corporate governance reforms post global financial crisis

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Corporate Governance in Financial Services

Reforms Post Global Financial Crisis

Sanjay Uppal

Chief Executive Officer

S i n g a p o r e

18 May 2011


Importance of

Corporate Governance


An integral component of a complex governance framework

Political / Social Governance

Economic Governance

Legal, Institutional & Regulatory Governance

CORPORATE GOVERNANCE


Corporate Governance : Definition

“Procedures & processes according to which an

organization is directed and controlled.

The corporate governance structure specifies the

distribution of rights and responsibilities among the

different participants in the organization – such as

the board, managers, shareholders and other

stakeholders – and lays down the rules and

procedures for decision-making.”

Responsibilities of the Board

Role of stakeholders in corporate governance

Disclosure & Transparency

Rights & equitable treatment of shareholders

Underlying Principles

Source : European Central Bank, Annual Report: 2004

Source : © 2009 U.N. Global Compact and the International Finance Corporation.

“The Foundation for Corporate Citizenship and

Sustainable Businesses.

Corporate citizenship — a commitment to ethical

behavior in business strategy, operations and culture.”


Corporate Governance for Banks : BCBS

System by which Banks are directed & controlled

The manner in which the business and affairs are governed by

boards of directors & senior management, which affects how they:

Set corporate objectives

Operate the bank’s business on a day-to-day basis

Meet the obligation of accountability to their shareholders &

take into account the interests of other stakeholders

Align corporate activities and behavior with the expectation that

banks will operate in a safe and sound manner & in

compliance with applicable laws and regulations

Protect the interests of depositors

Source : Basel Committee on Banking Supervision


Global Financial Markets: 2009

47.2

36.4

55.7

92.9

Stock Market Debt : Govt.

Debt : Private Bank Assets

World GDP = US$ 62.9

Source: IMF, Global Financial Stability Report, October 2010

Capital Markets = US$ 232.2 trillion

14.2

10.7

8.9

31

16

3.6 8.5

US UK Japan

EU (other) Developing New Asia *

Others

Bank Assets = US$ 92.9 trillion

* Includes: Hong Kong, Korea, Singapore & Taiwan


Sound Corporate Governance in Banks

powers Economic Development

• Investment, growth, employment opportunities Increases access to

finance

• Investment & growth opportunities Lowers cost of capital &

improves valuation

• Better allocation of resources & decision-making creates wealth

Improves operational performance

• Build trust between banks & its stakeholders – key in weak external environment

Builds / restores a bank’s reputation

• Fewer defaults, fewer financial crises brings economic stability

Less & better managed risk

Banks Impact on Economic Development

Banks are virtually universally a regulated industry & has access to government safety nets


Banks Play a Vital Role in the Economy

Well Governed Banks

Play a positive role in the

economy

Mobilize & allocate

society’s savings

Provide financing &

transmission facilities to

commercial activities

Poorly Governed Banks

Damaging impact on bank,

its stakeholders & broader

economy

Banco Ambrosiano (1972)

Metallgesellschaft (1993)

Barings Group (1995)

Sumitomo (1996)

Merrill Lynch (2001)

Allied Irish Banks (2002)

Freddie Mac (2003)

Asian financial crisis


Who is responsible for Corporate Governance ?

• Board of Directors

• Senior Management

Primary Responsibility

• Bank Supervisors Important Role

• Shareholders Depositors & customers

• Employees Auditors

• Banking industry associations Credit rating agencies

• Governments Securities regulators

• Stock exchanges

Others that can promote good governance

Basel Committee on Banking Supervision

Source : BIS Guidance Papers s.III, s.IV, s.V - Enhancing Corporate

Governance for Banking Organizations, Feb 2006. www.bis.org/BCBS


Banking in the 20th Century :

Key Developments

http://en.wikipedia.org/wiki/File:NatCuBank.jpg


Glass-Steagall Acts : 1932 & 1933

The lessons from the crash of 1929 saw emergence of new

policy framework by two Democrat Senators

Clear line drawn between being a bank & being an investor.

Banks no longer allowed to speculate with deposits.

The 2nd Act established the Federal Deposit Insurance

Corporation in the US to convince public it was safe to come

back to banks

The Act included banking reforms, some of which were

designed to control speculation

Unfortunately, the public was not convinced & the depression

continued

World War II saved the day as economy rebounded by the industriousness it generated

– lifting the American and world economy back out of the downward spiral

http://www.insidesocal.com/bargain/FFICLogo.jpg


The 1980s & 90s : The new economic (r)evolution

1997 1999 1995 1992


1990s : A new world order was emerging . . . . .

Economic liberalization

Changing balance between Developed & Developing markets

Emergence of multi-national corporations as global model

Outsourcing & new (economical) manufacturing locations

Debt crises

Technology-Media-Telecom (TMT) crisis

Stronger linkage of banks and the economy

Banking – Increased complexity, innovation, competition, regulation,…….

