INCURSIONS INTO CORPORATE GOVERNANCE AND ANALYSIS … · information through the data obtained from...

Annals of the „Constantin Brâncuşi” University of Târgu Jiu, Economy Series, Issue 3/2018

„ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 2344 – 3685/ISSN-L 1844 - 7007

INCURSIONS INTO CORPORATE GOVERNANCE AND ANALYSIS OF REALITY FACED

BY TOP 5 ROMANIAN BANKS

BĂTAE OANA-MARINA

GRADUATE OF FACULTY OF ACCOUNTING AND MANAGEMENT INFORMATION SYSTEMS

BUCHAREST ACADEMY OF ECONOMIC STUDIES

e-mail: [email protected]

Abstract

Worldwide, financial institutions keep on being challenged with navigating the constantly evolving and vast

universe of risks arising both from external factors which cannot be controlled within the internal control environment but

also from internal factors. Not only the larger companies, but also the medium ones, need to dedicate enough resources,

time, commitment in order to fully assess the risks that tend to affect a company at any moment in time. In order to make

sure that the objectives are met and the risks are monitored and controlled, companies should develop open and formal

communications mechanisms in order to establish a strong control environment, a good corporate governance model and

an efficient internal audit function. The preliminary steps consist in: foundation of an efficient internal control system,

formalization of governance structures, implementation of policies and procedures compliant with the statutory

requirements and adapted to the industry, develop well defined roles and responsibilities of persons in charge with

governance including a code of conduct, establish control functions within the company that oversee any breaches of

regulations, supervise anti-money laundering, corruption, anti-bribery etc. Both in case of unitary and two-tiers models of

corporate governance, out of all the subcommittees, it is really important to focus on the Audit Committee. This has became

more and more important when the number of whistleblower tips and also complaints increased, leading to internal

investigations over which the Audit Committee plays a critical role, overseeing the processes.

Keywords: corporate governance, financial institutions, risk management, code of conduct, agency theory, Board of Directors,

Supervisory Board. JEL Classification: G30, M14, N20

1. Introduction and research methodology

Nowadays, governance is an inevitable topic of discussions in many corporate boardrooms and

academic roundtables and for policy makers worldwide. Over the past ten years and subsequent to

those, corporate implosions increased the demand for a continuous process of improvement and

transparency in the boardrooms. Also, corporate governance highlighted the rhythm of change for a lot

of boards all over the world and each year is expected to continue this trend. It is well known and it will

be detailed in the following chapters the fact that the Board is not only accountable to the company and

its shareholders but also it has the duty to act in the company’s shareholders best interests [1].

An effective corporate governance is the most significant component of the proper functioning of

the banking sector and also the economy as a whole.

By taking into consideration the events occurred past years ago, an important concern refers to the

root causes of the financial crisis which have been highlighted by Ian Radcliffe, director at the World

Savings Banks Institute and they are: „financial innovation went wrong; flawed incentive structures;

poor risk management; supervisory deficiencies and international governance deficiencies” [2].

As subsequent events to the financial crisis occurred in the past, lessons were learned by banks

regarding the corporate governance:

To build a banking system which shall be sufficiently strong to resist to many of the systemic risks;

The objectives of banks need to be reviewed periodically reviewed, including here the policies and

procedures, in order to be up to date to all the significant events occurred in certain circumstances;

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The policies related to risk management have to be enforced, in case of banks these including

currency or maturity mismatches, related party (intercompany) exposure, non-performing loans

etc.;

The responsibilities of members which occupy positions in Boards need to be written down and

made available for different stakeholders, aspect that helps in promoting the transparency through

information disclosure requirements [3].

Firstly, one objective of this research is to highlight the evolution and the perspectives of the

corporate governance, as well as to emphasize the key role of the corporate governance on the

particularities of the processes and leadership structures in banking sector.

Secondly, another objective was to investigate on how governance actually works in Romania,

more specifically in Banking sector, how the recommended governance models are applied and how

are the management boards from Romania structured.

For this research, firstly, was used documentation, in order to know the historical facts about

corporate governance and also Romanian Banking sector, then analysis, investigation and synthesis of

information through the data obtained from the public corporate governance reports of the selected

banks and finally, interpretation of analysed data.

Documentation was done by analysing the most important opinions and approaches from the

international and national scientific literature. Finally, interpretations and conclusions were prepared

based on the connections established throughout the chapters.

