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Taking banks further away from the public

by January 13, 2018 General

When I, along with another colleague of mine, went to Philadelphia to interview jobseekers, the findings of one interviewee’s dissertation reminded me of something: the recent news on bank directors in Bangladesh. The candidate found that the more the diversity in the board of directors, the better the performance of the company. Following the new law in Bangladesh that allows four members of a family to be directors of a bank with extended term (virtually their whole life), its ripple effects have begun to rattle the banking industry.

Some bank owners took advantage of this new law and made sudden changes in the directorship positions, triggering a state of panic among depositors and other stakeholders. Some top bankers were courageous enough to voice their apprehensions to the central bank. These bank professionals find the erratic behaviour of bank directors to not only be a threat to financial stability but also unfavourable for corporate governance.

What was the urgency of making this family-dominant directorship law at a time when the banking sector is at one of its worst states in Bangladesh’s history? We have done enough damage to the capital market already. Now the only hope relies on the banking sector which must transition from a feudal form to a modern capitalistic structure. Turning banks into family-dominant businesses is actually a reversal of our progress—going back towards feudalism.

The ever-growing dominance of companies, particularly in the paradise of world capitalism, the US, ought to be mentioned. American companies became stronger over time by becoming more “public” in character. It involved two methods: (i) making the board of directors as diverse as possible—of course by reducing the number of members from the same family, and (ii) increasing the composition of common stocks which reach the public.

When Walt Disney went public, it made its board greatly diverse by combining both wealth and expertise from different walks of life—although people expected Walt Disney’s board members to be only from the media world. That didn’t happen simply because the owners had the foresight—they knew that diversity of knowledge is warranted in the board to add vigour and longevity to the company’s life. And as history proves, Walt Disney’s founders were right.

Not long ago Microsoft hired a board member who had no connection to the software business. The person actually owned a chain of hotels and also sat on the board of Walmart, the largest retailer of the world. The reason Microsoft included him as a board member is to enrich the company with diversified knowledge and expertise.

When you look at the way in which banking companies in Bangladesh have been formed, you’ll notice that this outlook has entirely been reversed. We seem to stick to homogeneity even though we know that countries like the US, UK, and Australia have resilient economies mainly because of diversity in knowledge. The revival of the US economy after 9/11, for example, amazed the world. The British government honoured the then Fed Chair Alan Greenspan with Knighthood. Greenspan cited the word “diversity” as the main saviour of the US economy. 

Our mindset is sadly the opposite. In the Bangladesh Investment Summit in Singapore, for instance, I came across one of our native speakers who was repeatedly describing Bangladesh as a homogeneous country in terms of race, religion, and culture, without understanding its negative impact on prospective foreign investors.

Homogeneity gives us a false sense of security and compromises a better outcome. Bureaucrats with the authority to form a project committee usually go for people from their own field because of the fear that experts brought in from outside may create disagreements—despite the fact that they may add some value. The super rich suffer from the same syndrome—preference of homogeneity over diversity. And they prefer a closed familial cluster over homogeneity—where the latter is akin to democracy and the former to monarchy.

The government’s recent law is nothing short of an endorsement of familial greed and control. As a result, top bank professionals are scared of their future. They seem to have one place of shelter—the central bank—which they had hoped would intervene in the situation of directorship changes that may destabilise an already beleaguered market. While the central bank understands their worries, it can do little if the ministry doesn’t want to displease the financial coterie.

Let’s assume that Bangladesh Bank prevents the sudden changes in directorship from materialising, but that wouldn’t be enough to oppose corporate greed. The business tycoons have their own survival tactics. And now the owners have the opportunity to make changes slowly until they can convert the board into a family dynasty which will invariably put more pressure on CEOs to cater to the former’s greed—by maximising profit at any cost without paying attention to increasing employment. And this is the main damage for the economy, and this is also why economists and bank professionals oppose this feudal culture of increasing family members in the managing board—opposite to what companies like Walmart, Microsoft, Walt Disney, and Bank of America do. 

The recent trend of immense profit accumulation in all private banks is a testament to the fact that more familial clusters will force bank professionals to ensure more profit maximisation and proportionately less employment generation. Have we ever collected statistics on how many jobseekers are employed per one million taka of profit? This, I believe, is what the central bank should ask the banks to report publicly every year, because the central bank can make rules for greater public interest. And employment generation is the prime objective of the dual mandate of any central bank—regardless of whether it is the US or Bangladesh.

Biru Paksha Paul is associate professor of economics at SUNY Cortland.