Yandraduth Googoolye: Corporate governance
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the
workshop on "Corporate governance", organised by the Mauritius Institute of Directors,
Port-Louis, 11 January 2013.
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Ladies and Gentlemen
A very good morning to you.
I would like to thank the Mauritius Institute of Directors - the MIOD - for organizing this
Workshop on Corporate Governance and inviting me to speak before such a distinguished
audience.
I understand that this is the second Workshop in this series - the first one was held in
November last year at this very same venue and due to the vast interest expressed by its
members, the MIOD had to organize this second workshop.
Corporate Governance is turning out to be a very topical issue indeed! Not only in Mauritius,
but worldwide. International standard setters like the Bank for International Settlements and
the OECD, among others, have recommended that bolder initiatives be taken to promote
higher corporate governance standards in organisations. These initiatives, as you all know,
were driven mainly by the corporate governance failures and lapses noted during the global
financial crisis.
The crisis has shown that there is not only the need for banks to improve their corporate
governance practices, but that supervisors also must ensure that sound corporate
governance principles are thoroughly and consistently implemented.
But why should banks be subject to more stringent rules than other companies? One would
be tempted to ask.
Well, simply because banks play a critical role in the economy. They are highly leveraged
institutions and most of their funds come from depositors - regulators cannot condone that a
customer loses his money on account of lax corporate governance standards being
maintained in institutions they regulate. Regulators have the ultimate responsibility of
ensuring the safety and soundness of the financial system while at the same time
safeguarding the interests of the depositors and the public at large.
Hence, it is vital that this special position of trust that banks have in the economy is
maintained through principles of good corporate governance. And it is within the remit of the
regulators to make sure that these principles are effectively adhered to by banks.
Predictably, the best option available to the Bank of Mauritius to ensure that these best
practices are being adhered to in the banking sector is to prescribe them in the form of
Guidelines.
In fact, as far back as 2001, the Bank of Mauritius issued the first Guideline on Corporate
Governance, which shows that corporate governance has always ranked high on our
agenda. The first Guideline, however, provided only a broad framework of corporate
governance whereby banks were advised to put in place a set of parameters without being
prescriptive enough.
The growth and increasing complexity of banks domestically coupled with the sad
experiences which unfolded during the financial crisis, however, heightened the need for the
Bank of Mauritius to revisit the codes and principles of corporate governance governing
banks.
As you all know, the history of banking contains many examples of banking crises. You may
recall the high profile failures such as Enron and Parmalat and nearer to us, the failure of
banks in the global financial crisis largely attributed to failures in corporate governance and
risk management practices and the underpinning poor corporate culture and ethics.
In response, many standard setting bodies and banking supervisors around the world have
revamped their corporate governance standards requirements and reassessed their
adequacy. Whilst these changes may have increased the burden of regulated financial
institutions, they provide a safeguard for the financial system as a whole.
The Bank of Mauritius has also kept pace with the evolving best practices set by international
standard setters and issued a new Guideline on Corporate Governance in August 2012.
This Guideline, I must say, was released to the industry after rather lengthy consultations
with the banking community and the public at large. The Guideline was issued for public
consultation in November 2010 and it was finalized after nearly two years. The Bank of
Mauritius adopted a collaborative approach on this front and discussion groups were set up
with banks. We even received comments from the MIOD for which we are very thankful and
we thank everyone who participated in this initiative. I must emphasize here that the new
Guideline has been finalized taking into account the specificities of the local context.
Let me now run you through the broad principles underpinning the Guideline.
The financial crisis has shown that in certain instances, the Board - which plays a significant
role in safeguarding the corporate governance principles and is ultimately responsible for
overseeing the organization and management of the company's affairs as well as the
individual board directors were simply unaware of and did not understand the risks taken by
the businesses which they were supposed to oversee. Other factors in corporate governance
breakdown were attributed to conflicts of interest, lack of board director independence, weak
internal and external audit practices and deficient internal control systems. Moreover, the
complexity of the organisational structure of some financial firms impeded transparency and
disclosure so that the firms' true conditions were not visible to external parties such as
regulators and market participants.
The new Guideline on Corporate Governance has thus, attempted to circumvent these
shortcomings and uphold the three principles underpinning good corporate governance,
namely integrity, transparency and accountability.
The Guideline emphasizes the responsibility of boards, their accountability as well as that of
the Chairperson who leads the Board. The quality of the people sitting on boards and
comprising senior management of financial companies has a direct bearing on the way these
institutions are managed. The Guideline, therefore, whilst ensuring that directors meet the fit
and proper person criteria, further prescribes for the leadership skills enhancement of board
directors. Poor leadership has undermined public confidence in financial institutions during
the crisis and has provided many painful but precious leadership lessons to one and all. The
Orientation Program for Directors outlined in the Guideline addresses the issue of leadership
by ensuring that directors are fully conversant with the principles of leadership, and the
leadership training programme has to be approved by the Bank of Mauritius. I am pleased to
announce that this Workshop has been duly approved by the Bank.
The crisis also brought to light the importance of inculcating a corporate culture which
promotes ethical principles. Culture has been described as "the way human beings behave
together - what they value and what they celebrate."
The banking crisis revealed a
breakdown of the values that promote trust and led to a crisis of confidence in banks.
Regulation can propel a change in culture when it is otherwise not feasible, as rightly
expressed by the Chief Executive of the UK, Financial Services Authority who stated that the
regulator can influence culture by "influencing the composition of management, influencing
incentives for good behaviour, influencing training and competence regime and deterring
poor behaviour."
