Manila Times: Integrity and accountability in rural banks

Manila Times — Corporate governance became the corporate buzzword in the business community shortly after the BW Resources scandal rocked the local stock market in 1999. The government corporate watchdog, the Securities and Exchange Commission (SEC), put in place legal frameworks to promote integrity, fairness and accountability in corporate managements. Three years after the BW fiasco, the SEC issued the Code of Corporate Governance.

In today’s world, corporate governance is still trending, to use the prevailing techno-speak. Some companies call it by different names, but they still mean the same thing and promote the same set of values that must be complied with and enforced for the benefit of all stakeholders. In some sectors, though, there is still a need to inculcate and promote the practice of good corporate governance across all players.

Recently, Bangko Sentral ng Pilipinas (BSP) Assistant Gov. Dolores Yuvienco delivered a timely speech on corporate governance being a continuing challenge for banks during the Visayas Management Conference for Rural Banks held in Waterfront Hotel in Cebu City. She pointed out that governance issues remain and have in fact evolved, morphing into different forms and emerging in different scenarios. Nonetheless, whatever you want to call it and wherever it may occur, complacency and misuse are always the common denominator.

Yuvienco opined that this year’s management conference, titled “Good Governance: Continuing Challenge for Rural Banks,” speaks volumes about the industry’s realization and acceptance that delicate governance is a challenge that rural banks continue to face. In the same vein, it points to the determination of the whole industry to address this issue and rise above the challenge. The BSP identified three main challenges that the rural banking industry must overcome to promote good governance: the challenge to overcome complacency; the challenge to put the public’s welfare in the forefront; and the challenge to transcend beyond familiarity.

A rural bank’s relative non-complexity and simplicity of operations also became its own worst enemy, according to the BSP official. Some directors of certain rural banks became complacent because they have this notion that they don’t need to set strategic goals for the bank since they have no intention of expanding its operations. However, this mindset does not take into account the ever changing environment and, more importantly, hinders any drive to improve the service and conduct safe and sound banking operations. Banks that are already contended tend to be complacent and settle, and settling lead to deterioration of operations and service.

Rural banks must always remain driven to constantly improve its operations and service, even if they don’t translate to literal expansion.

Choosing independent directors can be quite tricky especially if the rural bank is family-owned and considered the crown jewel of the clan. Trusting someone who is not blood-related or at least close to the family to make important decision in the board oftentimes face resistance from the bank hierarchy. Again, the tight-knit mentality rural banks foster with the communities they serve become counter-productive. An outsider is not always welcome, especially if that outsider is “too independent of a thinker” for comfort. However, one way to address this dilemma is for all rural banks to go through the process of carefully selecting independent-minded directors. Subsequently, the industry will have an assurance of the general objectiveness of the board of directors of banks which will hopefully translate to the sustained resiliency of the whole financial system.

The lean organization structure of rural banks is considered one of its greatest strengths, as familiarity among a small group of people foster camaraderie and trust. However, any change in the personnel will quickly alter this trust system and possibly expose the bank to high risk of abuse. It is important then that the bank’s control environment is not dependent on personalities or circumstances, but rather on the system itself. An effective checks and balances system that will protect the bank’s assets at all times will ensure that the rural bank will survive and thrive no matter who the personnel are.

The BSP has provided the governance guidelines under its Circular No. 749 issued on February 27. Its thrust for better governance is consistent with its risk-based approach to supervision, wherein banks that are deemed to be better run by its management will require less supervisory intervention. On the other hand, those that are not will be subjected to closer supervision and more intensive remedial actions.

In the end, as BSP Assistant Gov. Yuvienco stressed, recognizing that there is still much to be done is a step toward the right direction. Knowing the problem is already winning half the battle. Overcoming the other half will require a resolute resolve in conducting the business based on integrity, fairness and ethics, transparency in all transactions, complying with all the laws, accountability and responsibility towards the stakeholders.

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