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CIS Bankers Conference
Effec&ve Boards in banks
Ferdinand W. Tuinstra, Sr Banking Advisor IFC Europe & Central Asia – Access to Finance
Kyiv, June 6, 2013
‹#› IFC Corporate Governance Program
PresentaBon Purpose and Outline
Purpose: Making boards more effecBve and dynamic
Agenda § Introduc&on to Boards – Role of Boards
§ Understanding the Board composi&on & Board qualifica&on criteria
§ Board commiKees & composi&on
§ Working procedures and other issues
§ Board performance assessment
‹#› IFC Corporate Governance Program
Intro & The Board’s Role 1
SecBon
‹#› IFC Corporate Governance Program
“Best in class” boards
Truly exemplary boards are well-‐balanced teams that harness the diverse experiences, skills and intellects of their directors to pursue the strategic objec&ves of the companies they serve.
The best-‐in-‐class board fosters a culture of rigorous, relentless examina&on…presses for
con&nuous improvement, seUng a tone for senior management that reverberates throughout the organiza&on
Source: Heidrick & Struggles
‹#› IFC Corporate Governance Program 5
Boards of Family Owned Banks Key is PuTng ‘Business First’ Sample Issues Family First Cos.
Family Employment
Open-Door Policy for all family members, regardless of qualifications
Compensation Equal pay for all, regardless of their experience or performance
Leadership Leadership based on Seniority in Family, regardless of merit or qualifications
Resource Allocation
Business Resources used for personal needs (e.g., loans, grants)
Decision-Making Unilateral & Concentrated with Senior Family Member (e.g., Chairman/CEO)
Business First Cos.
Qualification-Based Employment, as for any other new hire
Merit-Based pay, based on experience, performance
Leadership granted to the right person (family or non-family), based on merit and qualifications
Business resources only used for business purposes – separate family reserve fund utilized for family needs.
Mulit-lateral, based on Defined Governance Structure (e.g., Executive Committee)
‹#› IFC Corporate Governance Program 6
What Should be Considered? Board EffecBveness
Board EffecBveness
Board Structure & ComposiBon
Board FuncBons & Behaviors
Board Roles & Director DuBes
ü Board discussions are candid with full veTng of issues.
ü Board challenges management effecBvely on issues.
ü Board working procedures are effecBve (e.g., meeBng proceedings, frequency, formality)
ü Board conducts rouBne self-‐evaluaBons of performance
ü Board offers rouBne training to directors
ü Proper commi\ees are in place (e.g., audit, remuneraBon, nominaBon)
ü Board size is opBmal ü Boards to include appropriate mix
of execuBve, non-‐execuBve and independent directors
ü Board possesses the opBmal mix skills
ü Board’s role is clearly defined vis-‐à-‐vis management
ü Board understands its oversight duBes (esp. Risk & Control) and has appropriate processes in place
ü Directors understand duBes and responsibiliBes to the company and shareholders
‹#› IFC Corporate Governance Program
Board and Corporate Governance Summary of regulatory recommendaBons
» Majority independent directors recommended
» ‘Fit and proper’ test » Diversity of directors » Board and management
succession plan defined
Board composiBon
» Disclosure of structure of total compensa&on
» Equity compensa&on for interest alignment
» ‘Risk-‐linked pay’ » Long-‐term perspec&ve of
execu&ve remunera&on
ExecuBve and Board compensaBon
» Annual evalua&on against CG principles
» Disclosure of performance metrics to shareholders
» Training the Non-‐Execu&ve Directors (NEDs)
Board performance assessment
» Separate Chair/CEO Posi&on (or Lead Director)
» Independent execu&ve sessions (without CEO)
» Independent Board CommiKees
Board independence
» Role of the NEDs – Ensure independence of the Board func&oning
» Delega&on of authority – Board commiKees and CRO
» Time commitment and minimum aKendance
Board roles and accountability
‹#› IFC Corporate Governance Program
ü Roles: No clear division between Management versus Board
ü DuBes: Directors not clear on their responsibili&es; Duty of Care/Loyalty
ü Structure: Lack of effec&ve func&oning commiKees; lack of clarity of board vs. commiKee roles
ü ComposiBon: Oden composed of insiders, hand-‐picked by major SHs or other board members; oden need crucial skillsets in Risk, Finance, Banking.
