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SUMMARY:

1. CORPORATE GOVERNANCE- AN INTRODUCTION

The subject of corporate governance has attracted worldwide attention with a series of collapse of high

profile companies like Enron, WorldCom, HIH insurance group etc. These failures have shattered the

trust of investors worldwide. Some of the scandals which made headlines all around the world were

somewhere related to poor corporate governance. These include the $18 billion meltdown of Parmalat

Finanziaria, SpA in 2003. Parmalat was among the largest food-based companies in the world .The

Parmalat case was one of the biggest scandals to hit Europe and many analysts called this fraud as

'Europe's Enron'. The company’s corporate governance structure could not keep up to some of the key

existing Italian corporate governance standards of best practice (Melis,2004). Another classic example

of a corporate house collapsing due to poor decision making and weak corporate governance was the

HIH insurance group of Australia. This collapse resulted in a deficiency up to $5.3 billion, “making it

the largest corporate failure” in Australia (Lipton, 2003). The collapse of the China Aviation Oil (CAO)

also created certain doubts regarding the standard of corporate governance in China. This collapse

came at a time when many companies were trying to get internationally listed and foreign investors

were becoming more and more eager to buy them out (Economist Intelligence Unit, 2004).

Poor corporate governance in banks is not a new subject. This inefficiency has been around for a very

long time. Since the beginning of Banking in Nigeria in 1914, almost “75 banks were lost primarily

because of factors related to poor corporate governance”. The banks did not fail due to lack of

customers but due to how they were managed and governed. According to a study by the Nigerian

Deposit Insurance Corporation, the main reason for these failures was interference of board members

(www.allafrica.com). Moreover, the recent subprime crises highlighted many issues of corporate

governance in banks world over. The main issue was that of independent directors. For e.g., UBS, one

of the world’s largest banks was among the biggest losers in the subprime crisis. It suffered a loss of

about $38 billion. As a result it replaced four of its directors. The departing members included “three

outsiders with experience respectively in rail equipment, chemicals and information technology”. This

shows that banks should definitely use experts on their boards (Economic Times, 2008). According to

Zabihollah Rezaee (2005), there may be seven reasons behind these high profile failings. These include

lax regulations, overconfident and egoistic management, inappropriate business conduct by top level

management, deficiency of alert oversight functions, unproductive audit functions, poor financial

disclosures and negligent shareholders. The above frauds adversely affect corporate governance,

auditors’ creditability and the quality of financial statements.

The term governance has been derived from the word gubernare, which means to rule or steer.

Originally this term meant to be a normative framework for exercise of power and acceptance of

accountability used in the running of kingdoms, regions and towns. However, over the years it has

found significant relevance in the corporate world. This is basically due to growing number and size of

the corporations, the widening base of the shareholders, increasing linkages with the physical

environment, and overall impact on the society’s wellbeing as we need a proper administrative system

to regulate so many complex things. The analysis of World Bank definition on corporate governance

seems more appropriate as it analyzes from two different perspectives. From the company’s point of

view, the stress is put on the relations between the various stakeholders such as owners, management,

employees, customers, suppliers, investors and communities. From another perspective in defining

corporate governance is reliable path where the corporate governance structures can be established. So,

a “nation’s system of corporate governance can be seen as an institutional matrix that structures the

relations among owners, boards, and top managers, and determines the goals pursued by the

corporation¨. (World Bank, 2002) The OECDs (1999) original definition is: “Corporate governance

specifies the distribution of rights and responsibilities among different participants in the corporation,

such as the board, managers, shareholders and other stakeholders, and spells out the rules and

procedures for making decisions on corporate affairs. By doing this, it also provides the structure

through which the company objectives are set, and the means of attaining those objectives and

monitoring performance.

Let us now discuss some of the important definitions of Corporate Governance.

1. “Corporate Governance deals with the ways in which suppliers of finance to corporations

assure themselves of getting a return on the investment.” The Journal of Finance, Shleifer and

Vishny, 1997 (page 737)

2. “Corporate Governance is about promoting corporate fairness, transparency and

accountability.” J.Wolfenson, President of the World Bank as quoted by an article in Financial

Times June 21, 1999

3. “Corporate Governance – which can be defined narrowly as the relationship of a company to

its shareholders, or, more broadly, as its relationship to society …” Financial Times 1997

4. “Corporate Governance is the system by which business corporations are directed and

controlled. The Corporate Governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as, the board, managers,

shareholders and other stakeholders, and spells out the rules and procedures for making

decisions on corporate affairs. By doing this, it also provides the structure through which the

company objectives are set, and the means of attaining those objectives and monitoring

performance.” OECD April 1999 (OECD’s definition is consistent with the one presented by

Cadbury, 1992)

5. “Corporate Governance is a field in economics that investigates how corporations can be made

more efficient by the use of institutional structures such as contracts, organizational designs

and legislation. This is often limited to the question of shareholder value i.e. how the

corporate owners can motivate and/or secure that the corporate managers will deliver a

competitive rate of return. Mathiesen (1999)

Objectives of Corporate Governance

The fundamental objective of corporate governance is to enhance shareholders' value and protect the

interests of other stakeholders by improving the corporate performance and accountability. Hence it

harmonizes the need for a company to strike a balance at all times between the need to enhance

shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in

the company. Further, its objective is to generate an environment of trust and confidence amongst those

having competing and conflicting interests.

It is integral to the very existence of a company and strengthens investor's confidence by ensuring

company's commitment to higher growth and profits. Broadly, it seeks to achieve the following

objectives:

� A properly structured board capable of taking independent and objective decisions is in place at

the helm of affairs;

� The board is balance as regards the representation of adequate number of non-executive and

independent directors who will take care of their interests and well-being of all the stakeholders;

� The board adopts transparent procedures and practices and arrives at decisions on the strength

of adequate information;

� The board has an effective machinery to subserve the concerns of stakeholders;

� The board keeps the shareholders informed of relevant developments impacting the company;

� The board effectively and regularly monitors the functioning of the management team;

� The board remains in effective control of the affairs of the company at all times.

The overall endeavour of the board should be to take the organisation forward so as to maximize long

term value and shareholders' wealth.

Rationale of Study

Before going into corporate governance of banks in particular, let us recall, just for the sake of context,

why corporate governance is important in general. At its most basic level, corporate governance sets up

the “rules of the game” to deal with issues arising from separation of ownership and management so

that the interests of all stakeholders are protected. Empirical evidence shows that businesses with

superior governance practices generate bigger profits, higher returns on equity and larger dividend

yields. Importantly, good corporate governance also shows up in such soft areas as employee

motivation, work culture, corporate value system and corporate image. Conversely, the failure of high

profile companies such as BCCI, Enron, WorldCom and Parmalat was a clear lesson of the damage bad

corporate governance can inflict.

Here at home we had a corporate scandal of unprecedented dimensions in Satyam Computers where

the company’s CEO admitted to having falsified accounts to the tune of over ` 7000 crore, and that too

spread over several years. Even as the judicial process relating to this alleged fraud is still under way,

the big question is in what ways was this failure of corporate governance and how are we fixing those

lacunae? We had instances of poor governance in the banking sector as well - erosion of standards in

forex derivative transactions and fraud in wealth management schemes - reminding us that we need to

work hard to get to best practice in every area of corporate governance.

No matter what view of the corporate objective is taken, effective governance ensures that boards and

managers are accountable for pursuing it. The role of effective CG is of immense significance for the

society as whole.

At first place it promotes the efficient use of scarce resources both within the organisation and the

larger economy.

Secondly, it makes the resources flow to those sectors or entities where there are efficient production of

goods and services and the return is adequate enough to satisfy the demands of stake holders.

Thirdly, it provides a broad mechanism of choosing the best managers to administer the scarce

resources.

Fourthly, it helps the mangers to remain focused on improving performance, making sure that they are

replaced when they fail to do so.

Fifthly, it pressurizes the organization to comply with the laws, regulations and expectations of society

and last but not the least it assists the supervisors to regulate the entire economic sector without

partiality and nepotism.

In order to overcome the under noted serious concerns within the business community, there is a need to introduce a

system of corporate governance that will ensure the transparency, integrity and accountability of Management including

non-executive directors.

•Concentration of greater financial power and authority in a lesser number of individuals,

•Violations of foreign exchange rules and regulations,

•Large scale diversion of funds to associate companies and risky ventures,

•Unfocussed business decisions leading to losses,

•Preferential allotment of shares to promoters at low prices,

•Exploited the weaknesses in the Accounting Standards to inflate profits and understate liabilities,

•Frequent changes in Board structures,

•Spinning off profitable business operations to subsidiary companies, and

•Charging of royalty for use of brandname by the parent company by leading companies.

In an open financial market, investors choose from a variety of investment vehicles. The existence of a corporate

governance system is likely a part of this decision-making process. In such a scenario, companies that are more open and

transparent, and thus well governed, are more likely to raise capital successfully because investors will have the

information and confidence necessary for them to lend funds directly to such companies. Moreover, well-governed

companies likely will obtain capital more cheaply than companies that have poor corporate governance practices because

investors will require a smaller “risk premium” for investing in well-governed companies. Thus, in an efficient capital

market, investors will invest in companies with better corporate governance frameworks because of the lower risks and

the likelihood of higher returns. Good corporate governance practices also enable Management to allocate resources more

efficiently, which increases the likelihood that investors will obtain a higher rate of return on their investment.

Limitations of corporate governance implementation in India

• If the Board is in awe of the family executive, it makes it difficult for the Board sometimes to ask tough

questions or at other times the right questions at the right time in order to serve the interests of the shareholders

better. As a result truly independent directors are rarely found in Indian companies. Serving on multiple boards is

problematic because doing so can overburden directors, thus hampering their performance, and increase the

potential for directors to experience conflicts of interest between the various corporations they serve.

• It is admitted that contribution of the independent directors is limited because the average time spent in Board

meetings by these directors is barely 14 to 16 hours in a year. In some cases, it has been found that no proper

training and orientation regarding the awareness of rights, responsibilities, duties and liabilities of the directors is

provided to an individual before appointing him/her as a director in the Board. Also there is unseen but the active

participation of political class.

• The directors on the board are largely reliant on information from the management and auditors, with their

capacity to independently verify financial information being quite limited, while auditors, as this case suggests,

have also been equally reliant on management information. The relevant issue here is the extent and the depth of

auditors’ effort in their exercise of due diligence. Excessive reliance on information from the management is

symptomatic of the ownership or control of companies in India by business families, and that poses a particular

challenge for corporate governance in India.

• The greatest drawback of financial disclosures in India is the absence of detailed reporting on related party

transactions. In addition, poor quality of consolidated accounting and segment reporting leads to

misrepresentation of the true picture of a business group.

