Topping Corporate Governance Charts

ONE OF THE MOST enigmatic aspects of modern commerce is perhaps persona legalis, the idea of assigning a legal soul to a business, separate from the people involved, with its own rights and duties. However, how can one hold a nebulous persona legalis accountable for breaching the imaginary line that demarcates the right from the wrong, the ethical from the unethical? The conundrum gave rise to the concept of corporate governance, the way a business organisation operates within society through regulatory systems adopted and inculcated by its leaders.

Banking institutions are the backbone of an economy. Their good conduct lends credibility to a country’s financial system. With this in mind, Fortune India-Grant Thornton Bharat set out to identify banks with best corporate governance on the basis of rigorous parameters to judge performance of the directors and the institution. Grant Thornton assessed corporate governance standards of all domestic banks and ranked them using secondary data in public domain such as reports by Reserve Bank of India (RBI), Securities And Exchange Board of India (SEBI) and annual reports. The study found that HDFC Bank tops in corporate governance among large domestic banks. South Indian Bank and CSB Bank lead the list of mid-sized and emerging domestic banks, respectively. ESAF Small Finance Bank is number one in small finance bank category.

Rankings and Scores

CSB Bank got the highest score of 980 points. ESAF Small Finance Bank was second with 977. South Indian Bank was seventh in overall score at 961 points. HDFC Bank got 905 points with overall ranking of 18. India’s largest bank, State Bank of India, ranked 39 in overall tally, got 653 points. It is ranked tenth in the large category.

In large category, public sector banks dominated with seven spots in top 10. Among private large banks, ICICI Bank was fifth with 841 points, while Axis Bank was sixth with 833 points. Mid-sized rankings were dominated by private players (10 out of top 15).

Small finance banks dominated overall by taking six slots in the overall top ten list. CSB Bank and Karur Vyasa were the only two emerging banks which made it to the list with first and sixth ranks, respectively. Only two mid-sized banks made it, South Indian Bank (rank 7) and Bandhan Bank (10). There is no large bank in the overall top 10 list.

The Parameters

The assessment parameters included composition and functioning of Board of Directors, focus on dealing with risks, readiness for succession planning at the top, employee turnover, compliance/audit processes and clarity and standard of policies and related documentation. Since the entire responsibility of corporate governance rests with Board of Directors, that was given utmost importance. The assessment included questions on the lines of whether the gender ratio of Board of Directors is in lines with SEBI Listing Obligations and Disclosure Requirements; whether directors possess the requisite experience and expertise; whether Certificate on Corporate Governance exists; is Corporate Governance Policy in place; compliance with Corporate Governance requirements; negative disclosures in annual report on Corporate Governance. On performance front, the banks were assessed on number of complaints, penalties levied, frauds encountered and discipline of the board.

A weight of 10% each was given to number of complaints against a bank in last three years, complaints per branch and instances of fraud, while 20% weight was assigned to the value of the frauds. A 15% weight was given to number of penalties levied in last three years, the value of penalties and assessment of corporate governance by the board.

Under the guidance of RBI, domestic banks have adopted robust and transparent risk management and decision making. Strong corporate governance is the key to increasing confidence in the banking system. It is pivotal to financialisation of the Indian economy and increased participation of banking institutions in commerce within the country.