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Corporate governance performance measures: is the right time for getting essentials reconsidered? Well, it's not a crisis, Brychko PhD candidate,

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Presentation on theme: "Corporate governance performance measures: is the right time for getting essentials reconsidered? Well, it's not a crisis, Brychko PhD candidate,"— Presentation transcript:

1 Corporate governance performance measures: is the right time for getting essentials reconsidered? Well, it's not a crisis, Brychko PhD candidate, Department of International Economics, Ukrainian Academy of Banking of the National Bank of Ukraine International Competition in Banking: Theory and Practice Sumy, 24. May 2012 Serhii V. Leonov Professor, Doctor of Economics, Head of the Chair of Finance

2 "Measurement is the first step that leads to control and eventually to improvement. If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you can't control it, you can't improve it." - H. James Harrington

3 Specific corporate governance issues in Italy and Ukraine: comparative analysis Critical analysis of contemporary Corporate Governance measures Construction of the Index of Corporate Governance Development in Ukraine Agenda

4 Why does it matter? The benefits of corporate governance practices vary based on bank and country characteristics, neither of which is well understood. Governance is not one-size fits all. Specific corporate governance issues in Italy and Ukraine: comparative analysis

5 General shareholders meeting Board of Statutory Auditors Independent auditors Steering and monitoring level Ownership level President Appointments Committee Remuneration Committee Internal Control Committee General Manager Executive level Board of Directors Executive Committee Chief Executive Officer Italian commercial bank Mediobanca Specific corporate governance issues in Italy and Ukraine: comparative analysis

6 Steering and monitoring level Ownership level General shareholders meeting Supervisory Board Management Board Audit Commission Credit Council Internal Audit Service Chairman of the Board Department of strategic projects and process Committee on tariffs and conditions Credit Committee Operational risk committee Management committee on asset and liability Program integration committee Technology committee Executive level Ukrainian commercial bank First Ukrainian International Bank Specific corporate governance issues in Italy and Ukraine: comparative analysis

7 General shareholders meeting Board of Statutory Auditors Independent auditors Steering and monitoring level Ownership level General shareholders meeting Supervisory Board Management Board Audit Commission Credit Council Internal Audit Service Chairman of the Board Department of strategic projects and process Committee on tariffs and conditions Credit Committee Operational risk committee Management committee on asset and liability Program integration committee Technology committee President Appointments Committee Remuneration Committee Internal Control Committee General Manager Executive level Board of Directors Executive Committee Chief Executive Officer Italian commercial bank Mediobanca Ukrainian commercial bank First Ukrainian International Bank Specific corporate governance issues in Italy and Ukraine: comparative analysis

8 Critical analysis of contemporary Corporate Governance measures All models are wrong, but some are useful. George E. P. Box (1979) All models are wrong in the sense of being a simplified representations of some reality. Gompers, Ishii and Metrick (2003) G-index (GIM) – Classic article; 800 citations on SSRN – Create a governance index as a proxy for the strength of shareholder rights and corporate governance practices – Study the empirical relationship between their index and corporate performance – Deciles rankings of companies Dictatorship portfolio Highest management, lowest shareholder power Democracy portfolio Lowest management, strongest shareholder rights

9 Some models are more wrong than others. Board Effectiveness Rating (BER) (2002) Market and Industry Indices (2000) Corporate Governance Quotient (CGQ) (2002) Board Accountability Index (BAI) Why? subjective estimation; based on international corporate governance principals and do not fit the situation of a specific country; not adopted to specifics of banking sector; deemphasize takeover defenses; can't insist on reliability of those indexes, etc. But some are useful. Critical analysis of contemporary Corporate Governance measures All models are wrong, but some are useful. George E. P. Box (1979)

10 Construction of the Index of Corporate Governance Development in Ukrainian banks ICGD UAH = 1/3 ICGD 1 + 1/3 ICGD 2 + 1/3 ICGD 3, Where: ICGD UAH – Index of Corporate Governance Development in Ukrainian banks ICGD 1 – Corporate Governance Quality ICGD 2 – Ability to cope with risks ICGD 3 – Profitability ICGD1 - Corporate Governance Quality Shareholder rights (6 indicators) Supervisory board (5 indicators) Financial Disclosure and Executive Remuneration (9 indicators) Board of Directions (4 indicators) Audit (4 indicators) Progressive practices (4 indicators) ICGD2 – Ability to cope with risks (5 indicators) ICGD3 – Profitability (5 indicators)

11 Construction of the Index of Corporate Governance Development in Ukrainian banks

12 Why its wrong? Why its useful? Has local character Considerate special aspects of banking activity, geographic region and market ICGD (or it components) could be used for the ongoing measuring (monitoring) of corporate governance at the national level and to assess the level of corporate governance development in a separate bank.

13 Key stuff "Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful." - Box and Draper, Empirical Model-Building In summary…


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