IFC and Central Bank of the UAE Developing a National Reform Agenda For Bank Corporate Governance in

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IFC and Central Bank of the UAEDeveloping a
National Reform Agenda For Bank Corporate
Governance in the MENA Region

• The Role of the Board in Implementing
  Corporate Governance - from strategy and
  performance to risk and controls
• Professor R Bob Garratt

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Why Governance?

• Greek Origin - kubernetes the steersman and
  cybernetics the connectedness and feedback from
  control systems to the direction-givers
• appears in Middle English C13th from Old French
  gouvernance (Geoffrey Chaucer)
• 1984 Bob Trickers Corporate Governance published
• 1992 Adrian Cadburys Report for UK
  (post-Maxwell)
• 1994 and 2002 King Reviews in South Africa
• 2002 Sarbanes-Oxley Act in US
• 2003 UK Code of Corporate Governance
• is governance a fashion item or a step-change
  in the behaviour and performance of boards of
  directors?

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Globalisation and its consequences on
international capital flows means growing
pressure for international standards
in - Financial Reporting - Banking
Supervision - Commercial Law - Corporate
Governance
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International agencies such as OECD, World Bank,
IMF, European Union and CACG are advocating more
effective Corporate Governance. The dimensions
of the present international debate revolve
around Shareholder Focus -------
Stakeholder Focus Private Sector Focus -------
Public Sector Focus One Size Fits All
------- One Value Set Fits All
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Is Agency Theory Dying?

• As the notion of ownership changes
• will Corporate Governance regulation spread into
  private businesses government agencies,
  not-for-profits etc.?
• Will we see the rise of Stewardship Theory?
• and Stakeholder Theory?

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Issues of Owners and Competence

• A growing international distrust of boards of
• directors. And with a listed company shareholder
  annual
• churn of up to 90 in the UK and 60 in the US
  who
• are now the owners? Would they ever be able to
  use
• their voting rights? If not, does this undermine
  a bastion
• of shareholder democracy capitalism? If
  institutional
• investors are reluctant to vote, are fund
  managers
• competent enough to cope? Who assesses
• regularly the fund managers competence?
• And will de-listing by private equity companies
• challenge the whole basis of current Corporate
• Governance?

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So what is governance about?

• Encouraging Board and Director
• Induction, Review and Development

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My assumption for today

• board performance leading to added
• shareholder value is the missing aspect of
• aspect of current corporate governance.
• Shareholder Value is the economic value
• generated after taking into account the
  reasonable
• short-term demands of the owners, the cost of
• capital, and after ensuring the long-term health
  of
• the business.
• Sir Brian Pitman

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Its all a matter of Trust and Competence

• Trust concerns consistency of values and
• behaviours in an individual or an
• organisation. The key values are honesty
• and openness. As politicians and the public
• trust boards and directors less because of
• highly publicised cases of fraud and
• Incompetence they are an easy target for
• blame and a political move from civil to
  criminal
• law.

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Who will be the dominant 21st century power? In
terms of language

• English
• Mandarin (Putonghua)
• Hindi
• Spanish
• Arabic?
• Much depends on Chinas decision on
• their new Company Law.

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There is no Anglo-Saxon model

• Although UK and US law derive from a Common Law
  base there are significant differences
• US has the Federal/States power fight
• Dominance of Delaware courts
• Almost impossible for the owners to sack a US
  director of a listed company
• US uses a rules-based approach UK and
  Commonwealth use a comply or explain base.

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UN Definition of Corruption

• the abuse of public office for personal
• gain

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Why Have a Board?

• I start with the view that the final
  responsibility for the future of the company
  depends upon the board as a whole and, therefore,
  the direction in which the company is to be led
  is the unique responsibility of that board.
• The job of the board is all to do with creating
  momentum, movement, improvement and direction.
  If the board is not taking the company
  purposefully into the future, who is?
• John Harvey Jones

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Are Bankers Different?

