Understanding and Implementing

Good Corporate Governance

Training Session for Pran-RFL, Dhaka, June 2017

 Objectives of the Workshop

1. What are the key principles and practical details of Corporate Governance?

2. What are the benefits of implementing good Corporate Governance?

3. How can we implement a Corporate Governance plan?

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 Module 1

Origins, Key Concepts, and Recent Developments

Training Session for Pran-RFL, Dhaka, June 2017

 Origins and Definitions

“The system by which companies are directed and controlled”

Cadbury Report, United Kingdom 1992

(Official Title, “The Financial Aspects of Corporate Governance”)

The “Cadbury Report” is the report of a committee whose chairman was Mr. Adrian Cadbury.

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 Definitions: OECD

Corporate governance involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders.

Corporate governance also provides the structure through which the objectives of the company are set,
and the means of attaining those objectives and monitoring performance are determined.

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 Definitions: the International Finance Corporation

Corporate Governance refers to the structures and processes for the direction and control of companies

Corporate Governance concerns the relationship among the management, the board of directors,
controlling shareholders, minority shareholders and other stakeholders.

Good corporate governance contributes to sustainable economic development by enhancing the

performance of companies and increasing their access to outside capital.

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 Key Concepts

What are the key concepts and ideas that you associate with Corporate
Governance?

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 Frameworks for Implementation: OECD

I. Ensuring the basis for an effective corporate governance framework

II. Rights and equitable treatment of shareholders and key ownership functions
III. Institutional investors, stock markets, and other intermediaries
IV. The Role of stakeholders in corporate governance
V. Disclosure and transparency
VI. The Responsibilities of the board

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 Frameworks for Implementation: International Finance Corporation

• Board structure and functions

• Internal Control Environment
• Disclosure and Transparency
• Relationship with Shareholders
• Family Governance (applicable to family-owned banks or companies)

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 Basel Committee: Corporate Governance Principles
for Banks
Board’s overall responsibilities Risk communication
Board’s qualifications and composition Compliance
Board’s own structure and practices Internal Audit
Senior Management Compensation
Governance of group structures Disclosure and Transparency
Risk Management Function The rule of supervisors
Risk identification, monitoring and controlling

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 Recent Developments

International standard setters have continued to update their guidance on good corporate
governance practices

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 Update of the OECD Principles

1. Greater focus on the role of the Board in risk management, tax planning and internal audit.

2. New Principle inserted: Boards should appraise their own performance and ensure that they collectively has the
right mix of experience. (Principle VI.E.4.)

3. Greater focus on disclosure of non-financial items (e.g. in management reports).

4. New Principle inserted: Stock market regulation should support effective corporate governance. (Principle I.D.)

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 Financial Stability Board: Thematic Review on Risk Governance

Many Boards did not pay sufficient attention to risk management

• Many Boards did not have structures that enabled effective analysis of the bank’s risks (e.g. they did not have a Risk
Committee of the Board)

• When Risk Committees did exist, Committee Members often were not experienced in Risk Management and they were
insufficiently independent from management

• Board and Board Risk Committees did not challenge Senior Management’s Proposals and Decisions

• Information provided to the Board was voluminous but not easy to understand.

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 New Priorities in Corporate Governance
1. Need to Improve the Quality of Boards of Directors
a. Wider range of experience
b. Greater technical skills
c. More independent directors

2. Greater Focus on ’Risk Governance’

a. Directors need to be more heavily involved in risk governance

3. Boards need to have a structure that enables them to perform their role effectively
a. Risk Committee
b. Audit Committee
c. Ability to oversee compliance

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 Module 2

The Board of Directors

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 Primary Tasks of the Board: British Petroleum*

• Active consideration and direction of long-term strategy and approval of annual plan
• Monitoring of BP’s performance against strategy and plan
• Obtaining assurance that the principal risks and uncertainties to BP are identified and that systems of
risk management and control are in place to mitigate such risk.
• Board and executive management succession

• * BP Annual Report, 2014, page 59

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 Responsibilities of the Board of Directors

Please write a job description for a Director of a large Bangladeshi

company

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 Board Structures: Unitary vs. Two-tier

Unitary Board Two-tier Board

Dominant model in the UK and the US Common in Germany and in some areas of
continental Europe
Supervisory Board (Aufsichtsrat) contains only
Board contains a mix of executive directors
non-executive directors
and non-executive directors
Executive Board (Vorstand) contains only
executives

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 Different Types of Directors

Executive Directors

Non-executive directors
Independent
Non-independent

How many executive directors do you think should sit on a Board?

