M R Pridiyathorn Devakula: Efficiency enhancements and risk management
Remarks by Mr M R Pridiyathorn Devakula, Governor of the Bank of Thailand, at the Asian Bankers'
Seminar, Bangkok, 16 March 2006.
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Distinguished Guests,
Fellow bankers,
Ladies and Gentlemen,
Today's seminar covers wide-ranging topics of interests to the banking community ranging from
efficiency enhancements to risk management needed to achieve sustainable business growth. While
these issues are topical and useful to bankers, I believe that one cannot simply reduce risks by relying
on risk management process alone. An effective risk management system has to be supported by
proper governance of the bank's Management and its Board of Directors.
One of the painful lessons of the 1997 crisis was that improper governance practices at the Board
level were amongst the root causes of the downfall of too many financial institutions. Back then, it was
not unusual for banks to lend to related parties with close connections to their owners, directors, and
management without the proper credit analysis. Board members of banks often neglected their
responsibilities to blow the whistle against these imprudent activities. Many Board members also did
not have adequate and timely access to the necessary information to detect such misdeeds so that
appropriate actions could be taken to prevent the resultant damages.
The concept of "governance" as understood in Western society and now introduced into our business
organizations, including financial institutions, has served as a good starting point to rectify some of the
root causes of the crisis. The Western governance concept including the appointment of an
independent director in the Board of Directors, the introduction of an Audit Committee, and other new
initiatives to improve the governance structure, have helped to address some of the problems of the
past -but only to a limited extent. Unfortunately, there have been some actual practices in the
Western corporate world which are contrary to the intended ideals of good governance. The notorious
examples of Enron and WorldCom are all too well-known, notwithstanding the fact that both
corporations had Boards of Directors established in accordance with the Western concept of good
governance. Yet both eventually faced severe financial difficulties.
As I see it, there are two critical aspects of the Western practices which may potentially lead to serious
financial difficulties for the firm. The first is that the Chairman and the CEO is one and the same
person. The second is the practice of allowing company stock options to be part of the compensation
for company Directors. Allow me to elaborate.
A CEO is by designation the Chief of Management, responsible for achieving the best possible
performance of the company. This means maximizing profits, increasing growth and market share,
expanding business lines, and doing all that it takes to maximize the company's share value. On the
other hand, the Board of Directors has to oversee the operations of Management, ensuring that they
operate well within the bounds of acceptable risks in order to ensure business continuity. The Board of
Directors, thus, needs to act as a check-and-balance against the Management with a view to ensuring
the safety and soundness of the enterprise. Meanwhile, shareholders also expect the Board to perform
its role as a watchdog or guarantor that the corporation would not incur losses or go into bankruptcy.
They also expect the Board to check Management against excessive risk taking.
Therefore, it goes without saying that if the roles of Chief of Management and the Chairman of the
Board are performed simultaneously by the same individual, then other Board members cannot fully
perform their duties of providing the check-and-balance required by good governance. Worse yet,
shrewd CEO will tempt other Board Members with stock options so that they would go along with his
policy direction. This would especially be the case when the CEO aims for high growth or business
expansion, which usually implies a quick rise in the company's equities. Though, these policies are
often prone to higher risks, Board members may become less inquisitive and more optimistic in their
judgment as a result of the personal interests in potential profits from stock options. At the end of the
day, their own personal interests would overtake their sense of conservatism and responsibilities.
One can think of an even worse scenario when the CEO would like to cover up any wrongdoings or
poor performances. Since this CEO is also chairman of the Board, he can easily influence the agenda
of the meeting. Thus, Board Members may never be aware of the company's problems. If and when
they have been informed of the problems, it may already be too late, as evidenced in the case of
Enron.
It is for the above reasons that the authorities here in Asia, are pushing for the separation of Chairman
and CEO positions so that they cannot be occupied by the same person in order to properly balance
the powers and functions of the two roles. It is also fortunate for us that the practice of issuing stock
options to directors of financial institutions is not yet widespread among banks in Asia.
Ladies and Gentlemen,
What I have highlighted is only one facet, and in fact only half of the story of good governance: that is
what NOT to follow. Let me turn to the other issue of the missing link in the Western concept of
governance.
In the Western World, the focus of the governance structure is to protect the interest of the
organization and its shareholders. It ensures that the management or staff would not abuse their
organisation for personal gains. However, there is nothing in the Western structure of governance that
talks about the need for the protection of consumers' interests, and, more importantly, the interests of
society at large.
A corporation that grows sustainably does so because it has earned the recognition of its customers.
Such an acceptance comes naturally when consumers trust that the goods or services being offered
by the company are of the quality that is worth their price, that they are being treated fairly and with
respect; and that they do not have ill feelings towards the company. In Western society where there is
great awareness for consumer protection, such ideas have therefore not been incorporated in the
prescribed governance of the corporation.
In the Oriental world, however, the idea of consumer protection has not been well embedded in our
culture. Hence there is a need to broaden the principle of governance to include consumer protection.
In short, this means that the Board of Directors needs to oversee that the firms provide not only quality
goods and services, but that they also treat their customers fairly and with respect. Indeed, the
absence of a strong consumer protection standard does not give the corporations the liberty to act in
their interests alone at the expense of the interests of consumers. Producers and service providers
that start by caring about the interests of customers as part of the principle of non-exploitation and
mutual co-existence, will find that they can maintain long standing relation and consumer loyalty.
Within the universe of businesses, the domain of financial services, particularly commercial banks,
stand out as one of the most prone to abuse. As capitalist organizations, commercial banks are in a
convenient position to profit directly from the general public. And this is exactly why this very sector
should also place the interests of society at the forefront of their concerns. Banks' involvements in
various community projects or the likes, are commendable, of course. But they also have to exercise
caution not to be involved in anything which could bring about detrimental impact on society. For
instance, they should take care to avoid facilitating any powers-that-be to exploit the banks or the
financial market or financing projects which are clearly damaging to the environment, or partnering
with businessmen in projects that take advantage of the economy.
In this context, therefore it becomes yet another duty of Board Members to also oversee that projects
endorsed by the financial institution are not the kinds that facilitate the exploitation of society. It is my
belief that any protection of the interests of the organizations cannot be done without the protection of
the interests of society as well. The organisation can only survive if its customers are satisfied with its
workings, and if the society accepts its actions.
Ladies and Gentlemen,
Allow me to end my remarks by quoting a teaching from a very senior monk who is well versed in
Buddhist economic philosophy. He said that in order for an organisation (corporation) to grow
sustainably, it must not exploit its employees, it must not take advantage of its customers, and it must
not exploit society in which it thrives in. In so doing, the organization must ensure that it can also
reward itself with a fair return so that the fruits of its labours can be fairly shared by every party
concerned.
Thank you for your attention.