Thursday 08th May, 2008 Banking & Finance Page 3 Creating an New thinking on risk environmentally sensitive management in banks needed work force at HSBC by P. Samarasiri, Assistant Governor, regulations all over the world were quickly liabilities on deposits and debts and to meet Central Bank of Sri Lanka introduced in a possible attempt to prevent such their financial obligations relating to other In response to the Directions on Corporate scandals and failures in future, and to soothe the financial services such as lending and payments Governance issued to banks by the Central Bank nervous minds of investors, both local and inter- services without interruption. Any potential on December 26, 2007, various views have been national. risk which may damage this public confidence expressed on the nature of the corporate gover- Modern Corporate Governance Codes have will cause depositors’ run on banks as well as nance that should be in banks. Therefore, this extensively addressed several major governance customers’ default on their obligations to banks article is published to educate the general public issues. These include transactions with related- which will eventually lead to liquidity crisis, about the background of the corporate gover- parties of the institutions such as directors, insolvency and failures of even well-run banks. nance literature, the need for a specific corpo- their close relations and businesses, conflicts of The literature of bank failures in many coun- rate governance mechanism for banks and the interest, creative accounting methods to hide tries shows that failures of some banks may nature of corporate governance introduced by adverse financial outcomes, ownership/share- cause contagion on the banking system due to the Central Bank. holder concentration and dominance, lack of damaged public confidence. shareholders’ voice, lack of independence of What is Corporate Governance? auditors and strategic direction toward long- ! Business involving money creation Any institution, whether it is state or pri- term wealth creation. In general, while related- Banking system has the ability to create Ranil Fernando and Ranjula Mendis of Team ‘Corporate Real Estate’ vate, conducts a business or economic activity party transactions have been at the very centre money through its business and this created receiving the winner’s certificate and award from Nick A Nicolaou Chief which involves several categories of stakehold- of many of Asia’s scandals, corporate scandals money is the largest component of the money in Executive Officer for HSBC Sri Lanka and Maldives ers such as owners/shareholders, employees, in the US and Europe have stemmed mostly circulation available for financing/facilitating HSBC concluded its much the common objectives of - customers and general public. Therefore, it is from creative accounting which hid the true pic- economic transactions. Therefore, the business awaited first ever “Inter supporting the group’s com- necessary that the business of any institution ture of financial transactions of a company. The of banks is carried on a public good which is Departmental Competition mitment to climate change, should be organized and conducted in a certain current financial market turmoil prevailing in money, and banks are part and parcel of the on Climate Change” by creating an environmentally management structure designed to protect the developed countries since August, 2007, and monetary and financial system of the country. announcing the finalists of sensitive workforce and iden- interests of its stakeholders which will mitigate resulting bank failures have raised several The failures of banks will adversely affect the the competition. Four teams tifying methods of reducing its business risks and ensure its sustainability monetary conditions and economic well-being of were selected for their inno- emissions and efficient use in the business. This management structure the public and cripple the monetary/financial vative thinking and were of resources. properly documented and adopted by an institu- system. Maintenance of monetary and financial awarded first, second and Out of many productive tion is the corporate governance. Therefore, cor- system stability to facilitate the economic stabil- third places by chief guest and innovative proposals, porate governance is about how the busines ity is the key responsibility of the Central Bank. Nick A Nicolaou, Chief Prof. Ajith de Alwis, former affairs of an institution are oragnised with a The public undertakes transactions (such as Executive Officer of HSBC Head of the Department of good risk management mechanism in a trans- deposits, investments and payments) through Sri Lanka and the Maldives Chemical and Process parent and accountable manner in the interest various types of money payment instruments at a special ceremony held at Engineering and a Senior of both the institution and its stakeholders. because of their confidence that such moneys the Bank premises in April Lecturer at the University of Corporate governance activists, practitioners serve as the legal tender, i.e., currency, or can be 2008. Moratuwa selected four of and researchers have developed certain corpo- converted into currency without delay. The The first place was the best teams. rate governance codes consisting of certain gov- maintenance of the public confidence in the awarded to the “Corporate The criteria for selecting ernance principles or certain principle-based legal tender is the responsibility of the Central Real Estate” team, whilst the best proposals were governance rules and, therefore, certain best Bank. Any contagion of failures of banks and teams “Operations based on practical guidelines practices in corporate governance are available large scale withdrawals of deposits will lead to Development and Design” – originality, ease of imple- in the literature. These best practices generally liquidity crisis in the financial system because and “Human Resources” mentation, carbon and relate to responsibilities, affairs and conduct of the amount of money held by the public by way were awarded second place. resource savings and need the board of directors, senior executive manage- of deposits with banks is significantly greater The “Card Centre” team was for team work. ment and board-appointed committees and dis- than the amount of currency in issue or curren- awarded third place The competition from its closure of financial position of the institution. cy held by banks. According to the estimate of amongst 45 teams actively inception in 2007 has already Accordingly, the management of an institution money in circulation in terms of broad money taking part in this year’s implemented some of the can adopt its own corporate governance code M2, the deposits held by the public with the competition. best ideas such as recycling designed following the best practices which will banking system consist of 87% whereas the cur- The competition was paper and toner cartridges, suit the nature of the business of the institution rency held by banks constitute only 3% of such open to all internal depart- rain water harvesting, min- and stakeholders. Furthermore, various regula- deposits. Therefore, maintenance of the public ments and branches within imising utility waste, creat- tory and supervisory authorities also have com- confidence is the key for the banking system sta- the bank and each entity was ing a paperless environment, menced prescribing certain corporate gover- bility. requested to make a presen- improving processors to nance codes for the institutions falling within issues relating to governance and risk manage- tation on initiatives that reduce turn around time, their purview because of the inadequacy of the ment of banks and financial institutions. The ! Fiduciary responsibilities of banks could be implemented to trading in used paper for institutions’ voluntary corporate governance failure of banks to comply with very basic rules Banks are the authorized agents of money to minimise the direct impacts notebooks with third party codes, given the significance of such institu- relating to credit and liquidity risk manage- facilitate the functions of money, i.e., a medium on climate change. suppliers and reducing the tions to the general public and the economy. ment, usage of complex structured finance prod- of exchange, a unit of accounts, a deferred pay- Each entry was scruti- use of plastic bags by dis- Corporate governance principles had its ori- ucts to transfer credit risk to investors who did ments system (borrowing and lending) and a liq- nised and evaluated against tributing cloth bags to staff. gins in the 19th century although the term not understand such risks or products, resorting uid store of wealth. The public conventionally “Corporate Governance” itself came into vogue to unsound/risky business models, lapses in treat banks as the safest places for keeping their in the latter part of the 1980s. The need to focus understanding and oversight of the boards of savings. This is the general public faith/confi- Eagle call centre upgraded on good corporate governance practices mainly directors on complex businesses and risk man- dence in banks which is the foundation of the Eagle upgraded its Call “We endeavour to continu- arose as a response to the separation of owner- agement models of banks and difficulty in valu- banking business. The majority of the public is Centre into a state-of-the-art ously innovate and improve ship and control following the formation of joint ing the complex finance products to reflect their not aware of financial analysis techniques to facility to provide greater our service standards and stock companies in the 19th century in Europe. market value (fair value accounting problem) assess the safety and soundness of banks and convenience and enhanced product offerings. We have The owners or shareholders of these joint stock are some of them. As a result, a new wave of direct financial gain/yield on deposits such as service to all its valued poli- upgraded this facility to companies, who were not involved in day-to-day reform to governance in banks is now in vogue interest rates is not the deciding factor for them cyholders.