European Journal of Commerce and Management Research (EJCMR)

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Vol-2, Issue 4
April 2013

Corporate Governance Practices in Banking

Sector: A Case Study of Andhra Bank
S Vijayalakshmi
Associate Professor, IBS Hyderabad.
Hyderabad, India.
vijayas@ibsindia.org
sedidi@gmail.com
Abstract The corporate governance practices of Andhra Bank
are analyzed using content analysis. The annual reports from
2004-05 to 2011-12 are analyzed with respect to board
composition and various mandatory and non-mandatory
committees. Corporate governance scores are used for analyzing
the governance practices adopted by the bank. As per clause 49
of the listing agreement corporate governance scores are
calculated for the years 2004-2005 to 2011-12 to know the extent
of corporate governance practices adopted by bank. The study
concludes by saying that overall corporate governance practices
of Andhra Bank are good. The scores are increasing year on year
from 2004-05 and consistent in the last four years and it is a sign
good governance.

Corporate governance is the system by which business

corporations are directed and controlled. The corporate
governance structure specifies the distribution of rights and
responsibilities among different participants in the
corporation, such as, the board, managers, shareholders and
other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs. By doing this, it also
provides the structure through which the company objectives
are set, and the means of attaining those objectives and
monitoring performance (OECD, 1999).2
II. LITERATURE REVIEW

Keywords: Corporate governance, corporate governance scores,

remuneration committee.

The authors investigated the impact of corporate governance

on the risk and return of Korean banks for a period of ten
years. The authors made a study on the ownership structure of
banks and the involvement of foreign institutions and
investors ownership and board membership of Korean banks.
The authors found heterogeneity of board structure on bank
performance. The authors also found that there is a significant
relationship between the extents of external board
involvement, presence of foreign directors on the board. The
paper also concluded that ownership and the number of
outside directors are associated with lower risk, and the
involvement of foreign board members is positively associated
with risk. 3

I. INTRODUCTION
Asian financial crises in 1997 severely affected the economies
of South Korea, Thailand, and Indonesia by the exit of foreign
capital. 1 As the corporations have grown to commendable
heights in terms of power and control over different
dimensions of society, governing them in the interests of
shareholders and society is a big task. Corporations need to be
governed by aligning the interests of state, society, and
shareholders. To overcome these challenges several corporate
governance mechanisms are evolved. (N. Balasubramanian,
2012)

Another study was conducted by Racha Ghayad in the Islamic

banks on the performance of banks. The study was found that
corporate governance in banks imposes an important
constraint in Islamic bank operations. The bank is based on
the principles of Islam- which is not affected by internal
variables but internal qualitative variables like the managerial
variables. The traditional banks as well as Islamic banks
cannot be compared because of divergence level of objectives.

In India in recent years governance reforms have become

cornerstone of corporate sector. A good corporate governance
structure is important for Indian corporate sector as Indian
companies started accessing the foreign capital. In 2000 the
biggest reform of Clause 49 of the listing agreement took
place followed by new companies Bill of 2009(awaited for
approval in parliament). (Jayati Sarkar)
Corporate governance refers to a set of legal, cultural and
institutional arrangements, and how the control is exercised,
and how the risks and returns are allocated. (Blair, 1995)
1

http://www.oecd.org/daf/corporateaffairs/corporategovernanceprinciples/356
39607.pdf
3
Sungho Choi, Iftekhar Hasan, Maya Waisman 3(2009)

http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

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Vol-2, Issue 4
April 2013

The Sharia member needs qualification in finance to ensure a

qualitative supervision. 4

of any failure of bank not only the shareholders but the entire
economy will be affected.

The implications of the banks fiduciary duty to depositors and

shareholders was analyzed by Andy Mullineux. The author
focused on the fiscal duty to tax payers for better corporate
governance practices in banks. The author made an extensive
study on the asymmetric information literature related to
banks. The paper was concluded by saying that for good
corporate governance banks require regulation to balance the
interests of depositors and tax papers and shareholders. 5

Transparency and disclosures are the main pillars of

governance framework to all the stakeholders. In less
developed countries government ownership and direction of
lending in priority sector lender is the feature. So banks
governance practices are vital in such economies.
Recommendations of Birla committee
Shareholders Role. The main role of shareholders is to
appoint the directors and auditors and make the board
accountable for good governance of the company.

Disclosures of corporate governance practices play a vital role

in enhancing perceptions that financial reports reflect the
organizational realities. The author Anne Abraham, Hemant
Deo, Helen Irvine 5(2008) aimed at focusing on a number of
unexpected disclosures by major Australian banks. He
highlighted the subjectivity of financial reports and their
nature on the real governance practices.6

Board of directors Role: Board of directors play a vital role

in company stewardship. It sets the strategic aim and financial
goals, their implementation and designing the adequate control
systems and enabling the board to monitor the accountability
of management to do it.