2. Theories in Corporate Governance – general aspects

The following theories are the ones on which the corporate governance is based:

a) Agency Theory. This assumes that a conflict arises due to the existence of a shareholder which

acts as the principal being the owner of the shares and the existence of another individual who conducts

the activity of the company, acting as an agent. Between the two parties, a conflict of interests appears.

The shareholders act as the principal and they are the ones who actually own the business, finance

the company through the capital they invest with the scope of achieving wealth, representing the

employers who monitor the managers who act as agents and offer their knowledge to the company they

are employed by, using their professional managerial skills to control the financing received from the

principal. Some of the rights of the principal need to be transferred to the agents who have the

obligation to carry out the duties received once with the transfer of the rights [4].

The objectives of both principal and agent are summarized below in Fig 1.

Figure no. 1 – Objectives of both principal and agent within a company

b) Transaction Cost Theory (Transaction Cost Economics – TCE). Both this theory and the

agency theory deal with almost the same aspects, the difference being the emphasized facts, in case of

agency being the individual agent compared to transaction cost theory where the focus is on the

individual transaction. TCE focuses on the fact that collusion might arise at the management level,

managers or even directors might arrange some transactions focusing on individual opportunity. The

Agency theory

Principal's objectives Agent's objecties

- control the decisions in their business; - large bonus and status for a director;

- maximize their profit and wealth; - extension of the business;

- higher profit which may lead to the increase of the

shares value and/or dividends to be cashed

- own a business conducted in accordance with laws,

ethics code and corporate governance.

- high salary;

- find solutions in achieving individual objectives

with the help of the company they run

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issue highlighted by this theory is the efficient and effective accomplishment of multiple transactions

by entities.

Figure no. 2 – Type of transactions comprised in TCE

c) The Stewardship Theory. This theory does not agree with the assumptions of the agency

theory according to which the agents have an opportunistic and selfish behavior, as their individual

interests in many cases differ from those of the principals. Principally, managers are motivated by the

accountability needs and also by their possible achievements in terms of their careers, and, secondly, by

their financial rewards [5].

d) The Stakeholder Theory. The main purpose of an entity is to create value for its

stakeholders and this purpose is achieved by converting their stakes into both services and goods [6].

The Organization for Economic Cooperation and Development (“OECD”) mentioned that the

promotion of a cooperation with the stakeholders represents a long term interest of a company and this

would lead to a value creation [7].

e) Resource Dependency Theory (RDT). This theory refers to the modality of the external

resources of the entity that may affect in some cases the behavior of the company and takes a strategic

view of corporate governance. Worldwide, the exchange of the external resources represents a

relationship of dependency between companies, emphasizing the fact that these resources may become

valuable and rare [8].

Transaction cost theory

External transactions Internal transactions

- the costs implied by searching

the supplier;

- bargaining and decision costs

which refer to purchasing the

component; - enforcement and policing costs

in order to monitor the quality

- different transacting

between different

departments within the firm

or business units

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Table no 1 – Comparison of the theories of corporate governance

Source: ACCA, P1

3. The codes of corporate governance and their related Board structures

The corporate governance codes have the role to guide professional individuals in order to

sustain a good model of governance within their business. A good model when discussing about the

global practice requirements is the one associated with the UK.

3.1. The UK corporate governance code

Since 1991 when the Cadbury Committee was established, the corporate governance reform

has started in the UK. The main scope of implementation of this Committee was to focus on all the

financial aspects of corporate governance. Therefore, it published different reforms in order to be able

to decentralize the power within an organization and to increase the independence at the level of non-

executive members which have the abilities to monitor the executives.

The main recommendations of the Cadbury report are summarized in Table no 2, below.

Basis Agency TCE Stewardship Stakeholders RDT

Focus Reciprocity (Self-

interest)

Transactional

costs Shareholder’s interest

Stakeholder’s interest and

Relationship building

Firm resources

and power

Objective Minimize agency cost Reduce

transaction cost Maximize Productivity Long term relationship

Acquire &

exploit resources

Base Normative Classical idea Classical idea Normative Classical idea

Model Individualistic Individualistic Collectivistic Collectivistic Collectivistic

Time horizon Short term view Long term view Long term view Long term view Long term view

