BB directs KPI framework for bank CEOs, spurs regulatory overreach concerns

Bangladesh Bank has introduced a performance evaluation framework for the managing directors (MDs) and chief executive officers (CEOs) of commercial banks. By bringing individual executive performance under direct central bank oversight, the policy has ignited widespread debate, triggering concerns over regulatory micromanagement, conflicting chains of command, and the erosion of board authority.

Under the new Key Performance Indicators (KPI) framework, Bangladesh Bank will assess the performance of MDs and CEOs every six months against targets covering solvency, asset quality, governance, customer conduct, and profitability.

The framework includes indicators such as return on investment (ROI), return on equity (ROE), interest and non-interest income, and operating expenses – areas traditionally determined by bank boards based on their institutions' business strategies.

Crucially, the regulator will use these assessments to determine the remuneration, incentives, and benefits of chief executives. The central bank's evaluations will also influence decisions regarding executive appointments, reappointments, tenure extensions, and succession planning.

Bank MDs, CEOs face performance reviews, removal for underperformance

The sweeping measure has drawn mixed reactions from bankers, former regulators, and economists. While some argue that direct intervention is necessary to stabilise Bangladesh's troubled banking sector, others contend it crosses the line from systemic regulation into operational management.

'Micro-management may be necessary for weak banks'

Sabeth Siddique, a former US banker and former assistant director of the Federal Reserve Board, said the framework could make Bangladesh Bank more directly accountable for the performance of banks by involving it in areas traditionally handled by boards.

"This KPI suggests that the banking sector is in serious crisis and gives a strong message to investors about ensuring governance," he said.

Sabeth acknowledged that central banks generally do not become involved to this degree of management, but said Bangladesh's circumstances are different because many bank boards lack the technical and governance capacity required to oversee institutions effectively.

"Sometimes micro-management is necessary as the board generally lacks the technical and governance skills – a key contributor to the banking crisis in Bangladesh. Bangladesh has a capacity problem of qualified board members," he said.

During the financial crisis in the United States, the Federal Reserve also became deeply involved in overseeing some large banks, he noted.

According to Sabeth, well-managed banks already have their own internal performance evaluation systems. He cited BRAC Bank as an example of an institution with a strong board.

For weak banks, however, he said greater central bank involvement could help protect the banking system.

"If the central bank is involved, it will be good for the country and the banking system because the regulator will be directly accountable for the failure," he said.

He noted that Bangladesh has around 60 banks, while, in his assessment, no more than five or six currently have strong governance.

'An extreme example of micromanagement'

Conversely, Zahid Hussain, former lead economist at the World Bank's Dhaka office, described the framework as "an extreme example of micromanagement."

"Bangladesh Bank's mandate is to regulate institutions by setting standards for solvency, depositor safety, and regulatory compliance," Hussain said. "Evaluating an individual CEO is not the regulator's responsibility. Every bank already has internal evaluation mechanisms."

Hussain warned that assessing executives using regulatory submissions conflates individual executive performance with institutional compliance. He cautioned that the model creates a severe problem of dual loyalty for bank leadership.

"If I am an MD, whom am I supposed to satisfy — the board or the central bank?" Hussain asked. "If Bangladesh Bank rates an MD's performance as satisfactory but the board disagrees, how is that conflict resolved? Conversely, if the regulator is dissatisfied while the board supports the MD's context, what happens to the executive's career?"

He urged the central bank to focus on pressing macro-economic challenges – such as soaring inflation, bad loan recoveries, and structural supervision – rather than taking on administrative workloads that exceed its regulatory mandate.

'Who appoints the MD should appraise the MD'

Muhammad A (Rumee) Ali, former deputy governor of Bangladesh Bank, also questioned the central bank's decision to directly evaluate MDs.

"The authority that BB has taken on itself by bypassing the boards of banks can lead to governance issues," he said.

"Who does the MD report to? Who appoints the MD? If BB wants the power to appraise them, they should take these responsibilities and accountability too. The board should be stripped of power, responsibility and accountability for appointing and appraising an MD. Divided loyalties to the board and BB are not helpful in clarifying who should do what."

Ali said Bangladesh Bank's regulatory responsibility includes holding bank boards accountable.

MDs are accountable to their boards and operate through them, he said. If an MD takes a decision, the board has the authority to assess what was done, what was achieved and what went wrong.

"But anything they do has to be done through the board, not directly," he said.

"The appointing authority should be the one to do that. That, to me, is the logic."

Ali also pointed to banks such as BRAC Bank, City Bank and Eastern Bank, saying their boards operate within regulatory requirements.

"Their managing directors will also come under the same level of scrutiny as those banks where there are questions about compliance or governance," he said.

"So, in my view, this should be looked at from the perspective of the chain of accountability and the proper process."

Bankers fear the framework could discourage executives

A senior banker, speaking on condition of anonymity, said the framework could demotivate bankers, particularly those who take charge of troubled institutions.

For example, an MD joining a bank with a default loan ratio of around 30% may not be able to substantially reduce the ratio within six months or even a year, the banker said.

Loan recovery depends on factors beyond the MD's control, including court proceedings and the legal recovery process.

If an MD's remuneration is reduced because such targets are not achieved, it could discourage experienced executives from joining weak banks and attempting to turn them around, the banker said.

"This will demotivate bankers," he said, noting that several banks are already struggling to recruit MDs.

'What is left for the board to manage?'

A bank chairman, speaking on condition of anonymity, said he had never seen a regulator directly set a CEO's goals in this manner.

"I have never seen a regulator directly setting the CEO's goals in this way globally," he said.

"This is fundamentally a matter of board discretion."

He said Bangladesh Bank's intervention could be understandable for troubled banks, but questioned why the same approach should be imposed on well-performing institutions.

"If the CEO knows that the regulator will determine the targets, then the CEO may simply go directly to the regulator instead of being accountable to the board," he said.

Different banks have different strategies, he noted.

"Our strategy may be different from City Bank's or EBL's. The board should determine the strategy and, based on that strategy, set the appropriate goals for the CEO."

"So the question is, if Bangladesh Bank dictates the CEO's goals and salary, what is left for the board to manage?"

'Performance evaluation itself is not new'

A managing director of a private commercial bank said banks already have established performance evaluation systems.

"We already have such a practice. Our board conducts performance evaluations twice a year and annually. Employees at different levels also have half-yearly and annual performance evaluations, followed by ratings," he said.

"So performance evaluation itself is not new to me. It is an international practice."

The issue, he said, is who should be responsible for conducting the evaluation.

"That is not the job of the regulator. It is the job of the board. The board should evaluate each person's performance," he said.

"If the regulator gets directly involved in this process, I don't think that is appropriate. It is not a regulatory job."