CORPORATE governance is the framework by which corporations are directed and controlled. In essence, it seeks to ensure that management acts in the best interests of the real owners and shareholders while maintaining a balance between economic and social goals. In the banking sector, this balance becomes particularly critical due to the systemic importance of banks, the reliance of ordinary depositors on sound banking practices and the potential for widespread impact in cases of failure.
The concept of corporate governance began gaining traction in the 1970s, following a series of high-profile corporate failures. One early example was the collapse of Penn Central, a once-prominent railway company in the United States, whose board failed to prevent egregious mismanagement and financial misreporting. In response, the US Securities and Exchange Commission began pushing for independent audit committees and stricter oversight by directors. Since then, the global banking industry has come under increasing pressure to embrace governance reforms, not as formalities, but as essential tools for long-term institutional integrity.
In today鈥檚 banking environment, corporate governance is not a mere regulatory obligation; it is a driver of reputational strength, operational stability and financial sustainability. The benefits of robust governance are numerous: more efficient processes, lower cost of capital, enhanced compliance, transparency in reporting, stronger stakeholder trust and better responsiveness to crises. In contrast, weak governance often results in mismanagement, regulatory penalties, erosion of shareholder value and in severe cases, insolvency.
At the heart of this system lies the board of directors. Its composition, independence, competence and conduct determine whether a bank will be guided by prudent judgment or hijacked by political or insider interests. When all board members share similar professional backgrounds or affiliations, diversity of thought is compromised. A well-composed board brings together varied experiences, ranging from credit risk, treasury, audit and compliance to strategic leadership and international banking. It also encourages constructive disagreement, which is essential for good decision-making.
Diversity alone, however, is not enough. The board must also function independently of management and exercise oversight without undue influence. This is particularly vital in Bangladesh, where regulatory frameworks exist but enforcement remains weak and interference, both internal and external, is not uncommon. Independent directors, in theory, help counterbalance this risk, but they must be appointed for their expertise and integrity, not for their affiliations.
Transparency is another cornerstone of governance. Banks must not merely highlight their achievements; they must report financial and operational difficulties openly and in a timely manner. Stakeholders, especially shareholders and depositors, deserve access to accurate, understandable and comprehensive information. Without transparency, trust collapses.
The Bangladesh Bank has taken several steps to formalise the governance structure within banks. The Prudential Regulations for Banks (2014) outline detailed responsibilities for boards, including those related to financial management, risk oversight, internal controls and strategic direction. Under the Bank Company Act, 1991, boards are tasked with formulating policy, overseeing internal audits, ensuring compliance, and preventing conflicts of interest. Yet, the real question is not whether the rules exist, but whether boards are empowered, competent and committed enough to uphold them.
Let us consider their responsibilities more concretely.
Boards must approve annual budgets, review financial statements quarterly and monitor income, expenditure, liquidity and asset quality. They are expected to delegate operational authority responsibly to the CEO and subordinates, avoiding direct interference in executive functions, especially in matters like recruitment or credit approvals. Boards must ensure that audit functions are independent and that findings 鈥� whether from internal audits, external auditors, or Bangladesh Bank inspections 鈥� are acted upon seriously.
Risk management is another critical domain. Boards must approve and monitor strategies for credit risk, market exposure and operational vulnerabilities. Risk management committees, where they exist, must be functional, data-driven and accountable to the full board. Disaster recovery plans and internal controls should be reviewed periodically, not merely filed away after regulatory inspections.
Audit committees, similarly, are not ceremonial bodies. Their role in assessing financial reporting standards, ensuring legal compliance and scrutinising both internal and external audits cannot be overstated. Their independence from management is crucial, as is their willingness to confront uncomfortable truths.
Beyond committees, boards must actively engage in strategic planning. They are expected to evaluate the performance of the CEO and top executives, set institutional goals and reflect candidly in annual reports on successes, failures and future plans. In human resource matters, boards should frame policy but never micromanage recruitment or promotion processes 鈥� practices that are too often manipulated in our context.
To ensure this level of performance, board members must bring a mix of core competencies and specialised knowledge. Every director should possess sound judgment, integrity, strategic thinking and financial literacy. Some should also bring expertise in credit operations, treasury, regulatory affairs, risk assessment and international banking. Emotional intelligence and team dynamics are just as important as technical skills.
A functioning governance framework also depends on regular board meetings 鈥� not excessive, but substantive 鈥� and efficient delegation to subcommittees. Bangladesh Bank allows each board to form one executive committee, one audit committee and one risk management committee. No other standing or ad hoc committees are permitted, a rule designed to ensure focused, non-redundant oversight.
The executive committee may act on matters delegated by the board but must report its decisions back for ratification. The audit and risk committees likewise operate under clear mandates. But without active, well-trained directors and robust internal policies, these structures will remain on paper only.
Ultimately, corporate governance is not about box-ticking. It is about aligning a bank鈥檚 internal mechanisms with its external obligations to shareholders, depositors, regulators and the broader economy. In an age of growing economic complexity and increasing public scrutiny, banks cannot afford to treat governance as a compliance requirement alone.
To build a strong culture of governance, banks must invest in director training, encourage genuine independence, uphold transparency and ensure that committees are not only formed but empowered. The path to true corporate governance in our banking sector is not elusive. It requires commitment, competence, and above all, the courage to lead from the top.
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Mohammed Mahfuzur Rahman is a deputy general manager of Probashi Kallyan Bank.