ü FuncBon: No annual plan to help ensure balance of topics; narrow focus on financials
ü Other: Board terms ill-‐defined – open-‐ended; board evalua&ons not common; work procedures lack formality.
What Common Challenges Have we Observed? Board EffecBveness
‹#› IFC Corporate Governance Program
EvoluBon of the role of the Board § The level of involvement of the Board also determines the effec&veness of the Board
Ceremonial Board Liberated Board Progressive Board
Group dynamics
CEO is all powerful, directors are passive Limited par&cipa&on in bank’s strategy Limited accountability
Fragmented dialogue in the Boardroom – Absence of consensus, word of the CEO prevails Absence of self-‐evalua&on
U n d e r s t a n d s r o l e o f independent directors Guides & evaluates the CEO Self-‐evalua&on a core part of the Board func&oning
InformaBon architecture
Management &ghtly controls informa&on flow
Management makes relevant informa&on available to Board, but the informa&on is not focused, &mely and clear Lack of Board understanding of the bank’s business model
Focused, &mely, accurate and c l e a r i n f o rma&on provided to the Board Directors possess right skills for the job and understand the bank’s business very well
Focus on important areas
Compliance role only Usually the Board passively cer&fies the management decisions
Board desires to make a c o n t r i b u & o n , b u t i s overwhelmed by substan&ve issues. Driven by compliance and rou&ne opera&ng issues
Joint agenda set by Board/C EO . B o a r d f o c u s o n an&cipatory and strategic issues, as well as compliance related issues
Low Involvement High Involvement Adapted from: Ram Charan, “Boards that deliver”
‹#› IFC Corporate Governance Program
Board is at Center of this EnBre Framework
General Assembly (Shareholders)
Board of Directors
Board Commi\ees
Audit Commi\ee Risk Commi\ee Exec Commi\ee
RemuneraBon Other Commi\ees
Bank Infrastructure
Internal Audit Risk Management
Business and Support Units
ReporBng ElecBon Feedback
Senior Management
Strategy Policies
Risk AppeBte Performance
Advice Concerns
External Audit
Capital Markets Authority
Central bank
RaBng Agencies
Investment Analysts
InternaBonal Financial Services Industry
Tran
sparen
cy
Profession
alism
Trust Respect
Press
Customers
InsBtuBonal Investors
External Stakeho
lders
Bank
Compliance
‹#› IFC Corporate Governance Program
Role of the Board
Role of the Board
Policy formulaBon » Crea&ng vision and values » Developing corporate climate and culture » Monitoring the external environment
Strategy and Stewardship » Strategic thinking – SeUng bank direc&on » Director/Chairman nomina&on and evalua&on
» CEO/Execu&ve selec&on and evalua&on » Succession planning
Accountability » Accountability to the bank, regulators, legislators and to stakeholders
» Protec&on of shareholder rights » Adequate transparency and disclosures -‐ Financial and non-‐financial informa&on
Oversight and Control » Internal control and risk management » Financial management and repor&ng » Internal/External audit » Compliance » Oversight of management performance
Short term Long term Internal Focus
Externa
l Focus
‹#› IFC Corporate Governance Program
Basel commi\ee on the role of Boards § Basel guidelines on Corporate governance for Banks have detailed the importance of a Board
and the role of the Board at banks
Role of Boards
Qualified and skilled Board Members
Strategic ObjecBves and Corporate values
Clear lines of Responsibility
Appropriate Managerial Oversight
Internal & External Audit & Control
FuncBons
CompensaBon, Strategy & Control
Governed in a Transparent
Manner
Know your Structure
‹#› IFC Corporate Governance Program 13
Draw a Clear Line Between Board and Mgmt. Duties
Management: § Develops/recommends strategic
direction § Develops/recommends business
plans and budgets § Develops effective executive board
or mgmt. team § Carries out corporate activities to
achieve corporate strategy and business plans
Board: § Approves strategic direction
§ Approves business plans and
budgets § Organizes work of the board
§ Monitors and guides managerial
performance
For example
Nose In – Hands Out!
