CORPORATE GOVERNANCE AND FINANCIAL SECTOR
- Kuchibhatla Prasad
Respected Ladies and Gentlemen:
Introduction
It gives me a great pleasure to be with you all to-day after a gap of one year. Last year I was discussing about “Micro Finance” and expressed and shared with you some thoughts about lack of transparency in the dealings of certain Micro Credit Institutions which is akin to “Sub-Prime Lending”. This year I requested Dr. K. S. Kameswararao Garu to allow me to speak on “ Corporate Governance and Financial Sector” mainly on two counts namely (a) I teach students “Corporate Governance” and (b) the people generally complain especially elderly people that “values” have lost relevance in the present day context. I too have realized that in all walks of life, the value systems have undergone terrible change. The corruption and cheating have become a way life since the last two decades leading to degradation of services offered to common people at large, especially in banks for a variety of reasons . Further, of late, many corporate governance issues have come to the fore not only in corporations but also financial institutions in India but also across the globe leaving behind a trail of blood bath in markets with full of omissions and commissions especially in the Financial Sector.
Background
In the recent past you must have seen how investors of Satyam Computers Ltd., had been taken for a ride by the Promoter Directors and other ‘Independent’ Directors. You had also witnessed and read about melting down of financial markets in US, Europe and else where requiring US Government to pump in 850 Billion US $ to bail out financial institutions and other Corporate bodies in just one tranche. Similarly in Europe the Governments and Central Banks often injected liquidity. The market losses are likely to run into trillions of US $ globally. Financial Institutions and Banks went into liquidation, mergers etc. All this is attributed to the devil of “Sub-Prime Lending” in US and its consequent impact on Financial Markets all over the world since we now live in “Globalization”. Millions of people are losing their jobs as mighty financial institutions fell like houses made of cards. The impact of these developments reverberated in the job markets of India and growth prospects are reassessed. There is an all round mood of frustration and despair. The best rated Financial Institutions and personnel could not save the institutions. “Citi that never sleeps” is put to sleep now and investors lost heavily and US Govt. is contemplating to increase its equity holding to 36 per cent. Indirectly, from the Mantra of “Privatization” the world seems to be moving to “Nationalization”- or greater control, supervision and regulation.
Corporate governance
I will firstly deal with the principles of corporate governance and connect it to ethical values. Secondly, I will briefly discuss the Financial Sector in general and then financial institutions and their problems and then try to explain whether it will be feasible to have corporate governance in financial sector and if so, what could be done.
What is Corporate Governance?
The Fundamental objective of Corporate Governance is the sustainable enhancement of long term value of share holders while at the same time, protecting the interests of other “Stake Holders’. It does, logically, conclude that the Management is accountable to “Stake Holders” since the affairs are conducted by it.
It is an accepted principle that for a business to thrive and operate smoothly, the business or organization has to maintain healthy relationship with all stake holders. The stakeholders of business are, apart from shareholders, employees, creditors, suppliers and customers. A good relationship has to be developed with the stakeholders through trust the enterprise or organization creates. The trust develops, generally, when organization or enterprise through its practices provides the following three important elements namely, Dependability, Predictability and Faith.
Dependability indicates that the actions of the Organizations can be believed as far as performance of the enterprise is considered. Predictability generally eliminates unforeseen actions. If we are not in a position to predict with a fair degree of certainty, it would be difficult to carry on business activity. When an enterprise develops these two elements of Dependability and Predictability, automatically, faith in the Enterprise/ organization develops because we develop a belief that the enterprise or business will continue to be predictable and dependable. If these three elements are available there will be scope for sustainable business or growth.
Ethics and Corporate governance
Ethics and Corporate governance have many things in common. Ethics mainly deals with individuals and their behavior in the society and Corporate Governance is a mere extension of individuals’ behaviour to stake holders and with a longer term perspective.
The word ’ethics’ is derived from the Latin word ‘ethicus’ meaning character or manners. This could be also extended to the concept of right and wrong behaviour (dharma and adharma). As such, ethics deals with morals, moral principles and recognised rules of conduct. The character of a person or an individual expressed in terms of his conduct or action. Similarly, the conduct or actions of corporate also will decide whether they are moral or immoral in their behaviour towards its stakeholders.
