1. THE ESSENCE CORPORATE GOVERNANCE IN THE FINANCIAL SECTOR Dr RH Mynhardt - UNISA 1

2. Topics Introduction and a case study Financial sector governance Role of financial firms Conclusion – Case study Dr RH Mynhardt - UNISA 2

3. CASE STUDY Small boutique bank in South Africa Bank was owned 40% by CEO and Chairperson. The rest was smaller shareholders. Bank employed one trader in derivatives He was given free reins by management to trade what he wanted. Previous Year profit made was $10 Mio. The bank had no permanent risk manager There was infrequent risk reporting Regular reporting to regulator but information was unaudited 3 Dr RH Mynhardt - UNISA

4. CASE STUDY Clearing house for derivatives introduced “Volatility skew” for daily margins All market participants warned well in advance of the changes coming. Dealer took no action 4 Dr RH Mynhardt - UNISA

5. Financial Sector Governance 5 Dr RH Mynhardt - UNISA

6. Financial Sector Governance – The latest crisis The recent global credit crisis highlighted the importance of a consistent, and consistently enforced, set of governance, risk and compliance policies in the financial sector The risk management systems have failed in many cases due to corporate governance procedures not being implemented Information about exposures in a number of cases did not reach the board and even senior levels of management Boards approved strategies but then did not establish suitable methods to monitor its implementation Accounting standards and regulatory requirements and supervision have also proved insufficient in some cases 6 Dr RH Mynhardt - UNISA

7. Financial Sector Governance Financial Sector Governance is an integrated governance, risk and compliance framework that provides a common language and understanding of risk and discourages the development of oversight functions that operate in isolation. Good governance in the financial sector is where the authorities and financial institutions are – accountable, – effective and efficient, – participatory, – transparent, – responsive, and – consensus-oriented. 7 Dr RH Mynhardt - UNISA

8. Financial Sector Governance Financial sector governance is providing a public good of financial stability through integration and legislation Where the Financial Sector consists of: – The integration of relevant financial institutions and roll players – the scope and design of financial regulation and legislation 8 Dr RH Mynhardt - UNISA

9. Financial Sector Governance Good governance can be obtained through: Appropriate levels of accountability, Managerial competence, Clear lines of responsibility, Oversight by senior management, Appropriate compensation mechanism and transparency within the institution 9 Dr RH Mynhardt - UNISA

10. Financial Sector Governance Laws and regulation by governments Disclosure and listing requirements by securities regulators and stock exchanges Accounting standards enforced by auditors Voluntary industry principles by the financial industry 10 Dr RH Mynhardt - UNISA

11. Dimensions of Financial Sector Governance FRAMEWORK - Establishing a framework for the functioning of financial markets by establishing clearing and payment settlement systems. REGULATE - Regulate, supervise and enforce regulation on market participants. COMPETE - Improve competiveness of the financial markets by allowing new types of financial products. TRANSPARENCY - Encourage market transparency and availability of information about markets. 11 Dr RH Mynhardt - UNISA

12. Dimensions of Financial Sector Governance CRISIS MANAGEMENT - React to financial crises, for instance with a Central Bank as a lender-of-last-resort- function. FINANCIAL STABILITY - Restructure financial regulation to achieve financial stability. ECONOMIC CONDITIONS - Manage international and national macro-economic conditions through the intervention in exchange rate markets, monetary and fiscal policy. CRIMINAL ACTIVITIES - Discourage criminal activity in the financial markets, such as fraud, money laundering, financing of illegal activies. 12 Dr RH Mynhardt - UNISA

13. Financial Sector Governance - Stakeholders A stakeholder is someone who will be affected by an endeavor and can influence it but who does not have to be directly involved with doing the work Government – Legislation, supervision and state-owned entities Employees – Job security Depositors – Safeguarding their deposits Suppliers – Providers of services to the industry Lenders - Safeguarding their loans Community - Safeguarding their interests Trade Unions - Safeguarding the workers Shareholders - Protecting their investment 13 Dr RH Mynhardt - UNISA

14. Financial Sector Governance - Organizational structures An organizational structure refers to the way that a financial institution arranges people and jobs so that its work can be performed and its goals can be met. The organizational structure should reflect the governance principles by which the institution lives Organizations are viewed as systems of governance. A distinction is made between formal structure and governance structure 14 Dr RH Mynhardt - UNISA

