Presentation on theme: "Corporate Governance in the Banking System"— Presentation transcript:
1 Corporate Governance in the Banking System 01/04/2017Corporate Governance in the Banking SystemThird Pan-African Consultative Forum on Corporate GovernanceDakar, Senegal9 November 2005Kirk OdegardSecretariat, Basel Committee on Banking Supervision
2 Sound corporate governance principles The role of supervisors 01/04/2017OutlineBackgroundSound corporate governance principlesThe role of supervisorsUnique challengesConclusions
4 01/04/2017BackgroundOrganisation for Economic Co-operation and Development (OECD) is international standard-setter for corporate governanceOECD issued corporate governance principles in 1999Basel Committee issued guidance in 1999 applying OECD principles to banksLate 1990s/early 2000s: corporate scandalsOECD issued revised principles in 2004Basel Committee currently reviewing bank guidance
5 Why guidance for banks? Critical role in the economy 01/04/2017Why guidance for banks?Critical role in the economyNeed to safeguard depositors’ fundsImportance of trust and confidenceHigh cost of bank failuresSensitivity to liquidity crisesAccess to confidential customer informationIncreasing complexity of bank activities
6 Foundations of effective governance 01/04/2017Foundations of effective governanceFoundations of effective corporate governance are important but may be beyond supervisory control:Macro-economic policiesSystem of business lawsMarket integrity and transparencyAccounting standardsBanking supervisors should be aware of impediments to sound corporate governance and take steps within their power to promote effective foundations1st paper concordat: confidentialLast on website: compliance and the compliance function in banksMost often downloaded paper from BIS website
7 Everyone’s responsibility 01/04/2017Everyone’s responsibilityBoard and senior management are primarily responsible for effective corporate governanceOthers can help promote sound bank governance:ShareholdersAuditorsIndustry associationsGovernmentsBanking supervisorsStock exchanges and securities regulatorsEmployees1st paper concordat: confidentialLast on website: compliance and the compliance function in banksMost often downloaded paper from BIS website
9 Working Group on Corporate Governance 01/04/2017Working Group on Corporate GovernanceEstablished by Basel Committee to review guidanceIncorporated elements of 2004 OECD principlesDiscussed lessons learned from corporate governance breakdownsMet with industry groups and rating agenciesConsulted with non-BCBS supervisorsIssued consultative paper in July 2005Final paper expected late 2005/early 20061st paper concordat: confidentialLast on website: compliance and the compliance function in banksMost often downloaded paper from BIS website
10 July 2005 consultative paper May be revised based on consultation 01/04/2017July 2005 consultative paperApply to a wide range of banks and countriesApplicable to diverse corporate and board structuresPrinciples, not rulesNot as prescriptive as some national legislationCommensurate with bank size, complexity and risk profileNot part of Basel II May be revised based on consultation 1st paper concordat: confidentialLast on website: compliance and the compliance function in banksMost often downloaded paper from BIS website
11 2004 vs. 1999 guidance Introduction of “know your structure” guidance 01/04/20172004 vs guidanceIntroduction of “know your structure” guidanceExpanded to consider group structuresProtection for “whistleblowers”State-owned and other non-listed banksMore in-depth discussion of:Conflicts of interestRole of the board of directorsAudit and other control functionsRole of banking supervisors
12 Sound corporate governance principles 01/04/2017Sound corporate governance principlesStrategic objectives and corporate valuesClear lines of responsibility and accountabilityRole of board of directorsOversight by senior managementInternal and external auditors and other control functionsCompensation policies and practicesGoverning in a transparent manner“Know your structure”
13 01/04/2017Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organisation.
