Corporate Governance Reforms Post Global Financial Crisis

Corporate Governance in Financial Services
Reforms Post Global Financial Crisis

Sa nj a y U ppa l
Chief Executive Officer
Singapore
18 May 2011
Copyright © 2013 StraitsBridge Advisors Pte Ltd

0

Importance of
Corporate Governance


1

An integral component of a complex governance framework

Political / Social
Governance

Economic
Governance

Legal, Institutional
& Regulatory
Governance

CORPORATE
GOVERNANCE


2

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

Underlying
Principles
Disclosure &
Transparency

Rights & equitable
treatment of
shareholders

“The Foundation for Corporate Citizenship and
Sustainable Businesses.
Corporate citizenship — a commitment to ethical
behavior in business strategy, operations and culture.”

Source : European Central Bank, Annual Report: 2004
Source : © 2009 U.N. Global Compact and the International Finance Corporation.


3

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


4

Global Financial Markets: 2009
Capital Markets = US$ 232.2 trillion

Bank Assets = US$ 92.9 trillion
3.6

47.2
92.9

8.5

14.2
10.7

16
36.4

8.9

55.7
Stock Market
Debt : Private

Source: IMF, Global Financial Stability Report, October 2010

31
Debt : Govt.
Bank Assets

US
EU (other)
Others

UK
Developing

Japan
New Asia *

* Includes: Hong Kong, Korea, Singapore & Taiwan

World GDP = US$ 62.9


5

Sound Corporate Governance in Banks
powers Economic Development
Banks

Impact on Economic Development

Increases access to
finance

Lowers cost of capital &
improves valuation

Improves operational
performance

Builds / restores a bank’s
reputation

Less & better managed
risk

• Investment, growth, employment opportunities

• Investment & growth opportunities

• Better allocation of resources & decision-making
creates wealth

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

• Fewer defaults, fewer financial crises brings
economic stability

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

6

Banks Play a Vital Role in the Economy

Well Governed Banks

Poorly Governed Banks

Play a positive role in the
economy

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

Mobilize & allocate
society’s savings
Provide financing &
transmission facilities to
commercial activities


7

Who is responsible for Corporate Governance ?
Basel Committee on Banking Supervision

Primary
Responsibility

• Board of Directors
• Senior Management

Important Role

• Bank Supervisors

Others that can
promote good
governance

• Shareholders
• Employees
• Banking industry associations
• Governments
• Stock exchanges

Source : BIS Guidance Papers s.III, s.IV, s.V - Enhancing Corporate
Governance for Banking Organizations, Feb 2006. www.bis.org/BCBS


 Depositors & customers
 Auditors
 Credit rating agencies
 Securities regulators

8

Banking in the 20th Century :

Key Developments


9

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

10

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

1992

1995


1997

1999

11

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 ?

12

This led to the debate on increased regulation vs. deregulation

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

13

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

14

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.

15

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

16

Financial Markets : 21st Century
Stormy times


17

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

18

Global* banking assets : Scale of the bubble
Contraction
deferred by
various
stimulus…
For now ?

87
79

US Fed
Funds rate

68

56

Glass-Steagall
Act repealed

+ Weak
Governance &
Regulations

49
42

37

2000

37

2001

57

+ Low cost of funds
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


19

What failed us ?


20

 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.

Subprime Mortgage Market

% of mortgage market

Losing Ground: Foreclosures in the Subprime Market
and Their Cost to Homeowners (Dec 2006)

Annual Loan Vol $bn

Signs were there well before the crisis began

Source : Inside Mortgage Finance

 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 : “Losing Ground : Foreclosures in the Subprime Market and
Their Cost to Homeowners” Dec. 2006. www.responsiblelending.org


“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.”

21

Signs were there well before the crisis began

Subprime Lending: A Net Drain on Homeownership”
March 2007
 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.

“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.”

 As a result, millions of families with the most to
gain from ownership have lost their homes and
billions of dollars in equity.

