Transcript Hawkamah Overview - State Bank of Pakistan

Implementing Good
Corporate Governance in Banks
May 29, 2006
Karachi, Pakistan
Dr. Nasser Saidi
Executive Director
Hawkamah ICG
DIFC
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
1. Data Dissemination
2. Monetary Policy
3. Fiscal Policy Transparency
Market and Infrastructure
4.Governance
5.Accounting
6.Auditing
7.Insolvency
8.Money Laundering
Financial System
9. Core Principles of
Bank Supervision
10. Core Principles of
Insurance Supervision
11. Core Principles of
Securities Supervision
12. Systemically Important
Payment System
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Agency
IMF
IMF
IMF
OECD/ World Bank/BIS
IFAC
IFAD
World Bank
OECD/FATF
BIS
IAIS
IOSCO
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
PRIVATE Sector
well
performing
institutions
PUBLIC Sector
Efficient
regulatory
regimes &
enforcement
enabling
legal
infrastructure
International Integration
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Empirical Evidence suggests ‘country
effects’ are important for good CG
1. CG frameworks and reform should address
both macro and sector/micro issues
2. Legal Origins matter
3. Public Governance matters. In particular:
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–
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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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Table 2. Middle East and North Africa Countries: Financial Development Index, 2002/03 1/
(Based on Qualitative and Quantitative Data) Scale: 0-10 2/
Financial
Development
Index
Bahrain
Lebanon
Jordan
Kuwait
United Arab Emirates
Saudi Arabia
Oman
Qatar
Pakistan
Tunisia
Morocco
Egypt, Arab Rep.
Sudan
Yemen, Rep.
Djibouti
Mauritania
Algeria
Iran, Islamic Rep.
Syrian Arab Republic
Libya
Average
Banking
Sector
Non-Bank
Financial
Sector
Regulation Supervision
Monetary
Sector &
Policy
Institutional
Environment
7.66
6.97
6.93
6.80
6.60
6.37
6.13
5.68
5.60
5.57
5.54
5.45
4.84
3.87
3.79
3.45
3.23
2.33
1.13
0.99
7.28
8.74
7.06
7.36
7.89
7.83
7.10
6.81
4.19
7.70
5.62
5.99
6.29
4.15
3.85
3.76
2.55
1.87
1.92
1.35
5.00
3.33
6.33
5.00
5.00
3.33
5.00
0.67
6.33
4.67
4.67
6.33
0.67
0.67
1.33
0.67
3.00
3.33
0.67
0.67
9.33
7.67
8.67
8.00
6.67
8.00
8.33
6.67
7.67
5.33
7.33
5.33
3.67
3.33
5.00
3.00
3.46
3.33
0.00
2.00
7.77
8.25
6.50
6.62
5.98
6.42
4.19
5.66
7.37
4.46
6.84
5.57
6.19
5.00
4.40
3.94
4.36
0.51
0.90
0.50
8.00
7.00
8.00
8.00
8.00
8.00
8.00
8.00
4.00
5.00
4.00
6.00
7.00
9.00
7.00
5.00
4.00
4.00
0.00
0.00
8.89
5.22
5.44
5.89
5.89
4.22
4.78
6.33
3.89
5.00
3.78
3.22
4.54
2.22
2.00
4.50
2.33
2.42
2.42
1.00
4.95
5.46
3.33
5.64
5.07
5.90
4.20
Source: IMF staff calculation
1/ Original "subjective" weighted index.
2/ Scale: Very Low=below 2.5, Low=2.51-5.0, Medium=5.1-6.0, High=6.0-7.5, Very High=above
7.5.
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Financial
Openness
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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
Internal Players
Shareholders
Board of Directors
External Players
Regulators and
Supervisors
The Market
The Public
Legislative and
Regulatory
Framework
Depositors
Executive Management
Auditors
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Supervisory
Authority
Reputational Agents:
Accountants
Credit Rating Agencies
Financial Media
Research Analysts
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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. Shari’a 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
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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 bank’s 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 bank’s 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 bank’s
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 bank’s group
structure.
