Corporate Governance for Banks in Southeast Europe: Policy - IFC

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A1. Responsibilities of the board 15The principal tasks of the board are to appoint and dismiss management and to approve and overseebank strategy and monitor its implementation. More specific tasks (sometimes exercised within specializedcommittees) involve setting the basic direction of, approving, and overseeing, among others, risk strategyand risk tolerance; risk management and compliance;Management versus Supervisory Boards“We start to become confused when we getregulatory requirements that refer to ‘board’and are not clear about which board.”Oliver Whittle, Albaniainternal systems of control, including internal audit;the corporate governance framework; and thecompensation system. 16 Though boards have manytasks, the essential precept of corporate governance isthat the board carries overall and ultimate responsibilityfor the bank’s performance. At the same time, it shouldbe clear that boards are not responsible for operationsand day-to-day management, which are the soleresponsibility of bank executives.There are really two different types of boards in SEE countries: boards of domestic banks and boards of thesubsidiaries of international banking groups. Though the laws that govern their establishment and operationare usually the same, these two types of boards differ in their functions and in the challenges they face. As aconsequence, the Policy Brief recommendations for domestic bank boards and for the boards of subsidiariesof banking groups are different.Many domestic SEE boards were established purely to comply with regulatory requirements; some could beviewed as control bodies designed to monitor legal compliance rather than to add value to bank operations.In some cases, domestic bank boards developed excessively close relationships with management, allowingmanagement to act with limited oversight. Similarly, the boards of foreign subsidiaries were at timesestablished as formalities. Meetings were infrequent, only in response to law or regulation, or their focus wason implementing decisions from the home office.Additionally, some subsidiary boards have little understanding of the local environment, because boardmembers are executives flown in from the home office. At times, their contact with and understanding of theregion is limited. These individuals can control the localsubsidiary but may not understand the local culture orthe local business environment. The particular situationof subsidiary boards in group structures is discussed inSection III.A.7, below.For the boards of domestic banks, a betterunderstanding of the role and responsibilities ofthe board is probably the most serious challenge tobetter bank governance. Irrespective of whether it isa domestic bank or a subsidiary of a group holding,board members need to understand the basic fiduciaryduties that they owe to the bank. 17 The duties of careand loyalty are primary.Board Responsibility Toward Stakeholders“I think corporate governance for banks isnot just dedicated to protecting the interestsof minority shareholders. However, thereis this interest of depositors as stakeholders,which must be guaranteed by the law, byregulators, but also within the board.”Gian Piero Cigna, Italy15 2010 BIS Principles, Section III.A, p. 7.16 For a more detailed description of board responsibilities, consult the documentation of both the BIS and the OECD.17 OECD, “Policy Brief on Corporate Governance of Banks in Asia”, (Asian Roundtable on Corporate Governance, June 2006).www.oecd.org/dataoecd/48/55/37180641.pdf12Policy BriefCorporate Governance for Banks in Southeast Europe
The duty of care requires that board members exercise reasonable care, prudence, and diligence in theiroversight of the bank. The practical implications of this duty are that board members are expected to satisfythemselves that decision-making structures and reporting and compliance systems are functioning properly,and that an external independent auditor is appointed and acts in an objective and independent way.On the other hand, the duty of loyalty requires an undivided and unselfish loyalty to the bank and demandsthat there be no conflict between the board member’s self-interest and his or her duty to the bank. Thepractical implication of the duty of loyalty is that board members are required to act in the interest of thebank and refuse any action, or to take part in any deliberation, in which they have a conflict of interest withthe bank. An implicit obligation of both duties is that board members are to maximize the long-term value ofthe bank for shareholders. 18Generally speaking, the fiduciary duties that require board members to act in the best interests of the bankimply that that they also take into account the interests of stakeholders, depositors in particular, and actresponsibly toward them. To do otherwise implies putting the bank at risk.Recommendations:Roles and responsibilities of the board: SEE boards should have a clear understanding of their role andexercise sound and objective judgment. The legal framework should make it clear that the board has overallresponsibility for the bank, including approving and overseeing the bank’s strategy, budget, risk appetite,and corporate governance. The role, responsibilities, and specific tasks of boards are well-documented ininternational best practice. Boards and supervisors need to be well-versed in international best practice.Oversight of management: To perform its role, the board should have the authority to select and, whennecessary, replace senior management. A clear line of accountability should exist between board andmanagement.Duties of board members: The duties of loyalty and care, as well as the specific roles and responsibilitiesof board members, should be clarified in (internal and external) rules and regulations and should be clearlycommunicated to board members and executives. The duties and obligations of supervisory board membersshould be covered by induction training, supported by development programs offered, for example, by institutesof directors, and should be made explicit in the employment contracts with the bank and set out in clear termsof reference.Personal responsibility of board members: Board members are responsible for overseeing the bank,including its compliance with the law. Board members must be aware that they may be personally liable ifthere is fraud or if they act negligently or in breach of trust. Insurance may protect board members against thefinancial consequences of such a finding.Guidance on board practices: Sufficient guidance on board practices should be available. Minimum standardsare typically set in law, while best practices are generally set in voluntary codes. Boards should inform themselvesand be aware of what is expected of them and what standards they are expected to comply with.Recommendations specific to boards of subsidiaries operating within group structures are found below inSection III.A.7.18 A number of papers discuss the fiduciary duties of directors towards depositors and equity-debtholders. In particular see:Jonathan R. Macey and Maureen O’Hara, “The Corporate Governance of Banks,” Federal Reserve Bank of New York, Economic Policy Review (April2003). http://www.newyorkfed.org/research/epr/03v09n1/0304mace.pdf.Bo Becker and Per Stromberg, “Fiduciary Duties and Equity-Debtholder Conflicts”, Harvard Business School (Working Paper 10-070 - November30,2011). www.hbs.edu/research/pdf/10-070.pdfOffice of the Comptroller of the Currency, “The Director’s Book”, US Department of The Treasury (October 2010). http://www.occ.gov/publications/publications-by-type/other-publications-reports/director.pdfCorporate Governance for Banks in Southeast Europe Policy Brief 13
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VII. AnnexesA. Southeast Europe Pol
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INTERNATIONAL EXPERTSPeter Dey, Cha
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B. Important sources of guidance on
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C. Synopsis: BCBS Enhancing corpora
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Complex or opaque corporate structu
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oard. The supervisory board is resp
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Bulgaria19.1% Others16.3% Unicredit
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Romania19% BCR (Erste)13.1% BRD (So
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For information requests and genera
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