What banks need most from their directors

Nironjan Roy | Published: May 15, 2017 20:43:15 | Updated: October 22, 2017 19:54:56

It is learnt from newspapers that the government is going to amend the Banking Companies Act 1991. The cabinet division has approved the draft of the Banking Companies (Amendment) Act 2017. The Banking Companies Act was also previously other amendmended several times.
Compared to other laws, viz. NI (Negotiable Instrument) Act 1881 which are required for running banking business, the Banking Companies Act is new. This is very natural because banking business is not static; rather it's very vibrant and ever changing all over the world. Moreover, this is the only business which complies with many national and international rules and regulations. In addition, economic conditions at national and international levels is very volatile and is changing continuously. In order to keep pace with development in domestic as well as world economy, banking operation is supposed to be updated on a regular basis for which legal support is inevitably required from the government. So amendment of the Banking Companies Act on a regular basis is not unlikely at all.
PROPOSED AMENDMENT:  Two key areas of banking business are set to be amended. One is related to election of directors while the other about appointment of Managing Director. Under the proposed amendment, directors can be elected for consecutive three terms instead of present two terms. Since each term consists of three years, one director will be able to serve for nine years instead of six at a stretch provided he or she is re-elected. Besides, maximum number of directors from one family is proposed to be increased from two to four. The present requirement of obtaining prior approval from the Bangladesh Bank for appointing and removing Managing Director of a bank is going to be changed to post-appointment approval from the central bank. The proposed changes are very vital.    
NATIONAL IMPACT:  Although the total number of directors will remain the same, yet allowing increasing the number of directors from one family to four - albeit, 'if the regulatory body relaxes its limit about the aggregate size of the board without taking into consideration the equity ownership diffusion  pattern of each of the corporate entities in the financial sector for proportionate  representation of non-sponsor shareholders  in the board' - may create some confusions. In practice, we have experienced that most directors of private banks come from extended family members. There is always dominance of one or two particular family/families in ownership structure as well as Board of Directors. As a consequence of family-dominant directors in the Board, division and sub-division among the Board members are not uncommon in our banking practice. Even sometimes rivalry emerges among different groups of Board members who represent various families. Needless to say, in many situations, this rivalry does not remain confined within the Board. It instead spreads to the management team as more than one position for Additional Managing Director or Deputy Managing Director need to be created for representing different groups of directors. This is not a good practice at all. Conflicting relation among the members of the Board extensively mayhinder regular operation of banking business and thus the growth of the bank may also be badly impacted.
INTERNATIONAL IMPACT: Electing more directors from one family may make a bank as a family-owned enterprise which may be viewed negatively by the international community. If two or three extended families elect most directors, eight to 12 directors will come from the same family which is recognised by family name. So the bank will easily be identified as a family-owned bank instead of a corporate one. We should keep in mind that a bank, if identified as a family affair, will face tremendous difficulties in maintaining correspondent relationship and enjoying counterparty limit with foreign banks because these banks are very much reluctant in undertaking transaction of family-owned banks. It may be mentioned here that without correspondent relationship as well as counterparty limit, no bank will be able conduct full-fledged banking business as no cross-border transaction including establishing LC (Letter of Credit) and foreign remittance cannot be carried out.
During the 19th Century and the beginning of this century, some banks of Middle East countries had been facing this acute problem because those banks were identified as family-owned ones due to dominance of one or two Sheikh families in the banks' Boards of Directors. So they had to change the ownership structure and the Board in order to address that blame. Even many American small banks are either family-owned or community ones. So these banks, although incorporated and regulated under extremely stringent rules and regulation, cannot enjoy the same status in transacting with many international banks. They have to either channel their cross-border transaction through large US banks or maintain special arrangement with international counterparts for providing this kind of services to their customers.
So the proposed amendment for increasing the number of directors from one family calls for careful consideration.
DIRECTOR'S TENURE: In the proposed amendment, directors' re-election for successive two terms has been increased to three terms. After the completion of successive three terms, the director will have to remain out of the Board for at least three years i.e. one term in order to be qualified for re-election. In fact, this change has no eventual impact on the functioning of the Board. The directors should uninterruptedly continue to serve the Board as long as they have the minimum requirement of being directors, do not breach any terms and conditions, and finally, get elected by the shareholders. However, there must be a certain deadline for each director beyond which s/he will lose eligibility for re-election.
Shareholders are the investors and as such owners of a bank. So they are the right persons to run the bank through electing the directors. Their role--direct or indirect--through election of directors should not be curbed or restricted. In the international banking arena, there is no such bar in re-electing director. However, there is a deadline for each director. Re-election is not allowed for that particular director. So our banking system can also follow this practice in continuing director's re-election.    
DIRECTOR'S QUALIFICATION:  Maximum number of directors from one family and scope for re-election are not important as qualifications of directors. In our country, possessing a certain number of shareholdings is the main and only qualification of being a director in the Board. So any person, regardless of his or her qualification and expertise, can become a director of a bank only by dint of possessing the required number of shares. This type of directorship in the corporate world may not have impact for any business operation except banking which requires special knowledge, expertise and experience. Mere holding of the required number of shares may make any person an owner but not director. This is more important for our banking practice in our country. The Board of Directors has to perform many responsibilities which among others include approval of loan proposals, interviewing for appointment and promotion and approval of various expenditures. Without having adequate qualification, expertise and knowledge, prudent adjudication cannot be provided to the credit proposals submitted to a bank. Similarly the Board of Directors would not be able to give proper direction and guideline to the management team if they do not possess equivalent or higher competence. So, requisite qualification of being director is more important than maximum number and highest tenure.
In order to become a director of the bank, s/he must have minimum expertise, knowledge and experience as may be set forth in the Banking Companies Act. There must be some provisions allowing the shareholders, having the required number of shares of being a director and nominating professional or competent person as director who will eventually represent him / her. This practice is followed in many banks in developed as well as developing countries. This practice, if adopted in our country's banking industry, will significantly improve corporate governance of our banks and as such will be rated positively by international banks.
The writer is a banker based in Toronto.


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