Showing posts with label Ethics. Show all posts
Showing posts with label Ethics. Show all posts

Saturday, January 23, 2021

2021 and Beyond

 


It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair...” This is how Charles Dickens begins his novel, A Tale of Two Cities.

Bottom of Form

Vision and Strategies Change

 This is an apt description of this age. We are at a maddening speed in technologies. Industry 4.0 has entered. Artificial intelligence, block chain technologies, man machine learning, robotics are the decisive forces of change in most organisations. Digital applications are replacing the traditional gurus (teachers). Tick boxes define the success of persons, whether in schools or office selections. People would like to travel, if possible, at the speed of light. Several corporates are rewriting their vision and strategy documents.   

 Conflicting Contours

 If those characteristics define the age of wisdom, street fights, large family divorces, abandoned children in larger numbers than before, failures in inter-country relationships redefining trade rules, ignoring climate warnings, several persons yearning to cross the boundaries aiming high only to know that ‘distant hills look green’, reflect the age of foolishness. 

 Mobocracy Vs Democracy

 With Joe Biden taking over the reins of the largest democracy, democracy would appear to be on the path of restoration. But, on the other hand, in India, with the unrelenting farmers’ agitation, mobocracy seem to be asserting itself, mainly because of the failure in following the Constitutional process for a well-thought-out reform in the sector. With 123 amendments, Indian Constitution seems to be under attack off and on and begs for a comprehensive overhaul, so as to keep the Fundamental Rights enshrined there intact.

 Financial Sector 

 In the financial sector, Covid-19 shook the world while in India, the scenario is much worse as frauds and cybercrimes are surging, threatening financial stability. Reforms in this sector should move strategies ahead of structures. Two World Bank economists in a recent blog commenting on asset purchases in emerging markets and developing economies, say that unconventional policies and unconventional times had set in. “History is a reminder to central bank’s credibility if asset purchase programs are used for prolonged monetary financing of fiscal deficits.”

 Investments in water, environment, natural resources, education, health and hygiene, and emerging technologies would be the defining features of sustainability.

 Ethics in Governance and Yoga

 Ethics in governance and transformation processes seem to be of criticality. Albert Einstein had said, “We should be men of values rather than men of success, ” Winston Churchill had said “We should extend values beyond our homes.” The corporate executives are selling their professional skills and not their conscience. It is the attitude to life and the value system one has to cherish and live with. Values are not like a sensex graph varying every day or with every person. Values are universal in character. It is the application of values that has been undergoing a change. Clean minds are as important as clean physics and dharmic yoga makes more sense than mere physical yoga embraced by people in different parts of the world, with PM Modi’s clarion call to the nation since 2014. 

 Post Covid, the stars surface

 During this third millennium, with sputnik science reaching for livable space even on Jupiter and the moon, India would be moving ahead of other nations and prove its leadership in space technologies. She has already proved herself as a leader in pharmaceuticals and software and would move its best foot forward in the transformational world. No wonder McKinsey in its most recent article has put Asia as the leader of the future and generations will define the future in terms of pre-Covid and post Covid. 

 The year 2021 and beyond will see the world transiting to a different horizon. The wisdom of the aged will fall behind the expectations of youth and it is this youth that are going to redefine the age ahead. I am not a soothsayer but the writings on the wall are clear.

 (The writer, an economist and risk management specialist, is author of “Roots to Fruits – The Journey of A Development Banker.” The views are personal.) 

   https://www.moneylife.in/article/2021-and-beyond/62745.html

 

 

 

Tuesday, July 30, 2019

Crisis in PSBs - II: Ethics Must Be Made Integral to Governance


Crisis in PSBs - II: Ethics Must Be Made Integral to Governance
Moneylife Digital Team
30.7.2019
If we want to improve the governance process, we have to make ethics at the centre. Ethics and values should be the basis on which all corporates and more particularly, banks dealing with public resources shall function, as trustees. It is the attitude to life and the value system one has to cherish and live with.