Ethical organization
Organisations have to strive hard to be recognised as ethical organisations in the eyes of stakeholders. The ethical nature of a corporate can be gauged on the basis of:
a. Corporate moral excellence
b. Corporate ethics and responses to stakeholders
c. And finally, ethics and corporate governance.
Evolution of Corporte Ethics-stages:
The stages of evolution of corporate ethics and governance are:
a. rule of jungle, in which all fight for survival of the fittest and weak organisations lose in the end;
b. do anything for immediate profit- the only value
c. profit maximisation in the short term
d. profit maximisation in the long run
e. stakeholders concept
f. and corporate citizenship
In other words, these stages could be depicted as stages of ethical consciousness in business. These stages are important to recognize the state of the organisation or sector- because man is greedy and selfish in dealing with others. As the business transactions have to be carried either as Proprietary/ Partnership firms or Corporations, the behaviour of individuals is very important. You may, in the context of first stage, recollect the Social Contract philosophy. It is the rule of jungle and in same way the enterprises are operated. In the next stage, the human behaviour relating to business indicates that individuals are prepared to do anything for the sake of profit which is most applicable to proprietary, partnership concerns and corporations. . Similarly, in the next stage, there is a desire to maximise profit in the short run so as to obtain higher benefit from the business transaction. In the next stage, the philosophy of the corporate is maximising the benefit in the long run or indirectly having sustainable business or growth aiming to live longer as a business entity. In the next stage, which is with increasing participation of general public to meet the financial requirements, stake holder concept has come to play a major role. Ultimately, the corporate should become a corporate citizen. - that is, it should become a part and parcel of the stakeholders or integrate its corporate philosophy for the betterment of the stakeholders. All businesses exist and operate within the society/societies and as such; they need to contribute to welfare of society in order to be sustainable.
Issues in Corporate Governance
Corporate Governance practices are a set of structural arrangements that are emerging in the free market economy to align the management to the company with the interest of shareholders and other stake holders and society at large. Corporate Governance addresses the three fundamental issues:
• Ethical Issues
• Efficiency issues
• Accountability issues
Ethical issues are connected with the problem of fraud, which is becoming wide spread in capitalist economies. Managements often employ fraudulent means to achieve their goals; the corporations may resort to unethical means like bribes, lobbying under cover of Public Relations and, gifts to potential customers in order to achieve goal of long term profit maximisation. Efficiency issues are concerned with the performance of managements, who are responsible for ensuring reasonable return on investment for shareholders. Accountability issues relate to need for transparency in conduct of business. As the business transactions of a corporation influence the workforce, customers and society at large, the accountability issues also relate to the social responsibility that a corporation must shoulder. Further the management is also accountable to
o Growth of companies
o Institutional investors
o Taking care of hostile activities of predators
o Insider trading
o Litigation against directors
o Restructuring of boards
o Changes in auditing process
Structures of Corporate Governance
Anglo-American model:
In this model shareholders elect the board of directors and these directors take up the advisory role. The Board performs three functions on behalf of the shareholders namely: representation, direction and oversight. In this structure of Governance, employees , suppliers, and creditors constitute the group of stakeholders. The Directors elected and appointed, make the policy of the corporation which is then implemented by the employees..
German model:
In this model, the shareholders do not directly control the governance mechanism- half of the members of the supervisory board are elected by the labour unions, the remaining by shareholders. The employees are not just stake holders but also have a say in the governance mechanism
Japanese Model:
In this model, the financial institutions have a major say in the governance mechanism; the shareholders along with banks appoint the members of the board- the banks have even power to suspend the board in case of emergency.
Indian Model:
The Indian model of corporate governance is a mix of the Anglo American and German models, with an over reaching power to the governments to intervene and replace the board of even non-Government companies in case of crisis which is more of an exception than routine. The corporations in India can be grouped into three namely, private companies, public companies, banks and other corporations- in case of banks, there are government banks, private banks. In case of public sector banks, the directors are nominated by the Government as per the statutory provisions. The CEOs or the CMDs are also appointed by the Government and the Board of directors has no right to remove the CMD.
Evolution of Corporate Governance
Earlier, the governments were expected to ensure good corporate conduct. Shareholders were of the opinion that stringent government controls and regulations would be able prevent malpractices by the corporations for fear of punishment. However, there was a growing realization that government’s control can not be a guarantee for preventing the malpractices and it may not be the best guardian of public interest. Shareholders began to advocate for market-driven corporate governance standards that would be more democratic and flexible. This has led to the birth and rise of self-imposed corporate governance or self-regulation. Through active participation of various stakeholders like shareholders and financial institutions, the corporate governance was strengthened. The factors that contributed to evolution of corporate governance are
• Responsibility for ensuring good corporate conduct shifted from government to a free market economy
• Active participation of High Net Worth ( HNW) individuals channeling through institutional investors and hedge funds
• Increasing competition in global economy.