• Although India's investor-protection laws are sophisticated, litigants must wait a long time before

receiving a judgment. Delays in the delivery of verdicts, high costs of litigation and the lengthy judicial

appointment process in courts make the legal enforcement mechanism ineffective. According to the OECD, “the

c credibility and utility of a corporate governance framework rest on its enforceability.”

• In India, the two audit-related issues which are commonly recognized are that of auditor independence (which is

a problem worldwide) because of the large if segmented market in accounting services, and the perceived

powerlessness of auditors in the face of corporate pressure. In many cases, they are ill-equipped to handle the

needs of large companies, because in the face of an audit failure, it is very difficult to discern whether the auditors

were complacent or they were pressurized by the concerted efforts of the insiders.

• There is no proper system to monitor the work of audit firms or to review the accounts prepared by the

company’s statutory auditors. However, in the aftermath of the Satyam case, the SEBI has decided to introduce a

peer review mechanism to review the accounts prepared by a company’s statutory auditor. In addition, the SEBI

has also decided to constitute a panel of auditors to review the financial statement of all BSE Sensex and NSE

Nifty companies.

Also there is no statutory compliance for the companies to obtain a report on Corporate Governance Rating by the Credit

Rating Agencies in India.

2. REVIEW OF LITERATURE

Sarkar and Sarkar (2000) provided evidence on the role of large shareholders in monitoring

company value in the Indian context, whose corporate governance system is a hybrid one. Similar

to other studies, this study also found that after a definite level of block holdings by directors the

company value enhances. But it did not find any substantial proof that institutional investors,

normally mutual funds, are active in corporate governance.

Turnbull, Shann (2000) this paper provides orientation in understanding the topic of corporate

governance to further research, analysis and reform. Limitations in the theories and practices of the

dominant Anglo paradigm are identified. Various viewpoints used in analyzing corporate

governance are described with their cultural specificities.

Becht, Marco, Bolton, Patrick and Röell, Ailsa A (2002) believe that Corporate governance is

concerned with the resolution of collective action problems among dispersed investors and the

reconciliation of conflicts of interest between various corporate claimholders. In this survey they

review the theoretical and empirical research on the main mechanisms of corporate control, discuss

the main legal and regulatory institutions in different countries, and examine the comparative

corporate governance literature.

A significant amount of research has been done on corporate governance practices in the Indian

context. Mukherjee (2002) argues that India has been moving closer to taking on an Anglo-

American (Anglo-Saxon) form of corporate governance. But the author questions the usefulness of

the Anglo-American model. She answers this question through an assessment of the "development

impact" of the new model as pointed out by measures such as growth, employment and respect for

shareholder rights. The results suggest that the Anglo-American model is not very effective in

meeting the objectives of the social system in India.

The study by Mohanty(2003) suggests that companies with good corporate governance measures

are easily able to borrow money from financial institutions as compared to companies with poor

corporate governance measures. Moreover, there is evidence that mutual funds have invested

money in companies with a good corporate governance track record as compared to companies with

a poor CG track record. By making use of a simultaneous equation approach, this study wraps up

by saying that this positive relationship is a result of the mutual funds (development financial

institutions) investing (lent money) in companies with good governance records and also because

their investments have helped to enhance the financial performance of such companies.

Bebchuk, Lucian A., Cohen, Alma and Ferrell, Allen (2004) investigate which provisions,

among a set of twenty-four governance provisions followed by the Investor Responsibility

Research Center (IRRC), are correlated with firm value and stockholder returns. Based on this

analysis, they put forward an entrenchment index based on six provisions - four constitutional

provisions that prevent a majority of shareholders from having their way (staggered boards, limits

to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority

requirements for charter amendments), and two takeover readiness provisions that boards put in

place to be ready for a hostile takeover (poison pills and golden parachutes). They find that

increases in the level of this index are monotonically associated with economically significant

reductions in firm valuation, as measured by Tobin's Q which present suggestive evidence that the

entrenching provisions cause lower firm valuation.

Brown, Lawrence D. and Caylor, Marcus L. (2004) analyzed broad measure of corporate

governance, Gov-Score, based on a new dataset provided by Institutional Shareholder Services.

Gov-Score is a composite measure of 51 factors encompassing eight corporate governance

categories: audit, board of directors, charter/bylaws, director education, executive and director

compensation, ownership, progressive practices, and state of incorporation. They relate Gov-Score

to operating performance, valuation, and shareholder payout for 2,327 firms, and find that better-

governed firms are relatively more profitable, more valuable, and pay out more cash to their

shareholders.

Rajesh Chakrabarti (2005) said that the problem of corporate in India is different from that of the

Anglo-Saxon environment. In India, the problem is the exploitation of minority shareholders by the

dominant shareholders, whereas in the Anglo-Saxon environment, it is exploitation of shareholders

by the managers. The author argues that in the Indian context, the capital market is more capable of

disciplining the majority shareholders than the regulators. The regulator can just facilitate the

market to ensure corporate governance. It cannot enforce corporate governance effectively, since it

involves micro-management.

Kamal, Yousuf, Pervin, Tahura and Alam, Samsul (December1, 2007) Given the bank’s

intermediary role in providing stability to the financial system, Bangladesh as well as many

emerging economies has implemented policies to develop and restructure the banking sector. An

important feature of these policies was to design guidelines for ‘best practices’ known as,

‘corporate governance of banks’. The unique feature of banking industry which deals with the

money of the depositors conveys the inevitability to implement corporate governance in this sector.

This paper in early part deals with the concept and evolution of corporate governance in this sector

and argued the importance of a broader view of corporate governance, which encapsulates both

shareholders and depositors. The penultimate section examines the corporate governance of banks

in Bangladesh in the context of ongoing banking reforms. The final section provides a set of

measures for both micro and macro level to strengthen corporate governance in this sector.

Biswas, Pallab Kumar and Bhuiyan, Md. Hamid Ullah (2008) this paper is an attempt to give a

short description of the theoretical literature focusing on different conceptual models of corporate

governance and empirical studies relating to whether good corporate governance leads to better

firm performance. Majority of the literature has been found to focus on the relationship between

shareholders, directors, and management. The findings of these empirical studies are mixed and as

a result, it is often difficult for users to draw any firm conclusion on the relationship. On the other

hand, studies undertaken considering the overall corporate governance mostly provide evidence of

significant relationship between corporate governance and firm performance. However, whether

better corporate governance causes higher firm performance still remains a valid research question

for reasons like ambiguity regarding the direction of causality.

Balasubramanian, Bala N., Black, Bernard S. and Khanna, Vikramaditya S (July2, 2008)

provide an overview of Indian corporate governance practices, based primarily on responses to a

2006 survey of 370 Indian public companies. Compliance with legal norms is reasonably high in

most areas, but not complete. They identify areas where Indian corporate governance is relatively

strong and weak, and areas where regulation might usefully be either relaxed or strengthened. On

the whole, Indian corporate governance rules appear appropriate for larger companies, but could

use some strengthening in the area of related party transactions, and some relaxation for smaller

companies. Executive compensation is low by U.S. standards and is not currently a problem area.

They also examine whether there is a cross-sectional relationship between measures of governance

and measures of firm performance and find evidence of a positive relationship for an overall

governance index and for an index covering shareholder rights. They find an overall association,

which is stronger for more profitable firms and firms with stronger growth opportunities. A sub

index for shareholder rights is individually significant, but sub-indices for board structure (board

independence and committee structure), disclosure, board procedure, and related party transactions

are not significant. The non-results for board structure contrast to other recent studies, and suggest

that India's legal requirements are sufficiently strict so that over compliance does not produce

valuation gains.

Afsharipour, Afra, (July 14, 2010) This Article examines India’s initial corporate governance

reform efforts as well as reforms adopted in the aftermath of the Satyam scandal. An evaluation of

India’s corporate governance reforms demonstrates that although extensive reforms have been

instituted, there remain significant lapses in implementation and enforcement. This Article

expresses concerns that these challenges may prevail because they have been shaped by unique

political and social forces. These forces include the traditional closed ownership structures of

Indian firms, an ineffective institutional framework to support enforcement efforts, weaknesses in

investor access to the courts, and political pressures related to government ownership of certain

industries.

Vrajlal K. Sapovadia and Kandarp V. Patel (2010) Governance is system and process of

organised entities, whether private or public, whether for profit or not. Governance relates with

defining objectives, powers, duties, obligations & disabilities of various stakeholders. Corporates

are for profit and they get fund from shareholders. Governments are generally for Sovereign

functions and citizen elects the leaders. Therefore their governance differs substantially.

Fan, Steve Z. and Yu, Linda Q (August 2011) They develop an index to capture the deviation of

a firm's governance structure from the common practice of its home country and show that the

Corporate Governance Deviation (CGD) index can distinguish firms that are indifferent under the

conventional Equal Weighted Sum (EWS) index. They document a strong impact of the CGD index

on firm valuation and provide robust evidence that the EWS index is more appropriate for the US

firms, while the CGD index works better in civil law countries. Their results indicate that a global

metric is inadequate to gauge the quality of governance across the world.

Hopt, Klaus J.(August 29, 2011) Corporate governance of banks differs considerably from general

corporate governance. For banks the scope of corporate governance goes beyond the shareholders

(equity governance) to include debt holders (debt governance). From the perspective of bank

supervision debt governance is the primary governance concern.

Sanan, Neeti and Yadav, Sangeeta (April, 2011) The main objective of this study is to evaluate

the impact of corporate governance reforms brought out by Securities and Exchange Board of India

(SEBI), Clause 49 of the Listing Agreement (2006), on the level of financial disclosures of the

Indian firms. The current research has been carried out with 30 Indian listed companies which form

part of Bombay Stock Exchange (BSE) index for the pre-reform period (2001-02 to 2004-05) and

post-reform period (2005-06 to 2008-09). A Corporate Governance Transparency and Disclosure

Score (CGS) has been constructed for the sample companies based on the attributes drawn from the

Standard and Poor’s (S&P) Transparency and Disclosure Survey (2008). The study indicates that

despite impressive corporate governance reforms, there is only a moderate level of financial

disclosures by the Indian firms. It emphasizes a need for improved enforcement of legal and

regulatory structures to enhance financial reporting quality.

Heremans, Dirk and Bosquet, Katrien (April 28, 2011) In tribute to the lifetime achievements of

Dr. Thomas S. Ulen, this Article addresses the topic of the future of law and finance within the

broader context of the future of law and economics. After highlighting some of the differences

between the U.S. and European approaches to law and finance, it focuses on specific law and

finance issues that were involved in the financial crisis (including the regulation of financial

institutions) and draws some tentative lessons for the future development of new research

paradigms in law and finance. Finally, this Article advocates a more risk-based approach of

corporate governance for banks as well as the need for specific corporate governance models. Far

from having a declining impact on legal reforms and scholarship, the impact of law and finance is

on the rise.