….along with a question : Is over-regulation constraining banking innovation,

competitiveness & global economic growth ?


This led to the debate on increased regulation vs. deregulation

Battle-lines were drawn : Glass Steagall Act – Supporters vs. The Opposition


1987 : Arguments Against Glass Steagall Act

Banks operate in “deregulated” financial markets where distinctions

between loans, securities, & deposits are not well drawn. They are

losing market shares to securities firms that are not so strictly

regulated, and to foreign financial institutions operating without much

restriction from the Act.

Conflicts of interest can be prevented by enforcing legislation against

them, and by separating the lending & credit functions through forming

distinctly separate subsidiaries of financial firms.

The securities activities that banks are seeking are both low-risk by

their very nature, and would reduce the total risk of organizations

offering them – by diversification.

In much of the rest of the world, banks operate simultaneously and

successfully in both banking and securities markets. Lessons learned

from their experience can be applied to US’s national financial

structure & regulation.

Arguments that perhaps found their basis in Adam Smith’s theories dating back over 200 years


1987 : Arguments For Glass Steagall Act

Conflicts of interest characterize the granting of credit & use of credit

(investing) by the same entity, which led to abuses that originally

produced the Act.

Banks possess enormous financial power by virtue of their control of

other people’s money; its extent must be limited to ensure soundness &

competition in the market for funds, whether loans or investments.

Securities activities can be risky & possibly lead to enormous losses

that could threaten the integrity of deposits. In turn, Government

insures deposits and could be required to pay large sums if banks were

to collapse as the result of securities losses.

Banks are supposed to be managed to limit risk. Their managers thus

may not be conditioned to operate prudently in more speculative

securities businesses. An example is the crash of real estate

investment trusts sponsored by bank holding companies (in the 1970s

and 1980s).

These comments surfaced in form of multiple headlines 20 years later.


Glass Steagall Act – Repealed : 1999

After 25 years and 12 attempts, Congress finally

approved the Gramm–Leach–Bliley Act that saw

the demise of the Glass-Steagall Act in 1999

The bills were passed by a Republican majority,

basically following party lines by a 54–44 vote in

the Senate and by a bi-partisan 343–86 vote in

the House of Representatives

The legislation was signed into law by President

Bill Clinton on 12 Nov. 1999

Hence, the commencement of a new era in banking. The modern-day Adam Smiths had prevailed

http://www.ratical.org/corporations/DERU.jpg


Financial Markets : 21st Century

Stormy times


Repeal of Glass-Steagall Era : The effect

The repeal enabled commercial lenders to underwrite

and trade instruments such as :

mortgage-backed securities &

collateralized debt obligations

It also enabled establishing so-called structured

investment vehicles that bought those securities.

Many believe that the repeal of this act contributed to the current Global financial crisis


Global* banking assets : Scale of the bubble

37 37

42

49

5657

79

87

68

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

* Banking Assets data includes United States, Latin America, Western Europe, China, India & Japan

Lower Fed rate has not resulted in lower costs of borrowing

Net credit growth remains low

Unwinding of excesses of 2005-2007 not yet over

+ Low cost of funds

+ Weak

Governance &

Regulations

Glass-Steagall

Act repealed

Contraction

deferred by

various

stimulus…

For now ? US Fed

Funds rate


What failed us ?


Signs were there well before the crisis began

Source : “Losing Ground : Foreclosures in the Subprime Market and

Their Cost to Homeowners” Dec. 2006. www.responsiblelending.org

Losing Ground: Foreclosures in the Subprime Market

and Their Cost to Homeowners (Dec 2006)

Despite low interest rates and a favorable economic

environment during the past several years, the

subprime market has experienced high foreclosure

rates comparable to the worst foreclosure

experience ever in the modern prime market.

Foreclosure rates will increase significantly in many

markets as housing appreciation slows or reverses.

Projected 2.2 million borrowers will lose their homes

and up to $164 billion of wealth in the process.

Many features of typical subprime loans

substantially increase the risk of foreclosure,

regardless of the borrower’s credit history.

Source : Inside Mortgage Finance

An

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Subprime Mortgage Market

“Because the subprime market is

designed to serve borrowers who

have credit problems, one might

expect the industry to offer

subprime loan products

that do not magnify the risk of

loan failure. In fact, the opposite

is true.”


Signs were there well before the crisis began

A last cry ….. Or was it already, as we now know, too late ?

Subprime Lending: A Net Drain on Homeownership”

March 2007

Source : “Subprime Lending: A Net Drain on Homeownership” CRL

Issue Paper No. 14. March 27, 2007. www.responsiblelending.org

Subprime loans made during 1998-2006 have led

or will lead to a net loss of homeownership for

almost one million families.

