Banks’ boards should ensure that managements are held accountable for their actions: RBI Deputy Governor

Bank boards should objectively assess management’s performance and ensure they are held accountable for their actions, according to M Rajeshwar Rao, RBI Deputy Governor.

“If management is not meeting expectations, boards of directors should take appropriate measures, including replacing management, to improve bank governance and risk management,” he said at a recent bank board conference.

Rao notices that RBI Looking at the ‘twin peaks’ model of regulation – prudential regulation and conduct regulation – through the lens of governance with equal emphasis on conducting business through prudence.

“There is no doubt that it is essential for management to perform well, but more importantly, this must be achieved by adhering to acceptable customer and market behavior and best corporate governance practices,” he said.

He noted that RBI often encounters issues of conduct that do not receive the priority or attention from the board that they should have.

Customer service, customer behavior, ethical employee behavior, data privacy, and cyber security are critical and important issues that gain greater importance in times of innovation, change, and business disruptions.

“Good practices or rather best practices in these areas are the soft core pillars that build the edifice of a successful financial institution, and even more so in these challenging times,” Rao said.

Therefore, there is a need to reflect on the role and expectations of the governance structure – the board and its committees, independent directors and assurance functions in banks and other financial institutions on these issues.

“In effect, the Board must lead a culture where it is expected to go beyond basic compliance with regulatory and legal requirements and aim for higher and better standards in the industry,” said the Deputy Governor.

To this end, the Board must ensure an adequate policy framework for its own assessment of effectiveness and composition, in accordance with their strategies and risk profiles, both in aggregate and in detail.

Rao emphasized that the classic three lines of defense are clearly within the purview of the Board of Directors with audit being the independent examination and oversight as the last line of defence/oversight.

“Here the governance framework put in place by the board must ensure that the three lines of defense do the job as expected – just like in a game of football the attackers, midfielder and defenders collectively must keep the ball in play and ensure that the supervisor as goalkeeper does not work “.

Regarding the link between regulation and governance, Rao notes that regulators usually decide the regulatory perimeter and direct the regulated entities so that accidents and surprises do not occur.

“While the regulators are responsible for issuing instructions requiring banks to adopt best practices in terms of governance, it is up to the board of directors to set the strategic direction, engage with management, and conduct a review of key policies and frameworks.

He said, “Boards must manage the alignment of performance with wages in addition to enforcing accountability to ensure adherence to best practices while achieving the goals set for the Bank by the Board of Directors.”