Schmid, Markus M., Sabato, Gabriele and Aebi, Vincent,(October 11, 2011)The recent

financial crisis has raised several questions with respect to the corporate governance of financial

institutions. This paper investigates whether risk management-related corporate governance

mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive

board and whether the CRO reports to the CEO or directly to the board of directors, are associated

with a better bank performance during the financial crisis of 2007/2008. They measure bank

performance by buy-and-hold returns and ROE and control for standard corporate governance

variables such as CEO ownership, board size, and board independence. Most importantly, their

results indicate that banks, in which the CRO directly reports to the board of directors and not to the

CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and

ROE during the crisis. In contrast, standard corporate governance variables are mostly

insignificantly or even negatively related to the banks’ performance during the crisis.

Aguilera, Ruth V. and Desender,Kurt A(January 2012)This paper discusses the role that indices

of corporate governance have had in comparative corporate governance research. To do so, they

begin with a short discussion of what corporate governance is and its main debates. Then, they

review the main indices highlighting their strengths and limitations as well as describing some of

the findings that emanate from them.

Murugesan Selvam,John Raja,Arumugan Suresh Kumar The impact of banks’ organization

structure on performance and corporate governance practices has been discussed for a number of

years, mainly in developed countries such as UK and US. This paper chooses to address above-

mentioned issue in Indian context. It investigates two category of banks namely government banks

and private banks. This paper adopts the Tobin’s Q, and Return on Capital Employed (ROCE) as

bank performance indicators. The following board governance variables are used such as Board

Committees, Board Directors, CEO as a chairman, Board meetings, and Women Executive and

Executive-Director ratio. Multiple regression analysis results show that board governance variables

like board committees, board directors and women director are statistically significant to

performance for banks where government has considerable stake. In addition, government banks

are older and also have better market valuation than private banks.

Christina James-Overheu, Julie Cotter This paper investigates whether the quality of a firm’s

corporate governance practices and its sustainability disclosures are inversely related to its assessed

default risk. It is expected that high reported standards of corporate governance will reduce the

assessment of a company‟s default risk by lenders, underwriters and ratings agencies, and therefore

reduce the cost of debt for such companies. A corporate governance index based on annual report

disclosures was developed to rate each company‟s corporate governance quality. Derivation of this

index was centred on corporate governance indicators suggested by prior research and best practice;

particularly the Australian Stock Exchange “Principles of Good Corporate Governance and Best

Practice Recommendations”. It is similarly expected that the voluntary disclosure of sustainability

information (Corporate Social Reporting or CSR) will enhance a firm‟s management reputation.

The assessment of default risk is captured by a firm‟s individual credit rating supplied by Standard

and Poor’s. their results indicate that neither annual report disclosures about corporate governance

practices nor sustainability disclosures are significantly related to assessed default risk when firm

size is controlled.

3. RESEARCH METHODOLOGY

Objectives of the study The present study has been undertaken with the main objective of making a comparative analysis of the

Corporate governance disclosure practices of the public and the private sector banking companies and

foreign banks in India for the year 2006-07 to 2010-11. More specifically, the following are the

objectives of the study:

1. To study and analyse the contents of the Corporate governance report in the annual reports of

the public and the private sector banking companies of India during the period under study.

2. To evaluate the adoption of disclosure norms by the Public and Private banks under study.

3. To make an analytical study of different codes for corporate governance recommended by

different committees in India and their implementation.

4. To examine the disclosure practices, board structure, procedures adopted and board

committees of the sample organizations to assess the adherence to good corporate governance by them.

5. To study and compare the extent to which corporate governance codes are being implemented by

the public and the private sector banking companies of India during the period under study.

6. To examine the impact on the overall value of the bank (Private banks, public banks or foreign

banks) from the view point of corporate governance with respect to the perception of its investors.

7. To critically evaluate the key elements of corporate governance to unearth their strengths and

weaknesses

8. To provide suggestions to increase the pace of growth in the area under study.

Research Questions

The proposed research will ask some fundamental questions on corporate governance in banking sector

and will try to identify how it helps banks to ensure transparency and growth.

The questions are:

• How the attributes of corporate governance help banking sector to create a situation, which

can minimize fraud/malpractices in financial matter in banking sector?

• Whether ownership pattern influences the effective governance and functioning of a bank?

• Does the declaration of corporate governance in annual report bring more transparency in

their business and how it pays in terms of business?

• Does the proper implementation of corporate governance principles create more public trust

and acceptability of a bank as a result give boost to share price?

• Is there any difference in corporate governance practices between Private sector and Public

sector banks?

• To what extent Indian Banking sector has accepted/implemented corporate governance

principles compared to international norms?

• What are the suggestions to banking industry with respect to corporate governance?

Scope of the study As the aim is to examine the major corporate governance practices adopted by all the Public, Private

and Foreign Banks in India, at present only 40 banks are listed in the Indian stock markets, out of

which I have taken total 35 banks, where 19 banks belong to public sector and remaining 16 banks in

the private sector category. In India, the implementation of corporate governance practices is directly

linked with Security Exchange Board India (SEBI) under clause 49 listing agreement. According to

SEBI, the corporate governance practices are applicable only to banks that are listed in the Indian stock

exchanges hence the foreign banks lay outside the purview of study. I have ignored the SBI associate

banks in my research since I have taken SBI, the parent organization. At the end of March 2011, the

following banks were listed in BSE or NSE:

List of banks considered in Research Study

S. NO Private Banks Public Banks

1. Dhanalakshmi Bank UCO Bank

2. Axis Bank Union Bank

3. South Indian Bank Vijaya Bank

4. Karur Vysya Bank Dena Bank

5. Jammu & Kashmir Bank Central Bank

6. ING Vysya Bank Bank of Maharashtra

7. Yes Bank Corporation Bank

8. HDFC Bank Syndicate Bank

9. Indus Ind Bank Indian Overseas Bank

10. ICICI Bank Indian Bank

11. Federal Bank State Bank Of India

12. City Union Bank Oriental Bank

13. Laxmi Vilas Bank IDBI Bank

14. Kotak Bank Allahabad Bank

15. Development Credit Bank Canara Bank

16. Karnataka Bank Bank Of India

17. Andhra Bank

18. Punjab National Bank

19. Bank Of Baroda

In order to make the inter period analysis of the corporate governance disclosure practices in both the

public and the private sector banking companies, a period of five years i.e. from 2006-07 to 2010-11

has been selected because it became mandatory for all the listed firms through revised clause 49 to

implement corporate governance disclosure in the annual reports w.e.f. 31st December 2005, before that

since it was not mandatory, many banks therefore never disclosed the corporate governance in their

annual reports. Hence the research is meaningful only after 31st Dec 05’.

Data Collection The research study is based on both the primary as well as secondary data. A sample of 500 investors

was taken from National Capital Region, Delhi on the basis of simple random sampling in order to

know their perception about implementation of Corporate Governance practices.

For the secondary research, the annual reports of the selected banking companies from both the public

and the private sector were the major source of data collection. All the annual reports were downloaded

from reportjunction.com, almost all the reports were obtained from there except a few.

Analysis of Data

For the purpose of analyzing the corporate governance disclosure practices of the public and the private

sector banking companies, primary research was undertaken wherein a simple random sampling was

done, a simple random sample is meant to be an unbiased representation of a group. The questionnaire

was filled by 500 respondents who happen to be the general investors.

As the aim is to examine the major corporate governance practices adopted by all the Public, new

Private sector and Foreign Banks (at present only 40 banks are listed in the Indian stock markets, out of

which I have taken total 35 banks, where 19 banks belong to public sector and remaining 16 banks in

the private sector category), I have tried to direct my research towards discovering firstly, how well the

corporate disclosure norms are being followed by the respective public, private banks and after the

analysis have depicted the same, then secondly if there is any impact/relation between corporate

governance disclosure and performance (through return on capital employed ROCE and Tobin Q

method). Certain items of information were identified after scanning the annual reports of the banking

companies of both the sectors as well as the review of literature. I have divided the corporate

governance codes into four major heads namely, procedure, disclosure, audit committee and board

structure. These major heads have several corporate governance disclosure variables as discussed

throughout in this paper which are drawn out of the codes described in Clause 49 of SEBI Act. For this

purpose corporate governance index was prepared.

Hypotheses

With reference to review of literature of corporate governance, and different types of banks, this paper

develops the following hypotheses for study to test the relationships between corporate governance

practices and performance:

H0 Firms’ performance is not positively related to the quality of its corporate governance practices

H1 Firms’ performance is positively related to the quality of its corporate governance practices

Independent variables

The various corporate governance indicators suggested by “Clause 49 of the listing agreement by Sebi”

are the independent variables which have bee explained later, wherein TDL is total disclosure, TBS is

total board structure, TAC is total audit committee, TPRO is total procedures, NBM is no. of board

meetings ,BS is board size, NAM is no. of audit meetings ,ACS is audit committee size ,NOC is no. of

committees and Tobin’s Q is market value of equity over book value of total asset. ROCE is calculated

by dividing earnings before interest and taxes (EBIT) by capital employed, where capital employed is

equity plus reserves and surplus, the latter two happen to be the dependent variables.

Development of a Corporate Governance Index

A corporate governance index based on annual report disclosures was developed to rate each bank’s

corporate governance quality. Derivation of this index was centered on corporate governance indicators

suggested by “Clause 49 of the listing agreement by Sebi”. The corporate governance index framework

is shown below. The maximum possible score was 20 (10 disclosure, 3 board structure, 3 audit

committee, 4 procedures). Each bank’s CG SCORE was calculated by dividing their total score by this

maximum possible score, to express it as a proportion for ease of comparability.

DISCLOSURE Maximum

Annual statements contain a statement addressing

corporate governance

If YES, 1 point. If no, 0. 1

Basis of related party transactions disclosed

if Yes,1 point.If NO,0 1

Appointment of a new director or re-appointment

of a director is disclosed

If YES, 1 point. If NO, 0. 1

Members attendance at meetings disclosed


Bank puts annual financial statements on web


Bank puts Directors report on web


Bank puts Annual report on web


Compensation of Directors (including non-

executives) disclosed


The disclosures of the compliance with mandatory

requirements and adoption (and compliance)/non

adoption of the non-mandatory requirements shall

be made


A director is not a member in more than 10

committees or act as Chairman of more than five

committees across all companies in which he is a

director

If YES, 1 point. If NO, 0 1

TOTAL DISCLOSURE 10

BOARD STRUCTURE

CEO not the same person as Board Chairman


50% independent directors if Chairman is Executive

Director or 33% independent directors if Chairman

is a Non-Executive Director

If YES, 1 point. If NO, 0,Not disclosed 0. 1

3) Number of meetings

Atleast 4 - 1 point

No meetings - 0 point

Not disclosed - 0 point 1

TOTAL BOARD STRUCTURE 3

AUDIT COMMITTEE

Atleast three directors


2/3 must be independent

If YES, 1 point. If NO 0, Not disclosed 0 1

Number of meetings during the year

4 or more - 1 point

Less than 4 - 0 point

Not disclosed - 0 point 1

TOTAL AUDIT COMMITTEE 3

PROCEDURES

The Bank has laid down procedures to inform board

members about the risk assessment and

minimization procedures


Company has Code of Conduct (Ethics)


Auditor or company secretary compliance with



Does CEO / CFO certify financial statements


TOTAL PROCEDURES 4

TOTAL SCORE 20

Organization of the Study The organization of the present research follows conventional chapter plan. The study is divided into

following six chapters:

1. Corporate Governance – An Introduction, Chapter one highlights introduction of corporate

governance, conceptual discussion, objectives, need, benefits and limitation of Corporate governance.