Let us now examine the Financial Sector and to what extent the Corporate Governance Principle have been implemented in the Indian context.
Financial sector :
The financial sector is one which includes financial institutions both development and others, banks, including urban and cooperative banks and non-banking financial companies (NBFCs) The Financial Sector in India and else where developed over a period of time . Initially, in India we have followed the system of banking and its practices followed in UK. The importance of financial institutions has been recognised long before and they are known as the ‘engines of development’ or’ drivers of growth’. They are also depositories for savings of societies. In other words, they act as custodians of wealth for the people and thereby the nation. Any wrongdoing by these financial institutions directly and indirectly effects the country’s financial position. Dependability, Predictability and Faith were recognized as important ingredients . As such, the banking industry used to recruit persons with high integrity.
In view of the importance attached to financial institutions, the actions of these institutions are guided by laws framed by the governments, for regulation and supervision. For better regulation and supervision, the affairs of these institutions are put in the hands of regulators in order to promote an orderly functioning and stability of growth. If these institutions are answerable/ accountable to stakeholders, that is, depositors, borrowers, shareholders, and other creditors, the corporate should be fair in their behaviour. These formal institutions are formed and nurtured, regulated and controlled to some extent by the governments, at the cost of a banking crisis translating into an electoral crisis is. Whatever be the color of the government or its leanings- may it be national or sub-national governments, these institutions have been used to achieve the political ends. This resulted in the culture of directed lending, Loan Melas and periodical loan waivers followed by recapitalization of govt. banks which is an unaccounted form of deficit financing. The last one was the Loan Waiver amounting to Rs.70,000 crore.
Despite the existence for about 60 years, banking industry in India could not replace the informal money lenders who charge exorbitant interest rates making the poor much poorer. Further, the banks in India have been lending at cheaper rates (subPLR) to big industrial houses at the cost of small and medium enterprises and tiny sector. The elitist models of financing resulted in low cost of servicing and subsidization of credit to big industrial houses at the cost of millions of small people who are deprived of credit facilities.
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Crucial Developments in financial sector
Financial Institutions and Banks and Corporations have been around for a long time. The banking had undergone considerable change from the year 2000 in India and 1980s in US and elsewhere. This is mainly because the intermediation -that is collecting deposits and lending between savers and users had come down because of availability of cheap funds in overseas markets through Euro Dollars and also development of capital markets and other institutions like mutual funds etc. In India, consequent to adoption of “New Economic Policy” and Financial Sector Reforms, the banking and insurance sector was opened up both for foreign and Indian players. This has resulted in the banks deriving more of their income from investment and other activities than their core activity of intermediation, which was becoming gradually unviable resulting in banks taking up the activities which were hitherto restricted, like allowing the financial institutions to increase their flow of funds to stock markets for primary and secondary sales of shares and also increasing their trading book for dealing in securities and also foreign exchange etc. These developments and changes helped HNW individuals and Corporations to play in the markets and increase their earnings
Consequently, the trading book gained importance at the expense of banking book leading to banks being exposed to market uncertainties (risk) or allowing the banks to speculate with the trading book activities (securities and currencies). The banks found an easy way to make money by speculation with borrowed funds and in some cases the borrowers too encouraged to take this route. It may be mentioned here that banks in US were prohibited from dealing with investment activities and also lending for long term investment as per Glass-Seagull Act. In India, the distinction between long term lending and short term lending was blurred with the demise of Development of Financial Institutions and the long term lending hitherto undertaken by development financial institutions, was also taken up by commercial banks with the help of financial engineering creating a sort of natural mismatch between maturity structure of assets and liabilities. This allowed the commercial banks with the help of mathematicians and statisticians to come out with new financial products which were also offered and traded freely in the financial world with a certain element of speculation. Aided by new technologies, the institutions entered into speculative deals in foreign exchange and other allied securities markets. The reluctance of Central Banks to allow non-Banks to enter some of these areas or give less leveraging to non-Banks entering these areas when allowed had a lot to do with banks entering these more risky areas, as they had a monopoly in the financial sector and they discovered arbitrage profits in the process.
