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Understanding ‘Conflict of Interest’ is need of hour in India

In Banking, corporate governance, fraud, Insurance, Legal, Management, Uncategorized on December 23, 2018 at 3:57 am

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I was not really shocked to read another issue of conflict-of-interest for Bank of Maharashtra after Chanda Kochhar case at ICICI Bank. Conflict of interest issues has been discussed for several years in news and media. Banking than insurance industry have more examples to such nature, though in the government we have seen examples where lawmakers have taken up roles resulting in the conflict-of-interest. This is because Insurance regulator in India has mentioned it specifically in Corporate Governance Guidelines that Conflict of interest and nature of interest should be defined, yet banking regulator is lagging behind. RBI guidelines indicated that there should be no conflict of interest but do not indicate ‘how to identify and take actions’ for such activities. Conflict of interest arises when a board member takes the strategic decision considering personal interest. Board members of all significant MNC’s in the global market place have to sign either ethical framework/Compliance guidelines or follow conflict of interest policy.

There is a desperate need of Conflict of Interest policy for Indian banking system. Ideally, it should be at all levels in the organisation  from managers to board members. For example, In some cases in India, bank managers are receiving more incentives than their salaries for selling insurance policies which divert their attention from selling banking products. Technically, insurance policies are sold by both banks and insurance companies while banking products are not even sold by their core employees, why? Why not introduce reverse bancassurance where insurance companies can also offer banking products. The reason is ‘KYC’. Some practitioners argue that banks know their customer more than insurance companies. Others argue that in a bank, customers receive money, while in insurance companies they pay money. The differentiation in the quality of agents between banks and insurance also sets the increased expectations. In a bank, a top MBA graduate joins as manager while in insurance companies they do not pay such salary at managerial level. Instead, I saw a reverse trend of hiring graduates in banking following insurance industry to lower the cost.

How do banks promote their products when half of the time banking executives spend on selling insurance? They cannot ignore banking services but what they can easily overlook is controls. Another conflict of interest arises related to favoritism by CMD of banks or CMD of insurance companies: who can question them. In case of banks, it could be a case of favouritism in granting new loans or extending the existing loans which may, later on, turn as NPA while in case of insurance companies, it may be a market investment to gain personal benefits.

What is a Conflict of Interest Policy?

A Conflict of Interest policy can be prepared by the Corporate legal department and must be signed by all board members at the first organizational board meeting. It should be mandated that no board member should be allowed to serve without signing this policy. It includes fiduciary duties (considering organizational interest for financial and legal matters), the duty of loyalty (putting board responsibilities for outside interests), and duty of confidentiality ( keeping how key business will deal with private information). Moreover, it should define the key definition about ‘interested person’ and ‘financial interest,’ duty to disclose and procedures for addressing conflict of interest for board and individuals. The process of deriving reasonable cause to show the violation of conflict of interest should also be discussed. Some questions like how compensation of director will impact the board quality of discussion. There is a requirement of the annual review of conflict of interest policy, the disclosure of outside interests and re-signing of the policy.

Worldwide, Conflict of Interest issue is not resolved in good faith. Recently, I have met Group CROs and senior executives of German Insurance Companies and regulator. The regulatory board in Germany and their staff have to sign an ethical framework compulsorily. The logic behind signing an ethical framework is that every employee in the organization takes the responsibility of disclosure of conflict of interest. This also depicts their promise of not engaging in any such activity. Thus, conflict of interest can be reduced by promoting a cognitive risk culture where everyone understands the risk of conflict of interest and their associated role in dealing with the risks.  India may follow German market for good practices to deal with the emerging issue of ‘Conflict of Interest’.

comments welcome !

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An Organisation Risk Pendulum

In crime, fraud, Risk Management on September 9, 2017 at 7:17 am

“Risk is often misinterpreted as a bad thing; however, it is not. Business needs risk to grow and thrive. Understand it, take risks which help you fulfilling your purpose. The key question remains how to balance risk pendulum in the organizational life”.

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If your company offers a unique product, any risk which provides a value to the product or customer is worth considering, however, the proportion should not be increasing 50% risk for a minuscule value to the customers. Think twice whether you are capable of handling enhanced risk for value creation. If you are unable to handle it, build capacity and then take the proportionate risk. On the other side, some risks are inherent in the business. For example, fraud risk. You will be surprised to know that fraud risk is often considered strategic risk. Tightening of controls in the business may be considered as a constraining activity in short-run but imagine in the long run, employees say that these frauds happened under the nose of senior management and question their integrity? What is the relevance of board, risk management team, auditors and audit committees in such instances?

A country with negligible crime rate (i.e. Dubai) attracts high investments while a country (i.e. Nigeria) with relatively very high crime rate has to struggle in inviting investors. Do controls play a positive role in business? Yes, it not only reduces the risk but also provides efficiency to the business with a potential of strategic advantage.

Many of us heard that after 2008 crisis, some large organisations are reluctant to take further risks. Does it mean they are over-matured and declining, or markets are exhausted, or they have just become risk averse for some period? This shows how a crisis impacts the speed of the Organisational Risk Pendulum. When the speed is low, what these organisations do – sit idle, focus on weakest links in organisational process or improve their strength in one or two core domains or simply learn from others mistakes. Over and above this, some companies wait for the crisis to occur because they are expert in dealing with crisis situations. For example, Business Continuity experts get maximum business after a crisis. Enterprise Risk Management and Risk Governance experts do the same, many consulting and credit rating companies take over the customers and markets. A more generic example is a doctor. When a pandemic spread in the society, doctors suddenly become highly in demand. It is clear that investment in risk management enhances the organisation capacity to maintain the speed of organisational risk pendulum during the crisis while it provides confidence to retain the speed in normal and volatile market situation.

Another key question arises How to drive your organisation at a speed to maintain an equilibrium between the risk of riskiness and risk of safety? What is right – Riskiness, stability, survival?

I believe all are important as Enterprise Risk Management (ERM) by definition maintains a balance in downside and upside of risk and uncertainty and considers all risks holistically. Knowing your organisational risk at integrated level provides a strategic direction to the company. Don’t wait. Know what you don’t