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 Independent Directors

No connection to the company apart from the directorship

• no large shareholding in the company

• no commercial relationship with the company
• did not recently work for the company (e.g. 3 years/ 5 years)
• is not a family relation of owners/managers

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 Independent Directors

• International trend is to attach greater important to independent directors

• Often a difficult concept for shareholders/managers and other directors to understand

• Opportunity to bring new skills onto the Board

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 Optimum size of the Board

• No international standards on Board size but,

• 4 directors is too few
• 17 directors is too many

• The way to get to the correct answer is to consider the skills and experience that the Board needs in
order to fulfill its functions effectively, taking into consideration the nature and the complexity of the
company.

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 Frequency of Board Meetings
• No international standards on how frequently Boards should meet but,
• 2 or 3 times per year is too few
• 12 times per year is too many

• The Board needs to meet frequently enough to be able to oversee the performance of the bank and its
management…

• …but if a Board is meeting too frequently, it is probably not focused on high-level strategy.

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 How much time should a Director devote to his/her work?

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 Paying Directors

It is important to pay directors

• Being a Director of a company is a serious responsibility and should be treated as such
• You won’t be able to attract high quality candidates over the long term if you don’t pay them properly

Directors should be paid fees based on attendance and responsibility (not in shares/bonuses)

Link the pay of Directors to the pay of an equivalent high-level professionals in other industries (e.g.
Senior Audit Partner at an accounting firm; Senior Partner at a law firm)

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 Women on Boards: Why it matters
ONE
• A well functioning Board contains directors with a variety of skills, outlooks and opinions
• When Boards perform badly, it is often because everybody thinks the same thing and there is insufficient
discussion, challenge, and difference of opinion
• Having women on Boards is one way of ensuring that the Board is diverse, and of reducing the likelihood of
‘Group-think’
TWO
• If you want to get the best people as Directors it doesn’t make sense to exclude 50% of the population

Also: it’s bad for society as a whole to prevent women from advancing professionally.

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 The Role of Board Committees (1)

• Board Committees enable the Board to focus in detail on particularly important aspects of the
company’s business.
• Three key committees are:

• Audi Committee
• Risk Committee
• Nomination and Remuneration Committee

What other committees might be appropriate?

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 The Role of Board Committees (2)

• Board Committees should INCREASE the efficiency of the Board.

• Board Committees typically have three members
• The Chairman should be an Independent Director
• If possible, a majority of the committee’s members should be Independent Directors

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 Which Board Committees should a company have?

Unilever British Petroleum Ryanair

Audit Audit Audit

Nomination & Governance Nomination Nomination

Corporate Responsibility Chairman’s Executive

Safety, Ethics, Environment Remuneration

Gulf of Mexico Safety

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 Which Board Committees should PRAN-RFL have?

PRAN-RFL Hi-Tech Industries

?

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 The Corporate Secretary

Corporate Secretary is NOT the same as the CEO’s Executive Secretary

• If a Board is to fulfill its functions, it needs strong administrative support

• The Corporate Secretary must have the status and experience to be able to interact with Directors
• The Corporate Secretary advises the Board on its legal obligations and ensures that the Board is
fulfilling those legal obligations
• Corporate Secretaries often have a legal background – but this is not a requirement

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 Responsibilities of a Corporate Secretary
• Arrange the meetings of the Board
• Take minutes of Board meetings, and ensure that they are circulated and reviewed by Directors in a
timely manner
• Oversee the arrangements for the Annual Shareholders meeting, including ensuring that the notice of
the meeting is sent out on time and is filed with the relevant authorities
• File documents with legal and regulatory authorities (e.g. financial statements filed with relevant
ministries or with stock exchange); preparation of the minutes of If a Board is to fulfill its functions,
it needs strong administrative support
• Advise Directors on their legal obligations, both collective and individual (e.g. new Corporate
Governance requirements; requirements to disclose commercial interests)

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 Appointing a Corporate Secretary
• For small companies it may be unrealistic to appoint a full time Corporate Secretary

• Someone could be appointed to fulfill the role of the Corporate Secretary part time

