Corporate Governance for Banks in Southeast Europe: Policy - IFC

Furthermore, the fundamental responsibility for oversight of the audit, the internal and external auditors, and,
more generally, the bank’s reporting and control systems, lies with the board and cannot be delegated to
an outside body that, ultimately, has limited or no accountability to owners. Finally, the findings of an audit
council can, at best, be endorsed by the board but can never be considered to be the board’s own position or
under the ultimate responsibility of the board.
Since audit councils differ so substantially from audit committees, some of the recommendations that
emanate from best practice that are typically addressed to audit committees (such as the presence of a certain
percentage of independent members, or the responsibility for overseeing the independent audit, or ensuring
that systems of control are in place) might not be relevant. It is, in fact, difficult to see how an outside body
can effectively carry out the larger expectations of an audit committee and be held (along with the board)
truly accountable for bank performance.
Other issues that have been reported about domestic bank audit committees is that they may not adequately
brief the full board. Some cases have been reported of committee chair using the audit committee to control
information flows and pursue their own interests. In other instances, representatives of larger shareholders
used audit committees as a type of executive committee where most strategic decisions were made.
The reporting burdens of audit committees are also a concern. In some countries, boards have a monthly
reporting obligation to supervisors. Since the full board cannot typically meet on a monthly basis, the
responsibility for reporting is assigned to the audit committee. This increases the work load of the committee,
shifts its focus toward being a compliance tool, and distracts the audit committee from its other tasks.
Few banks boards have remuneration committees, which are arguably of greatest importance next to the
audit committee because they establish performance standards for senior management and focus the
attention of management on what the board wants to achieve. Remuneration committees are also important,
because incentive plans that encouraged undue risk taking were found to be a contributor to the financial
crisis in the more developed banking markets.
Even fewer nomination committees exist. For foreign-owned banks, there is little need for a nomination
committee, because the parent decides who will sit on the board of the subsidiary. Similarly, for domestically
owned banks, these board committees are uncommon. Some of the reasons are that many domestic banks
are small, the stage of development of the board is such that it draws little benefit from a committee, and the
potential benefits of committees are not well-understood.
At times, there is not a clear understanding of the difference between board committees and operating
committees of the bank. So, for example, some banks cite asset-liability committees (ALCOs) as evidence
of proper board governance. The ALCO is an operating committee whose primary goal is to evaluate and
approve practices relating to risk due to imbalances in the capital structure of the bank. There may be similar
confusion about the risk committee.
It is important to recognize that operating committees are no substitute for proper oversight by the board or
board committees. It is precisely the excessive delegation of risk monitoring to executives that led to some of
the questionable risk practices at Lehman Brothers in the United States during the financial crisis. Similarly, it is
important that supervisory board members not be members of operating committees or become involved in
the operations of the bank (see Background Box 2).
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Policy Brief
Corporate Governance for Banks in Southeast Europe