The root cause of the problem is to some extent attributable to shrinking of banking business and becoming unviable. Most of the banks have developed expertise for bulk lending and small loans financing was never tried seriously. And, because of the ability of leveraging and collection of deposit facilities, the financial institutions found out new ways like franchisee models to increase the operations and thereby making profits to survive in the business. As we all know, while market risk is increasing, the uncertainty will also increase and losses are likely to be abnormal. Further, profits from trading are in the nature of zero sum game and some one has to lose when someone gains and the gains are equal to losses. Thus the regulators with a view to increasing the competition exposed the banks more and more towards speculation. The insurance companies also opened up and entered into trading book increasing the participation of financial institutions- the failure of AIG in US is attributable to shifting to this market operations. It may not be out of place to mention that out of new private sector banks, three went for voluntary amalgamation (Times Bank, Bank of Punjab and Centurion Bank) and there was meteoric rise of New Private Sector Bank from Andhra Pradesh soon to be followed by its downfall and merger with another Govt Bank (GTB-OBC). We had also witnessed the failure of Urban Cooperative Banks on a large scale and also of big non-banking financial companies (NBFCs) causing difficulties and distress to lakhs of investors and depositors. These developments mostly took place in the period just after introduction of New Economic and consequent introduction of Financial reforms. The Financial Reforms coincided with (in India) the process of deregulation by Reserve Bank India.
The banks also were encouraged to lend freely by way of retail loans or personal loans for purchasing cars, luxury goods and other consumer goods to increase the consumption patterns of the people. The personal loan segment also increased considerably where there was a scope to charge reasonably high interest rates (credit cards) when compared to corporates who were demanding sub-PLR rates of interest. The process of deregulation was completed and banks were given freedom to make their own policies and implement the same albeit with certain amount guidance from RBI. With the process of deregulation, and adoption of NEW ECONOMIC POLICY a stage has come where three ingredients namely Dependability, Predictability and Faith gave way to profit making at any cost and Social Responsibility of banks was laid to rest. The banks were allowed to access foreign currency loans to provide cheap loans to industrialists and others. With the increase in liquidity, the interest rates had come down and uncertainties mounted because of plugging our economy with global economy. With deregulation, the importance of Corporate Governance in Financial Sector was realized and banks’ Directors were requested to understand and implement Corporate Governance Principles by banks controlled by Government.
Stake holders
The stake holders of the Financial system are institutional as also individual depositors and borrowers i.e., you and me. Apart from this, we also have “Central Banks” of the countries who have been given powers to regulate and supervise the affairs of the financial system. So even Reserve Bank of India (in India) could be treated as one of the stake holders along with others described above. Last but not the least, are the governments from local to the national level who are the enforcers of the rule of law which is essential for corporate to exist. As participants in the Economy, we all should have full confidence and faith in the banking system and sanctity of banking transactions. You will appreciate that this should be possible only when, all institutions participating in the Financial System, adhere to the ethical principles and Corporate Governance.
Unfortunately, the depositors do not have faith in Banking system for a variety of reasons. Similarly the borrowers too lost faith because of failure of credit delivery system especially in case of small borrowers and lack of transparency and coercive methods used in collecting the dues from defaulters . This even forced Honourable Supreme Court to pass strictures. Further, the banking system has not responded favorably towards small borrowers (micro credit) resulting in NGOs to step in and do the job of lending. The Financial Inclusion extended only lip sympathy.
There are number of financial institutions spread all over India including rural areas. Now the question to be asked is whether we can have all the participants in Financial System with good internal Management, Governance and Accountability structures? Without viable and accountable alternative structures, removing controls and allowing self regulation is a dangerous thing in emerging markets.
Corporate governance in financial sector:
I remember to have read from a speech of Shri Vepa Kamesam, former Deputy Governor of Reserve Bank of India, that Hyderabad was a seat or temple of learning having prestigious Management Institutions and others. Unfortunately, from the very place we had seen the worst ethical behavior of Corporate Directors, and prestigious Audit Firm having International repute. The damage caused is not small but enormous in terms of financial losses. The trust reposed by investors and other stake holders on the Indian
Managers and Auditors and Corporate Governance took a severe jolt resulting in international community having lost faith on Indian business which certainly takes time to heal.