‹#› IFC Corporate Governance Program
Risk governance framework IllustraBve funcBonaries
Oversight
Escala&on
Coordina&on
Ownership
Assurance
Board
Risk and Audit CommiKees
Risk management division
Retail banking
Internal Audit
Treasury Corporate banking
Business units
Key responsibili&es Key func&onaries
‹#› IFC Corporate Governance Program
Risk governance framework IllustraBve funcBons
» Iden&fica&on, assessment, measurement, monitoring and repor&ng business risks
» Facilita&on and co-‐ordina&on of risk management ac&vity across the bank
» Reviewing and challenging risk informa&on » Escala&ng key issues to the Board
» Ul&mate accountability for the risk situa&on » Ar&cula&on of risk appe&te, communica&on of risk
strategy » Approval and review of risk policies
Board
Risk and Audit CommiKees
Risk management division
Retail banking
Internal Audit
Treasury Corporate banking
Business units
» Independent assessment of the effec&veness of risk management func&on
‹#› IFC Corporate Governance Program
3 lines of defense framework An approach for risk governance
» “Owner” of the risk management process
» Iden&fies, manages, mi&gates and reports on different risks
» Provides interpreta&on of regula&ons/leading prac&ces and disseminates to BUs
» Designs and deploys the overall RM framework
» Monitors adherence to framework and strategy
» Develops RM methodologies
» Develops risk policies and procedures and monitors compliance
» Performs aggregated risk repor&ng
Risk Management (Design, interpret, monitor &
report)
» Provides independent tes&ng & verifica&on of efficacy of corporate standard and business line compliance
» Validates the overall risk framework
» Provides assurance that the risk management process is func&oning as designed and iden&fies improvement opportuni&es
Internal Audit (Test & verify)
1st line of defence 2nd line of defence 3rd line of defence
» Sets the ‘Tone from the top’
» Establishes risk appe&te and strategy
» Approves the RM framework, methodologies, overall policies, and roles and responsibili&es
» Leverages risk informa&on into decision making process. Accepts, transfers or mi&gates iden&fied risks.
» Evaluates BU ac&vi&es on a risk adjusted basis
Governing Body/ Boards (Oversight) BU process and risk owners
ReporBng can only be as good as the underlying analysis 1st and 2nd line need robust risk profiles
‹#› IFC Corporate Governance Program
Board of Directors
Roles and responsibiliBes
» Develops business strategy » Approves risk management strategy for the bank
» Ar&culates risk appe&te » Approves risk appe&te transla&on into tolerances & limits
» Decides the risk governance structure » Ensures development of risk management framework
» Reviews and approves risk policies and procedures » Communicates the risk policies across the Bank
» Appoints an execu&ve responsible for risk management » Delegates relevant authority to risk func&onaries
» Reviews risk management effec&veness and compliance » Reviews significant risk issues highlighted by commiKees
» Reports to stakeholders on risk management » Approves public disclosures
Strategy
Risk appeBte
Risk governance
Risk policies and procedures
DelegaBon
Performance review
Disclosures
A Board’s Specific role in risk management Summary of key involvement areas
‹#› IFC Corporate Governance Program 18
Sample Authority Matrix No. Authori ty AGM
Board -‐ General
Audit Committee
Investment Committee CEO Management
A. General Corporate Authorities
A.1 Amendments to authorized share capita l xA.2
Deciding on major acquis i tions and divestures of other enti ties x
A.4 Publ ic offering of shares for BoP xA.5 Obtaining debt financing x (>$) x (<$)A.8 Share acquis i tion and equity participation in other enti ties inform xA.10 Approval of annual report and accounts x recommend
A.11 Decis ions on dividends and net profi t a l locations inform xA.13 Amendments to BoP's Articles of Association or By-‐Laws xA.15 Appointment of Board of Directors Members x recommend
A.16 Appointment of Chairman, Deputy Chairman xA.17 Approval of fees for Directors x recommend
A.20 Appointment and remuneration of External Auditors x recommend recommend
B. Operational Authorities
B.2 Approving corporate s trategy xB.4 Revis ion or rea l location of annual budget x (>$) x (<$) x (<$)B.5 Approval of unit speci fic plans and budgets x xB.12 Approval to participate of new development projects x (>$) x (<$) x (<$)B.21 Approving Investment Transactions x (>$) x (>$)B.23 Approving HR pol icies approvals and frameworks xB.26 Appointment of other non-‐Senior Management s taff x xB.27 Remuneration of CEO and Senior Executives x xB.33 Changes and investments to IT systems x (>$) x (<$) x (<$)
