating long term shareholder value.

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.

Accountability: Accountability is a key objective of good governance. Not only governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. In general an organization or an institution is accountable to those who will be affected by its decisions or actions. Accountability cannot be enforced without transparency and the rule of law. In reality, the civil society must prevent itself from getting accustomed