The structure of balance sheets high leverage and mismatch

in asset liability management are focused in this paper. Broad
areas of corporate governance like investors confidence,
lenders confidence and care of directors are explained in this
paper. The authors conducted a survey and concluded by
saying that external regulators and auditors have vital role to
play in the corporate governance practices. 7

Managements Role: The responsibility of management is in

terms of direction provided by the board and to put in place
adequate controls and ensure operations and to provide
information on a timely basis in a transparent manner to the
board.
Clause 49: Strengthening corporate governance structure
with whistle blower policy and independent directors

Banks exercise monitoring over borrowers in lending which

include loan interest rates and loan renewals. A study was
conducted in Chinese banks in the year 2011 and the author
conducted a survey for a period of 5 years by taking a sample
of Chinese public industrial firms whether banks adjust their
loan interest rates and consider loan renewal decisions Major
reforms took place in china in the year 2003. A negative
relation was found between the loan interest rate and financial
performance of borrower consistent with firms in financial
difficulties. It was also found that there are changes in
variables while making decisions before and after 2003. 8

In addition to mandatory guidelines, Clause 49 also prescribes

the whistle blower policy and tenure of independent directors.
The main objective is to fill the gap between the current and
future risks that are supposed to be covered under corporate
governance. The whistle blower policy involves the
confidential and also uninterrupted communication of any
illegal activity to the audit committee. In case of an
independent director the tenure should not exceed more than 9
nine years with 3 yearly tenures.

Corporate governance and banking sector:

III. RESEARCH OBJECTIVES
Banks are special because the managers have a fiduciary duty
to depositors and shareholders. Banks are the important
sources of external financing for so many businesses. They
play an important role in capital formation and core of
payment systems. Banks are the pillars of the economy and
almost universally a regulated industry. It is important that
banks should have strong governance practices. Market
control is not sufficient to ensure governance of banks. In case

To study the corporate governance practices by Andhra Bank

from 2004-05 to 2011-12. The specific objectives of the
research are as under:
1.

2.
4

Racha Ghayad (2008)

Andy Mullineux (2006)
6
Anne Abraham, Hemant Deo, Helen Irvine (2008)
7
Morrison Handley-Schachler, Linda Juleff, Colin Paton (2007)
8
Yiming Hu, Siqi Li, Thomas W. Lin, Shilei Xie (2011)
5

85

To examine the compliance of the bank with respect

to mandatory requirements of corporate governance
practices under Clause 49 of Listing agreement of
SEBI.
To examine the board composition, participation of
executive and non-executive directors in various
committees of the bank such as audit committee,
management
committee,
Risk
management
committee,
investors
grievance
committee,

European Journal of Commerce and Management Research (EJCMR)

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3.
4.

remuneration committee, It strategy committee, Asset

liability management committee, monitoring of large
fraud, and customer service and nomination.
To measure the quality of CG based on CG scores
from 2004-05 to 2011-12.
To suggest ways to strengthen the CG practices for
the bank.

Vol-2, Issue 4
April 2013

committees such as board of directors, audit, remuneration,

shareholders, and management as mandatory and customers
service, fraud, risk management, Information technology, risk
management as non-mandatory committees.
Composition of Board and Board meetings
The composition of the board of directors is found to adequate
as per clause of 49 for the years 2004-05 to 20011-12. The no
of the board members are consistent. So far as the attendance
is concerned CMD and ED attended almost all the meetings
held which is a good sign of corporate governance. The
numbers of meetings are consistently held but in the year
2006-07 nearly 234 meetings are held.

IV. METHODOLOGY
Annual reports of Andhra bank from 2004-05 to 2011-12 are
examined for the analysis. Besides the data related to CG has
taken from Prowess (CMIE database). Corporate governance
index has been prepared based on 17 parameters. Weights are
given to each parameter and bank weights are compared with
this index.

Audit committee
The composition of the audit committee of the board is
adequate in all the years starting from 2004-05 to 2011-12.
The composition consists of chairman and members of 1, 4
consistently. The number of board meetings held increased
consistently and maximum number is 63 in the year 2011-12.
The percentage of attendance also increased consistently. The
numbers of audit committee meetings held are 38, 45, 40, 50,
46, 49, 45 and 63 during 2004-05 to 2011-12 respectively.

Profile of Andhra Bank

Andhra bank is a medium sized public sector bank with a
stake of 51.55% of its share capital and is going to increase to
58% by infusion of 1100 Crores in capital. As on date Andhra
Bank is 100% CBS and pioneer in introducing Credit Cards in
the country in 1981.The bank was founded 89 years ago on
20th Nov. 1923. It was headquartered in Hyderabad, Andhra
Pradesh.

