This session looks at governance from a regulatory perspective.

1. Governance from a Regulatory Perspective
Speech to BVI ICSA Corporate Governance Seminar
Tortola, 1st June 2016
Simon Gray
Special Advisor
BVI Financial Services Commission

2. Subtext of Corporate Governance and the gfc -
Malice in Wonderland?

3. Perception
 “If I had a word of my own, everything would be
nonsense. Nothing would be what it is because
everything would be what is isn’t. And contrary-wise;
what it is is wouldn’t be, and what it wouldn’t be, it
would. You see?”
 - Alice
 “Fraud and deceit abound in these days more than in
former times!”
 - Sir Edward Cole (1602)
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4. GFC - a world gone quite mad..?
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5. Cats get a bad press!
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6. Irrational Decision making?
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7. Bullying Leaders?
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8. What’s on the menu..!
 Strictly Boardroom
understand importance of good corporate governance
key principles of corporate governance
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9. What’s on the menu..!
 Malice in Wonderland
failures of governance at many financial institutions
nice documents, regular meetings, lovely committees are
no use if largely lip service
good theory – bad practice
human fallibility
remuneration structures wrong
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10. What’s on the menu..!
 Faith in the Future
force better standards of corporate governance through
tougher on-site examinations
“What gets measured gets done”.
realistic remuneration – end of jam today and risk
tomorrow culture
avoid quick fix and short-termism
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11. Definition
 Set of Policies, Practices, Procedures, Laws and Customs
under which a company is administered and controlled
 Includes the interrelationships among the many stakeholders
involved: Shareholders, Board of Directors, Management, Employees,
Customers, Creditors, Suppliers, Regulators
 Ensure Accountability
 Shareholder protection
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12. Context
Corporate governance has been practiced for
as long as there have been corporate entities.
Yet study of subject is < half a century old
Phrase “corporate governance” scarcely used
until 1980s
Adam Smith – Wealth of Nations
Shakespeare’s Merchant of Venice
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13. Ancient History
 4th Century BC – Arthasastra – ancient Indian book of political
realism. Comprised of 15 books with book 11 entitled The Conduct
of Corporations. Sadly the tome then goes on to recommend the
use of spies, destruction of enemies & world domination.
 10th Century AD - “Governance” is an ancient word, used since the
time of Chaucer. But the phrase “corporate governance” is new!!
 16th Century - Shakespeare – Merchant of Venice
 19th Century– laid foundations for modern corporations / century of
entrepreneurs
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14. Recent History
 20th Century – the century of management – vast growth in
management theories, consultants, gurus and management
teaching
 1983 – it appeared as the title of a paper in Perspectives on
Management
 1984 – it appeared as the title of a report in the American Law Institute
on the Principles of Corporate Governance and also as the title of a
book Corporate Governance – practices, procedures and powers in
British companies and their board of directors.
 21st Century – promises to be the century of governance – as the
focus swings to the legitimacy and effectiveness of the wielding of
power over corporate entities world wide
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15. Code breaking..!
 1992 – Cadbury Committee
 Code of Practice on Corporate Governance
 importance of independent non-executive directors
 independence defined a “independent of management and free from
any business or other relationship which could materially interfere
with the exercise of independent judgment, apart from their fees and
share-holding.”
 Audit Committees
Cadbury represented a significant breakthrough in corporate
governance thinking
Replicated elsewhere
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16. Remuneration (1)
1995 - Greenbury report
 focus on directors remuneration
 full disclosure
 Code of best practice
 Remuneration Committees (including independent
outside directors to advise)
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17. Remuneration (2)
 1998 – Hampel Committee
 reported on outcome of Cadbury and recommended combining
Cadbury and Greenbury
 but committee staffed largely of directors of major public companies
and their professional advisors saw no reason to criticise
contemporary corporate governance, nor to advocate measures which
might limit directors’ powers to make unfettered decisions or widen
accountability
more on remuneration later
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18. Key change in corporate governance
The naughty 90’s
 dynamic flexible new corporate structures, often global, replaced the stable, often
regional, corporate groups of the post war years
 massively complex networks of subsidiary companies and strategic alliances with
cross-shareholdings of shares, cross-directorships, chains of leveraged (and often
public) funding, dynamic and ever changing operational and financial linkages
throughout the added-value chain
 conflicts with accountancy firms taking on more consulting roles
 “client focused” – euphemism for increased attempts to sell clients a significant
bundle of non-auditing services
 political indifference – laissez-faire
 shareholder indifference
 record number of new offerings to capital markets 18