Source : “Subprime Lending: A Net Drain on Homeownership” CRL
Issue Paper No. 14. March 27, 2007. www.responsiblelending.org

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

22

Stakeholders for Corporate Governance

• Bank boards
Primary Responsibility
• Senior management

Important Role

Others that can promote
good governance

• Bank supervisors

• Shareholders
• Employees
• Banking industry associations
• Governments
• Stock exchanges

Source : BIS Guidance Papers s.III, s.IV, s.V - Enhancing Corporate
Governance for Banking Organizations, Feb 2006. Go to www.bis.org/BCBS


 Depositors & customers
 Auditors
 Credit rating agencies
 Securities regulators

23

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."

"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."

— 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.

— Bernard Madoff, Oct. 27, 2007

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.

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 )


24

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


25

Perspectives from Government

"Fannie and Freddie are very solid
institutions. They have more-than-adequate
capital. They have access to capital markets."

"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."

— Chris Dodd , chairman of the Senate Banking
Committee, July 14, 2008.

—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


26

Perspectives from Analysts & Commentators

“Lehman is a takeover target…I upgrade to
buy”.

“Obviously AIG is not going bankrupt. The
insurance company is well capitalized.”

—Dick Bove, banking analyst at Ladenburg
Thalmann, 21 Aug. 2008

—Charlie Gasparino (CNBC), 5 Dec.2007

Within three weeks, Lehman Brothers filed for
bankruptcy. Stock went from $14 a share to $0.

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


27

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

Ref : IMF – Global Financial Stability Report, Sovereigns,
Funding, and Systemic Liquidity. October 2010

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


28

Corporate
Governance
Reforms


29

Challenges of Globalization & Governance
The world of
nation states

The world of
multi-nationals

Country A

Country B
Country A

Emergence of a new, transnational
space beyond national states

Country C
Country B
Country A

Country C
Country B

Country C

Can nation states effectively regulate transnational financial institutions ?

30

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

1994-95 :

Mexican Crisis

1997-98 :

Asian Crisis

2001-02 :

Enron, WorldCom

Basel 1

Basel II

Sarbanes Oxley

Solution – More regulations? Improved Governance ?

31

Global Governance : Focus on Financial Markets
OECD
IMF

Basel

IOSCO

WTO

G20
Summit
World
Bank

UN

Paris
Club

FSB

BIS

32

Global

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)
…..... . . .

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


33

Key themes common to all Governance proposals

Causes

Response


34

Corporate Governance Reforms
Summary of key regulations & proposals
 Financial Stability Board
 Basel Committee on Banking Supervision

 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


35

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 standardsetting 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)


36

Key Standards for Sound Financial Systems
Area
Macroeconomic Policy and Data Transparency
1 Monetary & financial policy transparency
2 Fiscal policy transparency
3 Data dissemination

Financial Regulation & Supervision
4 Banking supervision
5 Securities regulation
6 Insurance supervision
Institutional & Market Infrastructure
7 Crisis resolution and deposit insurance 2
8 Insolvency
9 Corporate governance
10 Accounting and Auditing
11 Payment, clearing and settlement

12 Market integrity

IMF :
BCBS :
IOSCO :
IAIS :
CPSS :

Standard

Code of Good Practices on Transparency in Monetary & Financial Policies
Code of Good Practices on Fiscal Transparency
Special Data Dissemination Standard
General Data Dissemination System

Core Principles for Effective Banking Supervision
Objectives and Principles of Securities Regulation
Insurance Core Principles

Core Principles for Effective Deposit Insurance Systems
Insolvency and Creditor Rights
Principles of Corporate Governance
International Financial Reporting Standards (IFRS)
International Standards on Auditing (ISA)
Core Principles for Systemically Important Payment Systems
Recommendations for Securities Settlement Systems
Recommendations for Central Counterparties
Forty Recommendations and 9 Special Recommendations on Money
Laundering and Terrorist Financing

International Monetary Fund
International Organization of Securities Commissions
International Association of Insurance Supervisors
Committee on Payment and Settlement Systems

Source : FSB - Key Standards for Sound Financial Systems
(http://www.financialstabilityboard.org/cos/key_standards.htm)

IADI :
OECD :
IASB :
IAASB :
FATF :

