Implementing Good Corporate Governance in Banks May 29, 2006 Karachi, Pakistan

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Implementing Good Corporate Governance in
BanksMay 29, 2006Karachi, Pakistan

• Dr. Nasser Saidi
• Executive Director
• Hawkamah ICG
• DIFC

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AGENDA

• Corporate Governance (CG) and economic
  development
• Why Bank CG?
• Key Players in Governance of Banking Sector
• Central Bank and Supervisors
• Banks and Financial Institutions
• Non-Bank Corporate Sector
• CG in Islamic Finance
• Complementary work to advance bank CG
• Hawkamah Institute for Corporate Governance

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Governance Financial Systems

• Consensus that sound financial systems involves
  countries adopting and implementing best practice
  standards in 12 key policy areas.
• Both public and private sector incentives are
  required to stimulate country adoption and
  compliance with these standards.
• Consensus that countries should give priority to
  adopting the international core standards

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The 12 Core Standards for Sound Financial Systems

• Macro Standards Agency
• 1. Data Dissemination IMF
• 2. Monetary Policy IMF
• 3. Fiscal Policy Transparency IMF
• Market and Infrastructure
• 4.Governance OECD/
  World Bank/BIS
• 5.Accounting IFAC
• 6.Auditing IFAD
• 7.Insolvency World Bank
• 8.Money Laundering OECD/FATF
• Financial System
• 9. Core Principles of
• Bank Supervision BIS
• 10. Core Principles of
• Insurance Supervision IAIS
• 11. Core Principles of
• Securities Supervision IOSCO
• 12. Systemically Important
• Payment System BIS

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Why The Core Standards?

• Deficiencies in these policy areas were a source
  of crises, and magnified, complicated and
  extended economic financial crises
• Countries complying with core standards can
  achieve
• 1. Transparency of economic risks
• 2. Economy characterized by well governed
  institutions and companies valued and audited
  according to agreed upon international
  conventions protecting contracts property
  rights
• 3. An ethical business environment
• 4. A financial system governed and regulated
  in a safe and sound manner, which serves the
  nation efficiently and sustains on going growth
  and economic development.

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CG integral element of sustainable economic
growth development
Economic growth prosperity
well performing institutions
PUBLIC Sector
PRIVATE Sector
Efficient regulatory regimes enforcement
participation
participation
enabling legal infrastructure
International Integration
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Empirical Evidence suggests country effects are
important for good CG

• CG frameworks and reform should address both
  macro and sector/micro issues
• Legal Origins matter
• Public Governance matters. In particular
• Control of corruption
• Regulatory quality
• Rule of law

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WB Governance Indicators Regulatory Quality
Source Kaufmann D., A. Kraay, and M. Mastruzzi
2005 Governance Matters IV Governance
Indicators for 1996-2004.
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WB Governance Indicators Rule of Law
Source Kaufmann D., A. Kraay, and M. Mastruzzi
2005 Governance Matters IV Governance
Indicators for 1996-2004.
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WB Governance Indicators Corruption
Source Kaufmann D., A. Kraay, and M. Mastruzzi
2005 Governance Matters IV Governance
Indicators for 1996-2004.
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Why Bank Corporate Governance Matters

• Lessons from Financial Crises
• Pressure from Analysts and Investors
• Renewed emphasis on environmental, social and
  governance issues
• Higher return on assets and significant market
  premiums
• Improved access to finance
• Better allocation of credit
• Deepening of financial markets
• Financial system stability

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Why Bank Corporate Governance Matters

• Banks dominant position in financial and payment
  systems
• Banks dominate both credit investment process
  for economy and majority of firms
• Government ownership and concentration of
  ownership in banking sector
• Strengthen prudential regulation and supervision
• Strengthen Transparency, Disclosure Reporting
• Face challenge of external competition
• Liberalization opening up is providing greater
  latitude to banks

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Key Players in the CG Framework for Banks
External Players
Internal Players
The Market
Regulators and Supervisors
Shareholders
The Public
Board of Directors
Legislative and Regulatory Framework
Depositors
Executive Management
Supervisory Authority
Reputational Agents Accountants Credit Rating
Agencies Financial Media Research Analysts
Auditors
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Focus Efforts to Address CG of the Banking System

• 1.Central Bank and Bank Supervisors
• 2.Banking sector and financial institutions
• 3. Non-bank corporate sector
• 4. Sharia compliant financial institutions

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1. CG of Central Banks and Bank Supervisors