19. Rapid growth spawns greed
Bad behaviour not new but world changed in 1990s
From 1990 – 2001
 worker pay increased 42%; corporate profits increased 88%, S&P 500
index increased 248%; and CEO pay rose a whopping 463%
 Earnings restatements, a serious step taken to correct inconsistencies,
increased dramatically
 1997, 116 firms restated their earnings
 2001, 270 firms restated their earnings
 “managements growing incentive, willingness, and ability to manipulate
earnings” – McNichols (Stanford University)
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20. Dominant CEO
 Queen of Hearts: Now then, are you ready for your sentence?
Alice: But there has to be a verdict first.
Queen of Hearts: Sentence first! Verdict afterwards.
Alice: But that just isn't the way.
Queen of Hearts: [shouting] All ways are...!
Alice: ...your ways, your Majesty.
 Cheshire Cat: All ways here you see, are the Queen’s ways!
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21. Lehman Brothers
8 independent Board members
 Theatrical producer
 Retired Navy Admiral
 Energy Company
 British Mobile
 Spanish TV
 Professional Board Member
 Financial Firm
Members average age 67
Dominant CEO
Negligent risk committee
FOF’s
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22. Merrill Lynch
 10 Board members
 2 Academics
 4 Real Estate and Investor
 Brewer
 Insurance Executive
 Lawyer
 Retired Navy Admiral
 Average age 62
 O’Neil was a dominant CEO
 Revolving door of talent at upper echelons
 Poor risk management
 Bad strategy
 FoO
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23. Bear Stearns
 9 non-executive Directors
 2 Equity investors
 Priest
 Toy Executive
 Oil Executive
 Mobile Phone Executive
 Professional Board Member
 Lawyer
 Academic
 Age from 59 – 80
 Absent CEO and non delegation policy
 No business strategy
 No capital planning
 Absence of effective supervisor demands a sterling Board
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24. AIG
 Did not understand risk of credit default swaps
 Outsized position
 No reserves
 Skirted regulatory controls
 Dominant CEO who micro-managed and was forced
to leave – no management succession
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25. Northern Rock
 Dominant CEO
 Failure to understand products
 Weak Board
 No plan “B”
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26. The benefit of hindsight
“It is only in the rinse cycle that you see just
how dirty the washing was. We are in the
rinse cycle.”
 Warren Buffet
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27. The Fix
 Remuneration
 Institute of International Finance
 Compensation Reform in Wholesale Banking 2010 – Progress
in implementing Global Standards (Sept 2010)
 Basel Committee on Banking Supervision
 Principles for enhancing corporate governance (Oct 2010)
 Longer term view re incentivisation
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28. Finally – faith and the future…! (1)
 Corporate Governance Policy for Financial
Institutions should be covered by regulatory
requirements
 Should apply to all banks
 Fitness and Propriety of Directors
 Clear delegations of authority and responsibility at
senior management level and through the
organisation
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29. Finally – faith and the future…! (1)
 Corporate Governance Policy for Financial
Institutions should be covered by regulatory
requirements
 Should apply to all banks
 Fitness and Propriety of Directors
 Clear delegations of authority and responsibility at
senior management level and through the
organisation
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30. Finally – faith and the future…! (2)
 Non-executive directors must have a mix of relevant
skills compatible with the bank’s business lines
 The Board clearly understands the risks undertaken
by the organisation and seeks professional outside
guidance periodically
 There is a clear strategy for the bank and definitive
risk parameters for executives and staff to follow
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31. Finally – faith and the future…! (2)
 Operational controls and policies, practices and procedures
are in line with the strategy and risk tolerance of the
institution
 The Board should be using all the tools at its disposal to
maintain rigorous oversight over the institution including
audit, supervisory authorities and outside counsel
 Supervisors should have experts dedicated to assessing
proper governance
 Supervisory authorities should keep the industry informed of
emerging good practice
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32. Learning from the past and looking to the
future
When written in Chinese the word crisis is composed of two
characters. One represents danger, and the other represents
opportunity.
– John F Kennedy
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33. Useful Corporate Governance Code Links
• https://www.frc.org.uk/Our-Work/Codes-
Standards/Corporate-governance/UK-
Corporate-Governance-Code.aspx
• http://www.oecd.org/corporate/
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34. But….!
 Time will tell if new initiatives will succeed
 Shari’a Governance?
 History paints a bleak picture
 21st Century the Century of Corporate Governance
 “It is clear that good corporate governance makes good sense. The name of
the game for a company in the 21st Century will be to conform while it
performs.”
 - Mervyn King
 Cautious optimism
 The buck stops with supervision…!
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35. Implementation
What get’s measured gets done…!
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36. Thankyou
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