Transcript Document

CORPORATE GOVERNANCE FRAMEWORK
by
Prof. YRK Reddy
www.yagaconsulting.com
www.academyofcg.org
©2005 YRK Reddy
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The Globalisation of Standards
• The rationale & the broad strategy
• IMF,World Bank,OECD,Commonwealth,
BCBS,IAIS
• The moves fro generic to specific – the
early arguments of ACG
• All assume market economy benefits and
mostly the “outsider model”
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A Good Situation
Research
Analysis/
Media/
Ratings/
markets for
control
Shareholder Meetings & Vote
Board, supervision, meetings & Vote
Management Reportings
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Activisim/
Transparency/
Accountability/
equitable rights
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Modern corporations are disciplined by
internal and external factors
(Source: Corporate Governance Framework, Nadereh Chamlou, Magdi Iskande, World Bank)
Internal
Shareholders
External
Private
Stakeholders
Board of Directors
Appoints
and
monitors
Reports to
Management
Operates
Core functions
Reputational agents1
Accounts
Lawyers
Credit Rating
Investment Bankers
Financial media
Investment advisors
Research
Corporate Governance
Analysis
Regulatory
Standards
(for example, accounting
and auditing)
Laws and
regulations
Financial Sector
Debt
Equity
Markets
Competitive factor and
product markets
Foreign direct investment
Corporate control
1Reputational
agents refer to private sector agents, self-regulating bodies, the media, and civic society that
reduce information asymmetry, improve the monitoring of firms, and shed light on opportunistic behaviour
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“The Irresistible Case for CG”
• Korea-US Research: 160% premuim
• ABN/AMRO: Best CG Rated companies had P/E
ratios 20% higher
• Russian study: 70,000% increase in firm value of
21 companies
• Deutsche Bank: S&P 500: 19% out-performance.
• Harvard / Wharton: abnormal returns of 8.5%
• Cheaper debt: Romania`s BCR
• Operations too: better ROE; EVA
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The Country Analysis in Scorecard –
Four Critical Factors
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Legal Infrastructure
Regulation
Information Infrastructure
Market Infrastructure
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The Special Case of Insurance
Industry
• Opacity of financial institutions due to nature of
some contracts; deferred exchange; swift changes
in risk profiles
• Illiquidity & risk of Asset liability mismatch
• Informational asymmetries between policy holders
& insurers
• Complex structure of principle-agent issues and
coordination problems
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• The need for strong regulation and active
supervision. ( fixes the informational asymmetries,
market failures, systemic risks).
• Supplemented by self-regulatory initiatives by
Boards and shareholders; market discipline, legal
infrastructure etc.
• A complex construct of listing agreements;
company laws; insurance laws; regulatory norms;
supervisory expectations – the great need for
alignment / harmonisation.
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The IAIS Guidance
• ICP 9 is mainly the role, responsibility of Boards
and senior management.
• Integrates with other Core Principles that relate to
CG:
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–
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Suitability of Persons
Changes in control & Portfolio Transfers.
Internal Controls
On-site inspections
Risk Assessment & Risk Management
Information, disclosure and Transparency towards the
market
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Insurance Core Principles on
Corporate Governance
Essential criteria
A) The supervisory authority requires and verifies that the
insurer complies with applicable corporate governance
principles
B) Board of Directors:
1. Sets out its responsibilities in accepting and
committing to the specific corporate governance
principles for its undertaking. Regulations on corporate
governance should be covered in general company law
and/or insurance law. These regulations should take
account of the size, nature and complexity of the insurer.
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2.
Establishes policies and strategies, the means of attaining
them, and procedures for monitoring and evaluating the
progress toward them. Adherence to the policies and
strategies are reviewed regularly, and at least annually.
3.
Satisfies itself that the insurer is organised in a way that
promotes the effective and prudent management of the
institution and the board’s oversight of that management. The
board of directors has in place and monitors independent risk
management functions that monitor the risks related to the
type of business undertaken. The board of directors
establishes audit functions, actuarial functions, strong
internal controls and applicable checks and balances.
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4. Distinguishes between the responsibilities, decision-making,
interaction and cooperation of the board of directors,
chairman, chief executive and senior management. The board
of directors delegates its responsibilities and establishes
decision-making processes. The insurer establishes a division
of responsibilities that will ensure a balance of power and
authority, so that no one individual has unfettered powers of
decision.
5. Establishes standards of business conduct and ethical
behaviour for directors, senior management and other
personnel. These include policies on private transactions, selfdealing, preferential treatment of favoured internal and
external entities, covering trading losses and other inordinate
trade practices of a non-arm’s length nature. The insurer has an
on-going, appropriate and effective process of ensuring
adherence to those standards.
