Reward and Accountability of Directors
The Ganguly Committee appointed by the Reserve Bank of India has rightly observed that the present remuneration in the form of sitting fees is quite low for the work expected of directors. One way of rewarding them is to give them a share in the profits and another is to give them share options in the bank.
The committee has suggested share options. Of course, there is one danger that, like some of the top managers in failed companies in the US, the board might pursue short-term profits at the expense of long-term stability; in some cases, there could be a temptation to boost profits by manipulating accounts.
One possible way of curbing it is to stipulate a lock in period of 3 or 4 years for such share options. A question may arise as to weather the nominees of RBI and government should be entitled to such remuneration.
The answer is that the Reserve Bank should not have their nominees at all, as suggested by the second Narasimham Committee on Banking Sector Reforms, because a regulator cannot don the role of a participant also.
Government should preferably withdraw their nominees from boards of public sector banks and monitor performance only through periodical reports.
It is a recorded fact that many such banks faced massive losses, even when government and Reserve Bank nominees were on the boards.
If directors are remunerated on the basis of their performance, they should also be held accountable for non-performance.
Almost all the expert committees aver that the directors are accountable to shareholders, but none seems to spell out what it means.
Peter Drucker is blunt in saving that “without financial accountability, there is no accountability at all”.
Thus, if the bank incurs losses over a period or faces sudden collapse, the directors should be made financially accountable.
The least that can be done is to ask them to repay the bank a multiple (3, 4 or 5 times) of the money earned by them from the bank in the past few years.
It is realised that this is a very crude form of fixing accountability, but a beginning ought to be made in crystallising accountability of directors in some concrete form.
To sum up, effective governance of banks must have the following minimum criteria:
The basic objective of governance should he safeguarding depositors’ money and optimising shareholders’ interests.
The directors should be competent and persons of integrity.
As a general rule, the board should ask the management to spell out as to when a transaction, especially in derivative products, could result in losses and take a view on the probability of incurring the losses.
On the basis of the overall risk appetite of banks, the transaction may be approved or rejected.
Suitable risk and reward system should he put in place for the directors of banks.
The Ganguly Committee appointed by the Reserve Bank of India has rightly observed that the present remuneration in the form of sitting fees is quite low for the work expected of directors. One way of rewarding them is to give them a share in the profits and another is to give them share options in the bank.
The committee has suggested share options. Of course, there is one danger that, like some of the top managers in failed companies in the US, the board might pursue short-term profits at the expense of long-term stability; in some cases, there could be a temptation to boost profits by manipulating accounts.
One possible way of curbing it is to stipulate a lock in period of 3 or 4 years for such share options. A question may arise as to weather the nominees of RBI and government should be entitled to such remuneration.
The answer is that the Reserve Bank should not have their nominees at all, as suggested by the second Narasimham Committee on Banking Sector Reforms, because a regulator cannot don the role of a participant also.
Government should preferably withdraw their nominees from boards of public sector banks and monitor performance only through periodical reports.
It is a recorded fact that many such banks faced massive losses, even when government and Reserve Bank nominees were on the boards.
If directors are remunerated on the basis of their performance, they should also be held accountable for non-performance.
Almost all the expert committees aver that the directors are accountable to shareholders, but none seems to spell out what it means.
Peter Drucker is blunt in saving that “without financial accountability, there is no accountability at all”.
Thus, if the bank incurs losses over a period or faces sudden collapse, the directors should be made financially accountable.
The least that can be done is to ask them to repay the bank a multiple (3, 4 or 5 times) of the money earned by them from the bank in the past few years.
It is realised that this is a very crude form of fixing accountability, but a beginning ought to be made in crystallising accountability of directors in some concrete form.
To sum up, effective governance of banks must have the following minimum criteria:
The basic objective of governance should he safeguarding depositors’ money and optimising shareholders’ interests.
The directors should be competent and persons of integrity.
As a general rule, the board should ask the management to spell out as to when a transaction, especially in derivative products, could result in losses and take a view on the probability of incurring the losses.
On the basis of the overall risk appetite of banks, the transaction may be approved or rejected.
Suitable risk and reward system should he put in place for the directors of banks.