Examining the role of independence and autonomy in the governance of private banks in Bangladesh
The finest and most successful private commercial banks (PCBs) in the world are usually those which are independently run by capable and expert management with adequate support, oversight, and monitoring from its board of directors without any unwarranted interference or unjustified control from it and, of course as, per well laid-down regulations.
All major strategic and operational decisions of these highly successful financial institutions are executed by its management upon proper vetting, review, and due diligence by the board of directors. An intensive review revealed, the board of such thriving banks is comprised of mostly independent non-executive directors, whose primary objectives align with the best interests of the bank, its health, and achievements as opposed to self-interest or ulterior motivations.
The current reality of Bangladeshi PCBs
It is a matter of concern that most Bangladeshi private commercial banks are not independently or autonomously-run institutions. Only a very few of the 40 plus Bangladeshi PCBs are at least somewhat autonomously run by its management with the proper guidance and support from its board of directors, and it is no surprise that those few particular banks are the strongest and most reputed in the country.
The reality is that most Bangladeshi PCBs are “board run” entities on a day to day basis as opposed to being institutions which have a balanced combination of both “management plus board” in the running of their operations. The required balance between management and the board in terms of their functions is not there because for the most part the board is the significantly more dominant party at most Bangladeshi PCBs.
This may have been somewhat acceptable if a majority or at least some of the board members of these banks were truly independent but that is also not the case in Bangladesh.
The board in Bangladeshi PCBs is mostly composed of people who usually hold direct ownership interest in the bank; those who are directly related parties, as well as those who are close friends and relatives of the owners and other influential board members.
This contaminated structure inevitably leads to the board members’ self-interest becoming a governing criterion in terms of formulating the institution’s overall strategy and direction.
When a PCB is subject to regular undue influence and interference from its board and, on top of that, the board itself is not composed of truly independent directors, the PCB is not likely to succeed since its primary governance framework is flawed and conflicted. Since it is unlikely that the dominant influence of the board over the operations and strategies of most Bangladeshi PCBs will go away anytime soon, it is necessary to evaluate how the board of these PCBs can be improved and strengthened in order to pave the way for better overall governance.
The importance and benefits of having independent directors
Including non-executive and non-owner/non-related party independent directors to the board of a PCB has been one of the most important and fruitful developments in the history of banking governance. Such directors do not have any kind of significant or related relationship with the institution, and therefore their primary motive and incentive is to act in the best interest of the institution and not themselves.
The goal here is that the independent directors be disconnected far enough from the business so that they do not lose perspective but rather bring a differing one including a different set of ideas, thoughts, and disciplines.
Sometimes such independent directors may not have the full necessary experience in the banking sector and if this is the case then they do need to gain a good level of general understanding of the industry and its functionalities.
Furthermore, the independent directors may obtain the required guidance and technical knowledge from the other executive directors as needed in order to properly grasp the complex and intricate workings of the institution and overall practical and mechanical framework.
It is important not to confuse independence with lack of expertise. There is ample evidence globally which shows significant value to having independent directors on a board; however, such directors must also understand the industry because just only being independent without the applicable skill and “know-how” will not improve the level of governance.
It is important that those who are chosen for this role also have a high level of emotional intelligence (EQ) which would enable them to directly empathize and relate to other board members and, as a result, understand their points of view.
In addition to having valuable external contacts and connections, independent directors bring the strength of diversity into the mix due to their knowledge and expertise in other industries, markets, and extended networks.
Since such directors are not affiliated with the institution, there is nothing stopping them from asking bold questions and challenging the management without any fear or inherent biases.
Lastly, the greatest value that independent directors bring is their pure and unadulterated objectivity, the sole purpose of which is the benefit and betterment of the bank whereby self-interest is not a factor in any way.
Practices of some of the largest international/regional banks
JP Morgan Chase’s board of directors targets balancing the needs for professional knowledge, varied industry knowledge, business expertise, financial expertise, and highest level management experience, while also ensuring diversity of representation among its members.