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6. Appoints and dismisses senior management. It establishes a
remuneration policy that is reviewed periodically. This policy
is made available to the supervisory authority.
7. Collectively ensures that the insurer complies with all relevant
laws, regulations and any established codes of conduct (refer
to EC f)
8. Has thorough knowledge, skills, experience and commitment
to oversee the insurer effectively (refer to ICP 7).
9. Is not subject to undue influence from management or other
parties. The board of directors has access to information about
the insurer, and asks and receives additional information and
analyses that the board sees fit.
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10. Communicates with the supervisory authority as required and
meets with the supervisory authority when requested.
11. Sets out policies that address conflicts of interest, fair
treatment of customers and information sharing with
stakeholders, and reviews these policies regularly (refer to ICP
25).
C) Senior Management is responsible for:
1. Overseeing the operations of the insurer and providing direction
to it on a day-to-day basis, subject to the objectives and policies
set out by the board of directors, as well as to legislation.
2. Providing the board of directors with recommendations, for its
review and approval, on objectives, strategy, business plans and
major policies that govern the operation of the insurer.
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3.Providing the board with comprehensive, relevant and timely
information that will enable it to review business objectives,
business strategy and policies, and to hold senior management
accountable for its performance.
Advanced criteria
1. The board of directors may establish committees with specific
responsibilities like a compensation committee, audit
committee or risk management committee.
2. The remuneration policy for directors and senior management
has regard to the performance of the person as well as that of
the insurer. The remuneration policy should not include
incentives that would encourage imprudent behaviour.
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3. The board of directors identifies an officer or officers with
responsibility for ensuring compliance with relevant
legislation and required standards of business conduct and
who reports to the board of directors at regular intervals (refer
to EC b).
4. When a “responsible actuary” is part of the supervisory
process, the actuary has direct access to the board of directors
or a committee of the board. The actuary reports relevant
matters to the board of directors on a timely basis.
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OECD Guidelines for Insurers
Governance
• Recommendations for Insurance and Private
Pensions Committee, adopted by OECD
Council on April 2005.
• Note the absence of “corporate” – and the
overall emphasis on the stakeholder system.
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“Regulation alone cannot achieve the good
practice necessary for integrity and
effectiveness. Companies themselves must
develop internal rules and systems in order
to reach these goals, but governments and
international bodies can provide guidance
on these rules and systems.”
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Main Objectives
“To provide complementary guidance that would help the
sector to enhance the protection of policyholders and/or
shareholders beyond the protection already by existing
regulation and supervision; and
“To develop complementary guidance specifically directed
to the insurance sector that would supplement corporate
governance rules generally applicable to corporations”
Covers:
Governance structure,
Internal governance mechanisms and
Stakeholders protection
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Guidelines for Insurer’s Governance
1. Governance Structure: The governance
structure must establish an appropriate
division of administrative and oversight
responsibilities, stipulate and delineate the
qualifications and duties of persons
bearing responsibilities, and protect the
right of policyholders and shareholders or
“participating policyholders”
Guidelines I. Identification of responsibilities
Guidelines II. Board's structure
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Guideline III.
Functions and responsibilities
Reviewing and guiding the strategy of the insurance
entity, including insurance strategies,; approving the
pricing strategy, setting performance objectives,
overseeing auditing and actuarial functions, and other
oversight structures and monitoring the administration
of the insurance entity in order to ensure that the
objectives set out in the fund by-laws, statutes or
contracts, or in documents associated with any of
these, are attained (e.g. diversified asset allocation,
cost effectiveness of administration et.);
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Guideline IV. Composition and suitability
Guideline V. Accountability
Guideline VI. Actuary
Guidelines VII. External Auditors
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2. Internal Governance Mechanisms: Insurance entities should
have appropriate control, communication and incentive
mechanisms that encourage good decision – making power and
timely execution, transparency, disclosure and ensure regular
review and assessment, having regard to the branches of
business operated. These mechanisms should be tailored to the
protection of policyholders, beneficiaries and shareholders (or
participating policyholders).
Guideline VIII. Internal controls
Guideline IX. Reporting
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3. Stakeholders’ protection: The governance framework of
insurance entities should ensure an appropriate protection of
the rights of stakeholders through disclosure and redress
mechanisms and the compliance with the basic rights of
shareholders or participating policyholders in the case of
mutual insurers.
Guideline X.
Protection of participating policyholders in the
case of mutual insurers.
Guideline XI. Disclosure
Guideline XII. Redress
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