Values are universal in character whereas their application changes. Business executives apply various ethical tests as a guide. There is variation among them on what test they apply on different occasions.  These tests, developed by Fr K Cyric include:
Corporate Executive Ethics Tests[i]

Ethics Test
Focus Question by the Executive
Relevant Information Test
“Have I obtained as much information as possible to make a decision?”
Involvement Test
“Have I involved all who have a right to have input?”
Test of Common Sense
“Does the action I am getting ready to take really make sense?”
Consequential Test
Have I anticipated and attempted to accommodate the consequences of this decision on any, who are affected by it?”
Mirror Test
“What does the man in the glass really say?”
Conventionalist Ethics Test
“Does this fall within the legal framework?”
Hedonistic Ethics Test
“Does it feel good to make such decision?”
Intuition Ethics Test
“Does my gut feeling approve of this decision?”
Revelation Ethics Test
“Does the decision cause greatest good for greatest number?”
Professional Ethics Test
“Will the decision be approved by the professional peers?”
Organizational Ethics Test
“Is the decision consistent with organizational goals?”
Test on one’s best self
“Is this action or decision I am getting ready to make, compatible with my concept of myself at my best?”
Fairness Test
“Would I consider this decision fair from the point of view of stakeholders?”
Enduring Values Test
“Does this decision uphold the enduring values?”
Universality Test
“Would I apply this decision to all similar situations, even to myself?”
Test of making public
“How do I feel if others knew I was doing this?”
Test of ventilation
“How would others view my decision?”
Test of Purified ideas
“Am I thinking that the decision I am making is right because some authority says, it is right?”


[i] R. Durgadoss & B. Yerram Raju (2011), ‘A Saint in the Board Room’, Konark Publishers (P) Ltd., New Delhi


Ethical Decisions Vary with Executive Profiles

A survey conducted in 1992 in Malaysia on 252 executives from different countries revealed that there were differences in ethical decisions, which varied with job position, job specialization, ethnic group, age and salary. There were differences in attitude between the USA and Hong Kong personnel. 77% of USA personnel said that they would report a defective or unsafe product, compared to 50% of Hong Kong respondents.

Three women, Sherron Watkins (ENRON), Coleen Rowley (FBI agent on clues to September 11) and Cynthia Cooper (World Com), all whistle blowers were named as the persons of the year 2002 by Time magazine.
Cuoto, an employee of Bayer Corporation who knew how Bayer was making wrong claims on the USA government, fought a hard battle to have his testimony recorded and videotaped in August 2002, even though he was struggling with terminal illness. Bayer pleaded guilty and paid fines under False Claim Act.

Such a strong level of conviction and whistle blowing attitude is not prevalent in many countries, where people do not come forward, even when they see wrong-doing happening in front of their eyes; thus, the behavior of executives differ from region to region. Moneylife in India has been acting as a whistle blower in many breaches to the legitimate claims of various stakeholders of the banks and FIs. Much ahead of the unfolding of the IL&FS collapse, it has warned that this monolithic institution has made many compromises of the rules and regulations of SEBI and RBI, though it took quite some time for the regulators to take note of them.  It is therefore important that each bank board should approve a Whistle Blower Policy and prominently display it on its website.

Facing Ethical Dilemmas

In business, not only are executives faced with questions between right and wrong, but also between right and right. We have experienced situations in which the professional responsibilities unexpectedly come into conflict with deepest values. Executives are caught in a conflict between right and right. And no matter which option they choose, they feel like they have come up short.

Research on moral standards and business ethics is sparse. Martin Weber in 1998 found that 85.9% of managers claim drawing their moral standards at work from the expectations perceived in the work environment. Organizational norms embodied by the corporation’s culture are strong determinants of individual thought and behavior in the workplace, whereas corporate culture establishes and maintains norms.