Net homeownership loss occurs in subprime loans

made in every one of the past nine years.2

History has shown that borrowers with lower

incomes or blemished credit can be successful

homeowners when given suitable mortgages with

reasonable terms and fees. But lax underwriting

practices, dangerous loan products, and a

disregard for affordability have set up vulnerable

homeowners to fail.

As a result, millions of families with the most to

gain from ownership have lost their homes and

billions of dollars in equity.

“Regulators and Congress have hesitated to

curb abusive and reckless lending practices,

citing a concern that stronger consumer

protections might reverse the gains in

homeownership.

The poor record of subprime loans shows that

this fear is misplaced.

In fact, states that have passed stronger laws in

recent years have reduced targeted practices

without reducing access to home loans.

By acting now, policymakers will help ensure

that mortgage loans pave the way to

sustainable homeownership that truly benefits

families and their communities.”


Stakeholders for Corporate Governance

• Bank boards

• Senior management

Primary Responsibility

• Bank supervisors Important Role

• Shareholders Depositors & customers

• Employees Auditors

• Banking industry associations Credit rating agencies

• Governments Securities regulators

• Stock exchanges

Others that can promote good governance


Source : BIS Guidance Papers s.III, s.IV, s.V - Enhancing Corporate

Governance for Banking Organizations, Feb 2006. Go to www.bis.org/BCBS


Perspectives from the Board Room

"We had $17 billion of cash" at the end of last

year, and "that liquidity cushion has been

virtually unchanged."

— Bear Stearns CEO Alan Schwartz telling

CNBC in a March 12, 2008, interview that he is

not aware of any liquidity problems at the firm.

Two days later, Bear Stearns, the fifth largest

U.S. investment bank, was forced to seek

emergency funds from the Federal Reserve and

JPMorgan Chase. The firm was taken over by

JPMorgan that weekend for $2 a share, which

was later raised to $10.

"In today's regulatory environment, it's virtually

impossible to violate rules...it's impossible for a

violation to go undetected, and certainly not for

a considerable period of time."

— Bernard Madoff, Oct. 27, 2007

Madoff was arrested in December, 2008 for

allegedly running a $50 billion Ponzi scheme, the

biggest financial scam in history. Madoff allegedly

misled hundreds of investors around the world for

years.

Source : CNBC, Dec 2008

(http://www.cnbc.com/id/28435645/Famous_Last_Words )


Perspectives from Regulators

"I expect there will be some failures” of smaller

banks. “Among the largest banks, the capital

ratios remain good and I don't anticipate any

serious problems of that sort among the large,

internationally active banks that make up a very

substantial part of our banking system.''

—Federal Reserve Chairman Ben Bernanke,

February 2008

Jul.2008 : IndyMac Bank failed ($32 billion)

Sep.2008 : Washington Mutual failed ($307 bn), the

largest bank failure in history

Oct.2008 : Wachovia was sold to Wells Fargo amid

concerns about its financial health

Citigroup still scrambles to raise cash from both the

government and private sources.

“Most of the negatives in housing are

probably behind us. The fourth quarter

should be reasonably good, certainly better

than the third quarter.

There are early signs of stabilization... It's

not over.

The evidence is that we're beginning to see a

flattening in statistics for sales of new

homes. The rate of construction is well

below the rate of purchases. [The U.S. is]

beginning to dig into the inventories of

unsold new homes.”

— Alan Greenspan, former Federal Reserve

Chairman, speaking at a conference sponsored

by the Commercial Finance Association,

October 26, 2006


Perspectives from Government

"Fannie and Freddie are very solid

institutions. They have more-than-adequate

capital. They have access to capital markets."

— Chris Dodd , chairman of the Senate Banking

Committee, July 14, 2008.

"I think this is a case where Freddie Mac and

Fannie Mae are fundamentally sound. They're

not in danger of going under…I think they are

in good shape going forward."

—Barney Frank, House Financial Services

Committee chairman, July 14, 2008

Sept 2008 : U.S. government seized control of both Fannie Mae & Freddie Mac,

concerned about their mounting losses.

Two years later, the Dodd–Frank Wall Street Reform and Consumer Protection Act, a federal statute in the United States, was signed

into law by President Barack Obama on July 21, 2010.

The law, initially proposed on 2 Dec. 2009 in the House by Barney Frank & in the Senate Banking Committee by Chairman Chris

Dodd, was named after them due to their involvement with the bill.

The Act is the most sweeping change to financial regulation in the US since the Great Depression, & represents a significant change

in the American financial regulatory environment affecting all Federal financial regulatory agencies and almost every aspect of the

nation's financial services industry


Perspectives from Analysts & Commentators

“Lehman is a takeover target…I upgrade to

buy”.

