Corporate Governance for Banks in Southeast Europe: Policy - IFC

RomaniaIn Romania, Regulation No. 18/2009 requires the establishment of board-level audit committees responsiblefor supporting the board in “fulfilling its internal audit duties.” According to the regulation, “auditcommittees shall be comprised, in majority, of members of the bodies having supervisory functions thatare independent of management—under a unitary board structure—and have a firm understanding ofthe role of this committee in the internal audit function.” Directors’ independence is still a major issue inRomania, because the Companies Act (Law No. 31/1990, as revised) provides this requirement as optionaland not mandatory. To cover this gap, the Bucharest Stock Exchange Corporate Governance Code stronglyrecommends that: “An adequate number of non-executive directors shall be independent....” (Principle VII).SerbiaIn Serbia, banking regulation requires that at least one-third of members of the board of a bank shall beindependent of the bank. A person not holding direct or indirect ownership in the bank or in the bankinggroup is considered independent.Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011).Subsidiary boardsSince the banking sector in SEE is dominated by foreign banks (see Table 2, above, for levels of foreignownership), questions arise regarding the governance of cross-border groups and, in particular, requirementsfor independent board members in subsidiaries. Another important issue is the presence of subsidiary boardmembers with local experience.In practice, wholly owned foreign bank subsidiaries have boards that are dominated by insiders. Such boardsmay, for example, consist of seven people, five of whom are executives from the parent bank, with the localchairperson being the chief executive officer or deputy chief executive officer of the parent bank. In addition,there may be two nominally independent people, or external members of the board.In all jurisdictions in the region boards of subsidiaries are held to the same independence requirements astheir parents. Some parties argue that this is not appropriate.However, SEE subsidiary boards could stand to be strengthened. There is a view that both subsidiaryboards and subsidiary board committees (in particular, the audit committee) need to have some level ofindependence. Independence on subsidiary boards is expected to protect local stakeholders and enhance thegovernance function for the parent. 28 In addition, subsidiary boards are expected to benefit from the presenceof board members with local expertise.The costs of better governance always need to be considered in conjunction with the anticipated benefits. Toavoid excessive burdens, there could be a requirement for systemically important banks, to have independentboard members, independent audit committees, and local board members. (A further discussion of groupstructures is found in Section III.A.7, below.)28 In particular, the Basel Committee’s Principles for enhancing corporate governance (2010) states, “The board of a regulated bankingsubsidiary should retain and set its own corporate governance responsibilities, and should evaluate any group-level decisions or practicesto ensure that they do not put the regulated subsidiary in breach of applicable legal or regulatory provisions or prudential rules. Inorder to exercise its corporate governance responsibilities independently, the board of the subsidiary is expected to have an adequatenumber of qualified, independent non-executive board members, who devote sufficient time to the matters of the subsidiary.”20Policy BriefCorporate Governance for Banks in Southeast Europe