Issuer

IMF
IMF
IMF

BCBS
IOSCO
IAIS

BCBS/IADI
World Bank
OECD
IASB
IAASB
CPSS
CPSS/IOSCO
CPSS/IOSCO
FATF

International Association of Deposit Insurers
Organization for Economic Co-operation and Development
International Accounting Standards Board
International Auditing and Assurance Standards Board
Financial Action Task Force


37

BIS : BCBS Principles for Enhancing Corporate Governance

Board
Practices
• Effectiveness
• Personnel & resources
• Risk methodologies &
activities
• Communication
• Leverage internal audit &
control functions, external
auditors

•
•
•
•

Board’s overall responsibilities
Board qualifications
Board’s own practices & structure
Group structures

Risk
Management
& Internal
Controls

Senior
Management

•
•
•
•

Bank’s activities
Accountability & transparency
Risk management systems
Internal controls

Focus Areas
• Board Oversight
• Aligned with prudent
risk-taking
• Consistent with the
bank’s ethical values,
objectives, strategy &
control environment

Complex or
Opaque
Corporate
Structures

Compensation

Source : Basel Committee on Banking Supervision – Principles for
enhancing corporate governance. October 2010

Disclosures &
Transparency

• Operational structure & risks
• Matrix structures
• Operating in not transparent
or compliant jurisdictions

• Adequacy
• Transparency to all
stakeholders


38

USA : Dodd-Frank Act 2010 – 20 Key Areas

1)
2)
3)
4)

Rules for Government / Regulators
Financial Stability Oversight Council
Ending Too-Big-To-Fail (Unwind Authority)
The Federal Reserve
Bank Supervision

5)
6)
7)
8)
9)
10)

Rules for Banks / Corporates
Enhanced Prudential Standards
Volcker Rule
Bank Capital
OTC Derivatives
Foreign Financials
Insurance

Dodd-Frank Act

Rules for Investors
11)
12)
13)
14)
15)
16)

Securitization
Executive Compensation & Corporate Governance
SEC & Investor Protection
Credit Rating Agencies
Hedge Funds and Private Equity Funds
Municipal Securities

17)
18)
19)
20)
21)

Rules for Consumers
Consumer Financial Protection Bureau
Other Consumer Protections
FDIC Deposit Insurance
Increases to the FDIC Deposit Insurance Fund
Reserve Ratio
Others

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


39

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


40

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


41

USA : Dodd-Frank vs. Sarbanes-Oxley

Problem

Solution

Management Accountability

Empowered Independent
Directors – particularly
independent audit committees

Board
Accountability

Empowered
Shareholders


42

UK : Walker Review on Corporate Governance
Corporate Governance in UK Banks & Other Financial Industry Entities, 2009

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)


43

UK : Walker Review – Board
Size, Composition & Qualification
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

(www.icffr.org)

Functioning & Performance Evaluation
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


44

UK : Walker Review – Shareholders & Risk
Role of Institutional Shareholders:
Communication & Engagement

Governance of 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 longonly investors.

(www.icffr.org)

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


45

UK : Walker Review – Remuneration
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

“If banks are to be able to contribute to

3. Remuneration committee should
oversee the pay of highly paid nonboard executives & should disclose
such "high-end" remuneration in bands

wellbeing, it is of critical importance that

4. There should be a significant deferral in
incentive payments for all “high-end”
executives based on specific risk
adjustment mechanisms

support of sustainable performance.”

(www.icffr.org)

the nation’s economic recovery and

remuneration practices be
reconstructed to provide incentives in


46

EU : Green Paper on Corporate Governance in FIs &
Remuneration Policies
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 assess adequately the
competencies of individual
board members and the
functioning of the board itself;

Board of
Directors

Risk
Management

Shareholders

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

Governance of financial
institutions :
Sources of weaknesses
& considerations
External
Auditors

Supervisors

Source : European Commission – Green paper on Corporate governance
in financial institutions and remuneration policies, June 2010

Remuneration

Roles & responsibilities may
need to be expanded

Policies encourage short-termism &
excessive risk taking.