—Dick Bove, banking analyst at Ladenburg

Thalmann, 21 Aug. 2008

Within three weeks, Lehman Brothers filed for

bankruptcy. Stock went from $14 a share to $0.

“Obviously AIG is not going bankrupt. The

insurance company is well capitalized.”

—Charlie Gasparino (CNBC), 5 Dec.2007

Federal Bailout Money for AIG

Sep.2008 : $85.0 Billion

Oct. 2008 : $37.8 Billion

Mar. 2009 : $30.0 Billion

“The worst of this subprime business is over.”

— Kudlow & Company (CNBC), 16 April 2008


Ratings of AAA-Rated U.S. Mortgage-Related Securities (as of July 31, 2010)

% of S&P’s originally AAA rated 2005–07 issuance

Ref : IMF – Global Financial Stability Report, Sovereigns,

Funding, and Systemic Liquidity. October 2010


Corporate

Governance

Reforms


Challenges of Globalization & Governance

Country A

Country B

Country C

Country A

Country B

Country C

Country A

Country B

Country C

The world of

nation states

The world of

multi-nationals

Emergence of a new, transnational

space beyond national states

Can nation states effectively regulate transnational financial institutions ?


Governance & Regulatory Reforms have followed Every Crisis

Crisis New Regulation

1929-30 : Financial Crisis Glass-Steagall Act

1973-74 : Oil Price Crisis Basel Committee on Banking

Supervision

1982 : Latin America Debt Crisis Basel 1

1994-95 : Mexican Crisis

1997-98 : Asian Crisis Basel II

2001-02 : Enron, WorldCom Sarbanes Oxley

Solution – More regulations? Improved Governance ?


Global Governance : Focus on Financial Markets

G20 Summit

OECD

Basel

WTO

UN

FSB

BIS

Paris Club

World Bank

IOSCO

IMF


Avalanche of New Corporate Governance Proposals

G20

Financial Stability Board (FSB)

International Monetary Fund (IMF)

Financial Action Task Force (FATF)

International Accounting Standards Board (IASB)

Basel Committee on Banking Supervision (BCBS)

International Association of Deposit Insurers (IADI)

International Association of Insurance Supervisors (IAIS)

Committee on Payment and Settlement Systems (CPSS)

International Organization of Securities Commissions (IOSCO)

International Auditing and Assurance Standards Board (IAASB)

Organization for Economic Co-operation and Development (OECD)

… . . . . . . . .

Glo

bal

Walker Review of Corporate Governance of UK Banking Industry The UK Corporate Governance Code

Guidance on Audit Committees (December 2010)

Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009

The UK Stewardship Code (July 2010)

Dodd-Frank Wall Street Reform and Consumer Protection Act, July 2010

Study & Recommendations on Prohibitions of Proprietary Trading & certain Relationships with Hedge Funds

& Private Equity Funds, Financial Stability Oversight Council, Jan 2011

European Commission – Green paper on Corporate governance in financial institutions & remuneration

policies, June 2010


Key themes common to all Governance proposals

Causes Response


Corporate Governance Reforms

Summary of key regulations & proposals

Financial Stability Board


US : Dodd-Frank Wall Street Reform & Consumer Protection Act

UK : Walker Review on Corporate Governance

EU : Green Paper on Corporate Governance in FIs & Remuneration Policies


Key Standards for Sound Financial Systems

FSB has designated the Standards under the 12 policy areas as key for sound financial

systems & deserving of priority implementation depending on country circumstances.

While the key standards vary in terms of their degree of international endorsement, they

are broadly accepted as representing minimum requirements for good practice that

countries are encourages to meet or exceed.

The FSB applied the following criteria for determining the list of key standards for sound

financial systems:

Relevant & critical for a stable, robust, and well-functioning financial system (including

in light of the lessons from the recent financial crisis), in order to impart a sense of

prioritization in implementation;

Universal in their applicability, by covering areas that are important in nearly all

jurisdictions

Flexible in implementation, by being general enough to take into account different

country circumstances

Broadly endorsed – namely, that such standards should have been issued by an

internationally recognized body in the relevant area in extensive consultation with

relevant stakeholders. To satisfy this criterion, the standard should preferably undergo

a public consultation process. This criterion would also be satisfied when the standard-

setting body has wide representation, or when the standard has been endorsed by

International Financial Institutions (IFIs), such as the IMF and the World Bank; and

Assessable by national authorities or by third parties such as IFIs.

