Corporate Governance Reforms Post Global Financial Crisis

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Every financial crisis is typically followed by introduction of new regulations. However, the avalanche of new policies, guidance & regulations in recent years following the onset of the financial …

Every financial crisis is typically followed by introduction of new regulations. However, the avalanche of new policies, guidance & regulations in recent years following the onset of the financial crisis will lead to unprecedented transformation in the governance of banks and financial services organizations.


The presentation analyses key events leading up to this crisis, changes in corporate governance sweeping across, US, UK & Europe and the challeges that organiations, regulators, governments and other stakeholder face in this period of transformation.

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  • 1. 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
  • 2. Importance of Corporate Governance Copyright © 2013 StraitsBridge Advisors Pte Ltd 1
  • 3. An integral component of a complex governance framework Political / Social Governance Economic Governance Legal, Institutional & Regulatory Governance CORPORATE GOVERNANCE Copyright © 2013 StraitsBridge Advisors Pte Ltd 2
  • 4. 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. Copyright © 2013 StraitsBridge Advisors Pte Ltd 3
  • 5. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 4
  • 6. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 5
  • 7. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 6
  • 8. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 7
  • 9. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd  Depositors & customers  Auditors  Credit rating agencies  Securities regulators 8
  • 10. Banking in the 20th Century : Key Developments Copyright © 2013 StraitsBridge Advisors Pte Ltd 9
  • 11. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 10
  • 12. The 1980s & 90s : The new economic (r)evolution 1992 1995 Copyright © 2013 StraitsBridge Advisors Pte Ltd 1997 1999 11
  • 13. 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 ? Copyright © 2013 StraitsBridge Advisors Pte Ltd 12
  • 14. This led to the debate on increased regulation vs. deregulation Battle-lines were drawn : Glass Steagall Act – Supporters vs. The Opposition Copyright © 2013 StraitsBridge Advisors Pte Ltd 13
  • 15. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 14
  • 16. 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. Copyright © 2013 StraitsBridge Advisors Pte Ltd 15
  • 17. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 16
  • 18. Financial Markets : 21st Century Stormy times Copyright © 2013 StraitsBridge Advisors Pte Ltd 17
  • 19. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 18
  • 20. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 19
  • 21. What failed us ? Copyright © 2013 StraitsBridge Advisors Pte Ltd 20
  • 22.  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 Copyright © 2013 StraitsBridge Advisors Pte Ltd “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
  • 23. 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 ? Copyright © 2013 StraitsBridge Advisors Pte Ltd 22
  • 24. Stakeholders for Corporate Governance Basel Committee on Banking Supervision • 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd  Depositors & customers  Auditors  Credit rating agencies  Securities regulators 23
  • 25. 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 ) Copyright © 2013 StraitsBridge Advisors Pte Ltd 24
  • 26. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 25
  • 27. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 26
  • 28. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 27
  • 29. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 28
  • 30. Corporate Governance Reforms Copyright © 2013 StraitsBridge Advisors Pte Ltd 29
  • 31. 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 ? Copyright © 2013 StraitsBridge Advisors Pte Ltd 30
  • 32. 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 ? Copyright © 2013 StraitsBridge Advisors Pte Ltd 31
  • 33. Global Governance : Focus on Financial Markets OECD IMF Basel IOSCO WTO G20 Summit World Bank UN Paris Club FSB BIS Copyright © 2013 StraitsBridge Advisors Pte Ltd 32
  • 34. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 33
  • 35. Key themes common to all Governance proposals Causes Response Copyright © 2013 StraitsBridge Advisors Pte Ltd 34
  • 36. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 35
  • 37. 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) Copyright © 2013 StraitsBridge Advisors Pte Ltd 36
  • 38. 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 Basel Committee on Banking Supervision 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 37
  • 39. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 38
  • 40. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 39
  • 41. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 40
  • 42. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 41
  • 43. USA : Dodd-Frank vs. Sarbanes-Oxley Problem Solution Management Accountability Empowered Independent Directors – particularly independent audit committees Board Accountability Empowered Shareholders Copyright © 2013 StraitsBridge Advisors Pte Ltd 42
  • 44. 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) Copyright © 2013 StraitsBridge Advisors Pte Ltd 43
  • 45. 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 Source : International Centre for Financial Regulation (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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 44
  • 46. 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. Source : International Centre for Financial Regulation (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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 45
