A strong corporate board performs four major roles: over-seeing the risk profile of a company, monitoring the integrity of its business and control mechanisms, ensuring that expert management is in place and maximising the interests of its stakeholders. Such board has regular and close contact with the organisation and can detect and correct any abnormal behaviour quickly. Such a board is also able to play a crucial role in hiring and retaining sound managers. The Group is of the view that banks being pivotal for the country's financial system, the boards of banks should fulfil all these four roles.

The Board of Directors of banks and financial institutions have, besides fiduciary obligations, as above, important social responsibilities, and the responsibilities to ensure compliance with the regulatory framework.

These would include compliance with the directions / policy of the Government etc. In their fiduciary capacity, the Boards of directors should receive regular reports from their management committees, auditors and audit committee, formulate clear written policies in regard to various business strategies and policies (credit, investments, etc.), performance parameters for the bank and ensure that the bank's affairs are conducted in accordance with the stated policies / regulatory requirements. The Board should formulate policies relating to credit dispensation particularly in regard to exposures to various productive sectors, geographical areas, investments, exposures to sensitive sectors such as capital market, strategies for recovery of loans and status of progress with respect to investments, risk management, etc.

The need for clear lines of responsibilities in any organisation cannot be overemphasised. In the case of banks, the Group notes that the responsibilities are well defined for the managerial functionaries.

Powers are delegated to the various functionaries of the bank for sanctioning of loans and advances, investments, incurring authorised level of expenditure, etc. The managerial functionaries are also made accountable and their performance is monitored vis-à-vis the performance targets agreed to by the Board, judicious exercise of discretionary powers, etc.

The Group recommends that every director should be given a brief on the functioning of the bank, before his appointment / induction, covering the following:

1. Delegation of various authorities by the Board

2. Strategic Plan of the bank

3. Organisational Structure

4. Financial and other controls and systems

5. Economic features of the market and competitive environment, and

6. Meeting with key management team after briefing.

The Group is of the view that the directors could be made more responsible to their organisations by exposing them to need-based training programmes / seminars / workshops to acquaint them with the emerging developments / challenges facing the banking sector. The directors could be exposed to the latest management techniques, technological developments, innovations in financial markets, risk management and other areas of interest to the organisation to discharge their duties to the best of their abilities. The Group is of the view that such investment would be of great value to the financial system. Ideally, in the Group's view, the Reserve Bank of India as the Regulator, could take the initiative in organising such seminars for the directors of banks and financial institutions.

The Group notes that broad guidelines have been issued both by the Government of India and the Reserve Bank in regard to the role expected of their nominees on the Boards of banks. These guidelines emphasise the following points:

1. The director is expected to regularly attend board meetings and take an active part in its deliberations.

2. Members of the Board do not exercise any executive authority individually, but are collectively responsible for the superintendence, direction and management of the bank

3. While directors can delegate certain powers to any committees, executives or other officers, they cannot absolve themselves of their responsibility of ensuring that the bank operates on sound and prudent lines.

They are responsible for safeguarding the interests of the depositors and owners through efficient and well informed administration of the bank.

Directors are expected to critically and thoroughly study agenda papers. They should pay adequate attention to the state of non-performing assets, recovery performance and write-off of large debts (say Rs. 1 crore or more). Based on the meetings attended by them, the nominee directors are required to submit reports to the Government (in the case of its nominees of the Boards of public sector banks) and to Reserve Bank of India (in respect of its nominees on the Boards of all banks).

Presently, there is no mechanism to make the directors on the Boards of banks and financial institutions accountable for the performance of their organisation. The Group is of the view that the lack of clearly documented responsibility and accountability of directors on the Board stems from the manner in which the Board is constituted. In the case of public sector banks, majority of the Board comprises nominees of the Central Government and the individual directors are, therefore, mainly accountable to the political institution of the land. The Group is of the view that while a change in the manner in which the Boards are constituted is essential in order to make the Board and its individual members more accountable, this would necessitate a change in the statutes governing the banking sector. According to the Group, the role of CEOs - their track record, competence and leadership qualities provides the pivot for good governance practices in a banking company. The process of selection of the CEO, therefore, assumes crucial importance in the endeavour to introduce modern corporate governance standards in banks.

The Group is of the view that it would be desirable to separate the office of Chairman and Managing Director in respect of large sized banks. Keeping in view the balance sheet size, sophistication of business transactions and complexity of the bank, the office of Chairman and Managing Director could be bifurcated into two : the Chairman who is the Chairman of the board and the Managing Director who could function as the Chief Executive responsible for day-to-day management of the bank. The Group is of the view that this functional separation will bring about more focus and vision as also the needed thrust in the functioning of the top management of the bank.