• For big and small companies, the role of the Corporate Secretary could be out-sourced to the
company’s outside law firm

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 Board Training and Induction

• Companies should have an ‘induction programme’ for new directors so that they can play an active
and informed role on the Board from their first meeting

• Companies should have a training programme for board members to enable them to upgrade their
skills or fill gaps in their knowledge

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 Example of Board Induction: British Telecom

* British Telecom Annual Report 2015

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 Module 3

Risk Governance and Internal Controls

Training Session for Pran-RFL, Dhaka, June 2017

 Building Blocks of Risk Governance
• Policies: e.g. Board “Risk Appetite Statement”

• Structure: e.g. committees; departments (internal audit)

• Processes: e.g. internal controls; risk limits

• People: who is responsible for what; how do they fit into the bigger structure?

• Culture: does the bank actually implement the values and ideas that it says it supports?

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 Structure of Risk Governance
• The Board of Directors, and its committees
• Sets the company’s Risk Appetite and High Level Policies/Procedures
• High level oversight of Senior Management and high-level oversight of Risk Management Function and Internal Audit
• Senior Management Team
• Operates the company in a manner that is consistent with the Board’s objectives
• Includes Chief Financial Officer, who heads the Finance Department
• Includes the Chief Risk Officer (CRO)
• Risk Management and Compliance
• Risk Management Department provides independent view on risks being taken by business lines and the bank as a whole
• Internal Audit Department
• Independent assessment of efficiency of internal controls and whether they are in line with the objectives and policies of
the Board.
• External Auditor
• Provides external assessment of financial statements and of the internal controls

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 Risk Appetite Statement
• Policies: e.g. Board “Risk Appetite Statement”

• Structure: e.g. committees; departments (internal audit)

• Processes: e.g. internal controls; risk limits

• People: who is responsible for what; how do they fit into the bigger structure?

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 Risk Appetite vs Risk Tolerance

Risk Appetite Risk Tolerance

We have a higher risk appetite related to We expect to make an 18% return on this
strategic objectives and we are willing to accept investment but we are not willing to take more
higher losses in pursuit of higher returns than a 25% chance that the investment will lead
to us losing more than 50% of our existing
capital

Source: COSO Understanding and Measuring Risk Appetite

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 Risk Appetite vs Risk Tolerance

Risk Appetite Risk Tolerance

As a health services organisation, we place the We try to treat all emergency room patients
safety of patients among our highest priorities. within two hours, and critically ill patients
We understand the need to balance immediate within 15 minutes. However, we accept that in
response to all patient needs with the cost of rare situations (5% of the time) patients in need
such quick responses. We have a low risk of non-life threatening attention may not receive
appetite for patient safety but a higher appetite attention for up to four hours.
related to response to all patient needs.

Source: COSO Understanding and Measuring Risk Appetite

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 Example of Risk Assessment: Proctor & Gamble*

*Taken from Proctor & Gamble’s 2015 Governance and Financial Report

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 Example of Risk Assessment: Proctor & Gamble*

*Taken from Proctor & Gamble’s 2015 Governance and Financial Report

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 Building a risk statement

What would a risk statement for PRAN-RFL look like?

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 The Board’s Risk and Audit Committees
• The Risk and Audit Committees are key tools that enable the Board to ensure that the strategy that it has approved
will be successfully implemented.

• Board Audit Committee: Is the company behaving in a way that is consistent with the Board’s objectives (policies
and procedures)

• Board Risk Committee: Is the company taking risks that are consistent with the Board’s objectives (risks and risk
management)

How much detail can we reasonable expect the Board to know?

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 British Petroleum: Audit Committee Key Responsibilities*
• Monitoring and obtaining assurance that the management or mitigation of financial risks are
appropriately addressed by the group chief executive and that the system of internal control is designed
and implemented effectively in support of the limited imposed by the Board.
• Reviewing financial statements and other financial disclosures and monitoring compliance with relevant
legal and listing requirements
• Reviewing the effectiveness of the group audit function and BP’s internal financial controls and risk
management.
• Overseeing the appointment, remuneration, independence and performance of the external auditor, and the
integrity of the audit process as a whole…
• Reviewing the systems in place to enable those who work for BP to raise concerns about possible
improprieties in financial reporting or other issues and for those matters to be investigated.
* BP Annual Report 2015

