Bank governance: Directors can no longer hide behind management
Risk-based supervision has changed what regulators expect from banks. One of its most uncomfortable consequences is the exposure of weak, passive, or compromised boards
Under compliance-based supervision, boards could rely heavily on management assurances. If policies were approved, committees were formed, and regulatory reports were submitted on time, responsibility felt distant. As long as capital ratios and liquidity indicators were met, boards were rarely questioned in depth.
The system rewarded form over substance. Risk-based supervision removes that comfort. Boards are no longer assessed only on structure, attendance, or documentation. They are assessed on understanding, challenge, independence, and decision quality. Passive boards, once tolerated, now sit directly within supervisory focus.
Supervisors now look beyond formal governance arrangements and focus on how boards actually engage with risk. The number of meetings matters far less than what happens inside those meetings. Supervisors examine whether boards understand the bank's risk profile, whether they ask difficult and uncomfortable questions, and whether they influence outcomes rather than simply endorse proposals.
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A board that routinely approves documents without real debate is no longer seen as neutral. It is treated as a source of risk. Silence in meetings and board minutes is no longer read as harmony or efficiency. It is increasingly interpreted as disengagement, weak oversight, or unwillingness to challenge management.
A key test under risk-based supervision is whether risk appetite is real and used in practice. Many banks have formal risk appetite statements that are carefully written and approved each year. Supervisors now look at whether these statements actually guide decisions or simply remain as documents in board files.
When a bank grows quickly, increases concentration, relies more on risky funding, or enters new business areas, supervisors examine the board's role. Did the board understand the downside risks? Did it question management's assumptions? Did it challenge optimistic forecasts and stress test results? Or did it rely on reassuring language, positive trends, and consultant presentations?
For many banks, boards remain the weakest link in the governance chain. Directors may be respected individuals with strong public standing, political influence, or business reputations. Yet they may lack time, technical depth, or the willingness to confront management. In some cases, boards are too close to management.
In others, they are disengaged or overly dependent on executive explanations. Risk-based supervision treats these weaknesses as risk drivers. A bank with strong capital and profitability but a passive board can receive a worse supervisory assessment than a weaker bank with credible governance. This outcome is deliberate. Banking problems rarely begin with capital shortages. They begin with poor oversight, unchecked incentives, and delayed decisions.
Risk-based supervision also reduces tolerance for what can be described as collective ignorance. Boards can no longer hide behind complexity, consultant language, or management reassurance. Approving strategies that directors do not understand is no longer acceptable. Supervisors do not expect every board member to be a technical expert.
They do expect the board as a whole to understand the bank's key risks, exposures, and trade-offs. If directors approve products, lending strategies, or funding structures they cannot explain, supervisors treat that as a governance failure. This has implications for board composition, training, and behaviour. Training matters, but attitude matters more. A well-trained but passive board remains weak. Independence without courage adds little value.
Information flow to the board is therefore critical under risk-based supervision. Generic dashboards, backward-looking summaries, and heavily filtered reports are no longer sufficient. Supervisors expect boards to receive forward-looking analysis, downside scenarios, early warning indicators, and clear explanations when risk appetite is under pressure.
Boards are expected to see bad news early, not after it becomes unavoidable. Supervisors also read board minutes closely. Routine approvals, brief discussions, and the absence of recorded challenge raise concern, regardless of formal compliance.
In Bangladesh, these expectations collide with deeper structural and cultural realities. Many bank boards are shaped by ownership influence, long tenure, and concentration of power. Independent directors exist, but their influence varies widely across institutions.
In some banks, boards are dominated by controlling shareholders. In others, board positions function as extensions of business or political interests. This weakens independence and limits challenge. Risk management functions in many banks remain compliance-driven and backward-looking. Reports often focus on regulatory ratios rather than emerging vulnerabilities. Data quality issues persist, and risk signals are frequently delayed or incomplete.
As a result, boards often operate with imperfect or sanitised information.
Governance challenges in Bangladesh also include more serious failures. In some cases, boards have been linked to misuse of funds, related-party transactions, and preferential lending. Where boards directly influence credit decisions or shield weak exposures, the boundary between oversight and interference breaks down.
Risk-based supervision brings these issues into sharper focus. Supervisors assess not only whether policies exist, but whether boards use their authority responsibly. A board that enables misuse of funds, tolerates repeated breaches, or prioritises shareholder interests over depositor protection is treated as a systemic risk. Under risk-based supervision, such behaviour attracts earlier and more intrusive supervisory responses.
Board capacity is another constraint. Some directors sit on multiple boards and have limited time to engage deeply. Complex issues are discussed briefly. Decisions are taken quickly, often on the basis of management reassurance.
Under compliance-based supervision, this was rarely questioned as long as formal requirements were met. Under risk-based supervision, it becomes visible. Supervisors ask whether boards have sufficient time, focus, and support to discharge their responsibilities. They also examine whether boards have access to independent advice and strong internal challenge mechanisms.
There is also a cultural dimension. In many institutions, challenging management is still seen as disruptive or disloyal. Consensus is valued over confrontation. Risk-based supervision does not reward this culture.
Supervisors expect respectful but firm challenges. They expect boards to test assumptions, question incentives, and intervene early. Where boards avoid challenges to preserve relationships or personal interests, supervisors identify governance weaknesses. Passive behaviour is no longer interpreted as stability.
For Bangladesh, risk-based supervision raises the bar for board accountability. Supervisors are expected to assess not only financial outcomes, but governance effectiveness. This requires judgment, consistency, and clear communication. Boards need to understand why supervisory concerns arise, not only what actions are required.
Transparent supervisory reasoning is essential to maintain credibility and predictability. At the same time, boards cannot wait for perfect guidance. Risk-based supervision places responsibility squarely at the top. Management executes, but boards own risk outcomes.
For bank executives, the message is clear. Strengthening board effectiveness is no longer optional or cosmetic. It directly affects supervisory outcomes. Banks that invest in independent boards, improve information quality, limit conflicts of interest, and encourage real challenges tend to experience more stable supervisory relationships. Banks that treat boards as ceremonial buffers, or worse as vehicles for private interests, face tougher questions and earlier intervention.
Risk-based supervision pushes accountability upward because that is where it belongs. Banking failures rarely begin with technical breaches. They begin with weak governance, ignored warnings, misuse of authority, and delayed action. By the time capital ratios deteriorate, the damage is already done. Boards are the last line before that point. Risk-based supervision makes their role visible and their responsibility unavoidable.
For Bangladesh, the framework is now in place and expectations are rising. Whether it leads to stronger banks or prolonged supervisory pressure will depend largely on boards. Boards that adapt will find the system strict but predictable. Boards that resist, or misuse their authority, will find that supervisory judgment, once formed, is difficult to reverse.
Dr Shah Md Ahsan Habib is a Professor at Bangladesh Institute of Bank Management (BIBM).
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
