corporate governance of banks in eurasia |
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On 30 April 2008, over 40 representatives from the banking sector in Eurasia and corporate governance experts from the EBRD, OECD, IFC and World Bank met at the EBRD’s HQ in London to discuss the findings of a policy brief on the corporate governance of banks in Eurasia (Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Mongolia, Tajikistan, Ukraine and Uzbekistan). The Policy Brief on Corporate Governance of Banks in Eurasia (English
The Policy Brief identifies key corporate governance challenges affecting banks in that region and makes recommendations to address them. Its purpose is to support policy makers, banking supervisors, capital market regulators, banks and banking associations in their work of strengthening corporate governance practices. Corporate governance in banks differs from the “ordinary” corporate governance of companies. This is due to the nature of the banking business (i.e. dealing with money), the need for protection of the weakest party in the chain (i.e. the depositor) and the systemic risks that a bank failure might cause. Bank failure might also undermine one of the core elements of the market economy, people’s confidence in banks – a painful experience that has already occurred during the transition period in Eurasia. In the large majority of countries in the region, the banking sector is the only advanced financial industry, while stock exchanges are inactive or characterised by low liquidity. Eurasian banks are in a position in which they can influence the corporate governance of their corporate borrowers. In this respect, banks are recommended to become role models for other companies in implementing high standards of corporate governance. The task force identified several weaknesses in the corporate governance framework in the region. Implementation (or the lack thereof) is by far the major issue. It recommends for national authorities to actively review the legislation in place and understand how the rules are applied in practice. In order to strengthen corporate governance practice and easily monitor its implementation, the adoption of voluntary corporate governance codes, applied under the “comply or explain” mechanisms can be appropriate. The adoption of a code and the resulting enhanced standards and practices would contribute to making banks safer and more attractive to investors and depositors. (see more information on corporate governance codes in the EBRD region) The introduction of independent directors and specialised committees within the board (such as auditing, remuneration, nomination and risk management) can easily be encouraged by a code. The task force has identified a series of areas where reform is needed. Recommendations address issues such as qualification of board members, disclosure of beneficial ownership, definition of clear boundaries of responsibility and accountability, internal and external audit, transparency and disclosure. The policy brief also identifies concrete actions. One for all: the abolition of the “Revision Commission” – an old Soviet style corporate body often without clear responsibilities and reporting duties – and the introduction of the “Audit Committee”, as an independent body, responsible for providing oversight of the bank’s internal and external auditors; approving the appointment, compensation and dismissal of external auditors and ensuring that management is taking appropriate corrective actions to address control weakness and non-compliance. The policy brief only sets out the start of the process. Now attention must be focused on effective implementation to the recommendations. The EBRD’s Legal Transition and Financial Institutions Teams are already working in Armenia for the development of a voluntary corporate governance code, also applicable to banks. The policy brief will be one of the guiding benchmarks for the new code’s preparation. The Armenian code should then be endorsed by the Central Bank and applied by banks which will report on their compliance. As a result, corporate governance legislation of banks can be benchmarked with practice and enhanced standards - introduced and monitored.
Read more on corporate governance in the EBRD region:
For additional information, please contact the EBRD’s corporate governance specialist, Gian Piero Cigna, at cignag@ebrd.com
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