2. Review of Literature, Chapter two narrates the academic literature on corporate governance

and especially corporate governances in banking sector.

3. Research Methodology, Chapter three describes the research problems, methodology of the

research and limitation of the research.

4. Corporate Governance disclosure practices of Banking Companies in India, Chapter four deals

with the current scenario of governance of banks, the principles and committee recommendations for

the implementation of CG practices in Indian banking sector.

5. Foreign Banks in India, chapter five discusses the framework for presence of foreign banks

in India and the Corporate Governance Guidelines for Foreign Banks to Protect Domestic Interest

6. Analysis and interpretation, Chapter five presents the outcome of primary and secondary

research analysis.

7. Conclusion and Suggestions, Chapter six gives concluding remarks on the research analysis

and recommendation to improve corporate governance practices in Indian Banking sector.

4. ANALYSIS OF DATA

Methodology of Index Construction

To construct the Disclosure Index, Board structure Index, the Audit Committee Index and the

Procedure Index we take the attributes within a specified governance mechanism and score each

attribute as 0 for NO and 1 for YES. We then aggregate the score across all the attributes within that

specific governance mechanism, divide it by the maximum possible score i.e 20. Note that though the

maximum value for each sub index is thus set to 20, none of the sample banks may earn the maximum

score. In other words, we normalize the maximum score to 20 rather than normalizing the best bank in

the sample to 20. This ensures that improvements over time in a particular governance mechanism will

be adequately captured by the index.

We use the standards specified in the Clause 49 regulations as well as insights from various academic

studies to score each attribute within a particular corporate governance mechanism. For example, with

respect to percentage of independent directors, we penalize companies that do not meet the Clause 49

requirements of having at least one third of its board members as independent directors (in case the

company has non-executive chairman) or 50 percent (in case the company has an executive/promoter

chairman). For scoring attributes that do not have specified standards in the Clause 49 regulations, we

take help of existing academic studies.

After analyzing the annual report of each of the 16 private banks and 19 public banks individually and

preparing a separate Corporate Governance index(CG Index) for each private and public banks, below

is the summarized comprehensive CG index score of all the private banks over the last five years:

Table 1: CG Index Score of Private Banks

CG Index Score for Private Banks

DISCLOSURE 2011 2010 2009 2008 2007



If YES, 1 point. If no, 0. 0.75 0.733333 0.6875 0.642857 0.692308

Basis of related party transactions disclosed if Yes,1

point.If NO,0 0.875 0.933333 0.9375 0.928571 0.923077



If YES, 1 point. If NO, 0. 0.375 0.466667 0.5 0.5 0.538462


If YES, 1 point. If NO, 0. 1 1 1 1 1


If YES, 1 point. If NO, 0. 1 1 1 1 1


If YES, 1 point. If NO, 0. 1 1 1 1 1


If YES, 1 point. If NO, 0. 1 1 1 1 1



If YES, 1 point. If NO, 0. 1 0.933333 1 1 0.923077




be made

If YES, 1 point. If NO, 0. 0.6875 0.666667 0.625 0.571429 0.538462




director

If YES, 1 point. If NO, 0 0.75 0.8 0.75 0.714286 0.615385

TOTAL DISCLOSURE

8.4375 8.533333 8.5 8.357143 8.230769

BOARD STRUCTURE


If YES, 1 point. If NO, 0. 0.5625 0.533333 0.3125 0.285714 0.384615




If YES, 1 point. If NO, 0,Not disclosed 0. 0.9375 0.933333 0.9375 0.928571 1


Atleast 4 - 1 point


Not disclosed - 0 point 1 1 1 1 1

TOTAL BOARD STRUCTURE

2.5 2.466667 2.25 2.214286 2.384615

AUDIT COMMITTEE


If YES, 1 point. If NO, 0. 1 1 1 1 1


If YES, 1 point. If NO 0, Not disclosed 0 0.8125 0.733333 0.75 0.857143 0.923077


4 or more - 1 point



TOTAL AUDIT COMMITTEE

2.8125 2.733333 2.75 2.857143 2.923077

PROCEDURES




If YES, 1 point. If NO, 0. 1 1 1 0.857143 0.923077


If YES, 1 point. If NO, 0. 1 0.933333 0.875 0.857143 0.846154



If YES, 1 point. If NO, 0. 0.9375 0.933333 0.9375 0.928571 0.923077


If YES, 1 point. If NO, 0. 0.4375 0.466667 0.375 0.428571 0.307692

TOTAL PROCEDURES

3.375 3.333333 3.1875 3.071429 3

TOTAL SCORE 17.125 17.06667 16.6875 16.5 16.53846

We observed from the Table 1, for private banks, the Total disclosure (TDL) ranged almost same each

year between 8.3 and 8.5 out of 10 whereas there is a slight improvement in the Total board structure

(TBS) from 2.3 till 2.5 out of 3, Total audit committee (TAC) remained almost constant, whereas Total

procedures (TPRO) showed again a slight improvement from 3 to 3.3 out of 4.

What is noteworthy is the improvement in the overall Corporate Governance Score (CG score) from

16.53 to 17.1, this reflects that there is a conscious improvement amongst private banks while making

Corporate governance disclosures.

Table 2: CG Index Score of Public Banks

CG Index Score for Public Banks

DISCLOSURE 2011 2010 2009 2008 2007

Annual statements contain a statement

addressing corporate governance

If YES, 1 point. If no, 0. 1 1 1 1 1

Basis of related party transactions

disclosed if Yes,1 point.If NO,0 1 0.947368 0.894737 0.947368 0.944444

Appointment of a new director or re-

appointment of a director is disclosed

If YES, 1 point. If NO, 0. 0.736842 0.736842 0.789474 0.789474 0.833333

Members attendance at meetings

disclosed

If YES, 1 point. If NO, 0. 1 1 1 1 1

Bank puts annual financial statements on

web

If YES, 1 point. If NO, 0. 1 1 1 1 1


If YES, 1 point. If NO, 0. 1 1 1 1 1


If YES, 1 point. If NO, 0. 1 1 1 1 1

Compensation of Directors (including

non-executives) disclosed

If YES, 1 point. If NO, 0. 0.894737 0.894737 0.894737 0.894737 0.888889

The disclosures of the compliance with

mandatory requirements and adoption

(and compliance)/non adoption of the

non-mandatory requirements shall be

made

f YES, 1 point. If NO, 0. 0.789474 0.789474 0.789474 0.789474 0.666667

A director is not a member in more than

10 committees or act as Chairman of

more than five committees across all

companies in which he is a director 0.421053 0.473684 0.631579 0.526316 0.5

TOTAL DISCLOSURE

8.842105 8.842105 9 8.947368 8.833333

BOARD STRUCTURE

CEO not the same person as Board

Chairman

If YES, 1 point. If NO, 0. 0.210526 0.210526 0.210526 0.210526 0.222222

As per Table 2, for public banks, the TDL, TBS, TAC, TPRO seem to be almost same in all the five

years without any remarkable changes. The same is reflected in CG score which again happens to be

the same i.e. was 16 out of 20 in year 2007 whereas 16.1 out of 20 in 2011.

50% independent directors if Chairman is

Executive Director or 33% independent

directors if Chairman is a Non-Executive

Director

If YES, 1 point. If NO, 0,Not disclosed 0. 0.263158 0.263158 0.263158 0.368421 0.277778


Atleast 4 - 1 point




1.473684 1.473684 1.473684 1.578947 1.5

AUDIT COMMITTEE


If YES, 1 point. If NO, 0. 1 1 1 1 1




4 or more - 1 point




2.210526 2.210526 2.210526 2.263158 2.333333

PROCEDURES

The Bank has laid down procedures to

inform board members about the risk

assessment and minimization procedures

If YES, 1 point. If NO, 0. 0.947368 0.947368 0.947368 0.947368 0.944444


If YES, 1 point. If NO, 0. 0.947368 0.947368 0.947368 0.947368 0.833333

Auditor or company secretary compliance

with corporate governance

If YES, 1 point. If NO, 0. 1 1 1 1 1

Does CEO / CFO certify financial

statements

If YES, 1 point. If NO, 0. 0.684211 0.578947 0.631579 0.631579 0.555556

TOTAL PROCEDURES

3.578947 3.473684 3.526316 3.526316 3.333333

TOTAL SCORE 16.10526 16 16.21053 16.31579 16

Table 3: CG Index of Private Banks (in percentage)

CG Index of Private Banks (in percentage)

DISCLOSURE 2011 2010 2009 2008 2007



If YES, 1 point. If no, 0. 75 73.33333 68.75 64.28571 69.23077

Basis of related party transactions disclosed if Yes,1

point.If NO,0 87.5 93.33333 93.75 92.85714 92.30769



If YES, 1 point. If NO, 0. 37.5 46.66667 50 50 53.84615


If YES, 1 point. If NO, 0. 100 100 100 100 100


If YES, 1 point. If NO, 0. 100 100 100 100 100


If YES, 1 point. If NO, 0. 100 100 100 100 100


If YES, 1 point. If NO, 0. 100 100 100 100 100



If YES, 1 point. If NO, 0. 100 93.33333 100 100 92.30769




be made,if YES, 1 point. If NO, 0. 68.75 66.66667 62.5 57.14286 53.84615




director 75 80 75 71.42857 61.53846

TOTAL DISCLOSURE

BOARD STRUCTURE


If YES, 1 point. If NO, 0. 56.25 53.33333 31.25 28.57143 38.46154




If YES, 1 point. If NO, 0,Not disclosed 0. 93.75 93.33333 93.75 92.85714 100


Atleast 4 - 1 point




AUDIT COMMITTEE


If YES, 1 point. If NO, 0. 100 100 100 100 100


If YES, 1 point. If NO 0, Not disclosed 0 81.25 73.33333 75 85.71429 92.30769


4 or more - 1 point




PROCEDURES




If YES, 1 point. If NO, 0. 100 100 100 85.71429 92.30769


If YES, 1 point. If NO, 0. 100 93.33333 87.5 85.71429 84.61538



If YES, 1 point. If NO, 0. 93.75 93.33333 93.75 92.85714 92.30769


If YES, 1 point. If NO, 0. 43.75 46.66667 37.5 42.85714 30.76923

TOTAL PROCEDURES

TOTAL SCORE

According to Table 3, the CG factors like putting annual report, directors report, and annual financial

statements score 100% in all the five years, similarly the factors like attendance in meeting, minimum

no. of audit members and minimum no. of audit and board meetings again score 100% in all the five

years which is commendable. However, the CEO seems to be the same person who is the chairman of

the bank in most cases and also CEO/CFO certifications seem improper as they have really low

disclosure percentages in all the five years.

