Corporate Governance for Banks in Southeast Europe: Policy - IFC

Romania
In Romania, Regulation No. 18/2009 requires the establishment of board-level audit committees responsible
for supporting the board in “fulfilling its internal audit duties.” According to the regulation, “audit
committees shall be comprised, in majority, of members of the bodies having supervisory functions that
are independent of management—under a unitary board structure—and have a firm understanding of
the role of this committee in the internal audit function.” Directors’ independence is still a major issue in
Romania, because the Companies Act (Law No. 31/1990, as revised) provides this requirement as optional
and not mandatory. To cover this gap, the Bucharest Stock Exchange Corporate Governance Code strongly
recommends that: “An adequate number of non-executive directors shall be independent....” (Principle VII).
Serbia
In Serbia, banking regulation requires that at least one-third of members of the board of a bank shall be
independent of the bank. A person not holding direct or indirect ownership in the bank or in the banking
group is considered independent.
Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011).
Subsidiary boards
Since the banking sector in SEE is dominated by foreign banks (see Table 2, above, for levels of foreign
ownership), questions arise regarding the governance of cross-border groups and, in particular, requirements
for independent board members in subsidiaries. Another important issue is the presence of subsidiary board
members with local experience.
In practice, wholly owned foreign bank subsidiaries have boards that are dominated by insiders. Such boards
may, for example, consist of seven people, five of whom are executives from the parent bank, with the local
chairperson being the chief executive officer or deputy chief executive officer of the parent bank. In addition,
there may be two nominally independent people, or external members of the board.
In all jurisdictions in the region boards of subsidiaries are held to the same independence requirements as
their parents. Some parties argue that this is not appropriate.
However, SEE subsidiary boards could stand to be strengthened. There is a view that both subsidiary
boards and subsidiary board committees (in particular, the audit committee) need to have some level of
independence. Independence on subsidiary boards is expected to protect local stakeholders and enhance the
governance function for the parent. 28 In addition, subsidiary boards are expected to benefit from the presence
of board members with local expertise.
The costs of better governance always need to be considered in conjunction with the anticipated benefits. To
avoid excessive burdens, there could be a requirement for systemically important banks, to have independent
board members, independent audit committees, and local board members. (A further discussion of group
structures is found in Section III.A.7, below.)
28 In particular, the Basel Committee’s Principles for enhancing corporate governance (2010) states, “The board of a regulated banking
subsidiary should retain and set its own corporate governance responsibilities, and should evaluate any group-level decisions or practices
to ensure that they do not put the regulated subsidiary in breach of applicable legal or regulatory provisions or prudential rules. In
order to exercise its corporate governance responsibilities independently, the board of the subsidiary is expected to have an adequate
number of qualified, independent non-executive board members, who devote sufficient time to the matters of the subsidiary.”
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Policy Brief
Corporate Governance for Banks in Southeast Europe