Management committee
Corporate Governance Practices in Andhra Bank
The composition and participation of the members in the
meeting is disclosed from 2004-05 to 2011-12. There was an
increasing trend in the number of management committee
meetings held. In 2004-05 98 meetings were held and 88%
were attended, in 2005-06 105 meetings were held and 88% of
the members attended and out of 116 meetings 87% of the
participants were attend during 2006-07, and out of 139
meetings held nearly 87% of members were attended during
2007-08 and during 2008-09 out of 146 meetings held nearly
92% of the participants attended the meetings. During 201011 out of 133 meetings nearly 95% of participants attended
and during 2011-12, 96% of the people attend. This shows a
good governance practice.

The main objective of the bank is to continue to remain

dynamic to the ever changing needs of the customers. The
bank philosophy is that proper Corporate Governance
facilitates effective management and control of business and
ethics and to optimize the value for all its stakeholders.
The principles of Corporate Governance basically require the
commitment of the Bank to attain high standard of
transparency, accountability, responsibility and financial
stability with the ultimate objective of building up values to
the stakeholders. The objectives are
1. Enhancing the shareholders value within the
principles of ethics and legal framework of the
country.
2. To protect interest of shareholders and other
stakeholders including customers, employees and
society at large.
To ensure transparency and integration in communication and
to make available full, accurate and clear information to all
concerned.

Risk management committee

The composition and participation of the board is adequate as
per clause 49 of the listing agreement. The number of
members in the risk management committee is 5 till 2007-08
and enhanced to 6 from 07-08 onwards till 2011-12. This
shows a good sign of the corporate governance practice. The
risk management meetings are held 23 in 2004-05 and reduced
to 21 in 2005-06 and increased to 36 consecutively for the
next year also by 2008-09 and 37 during 2009-10 and later
reduced to 29 and 30. Regarding the participation of the
members the percentage of attendance was 87, 88, 76, 94, 83,
92, 86 and 90.

V. DATA ANALYSIS
Corporate governance reports basically focus on transparent
management and control systems. Clause 49 identifies various

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Vol-2, Issue 4
April 2013

Depending on the score board the following are the

observations.

Shareholders/Investors Grievance committee

The numbers of members in the grievance committee were 4
initially during 2004-05 and enhanced to 5 in 2006-07 and
reached to 6 during 2011-12. This is a good sign of corporate
governance practice. The number of meetings held by this
committee increased from 8 with a 100% attendance to 20
during 2010-11 with a percentage of attendance of 92.

a)

b)

Remuneration committee
c)
The complete disclosure of this committee was given from
2006-07. Before that information is not reported in the annual
reports. The number of members in the committee was 4 till
2011-12. The members attended all the meetings and 100%
percentage of attendance is there from 2006-07 to 2011-12.

d)

e)
Information technology committee

This committee was stated during 2011-12. The composition

of the board was only two and there is needs for increasing
more members as per governance practices are concerned.

f)

Asset liability management committee

g)
The asset liability committee plays a very important role in
CG practices. The number of members range between 9 to 6
starting from 2004-05 to 2011-12. The number of meetings
held also range between 396 during 2004-05 and 180 during
2011-12. The number of meetings held is changed as per the
risk analysis and the practice followed by this bank is a good.

h)

i)
Meetings of Large fraud committee
Composition, Participation and Number of Monitoring of
Large Frauds, Customer Service, Nomination Committee
Meetings held (2004-05 to 2011-12) are explained in the
annual reports. The number of members in the committee
increased from 5 (2004-05) to 6 during 20011-12. However
the data is not available for the years 2007-08, 2008-09 and
2009-10. The number of meetings held ranged from 5 to 15.
This shows timely requirement of the committee members and
a positive sign of the corporate governance practices.

j)
k)

l)

m)
Measurement of Corporate governance practices in
Andhra Bank
n)
The measurement of corporate governance practices is done
through a score board. The score board consists of 17
important variables relating to the functioning of the bank
with respect to board structure, disclosures, committees, code
of conduct etc. as per clause of 49 of Listing Agreement.

o)