Table 4: CG Index of Public Banks (in percentage)

CG Index of Public Banks (in percentage)

DISCLOSURE 2011 2010 2009 2008 2007

Annual statements contain a statement

addressing corporate governance

If YES, 1 point. If no, 0. 100 100 100 100 100

Basis of related party transactions

disclosed if Yes,1 point.If NO,0 100 94.73684 89.47368 94.73684 94.44444

Appointment of a new director or re-

appointment of a director is disclosed

If YES, 1 point. If NO, 0. 73.68421 73.68421 78.94737 78.94737 83.33333

Members attendance at meetings

disclosed

If YES, 1 point. If NO, 0. 100 100 100 100 100

Bank puts annual financial statements on

web

If YES, 1 point. If NO, 0. 100 100 100 100 100


If YES, 1 point. If NO, 0. 100 100 100 100 100


If YES, 1 point. If NO, 0. 100 100 100 100 100

Compensation of Directors (including

non-executives) disclosed

If YES, 1 point. If NO, 0. 89.47368 89.47368 89.47368 89.47368 88.88889

The disclosures of the compliance with

mandatory requirements and adoption

(and compliance)/non adoption of the

non-mandatory requirements shall be

made

f YES, 1 point. If NO, 0. 78.94737 78.94737 78.94737 78.94737 66.66667

A director is not a member in more than

10 committees or act as Chairman of

more than five committees across all

companies in which he is a director 42.10526 47.36842 63.15789 52.63158 50

TOTAL DISCLOSURE

BOARD STRUCTURE

CEO not the same person as Board

Chairman

If YES, 1 point. If NO, 0. 21.05263 21.05263 21.05263 21.05263 22.22222

50% independent directors if Chairman is

Executive Director or 33% independent

directors if Chairman is a Non-Executive

Director

If YES, 1 point. If NO, 0,Not disclosed 0. 26.31579 26.31579 26.31579 36.84211 27.77778


Atleast 4 - 1 point




AUDIT COMMITTEE


If YES, 1 point. If NO, 0. 100 100 100 100 100




4 or more - 1 point




PROCEDURES

The Bank has laid down procedures to

inform board members about the risk


If YES, 1 point. If NO, 0. 94.73684 94.73684 94.73684 94.73684 94.44444


If YES, 1 point. If NO, 0. 94.73684 94.73684 94.73684 94.73684 83.33333

Auditor or company secretary compliance

with corporate governance

If YES, 1 point. If NO, 0. 100 100 100 100 100

Does CEO / CFO certify financial

statements

If YES, 1 point. If NO, 0. 68.42105 57.89474 63.15789 63.15789 55.55556

TOTAL PROCEDURES

TOTAL SCORE

As per Table 4, the CG factors like putting annual report, directors report, annual financial statements

score 100% in all the five years, similarly the factors like attendance in meeting, minimum no. of audit

members and minimum no. of audit and board meetings again score 100% in all the five years of the

public banks which are same as that of private banks. Moreover two new factors like auditor/company

secretary compliance and annual statements contain CG report are the two new factors which score

100%, which was not the case in Private Banks.

Table 5: Comparison of CG Index Score (in percentage) of Public and Private Banks in India

Comparison of CG Index Score (in percentage) of Public and Private Banks in India

DISCLOSURE Private Public

Annual statements contain a statement addressing corporate governance

If YES, 1 point. If no, 0. 70.11 100

Basis of related party transactions disclosed if Yes,1 point.If NO,0 91.9 94.7

Appointment of a new director or re-appointment of a director is disclosed

If YES, 1 point. If NO, 0. 47.6 77.7


If YES, 1 point. If NO, 0. 100 100







Compensation of Directors (including non-executives) disclosed

If YES, 1 point. If NO, 0. 97.2 89.4

The disclosures of the compliance with mandatory requirements and adoption

(and compliance)/non adoption of the non-mandatory requirements shall be

made

if YES, 1 point. If NO, 0. 61.8 76.5

A director is not a member in more than 10 committees or act as Chairman of

more than five committees across all companies in which he is a director 72.6 51.1

TOTAL DISCLOSURE

BOARD STRUCTURE


If YES, 1 point. If NO, 0. 41.6 21.3

50% independent directors if Chairman is Executive Director or 33%

independent directors if Chairman is a Non-Executive Director

If YES, 1 point. If NO, 0,Not disclosed 0. 94.7 37.1


Atleast 4 - 1 point


Not disclosed - 0 point 100 100


AUDIT COMMITTEE




If YES, 1 point. If NO 0, Not disclosed 0 81.5 24.6


4 or more - 1 point


Not disclosed - 0 point 100 100


PROCEDURES

The Bank has laid down procedures to inform board members about the risk


If YES, 1 point. If NO, 0. 95.6 94.7


If YES, 1 point. If NO, 0. 90.2 92.5

Auditor or company secretary compliance with corporate governance

If YES, 1 point. If NO, 0. 93.2 100


If YES, 1 point. If NO, 0. 40.3 61.6

TOTAL PROCEDURES

However, ‘Independence of directors’ seem to be an issue consistently with the public banks as the

percentage is very low i.e. 26% and around 21% is the case with ‘CEO the same person as chairman’,

the same results are shown in Table 5 at a glance wherein comparison of CG Index Score (in

percentage) of Public and Private Banks in India is shown.

Table 6: Year Wise Comparison of CG Score of Private Banks in India

Year Wise Comparison of CG Score of Private Banks

in India

2011 2010 2009 2008 2007

DCB 18 19 18 NA 18

Dhanalakshmi 16 17 17 NA NA

Axis 16 15 15 15 15

South Indian 17 18 17 16 16

Laxmi Vilas 17 16 15 15 NA

Kotak 17 16 17 17 16

Karur Vysya 16 17 16 15 14

Karnataka 16 16 15 15 15

J&K 17 17 16 16 16

ING VYSYA 19 19 18 18 18

YES 19 17 18 19 18

HDFC 17 16 17 18 18

Indus Ind 19 19 19 19 19

ICICI 17 17 17 17 16

Federal 17 17 17 17 16

City Union 15 NA 15 14 NA

Table 6 shows the CG score calculated for each private bank in each year out of 20 for the period 2007

till 2011, wherein we observe that amongst the private banks it is IndusInd bank which has scored the

highest and consistently in all the five years i.e. 19 out of 20 in each year, whereas City Union is the

bank which has scored the least CG Score amongst all the private banks.

Table 7: Percentage Change in CG Score from 2007 till 2011 in Private Banks

Table 7 shows the comparative percentage change of each bank from the year ended 2007 till 2011

from where we can make out that out of 16 private banks it is the Karur Vysya Bank which has shown

maximum improvement of 14.29% in their CG score thus displaying better CG disclosure practices

adopted by the over the years whereas HDFC has shown a downfall in their CG score of around 5.56%.

Below is Table 8 which shows the CG Score for each public bank out of 20 over the five years i.e. 2007

till 2011. As per the table, it is the Bank of India which scores best amongst all the public sector banks

whereas Dena Bank seems to be the least scorer. A further comparison between public and private CG

Scores would highlight this fact that private banks surprisingly are more consistent and better in

Corporate Disclosure Practices.

Percentage Change in CG Score

from 2007 till 2011 in Private Banks

DCB 0

Dhanalakshmi NA

Axis 6.67

South Indian 6.25

Laxmi Vilas NA

Kotak 6.25

Karur Vysya 14.29

Karnataka 6.67

J&K 6.25

ING VYSYA 5.56

YES 5.56

HDFC -5.56

Indus Ind 0

ICICI 6.25

Federal 6.25

City Union NA

Table 8: Year Wise Comparison of CG Score of Public Banks in India

Year Wise Comparison of CG Score of Public Banks in

India

2011 2010 2009 2008 2007

Uco 15 15 15 15 14

Union 17 15 17 17 15

Vijaya 16 17 17 17 16

Dena 14 14 15 15 15

Central 14 16 16 14 NA

Bank of

Maharashtra 16 15 15 15 15

Corporation 17 17 17 18 18

Syndicate 16 16 16 16 16

India Overseas Bank 17 17 17 17 17

Indian Bank 16 16 16 18 18

SBI 15 14 15 15 16

Oriental 16 16 17 17 15

IDBI 16 17 16 16 15

Allahabad 17 15 15 17 17

Canara 16 16 16 17 17

Bank of India 19 19 19 19 18

Bank of Baroda 17 17 17 16 15

Andhra 16 16 16 16 15

PNB 15 15 15 15 16 And as per Table 9, the maximum improvement shown by the public sector banks amongst all the 19

public sector banks is of Bank of India and UCO Bank around 13.33%, whereas it is the Indian Bank

that showed the maximum decrease around 11.11%.

Table 10 finally summarizes what has been explained above in a nutshell that it is the Private banks which are far

better than the Public sector banks as far as implementation of Corporate Governance disclosure is concerned

which states from the year 2007, 62.5% of private banks have increased in implementing better disclosure norms

thus fairing higher CG score in the later years, whereas only 42.1% of the public sector banks have shown that

improvement. Similarly its only 6.25% of private banks against 31.6 % in case of public banks whose CG Score

has decreased over these years. Also the CG Score for only 12.5% of private sector banks remain same for these

five years as compared to 21.1% of public banks.

