Banking Sector- True Corporate Governance is the Only Way Out
A recent research paper by the National Stock Exchange (NSE) on Corporate Governance and market valuation concludes that better corporate governance practices elicit premium valuation.
This article is the third one in the Corporate Governance and real practices in Indian scenario. We recommend a reading of the previous articles Corporate Governance in Indian Banks- A Revisit and Measures to Ensure Corporate Governance in Indian Companies, before proceeding.
Incidentally, all the companies in the banking sector that grabbed headlines in recent past commanded premium valuation, probably with the exception of PNB, and were led by eminent persons in their field, yet failed in the final count. If the media can be trusted, it must be reasonably assumed that corporate governance practices were flouted, warnings by regulators were ignored and key persons outgrew the institutions, at least in some cases. The promoters of the company / leaders at least bent, if not broke, regulatory prescriptions, principles, ethics, checks and balances. It must be presumed that all the stake holders failed collectively, probably because of the overconfidence and trust on each other that prevented diligent scrutiny. Eminent persons on the boards and auditors who were to be independent failed in effective discharge of duties. Leaders themselves lost track in pursuit of their own goals / or for registering better performance quarter after quarter. It is pertinent to note that not the lack of rules and regulations, but non-adherence led to the situations and for that reason, further tightening of regulations may not prevent recurrence.
Major stake holders of the companies, especially that of banks, can be grouped under investors, employees, customers and society. Investors get prominence for reasons well known to all and rewarding them through capital appreciation and regular dividends are undoubtedly topmost priorities of any prudent management. Investor expectation always behaves like twin edged swords. Transparent presentation of balance sheet sometimes hurts investors and future business prospects. Trying to satisfy investors beyond certain extent by any means, manipulations in balance sheets and continuous efforts to improve share value, leads to customer exploitation. This leads to profit maximisation, by reducing expenses for innovations and facilities affecting quality of services or by increasing charges and interests, resulting in wrath of customers. Customer dissatisfaction gets reflected in the balance sheet with a lag. But, employees of an organization are the first to know about unhealthy practices and non-adherence to laid down norms and that demoralizes employees instantly with the result of loyal and hardworking employees turning demotivated. This deteriorates customer service further and organizations enter a vicious cycle.
Presence of persons having strong faith in ethics and principles, who have the realization that all stakeholders are important for an organization, who believes that lasting organizations are created over a period, who understand that employees are the most crucial tool in the hands of an organization, who keep open the two way communications channels with all stake holders and who are not willing to sacrifice long term goals on the altar of short term gains can bring out changes. Corporate governance also hangs on these principles. Adherence to corporate governance principles in letter and spirit is the need of the hour rather than more regulations and stringent norms.