• Supervisors should bring to the board of directors’ and
management’s 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:
–
–
–
–
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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
1. Develop a mandatory bank CG Code
 Monitored by bank supervisors and reported on by board
 Reporting on compliance in bank annual report
2. 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 CCRO’s 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
Working Group (WG)
Central Bank (CB) +
Bank Supervisor (BS)
- Discuss
- Review
- Comparative Study
Draft
Bank Corporate Governance
Code / Guidelines (BCGC)
Technical Committee (TC)
CB / BS +
Banks / Financial Institutions
Issuance of BCGC by
Technical Committee (TC)
Issuance of
Bank Corporate Governance
Code (BCGC)
Approval of
Central Bank Council
- Discuss
- Approve
Approval by
Technical Committee (TC)
Workshop on BCGC
Public Hearing /
Website Posting
- Discuss Draft
- Peer Review
- Engage Internal / External Stakeholders
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4.
Shari’a 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 Institutions:
Guiding 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 IAH’s rights to monitor performance of investments
– IIFS shall adopt sound investment strategy
• Compliance with Islamic Shari’ah rules and principles
– Put in place an appropriate mechanism for obtaining Shari’ah rulings,
application of fatwa and monitoring of Shariah compliance
– IIFS shall comply with Shari’ah 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 NGO’s,
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 organisation’s IT sustains and
extends the organisation’s 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 cooperation, 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
Institution
& Capacity
Building
Focal Point 2
Knowledge
Exchange
Platform
Focal Point 3
Technical
Communication
Assistance
Analysis &
&
Research
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Focal Point 4
Policy
Dialogue
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Programmes & Activities
FOCAL PROGRAMMES
Institution & Capacity Building
2006
PROJECTS
IMPLEMENTATION
2007
2008
2009
National Task Force Creation
Regional Institute of Directors
Companies Houses for the MENA region
Centralized Credit Reporting Agencies
Academic Courses
Training and e-courses
Analysis, Research & Technical
Assistance
National & Regional Surveys
Tool Kits
Governance Econometrics
Quarterly & Annual Reports
Working Papers
Advisory & Consultation services
Drafting Codes
Communication & Policy Dialogue
Website
National Roundtables
Regional Forums
e-Discussions – e-Forums
Knowledge Exchange Platform
Awareness Raising Campaigns
CG Contests
Establishment of CG Virtual Library
Initiated
May 2006
Implemented
35
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
National Assessment of current corporate
governance practices.
Identification of key corporate
governance issues relevant to the country
benchmarked against international best
practices such as BIS principles
Government
Ministries &
Agencies
√
√
Central Banks &
Regulatory
Agencies
Banks & Financial
Institutions
Listed
Companies
Family Owned
Enterprises
√
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Assistance in development and followthrough of corporate governance task
force and agenda development.
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Workshops, seminars, outreach to
various CG stakeholders – investors,
auditors, lawyers, accountants, etc.
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Incorporation of national corporate
governance task force into a broader
regional initiative.
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Advice and development of public
awareness campaigns.
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Development of Central Credit Reporting
organization; Companies House, Credit
Rating Agencies.
√
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√
Development / implementation of
appropriate corporate governance
regulatory regime.
√
May 2006
√
State Owned
Enterprises
√
Media
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Firm Level Consultancy & Technical
Assistance Services
Government
Ministries &
Agencies
Central Banks &
Regulatory
Agencies
Banks &
Financial
Institutions
Development of codes of good corporate
governance, codes of ethics.
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Facilitate a peer review of corporate
governance codes
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Firm level assessments (and reassessments) on corporate governance
practices.
Media
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Board level seminars and workshops on
corporate governance strategies in various
emerging markets.
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Development and implementation of action
plan to incorporate good corporate
governance practices in company
operations.
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Firm level assistance, strategy development
and implementation to address firm’s core
corporate governance challenges in order to
attract more investments (e.g. IPO,
privatization, etc.)
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Training program for frontline managers on
implementing corporate governance
programs.
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Director Training Program
May 2006
Listed
Companies
Family
Owned
Enterprises
State Owned
Enterprises
Services
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Organisational Structure
Structure:
 Board,
 Executive,
 Investment advisory group,
 Scientific/expert advisory group
Board Committees
Executive Committee
Membership Committee
Corporate Governance Review Committee
Research & Publications Committee
Media and Communications Committee
Membership Structure
Corporate
Individual
May 2006
Legal Committee
Activities Committee
Funding Committee
Awards Committee
Educational Institution
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 & policyoriented 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: [email protected]
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