Table 9: Percentage Change in CG Score from 2007 till 2011 in Public Banks

Percentage Change in CG Score

from 2007 till 2011 in Public Banks

Uco 7.14

Union 13.33

Vijaya 0.00

Dena -6.67

Central NA

Bank of Maharashtra 6.67

Corporation -5.56

Syndicate 0.00

India Overseas Bank 0.00

Indian Bank -11.11

SBI -6.25

Oriental 6.67

IDBI 6.67

Allahabad 0.00

Canara -5.88

Bank of India 5.56

Bank of Baroda 13.33

Andhra 6.67

PNB -6.25

Table 10: Comparative percent change in CG Score of Public and Private Sector Banks from

2007 till 2011

Comparative percent change in CG

Score of Public and Private Sector

Banks from 2007 till 2011

Private Public

Increased 62.5 42.1

Decreased 6.25 31.6

Same 12.5 21.1

NA 18.75 5.2

100 100

Table 11: Comparison of Descriptive Statistics of CG Score of Public and Private Banks

Comparison of Descriptive Statistics of CG Score of Public and Private Banks

Min Max Mean Standard Deviation

Private Public Private Public Private Public Private Public

2011 15 14 19 19 17.0625 16.05263 1.181454 1.17727

2010 15 14 19 19 17.06667 15.94737 1.222799 1.223551

2009 15 15 19 19 16.6875 16.15789 1.25 1.067872

2008 14 14 19 19 16.5 16.31579 1.60528 1.293257

2007 14 14 19 18 16.53846 16 1.506397 1.236694

Table 12: Year wise scores for the Public Sector Banks from 2007 till 2011

Year wise scores for the Public Sector Banks from 2007 till 2011

2011 2010 2009 2008 2007

TDL 8.84211 8.84211 8.94737 8.94737 8.83333

TBS 1.42105 1.47368 1.47368 1.57895 1.50000

TAC 2.21053 2.15789 2.21053 2.26316 2.33333

TPRO 3.57895 3.47368 3.52632 3.52632 3.33333

NBM 13.73684 12.52632 13.00000 12.15789 13.11111

BS 11.89474 11.52632 13.89474 12.15789 12.05556

NAM 10.15789 9.89474 9.10526 8.89474 9.00000

ACS 6.10526 5.78947 6.36842 6.00000 5.88889

NOC 10.57895 10.15789 9.73684 9.05263 8.38889

percentage of CG report in the

annual report 14.35620 14.09672 14.33340 15.02198 17.63090

Tobin’s Q 0.01157 0.01530 0.00558 0.00585 0.00682

ROCE 0.31964 0.31474 0.31505 0.30378 0.32554

Where in: TDL is total disclosure NBM is no. of board meetings

TBS is total board structure BS is board size NOC is no. of committees

TAC is total audit committee NAM is no. of audit meetings

TPRO is total procedures ACS is audit committee size

Tobin’s Q is market value of equity over book value of total asset.

ROCE is calculated by dividing earnings before interest and taxes (EBIT) by capital employed, where

capital employed is equity plus reserves and surplus

In the above Table 11, we have calculated the descriptive statistics, which shows that in year 2011 the

minimum CG SCORE was 15 in case of private bank whereas it is 14 in case of public banks; however

the maximum score is same for both. The mean CG Score is higher of private banks compared to

Public banks with almost the same standard deviation in both sectors. The same trend is observed in

year 2010, however in year 2009 both public as well as private banks have same minimum and

maximum CG score but a higher mean and standard deviation in case of private banks. The same trend

could be observed in the remaining years till 2007 wherein the mean score and standard deviation of

private is higher than public banks

In Table 12 we have further factors whose descriptive statistics has been calculated for the public

banks. A bank performance indicator consists of two variables namely Tobin’s Q, and Return on Capital

Employed. Most of the past literature on financial institutions has used accounting measure as a proxy

for performance. In this paper, both accounting and market valuation measure are used to account

corporate governance practices intervention. In Table 12, the TDL (Total disclosures) have remained

almost consistent for these five years, TBS (Total board structures) and TAC (Total audit committee)

have shown a slight negative change from 1.5 to 1.4 and from 2.3 to 2.2 respectively. TPRO (Total

procedures) however have shown slight improvement along with the no. of board meetings from 3.33

to 3.5 and 13.11 to 13.73 respectively. Board size score has gone down from 12 to 11.89 whereas audit

committee size and no. of committees score has improved. The performance as indicated by Tobin Q

and ROCE does not show any significant improvement over the years where Tobin Q has gone up from

.006 to .011.We have also taken this new factor into account that what percentage of annual report is

actually dedicated to corporate governance report. In case of public banks the results are again

disappointing as the percentage instead of going up has gone down from 17.63% to 14.35%

Table 13: Descriptive Statistics for Public Sector Banks

Descriptive Statistics for Public Sector Banks

MIN MAX MEAN Std DEV

TDL 7.2 10 8.88 0.76999

TBS 1 3 1.48 0.67434

TAC 1.8 3 2.23 0.42302

TPRO 2.2 4 3.49 0.56575

No. of board meetings 8.6 15.6 12.92 1.8247

Board Size 10 16 12.34 1.83019

No. of audit meetings 7.2 11.4 9.41 1.18598

Audit Committee Size 4.8 8.2 6.03 1.05717

No. of committees 3 15 9.59 2.49

Percentage of CG report in the annual report 5.43 22 14.97 4.50923

Tobin's Q 0.00072 0.07583 0.00905 0.01658

ROCE 0.13218 0.38419 0.31495 0.0589

In Table 14, where the scores are reflected for the private banks, we find out that TDL ,TBS and TPRO,

no .of audit meetings, audit committee size and no. of committees show some slight improvement over

Table 14: Year wise scores for the Private Sector Banks from 2007 till 2011

Year wise scores for the Private Sector Banks from 2007 till 2011

2011 2010 2009 2008 2007

TDL 8.43750 8.53333 8.50000 8.35714 8.23077

TBS 2.50000 2.46667 2.25000 2.21429 2.38462

TAC 2.81250 2.73333 2.75000 2.85714 2.92308

TPRO 3.37500 3.33333 3.18750 3.07143 3.00000

no. of board meetings 11.06250 10.26667 11.12500 12.07143 11.23077

board size 10.37500 11.13333 10.31250 10.28571 10.46154

no. of audit meetings 8.18750 8.13333 8.00000 8.35714 7.92308

audit committee size 4.62500 4.53333 4.56250 4.28571 4.46154

no. of committees 9.75000 9.60000 9.12500 9.07143 8.76923

percentage of CG report in the

annual report 12.15114 12.03554 13.46369 13.89312 16.44961

Tobin’s Q 0.00585 0.00699 0.00719 0.00648 0.00945

ROCE 0.25018 0.23160 0.25709 0.23330 0.26165

the years, whereas TAC, no. of board meetings, board size reflect small negative changes since 2007

till 2011. The performance as indicated by Tobin Q and ROCE does not show any significant

improvement over the years where Tobin Q has gone up from .009 to .005. But again it was

disappointing to see that the percentage of annual report dedicated to CG report has gone down instead

of going up from 16.44% to 12.15%.

Table 15: Descriptive Statistics for Private Sector Banks

Descriptive Statistics for Private Sector Banks

MIN MAX MEAN Std DEV

TDL 6.8 9.8 8.41 0.93298

TBS 1 3 2.32 0.53259

TAC 2.2 3 2.81 0.28119

TPRO 2 4 3.19 0.65132

No. of board meetings (NBM) 4.2 26.6 11.23 5.52106

Board Size(BS) 7.67 15.6 10.45 1.87658

No. of audit meetings(NAM) 6 12.67 8.2 2.08795

Audit Committee Size(ACS) 3.2 7 4.54 1.0062

No. of committees (NOC) 6.33 12.2 9.24 1.69145

Percentage of CG report in the annual

report 7.47 19.67 13.6 3.53118

Tobin's Q 0.00131 0.02928 0.00735 0.00696

ROCE 0.11795 0.3405 0.24441 0.06644

If we compare Table 15 and Table 13, we find that the minimum score of total disclosures of public

banks is higher than the private banks i.e. 7.2 and 6.8 respectively out of 10 whereas public sector

banks even score full points unlike private banks, thus fetching a higher mean than the private banks,

thus having better disclosure practices. However the minimum and maximum score are same for the

total board structure in both the sectors, same is the case of total procedures. However what is

appreciable that TBS, TAC, TPRO the maximum score is the full points scored out of 3, 3 and 4

respectively by both the sector banks. Number of board meetings show that there has been higher

number of meeting in case of private banks as compared to public banks whereas public sector banks

are better when it comes to the board size. Public banks have better audit committee size and the

number of audit meetings is relatively same in both sectors. It is also very clear that the public sector

banks have constituted more number of committees so we can assume a better management of

activities. There is not much of a difference when we look at the percentage of CG report in the annual

report in both the sectors. Performance and profitability indicators such as Tobin’s Q reflects that

Public sector banks have a higher score whereas ROCE seems to be almost same in both the sectors.

Therefore the overall picture as per the analysis of the secondary data is:

Analysis:

The following model (Model 1) and (Model 2) was used to test hypotheses that a firms’ performance is

positively related to the quality of its corporate governance practices and the disclosure of CG factors,

in equation form, multiple regression models are expressed:

Tobin’s Q/ ROCE = α + β1TDL + β2TBS+β3TAC + β4TPRO +β5NBM + β6BS+β7NAM +

β8ACS+β9NOC + µ

Table 16: Correlation Matrix Analysis of Indian Private Banks

1 2 3 4 5 6 7 8 9 10 11

1.TDL 1

2. TBS 0.001 (0.991)

1

3. TAC

-0.186 (0.112)

-0.112 (0.342)

1

4. TPRO -0.231* (0.047)

0.373** (0.001)

0.008 (0.947)

1

5. No of board meetings

-0.224 (0.055)

-0.153 (0.193)

-0.406** (0.000)

-0.367** (0.001)

1

6. Board Size

-0.388** (0.001)

0.220 (0.059)

0.032 (0.787)

0.249* (0.032)

-0.029 (0.809)

1

7. No of audit meetings

-0.056 (0.637)

-0.560** (0.000)

0.174 (0.139)

-0.380** (0.001)

0.078 (0.510)

-0.140 (0.234)

1

8. Audit Committee size

-0.107 (0.366)

-0.189 (0.107)

-0.394** (0.001)

0.067 (0.571)

0.556** (0.000)

0.016 (0.896)

-0.124 (0.292)

1

9. No of committees

-0.033 (0.778)

-0.021 (0.861)

0.241* (0.039)

0.211 (0.071)

-0.071 (0.546)

-0.106 (0.368)

0.166 (0.157)

-0.185 (0.114)

1

10.Tobins Q

0.303** (0.009)

0.192 (0.101)

0.194 (0.097)

0.133 (0.260)

-0.335** (0.003)

-0.162 (0.167)

-0.369** (0.001)

-0.202 (0.084)

0.039 (0.740)

1

11. ROCE -0.146 (0.215)

-0.219 (0.061)

-0.132 (0.262)

-0.109 (0.353)

0.307** (0.008)

-0.101 (0.391)

0.374** (0.001)

0.171 (0.144)

-0.209 (0.073)

-0.484** (0.000)

1

Notes: *significant at <0.05, ** significant at <0.01, the p values are shown in parenthesis The correlation matrix results do not present any multicollearity problem among the independent variables. Though, few of the variables are having statistically significant relationship, but none of the variables carrying correlation coefficient of more than 0.8. The significance of this analysis is to fulfill the condition of multiple regression models, where all independent variables should be independent of each other

