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One of the main objectives of running a company is to maximize shareholder value. In order to achieve this objective, the company needs to be managed by a formalized and well established team of individuals; who would operate as per best interest of the company following a set of rules and optimal business practices. Corporate governance means the way in which business and affairs of each institution is directed and managed by their ‘Board of Directors’ (“Board”) and the ‘Management’.

The Board is the apex authority of any company; and is ultimately responsible for all past, present and future activities. The responsibilities and duties of the board as a whole have been defined in a variety of ways.

According to Bank for International Settlements (“BIS”), “the board has overall responsibility for the bank, including approving and overseeing the implementation of the bank’s strategic objectives, risk strategy, corporate governance and corporate values. The board is also responsible for providing oversight of senior management” (BIS in ‘Principles for Enhancing Corporate Governance’, October 2010, p.7).

Core Principles for Effective Bank Supervision: Principle 14

Banks should have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations. (Basel Committee on Banking Supervision)

Corporate laws identify the responsibilities of the board of directors with respect to corporate governance principles to ensure that there are effective controls over every aspect of risk management.

These controls are the responsibility of the board of directors and deal with organizational structure, accounting procedures, checks and balances and safeguarding of assets and investments. More specifically, these address:

•Organizational structure: definitions of duties and responsibilities including clear delegation of authority (for example, clear loan approval limits), decision making procedures, separation of critical functions (for example, business origination, payments, reconciliation, risk management, accounting, audit and compliance)

•Accounting procedures: reconciliation of accounts, control lists, information for management.

•Checks and balances (or “four eye principles”): segregation of duties, cross checking, dual control of assets and double signatures.

•Safeguarding assets and investments: including physical controls

To achieve a strong control environment, the board of directors and senior management of a bank should understand the underlying risks in their business and are both committed to, and legally responsible for, the control environment. (Basel Committee on Banking Supervision)