Rooted Economics Micro-

Economics Law Management

Sociology and

management

Behavior Opportunistic Opportunistic Pro-organizational Pro-social Pro-

organizational

Approach Economic Economic Sociological and

psychological Societal Level Strategic

Main theme Goal congruence Goal alignment Goal alignment Goal alignment Goal congruence

Cultural suitability High power distance Mixed Low power distance Low power distance Mixed

Model of man Economic man Economic man Self-Actualizing man Self-Actualizing man Economic man

Motivated by Self-objectives Self-objectives Principal’s objectives Shareholder and other

stakeholder’s objectives -

Structure Monitor and Control Monitor and

Control

Facilitation and

empowerment

Facilitation and

empowerment

Monitor and

Control

Need Economic need(lower

order)

Economic

need(lower

Growth, achievement

(higher order)

Economic and long term

firm growth

Economic and

long term firm

Control mechanism Control mechanism Trust mechanism Trust mechanism Control mechanism Attitude towards

the risk

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Table no 2 – Recommendations of Cadbury Report

Source: Author’s analysis of the Cadbury Report

Under the UK corporate governance model, a company is governed by only one corporate body that

comprises both the management and monitoring functions. The structure of the board is unitary,

therefore no supervisory board can be found in the one-tier board.

Table no 3 – Unitary Board’s advantages – UK corporate governance model

Source: Author’s analysis

3.2. The German corporate governance code

The national code is produced in 2002 by using the initiative of the federal government. The

two-tier board model is associated with this model. Under this dual system, both board of directors and

supervisory board exist side by side. The board of directors represent the lower tier, the operating

board, which is accountable for running the business, including the CEO and the other executives. The

upper tier includes the supervisory board which has a strategic oversight of the organization.

It is important to mention that all the companies listed to different Stock Exchanges all over

the world have to apply the dual system of corporate governance [9].

It is well known that Germany comprises a bank-based economy. The efficiency of the

German corporate governance code is aimed to the maximization of the value of stakeholders rather

than the one of the shareholders. However, even though the German model is highly dependent to EU

Directives, in fact, it has a lot of deep roots in German codes and legal doctrine [10].

Recommendations of Cadbury Report

1. The chairman and CEO’s roles should be separated;

5. At least three non executive directors should be included in the audit committee.

2. A major percentage of the non executive directors should be independent of the management of the company and

should not have any other relationship with the firm which could interfere in exercising their independent professional

judgement;

3. Without the approval of shareholders, the executive directors contracts must not exceed three years;

4. Informations about the chairman’s remuneration and highest paid member of the board of directors have to be

provided;

Advantages of One-Tier Board

- Non-executive directors ("NED") expertise: The non – executive directors are not involved only in

supervising, they are also implied in running the business;

- NED empowerment: These independent directors are as responsible as the executive directors and they

are active in the development of firm’s activities;

- Reduction of malpractice or fraud: The NEDs are being wider involved in the management of the firm;

- The activities ran by NEDs are helpful in improving the confidence of investors;

- The managers have the possibility to be at the same time managers and also members of the BoD;

- The Audit Committee includes only NED.

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3.3. The US Corporate Governance Code

Compared to the British approach which is based on different self-regulatory mechanisms and

soft law, such as codes, the US regulatory regime is based more on hard law. In the US no national

authoritative governance code exists, but this aspect does not mean that the governance is absent. The

period after Sarbanes-Oxley regulation (SOX) led to the increase of awareness regarding all differences

between both American and British approaches to the governance.

The US Securities and Exchange Commission (“SEC”) administrates the SOX act, legislation

that protects both public sector and shareholders from different manners of fraudulent practices or some

other accounting error that might occur in order to improve the accuracy of the companies’ disclosures.

Also, a new regulatory organism was implemented with the scope of increasing the public

monitoring of the auditors (gatekeepers), the Public Company Accounting Oversight Board

(“PCAOB”) [11]. SOX Act is mandatory in the US and a significant statement of this regulation

implies that all the companies’ records, both physical and electronic, must be kept not less than five

years [12].

4. Evolution of corporate governance in the banking sector

Many important restrictions were applied to the financial systems in the early 70s and these

included different controls of businesses conducted by the financial institutions. The governments had a

number of economic policy and social objectives which were served by the existence of the regulatory

restrictions. During the post-war interval of time, direct controls were applied in a lot of countries all

over the world with the scope of allocating funds to preferred industries, protecting the small savers

which detain limited financial knowledge, these controls being frequently used as different instruments

for the macroeconomic management [13].