Table 17: Multiple Regression Analysis of Indian Private Banks

Parameters

Tobin’s Q

(Model I)

Return on Capital Employed (Model

II)

Beta t test p value Beta t test p value

Constant -0.101 0.920 0.844 0.402

1. TDL 0.257 1.928 0.058 -0.027 -0.203 0.840

2. TBS -0.038 -0.277 0.783 0.011 0.081 0.935

3. TAC 0.244 1.872 0.066 0.007 0.053 0.958

4. TPRO .054 0.339 0.736 0.344 2.184 0.033*


-0.084 -0.486 0.629 0.405 2.348 0.022*

6. Board Size

-0.135 -1.175 0.244 -0.156 -1.364 0.177


-0.423 -3.165 0.002** 0.507 3.815 0.000**


-0.091 -0.616 0.540 -0.078 -0.530 0.598

9. No of committees

0.010 0.084 0.933 -0.371 -3.167 0.002**

F test 3.833* 3.950**

R^2 0.350 0.357

Adjusted R^2 0.259 0.267

Number of banks 16 16

*significant at <0.05, ** significant at <0.01 level

For the Private banks, as per Table 16, we observe that many variables share a significant or highly

significant correlation with each other. However none of these correlations are high enough to induce

multi-collenearity problems into the model. What we observe is that Tobin Q i.e the market related

profitability measure is highly positively correlated with the Total disclosures (TDL) and negatively

correlated with the Number of Board meetings (NBM) and Number of Audit Meetings (NAM), also

ROCE i.e. the measure linked to performance by the organization shows a highly significant positive

correlation with NBM and NAM.

From Table 17, it is understood that the multiple regression Model I is statistically significant, where F

test is 3.833 and is significant at 5 percent level. The independent variable NAM i.e. number of audit

meetings has a highly significant negative influence on Tobin Q. As per Model II, the F test is highly

significant at 1% level at 3.950, which signifies that majority of the independent factors have

significant relationship with ROCE. There are three independent variables, i.e. the number of board

meetings, number of audit meetings and the total procedures which have a positive impact on the

ROCE of the bank, however number of committees show a negative significant influence over the

ROCE of the private banks.

In case of Public sector banks, as per Table 18, given below we observe that many variables share a

significant or highly significant correlation with each other. However none of these correlations are

high enough to induce multi-collenearity problems into the model. What we also observe is that

Tobin’s Q is highly positively correlated with the Total Procedures (TPRO) and negatively correlated

with the number of Board meetings (NBM) and Total disclosures (TDL).

Below is Table19, it is understood that the multiple regression Model I is statistically significant, where

F test is 3.016 and is significant at 5 percent level. The number of board meetings has significant

negative influence with bank performance. The total audit committees (TAC) however have a positive

influence over Tobin’s Q. In model II, the F test is not statistically significant and it prevents further

interpretation of the results.

Table 18: Correlation Matrix Analysis of Indian Public Banks

1 2 3 4 5 6 7 8 9 10 11

1.TDL 1

2. TBS -0.083 (0.429)

1

3. TAC -0.197 (0.058)

0.645** (0.000)

1

4. TPRO -0.012 (0.909)

-0.433** (0.000)

-0.378** (0.000)

1


0.096 (0.356)

-0.072 (0.492)

-0.253 (0.014)

-0.138 (0.185)

1

6. Board Size

0.270** (0.008)

0.061 (0.560)

-0.018 (0.862)

-0.009 (0.933)

0.112 (0.281)

1


0.029 (0.779)

-0.009 (0.342)

-0.118 (0.258)

0.065 (0.534)

0.121 (0.247)

-0.091 (0.381)

1


0.334** (0.001)

-0.360** (0.000)

-0.264* (0.010)

0.138 (0.186)

-0.013 (0.903)

0.213* (0.039)

0.091 (0.386)

1

9. No of committees

0.011 (0.914)

-0.512** (0.000)

-0.329** (0.001)

0.223* (0.031)

0.206* (0.046)

-0310**. (0.002)

0.226* (0.029)

0.084 (0.418)

1

10. Tobins Q

-0.267** (0.009)

0.099 (0.342)

0.304** (0.003)

0.122 (0.241)

-0.333** (0.001)

-0.107 (0.306)

-0.022 (0.833)

-0.175 (0.091)

-0.081 (0.436)

1

11. ROCE 0.200 (0.053)

-0.069 (0.511)

-0.190 (0.067)

-0.123 (0.239)

0.191 (0.065)

-0.042 (0.690)

0.190 (0.067)

0.216 (0.037)

0.189 (0.069)

-0.612** (0.000)

1

Notes: *significant at <0.05, ** significant at <0.01, the p values are shown in parenthesis The correlation matrix results do not present any multicollearity problem among the independent variables. Though, few of the variables are having statistically significant relationship, but none of the variables carrying correlation coefficient of more than 0.8. The significant of this analysis is to fulfill the condition of multiple regression models, where all independent variables should be independent of each other.

Table 19: Multiple Regression Analysis of Indian Public Banks

Parameters

Tobin’s Q

(Model I)

Return on Capital Employed

(Model II)

Beta t test p value Beta t test p value

Constant 0.578 0.565 1.553 0.124

2. TDL -0.1452 -1.441 0.153 0.111 1.014 0.314

2. TBS -0.104 -0.700 0.486 0.177 1.144 0.256

3. TAC 0.324 2.412 0.018* -0.213 -1.526 0.131

4. TPRO 0.185 1.676 0.097 -0.188 -1.645 0.104


-0.218 -2.037 0.045* 0.076 0.691 0.491

6. Board Size

-0.010 -0.089 0.930 -0.078 -0.691 0.491


0.039 0.395 0.694 0.119 1.166 0.247


-0.104 -0.943 0.348 0.205 1.790 0.077

9. No of committees

-0.026 -0.210 0.834 0.166 1.303 0.196

F test 3.016* 2.180

R^2 0.244 0.189

Adjusted R^2 0.163 0.102

Number of banks 19 19

*significant at <0.05, ** significant at <0.01 level .

Perception of investors with respect to CG disclosures

The primary research was conducted through an interview process from the investors in general, in

order to elicit their valuable opinions on the attributes of corporate governance and to know their

perception about corporate governance disclosure practices adopted by the banks (463 out of 500

invested in bank) and other firms. A sample of 500 investors was taken from National Capital Region,

Delhi on the basis of simple random sampling, a simple random sample is meant to be an unbiased

representation of a group.

The outcome of this research would corroborate the findings from secondary research analysis.

However, without the qualitative analysis, the objectives of the research cannot be fulfilled. Hence, an

interviews method was used to make this research outcome authentic and justifying. The outcome of

the interviews was presented through bar graphs. A likert scale (1 to 6) was used from question1 to

question6 6 and a likert scale of (1-4) from question7to question 10, to measure the importance of each

attribute of corporate governance practices. Rank 1 was given for maximum importance and 6 is given

for minimum importance. The respondents were requested to tell regarding each attribute, average

score was calculated, and presented through bar graphs. Whereas in order to know the investor

perception about corporate governance on the basis of which they make investment decision, few

questions were put up from question 11 to question 19 whose response is depicted through pie charts

below.

Based on literature review and secondary research analysis, Interviews of respondents were conducted

meticulously. The primary motive behind interview method was to draw opinions on those attributes by

the respondent who happen to be the investors, who have invested their valuable money in the

stocks/mutual funds/bonds etc. of the firms and majority of them (463 out of 500) were the investors in

bank and what is their perception about how far the banks in specific, adhere to the requirements of

corporate governance disclosure practices and what according to them are most important and desirable

attributes with regard to corporate governance . Since banks and financial institutions occupy very

important role in financial system of a country, attributes of corporate governance has a solidifying

effect that ensures governance of banks.

Considering the paucity of time and convenience of interviewee, the format of interview was prepared

in a systematic manner so that the opinions of the investors were correctly depicted. Later on it was

converted into mean score (based on likert’s scale), that could be presented in a suitable bar diagram.

The outcomes of the interviews were connected with research objectives and research questions.

Since time allotted by interviewee was limited, interview procedure was organized in some specific

question format based on literature survey. Interviewees were requested to score on those attributes

after giving their valuable opinion.

The outcome of the interview with the investors helped in the analysis as their views helped me to

know what are the most desirable and important attributes with regard to implementation of CG

practices, they would expect in any firm to have, before they make investment it and in return the firm

builds trust and confidence in them.

Here is the analysis of the responses of the questions that were asked from the respondents:

1. We asked the respondents to Score good corporate governance on some key attributes in Indian

Banking Sector where they emphasized on transparency of financial statement clearly indicating that

transparency of financial statements will repose faith on banks from governance point of view. The

misgivings of fraud and malpractice will automatically erase from the mind of investors and will lead

to increase shareholders’ value. In addition, the respondents were very much positive about the other

attributes of corporate governance practices like ethical practice, legal compliance.

All these attributes certainly creates an environment of trust and confidence of shareholders and public

at large. Since banks are characterized by repository of finance, bank’s executives consider it very

much important to maintain transparency of financial statements and compliance with corporate

governance principles.

2. Among all the committees audit committee, remuneration committee, investors’ grievance

committee are some of the mandatory requirements, the outcome of this question support the efforts of

banks in implementing this decision through various committees. However the respondents perceive

that management committee needs all the importance, where the average score is around 4.However all

the committees except remuneration and risk monitoring score fairly well with regard to the perception

of the respondents. Thus, it can be correctly said that formation of those committees are very much

important for effective implementation of corporate governance practices.

3. Respondents were asked to score the concerns from the point of view of the management, which

necessitates implementation of Corporate Governance in banking sector. Practice of insider trading,

unethical practices adopted by banks and deviation from standard accounting practices in public sector

banks are some of major problems highlighted by respondents in banking sector. The banking scams in

Asian countries are some of the glaring examples. From the above results, we analyze that the

respondents who are the investors in a bank score ‘unethical practices adopted by the banks’ as a key

concern which further necessitates the implementation of corporate governance practices by the banks.

4. Since transparency and disclosure are two important pillars of corporate governance measures the

investors in the banks (respondents) were requested to score on those variables. This question is aimed

at taking the viewpoint to ensure transparency and disclosure. From the response, it is clear that proper

disclosure of information in annual report, proper means of communication to interested parties and

high quality of MDA are some important variables which can bring more transparency in governance.

The mean score of these three variables is around 4, justifying their opinion about those variables.

5. Since audit committee is considered as an important and mandatory committee to be set up with

certain powers and duties, it was important to know the opinion of our respondent investors as to which

characteristic is considered by them as most important from the audit committee practices point of

view. It seems it was difficult for the respondents to say any one or two characteristics of the audit

committee as important one except for’ external auditor providing non audit service, whereas the

minimum number of members and the number of meetings of the audit committee is an important

concern for the investors to make sure that the audit committee practices and processes are going fine.