The Group notes that many Expert Committees (including the Committee on Banking Sector Reforms under Chairmanship of Shri M.Narasimham) had recommended in favour of a reasonably long tenure of services for the whole-time directors. The Group recommends that the whole-time directors should have sufficiently long tenure so as to enable them to leave a mark of their leadership and business acumen on the bank's performance.

While the responsibilities of nominee directors have been clearly laid down, the responsibilities of the Board of Directors as a whole has not been delineated. Furthermore, there is no practice of advising the directors (other than nominee directors) of banks their responsibilities, role, etc. in the organisation. The Reserve Bank of India had circulated in 1984 among the private sector banks, guidelines on the role and functions of independent / non-executive directors on the Boards of private sector banks. These guidelines were in the nature of operational guidelines bringing home to them the fact that the directors should not interfere in day-to-day affairs of the bank or otherwise intervene in credit / investment / personnel / other operational matters. The guidelines highlight the need for the independent / non-executive directors to take interest in the banks' work concerning their own fields of specialisation / activity and also deliberate on all matters of general policy affecting the bank's functioning. The guidelines exhort that every director should function in a manner most conducive to the interests of the depositors, of the shareholders and of the nation as a whole. The Reserve Bank of India had also circulated in 1992 a list of "do's" and "don'ts" to the private sector banks, with a view to sensitising the directors on their role and responsibilities. A similar list had also been given by the Government to the directors of public sector banks. The Group recommends that these instructions may be reviewed and updated where required, and the roles and responsibilities of independent / non-executive directors be clearly stated.

Keeping in view the recent developments and the changes witnessed in the banks' operations, as also the technical developments, the Group suggests that Reserve Bank may bring out an updated charter indicating clear-cut, specific guidelines on the role expected and the responsibilities of the individual directors. The responsibilities of the directors according to the Group, should illustratively include the following:

1. Deliberating and approving the objectives, business strategies and annual business plans

2. Deliberating and approving the management succession policy of the institution, and assessing senior management's performance on an on-going basis,

3. Clearly defining the authorities and responsibilities of both executive directors and relevant senior management,

4. Developing and providing a list of checks and balances for use by senior management,

5. Formulating policies on vital areas of bank's functioning (viz., loan and recovery policy, investment policy, risk management policy, exposure to sensitive sector including capital market, etc.)

6. Guidance on risk management particularly investment assessment, the fixation of risk limits, exposure

7. Approve the policy on introduction of technology to the bank's various facets of working with a view to provide better service in a most cost effective manner as measured by targets of productivity and profitability

8. Maintaining and recording appropriate levels of checks and balances with regard to the influence of the management and/or large shareholder(s).

9. Monitoring on an on-going basis the bank's performance, build up of exposure to various categories of borrowers, industries, sectors, etc against targets of the annual operating plan.

10. Discussing the reports submitted by the Audit Committee, monitoring the follow up action taken to rectify the deficiencies observed, etc.

11. Ensuring compliance with all legal / regulatory requirements, etc.

As a step towards effective corporate governance, the Group is of the view that it would be desirable to take an undertaking from every director to the effect that they have gone through the guidelines defining the role and responsibilities of directors, and understood what is expected of them and enter into a covenant to discharge their responsibilities to the best of their abilities, individually and collectively. In this connection, the Group would recommend that before appointment of a director, a questionnaire on the lines of the one used by the FSA of UK, modified keeping in view of our requirements could be used as a model (Annexure 2) for obtaining relevant information regarding background of the potential appointee.

The Group is of view that in consonance with transparency in regard to responsibility of directors, an appropriate covenant should be obtained from each of the directors, whether they are independent / non-executive directors / nominees of Government / RBI / other institutions having sizable shareholding in banking organisations. The Group accordingly has devised a covenant for adoption by all the banks. A copy of the format is given in Annexure3.

The Group is of the view that the existing level of remuneration paid (by way of sitting fees, etc.) to directors of banks and financial institutions is grossly inadequate, by contemporary standards, to attract qualified professional people to their Boards, and expect them to discharge their duties as per the mutually agreed covenants. A few of the banks / FIs have modified their compensation plans to include a base salary, performance bonus and options to their directors. In order to get quality professional people, the level of remuneration payable to the directors should be commensurate with the time required to be devoted to the bank's work and also to signal the appropriateness of remuneration to the quality of inputs expected from a member. The remuneration of the directors may also include the form of stock option.

The Group is of the view that the statutory prohibition under section 20 of the Banking Regulation Act, 1949 on lending to companies in which a director is interested, severely constricts availability of quality professional directors on to the Boards of banks. The Group notes that internationally, however, banks are permitted to extend credit facilities to companies in which the directors are interested subject to full disclosure and appropriate covenants. The Group is aware that any change in the existing legal framework would require an amendment to the Banking Regulation Act.

The Group recommends that we move towards that goal.