Source : FSB - Key Standards for Sound Financial Systems

(http://www.financialstabilityboard.org/cos/key_standards.htm)


Area Standard Issuer

Macroeconomic Policy and Data Transparency

1 Monetary & financial policy transparency Code of Good Practices on Transparency in Monetary & Financial Policies IMF

2 Fiscal policy transparency Code of Good Practices on Fiscal Transparency IMF

3 Data dissemination Special Data Dissemination Standard

General Data Dissemination System

IMF

Financial Regulation & Supervision

4 Banking supervision Core Principles for Effective Banking Supervision BCBS

5 Securities regulation Objectives and Principles of Securities Regulation IOSCO

6 Insurance supervision Insurance Core Principles IAIS

Institutional & Market Infrastructure

7 Crisis resolution and deposit insurance 2 Core Principles for Effective Deposit Insurance Systems BCBS/IADI

8 Insolvency Insolvency and Creditor Rights World Bank

9 Corporate governance Principles of Corporate Governance OECD

10 Accounting and Auditing International Financial Reporting Standards (IFRS)

International Standards on Auditing (ISA)

IASB

IAASB

11 Payment, clearing and settlement Core Principles for Systemically Important Payment Systems

Recommendations for Securities Settlement Systems

Recommendations for Central Counterparties

CPSS

CPSS/IOSCO

CPSS/IOSCO

12 Market integrity Forty Recommendations and 9 Special Recommendations on Money

Laundering and Terrorist Financing

FATF

IMF : International Monetary Fund IADI : International Association of Deposit Insurers

BCBS : Basel Committee on Banking Supervision OECD : Organization for Economic Co-operation and Development

IOSCO : International Organization of Securities Commissions IASB : International Accounting Standards Board

IAIS : International Association of Insurance Supervisors IAASB : International Auditing and Assurance Standards Board

CPSS : Committee on Payment and Settlement Systems FATF : Financial Action Task Force

Source : FSB - Key Standards for Sound Financial Systems

(http://www.financialstabilityboard.org/cos/key_standards.htm)

Key Standards for Sound Financial Systems


Board Practices

Senior Management

Complex or Opaque

Corporate Structures

Disclosures & Transparency

Compensation

Risk Management

& Internal Controls

BIS : BCBS Principles for Enhancing Corporate Governance

Focus Areas

• Board Oversight

• Aligned with prudent

risk-taking

• Consistent with the

bank’s ethical values,

objectives, strategy &

control environment

• Board’s overall responsibilities

• Board qualifications

• Board’s own practices & structure

• Group structures

• Effectiveness

• Personnel & resources

• Risk methodologies &

activities

• Communication

• Leverage internal audit &

control functions, external

auditors

• Bank’s activities

• Accountability & transparency

• Risk management systems

• Internal controls

• Adequacy

• Transparency to all

stakeholders

• Operational structure & risks

• Matrix structures

• Operating in not transparent

or compliant jurisdictions

Source : Basel Committee on Banking Supervision – Principles for

enhancing corporate governance. October 2010


USA : Dodd-Frank Act 2010 – 20 Key Areas

Rules for Government / Regulators

1) Financial Stability Oversight Council

2) Ending Too-Big-To-Fail (Unwind Authority)

3) The Federal Reserve

4) Bank Supervision

Rules for Banks / Corporates

5) Enhanced Prudential Standards

6) Volcker Rule

7) Bank Capital

8) OTC Derivatives

9) Foreign Financials

10) Insurance

Rules for Investors

11) Securitization

12) Executive Compensation & Corporate Governance

13) SEC & Investor Protection

14) Credit Rating Agencies

15) Hedge Funds and Private Equity Funds

16) Municipal Securities

Rules for Consumers

17) Consumer Financial Protection Bureau

18) Other Consumer Protections

19) FDIC Deposit Insurance

20) Increases to the FDIC Deposit Insurance Fund Reserve Ratio

21) Others

Dodd-Frank Act

Source : The Implications of Landmark U.S. Reg Reform, Deutsche Bank Securities Inc., July 2010

Source : The Dodd-Frank Wall Street Reform & Consumer Protection Act


USA : Dodd-Frank – On Corporate Governance

Proxy Access. SEC authorized to issue rules permitting shareholders to use the

company’s proxy solicitation materials to nominate director candidates. SEC may

determine appropriate standards & procedures and can exempt certain issuers.

Chairman & CEO Structure Disclosure. SEC, within 180 days after enactment, issue rules

requiring companies to disclose in the proxy statement why they have separated, or

combined, the positions of chairman & CEO.

Risk Committees at Public Companies. Risk committees required for systemically

important, publicly traded non-bank financial companies, as well as any publicly traded

bank holding companies with total assets of $10 billion or more. Federal Reserve may

impose the requirement on publicly traded bank holding companies with <$10 billion in

assets as necessary or appropriate to promote sound risk-management practices. Risk

committees must have the number of independent directors as determined by the Federal

Reserve, and include 1 risk management expert having experience in risk management at

large complex companies.

Board Committee Approval Required for Certain Swap Exemptions. Effective 1 year after

enactment, any issuer of registered securities or reports under the Exchange Act wishing

to use the clearing exemption must have an appropriate committee of the board of

directors review and approve the use of swaps subject to the exemption.