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 British Petroleum: Audit Committee Focus 2015*

* BP Annual Report 2015

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 Effective Board Directors: What is needed

• Experience of managing large institutions

• Ability to think strategically
• Detailed technical knowledge of some subject matter areas (e.g. business line; geography; financial
management)
• Commitment to the job and sufficient time to do it

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 Senior Management Committee

• Senior Management should meet regularly and formally to oversee the management of the bank
• Senior Management meetings should focus on high level issues, rather than on simple performance
targets and budget vs. plan discussion
• Management meetings should be constructive and enable free discussion and an exchange of views
• Not all senior officials need to/or should sit on the Senior Management Committee

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 Risk Management Department
If Business Units are responsible for their own risk, what is Risk Management contributing?

• View of the company as a whole (risk may be acceptable within the context of a single department
but not when aggregated to risks in other departments)
• Broad risk view, including economic trends etc (risk may acceptable today but not when reviewed in
a wider macro-economic context)
• Specialisation and greater experience (more detailed and technical understanding of risk)
• Independence (Risk Management Department is focused on managing risk rather than purely
growing the business and generating profits.)

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 Risk Management Department: Positive and Constructive
Risk Management Department should not be seen as a ‘negative’ force in the company

• Risk Management should be seen as a source of solutions, not just the department that always says
‘no’
• Risk management can find ways to enable business units to continue serving clients and grow
business volumes by suggesting ways to reduce risks in the portfolio
• The Risk Management department should be seen as a resource
• In well governed companies, there will be a constructive relationship between the business lines and
the risk management department

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 The Role of the Chief Risk Officer

The Chief Risk Officer is a very important position in banks

• Chief Risk Officer (CRO) now an essential position in any bank

• CRO is part of the Senior Management Team and reports to the CEO…
• …CRO also has access to the Chairman of the Risk Committee
• The Board Risk Committee and the CRO should be in regular contact

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 Chief Risk Officer: Questions to Discuss

Should the CRO have a veto in the Senior Management Committee?

What sort of person would you appoint: a technical specialist or an experienced

company executive?

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 Compliance Department

• Huge expansion in recent years, in response to

• Increase in the volume of regulation
• Large fines imposed on banks for breaking laws or behaving badly (“culture”)
• Not just a banking issue: there is less tolerance of bad corporate behaviour now than in
the past (e.g. BP and Deep Horizon)

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 Compliance Department : Showing that the company is complying

Compliance does is not just about ‘complying’ with laws and regulations…
…You have to be able to SHOW that the bank is complying with laws and regulations

For example: Risk that ATMs do not work.

• Supervisor might say, x% ‘down time’ is acceptable, but anything more than that is not.
• Risk Management Dept will identify this as a risk and advise on how to manage it
• Compliance will ask: how can we demonstrate that we are monitoring down time

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 Internal Audit Function
• Provides an independent check that the company is implementing policies and procedures that are
consistent with the objectives set out by the Board.

• Sits outside the Management Structure (e.g. Chief Internal Auditor is a very senior executive but does
NOT sit on the Senior Management Committee)

• Chief Internal Auditor reports directly to the Chairman of the Audit Committee (except for
administrative matters, where s/he deals with the CEO)

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 Internal Audit: Key Points
• Audit needs to extend beyond financial matters
• Work of the Internal Audit Department should be based on an Annual Audit Plan that covers:

• routine/recurring items;
• items that have been identified as risky or which have been the subject of ‘findings’ in the past;
• Items that arise during the course of the year

• The internal auditor needs to develop a strong relationship with the external auditor: they can
compare findings and help each other

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 The changing role of internal audit
A 2012 KPMG Report on Internal Audit summarised the characteristics of a good internal audit
department:

• Deep industry knowledge with expertise in the way the company works
• Strategic outlook: internal audit understands the objectives and strategy of the company
• Strong relationships with senior managers and directors (in order to get things done)
• Strong interpersonal skills
• Experience of working in the business units (i.e. not a whole career spent in internal audit)

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 External Audit

• Provides an opinion on the financial statements that are prepared by the company’s Finance Department

• May also provide an opinion on the company’s compliance with local regulations or the adequacy of
financial controls.
• The Audit Statement will state what the audit includes
• Different countries have different requirements for what an audit must include

• The External Auditors may also write a “Management Letter” to Senior Management describing any
deficiencies that they have found.