87

Company philosophy on code of governance it is

getting 2 points on the scale of 100. The company is
good in on the disclosure of the statement of
company philosophy on code of governance
Regarding the structure and strength of the board,
weightage of 2 was assigned on a scale of 100. The
company for all the years has sufficiently disclosed
the composition of board of directors.
Chairman and MD duality is assigned weight of 5 on
the scale of 100. In all the years full disclosure is
presented during the period of study.
Disclosure of tenure and age limit of directors is
assigned weight of 2 and the company is getting 2 out
of 2 for the period of study.
Disclosure of definition of independent director, and
financial reports and selection criteria of Board of
director as independent director is assigned 3 out of
the scale of 100. But the disclosure are missing in the
annual reports for which the bank should be paid
attention
Post board meeting follow up system is assigned
weights of 2 on a scale of 100 and the company good
in this disclosure.
Appoint of lead independent director is given weight
of 2 out of the scale of 100 the company is poor in
disclosing this information and suggested that the
same to bank.
Disclosure of other provisions as to the board
committees is assigned 1 out of scale of 100 and the
disclosure is missing in this regard.
Disclosure of remuneration policy and remuneration
of directors is assigned 2 and during the year it was
good and disclosed but scores is only 1 in the later
years.
Code of conduct weightage of 2 is assigned but the
company is good in this disclosure.
Audit committee weight of 8 is assigned and
company got 8 and good in disclosing the particulars
of this committee.
Remuneration committee weightage of 6 is given but
from the year 2006-07 onwards disclosure are
presented in the annual report.
Shareholders/investors grievance committee is
assigned weight of 5 and the company got 5 in
disclosing the information in the annual report.
Nomination committee is assigned the weight of 2
and from 2007-08 onwards the company is disclosing
the details.
Disclosure and transparency committee is given the
maximum weight of 25 and the company is good in
disclosing the information treated to accounting
treatment, risk management etc.

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p) General body meetings the wright of 3 is assigned

and the bank is good in disclosing the same
q) Means of communication and general shareholder
information is given wright of 2 and bank is good in
disclosing the same.
r) CEO/CFO certification is assigned weights of 2 on
the scale of 100 and the company is not disclosing
the same.
s) Compliance of corporate governance and auditors
certificate is given 10 weightage and the bank
disclosed all the information and the bank is given
clean certificate from auditor.
t) Disclosures of shareholders interest are assigned
weight of 10 and bank is good in disclosing all the
information related to the section. The information is
available in various forms in the annual report.

[4]
[5]
[6]
[7]
[8]
[9]

[10]

[11]

VI. CONCLUSION

[12]

The company was getting a score of 75 in the year2004-05

and increased gradually to 91 on the scale of 100 on the basis
of 17 parameters mentioned above as per the index The
overall compliance of Andhra bank with respect to corporate
governance practices as mentioned under clause 49 of the
listing agreement is good. The performance of the bank was
improved drastically over a period of study.

[13]

[14]

REFERENCES
[1]
[2]
[3]

[15]

Annual Report 2004-05, Corporate Governance, Andhra

Bank
Annual Report 2005-06, Corporate Governance, Andhra
Bank
Annual Report 2006-07, Corporate Governance, Andhra
Bank

[16]

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Vol-2, Issue 4
April 2013

Annual Report 2007-08, Corporate Governance, Andhra

Bank
Annual Report 2008-09, Corporate Governance, Andhra
Bank
Annual Report 2009-10, Corporate Governance, Andhra
Bank
Annual Report 2010-11, Corporate Governance, Andhra
Bank
[8] Annual Report 2011-12, Corporate Governance,
Andhra Bank
[9] Das, S.C. (2007), Corporate Governance Standards
and Practices in Engineering industry in India, The
Management Accountant, Vol.42, No.2, pp. - 600-613.
[10] Hardeep Chahal, A. K. (January-June 2011). The
Ethics of Corporate Governance Practices in Jammu &
Kashmir Bank Limited. Indian Journal of Corporate
Governance.
[11] Jayati Sarkar, S. S. (n.d.). A Corporate Governance
Index for Large Listed Companies in India. Management
Review- IIM B.
[12] Kimber, D., and Phillip, L. (2005), Corporate
Governance Ethics in the Asia Pacific Region, Business
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[13] N. Balasubramanian, R. G. (2012). Corporate
governance and the Indian institutional context:
Emerging mechanisms and challenges In conversation
with K.V. Kamath, Chairman, Infosys. Bangalore: IIMB
Management Review.
[14 SEBI (2000), Securities and Exchange Board of
India, Secondary Market Department, 21 Feb, 2000,
www.sebi.gov.in/circular/2000/CIR 102000.html.
[15] SEBI (2004), Corporate Governance in Listing
Companies-Clause 49 of the Listing Agreement, Oct 29,
2004, www.sebi.gov.in /circulars/ 2004/ cfdar 0104.pdf.
[16] SEBI (2006), Corporate Governance in Listing
Companies-Clause 49 of the Listing Agreement, 13 Jan,
2006,
www.sebi.gov.in/circular/2006/CR12006/13.