Corporate Governance

Corporate governance is the system by which companies are directed and controlled. The corporate governance of banks differs from the corporate governance of ordinary companies. This is due to the nature of the banking business, the complexity of its organisation, the uniqueness of banks’ balance sheets, the need for protection of the weakest party in the chain (i.e. the depositors), and the systemic risks caused by bank failures.

The balance sheet of banks presents a much greater inherent opacity; it is difficult for outsiders to evaluate the quality of the assets which a bank holds and, therefore, its true financial position. Furthermore, a bank serves several conflicting interests, from equity holders, to borrowers or depositors and good governance is important for balancing those interests. Finally, the potential negative effects of bank failures are very damaging for both the economy and society, as was demonstrated vividly by the 2008 global financial crisis. For this reason, it is now acknowledged that the corporate governance of banks should be addressed with specific recommendations, focusing more on the “internal governance” than the protection of minority shareholders.

The way that banks fund their operations means that, in comparison to other companies, their corporate governance needs to provide protection to a much broader pool of stakeholders, particularly depositors who do not usually have the possibility to influence the banks’ business decisions. This requires a much deeper involvement of the board in strategic issues and risk oversight, as it must fully understand the risks the bank is exposed to and be able to monitor them effectively. As a result, this requires that the balance of skills at the board level and the expertise of its members are regulated in detail and closely scrutinised by bank supervisors. There is greater emphasis and more detailed guidance on the internal control functions of the so-called “second and third line of defence” : i.e.  risk management, compliance and internal audit, which are becoming mandatory for banks in an increasing number of jurisdictions. Banks are also subject to stricter disclosure requirements. In order to better address the specific circumstances of corporate governance in banks, regulators and standard setters have issued comprehensive guidance, which can be accessed here.

In the EBRD’s countries of operations, the good corporate governance of banks is particularly important because banks are the most significant (and in some cases, only) providers of credit. Difficulties in their operations could disrupt the entire economy. At the same time, this situation puts banks in a unique position to influence the governance practices of their corporate borrowers, so reducing risk in their own operations and becoming promoters of better corporate governance practices for all other companies.
Our interest in the corporate governance of banks stems both from the EBRD’s role as an active investor as well as that of an international financial institution deeply involved in policy dialogue that promotes good governance and resilient economies. So, our approach towards enhancing  the corporate governance practices of banks in our countries of operations is twofold, as we seek to implement improvements both at the level of individual companies and at the level of generally applicable regulations and codes.

During 2010-2012 we undertook several policy dialogue activities to further improve the corporate governance of banks in our countries of operations. This included launching a comparative assessment of the corporate governance of banks in several countries.  The assessment was aimed at providing the EBRD with an overview of the legal and regulatory framework governing the corporate governance of banks and an understanding of how diligently the various rules and best practice guidelines are implemented.

The EBRD has also worked together with the OECD and IFC to develop two Policy Briefs that target the Corporate Governance of Banks in South East Europe and the Corporate Governance of Banks in Eurasia

The Corporate Governance Development Framework — adopted by 35 Development Finance Institutions (DFIs) as of December 2017 — is a common approach towards addressing the corporate governance risks and opportunities in DFI investment operations. The EBRD is a founding member of the initiative which started in October 2007, when 31 DFIs signed an "Approach Statement" to place corporate governance at the forefront of the sustainable development agenda of DFIs. After the signing of the Statement, a Working Group – set up with representatives of major DFIs, including the EBRD — developed the DFI Toolkit on Corporate Governance. This set of tools aim to provide a common methodology for assessing corporate governance in the investment work of DFIs. The DFI Toolkit on Corporate Governance includes the following templates:

Corporate Governance Questionnaire

Corporate Governance Progression Matrix

Corporate Governance Instruction Sheet

List of Key Corporate Governance Terms

Sample - Corporate Governance Improvement Program

Sample - Corporate Governance Section in Internal Approval Documents

In September 2011, the EBRD and 29 other DFIs signed the Corporate Governance Development Framework, which endorses the toolkit as a common platform for evaluating and enhancing governance practices in their investee companies. The signatory institutions cover emerging markets around the world, including Africa, Latin America, the Caribbean, Asia, Middle East, North Africa, Europe and Central Asia, and represent total assets of more than US$ 850 billion. Through the Corporate Governance Development Framework, the signatories answered the G-20’s call for DFIs to strengthen their coordination and ensure the achievement of certain key institutional reforms, such as an increased commitment to transparency, accountability, and good corporate governance. As providers of financing to companies in some of the world’s most challenging economies, DFIs can be leaders in promoting good corporate governance practices. The Corporate Governance Development Framework helps signatory institutions evaluate the corporate governance risks and opportunities of the companies in which they invest. The signatories aim to raise awareness, both at the private and public sector levels, of the importance of good governance to sustainable economic development. Signatories are expected to implement the Framework at their own pace and at a level that suits their institutions. They also work together to advance the business case for good corporate governance.

In particular, each institution that adopted the Framework has undertaken to:

• Integrate corporate governance in its investment operations by adopting procedures and tools in line with the Framework, conduct corporate governance assessments of its investment clients, and develop action plans when appropriate.
• Identify staff responsible for implementation and oversight of the Framework.
• Provide or procure training to ensure capacity-building and knowledge sharing on corporate governance.
• Collaborate with other signatories to share experiences and resources on training and implementation.
• Report annually on the implementation of the Framework.

The DFI Corporate Governance Working Group is responsible for development of the Framework.Since the signing, signatories have been gathering annually to discuss current corporate governance developments, share experiences and pave the way forward.On 20-21 March 2018, the 12th Annual Development Finance Institutions Corporate Governance Meeting was held in London, at the EBRD (Agenda and Highlights)The EBRD has incorporated the Corporate Governance Development Framework in its own operational procedures.

As part of its Legal Transition Programme, the European Bank for Reconstruction and Development (“EBRD”) has been assessing the state of legal transition in its countries of operations. These assessments provide an analysis of the progress of reform and identify gaps and future reform needs, as well as strengths and opportunities.

In 2012, the EBRD developed with the Assistance of Nestor Advisors a methodology for assessing corporate governance frameworks and the governance practices in the EBRD countries of operations. This assessment was implemented in 2014-2015 (the “Assessment”).

The Assessment aims at measuring the state of play (status, gaps between local laws/regulations and international standards, effectiveness of implementation) in the area of corporate governance.

The Assessment is meant to provide for (i) a comparative analysis of both the quality and effectiveness of national corporate governance legislation (including voluntary codes); (ii) a basis to assess key corporate governance practices of companies against the national legislation; (iii) an understanding whether the legal framework is coupled with proper enforcement mechanisms (e.g., sanctions) and/or with authorities able to ensure proper implementation; (iv) a support to highlight which are the major weaknesses that should be tackled by companies and legislators for improving the national corporate governance framework; and (v) a tool which will enable the EBRD to establish “reference points” enabling comparison across countries.

This Assessment is based on a methodology designed to measure the quality of legislation in relation to best practice requirements and the effectiveness of its implementation through judicial and company practice as well as the capacity of the broader institutional framework to sustain quality governance. The analytical grid developed for assessing the governance framework is based on internationally recognised best-practice benchmarks (e.g. OECD Principles, IFC and World Bank ROSC governance methodologies). The methodology is applied identically across all the countries reviewed. The process for gathering, analysing and reporting information is applied identically for each of the countries assessed, which allows for comparing countries to each other a long a set of benchmarking points.