Source : Dodd-Frank Wall Street Reform and Consumer

Protection Act, Enacted into Law on July 21, 2010


USA : Dodd-Frank – On Executive Compensation

Pay and performance disclosure requirements

historical relationship between executive compensation & financial performance of

company

median annual compensation of all employees & annual compensation of the CEO

disclose of whether employees can hedge the value of equity securities

Say on Pay

Gives shareholders the right to a non-binding vote on executive pay and golden

parachutes

Clawback

Requires public companies set policies to take back executive compensation if it was

based on inaccurate financial statements that don’t comply with accounting

standards

Enhanced compensation oversight for the financial industry

Source : Dodd-Frank Wall Street Reform and Consumer

Protection Act, Enacted into Law on July 21, 2010


USA : Dodd-Frank vs. Sarbanes-Oxley

Problem

Management Accountability

Board Accountability

Solution

Empowered Independent Directors – particularly

independent audit committees

Empowered Shareholders


UK : Walker Review on Corporate Governance

Themes of the Report

Walker retains the Combined Code of the Financial Reporting Council

(FRC), specifically the “comply or explain” principle and that no new primary

legislation is needed.

Maintains that the chief deficiency of banks & other financial institutions

(BOFI) were behavioral not organizational. Specifically we need to foster an

environment in which boards get challenged.

Non-executive directors (NEDs) should be charged to focus on risk issues

separately from the executive risk committee process.

Fund managers and other shareholders should engage more productively

with their investee companies over long-term objectives.

There should be enhanced attention to remuneration policies in respect of

variable pay, disclosures and incentives.

Source : International Centre for Financial Regulation

(www.icffr.org)

Corporate Governance in UK Banks & Other Financial Industry Entities, 2009


UK : Walker Review – Board

1. Provide NEDs with thematic

business awareness sessions

2. NEDs should give greater time

commitment

3. NEDs should be under the FSA's

tougher authorization process

1. NEDs should be ready, able and

encouraged to challenge & test

proposals on strategy put forward by the

executive

2. Chairman should be expected to commit

substantial amount of time, have

convincing leadership experience & be

responsible for leadership of the board.

3. Chairman should be proposed for

annual reelection.

4. Board should undertake evaluation of its

performance with external facilitation

every 2nd or 3rd year

5. Evaluation statement should be

released on the annual report to assist

shareholders’ understanding of the main

features of the evaluation process

Size, Composition & Qualification Functioning & Performance Evaluation


(www.icffr.org)


UK : Walker Review – Shareholders & Risk

1. Board should be aware of any material changes

in the share register.

2. FSA should be ready to contact major selling

shareholders to understand their motivation.

3. Best practice “Statement of Principles – the

Responsibilities of Institutional Shareholders

and Agents” should be ratified by the FRC to

become the core of the Principles for

Stewardship.

4. Institutional Shareholders' Committee (ISC), in

consultation with FRC, should annually review

their continuing aptness & propose any

appropriate adaptation

5. FSA should encourage commitment to the

Principles of Stewardship. To facilitate effective

engagement, a Memorandum of Understanding

should be prepared initially among major long-

only investors.

1. A board-level risk committee, established

separately from the audit committee,

chaired by a NED, taking the

responsibility for oversight and advice on

the current risk exposure and future risk

strategy.

2. A major element in the mandate of the

risk committee should relate to capital.

3. Board risk committee should, as a matter

of good practice, draw on external

advice.

4. Risk report should be included as a

separate report within the annual report

5. Risk committees should have power to

scrutinize strategic transactions involving

acquisition or disposal, and necessary

block big transactions

Role of Institutional Shareholders:

Communication & Engagement Governance of Risk


(www.icffr.org)


UK : Walker Review – Remuneration

1. Remuneration committee’s remit should

cover firm-wide pay with particular

emphasis on risk.

2. Chairman of the committee should face

re-election if the risk report attracts less

than 75% shareholder approval

3. Remuneration committee should

oversee the pay of highly paid non-

board executives & should disclose

such "high-end" remuneration in bands

4. There should be a significant deferral in

incentive payments for all “high-end”

executives based on specific risk

adjustment mechanisms

“If banks are to be able to contribute to

the nation’s economic recovery and

wellbeing, it is of critical importance that

remuneration practices be

reconstructed to provide incentives in

support of sustainable performance.”

Remuneration


(www.icffr.org)


Board of Directors

Shareholders

External Auditors

Remuneration

Supervisors

Risk Management

Policies encourage short-termism &

excessive risk taking.

