Corporate Governance for Banks in Southeast Europe: Policy - IFC

A1. Responsibilities of the board 15
The principal tasks of the board are to appoint and dismiss management and to approve and oversee
bank strategy and monitor its implementation. More specific tasks (sometimes exercised within specialized
committees) involve setting the basic direction of, approving, and overseeing, among others, risk strategy
and risk tolerance; risk management and compliance;
Management versus Supervisory Boards
“We start to become confused when we get
regulatory requirements that refer to ‘board’
and are not clear about which board.”
Oliver Whittle, Albania
internal systems of control, including internal audit;
the corporate governance framework; and the
compensation system. 16 Though boards have many
tasks, the essential precept of corporate governance is
that the board carries overall and ultimate responsibility
for the bank’s performance. At the same time, it should
be clear that boards are not responsible for operations
and day-to-day management, which are the sole
responsibility of bank executives.
There are really two different types of boards in SEE countries: boards of domestic banks and boards of the
subsidiaries of international banking groups. Though the laws that govern their establishment and operation
are usually the same, these two types of boards differ in their functions and in the challenges they face. As a
consequence, the Policy Brief recommendations for domestic bank boards and for the boards of subsidiaries
of banking groups are different.
Many domestic SEE boards were established purely to comply with regulatory requirements; some could be
viewed as control bodies designed to monitor legal compliance rather than to add value to bank operations.
In some cases, domestic bank boards developed excessively close relationships with management, allowing
management to act with limited oversight. Similarly, the boards of foreign subsidiaries were at times
established as formalities. Meetings were infrequent, only in response to law or regulation, or their focus was
on implementing decisions from the home office.
Additionally, some subsidiary boards have little understanding of the local environment, because board
members are executives flown in from the home office. At times, their contact with and understanding of the
region is limited. These individuals can control the local
subsidiary but may not understand the local culture or
the local business environment. The particular situation
of subsidiary boards in group structures is discussed in
Section III.A.7, below.
For the boards of domestic banks, a better
understanding of the role and responsibilities of
the board is probably the most serious challenge to
better bank governance. Irrespective of whether it is
a domestic bank or a subsidiary of a group holding,
board members need to understand the basic fiduciary
duties that they owe to the bank. 17 The duties of care
and loyalty are primary.
Board Responsibility Toward Stakeholders
“I think corporate governance for banks is
not just dedicated to protecting the interests
of minority shareholders. However, there
is this interest of depositors as stakeholders,
which must be guaranteed by the law, by
regulators, but also within the board.”
Gian Piero Cigna, Italy
15 2010 BIS Principles, Section III.A, p. 7.
16 For a more detailed description of board responsibilities, consult the documentation of both the BIS and the OECD.
17 OECD, “Policy Brief on Corporate Governance of Banks in Asia”, (Asian Roundtable on Corporate Governance, June 2006).
www.oecd.org/dataoecd/48/55/37180641.pdf
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Policy Brief
Corporate Governance for Banks in Southeast Europe