Corporate Governance for Banks in Southeast Europe: Policy - IFC

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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). 26 Policy Brief Corporate Governance for Banks in Southeast Europe
Background Box 2: Board Committees in SEE banks Albania In Albania, banks are required to establish an audit committee consisting of three members with experience in accounting or auditing. They are appointed by the shareholders’ meeting and from outside the steering council (supervisory board). The audit committee is responsible for the supervision of the audit, accounting procedures, and internal controls of the bank. The steering council can appoint other committees composed of nonexecutive members of the council. Bosnia and Herzegovina In both entities of Bosnia and Herzegovina, banks’ supervisory boards must appoint an audit committee consisting of five members for a term of four years. Members may be reappointed. Audit committee members cannot be members of staff or members of the supervisory or management boards. 34 Bulgaria In Bulgaria, in line with Article 41 of the 8th EU Company Law Directive, the Law on Financial Independent Audit requires “public interest companies” (including banks) to establish an audit committee. Ordinance No. 4 on the Requirements for remuneration in Banks, adopted in 2010, requires banks to set up a remuneration committee. Croatia In Croatia, the Credit Institutions Act implicitly requires banks to have an audit committee, because the Act expressly provides for reporting duties by internal audit to the audit committee. The Croatian National Bank has the authority to order a credit institution’s supervisory board to appoint appropriate committees for specific oversight responsibilities. FYR Macedonia In FYR Macedonia, banks are required to establish an audit committee, to be appointed by the general meeting of shareholders. The majority of the committee’s members must be from the supervisory board, and the others should be “independent” outsiders. At least one of the members of the audit committee needs to be an auditor. All audit committee members need to have knowledge of accounting and auditing and be informed of the bank’s operations, its products and services, the risks the bank is exposed to, the internal control systems, and the risk management policies of the bank. The Corporate Governance Code of the Macedonian Stock Exchange further recommends that listed companies and banks consider the introduction of nomination and remuneration committees at the supervisory-board level. The Decision on the Basic Principles of Corporate Governance defines the role of the risk management committee and requires banks to have adequate remuneration policies and procedures and a remuneration committee. Montenegro In Montenegro, bank boards are required to appoint the members of the audit committee, made up of a majority of people not connected with the bank, who have experience in finance. Bank boards can also create risk management, nominations, or remuneration committees. 34 See Article 75, and following, of Republika Srpska’s Law on Banks and Article 32g, and following, of the Federations’ Law on Banks. Corporate Governance for Banks in Southeast Europe Policy Brief 27
Page 1 and 2: Corporate Governance for Banks in S
Page 3 and 4: Contents I. Introduction...........
Page 5 and 6: I. Introduction The stability of gl
Page 7 and 8: II. Overview of bank corporate gove
Page 9 and 10: framework for coordinating crisis m
Page 11 and 12: III. Sound corporate governance pri
Page 13 and 14: The duty of care requires that boar
Page 15 and 16: A3. Training 20 Finding board talen
Page 17 and 18: Tests for integrity are needed. How
Page 19 and 20: Background Box 1: Legal Requirement
Page 21 and 22: Capacity issues Finally, competent
Page 23 and 24: A5. Role of the chair 29 The chair
Page 25: Among committees, the audit committ
Page 29 and 30: Briefing of the board: Audit commit
Page 31 and 32: Bulgaria The Bulgarian banking sect
Page 33 and 34: Recommendation: Evaluations: Banks
Page 35 and 36: Effective systems of risk managemen
Page 37 and 38: strategy. When the executive body o
Page 39 and 40: circumstances, these findings shoul
Page 41 and 42: A significant concern is the large
Page 43 and 44: D. Disclosure and transparency 60 D
Page 45 and 46: Supervisors also expressed skeptici
Page 47 and 48: Background Box 5: Disclosure Requir
Page 49 and 50: Recommendations: Disclosure and tra
Page 51 and 52: These limitations are due to the ve
Page 53 and 54: examinations permit a systematic ev
Page 55 and 56: Recommendation: Remedial action: Su
Page 57 and 58: VI. Additional issues A. State owne
Page 59 and 60: VII. Annexes A. Southeast Europe Po
Page 61 and 62: INTERNATIONAL EXPERTS Peter Dey, Ch
Page 63 and 64: B. Important sources of guidance on
Page 65 and 66: C. Synopsis: BCBS Enhancing corpora
Page 67 and 68: Complex or opaque corporate structu
Page 69 and 70: oard. The supervisory board is resp
Page 71 and 72: Bulgaria 19.1% Others 16.3% Unicred
Page 73 and 74: Romania 19% BCR (Erste) 13.1% BRD (
Page 75: For information requests and genera

Corporate Governance for Banks in Southeast Europe: Policy - IFC

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