15. Formal structure http://lh5.ggpht.com/_iFIztPmvqg8/TBQjj9jReMI/AAAAAAAACqk/h-E7a4kAwQ8/Line-and-Staff- Organisation-Structure.jpg http://lh5.ggpht.com/_iFIztPmvqg8/TBQjj9jReMI/AAAAAAAACqk/h-E7a4kAwQ8/Line-and-Staff- Organisation-Structure.jpg 15 Dr RH Mynhardt - UNISA

16. Governance structure http://www.td.com/images/governance/td-governance-governancestructure.gif http://www.td.com/images/governance/td-governance-governancestructure.gif 16 Dr RH Mynhardt - UNISA

17. Role of financial firms 17 Dr RH Mynhardt - UNISA

18. Role of financial firms in an economy Mitigating and managing risk – Crucial in risk management (systemic risk) Harnessing opportunity – Innovation and expansion Creating business models – Involve everyone as employees, contractors, suppliers, customers and retailers in economic viable ways 18 Dr RH Mynhardt - UNISA

19. Role of financial firms in an economy Building institutional capacity – Strengthening industry members to play their role in the industry (institutions, government and associations) Developing human capital – Strengthening skills of employees, business partners and the community Helping to organize “the rules of the game” – Shaping regulatory and legal frameworks 19 Dr RH Mynhardt - UNISA

20. Building transparency Transparency can be defined as a principle that allows those affected by administrative decisions, business transactions or charitable work to know not only the basic facts and figures but also the mechanisms and processes. Transparency works hand in hand with integrity. If a company is transparent enough and reports material facts in real time, stakeholders will have more confidence in the management. Transparency helps those in charge to avoid fraud and put measures in place against it. 20 Dr RH Mynhardt - UNISA

21. Improving incentives Economic incentives are offered to encourage people to make certain choices or behave in a certain way. They usually involve money, but they can also involve goods and services. Positive economic incentives reward people financially for making certain choices and behaving in a certain way. Negative economic incentives punish people financially for making certain choices and behaving in a certain way. 21 Dr RH Mynhardt - UNISA

22. Improving incentives Positive economic incentives These reward people financially for making certain choices and behaving in a certain way. They also reward people with some sort of financial gain such as a better price, a free item, or an upgraded item. Coupons, sales, discounts, and rewards can be positive economic incentives. They are called positive because they are associated with things many people would like to get. 22 Dr RH Mynhardt - UNISA

23. Improving incentives Negative economic incentives These punish people financially for making certain choices and behaving in a certain way. These incentives cost people money. Fines, fees, and tickets can be negative economic incentives. They are called negative because they are things you don't want to get. 23 Dr RH Mynhardt - UNISA

24. Improving incentives Economic incentives are financial advantages granted to companies or organizations that improve their working conditions. They include: – state subsidies, – grants and financing – incentives based on tax systems or tax structures – capital charges What can financial firms do? – Forums, pressure groups, lead by example, etc 24 Dr RH Mynhardt - UNISA

25. Preventing corruption Corruption and bribery thrive on systemic weaknesses An essential element of corporate social responsibility is honest and transparent trading. Bribery and corruption create a disincentive to trade as well as uneven trading conditions that can damage economic systems and the individuals within them. 25 Dr RH Mynhardt - UNISA

26. Preventing corruption Integrity and competence of officials both company and public level – Remuneration of officials – Regulations concerning gifts and hospitality – Conflict of interest – Guidance and training on ethical conduct and risks of corruption – Enforcement of codes of conduct 26 Dr RH Mynhardt - UNISA

27. Preventing corruption Management system – Prevention of undue influence – Rotation of officials – Auditing procedures and institutions – Increasing administration’s accountability through surveys Transparent regulatory and supervisory system – Discretion and fuzziness in statutes regulating private economic activities are particularly problematic. – Fostering ethical business 27 Dr RH Mynhardt - UNISA

28. Encouraging disclosure Rules and procedures – Self imposed rules and procedures – Industry imposed rules and procedures – Government imposed rules and procedures Incentives – Self imposed rules and procedures – Industry imposed rules and procedures – Government imposed rules and procedures 28 Dr RH Mynhardt - UNISA

29. Case study – The conclusion 29 Dr RH Mynhardt - UNISA

30. CASE STUDY - Conclusion Clearing house for derivatives introduced “Volatility skew” for daily margins All market participants warned well in advance of the changes coming. Dealer took no action Daily margin call resulted in cash shortage for the bank Result that bank had liquidity shortage Regulator was summoned on the specific day Regulator arranged life-buoy for bank – cash loan Bank had to close derivatives book – sold to market Eventually the bank its closed doors Shareholders lost their money Dealer was never prosecuted 30 Dr RH Mynhardt - UNISA

31. Thank You 31