When employees have no clear picture of the moral or ethical stance of the organization, they tend to operate at the lowest perceived level. Going by the increasing frauds, the alleged corruption in banks at various levels where they interface with the customers on loans and the way persons in top positions compromised the principles and statutes leads us to conclude that the ethics committees of bank boards, even where they are in place, have not functioned effectively.

A quote from a Raghuram, Rajan’s speech of May 2014, would be an apt conclusion of this paper: ‘The banking sector is on the cusp of revolutionary change. . .  Let us remember that what is at stake is not just the tremendous amount of national value that is represented by public sector banks but future financing and investment in our economy. A healthy public sector banking system should be distant from government influence but not from public purpose.’ https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=893

  


PSB Goverance


Crisis in PSBs - I: What is the Responsibility of the Government as the Owner?

The government-owned, or public sector banks (PSBs), which are under severe stress, require an urgent surgical strike. Bulging non-performing assets (NPAs), increasing frauds, and declining credit to the key sectors is worrying. Moneylifehas laid bare many of the frauds and misdemeanours of the commercial banks that included Syndicate Bank (2014), Bank of Baroda (2015), Punjab National Bank (2017), to mention a key few. The free ride of businessmen started eroding confidence in banks due to questionable lending practices in PSBs.

 The rot goes deep. For example, what are the answers to these questions?

1. All limits above Rs5bn should be sanctioned by the board duly overseen by the risk management committee. Banks also have internal audits, statutory audits and financial inspection of banks by the Reserve Bank of India (RBI) annually. Then how were such limits sanctioned without due diligence of directors on the boards of top-12 defaulting companies referred to the Insolvency and Bankruptcy Code (IBC) in 2017? What role did various committees play during the currency of the loan?

2. Even after the roles of managing director (MD) and chairman are separated, why couldn’t the non-executive chairman provide the required guidance to the board in enforcing accountability and transparency?

3. Why did the banks fail in due diligence of directors of the companies to which they sanctioned loans? It was noticed in several cases that the directors held suspicious transactions with other boards or companies but did not go on record as such. Integrity of the borrowers was taken for granted, going by the way banks nurtured the accounts.

4. Why and how were the banks allowed to hold the accounts with recovery actions far beyond 90 days in regard to all the major corporate advances?

5. When the RBI is represented on the board and with data on non-performing assets (NPAs) and corporate advances and the analytics of the financial stability reports coming out every quarter, why could it not contain the contagion of NPAs?


6. Why couldn’t the RBI director on the board insist on the audit committee to steer clear of acts that led to prompt corrective action (PCA)?

7. All the banks are subject to risk based supervision by the RBI. Then how could the banks manage such supervision and yet hide the processes that led to the frauds that surfaced later?

8. What is the role played by the nominee director of government of India in the board approvals and the NPA status of the bank concerned? 

9. Did the board of any bank give a strategic direction to the MD and monitor such direction subsequently?

10. When government of India (GoI) directed merger of associate banks with State Bank of India (SBI) or later the merger of two other PSBs with Bank of Baroda, fait accompli, the boards passed a resolution favoring the mergers and the consequences and the impacts on customers and other stakeholders were hardly discussed and there were also no voices of either concern or dissent. The role played by independent directors becomes significant in such situations. 

Clearly PSBs are facing a huge goverance deficit. Year after year, volumes involved in frauds have only increased, notwithstanding the existence of internal chief vigilance officer, external vigilance commission, system audit, risk audit, stock audit, concurrent audit, and annual internal inspections by the banks’ own audit team, external statutory audit, forensic audit and the annual audit of the bank by the RBI approved chartered accountant firm. PNB fraudsters successfully hoodwinked all of them. 

The question is: What is the role of the owner, regulator and controller of PSBs? The government has announced recapitalisation to the extent of Rs211,000 crore to meet the regulatory capital requirement once Basel III becomes operational (Basel III implementation date has since been extended to April 2019 from April 2018).

The present finance minister, sailing with the wind, again provided another Rs70,000 crore capitalisation in the next nine months.