The Guideline on Corporate Governance, thus imposes the responsibility on directors and
senior management to lead by example in an environment that emphasizes trust, integrity,
honesty, judgment, respect, responsibility and accountability. Culture can only be effective
when combined with strong leadership. For corporate governance principles to be really
effective, the tone must be set from the very top of the organization in order that these
principles trickle down to the lowest level of the organization to ensure compliance. The
board should actively sustain an ethical corporate culture in the organization. Further,
strategic plans and procedures have to promote ethical balance, fair dealing practices must
be applied, and a code of ethics must be laid down and communicated to all the members of
the organisation.
The Guideline on Corporate Governance not only draws from lessons learnt from the crisis,
but also aims at addressing corporate governance weaknesses identified in financial
institutions during on-site examinations conducted by the Bank of Mauritius and which have
not been remedied in line with the recommendations of the Bank of Mauritius. While the 2001
Guideline recommended for a rotation of directors, it was noted that this recommendation
has not been implemented to the satisfaction of the Bank of Mauritius. It was found that
some boards remained "Pale, Male and Stale" as Governor Bheenick remarked during the
first Workshop. To remedy that, we had no other alternative than to limit the term of office of
non-executive directors of local banks to 6 years with a cooling-off period of two years before
a possible re-appointment. This would allow for more fresh blood in the Boardroom with new
ideas, new mindset and, why not, bolder initiatives. Renewal of board members allows new
thinking on the board. Nevertheless, we are alive of the need to maintain continuity at the
Board level and banks have been granted a transitional period to comply with that provision.
In addition, on the issue of directorship, it needs to be highlighted that while the Bank of
Mauritius is mandated under the Banking Act 2004 to allow a director to sit on the Board of
more than one financial institution, we have taken the view that there is a potential risk of
conflict of interest, if we were to allow this. We also believe that all directors should allocate
sufficient time to perform their board responsibilities effectively.
The Chairperson of the Board must be an independent director under the Guideline. This
requirement is based on the principle that effective board debate and discussion require
independent board leadership. A strong presence of independent directors implies
independent judgment, free of any external influence.
The board is further encouraged to appoint a lead independent director. The lead
independent director has a potentially major role to play within the board, if there is a
potential or actual tension between the Chairman and CEO or, alternatively, where the
closeness of the Chairman and the CEO might inhibit the ability of
nonexecutive/independent directors to challenge and to contribute effectively to the works of the
board.
As regards the various sub-committees of the boards, the Guideline makes it mandatory for
financial institutions to have an Audit Committee, a Conduct Review Committee for related
party transactions and a Risk Management Committee. Board sub-committees represent the
arm of the board for those issues that require special competencies. The sub-committees
should report regularly and formally to the board which should stand ready to challenge any
key issues as the board bears the ultimate responsibility.
Corporate governance principles also require the bottom-up flow of information to the board
through independent control functions such as the internal audit, compliance and risk
management functions. However, the onus remains on the board to ensure receipt of
management information as appropriate for the exercise of its oversight responsibilities. We
may recall that the global financial crisis revealed weaknesses in corporate governance
practices of failed banks where information on the real risks being taken by the institution did
not reach the board or even senior levels of management. Even if risk management systems
are functioning, the absence of transmission of information to the board and senior
management would constitute a breakdown of corporate governance principles. Approving
strategy is not sufficient, suitable metrics must be set to monitor the implementation of
strategy and the responsibility for such monitoring falls on the board.
Internal Audit and Compliance are two independent assurance functions which constitute the
eyes of the board in matters of internal control as well as legislative and regulatory
compliance. Whilst the Banking Act 2004 already elevated the Internal Audit function in the
organization by giving it a direct reporting line to the Audit Committee, the Guideline on
Corporate Governance has now enhanced the value and importance of the Compliance
function by prescribing that it has a direct reporting line to the board or a board committee.
This function has the responsibility of ensuring compliance with legislative and regulatory
requirements as well as policies and procedures. Moreover, a compliance certificate has to
be delivered by the board to the central bank on an annual basis as we want to ensure that
the board is assuming its compliance oversight responsibilities over the activities of the
institution.
It would be remiss of me, if, in a talk on corporate governance, I did not mention the role of
external auditors. The latter provide an independent opinion on whether the financial
statements of the bank are complete, fair and properly drawn up with a true and fair view of
its affairs. They will also draw attention on any significant matters identified during the course
of their audit work. We view auditors as partners in our quest to have safe and sound
institutions and expect the highest standards from them.
Excessive risk taking by employees and compensation based on short term profitability have
often been a serious hit to the banks. Weaknesses in these areas contributed to the failures
of financial institutions during the crisis where remuneration systems were not related to the
strategy and risk appetite of companies and served more the self-interest of bankers rather
than the long term interest of the financial companies. To address this issue, the guideline
recommends that incentives be designed to discourage such practices and remuneration for
executives, directors and key personnel be fair and reasonable.
The Bank of Mauritius will ensure that the provisions of this Guideline are being complied
with. In fact, compliance thereto will be factored in the computation of the CAMEL Ratings of
banks which are published on the Bank's website since 2011. The CAMEL Ratings comprise
an assessment of the following components: Capital, Asset quality, Management, Earnings
and Liquidity. Four of the five components, namely the Capital, Asset Quality, Earnings and
Liquidity, are based on objective criteria, i.e. data submitted by banks in their returns to the
Bank of Mauritius, whereas the Management component is based on subjective criteria many
of which are contained in the Guideline on Corporate Governance. The Bank therefore,
expects financial institutions to comply with the provisions of the Guidelines, as
noncompliance thereto will have a bearing on the Management component in the CAMEL rating
of banks.
On this note, may I conclude by commending the initiative of the MIOD to organize this
workshop and assist stakeholders to better understand the Bank's Guideline on Corporate
Governance. I am confident that participants will benefit from it. May I also congratulate the
Institute for its relentless efforts to improve professionalism and ethics in our corporate
entities.
I thank you very much for your kind attention.