• Develop a credible and transparent regulatory
  environment
• Address Central Bank governance to ensure its
  independence and accountability
• Regulatory environment must not be perceived to
  be under control or influence of any particular
  interest group
• Follow BIS principles for sound banking CG

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Designing a Consistent Governance Structure at
the Central Bank
Source Central Bank Governance A Survey of
Boards and Management. Tony Lybek and Joanne
Morris, IMF Working Paper WP/04/226,
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Implementing an Effective Governance Structure at
the Central Bank
Source Central Bank Governance A Survey of
Boards and Management. Tony Lybek and Joanne
Morris, IMF Working Paper WP/04/226,
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Role of Bank Supervisors

• Promote strong corporate governance
• Determine whether the bank has sound corporate
  governance policies and practices
• Hold the Board and senior management accountable
  for governance and internal control weaknesses
• Be attentive to warning signs of deterioration in
  management

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BIS Sound CG Principles for Banking Organizations

• Principle 1 Board members should be qualified for
  their positions, have a clear understanding of
  their role in corporate governance and be able to
  exercise sound judgment about the affairs of the
  bank.
• Principle 2 The board of directors should approve
  and oversee the banks strategic objectives and
  corporate values that are communicated throughout
  the banking organisation.
• Principle 3 The board of directors should set and
  enforce clear lines of responsibility and
  accountability throughout the organisation.
• Principle 4 The board should ensure that there is
  appropriate oversight by senior management
  consistent with board policy.
• Principle 5 The board and senior management
  should effectively utilise the work conducted by
  the internal audit function, external auditors,
  and internal control functions.
• Principle 6 The board should ensure that
  compensation policies and practices are
  consistent with the banks corporate culture,
  long-term objectives and strategy, and control
  environment.
• Principle 7 The bank should be governed in a
  transparent manner.
• Principle 8 The board and senior management
  should understand the banks operational
  structure, including where the bank operates in
  jurisdictions, or through structures, that impede
  transparency (i.e. know-your-structure).

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BIS Sound CG Principles for Banking
Organizations The Role of Supervisors

• Supervisors should provide guidance to banks on
  sound corporate governance and the pro-active
  practices that should be in place.
• Supervisors should consider corporate governance
  as one element of depositor protection.
• Supervisors should determine whether the bank has
  adopted and effectively implemented sound
  corporate governance policies and practices.
• Supervisors should assess the quality of banks
  audit and control functions.
• Supervisors should evaluate the effects of the
  banks group structure.
• Supervisors should bring to the board of
  directors and managements attention problems
  that they detect through their supervisory
  efforts.

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2. CG of Banking Sector and Financial
Institutions

• Understand and implement BIS standards
• Address institutional barriers from implementing
  BIS standards
• Be transparent and disclose
• Board and senior management structure
• Organisational structure
• Incentive structure of the bank
• Related party transactions
• Annual financial statements with supporting notes
  and schedules
• Develop codes of ethics and CG handbooks for
  banks, as guidance for directors and staff
• Jordan, Pakistan

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3. Banks have a role in extending CG to non-bank
corporate sector

• For CG to take root in countries with relatively
  undeveloped financial markets, banks can play a
  crucial role to advance good CG practices.
• Establish cascading effect of CG to banks
  corporate clients.
• Over 90 of firms in emerging markets are FOEs
  and are mostly dependent on banks, not capital
  markets, for source of capital.

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Implementing CG in Non-Bank Financial Sector

• Two step process
• Develop a mandatory bank CG Code
• Monitored by bank supervisors and reported on by
  board
• Reporting on compliance in bank annual report
• Central Bank issues a circular relating to CG
  code for non-bank corporate clients of the
  banking system
• Develop effective monitoring by banks (i.e.
  market based monitoring)
• Support monitoring by development of credit
  bureaus and credit rating agencies
• Create incentives (such as lower risk assessment
  for capital adequacy requirements) for
  CG-compliant corporate clients thereby also
  providing incentives for banks

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Reinforcing Institutions for a CG regime for bank
and non-bank corporate sector

• Central Credit Reporting Organizations
• Provide information on bank and non-bank credit
  (including supplier credit)
• Local CCROs can collect, organize, and analyze
  valuable material information in an efficient
  manner
• Companies Houses
• Act as a corporate registrar and reliable source
  for publicly available information about
  corporations
• Provide and disseminate financial reports and
  info on board management actions
• Credit Rating Agencies
• Risk assessments and credit ratings for companies
  and governments
• Important for capital market development, and
  implementation of Basel II by providing credit
  benchmarks for local markets

