Debt restructuring must be followed by financial sector reforms

Friday, 2 June 2023 00:00 –      – 9

The banking sector has successfully navigated the extraordinary stress of the COVID-19 pandemic and the economic crisis of the past year or so. As thoughts turn to a world beyond the immediate crisis, a strong banking sector is a sine qua non for a strong and sustained recovery. In a high interest rate, low profitability world, where the risk overhangs of the past three years or so is much in evidence, banks will need to focus on better governance, resource capabilities and customer needs, while driving efficiency and building resilience, both balance sheet and off balance sheet. On the other hand, a bank or NBFI Board’s principal duty is to create and deliver sustained shareholder value through unambiguous ownership of strategy and oversight of its implementation.

In doing so, a board needs to give due regard to matters that will affect the future of the bank or NBFI, such as the effect the board’s decisions may have on employees, the environment, communities and relationships with suppliers and in sustaining the optics of good governance and responsible banking. The board must also ensure the management team achieves the right balance between promoting long-term growth and delivering short-term objectives. Boards are also collectively responsible for ensuring an effective system of internal control that provides assurance of efficiency, growth and stability in operations within judicious management of the risk-reward ratio and for ensuring that the top management team maintains an effective risk management and risk oversight metrics, across the company. Today the financial sector is constantly being buffeted by wave after wave of capital issues, talent, regulatory and technological challenges. The increased regulatory compliance and related costs impact every financial institution in both the approach in doing business and the cost of doing business.

Better governance

The financial industry is now in transition, with many challenges ahead. As a result, there has never been a greater need for well-functioning, informed, mature and principled boards. There has also never been a more important time for board members to keep in mind that their responsibilities go beyond the institution they serve. To achieve long-term value for shareholders bank boards would need to look for ways to strengthen their institutions and to do so they need to strengthen themselves as a board. One way is to adopt the practices of effective boards – onboarding competent and credible directors to their boards and more critically, retiring those who aren’t. Well performing companies on many occasions have been destroyed by bad board governance countenanced by less than mature board members serving their own interests.

Almost always it is the board and the top management of these companies that set these institutions on the slippery slope to ruin and then take them rapidly down. These are classic examples of boardroom and top management failure in discharging their fiduciary responsibility to shareholders and their failure to ensure the long-term health of the institution. Almost all legislative and regulatory action by most governments’ post 2008 was geared towards preventing such episodes in the future. The regulators so far have done a decent job.

Director criteria

The most challenging and distracting issues a board can face are those related to its own members. These issues typically arise in connection with conflicts of interest between board members and the institutions they tacitly represent, or when board members experience financial difficulties of their own.

A board can also lose its effectiveness when there are personality clashes in the boardroom or when one or more board members seek to dominate the deliberations. The best time to avoid such issues is during the selection process for new directors. Compromise in the selection of directors will almost always dilute the effectiveness of the board as a whole.

Directors add value to a bank and NBFI board when they are possessed with:

  •  a high level of financial acumen
  •  an impeccable track record of credible behaviour
  •  are aware of risk fundamentals and oversight techniques
  •  are able to manage dynamics with top executives
  •  demonstrate emotional intelligence, when addressing tough issues

To play that role; directors need to explicitly display the following key characteristics:

  •  Independence and a deep duty of care about the progress of the institution – being free of conflicts, both perceived and otherwise
  •  Time to devote to the job – to prepare for board meetings and to actively participate in board subcommittees
  •  Competent – being fully engaged and proactive as a board member
  •  Courage and credibility – ability to deal with tough issues
  •  Willingness to learn

A group of good, solid and dependable board members could be far more effective than an all-star line-up of directors. A board is most effective when it acts as a group, where all members can voice their opinions, and where difficult questions can be asked. Dominant shareholders and board cultures in which constructive debate never occurs have contributed to the demise of many financial institutions. Therefore careful selection of new board members, keeping in mind the strengths and weaknesses of the other members of the board, is well worth the time and effort involved. The board of a financial institution that runs on public deposits is accountable to the public, as a group, since their functioning is essentially collegial in nature, and is expected to promote a shared point of view about what decisions the firm should make to create lasting value.

