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    2005 YRK Reddy 1

    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