Many experts feel that good (taxpayers’) money is flowing to the bad (crooks) with no accountability.

Although the government seemed to recognise the need for reforms, it fell short of introducing the structural changes suggested in the report. At the root of the rot lies poor governance and the absence of ethics. Ethics took a hard beating and governance is in utter disarray against the backdrop of unlearnt lessons of similar past offences, both within the bank and outside. Bad banking has now become a major concern of the body politic. 

It is the boards that should make the difference between the most successful and the unsuccessful corporate, whether in banking or elsewhere. Managerial efficiency, risk management systems and efficient governance require urgent attention. 

The Financial Times had held a series of debates in 2013 on better boards and corporate governance. The strong message that emanates from the debates is that fewer rules and more significant consequences for breaking them would make a lot of sense. Further, it is not good to have one-size-fits-all approach to corporate governance and the organisations should be empowered to craft their own systems of governance.

Narasimham Committee-1 made some significant recommendations regarding governance that would require a re-visit.

Ownership Issues

SBI has its chairman, MDs and deputy MDs (DMDs) as members of its board. PSB boards have been reconstituted in line with the recommendation of PJ Nayak committee with MD and non-executive chairman as two separate positions with both of them requiring the approval of the RBI. 

MD of PSBs are selected by banks board bureau (BBB) since 2015. BBB proved not so effective with long delays in filling the top positions of several banks and overbearing influence of ministry of finance (MoF) in the selection process. SBI post-merger and PSBs have individual shareholders who include even employees and retired employees of the banks as minority shareholders. This status involves the issue of protecting the interests of minority shareholders as well.  

Ownership, governance and regulation have created inconvenient compromises in the PSBs. The roles of owner and regulator combined in GoI have a built-in conflict. The presence of RBI in banks’ boards is further conflict of interest. The Narasimham Committee -1 recommended 25 years ago that RBI should dissociate itself from bank boards. This obvious step has still not been taken.

The role and functions of the ethics committee have not been well defined. The board should have full authority for appointment of statutory auditors with no role for the RBI. But going by the experience of the failures of banks such as the Global Trust Bank Ltd, RBI decided that the auditor firm should be from its approved list. 

The GoI has a strong lock on the banking sector but talks of competition in banks, independence and autonomy. It plants its officials from the finance ministry as directors on PSB boards. At best, these nominated directors carry the proceedings with their own interpretation to the ministry, and such interpretation may cause some unintended consequences to the banks they serve. 

How Do We Avoid Conflict of Interest?

A governance code could have guidelines for the management on its behaviour patterns because it is they who are running the institution and making the day-to-day decisions and their behaviour will be of greater consequence to the functioning of the bank than that of the board that meets at pre-determined intervals. The ‘comply and explain’ requirements should be very clear and unambiguous. Non-negotiable rules would lessen the complexity of corporate governance from the investors’ perspective. 

In India, unlike in some European two-tier boards and unlike in UK, the boards of PSBs, provide for employee representatives too on boards from the workers and officers.

Although several PSBs in the wake of financial sector reforms allotted shares to their employees it is not necessary that the workmen directors need be shareholders. Systems of governance should be focused on empowering front-line staff—rather than trying to keep them in check, even the  debates in Financial Times concluded.

Though stakeholders’ interests should weigh more than those of the shareholders, it is the lack of ownership culture among this set of non-executive directors (NEDs) that results in their performance below the expectations of the group they represent and that should cause worry. This constituency of stakeholder on the board needs careful treatment and nurturing. Employees and pensioners would be a growing constituency and they should have a place in the board as part of minority interests’ protection. 

Audits and Audit Committees

Banks that complain of multiple audits interfering with their business could not justify the concern due to the alarming rise in financial irregularities and poor credit risk management. Systems have become vulnerable to intrusions putting the banks to losses not seen before. Therefore, system audits have assumed critical importance. 