Ladies and Gentlemen, you must have seen the pundits and experts claiming that lack of proper Corporate Governance and failure of Independent Directors on the Board of Satyam Computers to monitor the affairs of the company and negligence on the part of Company’s Auditors to audit the accounts and collusion with promoters were mainly responsible for allowing the Directors to siphon off funds. The Investors of Satyam computers lost their money invested and the employees of the company and also customers had to face uncertainty and the corporate governance has come to be questioned by investors overseas.
Executive Compensation Policies and corporate misdemeanors
With the opening of Trading Book, Financial Institutions started offering attractive packages and bonuses and incentives for achieving the profits. The targets and incentives and other benefits tempted the educated people to opt for the job of traders with banks and broking houses. Consequently the disparities started showing up between the employees of banks. Corporations and banks started offering high salaries and perks to retain these people who could not find or think what was happening. We have seen how Nick Leason manipulated the deals or trades and showed artificial profits and when the bubble burst, the oldest institution in UK went into liquidation. In US and Europe, the financial melt down was attributed to greed, lack of regulation or failure of self-regulation and supervision and failure of risk Management practices. But the truth is what happened was only fraud perpetrated in a concerted manner to cheat the investors and others
It may be recalled that the former chief executive of Royal Bank of Scotland Sir Fred Goodwin went on buying up other banks and insurance companies at top dollar prices funded by massive borrowing which proved to be disastrous when the market turned down. Even in 2007 when early signals of market meltdown were visible he went on a buying spree. The mistakes were huge and the bank had to be bailed out by the Govt, and last month, the bank reported a loss of 24 billion pounds, the largest loss ever reported by a bank in corporate history of Europe. . Now the bank has become a nationalized bank. Sir Fred was compensated for his mistakes by providing a life pension of sterling seven lakh (700,000) pounds per year for the rest of his life. Many business executives and senior public servants have generous pension schemes. And in case of mergers and acquisitions top executives ensure attractive retirement benefits for themselves. It may not be out of place to mention here that some of our own Indian banks have opened offices overseas and some other had plans to acquire foreign banks when the banking business is dwindling and without fulfilling their commitments to the country where the banks are established. The main attraction for all these banks is only to visit foreign countries and make money. . We have seen already how ICICI Bank suffered losses by investing in Collateralised Debt Obligations based on sub-prime securities. Even in 1980, most of the Indian Banks having overseas operations had suffered losses and ultimately some branches were closed down. We have not learnt lessons and Executives of banks project a rosy picture.
We may recall here that Tatas went on a buying spree and purchased Corus steel and at a very exorbitant price at least six times the market valuation. The media in India hailed the purchase as one of the best buys without realizing the implications. There were many corporates in India too who went for acquisition of foreign companies. Who lost the money? And who gained? Investors or shareholders of Tata lost heavily and the investors of Corus gained. There is another tribe in this deal who gained- The investment banks and their executives who received bonus and incentives. The US Government indicted “Wall Street” guys for this type of behaviour. Whatever may be the reason, it is ultimately the stake holders who suffer in the long run and so called financial experts drawing fat salaries, allowances bonuses etc., continue to enjoy the same facilities.
What was told in the beginning of 2000 in India and late 1990s in Europe and US was that it would be difficult to operate both for public and private sector and to function and survive without adopting the best standards of Corporate Governance in global economy. Time and again the common man was assured that with “Corporate Governance” the FDI would flow and thereby business activity would increase. Awards were given to persons for implementing high standards of “Corporate Governance”. However, the persons who received the award were proved to have not at all followed corporate governance principles. Despite assurances, from various agencies, there had been failures and lapses in corporate issues but the regulators slept over the same peacefully waiting for the dooms day and in the mean time helping speculators to make more money (profits) at the expenses of common man .
What happened to our “Corporate Governance” and ‘best’ Risk Management Techniques and models? Corporations, including financial sector, spent tons of money on the models just to satisfy the regulators and supervisors ignoring to improve ethical values and corporate governance culture among management, workers, and other stakeholders.
What makes it topic of interest for the day?
Why suddenly the Issues of Corporate Governance are again being raised especially for “Financial Sector”? It is because of the total failure of philosophy of “deregulation” or “self regulation” and also losses suffered by gullible investors. Further, it is the failure of Governments and Central Banks of the various countries in world which necessitated rethinking on the philosophy of de and self regulation. Now the noises are being made to reverting to old philosophy of “Regulation” and “Controls”. The philosophy of “Deregulation” and giving full freedom to private sector being practiced since the last 30 years and odd in US and Europe is not finding many takers now.