• No
• But they think that they are
• However, there is a strong transactions/projects
  culture in many investment and retail banks which
  keeps such a short-term focus that the key notion
  of a directors long-term fiduciary duty is
  often lost

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Common wrong assumptions for directors to make

• That there is little legal or behavioural
  difference between being a director and a manager
• that there is no need for collegiality
  (equality) around a boardroom table the
  one-vote principle
• that there is no need for independent thought
• that you can be a representative of others
• that your primary loyalty is to the owners
• that you have limited personal liability
• that boards are essentially symbolic/powerless

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Corporate Governance

• concerns the appropriate board structures,
  processes and values
• to drive the enterprise forward to
• achieve the organisations Purpose whilst keeping
  it under prudent control

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The fundamental values of good governance
are - Accountability - Probity
(Honesty) - Transparency (Openness)
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The Key to Direction Giving is to Distinguish
between Managing and Direction-giving
Organising for Tomorrow

• Managing is about dealing, hands-on, with the
  immediate crisis designing, installing and
  maintaining prudent control systems
• Direction - giving is about showing the way ahead
  and leading

Both are necessary for healthy organisations but
they require very different attitudes, knowledge
and skills especially in approaches to thinking
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Consequences of Effective Corporate Governance

• International studies show that on
• average companies with acknowledged
• effective corporate governance command
• a 17 share price premium
• liability insurers are looking at offering
• discounts for rigorous board assessment
• and development post new Combined
• Code

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Implementing Corporate Governance starts with
Induction

• The Chairman as Board Architect and Developer
• The Companys Constitution
• The Duties and Rights of the Director
• The Roles and tasks of the Board
• The Annual review and Development Process for the
  Board and each Director

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Reserved Powers

• A statement of the boards reserved powers, in
  which the powers and responsibilities of the
  board are set out, can help companies to clarify
  the difference between direction and management.
  Such statements tend to be formulated for boards
  of larger companies, and provide a clear terms of
  reference for these boards, their directors, and
  the managers of the business.

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Stage of strategy development
Board authorities
Managerial authorities
Clarifying joint or unclearly assigned
authorities
Understand the external
environment/changes Main forum for debate and
discussion of vision, values, goals and
key issues Develop and agree vision,
values and culture Provide advice and support
to executives during the development of
the plan Comment on executives drafts
Check compliance accountabilities Agree
final structure of strategy
Undertake research to provide information
for the development of the strategy Embed
the learning organisation culture through
the organisation Provide feedback on
environmental scanning rapidly to the board
Who will write drafts of strategy and
implementation plans Who will agree the use of
consultants and advisors Who will control
the budget for strategy development
Developing Strategy

Ratifying the strategy
Approve strategy implementation and feedback
process Delegate to senior management/
executives
Present implementation plan to board
Develop implementation plan Allocate resources
to implementation
Who will disseminate the strategy Who will
complete the details of the strategy
Monitor overall progress of strategy
implementation Help executives in problem
solving and trouble shooting Communicating
with shareholders/stakeholders
Manage implementation process Measure
progress Manage resource committed Sign off
completed tasks Report frequently to the board
Who is responsible for speed and frequency
of the feedback
Monitoring implementation
Help identify potential partners Help
approach potential partners Negotiate detailed
agreements Manage partnerships and alliances
Developing partnerships and alliances
Identify and approach potential partners
Use board networks Communicate with existing
partners Approve formal partnerships and
alliances
Who will finalise partnership agreements

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Sarbanes-Oxley Act, US 2002

• Penalties for corporate fraud and prison terms up
  to 20 years for destroying or altering documents
  in federal investigations
• CEOs who certify false accounts face prison for
  up to 20 years and fines of up to 5million
• New 5 member board to oversee accounting
  profession with disciplinary and subpoena powers
• Restriction of consulting and non-audit services
  from accounting firms
• SEC will impose new rules on financial analysts
  to prevent conflicts of interest. Etc.
• But they have already a strong Fraud law!

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Abolish reliance on quarterly reporting

• Over-reliance on Quarterly Reporting is
• inherently dangerous. It assumes the
• possibility of ever-increasing performance
• In a complex and discontinuous world. It
• is based on an artificial model of
• uninterrupted growth.

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The UKs 2003 Combined Code of Corporate
Governance

• The 17 Main Principles
• 1. Every company should be headed by an effective
  board, which is collectively responsible for the
  success of the company
• 2. There should be a clear division of
  responsibilities at the head of the company
  between the running of the board and the
  executive responsibility for the running of the
  companys business. No one individual should
  have unfettered powers of decision.

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17 Main Principles continued - 2

• 3. The board should include a balance of
  executive and non-executive directors ( and in
  particular independent non-executive directors
  such that
• no individual or small group of individuals
  can
• dominate the boards decision taking.
• 4. There should be a formal, rigorous and
  transparent procedure for the appointment of new
  directors to the board.

