The Importance of Good Corporate Governance for Banks David Carse Deputy Chief Executive Hong Kong M - PowerPoint PPT Presentation

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The Importance of Good Corporate Governance for Banks David Carse Deputy Chief Executive Hong Kong M

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Corporate governance is the system by which companies are directed and controlled. ... The process of establishing a cadre of truly independent directors in Hong Kong ... – PowerPoint PPT presentation

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Title: The Importance of Good Corporate Governance for Banks David Carse Deputy Chief Executive Hong Kong M


1
The Importance of Good Corporate Governance for
BanksDavid CarseDeputy Chief Executive Hong
Kong Monetary Authority 3 November 2000
2
The importance of corporate governance
  • Corporate governance is the system by which
    companies are directed and controlled.
  • Good corporate governance is a key element in
    improving economic efficiency.
  • Conversely, bad corporate governance,
    particularly in banks, can undermine economic and
    financial stability.
  • This was demonstrated by the Asian Crisis.

3
The role of bad corporate governance in the Asian
crisis
  • Weak corporate governance in Asian banks (and
    their customers) was one of the key factors in
    the Asian crisis
  • many banks were controlled by owner-managers and
    the board of directors played little role
  • banks were often parts of wider conglomerates and
    used to fund other parts of the group or the
    owners (connected lending)
  • banks were subject to political influence in
    their lending decisions
  • management was weak and lacked self-responsibility
  • growth was more important than return on capital
  • risk management was poor
  • lack of credit controls and skills
  • excessive risk concentrations in individual
    borrowers and sectors
  • excessive funding and currency mismatches

4
The situation in Hong Kong
  • Corporate governance of Hong Kong banks is
    relatively good by regional standards as has been
    shown by their ability to survive the Asian
    crisis intact.
  • However, the HKMA considers that there was a
    vacuum in leadership in a few local banks during
    the Asian crisis because the board of directors
    did not play an effective leadership role.
  • This may result in either inadequate supervision
    of management or the main shareholders becoming
    directly involved in the running of the business.
  • In either case, the board of directors is
    bypassed and checks and balances are lost.
  • To address these issues the HKMA issued a
    guideline on corporate governance in locally
    incorporated authorized institutions in May 2000.

5
Contents of the HKMA Guideline
  • Major responsibilities of the board
  • ensure competent management
  • approve objectives, strategies and business plans
  • ensure that the banks operations are conducted
    prudently and within the framework of laws and
    board policies
  • ensure that the banks affairs are conducted with
    a high degree of integrity
  • Legal obligations of directors
  • including liability for breaches of the Banking
    Ordinance
  • The use of auditors
  • including role of internal audit
  • Specific requirements

6
Specific Requirements
  • 1. The board should ensure that the bank
    establishes policies, procedures and controls to
    manage the various types of risk with which it is
    faced.
  • The HKMA has identified 8 types of risk for
    purposes of its supervision (i.e. credit,
    interest rate, market, liquidity, operational,
    reputation, legal and strategic risk).
  • The board should approve relevant policies to
    manage these risks while senior management should
    put them into effect.
  • It is important that the policies should not
    exist merely for forms sake (e.g. to satisfy the
    regulator), but should dictate how the bank is
    actually run in practice.

7
Specific Requirements
  • 2. The board should ensure that the bank fully
    understands the provisions of section 83 of the
    Hong Kong Banking Ordinance on connected lending
    and establishes a policy on such lending.
  • Section 83 of the Hong Kong Banking Ordinance
    limits the unsecured advances of banks to
    connected parties (e.g. directors and their
    relatives). A breach of section 83 is a serious
    offence.
  • The board is required to ensure that the bank
    fully understands its legal obligations and
    establishes a policy on connected lending
    according to the minimum standards specified in
    the Guideline.

8
Specific Requirements
  • 3. The board should ensure that it receives the
    management letter from the external auditor
    without undue delay, together with the comments
    of management.
  • The management letter should normally be received
    within 4 months from the financial year-end. The
    board should ask for managements explanation if
    prolonged delay is experienced.
  • The board and/or audit committee should ensure
    appropriate action is taken to address any
    weaknesses identified in the management letter.
  • A copy of the management letter should be given
    to the HKMA.

9
Specific Requirements
  • 4. The board should maintain appropriate checks
    and balances against the influence of management
    and/or shareholder controllers, in order to
    ensure that decisions are taken with the banks
    best interests in mind.
  • Independent non-executive directors help to
    provide the necessary checks and balances and
    bring in outside experience.
  • The board should have at least 3 independent
    directors to provide a sufficient pool of
    independent directors to sit on committees (in
    particular the audit committee) and cover
    absences.
  • In cases where the chairman is also the chief
    executive of a bank, more than 3 independent
    directors may be required to provide a strong
    independent element on the board.
  • Banks should notify the names of their
    independent directors to the HKMA. The HKMA may
    require additional independent directors to be
    appointed.

