Corporate scandals have brought the issue of good governance into sharp focus. Good governance is more important than ever, not just in terms of complying with rules laid down by regulators, but also in terms of reassuring shareholders and other stakeholders that a company is being run properly.
The Banker and FT Business ran a morning briefing on the topic last month. Entitled ‘Control and Survive: Benchmarking Corporate Governance in Global Banking’, it featured senior staff from ABN AMRO, HBOS, Banca Comerciala Romana, Bank of America, the Bank for International Settlements (BIS), the International Banking Federation (IBFed), the Organisation for Economic Co-operation and Development (OECD), the European Corporate Governance Forum and the UK’s Financial Reporting Council. Sir Derek Higgs, author of the UK’s Combined Code, and a non-executive director of Egg and Allied Irish Banks, also spoke.
Whistleblowers
Richard Bruens, head of investor relations at ABN AMRO, outlined his bank’s approach to corporate governance and how relations are conducted between the supervisory board, the managing board and shareholders. Its policy on whistleblowers (employees who alert the authorities to malpractice) was particularly important, he said. The bank has to comply with the Dutch corporate governance code on this matter and, for its US operations, with the Sarbanes-Oxley Act. “Suspicions of malpractice must be reported, reports are handled confidentially and whistleblowers must be protected,” he said.
Grant Kirkpatrick of the OECD’s Corporate Affairs Division, which promotes “principles of corporate governance” around the world, said protection for staff who reported their employers to regulators was essential. “Let’s be honest about this. Whistleblowers around the world will never get a job again. That’s why our principles are very strong on protecting them. But very few countries enforce that part of the principles,” he said.
Compliance monitor
The OECD monitors countries on their levels of compliance. “We are looking at state-owned enterprises in particular, including state-owned banks,” said Mr Kirkpatrick.
“We have set up regional round tables around the world to develop good governance and we are finalising a report on how governance in Asian banks can be improved. We are also working with experts from many countries to develop a boardroom guide on the OECD principles and national codes,” he said.
Charles Freeland, deputy secretary general of the Basel Committee on Banking Supervision, BIS, said banks differed in many respects from other corporate bodies, which was why the Basel Committee had translated the OECD principles into something more relevant to banks. “We have not provided mandatory rules, just guidance,” he said.
Guidance update
Following the revision of the OECD principles last year, the Basel Committee is updating its guidance. It published a consultation paper in July – Enhancing corporate governance for banking organisations – on which banks have until the end of October to comment. “I would encourage anyone interested to look at it and react,” he said.
The document covers emerging markets as well as the BIS member countries, and contains four potentially controversial topics. “The section on compensation says that the board and management needs to look at long-term incentives and less at short-term bonuses,” said Mr Freeland. “There are also paragraphs on the treatment of conflicts of interest, which note that, if there are conflicts, they need to be identified and managed, and made transparent to shareholders.”
A third section says the board and management of banks need to know the activities in which their banks are engaged and manage them carefully, particularly areas such as structured finance, offshore finance and other areas where there are high reputational risks. Fourth, there is mention of how whistleblowers should be dealt with and protected.
Governance fatigue
Ian Mullen, chairman of IBFed and chief executive of the British Bankers’ Association, broadly supported the contents of the Basel paper but sounded a few notes of caution. In particular, he was critical of the suggestion that all customers and depositors should be sent their bank’s full annual report and accounts.
While banks need to be properly and carefully run, Mr Mullen and other speakers warned of “governance fatigue” – something that afflicts company boards but which could spread to the public at large.