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 External Audit’s Relationship to the Company
• External Audit is checking the work of the Finance Department (which prepares the bank’s financial
statements), but…

• External Audit’s key relationships are with the company’s internal audit department and with the
Audit Committee of the Board

• External Auditors are a resource that can be used by the internal audit department and the Board
Audit Committee to strengthen their own work.

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 Module 4

Transparency and Corporate Governance

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 Transparency

Why is transparency important, from the perspective of Corporate

Governance?

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 Benefits of Transparency

Broadens the range of potential investors, lenders, suppliers and other

stakeholders who are interested in working with the bank

Increases the accountability of the Board and the Senior Management

Distinguishes the bank from others / shows leadership in the market

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 Transparency: Class Discussion

What information do you think a medium-sized Bangladeshi should

disclose?

To whom should the information be disclosed?

What channels should the bank use to disclose it?

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 The benefits of ‘internal’ transparency

• Happier employees who are more likely to stay with the company
• Understand their own objectives
• Understand reasons why decisions were made (even if they not like those
decisions)
• Greater rapport between senior management and middle/low ranking staff
• More accountability for performance
• This will be supported by high-performers

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 Disclosure of Executive Pay and Incentives

Why is the disclosure of Executive Pay and Incentives

important, from the perspective of Corporate Governance?

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 Good decisions – Bad decisions

Do you think the senior executives managing banks in the

years before the global financial crisis made good decisions
or bad decisions?

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 Executive Pay – Recent Trends

‘malus’ and ‘claw-back’

‘Malus’
• Pay bonuses over several years, not all at once, with an option not to pay it (or to reduce
it) if the work for which the bonus is being paid turns out to have been bad work (e.g.
trades/transactions that were initially profitable but then became loss-making)
‘Claw-back’
• Require people to pay back money that they have already received, if it turns out that the
work for which the bonus is being paid was bad work.

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 Types of event that trigger malus/claw-back

• Breach of code of conduct

• Financial performance/losses
• Non-compliance or breach of authority level
• Ethical Violations not related to the financial statements

Source: Mercer, Financial Services Executive Compensation Survey, 2011

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 Module 5

Relations with Shareholders

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 Shareholders’ Rights

• To register their ownership of the shares

• To sell or transfer the shares
• To get relevant and material information about the company on a regular and timely basis
• Participate and vote in shareholder meetings
• Elect and remove directors
• Share in the profits of the company

Source: OECD Principles of Corporate Governance, 2015. Page 20

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 Equitable Treatment of Shareholders

All shareholders, of the same class, should be treated equally.*

 Receive the same information, at the same time

 Equal rights to speak and vote at shareholder meetings
 Equal access to Board and management?

* Different class could mean, non-voting vs voting shareholders

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 Respecting the Rights of Minority Shareholders

• Minority shareholders should not be subject to abusive behaviour/actions

• E.g. major corporate decision taken without consulting them

• Board/management need to find a way to keep minority shareholders informed

about company plans and activities
• Use of ‘cumulative voting’ during shareholder meetings (or reservation of one
or more Board positions for minority shareholders)

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 Corporate Governance Issues for State-Owned Enterprises

• Who owns the company and who controls it?

• E.g. is the company owned by a government ministry
• E.g. has the owner delegated its authority to another government agency?

• Is there separation between ownership and regulation?

• Does the owner have a clear strategy for the company?
• Is there a ‘Memorandum of Understanding’ between the company and the government owner?

• Does the owner appoint all of the directors?

• What is the policy of the government regarding the appointment of directors

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 Module 6

Family Governance

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 How does the controlling family manage its relationship with the company?

• What are the objectives of the family, in relation to the company?

• What (organisational) structures does the family have to manage its relationship to the company?

• What policies does the family have to manage its relationship with the company?

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 Defining objectives

• The family’s objectives should be defined in a ‘Family Constitution’

• Much depends on how important the company is to the family financially…

• Only significant asset?
• Only significant source of cash/income?
• Or, only one part of a much bigger portfolio of investments

• …And how important it is for the family in other ways

• The family is closely identified with the success of the company
• The company provides employment to the family’s children

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 Ownership vs. Governance

• The family owns the company…

• …the Board of Directors governs the company

• Directors have a duty of care to the company not the family.