10
Specific Requirements
  • 5. The board should establish an audit committee
    with written terms of reference specifying its
    authorities and duties.
  • The audit committee serves as the boards eyes
    and ears in monitoring compliance with board
    policies, regulations etc. It also provides
    oversight of the internal and external auditors
    and assists in providing independent review of
    the effectiveness of internal control systems.
  • The above functions should be performed by
    non-executive (preferably independent) directors
    to avoid conflicts of interest and ensure
    impartiality.
  • The audit committee should therefore be made up
    of non-executive directors, the majority of whom
    should be independent.

11
Specific Requirements
  • 6. Board meetings of a bank should be held
    preferably on a monthly basis but in any event no
    less than once every quarter.
  • The board can only fulfil its responsibility if
    it meets frequently enough and receives
    sufficient information from management to enable
    it to monitor the banks financial position and
    performance.
  • Banks should keep full minutes of board meetings.
  • The HKMA will require banks to provide it with a
    record of the number of board meetings held each
    year.

12
Specific Requirements
  • 7. Individual directors should attend at least
    half of board meetings held in each financial
    year and all meetings where major issues are to
    be discussed.
  • While effectiveness of a director cannot be
    measured simply by attendance at board meetings,
    it is difficult for even the most competent
    individual to make a contribution if he/she does
    not turn up for meetings in the first place.
  • Participation of directors in board meetings can
    be facilitated by video or telephone
    conferencing.
  • The HKMA will monitor the attendance records of
    individual directors.

13
Specific Requirements
  • 8. The HKMA will meet the full board of directors
    of each bank every year.
  • The HKMAs intention is not to participate in
    board meetings but to strengthen communication
    between the HKMA and the banks at the highest
    level.
  • The meeting will enable the HKMA to convey first
    hand its views on the banks current financial
    position and quality of its risk management and
    internal controls and to communicate any major
    supervisory concerns.
  • The board will also have the opportunity to
    convey its views directly to the HKMA.

14
Questions raised on our Guideline
  • Is the HKMA interfering too much in the way in
    which banks choose to manage themselves?
  • Is too much burden being placed on the board, and
    on non-executive directors in particular, in
    terms of establishing policies and controls?
  • Should we draw a distinction between listed and
    non-listed banks?
  • Is it right to place more onerous requirements on
    banks compared with other companies, e.g. as
    regards the number of independent directors?
  • Where are truly independent directors going to be
    found?

15
The HKMA response
  • Promotion of good corporate governance falls
    clearly within the supervisory responsibilities
    of the HKMA.
  • Banks are different from other companies because
    of the nature of the risks they take on and
    because they are looking after other peoples
    money.
  • Corporate governance is therefore particularly
    important for banks, whether listed or
    non-listed.
  • Directors need to ensure that the risks in banks
    are properly managed, and under the Hong Kong
    Banking Ordinance they have a specific legal
    responsibility to do so.
  • This does not mean that the directors should
    themselves formulate policies for managing risk,
    but they should certainly approve such policies.

16
The problem of independent directors
  • We do acknowledge that it is not easy to find
    truly independent directors or those that are
    prepared to oppose dominant shareholders.
  • There is also the risk that quasi-independent
    directors will be used to give a false impression
    of good governance.
  • The process of establishing a cadre of truly
    independent directors in Hong Kong and elsewhere
    in Asia will take time.
  • Training courses for directors and organizations
    to promote the use of independent directors like
    the UK PRO NED can help, as can the use of
    mechanisms such as board nomination committees.

17
The need for transparency
  • Financial disclosure and accountability are also
    important aspects of good corporate governance.
  • The increased focus on shareholder value means
    that banks need to be more open about their
    financial performance and the nature and size of
    the risks they are running.
  • Depositors and other providers of funds
    (including minority shareholders) also need
    sufficient information to be able to tell good
    banks from bad.
  • The HKMA has therefore focussed in the last six
    years on encouraging banks to disclose more
    information in their annual and interim accounts,
    in particular on asset quality.

18
Conclusions
  • The Asian crisis has demonstrated the need for
    Asian banks to improve their corporate governance
    through such means as
  • giving greater prominence to the role of the
    board and outside directors in particular
  • introduction of professional management
  • greater transparency
  • effective internal and external audit
  • Globalization of financial services is in any
    case driving banks in this direction
  • investors and fund providers will increasingly
    expect minimum standards of good governance
  • foreign banks operating in Asian markets will
    provide a role model
  • Western and Asian models of governance will
    converge
  • The Guideline issued by the HKMA is consistent
    with this global trend and is intended to keep
    Hong Kong banks at the forefront of good
    governance.
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