  • 47. 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.” Source : International Centre for Financial Regulation (www.icffr.org) the nation’s economic recovery and remuneration practices be reconstructed to provide incentives in Copyright © 2013 StraitsBridge Advisors Pte Ltd 46
  • 48. 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. Copyright © 2013 StraitsBridge Advisors Pte Ltd 47
  • 49. EU : Green Paper on Corporate Governance in FIs & Remuneration Policies 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. Source : European Commission – Green paper on Corporate governance in financial institutions and remuneration policies, June 2010 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. Copyright © 2013 StraitsBridge Advisors Pte Ltd 48
  • 50. EU : Green Paper on Corporate Governance in FIs & Remuneration Policies 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. Source : European Commission – Green paper on Corporate governance in financial institutions and remuneration policies, June 2010 Copyright © 2013 StraitsBridge Advisors Pte Ltd 49
  • 51. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 50
  • 52. Corporate Governance Reforms : Challenges Ahead Copyright © 2013 StraitsBridge Advisors Pte Ltd 51
  • 53. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 52
  • 54. 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. Copyright © 2013 StraitsBridge Advisors Pte Ltd 53
  • 55. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 54
  • 56. 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 ? Copyright © 2013 StraitsBridge Advisors Pte Ltd 55
  • 57. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 56
  • 58. About StraitsBridge Copyright © 2013 StraitsBridge Advisors Pte Ltd 57
  • 59. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 58
  • 60. 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. Copyright © 2013 StraitsBridge Advisors Pte Ltd 59
  • 61. 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 Copyright © 2013 StraitsBridge Advisors Pte Ltd 60
  • 62. Disclaimer It is possible that this presentation could or may contain forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other words of similar meaning. Undue reliance should not be placed on any such statements because, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, to differ materially from those expressed or implied in the forward-looking statements. The use of copyrighted material is consistent with the "fair use" provisions contained in §107 of the U.S. Copyright Act of 1976 due to the following characteristics: (a) The use of copyrighted material is of a nonprofit, educational nature, intended for the sole purposes of research and comment. (b) This use of copyrighted material does not significantly negatively affect the potential market for or value of the copyrighted work(s). Further use is prohibited. The use of registered trademark material is not subject to civil action or injunction as outlined in §1114 and §1125 of the Trademark Act of 1946 (the Lanham Act) due to the following characteristics of this work, and the registered marks published herein: (a) The use of reproductions of registered marks is not for the purpose of commerce, nor is the use connected with the sale, offering for sale, or advertising of any goods or services. (b) The use of reproductions is not likely to cause confusion, mistake, or deception as to the affiliation, connection, or association of this work with owners of published registered marks, nor as to the origin, sponsorship, or approval of this work by owners of published registered marks. Wherever possible, the copyright or registered mark owner's name has been noted near the copyrighted work or registered mark; however, all material used in this site, including, but not limited to, newspaper articles, presentations, research, surveys and logos, should be considered protected copyrighted material or registered mark with all rights reserved to the owner, named or unnamed. The presenter does not recognize or accept the inappropriate misuse of copyright protection as a statutory means of prohibiting legitimate free and creative expression and illustration of critical or historical perspective toward any aspect of copyrighted work or its owner, or as a means of prohibiting the legitimate use of such work as example, or as a means of lending unassailable authority to, and inhibiting direct scrutiny of, any presentations, in particular those of a commercial nature, which are inherently subjective, self-serving, invasive, propagandistic, and/or otherwise serve, deliberately or not, to influence or modify public or individual psychology, behavior or attitudes. This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. StraitsBridge Advisors has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. StraitsBridge Advisors disclaims any responsibility to update the information or conclusions in this report. StraitsBridge Advisors accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. Copyright © 2013 StraitsBridge Advisors Pte Ltd 61
  • 63. StraitsBridge grants permission to  Download, display or print material for personal use or use within an individual organization and for noncommercial use only.  Reproduce extracts provided the source is stated as being : “Corporate Governance in Financial Services – Reforms Post Global Financial Crisis” by Sanjay Uppal, Straits Bridge Advisors Pte Ltd. May 2011” www.straitsbridge.com info@straitsbridge.com StraitsBridge Advisors Pte Ltd StraitsBridge Advisors FZC StraitsBridge Advisors 1 Raffles Place P.O. Box 454671 Level 12, Tower C, Building 8 Level 24. Tower 1 Dubai DLF Cyber City. Gurgaon Singapore 048616 United Arab Emirates India 122002 Copyright © 2013 StraitsBridge Advisors Pte Ltd 62