RBI Deputy Governor Urges Financial Boards: Own Outcomes, Not Just Paperwork

Reserve Bank of India Deputy Governor Swaminathan J. emphasized the critical need for stronger board-level accountability across financial institutions during the 10th Annual Corporate Governance Summit. He urged directors to shift their focus from merely procedural compliance to 'intent-driven governance,' where boards actively 'own outcomes, not paperwork.' Swaminathan noted that many organizations address governance challenges by merely altering organizational charts or reporting lines, which only provides a superficial fix.

He outlined five key practices for boards to adopt. These include a fundamental shift in mindset, directors actively exercising their duty of care and loyalty by setting clear risk appetites, defining outcome goals, and demanding independent assurance on important matters. Furthermore, genuine independence on boards was highlighted, defining it as the ability to challenge decisions, backed by sufficient time and information, with the chairperson playing a role in facilitating dissent. For large conglomerates, Swaminathan advised boards to look beyond individual entities and 'look through the group,' advocating for the ring-fencing of critical entities and strict related-party policies. He also stressed the importance of empowering control functions like risk, compliance, and internal audit with direct board access and adequate resources, warning that weak lines of defence are a board failure.

Addressing the regulatory architecture, Swaminathan acknowledged inherent overlaps but pointed to challenges like conflicting rules and uncoordinated enforcement. He proposed principles for regulators including balancing entity- and activity-based regulation, applying proportionality, and striving for outcome-based rules.

Impact: Enhanced corporate governance and regulatory clarity can lead to greater stability in the financial sector, reduce systemic risks, and bolster investor confidence. This, in turn, can positively influence market sentiment and contribute to sustainable economic growth. A stronger governance framework within financial institutions is crucial for the overall health of the Indian stock market and economy. Impact Rating: 7/10

Difficult Terms: * **Intent-driven governance**: A governance approach focused on achieving the intended purpose and desired results of an organization, rather than just adhering to rules and procedures. * **Duty of care and loyalty**: The legal and ethical obligations of board members to act in the best interests of the company and its stakeholders with diligence, prudence, and good faith. * **Risk appetite**: The level and type of risk that an organization is willing to accept in pursuit of its strategic objectives. * **Independent assurance**: Verification and confirmation provided by an impartial party or an independent internal function regarding the reliability of financial reporting, internal controls, or compliance activities. * **Ring-fencing**: The practice of isolating specific assets, liabilities, or operations of an entity to protect them from the risks or financial distress of other parts of the group. * **Related-party policies**: Rules governing transactions between an organization and its directors, management, significant shareholders, or other entities connected to them, to prevent conflicts of interest and ensure fairness. * **Control functions**: Departments within an organization responsible for oversight and risk management, such as risk management, compliance, and internal audit. * **Regulatory architecture**: The overall framework of rules, regulations, supervisory bodies, and enforcement mechanisms governing a particular market or industry. * **Entity-based regulation**: Regulation that focuses on the financial health and conduct of individual financial institutions. * **Activity-based regulation**: Regulation that focuses on specific financial activities or markets, irrespective of the type of institution undertaking them. * **Proportionality**: Applying regulatory measures in a manner that is appropriate to the size, complexity, risk profile, and systemic importance of the regulated entity or activity. * **Outcome-based rules**: Regulations that specify the desired end results or objectives, allowing firms flexibility in how they achieve them, rather than dictating prescriptive methods.