Starting with the middle of ’70, a significant process took place in most countries in order to

consolidate the regulatory reform applied in the financial entities. The rationale for the regulatory

reform is to address different concerns over both the stability and safety of the financial institutions and

the banking sector as a whole. In case a bank fails, this situation might lead to the failure of different

other companies which are exposed due to the business relationships with the financial institutions

[14].

The economy of countries is highly dependent on the efficiency and drive of its companies. The

essence of a system with good corporate governance is exercising the boards’ freedom of driving

companies forward within a framework which contains effective accountability [15].

The public interest in both corporate governance and control issues has increased and the

companies keep track on responding to this challenge.

The control environment of each bank must be underpinned by different principles which were

established by the Banking Act in 1987 for the Bank of England, such as:

Each controller, director or manager of a financial institution must be a proper and fit individual

in order to hold the particular position which he is given;

The business shall be directed by at least two persons;

The Board of Directors shall include also non-executive members;

A prudent manner is mandatory in conducting the financial institutions;

The activities carried out at the level of the business of the financial institutions contain

appropriate professional skills and integrity [16].

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All the failures which had occurred within different companies and banks over a period of time led

to aiming the attention on the responsibilities and roles of directors and also on how important it is to

provide in a timely manner the confirmation and information to shareholders regarding the key matters

of the corporate including its operations. All the recommendations which were provided by the

Cadbury Committee and also the statement of the internal financial controls which were to be included

in the listed entities’ accounts, can be overviewed as a public affirmation that the key authorization

criteria included in the Banking Act have actually been met over the time.

The report prepared by the Board of Banking Supervision regarding the failure of Barings has

reinforced the work of Cadbury and drew out different lessons for boards, which are located at the heart

of a good governance [17].

The collapse of Barings Bank, the world’s second oldest bank which was based in London, was due

to unauthorized catastrophic activities of one employee, Nick Leeson, who went in all the cases

undetected, fact which arised as a consequence of management and most basic internal controls

failures. Neither the regulators nor the external audit had discovered the individual’s unauthorized and

inappropriate activities [18].

Commitment, vigilance and energy are the most significant aspects required from corporations,

both financial and non-financial institutions, in order to create a strong control environment in which a

balance between profitability, confidence, reputation, assets safeguarding over unnecessary and costly

procedures exists.

There is an interdependence between controls and people and oversighting, neglecting, failures in

communication, errors of rationale are examples of factors which determine ineffectiveness of controls.

Impropriety or even collusion not only at the management level, but at every level, can circumvent the

controls in place. Nowadays, a business is characterized by dynamism, therefore, the risks to which a

company is exposed are in a continually process of change, both in size and nature. For example, if

new systems are implemented within an organization, this will bring new possibilities for errors or even

fraud. This emphasizes the need of updating policies, procedures and internal controls in order to keep

track of the changing circumstances.

The management within a financial institution is accountable for the creation of an environment

that safeguards the interests of depositors and shareholders and is also responsible to ensure that the

activities carried out are conducted with professional skill and integrity. This role is really significant

and it has been proved in the past that without the involvement of the management and its proper

attitude, or a strong control framework or a wholehearted commitment, the controls implemented

within the bank will not have any impact on the employees whom in some cases might not give them

the importance that they require [17].

5. A corporate governance policy and framework within banks

As a foundation to the corporate governance and control environment, the banks should take into

consideration the preparation of a guideline in which the key elements of banks’ policies are described,

the manner in which those policies are communicated within the bank and also the modality of

adherence should be monitored in order to identify any weakness in the process since from the

beginning.

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From this guideline, the policy and control framework can be created based on a policy manual. It

is indicated for this manual to include a set of policies and procedures and also description of internal

processes, summarized in Fig. 3.

Figure no 3 – Corporate governance and policy framework within a financial institution [17]

The policy manual includes different group policies which cover such matters as fraud detection

and response, business rules, management information, authorized signatures, career development,

approval of expenditure, human resource policies and so on. It is recommended for the policy manual

to include sections for each business category, risk management and also on the role and

responsibilities of the support function of banks [17].