6. Next we wanted to know what according to the investors are the most desirable characteristics of the

Board of Directors.’ Expertise in accounting and finance’ is a but natural choice of the respondents who

happen to be the investors in a bank which gets the highest mean score i.e. 4.26 of all the six

characteristics. Needless to say, that expertise in accounting and finance can really help the

minimization of frauds and losses. Election of the BOD under shareholder agreement also seems to be

another important concern of the respondents.

7.As per the clause 49, the company has to comply with the provisions such as, a statement in summary

form of transactions with related parties in the ordinary course of business and shall be placed

periodically before the audit committee, details of material individual transactions with related parties

which are not in the normal course of business shall be placed before the audit committee and details of

material individual transactions with related parties or others, which are not on an arm’s length basis

should be placed before the audit committee, together with Management’s justification for the same.

The same seems to be the most desirable characteristic related to RPTs by our respondents who have

given highest mean score of 2.70 to ‘audit committees to approve all RPTs’.

8. What according to the investors is the most desirable characteristics of the Board practices and

procedures, the respondents have given highest mean sore of 2.79 to ‘regular system required for

evaluating CEO and other executives, as they believe that if there is some fair and regular procedure for

evaluating the CEO and other executives, there shall be more transparency in the system and financial

dealings hence there is a better and higher chance of the corporate governance implementation.

9. This was one of the very important questions, whose reply rests only with the current and the

prospective investors who are really concerned about what the banks regularly provide on their

websites to keep them updated, on the basis of which they have to take financial decisions. The

response was again interesting, where almost all the attributes were scored almost on the same level, if

however we have to tell the most important attribute, the respondents believe that financial information

i.e. annual and quarterly financial information is the most important, scoring a mean score of 2.77 out

of 3, which the banks need to provide on their websites.

10. In order to get a Score about the most desirable characteristics of Shareholder rights, as an

investor, our respondents gave maximum score and importance to the rights of the shareholders i.e. the

shareholders can vote by postal ballot and Shareholders can request SEBI or Tribunal to investigate

oppression. This definitely is going to help bring better corporate governance execution.

11.From the above analysis we find that maximum investors (respondents) find that the bank in which

they have invested has a written code of corporate governance which covers the rights of shareholders,

whereas a comparatively less number of respondents find that their bank in which they have made the

investment does have a written code of conduct wherein the duties of the board are mentioned and

almost same number of respondents believe that their bank specifies its rules of disclosure in the

written code of conduct of their bank. So again it seems that the investors lookout for ‘the rights of

shareholders’ as an important attribute while judging the corporate governance of a bank.

12. Question 10 to 15 are the basic questions as to Corporate Governance put up by the respondents

which gives the idea to an investor about how well the corporate governance norms are being followed

by a bank and accordingly they take investment decision. The response is quite mixed in this case as it

seems that no majority of banks follow a particular pattern rather almost 50% of the respondents are of

the view that their banks distribute their code of conduct to their employees and almost the same

percentage believe that they distribute it to the shareholders.

13. Again a very close result is what we observe, no particular option seems to be the choice of most of

the banking companies, as at least what the data shows is that almost same percentage of respondents

feel that the banks in which they have invested, their policies are easily available to regulators as well

as employees and public.

14. We asked the investors that their bank’s code of conduct takes which issues into account,as per the

survey results, the maximum number of respondents chose ‘Ethical standards in dealing with

customers, vendors and other relevant parties’ which they find in their respective bank’s code of

conduct policy. This is a positive sign from the corporate governance point of view, which reinstates

that banks make deliberate effort in ensuring that ethical standards are followed by them while dealing

with their customers, investors, vendors and other relevant parties, which in itself is a sign of relief for

the investors that they are investing their money in safe hands of the banks.

15. We asked the respondents if they go through Corporate Governance report /norms of the bank

before taking investment decision in it. The response to this question again reflects a big positive

picture about the investors, with as many as 268 out of 500‘YES’ responses of the investors who are

now more alert, better informed and who make sure to go through the annual report of the bank and

specifically its Corporate governance report mentioned there in it, before they finally decide which

banking sector and particularly in which bank they should invest in.

16. Next we wated to explore if the Bank has revealed a code of conduct / ethics clearly or not,the

maximum ‘Yes’ response of 258 out of a total of 500 respondents, reflects a positive side of most of

the banks, who ensure to reveal their ‘code of conduct’ policy clearly and are making a conscious effort

to bring in more transparency and ethical ways of dealing and thereby ensuring a better implementation

of corporate governance in their bank.

17. A question was asked just to get an idea in general about how much a person is planning to convert

his savings into investment annually. The results were on expected lines, that is most of the investors

invest somewhere in between one to ten lakhs , which is actually a mediocre path adopted by him

inorder to minimize his risk by not investing huge sums of money, rather he follows conservative

approach and obviously expects a fair return out of it.

18.The purpose of asking this question from our respondents (investors) was to get an idea how much

experienced he is as an investor, in other words since how long he has been an investor in the stock

market, the result was a little surprising to find that majority of my respondents are there for more than

twenty years.

19. This question ultimately answers for all the above questions, where has the investor finally made a

choice i.e. in which banking sector he has invested. In my survey I find that majority of them have

chosen Public sector banks(260 out of 500) over private sector banks(203 out of 500) for the

investment purpose, the rest(44 out of 500) have invested in some other non banking organizations, out

of which I can thus make an inference that the maximum number of respondents have chosen the

Public sector banks over the Private sector because it matches most of the criteria if not all with regard

to Corporate governance disclosure and consider it as a more safer option.

Based on the primary survey

CONCLUSION

The findings from primary research were quite satisfactory because the respondents were quite

categorical in highlighting the attribute of good corporate governance. It was a qualitative analysis that

reflects the prevalence of corporate governance practices in Indian Banking sector. The outcome of

secondary research analysis has already established the fact that good corporate governance is a reality

and Indian Banking sector has left no stone unturned to achieve this. Corroborating this outcome of

secondary research, primary research was aimed at to draw significant insight into it. The outcome of

primary research also reflected the sheer sincerity of senior bank’s executive to take this mission

forward to the zenith of success. However, the results were a little conflicting because as per the

secondary research analysis, we deduced that Private sector bank are much better when it comes to

implementation of corporate governance disclosure practices but as per the primary research, the result

is different where we observe that majority of investors chose public sector banks over private for the

investment purpose. What I can infer about it is that the investors still believe Government controlled

banks are a more safe option for the investment, it reflects the conservative approach of any investor

where he wants to bear the minimum risk and keep his funds safe.

Therefore if we look at a broader picture we find that it is the Private sector banks whose performance

is majorly influenced by the corporate disclosure as reflected by correlation and multiple regression vis

a vis Tobin’s Q and ROCE, wherein larger number of CG factors leave an impact on the overall

performance of the private sector banks in comparison to Public sector banks. What is noteworthy is

the improvement in the overall Corporate Governance Score (Table 1) from 16.53 to 17.1, this reflects

that there is a conscious improvement amongst private banks while making Corporate governance

disclosures. The same is reflected in CG score (Table 2) which again happens to be the same i.e. was 16

out of 20 in year 2007 whereas 16.1 out of 20 in 2011. A further comparison between public and

private CG Scores would highlight this fact that private banks surprisingly are more consistent and

better in Corporate Disclosure Practices.

This also makes us reject our null hypothesis H0 and accept the alternate hypotheses H1 i.e. Firms’

performance is positively related to the quality of its corporate governance practices seems to be

statistically correct since there are many independent factors like total procedures (TPRO), number of

board meetings, number of audit meetings and total audit committees (TAC) which are significantly

positively related and influence the bank performance.

SUGGESTIONS:

1. Since the hypothesis has been proved correct, which we also see above that how the CG factors

like number of board meetings and audit meetings, total disclosures in case of Private banks and

factor like total procedures in case of Public banks positively affect the profitability, therefore

stress should be laid continuously on these factors along with the others.

2. Since it seems that number of audit meetings have an adverse influence on the market value

profitability (Tobins Q) in case of private banks, therefore it is advisable to restrict the number

of the same and to ensure the quality of audit that is at the root of effective corporate governance by making

the Auditor accountable for the disclosure of financial information and to form an appropriate system in order to

monitor the work of Audit firms undertaken in its meetings.

3. Large number of committees seems to have a negative impact on the profitability of the private

banks which is a strange thing to understand, therefore efforts should be made to probe the

reasons of the same and take necessary action accordingly.

4. In case of public banks, number of board meetings have an adverse effect on the profitability

therefore I would suggest that not too many board meetings should be conducted and should try

to restrict the same as it may hamper the qualitative time of the directors I discharge of their

duties.

5. Since we also find that Private banks are more consistent and better than Public banks when it

comes to CG disclosure practices, therefore in order to bring overall better CG disclosure

practices should try to establish a clear mandate for each regulatory Authority for the enforcement of Clause

49 of the Listing Agreement, thereby improving India’s corporate governance enforcement mechanism.

6. To make a statutory compliance for the listed companies to compulsorily obtain a report on Corporate

Governance Rating (CGR) from a Credit Rating Agency in India.

Other notable findings from secondary research analysis reflect that corporate governance in banks is in

a formative state. It is fast evolving and long way to go. While setting accountability standards for

Board, there is need for enhanced transparency and disclosure in respect of various aspects of board

constitution and functioning. Both private and public sector banks are not practicing completely the

corporate governance code inspite being mandatory in nature. Still, the outcome is very much

satisfactory.

Limitations of the study: The present study suffers from the following limitations:

1. The study required annual reports of the public and the private sector banking companies for a

period of five years. However as per Table 4, the annual reports for all the five years could not

be obtained for the five banking companies of the private sector.

2. Items of information included in the CG index for various categories were selected keeping in

view the mandatory requirements, but there may still be certain relevant items, which may not

be selected while constructing the index, which may prove to be as important for CG disclosure

and implementation.

4. SEBI issued revised clause 49 in October 2004, when it became mandatory for all the listed firms

to implement corporate governance disclosure in the annual reports w.e.f. 31st December 2005,

before that since it was not mandatory, many banks therefore never disclosed the corporate

governance in their annual reports. Hence, I could undertake the study for only five years i.e.

after Dec 2006 therefore; the study of corporate governance has been restricted to 2006-2007 to

2010-11 only.

5. A sampling error can occur with a simple random sample if the sample doesn't end up

accurately reflecting the population it is supposed to represent.

6. According to SEBI, the corporate governance practices are applicable only to banks that are

listed in the Indian stock exchanges hence the foreign banks lay outside the purview of study, so

I have not done the detailed analysis by using statistical tools or preparing Corporate

governance index for the foreign banks unlike public and private sector banks.

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