CORPORATE GOVERNANCE INCREASE IN BANKING SECTOR

It is very difficult to run any organization without any strategic objective or corporate value.

SYED ALAMDAR ALI
June 25 - July 01, 2007

The importance of identification and treatment of risks, and adherence to corporate governance in Banking in the present era has increased manifold. The requirement of increased identification of each and every transaction routed through banking channels has increased with intensity. All banks in Pakistan have been directed to complete "Know Your Customer" (KYC) requirement before entering into banking relationship with any of its prospective customers. The Banks have been strongly directed to fill out a separate Form for the purpose at the time of opening the Bank Accounts that includes comprehensive information about the nature of client's business its income and expected turnover in the account. Any deviation from the information provided by the client is viewed by the banks seriously and the same is reported to the State Bank of Pakistan on priority. Furthermore, due to increased use of cross-border banking facilities the banks now are in need to cater the risks they have never faced a few years back. For instance, in a foreign currency translated lending transaction a bank may be facing all types of risks as have been identified to be catered by the International Convergence of Capital Measurements and Capital Standards' known commonly as Basel II, as also directed to be followed by the State Bank of Pakistan.

This increased appetite by the supervisory and controlling authorities to cater multiple risks has leaded the banks to promulgate the corporate governance in true spirit. The following are some important corporate governance practices that need to be followed:

ESTABLISHING STRATEGIC OBJECTIVES AND CORPORATE VALUES, AND THEIR COMMUNICATION THROUGHOUT THE ORGANIZATION:

It is very difficult to run any organization without any strategic objective or corporate value. Therefore any organization should design such objectives and values that will ensure smooth functioning of the organization from top to bottom in a corruption and bribery free environment. The same values should also be followed in external dealings. In this regard the Board of directors of the Bank should ensure that all the policies are implemented with good quality of corporate governance.

IMPLEMENTING CLEAR LINE OF RESPONSIBILITY AND ACCOUNTABILITY:

The rules of accountability and responsibility should be designed in such a way that they will include accountability for the board of directors as well. The management being answerable to the board of directors for the affairs of the company is responsible for maintaining hierarchy of powers and responsibility for the performance of line and staff functions.

RECOGNIZANCE AMONG THE BOARD MEMBERS ABOUT THEIR ROLES AND POSITIONS:

The ultimate responsibility about the operations and financial stability of the bank rests with the board of directors. In order to accomplish this objective the board members must be sufficiently qualified to exercise their judgments independent of the opinions of management, majority of shareholders and the government. This can be ensured by adding on the board qualified and experienced persons who are not the shareholders of the company, or forming a separate board of auditors. Simultaneously the directors should also periodically evaluate their own performance through identifying weaknesses and initiating corrective actions.

*The senior management should ensure that it is not overly involved in the business line decision-making.

*Any senior manager should not be assigned to an area where he does not have the expertise.

*Any senior manager should not be unwilling to control the competent employee(s) due to the fear of their turning over.

The Compensation approaches should be inline with the Company's strategic values:

In this regard it must be observed that no business managers is encouraged to exploit the compensation packages by focusing only on the short term profitability with no regard to long term objectives. Such situations can arise particularly in case of officers dealing in the stock market, money market, and loan department of the Banks. In order to avoid such situations any compensation package should be structured in such a way that it will be consistent with the Bank's culture, objectives, strategy and control environment.

TRANSPARENCY IN CORPORATE GOVERNANCE:

It has been rightly laid down in the Basel Committee's paper "Enhancing Bank Transparency" that it will be very difficult to hold the board of directors and the management of the bank accountable if there is lack of transparency in the accountability procedures of the Banks. This situation occurs when the various stakeholders, market participants do not receive sufficient information on the results, structure and objectives of the bank, with which to judge the effectiveness of the board and senior management governing the bank. Transparency can enforce sound corporate governance. In this regard the disclosure of public information is required in the following area:

*The size, membership, qualifications, experience and committees of the members of the board of directors and top management should be adequately disclosed in the annuals reports in order to bring only competent persons in supervisory and controlling positions.

*The basic organizational structure showing the clear powers and responsibility should be adequately disclosed.

*Information about the compensation, incentives and promotion structure should also be made public. The names of the persons who receive the incentives and promotions should also be made public along with their achievement, in order to increase the transparency.

*The nature and extent of the transactions with the affiliates and related parties should also be disclosed to make it transparent.