6. An internal control policy within banks

All the principles, accountabilities and policies relating to the internal control system shall be

concatenated by the banks in a paper which shall be made available to each member of the

management. This paper shall include the followings:

A statement of the responsibilities;

A clear and concise definition of the bank’s internal controls and also internal financial

controls;

A short description of the bank’s control environment which shall cover the corporate

culture, management style, the control disciplines such as sanctions and also the manner of

implementation and also monitoring of internal controls;

A statement which comprises the commitment of the bank to high ethical principles and

integrity;

The commitment to competence which shall cover different ways of recruitment, trainings

and developments of new and existing staff;

Organization’s charts and responsibilities (e.g. functionality regulation made available

within the bank);

Procedures related to risk assessment which shall cover at least the financial and also

management reporting objectives and standards, including also operational procedures;

Bank objectives

Statements of Principle

Code of Conduct

Policy manual

Business area policies Risk policies Support area policies

Product programmes and risk profiles

Procedures and controls

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The key control activities which shall cover accurate, timely, qualitative and appropriate

financial information, four eyes principle, segregation of duties, reconciliation procedures,

valuation procedures, reporting, monitoring and communication;

Appropriate authorization of daily transactions reconciled with trial balance;

Reconciliation of clearing and suspense accounts on a daily basis;

Preparation of financial statements in accordance with the international financial reporting

standards and also the preparation of the financial information on a timely basis or upon any

request;

Implementation of the adequate systems in order to satisfy the banks needs [17].

7. Risk management in corporate governance

All the issues which are related to the corporate governance and also to the ways of

managing the risks arising with the companies, in general, and banks specifically, were given a

major importance worldwide. An overriding risk appears each time an organization fails to meet

the corporate governance principles.

There is no company in which the risks can be fully eliminated, but a strong control

environment can help and make them as low as reasonable practicable.

Figure no. 4 – Risk analysis performed by OECD

Source: ACCA, P1

The steps of the risk management are the following:

Risk identification – done by stakeholders, firstly the risks have to be identified in order to be

further managed;

Risk assessment – evaluation of risks by considering the likelihood of occurrence and the way

they might affect either the financial or non-financial institution. The following action is to

prioritize the most urgent tasks which need attention;

Risk planning – includes establishing policies which, in case of bank, generally is done by a

Compliance department – detailed further in Chapter 8.

Risk monitoring – keep track of changes occurred by appearance of new risks in the

environment and re-prioritize the managing activities if needed [8].

An important component of the risk management is represented by the principles of the

Enterprise Risk Management (“ERM”). ERM is defined as the “process effected by an entity’s

board of directors, management and other personnel, applied in the strategy setting and across

the enterprise, designed to identify potential events that may affect the entity, and manage risk

OECD Principles of good corporate governance Risk analysis

The board either does not control the company in an adequately manner

or attempts to run the firm for its benefit rather than for the benefit of

the stakeholders.

Responsibilities of the board

Disclosure and transparency

Equitable treatment of shareholders and stakeholders

Rights of shareholders The firm does not allow shareholders their rights (e.g. it does not

provide necessary informations in general meetings).

Under an acquisition, all shareholders may not be offered the same

price for their holding. Firms may ignore some stakeholders also.

Directors do not provide appropriate financial statements and do not

disclose the true situation of the company (e.g. Enron).

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to be within its risk appetite, to provide reasonable assurance regarding the achievement of

entity objectives” [19].

ERM is actually an initiative of the Committee of Sponsoring Organizations of the

Treadway Commission (“COSO”) and it is illustrated by a cube, translated in Table no 4,

below.

Table no. 4 – COSO ERM framework matrix

Source: ACCA, P1

Therefore, a good control over the risk management process can help both the financial or non-

financial institution and also the internal and external auditors to evaluate the internal control system.

8. Code of Conduct and Compliance Department

All banks should detain a code of conduct which is able to provide an easy access to the core

values regarding both ethical and legal conduct of the business. It should set the tone within the bank,

meaning that it will include sections regarding at least the following: confidentiality, relationship with

both internal and external auditors and also regulators, personal interests, insider training, conflicts of

interest, personal expense claims, money laundering and also reporting breaches of the code.

It is vitally for a bank to have a high reputation in respect of legality and also ethical values,

complying with the spirit and not only the letter of regulatory and legal requirements, observing high

standards of fairness in dealing and integrity, displaying professional skill and care in all the carried out

activities.

It is essentially for a bank to comply with the spirit of the law, taking into consideration that the

reputation is very important in order to attract and maintain customers. Any breaches of the regulation,

law or standards cannot at any moment in time be justified by the pursuit of the profit or by any market

practice. The banks need to be open and also very co-operative with auditors and also regulators, keep

them informed at any moment in time of anything which shall reasonably be disclosed to those parties,

through a constructive dialogue.