Having said so, I would like to dwell upon the following aspects: - briefing you on
a. Genesis of corporate governance
b. Evolution of corporate culture
c. Deregulation / regulation, and
d. Failure of corporate governance at all levels
I would also like to touch upon whether it is good to have regulation and supervision instead of deregulation.
The need for corporate governance
The financial sector is generally faced with a wide range of complex risks relating to credit, liquidity, exposure concentration, interest rate, exchange rate, settlement and internal operations. I am not going to discuss in detail the various other risks including internal control etc. because general public are not interested. The interest of the public from the financial institutions is availability of credit to people in need of credit, reasonable interest rates, reasonable service charges etc. Further, the objective of Central Bank of a country is to provide need based credit for productive and other purposes to ensure growth and thereby employment. The Financial sector in India unlike other Western and European countries, is composed of public and private enterprises. As long as there is protection, controls and regulations, the institutions can not become competitive and efficient for offering excellent services to customers. Indeed, the financial institutions realized that if they have to survive, they should become independent and offer best services at reasonable charges. However, the need to earn profits by these institutions resulted in charging un reasonable and unfair service charges which affected the small and medium borrowers. The fear of NPA has made banks to look for alternative short term gains through financial products and deployment of credit also received a set back and loans started flowing to credit worthy borrowers having good cash flows at the neglect of small people. In order to recover loans, banks, emulating the example of certain foreign banks, started having recovery agents who in turn used coercive measurers All these factors resulted in the financial sector being criticized for not having human face when it comes to the question of recovery of loans and advances from their borrowers. The more emphasis on trading book to some extent resulted in a sort of Financial War Fare and big people fight small get affected. The financial Institutions had taken aggressive postures in increasing their positions without realizing the ground realities.
Corporate warfare
Sometime in the nineties, with the introduction of new technologies, it was made easy for fund transfer all over the globe. The impact of this was greatly felt on the emerging markets where the forex markets determined the forex rates based on demand and supply. These institutions were gunning for free trade, liberalization of financial sector, and
deregulation so as to create an atmosphere, or an environment for speculators to enter and trade through them; This had given lot of leverage for the speculators as well as banks to play in the market and make the bucks at the expense of the emerging markets who were starved of foreign exchange for having real economic transactions and this created special arbitraging opportunities for investment banks given the fact that non-banks could not enter those areas like offering derivatives.
Three decades ago, sometimes in 1980, multinational banks like Citi Bank, Bank of America ABN Amro, Deutche Bank, Morgan Stanly, HSBC, Stanchart etc., tried to expand their operations with a view to increasing their operations, and earning more and more profit in emerging countries or developing countries, (as these banks found the operational model based on core business of intermediation much less profitable) and developed more profitable offshore operations with funds not accountable to any central bank. For example, a looming currency crisis in countries where capital account convertibility is introduced (like Thailand) was a guaranteed opportunity for making profits for these banks, as the reactions of central banks of emerging economies and their propensity and limitations to intervene in a currency crisis is more or less predictable by these banks. (And where exchange controls were in place, the schemes like FCNR and FCBOD where exchange risk is born by Central bank of host country were guaranteed money spinners with a one way movement of rupee for these banks); Their only unknown variable in the matrix is the responses of their own competitors, like hedge funds, which was also to some extent predictable, given the fact recruits to these competing banks were educated more or less by same institutions and operating on the same statistical models for risk measurement. In this corporate warfare for pursuit of profit whoever was the winner, corporate governance was the sure loser, the world as a whole poorer with guaranteed bouts of massive leveraging followed by equal deleveraging (Lehman brothers) leading to bubbles and their eventual bursting, recession and periodic crises, the profits of some corporates being the losses of other corporates. (like Bank of America gobbling up Morgan Stanley dirt cheap)
At the same time, the investment banks like Lehman brothers, Meryll Lynch, Goldman Saccs etc have found an ideal situation to make money-a killing- by providing investment opportunities. At the same time, the ethical values of the society have been going down and with deregulation and liberalisation, the concept of profit at any cost has emerged a key factor driving the economy and the investors as a whole. The stock markets have been manipulated and new financial products evolved. The philosophy of Banking and Development Finance essential for growth of economy have given way to trading of securities and other financial instruments developed by mathematicians and statisticians based on certain assumptions and which could not be understood by ordinary people and sometimes even regulators. The complexity of the financial products and faster movement of foreign currency across the globe has put lot of pressure on the central banks in curtailing or managing liquidity and also foreign exchange rate. Reckless lending increased toxic assets which were of no use.
