Corporate Governance for Banks in Southeast Europe: Policy - IFC

The value of independence: The value of an independent view of bank affairs needs to be better
communicated. Independent board members bring fresh ideas and increase objectivity. Some level of
independence will benefit independence-minded owners of closely held banks. Independent board members
can also demonstrate commitment to depositors and other stakeholders and help instill trust.
Qualifications of independent board members: Independent board members need to bring needed skills
to the bank. If independent board members are to sit on board committees, they should be required to have
specific expertise and background to effectively fulfill their responsibilities. Job descriptions for independent
board members would help define the required background.
Definitions of independence: Better and more simple definitions of independence are required. Current
definitions are long checklists of negative characteristics that disqualify a board member from being labeled
as independent. Checklists are often popular with supervisors, because they are simple to use. Although
checklists ensure consideration of a certain number of key factors, they are poor at flushing out important
qualitative factors. Definitions should describe the qualities that are needed and not just those that are to be
avoided. An overly narrow and negative definition of independence can result not only in the selection of
poor board members but also in the loss of valuable talent.
The Basel Committee provides a simple working definition of independence: “The key characteristic of
independence is the ability to exercise objective, independent judgment after fair consideration of all relevant
information and views without undue influence from executives or from inappropriate external parties or
interests.” Furthermore, the Basel Committee task force for the new corporate governance principles has
reduced emphasis on prescribing independence for individual independent board members and focused
more on ensuring that the collective board is objective, qualified, and so on, thus allowing a good mix of
experience as well as inclusion of individuals that may not meet the letter of the independence definition.
Letting the markets decide on independence: Competitive pressures should be allowed to create
demand for independence. However, sometimes board members may be threatened by or afraid of change.
So a minimum of independent board members may need to be legislated to get the idea started. The number
of independent board members should be disclosed to allow the public to assess the potential risks associated
with an absence of independence.
Independence on boards of subsidiaries: It is not desirable to prevent owners of wholly owned foreign
subsidiaries from determining the specific composition of their supervisory boards, though some level
of independence on the boards of foreign subsidiaries is considered to be beneficial. The committees of
subsidiary boards, in particular the audit committee, could benefit from the presence of independent board
members. Consideration should be given to mandating a minimum level of independent board members for
subsidiary boards. This may be particularly important if the foreign subsidiary is among the top banks within
the country.
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Policy Brief
Corporate Governance for Banks in Southeast Europe