The complexities of the systems are on the increase with increasing role for them—both in operational and instructional matters. There is a growing trend of addressing any customer grievance only through an instruction embedded in the system. Almost all banks have been generating only e-circulars. The employees and managers hardly go through them save exceptions – those in the regional/zonal/head/central offices. The ability of the banks to put them to institutional learning periodically is also dwindling. Learning mechanisms seem to have been severely impaired. This leads to unnerving top management not generally admitted in public but discussed internally. The board has a responsibility through the HR (human resource) committee to resolve such a dilemma. 

Need for an Independent Director with knowledge of Technology 

The world over, technology risks and cyber risks are overcrowding the banks and financial institutions. Michael Bloch et al of McKinsey in their "Elevating Technology to the Boardroom Agenda Report (2012)" insists that the boards call for periodic reviews of technology’s long-term role in the industry by pushing the IT jargon the background and bringing in the right people to the board meetings for discussions on technology adoption. 

Leveraging technology savvy board members and strengthening technology governance structure by delegating the related risk issues to the board committee that oversees the risk management portfolio are some of the key suggestions worthy of consideration.

Good Governance Requires More Than Rule Fixes

Universal banking that permitted the banks to take to finance housing, real estate, retail loans, and sell third-party products, like insurance, mutual funds, pension funds etc, followed by digital banking, has made banking a non-core activity with overwhelming incentives for performing non-banking functions. 

Banks insure their own assets with the general insurance companies. Bank employees are expected to handle the banking products of deposit, credit and investments and not insurance and mutual fund products. 

Boards were silent spectators when the banks were measuring executive and employee performance based on the earnings on third-party products. 

During 2018, MoF directed the banks not to pass on any incentive for selling third-party products to any employee or executive and the benefit of such business should be accounted for in the profit of banks. Thereafter, PSBs started refocusing on banking business. Performance evaluation criteria should be overseen by the board. Boards, therefore, have a serious challenge in HR management oversight.

RBI should approve those directors on bank boards who are of impeccable integrity and unquestionable character, with no role conflict at any point of time.

The ‘fit and proper’ criteria prescribed by the RBI need revision. It is desirable that the selected person should be asked to give a two-page write up on his knowledge of the board functioning; his intended contribution, and his relationships with the other directors on the board and of his views on the present management, as a third eye from the published data and information, as obtaining with the Netherland banks. 

This statement can be reviewed by the regulators who may even seek clarifications where necessary before confirming the appointment. Knowledge and culture are two different aspects though synchronisation would enhance the value of the person. Such a write-up from the prospective director, therefore, can help in self-assessment of the director and performance assessment of the board itself eventually.

The annual general meetings (AGM) should not end up as the presentation of the audited statement of accounts to the general body; it should have group discussions of the shareholders on wide ranging issues like the strategies, risk appetite and risk culture in the organisation. In the alternative, it is also worthwhile to have board retreats for two days annually for self-evaluation and the way forward prior to the AGM and have at the AGM a synopsis of the discussions in the retreats,  as a guide for future.

It is the banks that could alone answer these questions as board documents are confidential. The best way to prevent such transactions is to strengthen corporate governance by the regulators/supervisors at once disassociating themselves from being on the boards of all categories of banks.

*The Author is an economist and Risk Management specialist. These series of articles are the abridged version of the NIBM Conference (July5-6, 2019) Paper on “Good Corporate Governance – the Best way for resolving the Indian Banking Crisis”. The views are personal.
  




Saturday, November 24, 2018

Values are the Elixir of Life


Values are the elixir of life

Most countries which are less spiritual than India are less corrupt than us and they suffer from less poverty. Why should we have any spirituality at all in our country? Sadguru Jaggi Vasudev responded to this nicely. I thought of starting my discussion today with his thought.
Centuries ago, the whole world, far smaller than the one we are living today, no doubt, was looking to ancient India because India was very much in tune with both the outer and inner laws. Several tried to travel to India to learn and enjoy visiting the country. Columbus wanted to travel to India but landed in a different place; so was Vasco De Gama who landed in Panaji; it was Robert Clive who made to Calcutta. What was it that attracted them to this place? Only riches?  Jaggi Vasudev attributes it to spirituality.