It was said that Alan Greenspan, Governor, Fed Reserve, has created knowingly the housing bubble, which, though pushed up the service sector earnings but damaged the real economy leading to instability and financial chaos globally. All fingers are pointed towards the regulators who deliberately agreed for deregulation without having checks and balances in position. Though Indian Financial Sector has shown resilience it is still doubtful to what extent the bubble of NPAs is being hidden by Indian Banking systems
It is evident that without firm corporate governance, even though having rigorous regulations and supervision in place, financial sector many not be in a position to sustain its growth and participate in the development of society. Financial Sector is essential to the well being of an individual company and the stakeholders particularly shareholders and creditors . A sound governance is a critical ingredient in maintaining a sound financial system and a robust economy. That is the reason why governments all over the world are focusing their attention on the corporate governance failure. In the case of Satyam, we had seen how the ministry of company affairs has stepped in to help in resurrection of the company. As such in the financial system, corporate governance will continue to be one of the key factors that determine the health of the system and the ability to survive economic shocks.
Secondly, exorbitant interest rates on credit cards and service charges on various financial products will harm the financial sector. . Though the central bank of the country is concerned with the banking sector or the financial sector facing various risks, the common man who is a stake holder by virtue of being a citizen of the country is concerned with his own well being: it may be noted here that banks are generally treated as lenders of umbrella when it is not raining and taking back when it rains. In the rural areas we witness innumerable number of suicides as the borrowers fail to pay the loans. Who is responsible for all this mess? On the one hand, we have banks giving their money in large quantities to the people who never needed it and thereby creating resource constraint to the borrowers. Suicides are committed by small farmers who do not have adequate savings to support crop failures and also not to be disgraced in the society by recovery agents.
The central bank of the country who are responsible for regulation and supervision have given importance to protection of depositors, creditors but not to the borrowers and the woes of the borrowers especially small and medium have not been addressed properly and attention of the central bank was and is mainly on financial stability resulting in big people taking away chunk of the money even in times of crisis. The common people continue to suffer.
In the recent meltdown, the government and central bank have injected trillions of dollars just to prop up the banks and bring in financial stability. Common man lost their savings, pension funds etc..
The corporate governance in the financial sector mainly relate to the following issues:
1. management
2capital position
3.concentration of credit exposure to individual counterparties
4. asset quality and provisioning
Interest rate, exchange rate and equity
It is often argued that financial distress episodes in a number of emerging economies have been caused by excessive exposure of concentration, directed lending, lending to connected parties, poor credit policies, and inadequate management of foreign exchange risks..
Some points to ponder
When majority of stake holders are unhappy can the institutions survive? Can a climate of repeated recapitalization nurture good corporate governance standards?
Is it possible to have corporate governance in the globalised environment where ethical values are at discount both with the general public, regulators, and government agencies?
Can we really have islands of corporate governance in corporations in an ocean of corruption in government circles?
How do we generate people of impeccable morality in corporates where morality is seen as a sure impediment to making money that is associated with failure?
Can a sub-culture of corporate governance evolve in a culture where corporate governance is seen as ‘some stuff to do with filing of papers with SEBI’.
How can talented pool attracted to educational institutions rated on the basis of compensation packages and geared to advertising prestigious placements devoid of any strong respect for human values turn out ethical corporate citizens? Can the culture of directed lending and periodical loan waivers promote corporate governance ?
All is however not lost; the presence of some oases of industrial houses and schools of excellence gives us some signs of hope in an ocean of despair.
Ladies and gentlemen, I conclude that nothing is lost yet. Financial sector stability is more important for the world to prosper. As we are all stakeholders, we should try to develop Corporate Governance in true spirit . Reserve Bank Of India had already taken action in formulating a “Code” Codes and Standards for banks through Banking Codes and Standards Board of India to promote a set of rules and declaring in what fashion they would like to deal with customers. On our party we should give more importance to values –ethical values- evolved through the good work of philosophers. Ethical behaviour should become a way of life. Lets us work for it.