Objectives of

a company

Organisational

levels Components

Operating Business unit

Objective setting.

In order for a business to be successful, the objectives must be aligned to the mission of the entity and they also need

to be consistent with the risk appetite of the company.

Reporting Divisions

Event identification.

In the achievement of the company’s objectives, there appear different events which may be internal or external, both

positive or negative. These events must be identified at the right time.

Compliance Entity

Risk assessment.

In order to identify different ways to manage risks, those risks need to be analysed and prioritized, taking into

consideration their likelihood to occur.

not applicable not applicable

Risk response.

The management of the company selects different risk responses in order to avoid, reduce, accept or share identified

risks. Those selections are developped in order to align risks with the risk tolerances and appetite of the company.


Control activities.

Policies and procedures of the entity are helpful in ensuring that the risk responses are carried out in an effectively

manner.


Information and communication.

The information which is considered relevant is identified, captured and communicated in the right form and at the right

time which ensure that people carry out their responsibilities.

not applicable not applicable Monitoring.

The entire ERM process is permanently monitored and if modifications are necessary then they are being made.

Internal environment.

This component is very important and it also includes the risk management philosophy and also the risk appetite. Subsidiary Strategic

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Additionally to the code of conduct, all banks should have a compliance department which

underpins the ethical aspirations and also is accountable for ensuring that the policies, procedures and

structures which are in place are actually applied within the bank and compliant with the law. The main

role of this department is to educate, advice, implement procedures, policies and in-house rules,

monitor the compliance, maintain a good relationship with the regulators and develop a good

management [17].

9. The corporate governance – a case study of the reality faced by Romanian Banks

9.1 Introduction and analysis of the selected sample

As Nelson Mandela quoted “The time is always right to do right”, the objective of this case

study is to find out if the Romanian banks have time and, also have the necessary resources to always

do right in today’s world.

For banking sector to function, there is a critical need of an effective governance to exist. Banks

have a crucial role in the world’s economy due to the fact that they intermediate multiple funds from

different savers or depositors to another activities which, in fact, are supporting the world’s economic

growth. Hence, by carrying out their activities in a safety manner, banks are the pawn in the economy

worldwide.

As it is well known, banks proved that they have a better understanding of all most important

components of governance, for example: a rigorous division of risk management, strong implemented

internal controls, an effective board oversight, compliance with laws and regulations etc.

In order to correlate the case study with the literature review from the previous chapters, top

five most profitable Romanian banks as at December 2017 were selected with the scope of analyzing

the componence of their management, the structure of their boards in terms of committees and

subcommittees and also to which extent they apply the corporate governance codes, answering the

questions such as:

“What corporate governance model are they inspired from?”

“What is the board structure, one-tier or two-tiers?”

“In how many committees the members occupy different positions, in parallel?”

“How many subcommittees do the committees have?”

“Does the Romanian citizenship occupy a major percentage within the boards?”

“Are female occupying executive functions? To what extent?”

All the questions above will be further investigated based on the most recent data which is

available for the public on banks official websites.

The selection was based on audited reported profit as at the end of December 2017, being

represented by top 5 Romanian banks, included in Table no 5 below.

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Table no 5 – Top 5 most profitable banks from Romania in 2017

Source: Data available at: http://www.zfcorporate.ro/zf-print/prima-pagina/topul-celor-profitabile-banci-

romania-2017-brd-socgen-banca-transilvania-bcr-podium-topul-celor-profitabile-banci-piata-locala-2017-fiind-

urmate-clasament-ing-bank-raiffeisen-bank-unicredit-17070964 [20] and author’s analysis

9.2. Results obtained for the Romanian Banking Sector – 5 Banks selected

The total population includes 5 banks, out of which 40% apply the unitary model of corporate

governance, the remaining ones applying the two-tiers model. In most situations, the quoted banks shall

apply the dualist corporate governance model. However, out of 60% of banks which apply two-tiers

model, neither one is individually quoted on the Bucharest Stock Exchange (“BSE”). It can also be

observed that even if Banca Transilvania and BRD are public interest entities, listed on BSE, they still

apply the unitary model, even though the recommended one for quoted companies is the dualist one. A

special case included in the analyzed sample is represented by ING Bank Romania which acts as a

branch of ING Group and has special rules from the Regulator – National Bank of Romania (“NBR”),

therefore the corporate governance from the group will be taken into consideration, this applying at the

level of the subsidiaries / branches also.

