corporate governance example
Transcript of corporate governance example
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CORPORATE GOVERNANCE FRAMEWORK
byProf. YRK Reddy
www.yagaconsulting.comwww.academyofcg.org
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The Globalisation of StandardsThe 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 SituationA Good Situation
Research
Analysis/
Media/
Ratings/
markets forcontrol
Activisim/
Transparency/
Accountability/
equitable rights
Shareholder Meetings & Vote
Board, supervision, meetings & Vote
Management Reportings
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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
External
Private
Reputational agents1
AccountsLawyersCredit RatingInvestment BankersFinancial mediaInvestment advisorsResearch
Corporate GovernanceAnalysis
MarketsCompetitive factor and
product marketsForeign direct investmentCorporate control
Standards
(for example, accounting
and auditing)
Laws and
regulations
Regulatory
Financial SectorDebtEquity
Shareholders
Board of Directors
Management
Core functions
Reports to
Appoints
andmonitors
Operates
Internal
Stakeholders
Modern corporations are disciplined byModern corporations are disciplined by
internal and external factorsinternal and external factors(Source: Corporate Governance Framework, Nadereh Chamlou, Magdi Iskande, World Bank)
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The Irresistible Case for CGThe 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 The Country Analysis in Scorecard
Four Critical FactorsFour Critical Factors
Legal InfrastructureLegal Infrastructure
RegulationRegulation
Information InfrastructureInformation Infrastructure
Market InfrastructureMarket 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 byBoards 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 Boardsand senior management.
Integrates with other Core Principles that relate toCG: Suitability of Persons
Changes in control & Portfolio Transfers.
Internal Controls
On-site inspections Risk Assessment & Risk Management
Information, disclosure and Transparency towards themarket
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Insurance Core Principles on
Corporate GovernanceEssential criteria
A) The supervisory authority requires and verifies that theinsurer complies with applicable corporate governance
principlesB) Board of Directors:
1. Sets out its responsibilities in accepting and committing tothe specific corporate governance principles for itsundertaking. Regulations on corporate governance should be
covered in general company law and/or insurance law. Theseregulations should take account of the size, nature andcomplexity of the insurer.
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2. Establishes policies and strategies, the means of attainingthem, and procedures for monitoring and evaluating the
progress toward them. Adherence to the policies andstrategies are reviewed regularly, and at least annually.
3. Satisfies itself that the insurer is organised in a way thatpromotes the effective and prudent management of the
institution and the boards oversight of that management.The board of directors has in place and monitors independentrisk management functions that monitor the risks related tothe type of business undertaken. The board of directorsestablishes 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 boardof directors delegates its responsibilities and establishes
decision-making processes. The insurer establishes a divisionof responsibilities that will ensure a balance of power andauthority, so that no one individual has unfettered powers ofdecision.
5. Establishes standards of business conduct and ethicalbehaviour for directors, senior management and otherpersonnel. These include policies on private transactions, self-dealing, preferential treatment of favoured internal andexternal entities, covering trading losses and other inordinate
trade practices of a non-arms length nature. The insurer hasan on-going, appropriate and effective process of ensuringadherence to those standards.
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10. Communicates with the supervisory authority as required andmeets with the supervisory authority when requested.
11. Sets out policies that address conflicts of interest, fairtreatment of customers and information sharing withstakeholders, and reviews these policies regularly (refer to ICP25).
C) Senior Management is responsible for:
1. Overseeing the operations of the insurer and providingdirection to it on a day-to-day basis, subject to the objectivesand policies set out by the board of directors, as well as to
legislation.
2. Providing the board of directors with recommendations, for itsreview and approval, on objectives, strategy, business plansand major policies that govern the operation of the insurer.
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3.Providing the board with comprehensive, relevant and timelyinformation 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 specificresponsibilities like a compensation committee, auditcommittee or risk management committee.
2. The remuneration policy for directors and senior management hasregard to the performance of the person as well as that of theinsurer. The remuneration policy should not include incentivesthat would encourage imprudent behaviour.
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3. The board of directors identifies an officer or officers with
responsibility for ensuring compliance with relevantlegislation 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 goodpractice 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 toenhance the protection of policyholders and/or shareholders beyondthe protection already by existing regulation and supervision; and
To develop complementary guidance specifically directed to theinsurance sector that would supplement corporate governance rulesgenerally applicable to corporations
Covers:
Governance structure,
Internal governance mechanisms andStakeholders protection
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Guidelines for Insurers Governance
1. Governance Structure: The governance
structure must establish an appropriate
division of administrative and oversight
responsibilities, stipulate and delineate thequalifications 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 administrationof 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 shouldhave appropriate control, communication and incentive
mechanisms that encourage good decision making power andtimely execution, transparency, disclosure and ensure regularreview and assessment, having regard to the branches of
business operated. These mechanisms should be tailored to theprotection of policyholders, beneficiaries and shareholders (orparticipating policyholders).
Guideline VIII. Internal controls
Guideline IX. Reporting
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3. Stakeholders protection: The governance framework ofinsurance entities should ensure an appropriate protection of the
rights of stakeholders through disclosure and redress mechanismsand the compliance with the basic rights of shareholders orparticipating policyholders in the case of mutual insurers.
Guideline X. Protection of participating policyholders in thecase of mutual insurers.
Guideline XI. Disclosure
Guideline XII. Redress