‹#› IFC Corporate Governance Program
Sample Director Duties: Important Directors Understand & Commit to These
1. The director shall fully understand the Board’s roles and responsibilities as identified in the Board Charter...
2. The Director shall fully understand the corporate governance and ethics policies of the company…
3. The Director shall exercise fully duty of loyalty to the company, by NOT:
- Conducting transactions in which they have a personal interest; Disclosing confidential information; Entering into contractual relations with a competing company; Using assets and facilities of the Company for personal benefit/gain; Using information and business opportunities received in their official capacity for personal gain
4. The Director shall exercise full duty of care to the company, including:
- Acting honestly in the interests of the Company; Displaying maximum care and prudence that may be expected from a good manager in a similar situation and under similar circumstances; Ensuring that the Company acts in compliance with all applicable laws and regulations; Requesting sufficient information from management to enable him/her to make balanced decisions.
19
5. The Director shall commit adequate time to the position…
6. The Director shall ensure maximum contribution of his/her knowledge, skills, expertise, abilities, and professional resources...
7. The Director shall fully participate in Board discussions by ensuring that he/she gives full consideration and depth of analysis to issues…
8. The Director shall ensure objectivity of analysis promoting long-term interest of company …
9. The Director shall ensure that he/she takes individual responsibility to stay educated and informed …
10. The Director shall voice concern to the Chairman or other members as appropriate, if he/she feels that any of the terms discussed in these TORs are not being realized…
‹#› IFC Corporate Governance Program
Understanding Board composiBon 2
SecBon
‹#› IFC Corporate Governance Program 21
Ensure Good Mix of Skills
Type: Executive - Non-Executives - Indpedendents
Experience: Industry – Geographical - Market
Subject Expert: Financial - Risk - Legal - Other
Personal Attributes: Leaders – Tacticians
Diversity: Age – Gender - Cultural
View Points: Risk Adversity – Differing Perspectives
Other Value Added: Business Contacts – Reputation
‹#› IFC Corporate Governance Program
Director requirements – Basel criteria
Principle 1: Board members should be and remain qualified, including through training, for their posi&ons. They should have a clear understanding of their role in corporate governance and be able to exercise sound and objecBve judgment about the affairs of the bank
BIS, Principles for Enhancing Corporate Governance, March 2010
Qualifica&on of Board members
» Appropriate experience, competencies and personal quali&es, including professionalism and personal integrity – Both at individual and Board level
» IndicaBve areas of experBse: Finance, Accoun&ng, Strategic planning, Communica&ons, Governance, Risk management, Legal, Bank regula&on, Audi&ng and Compliance
» Basel recommends tailored iniBal training and con&nuous ongoing training on relevant issues for Board members
» Responsibility of providing risk management related training/knowledge to the Board members (especially the NEDs rests with the CRO
‹#› IFC Corporate Governance Program
Fit and proper test – Regulatory criteria Fit and proper criteria include: (i) Skills and experience in finance commensurate with the intended ac&vi&es of the bank (ii) No record of criminal ac&vi&es or adverse regulatory judgments that make a person unfit to uphold
important posi&ons in a bank
BIS, Core Principles Methodology, October 2006 Fit and proper test – FSA requirements » Applicable to Board Chairman, Chairman of risk commiKee, Chairman of audit commiKee, Chairman of remunera&on commiKee, Senior independent director (SID) among others