Spirituality is something within of everyone and not one that you organize on the street, according to him. But we are doing too much outside and call it spirituality. “The physical existence is ruled by physical laws. If you are not in tune with them you suffer. Various cultures in the world have done far better than us in the world because they are in tune with the physical world.” However, their suffering within is untold, because they are not in tune with their inner laws. These inner laws teach us to be ambitious and not greedy; to have character with competence and not jealousy and incompetence and to live by values and culture but not by ego and extravaganza. Where are we after 71 years of independence? Why do we see greed everywhere? Why do we want to appear different from what we actually are? Politics and religion have some umbilical cord and this relationship whether Pope and the Church, Mohammad and Islam, Buddha and Peace, have all moved from the Court Halls of the then Kings or Monarchs.

Friday, February 23, 2018

10-Point Agenda for Rebuilding Trust in Banking - PNB Fraud


.

Bad banking has now become major concern of the body democratic. PNB fraud of Rs.11300cr proved a saga of utter disregard to responsible banking. Ethics took hard beating and governance in utter disarray in the backdrop of unlearnt lessons of the similar past offences both within the bank and outside. It takes years to build reputation but only a few minutes to destroy.

Wednesday, May 3, 2017

Ethics and Governance in Banks in India

Banking reforms should target ethics and governance
Dr B Yerram Raju  and  Vikas Singh
02 May 2017 14  

The Reserve Bank of India (RBI) has put four banks on its critical watch list and warned another ten to spruce up their capital. What prompted the RBI to do this is anybody’s guess. Both the warning and action are sorely needed.

Huge bank frauds are reported, many of them from public sector banks (PSBs). An analysis of both frauds and the increasing non-performing assets (NPAs) suggests that the attention of banks to their basic functions of deposit and credit has diminished in the wake of their search for non-banking products like mutual funds and insurance, which offer hefty commissions to all cadres of officers. 

Neither the PJ Nayak Committee’s suggested governance reforms, leading to the setting up of the Bank Board Bureau (BBB) for selection of directors and chairpersons, nor Indra Dhanush seem to have improved the governance of banks. There is deep erosion in values and governance, in PSBs in particular and the Indian financial system in general.

Saturday, October 22, 2016

22nd Convocation Address on 22nd October 2016


Mrs Arthy Sampathy, Mr Sailesh, Prof V.G. Chari and all other Professors, distinguished audience and most importantly, all the graduates getting coronated today -  I am delighted and privileged to be amidst these blossoming flowers of life whose petals are in pleasant colours that the most beautiful butterfly would envy. At the outset, let me congratulate all of you for all that you achieved on this illustrious Siva Sivani Campus. I also congratulate the faculty and staff who should be feeling equally proud of seeing you transcending to a different territory.
Image result for siva sivani institute of management
When Dr Chari called me on the morning of 16th of this month to adorn this dais I instantaneously accepted the invitation for, it is a great honour to be in the hall of fame of Siva Sivani Institute alongside doyens like Abdul J. Kalam who ignited the minds of youth and scientists alike. I also realise the responsibility to share with you such lessons of life that you would love to hear.
Image result for siva sivani institute of management
If it is my parents who taught me love and affection, it is my gurus who made me sterner stuff. I shall invoke my parents’ and Gurus’ blessings before I call upon you to do all that you wanted to do after you leave this campus. “Matru Devo Bhava, Pithru Devo Bhava, Acharya Devo Bhava.
I was wondering what you would love to hear for the next few minutes different from what you had been listening during the last two years on this campus. I thought the choices made in my life at different points of time could be of interest to you. You are today fortunate to stand in the midst of an intersection that takes you to the roads leading to join a job or setting up an enterprise that creates the jobs.