Table no 6 – Analysis of the structure of governance within selected banks

Source: Data available at [21 - 27] and author’s analysis

9.2.1. Results for banks which apply one-tier corporate governance model

As mentioned above, from the total population, these banks which apply one-tier corporate

governance model, represent 40%, BRD and Banca Transilvania, both being quoted on BSE.

Both banks are conducted through a Board of Directors (“BoD”). However, it is worth

mentioning that BRD has an additional Superior Leadership which has the role to help BoD to achieve

its goals.

The BoD of Banca Transilvania includes the following Committees:

Audit Committee

Risk Administration Committee

Bank Audited profit as at

Dec-16 in RON mil.

Audited profit as

at Dec-17 in RON

mil.

Variance 2017 vs.

2016 (%)

Rank in

sample as at

Dec-17

BRD 728.3 1,380 89% 1

Banca Transilvania 1,230 1,190 -3% 2

BCR 1,040 668 -36% 3

ING Bank 474 493 4% 4

Raiffeisen 450 491 9% 5

Bank Quoted or unquoted? Similar to UK /

German / US model? Structure

BRD Yes UK One-tier

Banca Transilvania Yes UK One-tier

BCR individually no, but quoted through Erste Group BankUK Two-tiers

ING Bank No UK Two-tiers*

Raiffeisen No, only Raiffesein Bank Bonds. UK Two-tiers

* ING Group is taken into analysis, since ING Bank Romania acts as a branch.

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Remuneration and Nominalization Committee

Leadership Committee

Procurement Committee

Assets and Liabilities Committee

Human Resources Committee

Credit Approval Committee

Credit and Headquarters Risk Committee

Credit and Subsidiaries Committee

Remedial and Workout Committee

Forced Execution Monitoring and Assets Capitalization Committee

Financial Institutions Credits Committee

The BoD of BRD includes only 4 Committees:

Audit Committee

Remuneration Committee


Nominalization Committee

Hence, Banca Transilvania includes by 9 committees more than BRD, even though both are

listed on BSE, this proving the unitary model of corporate governance applied is not the same for each

bank, but it does not mean the governance is absent. There is no specific number of committees

recommended by any corporate governance code worldwide.

Figure no 5 – Number of Committees of BoD in case of unitary model of governance

While the BoD of Banca Transilvania (“BT”) comprises 7 members, in case of BRD there are

only 5 members. 86% of the BoD members of BT are men, while the remaining percentage of 14%

represent women. The situation is totally different in case of BRD where out of a total of 5 members of

BoD, all of them are men.

13

4

-

2

4

6

8

10

12

14

Number of Committees of BoD

Banca Transilvania

BRD

295



Figure no 6 – Gender of BoD members of BT

In the Figure no 7 below, it is illustrated the fact that BT remains a bank which is conducted by

Romanian individuals, in a percentage of 71% in the total members of its BoD, while BRD is

conducted by foreign management by 80% in the total of its 5 members of the BoD.

Regarding parallel positions detained by members of BoD also in the committees, in case of

BT, no data was made available for the analysis.

Thus, in case of BRD, all the members of the BoD occupy at the same time also positions in the

subcommittees of the Bank.

Figure no 7 – Citizenship at the level of BoD for unitary model

86%

14%

Gender of BoD members of BT

Male Female

71%

29%

20%

80%

0%

20%

40%

60%

80%

100%

120%

Romanian citizenship Foreign citizenship

Citizenship at the level of BoD for unitary model

BRD

BT

296



9.2.2. Results for banks which apply two-tiers corporate governance model

As mentioned above, from the total population, these banks which apply two-tiers corporate

governance model, represent 60% in the total selected sample.

a) Supervisory Board (“SB”)

The SB of BCR includes 4 subcommittees and 7 non-executive members (out of which 1 is a

vacant position), 100% being represented by men and 17% in the total of 6 occupied positions are

represented by a Romanian individual (Tudor Ciurezu):

Audit and Compliance Committee




The SB of Raiffeisen Bank includes 5 subcommittees and 7 non-executive members, out of

which 2 are Romanian women, the remaining 71% being represented by members with foreign

citizenship:

Audit Committee



Credit Committee

Risk Committee of Supervisory Board

The SB of ING Bank includes 4 subcommittees and 8 non-executive members, out of which 2

are women and only 1 individual is Romanian, representing 13% in the total members (Mariana

Gheorghe – former CEO of OMV Petrom SA):

Audit Committee

Risk Committee


Nomination and Corporate Governance Committee

In all cases, all of the members of SB occupy another position at the same time in the

subcommittees of the banks.

b) Management Board (“MB”)

The MB of BCR includes 4 subcommittees and 5 executive members (out of which 1 is a

vacant position), 40% of the total members being represented by women and another 40% being

represented by Romanian individuals, including the CEO – Sergiu Cristian Manea:


Credit Committee

Costs and Investments Committee

Risk Committee of Management Board

The MB of Raiffeisen Bank includes 9 subcommittees and 7 executive members, out of which

57% are Romanian men, the remaining 43% being represented by members with foreign

citizenship, no woman being in an executive position:


Significant Risks Administration Committee

Credit Committee

Problematic Loans Committee

297



Retail Loans Committee

Projects Portfolio Committee

Regulation and Procedures Committee

Security Committee

Investments Committee.

The MB of ING Bank has no subcommittees and includes 3 members, the CEO, CFO and CRO,

all of them having a foreign citizenship, no woman being in an executive position.

10. Conclusions

All team members of the management have accountability for governance, but overall the

responsibility is best assigned by taking into consideration also the geographically aspects. Each

country has its unique legal and statutory foundations for different matters regarding the corporate

governance, this situation being met in case of the case study presented above, for Romania, also. For

the banks which are part from a Group from abroad, being the case for all selected banks, except Banca

Transilvania, the policies, procedures, code of conduct, corporate governance keep the influence from

the Parent bank that consolidates the financial statements of all subsidiaries, including the ones from

Romania.

Generally, all the Banks follow the UK corporate governance model based on a soft law, more

on a guideline and specifically, ING Bank follows more the Dutch corporate governance code,

including the comply or explain principle, with influence from the UK corporate governance model,

emphasizing continuity of business, long-term value creation, effective management and supervision,

including also remuneration.

In the past year, fraud incidents recorded an increase by over 130% which resulted in significant

both monetary and reputational losses for the financial institutions. Many of these incidents, including

also high-profile crimes, such as the Society for Worldwide Interbank Financial Telecommunication

(“SWIFT”) attacks from 2016, involved, in fact, the exploitation of all the governance deficiencies and

also ineffective operating corporate governance models [28].

To maintain a proper governance for risk management has represented a major point of focus

for regulators and industry groups, including the Basel Committee on Banking Supervision, the Office

of the Comptroller of the Currency, the Committee of Sponsoring Organizations of the Treadway

Commission, and the Federal Institutions Examination Council (“FFIEC”), the last one being a

regulatory council which is composed of the Office of the Comptroller of the Currency, the Federal

Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration

and also the Consumer Financial Protection Bureau.

Accordingly, the regulators expect for the financial institutions to develop an operating

corporate governance model, including the assignment of clear roles and accountabilities for risk

management – emphasizing fraud risk management, across the three lines of defense [29]. The first line

is at the level of each business unit and it is responsible for both owning and managing all fraud risks,

while the second line consists of the independent risk management functions and it is accountable for

monitoring and overseeing fraud risks and the last line, the third one is represented by the internal audit

which provides independent assurance for fraud management activities, evaluating the internal control

environment.

Fraud governance is more than just compliance and the need of development its practices goes

beyond regulatory compliance, such practices being necessarily to properly identify and also defend

against different emerging threats that are growing in complexity, including also risks related to the

Cloud [30] and digital information, theft of personal information through the compromise of business

298



e-mail and account take-over through mobile self-servicing [31]. Additionally, such practices help the

entities to operate in a more efficient manner and also to reduce costs as they result in clear assumed

accountabilities, enhanced cross-collaboration and also fraud loss reduction.

In conclusion, in order to realize the benefits, all financial institutions should take steps in order

to establish a strong foundation for the fraud risk management [32], comprising formalizing

governance structures, aspect which is applied in case of the selected sample for the analysis included

in the case study, and documenting roles and accountabilities for all the functional groups, aspect

occurred also and described on the corporate governance reports made public for the stakeholders on

the official websites of the analyzed Romanian banks.

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