Corporate Governance for Banks in Southeast Europe: Policy - IFC

Briefing of the board: Audit committees should not become gatekeepers. It is good to have the internal
auditor periodically brief the full board to ensure good communication and not to cloister the internal auditor
within the confines of the audit committee. Also, if the audit committees are receiving briefings from the
risk managers and compliance people, they should also periodically brief the full board. In any event, the full
board should be discussing risk and periodically hear from the risk manager, and the risk manager should
have fluid access to the board.
Assessment of statutory audit bodies or “audit councils”: In SEE, it is important to distinguish between
statutory audit bodies required by company law, or so-called audit councils, and an audit committee of the
board. The statutory body typically has a different role and is not a substitute for a properly constituted board
committee. In the majority of countries in SEE, audit councils can be made up of outsiders, which creates
problems with confidentiality and accountability. At a minimum, the effectiveness of such structures should
be assessed.
Qualifications and independence: Board committees tend to benefit greatly from specific skills and a
reasonable level of independence. A majority of independent members and of members with specific skills
is widely considered a minimum. SEE banks should seek to staff board committees with experienced and
independent individuals as needed.
A7. Group structures 37
Group structures are very important in the SEE context,
given that the vast majority of banking activity is
conducted by subsidiaries of foreign banking groups.
In most cases, parent banks come from outside
the region. Though, in a few cases, locally owned
banks are parents of regional groups, as with the
Komercijalna Banka ad Beograd. Although the large
presence of international banking groups has brought
improvements in banking and corporate governance
practices, the very high levels of foreign ownership have
also raised concerns.
A local subsidiary of a foreign bank may not be a
significant operation from a group perspective, yet
a foreign subsidiary in SEE can easily have a systemic
impact in a small country. As was famously described
by Mervyn King, governor of the Bank of England,
“Global banks are global in life, but national in death.”
In other words, when things go wrong, it is ultimately
the local entity that suffers the consequences and, to a
much lesser extent, the group. By extension, it is local
stakeholders and the local economy that will suffer the
costs of a subsidiary bank failure.
Subsidiary Boards
“There is no way…parents are going to
want the subsidiary board to come in on
issues of strategy and risk. But that does not
mean that directors can…abrogate their
responsibilities. They have…responsibilities
but their position is extraordinarily difficult.”
John Plender, United Kingdom
“Of course, looked at on a group basis, you
would say, ‘We are responsible as a group.
Here is the brand. We will look after you,’
but when the balloon goes up, [and] the
local regulator…has to sort this mess out…
every legal argument is likely to be raised
that places the responsibility with that local
subsidiary, to the detriment of the public
and the depositors in that host country.”
Roger McCormick, United Kingdom
37 2010 BIS Principles, Section III.A, pp. 15–16.
Corporate Governance for Banks in Southeast Europe Policy Brief 29