By following these foundational principles, the board strives to include members who have a solid combination of leadership skills, business management experience, experience relevant to JP Morgan Chase and its businesses, and those who possess qualities of judgment, achievement, integrity, effectiveness, and the willingness to challenge management when required.
In its corporate governance guidelines, Citigroup, Inc states that at least two-thirds of the members of its board should be independent.
Some of its criteria for consideration of potential candidates for inclusion into its board are those individuals who have exhibited that they are committed to the highest ethical standards; have business, governmental, non-profit or professional experience at the chairman, chief executive officer, chief operating officer, or equivalent policy-making and operational level of a large organization; have special skills, expertise, and background that would complement the attributes of the existing directors; have the financial expertise required to provide effective oversight; and possess a willingness to challenge management while working constructively as part of a team in an environment of collegiality and trust.
HSBC Holdings plc requires that its board comprises a majority of independent non-executive directors, whose role is to challenge and scrutinize the performance of management and help develop proposals for strategy. They are also required to review the performance of management in meeting agreed goals and objectives, including the monitoring of the group’s risk profile.
Standard Chartered’s board currently has 16 members: The chairman, six executive directors, and 9 non-executive directors. It is responsible for ensuring that, as a collective body, it has the appropriate skills, knowledge, and experience to perform its role effectively. It provides leadership through oversight, review, and providing guidance whilst setting the strategic direction.
The board considers all the non-executive directors to be independent and free of any business relationship or other circumstance that could materially interfere with the exercise of objective, unfettered, or independent judgment.
Some of our regional banks like DBS or UOB in Singapore, HDFC Bank or ICICI Bank in India, as well as Commercial Bank or Sampath Bank in Sri Lanka are also closely following a similar path. All these banks’ boards are predominantly run by independent or non-executive directors.
Most of their independent directors come with very good and relevant professional credentials and they, as independent directors, literally influence the strategy and management of the banks. Their incentive and remuneration packages are also very thoughtfully and encouragingly structured.
Based on this, there is no doubt that some of the most successful and well-known global or even regional banks place a very high level of importance on having independent non-executive members on their boards. The success and strength of these institutions prove that having such independent directors must have a directly positive correlation to their immense achievements.
Therefore, the obvious question becomes why Bangladesh cannot also replicate and enforce this criterion into its own PCBs and take actionable steps to remove the undue and toxic interference and influence of related party board members who have done nothing but plague the sector, and have become an obstacle to ultimate autonomy and better governance. In some banks, the management is also interfered by the board in day to day running of the bank.
Time to rethink the governance of Bangladeshi PCBs
As per the United Nations Committee for Development Policy, Bangladesh has been categorized as a Least Developed Country (LDC) since 1975. The country reached the lower middle-income country status in 2015. In 2018, Bangladesh fulfilled all three eligibility criteria for graduation from the UN’s Least Developed Countries (LDC) list for the first time and is on track for graduation out of LDC status in 2024.
Considering this, it is absolutely crucial that Bangladesh immediately begins working on improving and strengthening its ailing banking sector in order to be ready to tackle all the new challenges ahead due to its upcoming graduation out of LDC status.
LDCs in general enjoy benefits from many kinds of waivers and “free passes” from very stringent international rules and regulations, and these would no longer be available to many vital industrial sectors in Bangladesh upon its graduation out of LDC status.
Since a nation’s banking sector is basically the backbone and foundation of its commercial and business infrastructure, there is no doubt that a strong, viable, and efficient banking sector will smoothly and effectively propel Bangladesh into the next level as a middle-income country.
Therefore, rethinking and fixing the structure, role, responsibilities, admittance criteria, and independence of the board of directors of Bangladesh’s PCBs is the first and foremost step towards ensuring stronger and more effective governance.
At the same time, the regulators and respective boards should also encourage a local pool of banking professionals to grow and develop to drive the local banking sector towards a better future.
Mamun Rashid is an Economic Analyst and Yamen Jahangeer is a CPA from USA.