14 Strategic objectives and corporate values 01/04/2017Strategic objectives and corporate valuesShould be established by the board of directorsCorporate culture should foster ethical behaviour“Tone at the top” is importantStandards should address corruption, self-dealing and other unethical or illegal behaviour“Whistleblowers”: Employees should be encouraged to raise concerns about illegal or unethical practices to the board or an independent committee without fear of reprisalBasel II is less a compliance exercise than an opportunity to upgrade risk management systems
15 Potential trouble situations 01/04/2017Potential trouble situationsLending to officers, employees or directors where allowed by national lawConsistent with market terms or terms offered to all employeesLimited to certain types of loansReports should be provided to the boardSubject to review by auditors and supervisorsPreferential treatment to related partiesConflicts of interestBasel II is less a compliance exercise than an opportunity to upgrade risk management systems
16 Addressing conflicts of interest 01/04/2017Addressing conflicts of interestPotential conflicts of interest arising from activities of the bank should be:IdentifiedPrevented or appropriately managedInformation barriers between different unitsSeparate reporting lines and internal controlsClear, fair, accurate information to customersAppropriately disclosedBasel II is less a compliance exercise than an opportunity to upgrade risk management systems
17 01/04/2017Setting and enforcing clear lines of responsibility and accountability throughout the organisation.
18 Board and senior management 01/04/2017Board and senior managementUnclear lines of responsibility can make problems worseThe board of directors should:Define authorities and key responsibilitiesOversee management actionsSenior management should:Delegate responsibilities to staff and promote accountabilityBe responsible to the board for the performance of the bank
19 Accountability within banking groups 01/04/2017Accountability within banking groupsParent board and senior management:Set general strategies and policies for the groupDetermining governance structure for subsidiaries that best contributes to effective oversightBe aware of risks throughout the groupIntegrate and coordinate governance structuresBank board and senior management:Responsible for governance of bankSoundness of bank, protection of depositors, compliance with laws and regulationsIntra-group outsourcing (e.g. internal audit, risk management) do not eliminate bank board oversightHas ultimate responsibility for corrective action at the bank
20 01/04/2017Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are able to exercise sound independent judgment about the affairs of the bank.
21 01/04/2017The board should…Understand oversight role and duties to bank and shareholdersAvoid conflicts of interestHave sufficient time and energy to fulfill responsibilitiesMaintain collective expertise as bank growsImplement targeted board training as necessaryAssess the effectiveness of its own governance practicesEnsure bank has an appropriate plan for executive successionQuestion and receive information from senior managementProvide sound and objective adviceDo not participate in day-to-day managementExercise due diligence in hiring external auditors
22 Independent directors 01/04/2017Independent directorsBoard should have adequate number of independent directorsIndependence = ability to exercise objective judgmentHelpful if not members of bank managementEspecially important in certain areas:Ensuring integrity of reportingReview of related-party transactionsNomination of board members and key executivesBoard and key executive compensation
23 Ensuring that there is appropriate oversight by senior management. 01/04/2017Ensuring that there is appropriate oversight by senior management.
24 Senior management responsibilities Should have necessary skills to manage business and exercise appropriate controlOversee line managers consistent with board policiesCritical role: Establishing system of internal controlsSituations to avoid:Inappropriate involvement in business line decisionsManaging areas without skills or knowledgeInability to control “star” employees
25 01/04/2017Effectively utilising the work conducted by internal and external auditors, as well as other control functions, in recognition of their critical contribution to sound corporate governance.
26 Auditors and other control functions Should be:IndependentCompetentQualifiedIdentify problems in risk management & internal controlEnsure financial statements are accurate
27 Enhancing audit & control effectiveness Recognise importance and promote throughout bankEnhance independence (e.g., limit non-audit services)Auditors have duties to bank and its stakeholdersConsider rotation of audit firm or lead audit partnerUtilise audit findings and require timely correctionReport to the board or audit committeeExternal auditors review internal controlsIndependent directors meet in the absence of bank management with external auditor and heads of internal audit, compliance, legal functions
28 01/04/2017Ensuring that compensation policies and practices are consistent with the bank’s ethical values, objectives, strategy and control environment.
29 Board and key executive compensation Compensation should be consistent with:Long-term business objectives and strategyCorporate cultureControl environmentShould not overly depend on short-term performanceBoard (or independent committee) should approve compensationPolicies re: trading bank stock and granting/re-pricing stock options
30 Conducting corporate governance in a transparent manner. 01/04/2017Conducting corporate governance in a transparent manner.
