Corporate Governance for Banks in Southeast Europe: Policy - IFC

The introduction of independent board members on SEE boards has met with significant challenges (see
Chart 2). Though regulators and supporters of good governance have promoted greater independence, the
value and effectiveness of independence is widely questioned. Among domestically owned banks, skepticism
exists principally because SEE banks tend to be closely held and run by owners, making the classic governance
problem of information asymmetries between managers and owners less acute.
Independence
“Director independence is almost nonexistent.”
Belgrade Conference 2009
“Formal independence alone does not do
the trick.”
Christian Strenger, Germany
Furthermore, independence is often a matter of form
over substance. Independent board members are
often former ministers or lobbyists, or they represent
political bodies, rather than being professionals who
have an independent view on the activities of the bank.
On paper, such board members may appear to fit
definitions of independence, but a closer examination
of their backgrounds usually shows that they do not
actually contribute to the goals of independence.
Another challenge to independence is the level of
board-member remuneration. When board members
receive too much of their remuneration from a
particular board, they are less likely to stand up to management. Even remuneration that appears modest
in the eyes of foreigners can be sufficient to influence a local board member’s objectivity. Many SEE board
members will receive board fees that exceed their regular monthly salary and will depend on those fees and
other benefits that come with board membership.
Ultimately, a prerequisite for effective independent board members is owners and chairpersons who are
open to constructive criticism and debate. To the extent that board leadership is not willing to embrace open
dialogue, the value of independent board members cannot be fully tapped. Such openness may be a tall
order. Nevertheless, a strong argument can be made in favor of some level of independence on bank boards,
even though independence may be uncomfortable for some.
Another argument for independent board members is that independence helps monitor the interests of
stakeholders. Even though stakeholder interests are typically guaranteed by regulation and law, best practice
suggests that monitoring stakeholder interests is also a function of the board. 24 Having a minimum number
of independent board members may help banks be more attuned to the needs of depositors and the local
community, and it could have an important reputational effect. Requirements for independence in SEE are
shown in Background Box 1.
24 See OECD Principles of Corporate Governance. “It [the board] should take into account the interests of stakeholders.”
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Policy Brief
Corporate Governance for Banks in Southeast Europe