Unable to adequately identify,

understand & control risks that

their financial institutions are

exposed to

The function, specifically the

CRO, often lacks the authority,

independence & perspective to

implement adequately a

suitable risk management

culture

Do not fulfill their duty sufficiently

as “responsible owners” to ensure,

via exercise of their voting rights,

long-term viability of financial

institutions & adequate corporate

governance

Do not assess adequately the

competencies of individual

board members and the

functioning of the board itself;

Roles & responsibilities may

need to be expanded

Source : European Commission – Green paper on Corporate governance

in financial institutions and remuneration policies, June 2010

Governance of financial

institutions :

Sources of weaknesses

& considerations

EU : Green Paper on Corporate Governance in FIs &

Remuneration Policies




Key recommendations to public consultation

1. Limit the number of boards

that a director could sit on

2. Requiring greater

expertise, relevant

experience and diversity;

3. Increasing legal liability via

expansion of directors’

duty of care

4. prohibiting combining the

role of chair and CEO

5. regulation or restriction of

stock options & golden

parachutes.

1. Strengthen role of directors in

risk supervision

2. Add risk management

committee at the board level

3. Formal public risk statement

that defines, validates &

discloses an entity’s risk

appetite, profile and risk

management system

parameters.

4. This proposed risk statement

would be in addition to the

required risk disclosures under

IFRS 7, which focuses more

narrowly on an entity’s

requirement to disclose their

exposure to, and management

of, risks related to financial

instruments.

1. Greater emphasis on

shareholder

responsibility

2. Greater transparency of

asset managers’

incentives and

engagement

3. More comprehensive

disclosure by entities of

risk appetite, risk

exposure and risk

management systems.

Risk Management Shareholders Board of Directors






1. Creating a duty for

supervisors to assess

the effectiveness of

the directors

2. Increasing the

supervisors’ role in

assessing the

eligibility of director

candidates

1. Increased cooperation

with supervisors

2. Increased reporting to the

board of directors and

supervisors of serious risk

circumstances

3. Potential requirements to

provide additional

assurance connected to

risk-related financial

information.

1. Commission has already

adopted two recommendations

on remuneration and released

two assessment reports by

member states in conjunction

with this green paper.

2. Those reports note that the

application of the Commission’s

previous recommendations has

been neither uniform nor

satisfactory.

3. Therefore, this green paper

considers the need for relevant

legislative measures.

Comments were due by 1 September 2010, after which the Commission would consider whether any proposals will

be adopted in the course of 2011.

Supervisors External Auditors Remuneration

Key recommendations to public consultation




Key themes common to all proposals

Causes Response

Structure, conduct & monitoring and enforcement

Internal procedures have to be clear, enforced

and effective

External relations have to be managed by both

sides & be transparent

Need for global uniformity of standards to contain

regulatory arbitrage

Stronger global governance


Corporate Governance Reforms :

Challenges Ahead


Pressure in the Board Room

Banks are facing increasing scrutiny of

actions in the Board Room

Institutional investors demanding more

transparency & engagement

Boards seen as the vehicles to restoring

trust & protecting average investors


Risks : Lesser or different ?

Regulatory Arbitrage :

– Capital is mobile and may float to the least regulated jurisdictions

– OTC derivatives market : Consistent global reform critical to avoid

regulatory arbitrage & reduce systemic risk

– Markets may lose competitiveness if banks move businesses to ‘easier’

regulatory regimes

New regulations could increase the systemic risk to the world

economy : Increased internationalization of financial regulation risks

amplifying future global booms & busts. Global regulations lead to global

crises as organizations are encouraged to hold similar assets and respond

in similar ways when things go wrong.

Too Big To Fail : Attempts to focus regulation on the institutions that

contribute the most to systemic risk carry their own risks. If institutions

understand that they are seen as “too big to fail” then that will encourage

excessive risk taking.

Procyclical : Basel regulations may still be procyclical, imposing more

onerous requirements on institutions at times when the system is in trouble.

“Financial System

Riskier, Next Bailout

Will Be Costlier”

– Standard & Poor,

April 2011


Remuneration

“It is impossible to establish a compensation mechanism that

separates skilled from unskilled managers solely on the basis of their

returns histories.

In particular, any compensation mechanism that deters unskilled risk-

neutral mimics also deters all skilled risk-neutral managers who

consistently generate returns in excess of the risk-free rate”

– Dean Foster & Peyton Young

Dean P. Foster - Professor of Statistics; Marie and Joseph Melone Professor, Wharton

Peyton Young - Research Professor in Economics, Johns Hopkins University


Shareholder-Creditor Conflict

Greater risk taking depresses creditor claims & increases

shareholder value

Equity cost of capital high in context of shareholder-creditor

conflict: increased capital is wealth transfer to creditors

Which Shareholders

Critical role of hedge funds in takeovers

High frequency trading: 60-70% of equity trades in US and 30-

40% in Europe

Average holding period of shares declined from 3 years in 1990

to less than a year

Should the firm reflect all shareholder interests equally or mainly

long-term ?


