Corporate Governance for Banks in Southeast Europe: Policy - IFC

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The value of independence: The value of an independent view of bank affairs needs to be bettercommunicated. Independent board members bring fresh ideas and increase objectivity. Some level ofindependence will benefit independence-minded owners of closely held banks. Independent board memberscan also demonstrate commitment to depositors and other stakeholders and help instill trust.Qualifications of independent board members: Independent board members need to bring needed skillsto the bank. If independent board members are to sit on board committees, they should be required to havespecific expertise and background to effectively fulfill their responsibilities. Job descriptions for independentboard members would help define the required background.Definitions of independence: Better and more simple definitions of independence are required. Currentdefinitions are long checklists of negative characteristics that disqualify a board member from being labeledas independent. Checklists are often popular with supervisors, because they are simple to use. Althoughchecklists ensure consideration of a certain number of key factors, they are poor at flushing out importantqualitative factors. Definitions should describe the qualities that are needed and not just those that are to beavoided. An overly narrow and negative definition of independence can result not only in the selection ofpoor board members but also in the loss of valuable talent.The Basel Committee provides a simple working definition of independence: “The key characteristic ofindependence is the ability to exercise objective, independent judgment after fair consideration of all relevantinformation and views without undue influence from executives or from inappropriate external parties orinterests.” Furthermore, the Basel Committee task force for the new corporate governance principles hasreduced emphasis on prescribing independence for individual independent board members and focusedmore on ensuring that the collective board is objective, qualified, and so on, thus allowing a good mix ofexperience as well as inclusion of individuals that may not meet the letter of the independence definition.Letting the markets decide on independence: Competitive pressures should be allowed to createdemand for independence. However, sometimes board members may be threatened by or afraid of change.So a minimum of independent board members may need to be legislated to get the idea started. The numberof independent board members should be disclosed to allow the public to assess the potential risks associatedwith an absence of independence.Independence on boards of subsidiaries: It is not desirable to prevent owners of wholly owned foreignsubsidiaries from determining the specific composition of their supervisory boards, though some levelof independence on the boards of foreign subsidiaries is considered to be beneficial. The committees ofsubsidiary boards, in particular the audit committee, could benefit from the presence of independent boardmembers. Consideration should be given to mandating a minimum level of independent board members forsubsidiary boards. This may be particularly important if the foreign subsidiary is among the top banks withinthe country.22Policy BriefCorporate Governance for Banks in Southeast Europe
A5. Role of the chair 29The chair of the board plays a crucial role in thegovernance of the bank. A good chairperson can bringout the talents of board members and provide theleadership and context necessary for board membersto contribute. A bad chairperson can stifle debate andhamper the board in achieving its objectives. One ofthe most important responsibilities of the chair is to setthe board agenda and ensure that important decisionsare subject to proper discussion and examination.The Need for Strong Board Leadership“If push comes to shove, and you askedme to choose between financial industryexpertise and leadership skills, I wouldsay go with leadership skills.”Catherine Lawton, United KingdomMore specifically, the chair’s responsibilities are to ensure that 1) the board receives accurate, timely, and clearinformation from management to enable the board to make sound decisions; 2) sufficient time is allowedfor discussion of complex or contentious issues; 3) constructive debate and criticism flourish; 4) effectivecommunication with board committees occurs; 5) induction and other training opportunities exist; 6) theperformance of the board is evaluated at least once a year; and 7) plans are made for strengthening theboard and bank governance.SEE chairpersons may not fully appreciate some of these general and specific responsibilities that contributeto the sound governance of the bank. They tend, understandably, to be more focused on performanceissues. However, governance ultimately influences bank performance by affecting the quality of decisionmaking at the board level. More progressive and forward-looking board leadership is a key to improving bankgovernance. The need for leadership may be particularly important in boards of subsidiaries of foreign groups,where the work may focus narrowly on implementing directions from the home office.Best practice increasingly suggests that the roles of chief executive officer and chairperson be separatedor that other means be found to provide an appropriate counterbalance to the powers of the executive. Incountries with two-tier boards, the roles should be separate by definition, since executives should not sit onsupervisory boards. In countries where single-tier boards exist, there is continued discussion on whether theroles of chairperson and chief executive officer should be separated.The argument in favor of combining the two is that it provides a better understanding of the operationalissues at board level, fewer decision-making hurdles, better integration of strategy and tactics, and clearerdirection. The arguments against are that it is hard for other board members to challenge a powerful chiefexecutive officer who is also chairperson, independent board members can be intimidated and neutralized,and the evaluation of board and executive performance becomes biased. In the end, the argument for isbased on the notion that there is an irreconcilable conflict between the roles of monitor and executor.In SEE, the chair of foreign subsidiaries are usually executives from the home office of the bank. So, in effect,there is a separation of the roles of chairperson and chief executive officer among the vast majority of banks,though such separation does not automatically guarantee sufficient control of the executive. Among locallyowned banks, the chair is often the major shareholder or the major shareholder’s representative, and theroles of chair and chief executive officer may be combined.29 2010 BIS Principles, Section III.A, p. 12.Corporate Governance for Banks in Southeast Europe Policy Brief 23
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Page 61 and 62: INTERNATIONAL EXPERTSPeter Dey, Cha
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Bulgaria19.1% Others16.3% Unicredit
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Romania19% BCR (Erste)13.1% BRD (So
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Corporate Governance for Banks in Southeast Europe: Policy - IFC

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