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PROCESS OF DEVELOPING BANK CORPORATE GOVERNANCE
CODE / GUIDELINES
Issuance of Bank Corporate Governance Code
(BCGC)
Working Group (WG) Central Bank (CB)
Bank Supervisor (BS)
- Discuss - Review - Comparative Study
Draft Bank Corporate Governance Code /
Guidelines (BCGC)
Approval of Central Bank Council
Technical Committee (TC) CB / BS Banks
/ Financial Institutions
- Discuss - Approve
Approval by Technical Committee (TC)
Issuance of BCGC by Technical Committee (TC)
Public Hearing / Website Posting
Workshop on BCGC
- Discuss Draft - Peer Review - Engage Internal
/ External Stakeholders
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4. Sharia Compliant Financial Institutions

• Islamic Financial Services Board developed seven
  guiding principles, divided into four parts, on
  CG for institutions offering only Islamic
  financial services (IIFS).
• Complements current corporate governance
  principles issued by OECD, BCBS and other
  international standard setting bodies.
• Recognizes that specific CG practices will vary
  in scope and content
• Prudential regulations covering aspects of
  capital adequacy, risk management, investor
  protection, transparency and market discipline,
  accounting practices will have CG dimension on
  structure and business practice. Focus is on
  holistic compliance of regulations.

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Islamic Financial InstitutionsGuiding
Principles (DRAFT)

• General Governance Approach of IIFS
• Establish comprehensive governance policy
  framework
• Reporting of financial and non-financial
  information meets international standards
• Rights of investment account holders (IAHs)
• Recognizes IAHs rights to monitor performance of
  investments
• IIFS shall adopt sound investment strategy
• Compliance with Islamic Shariah rules and
  principles
• Put in place an appropriate mechanism for
  obtaining Shariah rulings, application of fatwa
  and monitoring of Shariah compliance
• IIFS shall comply with Shariah rules and
  principles
• Transparency of financial reporting
• IIFS shall make adequate and timely disclosure to
  the IAH and the public on investment accounts
  that they manage

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Complementary Work Needed to Advance CG

• Engage wide participation from NGOs, chambers of
  commerce, media, business associations,
  government
• Develop necessary institutions and build human
  capacity in major areas (accountants, regulators,
  bankers, company directors)
• Design an effective regulatory system, but also
  create the conditions that make such a system
  credible.
• In the end, corporate governance is about
  establishing a climate of trust and confidence.

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Bank IT Corporate Governance

• IT CG
• Public dimension enabling framework for Digital
  economies societies. E-Government imperative
• Private dimension
• IT governance is the responsibility of the board
  of directors and executive management. It is an
  integral part of enterprise governance and
  consists of the leadership and organisational
  structures and processes that ensure that the
  organisations IT sustains and extends the
  organisations strategies and objectives.
• IT governance is concerned about two
  responsibilities
• IT must deliver value and enable the business
• IT-related risks must be mitigated.

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Hawkamah Institute for Corporate Governance

• First Institute of its kind in the region
• An autonomous, international association, hosted
  by the Dubai International Financial Centre
  (DIFC), and serving the MENA countries, Central
  Asia and beyond
• Premises in DIFC to be ready by October 2006 to
  host Hawkamah ICG and Hawkamah Institute of
  Directors (HIoD) as well as academic institutions
• Financially self-sustaining organisation with
  income from memberships, consultation, training,
  in addition to grants sponsorship

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Mission and Vision

• Bridge the CG gap
• Assist the countries and companies of the region
  in developing sound and globally well integrated
  CG frameworks
• Coordinate and sequence the designing, and
  implementation of CG reforms
• Monitor the outcomes of CG policies at the public
  and private sector level.
• Hawkamah-ICG will serve as a platform for
  regional co-operation, based on a concrete agenda
  for measurable and time-bound action, aiming to
  raise awareness of national, regional and global
  initiatives and build a coalition for reform,
  Joint Declaration OECD-UAE, 2005.

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Hawkamah Institute for Corporate Governance

• Strengthen institutional and capacity building by
  setting up a regional Institute of Directors.
• Source of CG technical assistance, monitoring,
  analysis, research, consultation and reform.
• Foster communication and policy dialogue on CG
• Develop home-grown CG frameworks working with
  national task forces
• Natural bridge and intermediary for institutions
  promoting CG in the region

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Strategy Programmes
Focal Point 1
Focal Point 2
Focal Point 3
Focal Point 4
Knowledge Exchange Platform
Technical Assistance Analysis Research
Communication Policy Dialogue
Institution Capacity Building
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Programmes Activities
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Targeted Sectors

