A Critical Role of Corporate Governance System in Banks

Corporate governance in banks is a critical issue that has garnered significant attention in recent years. Banks are essential financial intermediaries that play a crucial role in the economy, and their stability is essential to ensure financial stability in the broader economy. Therefore, it is essential to ensure that banks are governed effectively, transparently, and in the best interests of all stakeholders, including shareholders, depositors, and society at large. The importance of corporate governance in banks has been underscored by the global financial crisis of 2008, which was, in part, a result of poor corporate governance practices in banks. In this essay, we will explore how different studies reveal the concept of corporate governance in banks, its importance, and the best practices that banks can adopt to ensure effective governance.

Overview of Different Concepts

Gabriella Opromolla discussed the new comprehensive regulatory framework containing guidelines on the organization and corporate governance of Italian banks. The paper highlighted the structure of the regulatory framework and the content of the rules, including rules on a bank’s choice of board model, a bank’s corporate governance project representing bylaws and internal organization, tasks and powers of governing bodies, composition of governing bodies, compensation and incentive mechanisms, and information flows. It was found that the new regulatory framework focused on the principles set forth by Basel Committee’s guidance and are similar to the recent prudential measures which assign a central role to corporate organization. The author suggested that the banks need to establish appropriate corporate governance arrangements, efficient management and control mechanisms aimed to support the risks to which they are exposed.

Y.R.K. Reddy studied the ethics of corporate governance from Asian perspective. The study was based on theoretical assumptions with the accepted international framework and standards. The authors highlighted the key developments relating to corporate governance in Asia; identified key structural factors and cultural influences in order to derive conclusions from these. It was found that there is a discernible overall tilt to stakeholders due to the dominance of state-ownership and the trust-based relationship-oriented paternalistic approach among family-controlled corporations. The stakeholder approach is demonstrated more by the newly globalizing firms due to the expectations of international financiers and the increasing competition for input such as human resources and output discerning consumer-markets. Asia has formally accepted the international standards of corporate governance, the requisite approach to prominent stakeholders, the contract and principle-based system conforming to the Western view. It was concluded that there is dualism of the culturally determined practices co-existing well with the international standards.

Mohamed Belkhir studied the relationship between board size and performance in a sample of 174 bank and savings-and-loan holding companies, over the period 1995-2002. For the purpose of analysis the author applied various statistical tools, which includes panel univariate analyses and panel data techniques. It was noticed that there was a positive relationship between board size and performance, as measured by Tobin’s Q and the return on assets. He further examined whether this positive association is due to the fact that banks reduce the number of their directors in the consequences of poor performance by testing for the relationship between board size and performance. The author found that that the number of directors leaving the board and the number of those joining the board for the first time increased following a poor performance, and the net effect in board size was not affected by past performance. The results suggested that the reducing the number of directors in banks might have adverse effects on performance of banks.

Mohamed H. Behery & Tarek Ibrahim investigated the relationship between the relatively strong banking industries and the values of stakeholder systems and compared the international successful stock markets systems of US and the UK with successful stakeholder systems of Japan, Germany, and most of continental Europe. The authors designed two separate questionnaires for testing the issues of reliability and validity. The questionnaires were prepared and responses were collected from loan managers and finance directors of selected banks. From the analysis it was revealed that the business loans managers see corporate stakeholders’ role in both decision making and running firm’s operations as equally important. To the contrary the finance directors differentiate between and among corporate constituencies’ role in the process of decision making. It was further observed that banks’ support to shareholders interests is positively associated with banks profitability and liquidity, banks support to suppliers’ interest is positively associated with banks’ profitability, capital adequacy, and asset quality, banks’ support to the creditors’ interest is positively associated with bank’s liquidity, banks’ support to unions, suppliers, and government relations is positively associated with bank’s liquidity, and banks’ support to corporate employees and managers is positively associated with bank’s asset quality. The report summarized that that banks’ performance is positively associated with their orientations toward fulfilling corporate stakeholders’ interests.

Shamsi S. Bawaneh examined how Jordan banking sector is affected by the Corporate Governance (CG) requirements released by Basle Committee on Banking Supervision (BCBS) and Organization for Economic Cooperation and Development (OECD). The authors highlighted that the organizational response to environmental change and the development in the use of control systems in accordance with organizational context and organizations and society are viewed as socially-constructed systems of reality. They used variety of methods in collecting evidence to get close to the subject and to see the bank’s social context from various perspectives, to gather more complete data on the issues and to generate a rich source of field data by utilizing the “data-triangulation” approach. Further many techniques were applied which includes interviews, participant observations, document analysis, archival records, and examination of newspaper reports. It was observed that corporate governance continues to gain attention and importance from parties concerned in the Jordan banking sector, because of many reasons like BCBS requirements, the financial crisis in some financial firms, as well as for the country as a whole. The government of Jordan involves in the banking activities by imposing restrictions, issuing specific regulations related to financial practices, and restructuring the banking system as a whole and this involvement may create unstable ground for future long-term planning for banks. It is concluded that the CBJ needs to advise banks not to take risks and to design an effective banking regulation and in order to design an effective banking regulation it is essential for the CBJ to have a clear picture of what are the benefits and what are the costs of regulation, and a good example of what happens if there is not a clear idea of the benefits and costs of regulation is the Basel agreements.

Alexandrina S.C. studied the corporate governance disclosure, analyzing possible influences over governance. He identified the possible associations between corporate governance features and the level of disclosure through annual reports in case of banking institutions listed at London Stock Exchange focusing on ownership concentration. His research was based on econometric analysis using statistical tools - correlations for identifying the relationships and regressions for assessing them. He interpreted that there is significant negative influences of ownership concentration on the level of disclosure and that the extent of disclosure is negatively associated with ownership concentration. He concluded that the higher the dispersion of shareholders, the higher the level of transparency.

Brahmbhatt et al. examined and compared corporate governance practices of private and public bank and to study the importance of governance parameters from investors and financial advisors perspective. The authors identified whether the banks follow and apply the different mandatory and non-mandatory parameters of corporate governance and analysed the significant differences in corporate governance mechanism and importance given to it by different company policies. They reported that major mandatory clauses are met with but non mandatory parameters are not integrated in the corporate system or either of the parameters are not disclosed in Annual Reports. It was further added that the possibility of enhancing the corporate governance capabilities through mandatory and non-mandatory governance norms leading to vigilant and transparent system and shifting major parameters of non-mandatory clauses to mandatory norm. 

Conclusion

In conclusion, corporate governance in banks is of utmost importance for ensuring that banks operate in an ethical and responsible manner. It helps to protect the interests of shareholders, employees, and other stakeholders, while also safeguarding the financial system as a whole. Banks that prioritize good corporate governance are more likely to succeed in the long term, while those that neglect it are likely to face legal and reputational risks. Overall, it is clear that strong corporate governance practices are essential for the health and stability of the banking sector, and must be taken seriously by all involved parties.