Due to the banking crisis of 2008, the question of how banks can protect themselves against future failures has attracted the attention of regulators, banking experts and the business media. An important area is the need for greater transparency, mainly with regard to remuneration in the banking sector, and how bank boards need to improve their corporate governance practices to reduce the chances of a repeat of the credit crisis.
The recent publication of the draft Code of Corporate Governance for banks by the Central Bank of Egypt marks an important step in this process. Banks, along with their respective boards, must pay close attention to corporate governance guidelines.
There are a number of good governance tips and recommendations available to the board of banks. However, I consider the following “10 Commandments” to be critical to establishing a strong governance regime:
1-Set the right tone at the top.
The main concerns of the board should include guiding, approving and supervising the bank’s strategic objectives, corporate values and policies. This could be achieved through the development of a code of conduct for bank employees, management and board members. Likewise, the board of directors must clearly define areas of responsibility, levels of authority and reporting lines within the bank.
2-Adequate qualifications of board members
The board must have adequate knowledge and experience in relation to each of the material financial activities that the bank intends to undertake to enable effective governance and supervision of the bank.
To ensure that non-executive directors have the knowledge and understanding of the business, the board must provide thematic business awareness sessions on a regular basis and each director must receive a personalized induction, training and development that will be reviewed annually with the president. Likewise, provision must be made for the adequate distribution of the executive directors in business areas other than those for which they are directly responsible.
Non-executive directors are encouraged to spend more time with the business to ensure they can participate effectively in strategy and other board decisions.
3- Additional independent non-executive directors
To encourage an independent element within the board, banks should consider that independent directors should constitute a significant board membership, and that the board should have at least three independent non-executive directors. Larger banks may have a higher proportion of non-executive directors.
Non-executive directors must be able to spend enough time in the role to assess risk and ask tough questions about strategy.
In the UK, there are recommendations for banks to appoint a senior independent director (SID) whose role is to provide a sounding board for the chairman and to serve as a trusted intermediary for non-executive directors, where necessary.
4-Establish board risk governance
Banks must establish a board risk committee to work in conjunction with the existing audit committee. The risk committee would focus on risk strategy and management, free from any conflict with the demands of the audit committees. The risk committee would report periodically (as part of the annual report) on the risk strategy and management. The risk committee has the authority to seek outside advice to test its risk management assumptions, particularly in the context of risk related to significant banking transactions.
Given the importance of an independent risk management function, banks should appoint a chief risk officer (CRO) with sufficient authority, stature, independence, resources and access to the board. This executive must report both to the risk committee and internally to the CEO. Removal of the CRO should be subject to board discussion and public disclosure.
5-Expand the scope of the remuneration committee
The scope of the remuneration committee should be expanded to cover all aspects of remuneration policy at the bank-wide level, with particular attention to the dimension of risk. The compensation committee is responsible for reviewing the compensation philosophy and major compensation programs.
To reduce perceived excessive risk-taking within banks, this committee is also expected to approve links between performance targets and payment or bonus schemes. At least half of the bonuses must be paid in the form of a long-term incentive plan.
6-Develop information technology (IT) governance
IT governance provides the structure that links IT processes, resources, and information to the bank’s strategies and objectives, enhances effective board decision-making, and creates greater transparency and accountability. IT governance ensures that related risks are properly identified and managed. The board must approve IT expenditures and provide adequate oversight over all aspects of IT governance, including procurement, outsourcing, efficiency of systems and procedures, IT security, customer data protection, and adequacy of systems against fraud and money laundering.
7-Improving efficiency through board evaluation
The board and board committees should be subject to a formal and rigorous externally facilitated performance review of the process every three years. The evaluation statement must be included as a specific section of the president’s statement or as a separate section of the annual report, signed by the president. Where an external facilitator is used, this should be stated in the statement, along with their name and other details relevant to shareholders.
8-Manage conflicts of interest effectively
Banks must establish information barriers (“Chinese walls”) between different departments so that decisions by staff in one department are made in ignorance of confidential information available to staff in other departments that could affect their decision. Conflicts of board members or senior executives should be reported to the banks compliance officer. A good corporate governance practice is to establish and disclose a conflict of interest policy.
9-Monitor the governance of bank customers
It is important for banks that their clients apply the principles of good governance. Banks may find it in their interest to verify the governance framework and practices of their corporate borrowers. Even in circumstances where a bank cannot directly influence the governance practices of its borrowers, it can have significant influence by “walking the talk.”
10-Track potential governance failures
Banks must have a policy that establishes appropriate procedures for employees who have concerns about the integrity of the bank’s operations or its staff (the so-called whistleblowing policy). Employees must be able to communicate their concerns with the corporate protection from management retaliation. The procedure must facilitate the flow of confidential and direct or indirect communication to the board (or Audit Committee) outside the internal “chain of command”. Establishing proper communication channels would allow bank staff to discuss their concerns in confidence without fear of reprisal.
conclusion
Good corporate governance is crucial in today’s complex and dynamic banking environment to ensure long-term sustainability and the trust of stakeholders, including regulators, investors, customers and employees. Therefore, it must be cultivated and practiced regularly within banks at the board and executive management level. Remember; Corporate governance is like a muscle, it must be exercised or it will atrophy.
