Introduction
Corporate Governance is main for each & every financial institution. An increase in the integrated financial system, risks arise quickly in different aspects of financial institution system and have a real impact on the real sector of the country. Any downfall in the corporate governance that’s effect the financial institutions to operational risk which quickly impact in the credit, market, liquidity or the reputation decreased in the society. Therefore, the financial institutions and their regulators have put in their systems, controls and processes to ensure the standards of corporate governance. These processes have changed over a period of time and are continuously keeps changing in the internal, external and supervisory management. However, the instances of corporate governance are failures and would result in bad corporate behaviour have recurred not only in India but across the whole world. In the context of India, the financial system has witnessed instance of the system or governance failures in banks, NBFCs and the market intermediaries with the different dimensions and aspects. Common threads across are such as managerial misconduct, the concentration of power is misused, the lack of market discipline and inadequacies of external oversight. The emergence of corporate governance failures from time to time indicates that certain changes in the internal control systems, governance processes, audit mechanisms and regulatory structured could not be out.
Corporate governance in financial institutions
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Corporate governance refers to the sets of structures, processes and relationships between the management of the company, its board member, its shareholders and the stakeholders, through which the objectives are achieved and processes are a set of achieving this objective along with the tools that are monitored. The primary objective of the corporate governance is to safeguard the interest of the stakeholder’s interests in an effective manner by ensuring that helps in undertaken in an effective, efficient, responsible and ethical manner. The banks and the financial institutions that’s takes the deposits from the people to kept in their account. It provides a comprehensive guide for the purpose of developing suitable corporate governance systems with the size, complexity, importance of the system, substitutability, interconnected of banks and the financial institutions.
Corporate governance in financial institutions: In the context of India
Financial sector regulators in India are RBI, SEBI, IRDAI and PFRDA have put the regulatory aimed at strengthening governance with the regulated entities. These regulations remain same and the conduct of the board and senior management such as the chair and meetings of the board, the composition of the certain committees of the board, audit, nomination and remuneration, risk management, age, tenure, qualification and the appointment of the directors etc. These regulations it has its own prescribed code of conduct and code of ethics and proper norms and reporting structures. The regulatory provisions are put the limit to the directors should not interfere in the day-to-day functioning and prevent from influencing the employees not to be directly involved in the function of appointment and promotion of employees.
Reasons for the failure of corporate governance in financial institutions
As we discussed above the boards of financial institutions strengthened with the independent directors and with the well-structured committees and supported by the compliance, risk and audit functions have its own primary responsibility. The corporate governance is fails not only in India but across the world to look closure at the reasons for corporate governance and the reasons of the failure control.
The following points are the reasons for the corporate governance
- Lack of Transparency:
Lack of transparency is one of the main drivers for poor corporate governance in financial institutions. Transparency is the basis of trust, and when financial institutions do not make clear information on their operations, both financial health and risk exposures for stakeholders are left in obscurity. Lack of transparency could stem from murky reporting practices, inappropriate disclosure channels or deliberate acts to mask unsavoury information. In such an environment, it becomes hard for investors, regulators and even internal stakeholders to ascertain dominance or the true state of the institution thus breaking down trust.
- Weak Board Oversight:
The board of directors does play a critical role in ensuring that the standards for corporate governance are upheld within such an institution. However, weak board oversight may play a sizeable role in the failure of governance. This can appear in several forms including not enough independent directors, weak skills among board members or a deficit of commitment to tough calls on management. However, in certain instances the boards may get involved into conflicts of interest thus compromising personal gains as opposed to what is best for institution. Such poor supervision often leads to ineffective strategic choices, negligent risk management and a loss of shareholder value.
- Inadequate Risk Management:
Risk management is critical for the sustainability of financial institutions, and in its absence one can readily identify poor corporate governance. This can result in institutions that do not implement adequate risk management frameworks, which overlook stress testing or underrating the potential impact of new risks. This negligence can cause disastrous results, and this is evidenced from the events that followed the global financial crisis of 2008 where poor risk management practices brought down leading banks. Negligent risk management not only harms the financial health of an institution but also puts stakeholders at needless risks.
- Short-Term Focus:
The long-term sustainability can be compromised by operation of financial institutions that adopt a myopic, short-term perspective. Pressures from shareholders, analysts and even management remunerations linked to result based on short-term performance metrics might lead in making decisions that promote gains at the cost of long-term health for organisation. Such emphasis on immediate profitability is known to result in reckless risk-taking, lack of the necessary investment towards fundamental infrastructure and mere neglect of long-term strategic planning. As a result, the financial institutions become exposed to external shocks and may fail in adjusting themselves with changing circumstances of market.
- Regulatory Capture:
Regulatory capture refers to a situation where regulatory authorities mandated with the responsibility of supervising and monitoring financial institutions become too close to its stakeholders hence compromised in carrying out their roles. Various forces can produce this alignment, including revolving doors between regulatory agencies and industry or the insufficient funding of regulators as well lose their independence due to lobbying by influential firms. If regulators do not act with independence and thorough enforcement of governance standards, financial institutions will look to exploit the gaps in regulation causing an erosion on checks that must be present for a sound functioning system.
Conclusion
The corporate governance standards are a main regulatory function for the financial institutions. A set of governance processes, control systems, audit mechanisms, supervisory oversight and regulatory structures are put in the place of the financial institutions. The failure of the corporate governance has been a recurring in the global. All the corporate governance is failed due to the structures, board member, audit and external evaluation take place. Poor corporate governance in financial institutions is a complex phenomenon that has far-reaching consequences to the integrity and stability of the entire system. These challenges need to be met head on through a multipronged strategy which seeks intensify transparency, fortifies board oversight, enhances risk management practices and encourages long-term perspective whilst ensuring regulatory independence. By dealing upfront with these problems, financial institutions can recapture trust; reduce potential risks and support systemic resilience. All the stakeholders, shareholders and executives should note the importance of effective corporate governance in order to implement it for protection the interests of all concerned parties.
Author : Bhaskar Pandey, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD
