CORPORATE GOVERNANCE

Regulatory expectations and current good practice

Charles CattellThe Cattellyst Consultancy

“Accidents don’t happen by accident!”

Concerns stemming from the crisis

• The nature of the financial system

• Adequacy of capital and liquidity

• Attention to risk• Quality of governance• Culture within firms

– Individual – Collective

• The Walker Review– A review of corporate

governance in UK banks and other financial industry entities

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Governance initiatives

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UK Corporate Governance Code

Comply or

explain

• Leadership• Effectiveness• Accountability• Remuneration• Relations with shareholders

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Main principles - leadership

• Board is collectively responsible for long term success

• Clear division between running the board and running the business

• Chairman is responsible for leadership and ensuring board effectiveness

• NEDs should constructively challenge and help develop proposals on strategy

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Main principles - effectiveness• Board and committees to have appropriate balance of skills,

experience, independence and knowledge of company• Formal, rigorous and transparent procedure for appointing new

directors• All directors should allocate sufficient time to discharge

responsibilities effectively• All directors should be induced and regularly update/refresh

their skills and knowledge• Board information to be supplied in a timely manner and

appropriate quality• Formal and rigorous annual evaluation of board and individuals• All directors should submit to regular re-election

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Main principles - accountability

• Present balanced and understandable assessment of position and prospects

• Board to determine risk appetite and maintain risk management and control systems

• Formal and transparent arrangements for applying risk management and control principles and maintaining relationship with auditors

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Main principles – remuneration and shareholder relations

• Remuneration to attract and motivate directors of required quality. Executive directors’ remuneration to reflect corporate and individual performance

• Formal and transparent policies for fixing remuneration

• Dialogue with shareholders based on mutual understanding of objectives

• AGM should be used to communicate with investors and encourage participation

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Improving Board Effectiveness (Higgs Guidance )

• Roles– Board– Chair– Senior independent

director– Executive directors– Non-executive directors– Company secretary

• Decision-making

• Board composition• Directors’ skill base

– Induction – Development

• Evaluating performance– Board– Individual directors

• Communications– Shareholder– Other stakeholders

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EC Green PaperCorporate governance in financial

institutions and remuneration policies1. Boards of directors2. Risk related functions3. External auditors4. Supervisory authorities5. Shareholders6. Effective implementation of corporate governance

principles7. Remuneration8. Conflicts of interest

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FSA – effective governance

The mighty Handbook

More principles-based

regulation

Outcomes-focused regulationIntensive, intrusive

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FSA’s scrutiny of governance• Practical effectiveness of board, management and

organisational structures• Evidence of depth of discussion and understanding,

challenge and risk-based decision making• Formulation of risk appetite and subsequent monitoring

of performance• Quality of reporting and MI with evidence of

understanding and subsequent actions/feedback• Approach to culture, incentives and remuneration

– Firms should understand their culture and the risks posed by the wrong culture

– Regulatory focus on implications of unacceptable culture

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Approved Persons intensification

• Significant Influence Functions (SIFs)– SIF approval process

• Thorough verification of suitability• Greater proportion of pre-approval interviews

– Ongoing supervision of SIFs– Competence and capability of SIFs in key roles

• Chairman• Senior Independent Director• Chairs of committees• Finance, risk and internal audit functions

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What SIFs can expect (on approval and at ARROW)

• Competence proportionate for role

• Relevant technical competencies

• Relevant non-technical skills and behaviours

• Recognition of gaps and willingness to address them

• FSA will examine – Awareness of

responsibilities of being an Approved Person

– Understanding of role and contribution in managing risks

– Knowledge, skills and experience

– Motivation and capacity

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“Intensive and intrusive” in practice• Closer scruitiny of governance structure, business

model and effectiveness of risk management• More enforcement action against senior

management for incompetence• More demanding due diligence and greater challenge

to firms and individuals when appointing SIFs• Increased granularity of Approved Persons regime

and greater clarity about competencies• Enhanced training of FSA’s supervisory staff• FOS stance now has strong consumer bias

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Any questions?

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Discussion points1. What are the principal corporate governance

challenges faced by friendly societies?

2. How is the post-crisis corporate governance agenda likely to impact on friendly societies?

3. What steps should societies take to ensure that the members of their boards / committees of management have appropriate skills, knowledge and expertise?

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CORPORATE GOVERNANCE

Regulatory expectations and current good practice

Charles CattellThe Cattellyst Consultancy

01737 55551507778 405239

charles@cattellyst.co.uk