For any firm weather it's a financial institution or non financial institution, the ultimate and fundamental goal of the very existence of the organization is to maximize the shareholders value whereas, share price of the organization in secondary markets represents the value of shareholders wealth. The management of the bank strives to increase the share price of the bank in the secondary market i.e., stock exchanges. Shareholders are the sponsors who provide funds for start up and finance the operations of the bank. They are important source of banks equity. They are also the primary risk taker because in case of any default or failure, they will be the first one to take the burn. As a result of this, they expect a reasonable return on their investment and risk. They can be compensated with two kinds of payout. The bank management can either go for higher share prices or pay dividends to the shareholders. Off course, no bank can move on without generating adequate profitability. It is the second and crucial objective of the bank management to generate profitability with the regular bank operations. With profits, the bank can finance its expansion and other growth projects which can in turn aid in increasing the shareholders value (Madura, 2009).
One of the structural issues which arise in bank management is conflict of interest between agency and principal. There is often the case in which management intentionally takes decision that shareholders will not agree to otherwise. For instance, management may retain higher amount of profitability for capital expenditure rather than distributing it to shareholders as dividend payment.
Role of Directors
The main responsibility of Board of directors in the bank is to manage the operations of the bank. They ensured that shareholders interest is well protected by the management decision making process. Board of directors are usually categorized as executive and non executive. Non executive being independent directors are majority in the board composition. They are outside directors and don't participate in day to day operations of the bank. Board members have a very crucial role in bank management. They ensure that the bank disclosed all the relevant information in a transparent manner. They are set the direction for the long term growth of the company while also making important strategic decisions for expansion and development including acquisitions and investment ...