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17 Main Principles continued - 3

• 5. The board should be supplied in a timely
  manner with information in a form and of a
  quality appropriate to enable it to discharge its
  duties. All directors should receive induction
  on joining the board and should regularly update
  their skills and knowledge .
• 6. The board should undertake a formal and
  rigorous annual evaluation of its own performance
  and that of its committees and individual
  directors.
• 7. All directors should be submitted for
  re-election at regular intervals, subject to
  continuing satisfactory performance. The board
  should ensure planned and progressive refreshing
  of the board.

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The Triple Bottom Line

• Annual, Externally Audited Accountability on
• Financial
• Physical Environmental
• Corporate (Social) Responsibility Issues
• Combined Added Value

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What Can Boards And Directors Do About This?

• Some Practical Frameworks

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Tasks of the Board

• Formulating Policy and Foresight
• Thinking Strategically
• Supervising Management
• Exercising Accountability to shareholders and
  stakeholders

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The Emotional Climate of Boards
The Representative Board
The Professional Board
High
Understanding
The Country Club Board
The Passive Board
Low
Low
High
Inclusion
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The Learning Organisation
External World
Policy
The Business Brain
Strategy
Internal World
Operations

• Acceptance that good and bad learning occurs
  continuously at all levels of the organisation
• Focus on systems for capturing learning fast
• Valuing of people and learning
• Discussability forgiveness provided one learns

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The Learning Organisation
Monitoring external environment

• Giving
• direction

Policy
Disruptions from the environment
THE BUSINESS BRAIN
Strategy
Control System
Performance
Operations
Deviations from plans
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The Learning Organisation
Monitoring external environment

• Giving
• direction

Organisational Effectiveness
Policy
Disruptions from the environment
THE BUSINESS BRAIN
Strategy
Control System
Organisational Efficiency
Performance
Operations
Deviations from plans
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For any organism to survive, its rate of
learning has to be equal to, or greater than, the
rate of change in its environment
The Learning Organisation

• L C

Source Reg Revans
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Asking Discerning Questions

• Directors are charged to think critically and
  independently and to ask discerning questions of
  proposals to them using their intelligent
  naivety of the daily operations

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PPESTT Analysis The Boards Homework

• Changes in the
• Political Environment
• Physical Environment
• Economic Environment
• Social Environment
• Technological Environment
• Trade Environment

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Keys to Understanding the External Environment

• Read newspapers and watch TV constructively
• get out more - you have two eyes, two ears and
  one mouth. These are the correct proportions for
  directors

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The Learning Board - Basic Framework
EXTERNAL
ACCOUNTABILITY
POLICY FORMULATION
BUSINESS BRAIN
BOARD CONFORMANCE
BOARD PERFORMANCE
SUPERVISING MANAGEMENT
STRATEGIC THINKING
INTERNAL
SHORT TERM
LONG TERM
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POLICY FORMULATIONStating PurposeCreating
Vision and ValuesDeveloping Corporate Climate
and CultureMonitoring the External Environment
C R Garratt 1992

• ACCOUNTABILITY
• To the Company
• To Owners
• To Regulators and Legislators
• To Stakeholders
• Ensuring Directorial Audits

EXTERNAL

• BUSINESS
• BRAIN

• Positioning in the changing markets
• Setting Corporate Direction
• Reviewing and Deciding KeyResources
• Deciding Implementation Processes
• Risk Assessment
• STRATEGIC THINKING

• Overseeing Management Performance
• Monitoring Budgetary Control
• Reviewing Key Business Results
• Assessing Organisational Capability
• SUPERVISING MANAGEMENT

SHORT TERM
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Typical Risks

• Reputation
• Financial
• Political
• Country
• Legislative/Regulatory
• Health and Safety
• Physical Environmental
• Human Rights
• Information Security
• Terrorism
• Business Continuity

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Four Risk Strategies

• Delete it
• Outsource it
• Share it
• Take it

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Mervyn Kings 8 key questions

• Is there any personal conflict for me regarding
  the issue before us? If so, declare it no matter
  how remote. Then, do I vote or abstain?
• Do I have all the facts to make a decision?
  Remember the Duties of Care, Skill and Diligence
• Is this a rational business decision based on
  facts?
• Is this decision in the best interests of the
  company?
• Is the communication to the stakeholders
  transparent?
• Is the company seen to be deciding in a socially
  acceptable way?
• Would the board be embarrassed if this decision
  appeared on the front page of a newspaper?
• Do I understand how this company makes money?
  What would kill it in the next few years?

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References

• The Fish Rots From The Head, Bob Garratt, Profile
  Books, London, 2003
• Thin On Top, Bob Garratt, Nicholas Brealey
  Publishing, London, 2003
• e-mail garratts_at_btconnect.com