When a family creates a formal Board of Directors, it separates issues of ownership from issues of
governance

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 Family Constitution

• The family’s objectives should be defined in a ‘Family Constitution’

• The Family Constitution should also define:

• The family’s relationship with the company

• Policies that will govern the family’s relationship with the company (e.g. Family Employment Policy)

• The structures that the family will use to manage that relationship

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 Family Constitution
• XYZ Family it committed to the long term success of ABC Company, in which it currently holds a 60% controlling
stake.
• We intend to retain our majority ownership and our control over the long term and as a result we are committed to the
long-term future of ABC. We want ABC to diversify its product lines in the years ahead and develop international
business but this growth must be funded through internal capital generation or debt: we are not willing to subscribe new
capital for the company (except in cases where the company is in financial difficulty).
• Our policies relating to our stake in ABC will be decided at a Family Council meeting which will be held every six
months…..
• It is not important to us to hold a majority of seats on the Board of Directors, we do intend to appoint the Chairman of
the Board…
• What other points might a constitution include….?

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 Family Structures
• Family Assembly

• Important point is that this is a meeting that is called specifically to discuss matters related to the company

• At a minimum, there should be an agenda and, afterwards, a formal record of what was agreed at the meeting.

• Who gets to make decisions at the Family Assembly?

• The Founder/Patriarch (in practice) takes all decisions and informs everyone else (bad!)

• Family members who own shares make decisions, after consulting with other members of the family

• All members of the family* take decisions, even if they do not hold shares

* Very important: who are the “Members of the Family” for the purpose of Family Council Meetings?

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 Family Structures
• Family Council

• When the ‘Family Council” is working well, the family could set up a ‘Family Council’

• The Family Council represents the interests of the family – not all members of the family sit on the Family Council.

• The Family Council is the point of contact that the family has with the company
• Family Office

• The Family’s portfolio is managed by professional managers who are appointed by the Family Council.

• In practice, Family Offices are created when families have a large portfolio of assets to manage.

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 Policies Governing the Family’s Relationship with the Company

• Employment policy
• Representation on the Board/Senior Management Team
• Dividend Policy
• Sale of shares (do other members of the family have first option to buy?)
• Valuation of shares

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 Family Employment Policy

Should include provisions such as:

• As a family, we want the best qualified people to run the company, regardless of whether they are family
members or not.
• We do not expect family members to work in the company…
• …But if they do, we do not guarantee that they will get a job.
• Family members must be appropriately qualified and must apply for jobs in the same way as external
applicants. Sale of shares (do other members of the family have first option to buy?)
• Family members who work in the company will receive the same salary as non-family members doing the
same (or comparable) job.

Does the family have the right to say, “We want the CEO to always be a member of the family”?

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 Module 7

Laws, Regulations and Codes

Training Session for Pran-RFL, Dhaka, June 2017

 Laws, Regulations and Codes
• Companies Law
• all organisations that are legally incorporated as companies must obey the provisions of the
local Companies Law.
• The Companies Law may include rules related to corporate governance
• Stock Exchange
• The Stock Exchange regulator (or the stock exchange itself) may have a Corporate Governance
code
• All companies that are listed on the exchange must object the code
• Code of Corporate Governance
• Applies to all organisations, but may be ‘guidelines’ rather than rules.

Sometimes these codes may contract each other!

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 Laws, Regulations and Codes Bangladesh
Companies Act (Bangladesh) 1994
• Some references to governance issues (e.g. appointment of directors; administration of annual
meetings)
Securities and Exchange Commission Code on Corporate Governance (2012)
• Good provisions relating to the working of the Board and to audit
Code of Corporate Governance for Bangladesh, 2004
• This is an excellent document which is still relevant even though it was written in 2004.

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 Compliance with Laws/Regulations/Codes is an Opportunity

Compliance with laws/regulations/codes is an opportunity for companies to distinguish themselves in

their local market.

Companies can use compliance as a way to position themselves as market leaders in governance and
‘best practices’

Compliance enhances the ‘transparency’ of companies.

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 Module 8

Review of the Day

Training Session for Pran-RFL, Dhaka, June 2017

 Review of the day

How can we implement what we have learned today?

How can we make a difference?

Suggestions for further learning

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 Questions and Comments?

Andrew Cunningham
Director
Darien Analytics
Email: [email protected]
Website: www.darienmiddleeast.com

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