47

Key recommendations to public consultation
Board of Directors
1. Limit the number of boards
that a director could sit on

1. Strengthen role of directors in
risk supervision

2. Requiring greater
expertise, relevant
experience and diversity;

2. Add risk management
committee at the board level

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.

Shareholders

Risk Management

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.


48


Key recommendations to public consultation
Supervisors
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

External Auditors

Remuneration

2. Increased reporting to the
board of directors and
supervisors of serious risk
circumstances

1. Commission has already
adopted two recommendations
on remuneration and released
two assessment reports by
member states in conjunction
with this green paper.

3. Potential requirements to
provide additional
assurance connected to
risk-related financial
information.

2. Those reports note that the
application of the Commission’s
previous recommendations has
been neither uniform nor
satisfactory.

1. Increased cooperation
with supervisors

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.



49

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


50

Corporate Governance Reforms :
Challenges Ahead


51

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


52

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.

“Financial System
Riskier, Next Bailout
Will Be Costlier”
– Standard & Poor,
April 2011

Procyclical : Basel regulations may still be procyclical, imposing more
onerous requirements on institutions at times when the system is in trouble.


53

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 riskneutral 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


54

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 3040% 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 ?


55

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

56

About StraitsBridge


57

Supporting CFOs in Financial Services


A DVISORY



S OLUTIONS

The CFO’s
trusted partner

Finance transformation
that YOU need

investor
relations

audit

ERP

balance
sheet

financial control
m&a tax
Strategy margins

capital

risk

liquidity

data CFO

regulations
ROI

finance transformation
basel costs

Global experience.
Customized solutions.

performance
technology & systems

general
ledgerinformation
revenue payables

I MPLEMENTATION

Our services span across the CFO
domain in financial services....

Dedicated focus on the CFO
agenda.

....with proven strategies to
address challenges facing the
CFOs

We know what works, how to make
it work & the pitfalls to avoid – vital
for achieving lasting
transformation.

We are finance professionals first.
We bring our global experience to
customise best practices so they
help CFOs achieve high
performance.

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

across banking & financial services, consulting, and information technology sectors
Singapore  Dubai  New Delhi

58

Solutions across the CFO’s domain
Areas of Expertise
Financial
Control & Risk
Management

EXPERTISE : Our expertise spans across the CFO’s
domain in financial services – the structure of our
practice reflects its complexity

Business
Intelligence &
Data
Management

Performance
Management

BESPOKE SOLUTIONS: We leverage best practices &
customise them to develop and deliver solutions that
help achieve lasting transformation

Organization

People

Finance
Technology &
Systems

Processes

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

Balance Sheet
& Capital

Technology

Strategy
Development

Mergers &
Acquisitions

Investor
Relations

Our well designed implementation strategies embody change across all elements of the Finance infrastructure
— organization, process, people & technology.

59

Profile : SANJAY UPPAL
Name

Sanjay Uppal

Position

Founder & Chief Executive Officer, StraitsBridge Advisors

Other

 Non-executive Director

Taurus Wealth Advisors, Singapore

Positions

 Mentor

ICAEW F-Ten International leadership development program

Professional

 Over twenty years’ experience in Finance with leading international and Asian banks, including CFO, Board, global strategy and
finance leadership roles.

Experience

 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.

 Organization development
 Balance Sheet & Capital Management

 Finance systems & technology

 Business Intelligence

 Post merger integration

Qualifications

 Strategy Development & Execution

 Corporate Finance & Capital Markets

& Markets

 Profit Improvement

 Investor relations

Organizations

 Financial Management & Governance
 Mergers & Acquisitions

Expertise

 Post-merger Synergies

 Standard Chartered Singapore, Taiwan, Philippines,
Indonesia, India, UAE

 Hong Leong Bank

Malaysia, Singapore, Vietnam,
Hong Kong

 EmiratesNBD

 ANZ

India

UAE, KSA, Qatar, Singapore, UK, Jersey

 MBA (Finance)
 Bachelor degree in Electrical & Electronics Engineering
 Masters degree in Physics


60

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