Personal CharacterisBcs Competencies
» Honesty » Leadership » Integrity and Reputa&on » Accountability » Maturity » Work Ethic » Interpersonal skills
» Industry Experience » Business Judgment » Educa&on/Special Skills
– Finance and Accoun&ng; – Risk Management and Internal
Control – Strategic Management – Bank products and markets
‹#› IFC Corporate Governance Program
ResponsibiliBes of Chairman and CEO
Board Leadership Business Leadership
Chief ExecuBve Officer: » Develops/recommends strategic direc&on
» Develops/recommends business plans and budgets
» Develops effec&ve execu&ve board or management team
» Carries out corporate ac&vi&es to achieve corporate strategy and business plans
The Chairman of the Board: » With the board, approves strategic
direc&on
» With the board, approves business plans and budgets
» Organizes work of the board
» Monitors and guides managerial performance
» Decides on the agenda for Board mee&ngs in consulta&on with the CEO
For banks which seek to clearly separate the roles of the CEO and the Chair a summary of primary responsibili&es of the CEO and the Chairman have been listed below
‹#› IFC Corporate Governance Program
Board commi\ees and composiBon 3
SecBon
‹#› IFC Corporate Governance Program
Typical Board structure
Board of Directors
Chairman
Management Team
Chief ExecuBve Officer
Audit Commi\ee
NominaBon Commi\ee
Credit Commi\ee
Risk Commi\ee
RemuneraBon Commi\ee
ALCO
Chief Internal Auditor External Audit Senior Partner
Compliance Officer
Chief Risk Officer
Chief Financial Officer Chief Credit Officer
Full voBng members
Not a member, but a\ending
Structure/governing body
‹#› IFC Corporate Governance Program
Board commi\ees at a bank Board commi\ees
The Combined Code requires firms to have the following Board commiKees
Audit Commi\ee NominaBon Commi\ee RemuneraBon Commi\ee
AddiBonally, Banks usually have the following commi\ees
Board Risk Commi\ee Compliance Commi\ee
Board Credit Commi\ee Market Risk Commi\ee Strategy Commi\ee
Range of combina&ons used along with Audit commiKee (see next slide)
Other possible Board CommiKees
CSR Commi\ee Finance/Capital Management Commi\ee Ethics Commi\ee
Human Resources Commi\ee Treasury Commi\ee IT Steering Commi\ee
‹#› IFC Corporate Governance Program
Risk-‐related commi\ees at a bank Range of combinaBons
Nomina&on and Governance commiKee
Audit commiKee Risk commiKee Compliance commiKee
Audit, Risk and Compliance commiKee
Risk and Compliance commiKee
Audit and Compliance commiKee
Audit and Risk commi\ee
Audit commiKee
Risk commiKee
Compliance
1
2
3
4
5
Not a prudent governance prac&ce to combine Audit and Risk func&ons in a Board level commiKee
Remunera&on commiKee
Alterna&
vely, som
e banks c
ombine
the
Nom
ina&
on and
Rem
unera&
on com
miKees
‹#› IFC Corporate Governance Program
Board commi\ees at a bank Survey of European Banks
Survey of Top 25 European Banks*
Source: Nestor Advisors, Board profile, structure and prac&ce in large European Banks, 2008
‹#› IFC Corporate Governance Program
Establishing commi\ees Key quesBons to be answered
When should a bank establish a Board level commi\ee?
When the magnitude, complexity and importance of issues exceed the bandwidth of the Board
Standing commi\ee or ad hoc commi\ee?
For major, long-‐term ac&vi&es establish standing commiKees For rela&vely short-‐term ac&vi&es, establish ad hoc commiKees Usually, large banks have 4-‐6 Board level commiKees
Commi\ee composiBon
At least 3 members on each commiKee (op&mal size varies) No membership of more than 2 commiKees. Independent members for Audit, Compliance, Risk, Nomina&on and Remunera&on commiKees
Commi\ee meeBng frequency Monthly, Quarterly mee&ngs
Commi\ee Quorum Vo&ng rights, quorum, proxy issues to be iden&fied
‹#› IFC Corporate Governance Program
Thank You