31 Transparent governance Necessary for shareholders, other stakeholders and market participants to monitor and hold accountable the board and senior managementNeed information on corporate structure and objectivesComplex cross-shareholdings can impede transparencyAt a minimum, all banks should make disclosures to supervisors
32 What should be disclosed? Disclosure on public website or in annual report:Board and senior management structureOrganisational structure (including ownership)Incentive structure of the bankCode of business conduct and/or ethicsRelated-party transactionsFull annual financial statement with supporting notes and schedules
33 01/04/2017Maintaining an understanding of the bank’s operational structure, including operating in jurisdictions, or through structures, that impede transparency (i.e. “know your structure”).
34 Operational structure Some bank operations may lack or impair transparencyParticular jurisdictions (e.g. some offshore centres)Complex structures (e.g. special purpose vehicles or corporate trusts)Banks may provide services or establish opaque structures for clientsOften legitimate and appropriate business purposes
35 Supervisory concernsThe use or sale of opaque structures/products may:Pose potentially significant financial, legal and reputational risksImpede board and senior management oversightHinder effective banking supervisionRisks should be appropriately assessed and managed
36 Risk management expectations Clear policies and procedures should be in placeApproval for use and saleIdentify and manage all material risksNeed for such activities should be regularly assessedCorporate governance expectations should be established for all relevant entitiesActivities should be subject to enhanced audit procedures and internal control reviewsAssess compliance with applicable laws, regulations and internal policies and procedures
37 The role of supervisors 01/04/2017The role of supervisors
38 01/04/2017Supervisory rolePoor corporate governance practices can be a cause or a symptom of larger problemsBanking supervisors should:Promote strong corporate governanceDetermine whether the bank has sound corporate governance policies and practicesHold the board of directors and senior management accountable for governance and internal control weaknessesBe attentive to warning signs of deterioration in managementConsider issuing supervisory guidance for governance
39 Supervisory questions 01/04/2017Supervisory questionsDoes the board exercise effective oversight?Are controls to detect and mitigate conflicts of interest adequate?Are internal controls properly implemented (as opposed to being written down but not operational)?Do internal and external audit functions conduct independent and effective reviews?Are major shareholders, directors and managers “fit and proper”?Will an individual’s skills and experience contribute to bank safety and soundness?Does criminal or regulatory record make a person unfit?Is a group structure managed in such a way as to negatively impact management of the bank?
41 Controlling shareholders 01/04/2017Controlling shareholdersFor example, family-owned or other non-listed banksControlling shareholders can be a valuable resourceUnique governance challenge because of influenceThere should be sufficient checks and balances on inappropriate activities or influencesThe board and its directors have responsibility to the company and all of its shareholdersSupervisors should be able to assess fitness & propriety of bank owners
42 State-owned banks OECD has issued guidance for state-owned enterprises 01/04/2017State-owned banksOECD has issued guidance for state-owned enterprisesGeneral principles should be applied to state-owned banksOwnership and supervision functions should be fully separatedGovernment should not be involved in day-to-day managementBoard independence from political influence should be respectedObjectives of state ownership and state’s ownership policy should be disclosed
43 01/04/2017Two-tier boardsSome countries adopt a two-tier board of directors (e.g. management board and supervisory board)Basel Committee recognises that both one-tier and two-tier boards may be appropriateTwo-tier boards may be structured differently across jurisdictions, so no specific guidanceWhichever structure is used, principles of sound corporate governance should be in place
45 Wrapping upBanks have a unique role in the economy, so targeted corporate governance guidance is appropriateKey elements:Board of directors = oversightSenior management = internal controlsSupervisors = promote and assess sound governanceActual practice is just as important as written policies and procedures
46 Questions or Comments? Kirk Odegard Member of Secretariat 01/04/2017Questions or Comments?Kirk OdegardMember of SecretariatBasel Committee on Banking SupervisionBank for International Settlements