Corporate Governance for Banks in Southeast Europe: Policy - IFC

Tests for integrity are needed. However, probity tests have
their limitations, principally because they work through a
process of exclusion based on a series of negative criteria.
They do not establish what is needed or test for other
important behavioral characteristics of board members.
Behavioral characteristics include, for example, capacity
for leadership, ability to work on a team, and ability to
receive and provide constructive criticism.
Behavioral Issues and Group Dynamics
“You find that foreigners talk too much and
the locals do not talk. That creates tension.
It does not just have a neutral effect; it is bad
dynamics on the board.”
Dragica Pilipovic Chaffey, Serbia
In SEE, few banks have a clear notion of what skills are required on the board or have a formal job description
for the needed board member. Nor do they publish such job descriptions or disclose why board members
have been selected for their posts.
Independence
Best-practice boards have the capacity to make objective and unbiased economic decisions. Objective and
unbiased judgment is also necessary to protect the bank and its shareholders from the possible negative
effects of conflicts of interest. The way boards typically achieve these goals is by having independent board
members. Typically, there are three classifications of board members: 1) executive, 2) nonexecutive, and 3)
independent. 23 A sufficient number of nonexecutive and independent board members is the way to achieve
considered and objective decision making.
Independence and the capacity for independent judgment are particularly important on the audit,
remuneration, and nominations committees of the board, because these three committees are tasked with
overseeing issues where the potential for a conflict of interest is particularly acute. Best practice usually
suggests that audit and remuneration committees be staffed fully by independent board members, and
nominations committees be staffed in majority by independent board members. (A further discussion of
board committees is found in Section III.A.6, below.)
Chart 2: Independence of Boards in SEE Banks
What percentage of your board is independent according to applicable legislation, banking
regulation, and/or governance codes?
no independent directors
less than 30%
30% to 50%
more than 50%
0 5 10 15 20 25 30 35 40
Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011). Question asked to regulators in the region.
23 Definitions of independence vary in SEE legislation (see Background Box 1, below). According to international best practice,
nonexecutive board members may or may not be independent. Executives are never considered independent.
Corporate Governance for Banks in Southeast Europe Policy Brief 17