Let the banks become institutions
It can be safely argued that a longer tenure for sponsor-directors in the board would not prove to be a step that would contribute to better corporate governance
Md. Rizwanul Islam
Recently, the sponsor-directors of private banks have made some demands. They include the demand that sponsor directors be allowed to retain their directorship for life or at least for a longer period. According to them, their demands need to be fulfilled for ensuring that the sponsor directors get a just reward and also for better management of the banks. There is no doubt that by setting up banks, the sponsors make a very vital contribution. Their entrepreneurial adventure, for sure, promotes the use of idle money for productive purposes, create jobs, and contribute to the economic development. However, these contributions do not justify some of their recent demands. In any case, by setting up institutions, they enjoy various forms of controls over the banks. For instance, they design the memorandum of association and articles of association and appoint the first members of the board of directors. And, their demand for even more control extending for a longer period seems to be bereft of cogent reasons.
A fundamental flaw of the demands of the sponsor directors for a longer tenure is that it ignores that the banks are distinct from many other companies and they heavily depend on the financial contribution of the depositors. The sponsor-directors in most cases hold a very tiny proportion of the total fund of the bank and much of the contribution is made by the depositors whose interest may often be neglected by the management. A simple fact on the spread between the rate of interest charged on loan and the interest paid on deposits may epitomise this. If the sponsor directors have to work as directors for life or a longer period, it would mean that they have failed to build a strong institutional culture in the banks. Again, the loss of a position in a companys board cannot be equated with a deprivation of their right to wealth, as the sponsor directors seem to suggest. The reason is, even without a position in the board, they would be entitled to exercise their rights as shareholders and get dividends on their investment. And the law has a more relaxed then has been portrayed by the sponsor directors.
Indeed, if we read the relevant law, we would note that the current law on the tenure of sponsor directors is not too inflexible. Under Section 15AA of the Bank Companies Act, 1991, the tenure of the directors (except managing director or chief executive officer) cannot extend to more than two terms consisting of six years, in total. Thus, subject to the approval of the shareholders, a sponsor director is allowed to retain the position of a managing director or chief executive officer. More importantly, while the current provision does not allow sponsor directors to hold a position for more than six consecutive years, it puts no restriction on them holding the position for further term/s. The only condition is that there has to be an interval of three years after every six years of appointment.
Another demand of the sponsor directors is that the definition of family under the current law is too broad in that it includes spouse, parents, siblings, children, and any person dependent on the sponsor director. Under Section 15(10) of the Bank Companies Act, 1991, not more than two persons from one family can simultaneously sit on the board of a bank. However, despite a growing tendency of nuclear families, unlike the western culture, in Bangladesh members of the extended family still have a close tie with each other. Therefore, it is quite possible that although many adults, on paper, have their own business, but they have an inseparable tie with their parents, and are not factually independent of them. In this reality, the relaxation of the meaning of family should not take place.
Possibly the only justifiable demand of the sponsor directors is the relaxation of the requirement of getting approval from Bangladesh Bank for appointing directors. The restriction limits the autonomy of the shareholders and should be amended. Because in any case of illegality or abuse of power by the directors; the shareholders as well as the regulators, can intervene. And the need for approval of the regulators before appointment as directors seems to be unnecessary. It is, thus, difficult to disagree with the argument of the Bangladesh Association of Bankers that the existing provision on this point, has perhaps needlessly equated ordinary directors with the managing directors.
The sponsor-directors already exert much control on the management of banks. For the protection of ordinary shareholders, depositors, and other stakeholders, it is urged and expected that the regulators would not concede to the unreasonable demands of the sponsor directors. It can be safely argued that a longer tenure for sponsor-directors in the board would not prove to be a step that would contribute to better corporate governance in banks. If the regulators bow down to the demands of the sponsor directors, that would be a disregard for the interest of the depositors and ordinary shareholders. Even a longer duration for sponsor directors would be regrettable.
The writer is an Associate Professor at School of Law, BRAC University