Of note is that the Chairpersons of financial institutions should drive this quest for excellence and build an institution that is built to last years beyond their tenures. A less than competent chair and worse, a dependent chair – or even a dependent Director, is a recipe for failure of the institution.

Board composition and continuing fitness

The composition of a board, and the interpersonal dynamics among its members are critical for the success of a financial institution. A bank board, like any other working group, can be heavily influenced by members who dominate the discourse, or by members who actively discourage discussion or dissent.

A board is not intended to merely rubber stamp the proposals of management. If the responsibilities are to be effectively discharged, it is important that the composition of a board, and the interpersonal dynamics among its members are right.

While integrity is an essential prerequisite, this alone is not sufficient and directors must be people who are alert and have the capacity to understand the inherent risks taken on by an institution and objectively analyse the recommendations and the directions taken by the management, on various aspects of a firm’s operations.

It is equally important that the board has high levels of competence within its ranks which embraces other disciplines such as law, economics, marketing, human resource management and technology, so that a multidisciplinary and all-encompassing approach is taken in managing risks and growing the bank’s business.

The Regulator too can play a heightened role through their fit-and-proper assessment process, initially at the outset and more importantly at the annual assessment. In today’s world of boundless information and limitless access to it, regulatory scrutiny of directors’ new dependencies and perceived conflicts of interest could be used by the regulator to caution the concerned director at the minimum or deny F&P clearance at the maximum. Regulatory scrutiny of board and subcommittee minutes to extract active participation and independence of positions taken of individual directors, is another. An expanded definition of independence beyond simple shareholdings and directorships and encompassing remuneration and benefits from other directorships, is good starting point.

A new breed of Independent Directors

Most codes now insist that one-third of the number of directors are independent non-executive directors. However, independence is less about ‘shareholding’ and “connected Directorships” and more about how independent the director is in his thinking and positions taken, well beyond his ability to challenge proposals at the board meeting. Non-executive directors are the ones who really should perform the critical role of independent directors, since executive directors are often left to defend the managements’ recommendation, decisions and proposals in Board meetings. Non-executive directors who have gracefully relinquished their positions when their independence is compromised or when their ‘perceived dependence’ is patently apparent, are few and far between in our banks and financial institutions.

Most codes now require nomination committees to recommend the appointment of new directors. The main purpose of having a nomination committee is to ensure that there is a transparent appointment process, which is not dominated by the chairman or the CEO or even a Director or group of Directors for that matter, and to ensure that the right balance of skills, experience and independence is brought to the board table, while giving due consideration to shareholder demands. Most hang in for the regulatory period and fade away, leaving a legacy of lasting damage to the institution.


Most directors only visit the institution they represent once or twice a month, which makes a full understanding of the operations very challenging. Given the limited scope of the role, most directors don’t understand the business well enough to challenge the executives. Therefore there certainly needs to be a learning element brought into board meetings and beyond to ensure the directors properly understand the business they are overseeing and also have the competence to get under the skin of the institution and follow up on things that don’t seem quite right.

Boards are expected to enable continuous professional development of their Directors to ensure they stay ahead of the game. With such education, directors can become far more effective in identifying and understanding of the risks to be managed, as well as the key drivers that most influence a bank’s performance. This also means getting people on the board who are experts in areas like branding, HR, learning, and the like—not usually the kind of people boards look to right now. That is why most boards miss out on major forward risks that they should have been flagged by themselves, in the first place.

Board members are now expected to provide oversight and perspective to the executives running the institution by bringing their own experiences to the table, from other institutions they have managed, to help the institution to make better quality decisions and to help build a sustainable banking business. Banks are experiencing a growing tension between supporting their customers and increased concerns about the rise in non-performing loans (NPL), which will lead to capital erosion. While joint action with governments and regulators is likely required to address the immediate an NPL overhang, the repercussions for businesses and individuals are expected to be longer lasting. Looking ahead, there are three areas of focus that will reshape the sector and support a stronger recovery: serving customers better, through the right channels, with dynamic and relevant products and services; adapting to new ways of working; and building more resilient and agile and bigger organisations. If they fail to facilitate these they will face the wrath of the regulators, depositors, employees and even possible legal action.


(The writer was Chairman of the largest two private commercial banks and chaired the Banking Sector Consolidation Committee in 2015/16.)




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