1. Listed Companies, Capital Markets Regulatory
   Authorities
2. Banks, Financial Institutions, Central Banks
   Supervisory Authorities
3. Non-listed companies Family-Owned Enterprises
   (FOEs) Small and Medium Enterprises (SMEs)
4. Public Sector State-Owned Enterprises (SOEs)
5. Media Academia Raising Awareness, Building
   Capacity conducting research on CG

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Policy Level Consultancy Technical Assistance
Services
Services Government Ministries Agencies Central Banks Regulatory Agencies Banks Financial Institutions Listed Companies Family Owned Enterprises State Owned Enterprises Media
National Assessment of current corporate governance practices.  v v v v v v v
Identification of key corporate governance issues relevant to the country benchmarked against international best practices such as BIS principles  v v v v v v v
Assistance in development and follow- through of corporate governance task force and agenda development.  v v v v v v v
Workshops, seminars, outreach to various CG stakeholders investors, auditors, lawyers, accountants, etc. v v v v v v v
Incorporation of national corporate governance task force into a broader regional initiative. v v v v v v v
Advice and development of public awareness campaigns. v v v v
Development of Central Credit Reporting organization Companies House, Credit Rating Agencies. v v v  
Development / implementation of appropriate corporate governance regulatory regime.  v v v  
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Firm Level Consultancy Technical Assistance
Services
Services Government Ministries Agencies Central Banks Regulatory Agencies Banks Financial Institutions Listed Companies Family Owned Enterprises State Owned Enterprises Media
Development of codes of good corporate governance, codes of ethics. v v v v v v v
Facilitate a peer review of corporate governance codes v v v v v v
Firm level assessments (and re- assessments) on corporate governance practices. v v v v  
Board level seminars and workshops on corporate governance strategies in various emerging markets.  v v v v  
Development and implementation of action plan to incorporate good corporate governance practices in company operations. v v v v  
Firm level assistance, strategy development and implementation to address firms core corporate governance challenges in order to attract more investments (e.g. IPO, privatization, etc.) v v v v  
Training program for frontline managers on implementing corporate governance programs. v v  v v
Director Training Program   v v v v  
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Organisational Structure

• Structure
• Board,
• Executive,
• Investment advisory group,
• Scientific/expert advisory group

Board Committees Executive Committee Legal
Committee Membership Committee Activities
Committee Corporate Governance Review
Committee Funding Committee Research
Publications Committee Awards Committee Media
and Communications Committee
Membership Structure Corporate Educational
Institution Individual Academic/Research
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Hawkamah Bank CG Plan

• Develop and assist in implementing bank corporate
  governance codes and principles
• Assist in implementing BIS Sound CG Principles
• Provide consultation, technical assistance and
  advisory services for Central Banks Bank
  Supervisors
• Organize seminars, workshops, forums, and
  conferences
• Conduct bank corporate governance surveys
  policy-oriented research
• Bank CG capacity building and awareness
• Director training program on bank CG
• Conduct individual bank CG assessments

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Hawkamah Institute of Directors

• Open to private and public sector companies,
  entrepreneurs of start-up companies, and people
  responsible for the strategic direction of a
  business organization.
• Services offered include
• Training and certification program
• Executive coaching
• Workshops, seminars and conferences
• Financial planning and consultancy services
• Affinity programs such as personal loans,
  liability insurance coverage, etc.
• Access to members only lounges and facilities

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Strategic Partners

• Hawkamah is partnering with
• OECD
• WB-IFC
• WB Global Corporate Governance Forum
• Union of Arab Banks
• Center for International Private Enterprise
• DSG, IMD, YAL
• Central Banks, Bank Supervisory Authorities
  Bank Associations
• Capital Market Authorities, Stock Exchanges,
  Market Professional Associations SROs
• International Regional organizations
• Countries participating in the MENA-OECD
  Investment Program
• CG centers, universities

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Role of Strategic Partners

• Provide technical assistance and advisory
  services related to institutional and human
  resource capacity building in corporate sector
  reform and governance
• Establish sustained dialogue with regional and
  international organizations specialized in
  corporate governance
• Provide funding for various Corporate Governance
  Programmes and Projects
• Organize seminars, workshops, forums, and
  conferences dedicated to issues of corporate
  governance in the region and the world
• Conduct research and surveys on corporate
  governance in the region and means of enhancement

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• Hawkamah
• BUILDING INSTITUTIONS
• FOR THE REGION
• www.hawkamah.org
• Hawkamah Institute for Corporate Governance
• DIFC, The Gate Level 14
• T 9714-362-2222 F 9714-362-3333
• E info_at_hawkamah.org