In conclusion

The theory that moral responsibility & self-interested competition in the

free market would alone tend to benefit society has failed the world again

Current efforts should not be taken as an assurance that the system is

now crisis-proof

Government to play a more intrusive role.

Strike a balance between standardization & diversity in regulations

Risk capabilities to define individual institution strategies

Stress test organizations against ‘herd mentality’

A new balance between free markets & regulation – however, compliance

with regulation is itself not enough

Start of an era of “Responsible Banking”

Adapt quickly : late can be too late

Regulatory & Policy frameworks requires strengthening – both inside the

banks and outside

Focus on core stakeholders – Rebuild trust

The crisis is not over yet….neither are the lessons


About StraitsBridge


StraitsBridge leadership team has led some of the world’s most prestigious organizations

across banking & financial services, consulting, and information technology sectors

Supporting CFOs in Financial Services

Finance transformation

that YOU need

Global experience.

Customized solutions.

We are finance professionals first.

We bring our global experience to

customise best practices so they

help CFOs achieve high

performance.

Our services span across the CFO

domain in financial services....

....with proven strategies to

address challenges facing the

CFOs

Singapore Dubai New Delhi

The CFO’s

trusted partner

Dedicated focus on the CFO

agenda.

We know what works, how to make

it work & the pitfalls to avoid – vital

for achieving lasting

transformation.

ADVISORY SOLUTIONS IMPLEMENTATION

CFO

finance transformation

tech

no

log

y &

sys

tem

s

performance

risk

financial control

ba

lan

ce

sh

ee

t

capital

liq

uid

ity

investor relations

Strategy margins

basel

ER

P

payables

general ledger

m&a

information

costs RO

I

revenue

audit

tax

regulations

data


Financial Control & Risk Management

Performance Management

Balance Sheet & Capital

Mergers & Acquisitions

Investor Relations

Strategy Development

Finance Technology &

Systems

Business Intelligence &

Data Management

Solutions across the CFO’s domain

EXPERTISE : Our expertise spans across the CFO’s

domain in financial services – the structure of our

practice reflects its complexity

BESPOKE SOLUTIONS: We leverage best practices &

customise them to develop and deliver solutions that

help achieve lasting transformation

THE RIGHT PARTNER : Our unique mix of strategy,

finance, governance, technology, productivity and

program management allows us to be the right partner

to the CFOs in achieving financial effectiveness for

their organizations

Areas of Expertise

People

Technology Processes

Organization

Our well designed implementation strategies embody change across all elements of the Finance infrastructure

— organization, process, people & technology.


Profile : SANJAY UPPAL

Name Sanjay Uppal

Position Founder & Chief Executive Officer, StraitsBridge Advisors

Other

Positions

Non-executive Director Taurus Wealth Advisors, Singapore

Mentor ICAEW F-Ten International leadership development program

Professional

Experience

Over twenty years’ experience in Finance with leading international and Asian banks, including CFO, Board, global strategy and

finance leadership roles.

Led complex transformation and growth for banks through bringing together a distinctive mix of corporate finance, strategy

development, corporate governance, M&A, technology enablement and change management skills.

Standard Chartered Bank – CFO & Senior leadership roles : As CFO for Taiwan, Philippines & the UAE and in finance leadership

roles in Singapore, India & Indonesia, Sanjay was instrumental in delivering transformational growth for the business leveraging

transformation of Finance as a true business partner.

Group CFO, EmiratesNBD [Assets ~ US$ 78 billion] : Led the bank’s transformational growth from 2005 to 2010 to emerge the

largest banks in the MENA region, including its US$ 11 billion merger with National bank of Dubai.

Group CFO, Hong Leong Bank [Assets ~ US$ 52 billion] : Led the transformation of the Finance function, post-merger financial

integration, realization of synergies, balance sheet restructuring & capital funding.

Over the years, Sanjay has delivered keynote speeches at CFO conferences across Asia and awarded by industry bodies for his

role as a CFO and for investor relations.

Expertise Financial Management & Governance

Mergers & Acquisitions

Investor relations

Corporate Finance & Capital Markets

Finance systems & technology

Post merger integration

Profit Improvement

Strategy Development & Execution

Organization development

Balance Sheet & Capital Management

Business Intelligence

Post-merger Synergies

Organizations

& Markets

Standard Chartered Singapore, Taiwan, Philippines,

Indonesia, India, UAE

EmiratesNBD UAE, KSA, Qatar, Singapore, UK, Jersey

Hong Leong Bank Malaysia, Singapore, Vietnam,

Hong Kong

ANZ India

Qualifications MBA (Finance)

Bachelor degree in Electrical & Electronics Engineering

Masters degree in Physics


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