The fact is everything was in place but it was the deteriorating financial discipline in many countries, which compelled the regulators to venture deeper into the subject. Be it the security scam of 1992 in India or the Baring Brothers episode, the whole financial system got a heavy jolt. There were many other similar events happening across the globe. More recently, the importance of corporate governance has increased manifolds owing to the chain of events that caused the cataclysm termed as the global financial crisis.
From the viewpoint of banks and financial institutions, corporate governance includes maintaining capital adequacy, management of operational, credit and market risks, to name a few.
Corporate governance is a manner by which organizations are directed and controlled. It provides a structure through which a company’s objectives are set and the means of monitoring the performance of those objectives are outlined. It includes the laws governing the formation of individual units, firms, companies etc. and the bylaws established by themselves in their Memorandum of Association and Article of Association. The fundamental concern of corporate governance is to ensure that a company’s directors and managers act in the interest of the company and all its stakeholders. Good governance thus aims to protect shareholders’ rights, enhance disclosures and transparency facilitating an effective functioning of the board and provide an efficient legal and regulatory environment and enforcement framework. Concisely, corporate governance is all about responsibility and accountability of the directors and the management team to the stakeholders. It has to be a transparent and fair system where all the shareholders are treated equally and have the opportunity for redressing the violation of their individual rights.
NEPALI SCENARIO
Against this backdrop, let us evaluate the present scenario of corporate governance in Nepal, especially in the financial sector. Is the recent Nepal Rastra Bank (NRB) order to liquidate a commercial bank a pre-cursor to the future happening of important events?
We all know that banks play a crucial role in building the economy and Nepal is no exception. Effective corporate governance in banks and financial institutions helps foster financial stability, strengthen risk management and ultimately contribute to a strong financial system. A sustainable growth in the economy is critically dependent on a sound financial system. Nepal is in a critical stage of transition. At this juncture, there is an utmost need to have good corporate governance practices in the financial sector. The working board requires individuals who are informed, competent and independent to ensure enterprise integrity, which can promote sound economic growth. Increased competition resulting from entry of international players has significantly improved corporate governance in the banks of many developing economies.
In Nepali context, the regulators very kindly agreed for the entry of international players in the form of joint venture banks into the market. This shows that government/regulators are open to competition from international companies. With Nepal’s accession to World Trade Organization, other major international players are expected to join in who will bring in fresh dimensions to the sector. In other developing markets, the entry of international players has made all the difference; they have galvanized the market and imparted healthy competition.
Banking reforms can only be fully implemented once prudential regulatory systems are in place. As a matter of fact, Nepal has plenty of it. There are many laws and bylaws. It is critically important for making corporate governance effective in an economy like Nepal. Most of the markets, which have developed today, have gone through this phase for many years. Nepal is not an exception.
From the viewpoint of banks and financial institutions, corporate governance includes maintaining capital adequacy, transparency in the publication of accounts, management of operational, credit, market and environmental risks, to name a few. As for example, when Standard Chartered Bank started its operation in Nepal, we were aware of only two risks – operational and credit. Today, so many added risks have come through the process of evolution because markets have matured and newer instruments have been introduced. So, as a sequel to that, regulators have to devise additional control mechanisms. The Basel II is a good reference to make.
In Nepal, NRB has issued directives on good corporate governance. It is a clear indication of central bank’s commitment to bring about high level of corporate governance. To be very specific, Directive Number 6 of the central bank is related to the code of ethics to be observed by directors and chief executive officers of banks and financial institutions. These codes of ethics require all the directors, regardless of their executive or non-executive status, to sign a declaration which prohibits directors’ involvement in activities against the interest of the company.
I firmly believe that good governance and good performance reinforce each other. With good governance, good performance comes automatically.
In conclusion, I would like to emphasize that for the betterment of the overall financial system in the country, it is incumbent upon all of us i.e the regulators, the companies, the directors, employees and the shareholders to gracefully honor the principles of governance. It is our collective responsibility and we cannot just hold the central bank or the chief executive officer responsible for any setback. I strongly believe that banks and financial institutions reforms can fully be implemented if and only if prudential regulatory systems are practiced with a strong desire for success. Nevertheless, an efficient judiciary system would also be required for effective implementation.
(Writer is CEO, Standard Chartered Bank Nepal Ltd.)
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