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New Corporate Governance Regulations

New corporate governance guidelines highlight the need for banks to review and refresh the functioning of their boards. Banking in Oman has recently published an extensive and revised set of guidelines for bank directors and, although they are a revision of earlier guidelines, they come at a very important time. Globally investors who saw an unparalleled loss in the value of their investments in banks during the financial crisis are questioning whether board directors understood the risk their institutions were exposed to, and are calling for corporate governance to be improved in order to ensure that similar crises can be avoided in the future.

The new guidelines highlight the importance of the composition of the board and the valuable role non-executive directors have to play. They stress the role and responsibility of the board in setting clear strategies and objectives based on a comprehensive understanding of the risks an institution runs. The guidelines also suggest that in the light of the new guidelines banks need to review the performance and structure of their boards.

Key lessons*

Define the purpose and objectives of the bank
Establish Board committees needed for monitoring and control purposes
Ensure accountability and transparency
Strike the desired balance between wealth creation and controls
A rigorous process to ensure that decision making is properly managed.
*Corporate Governance Guidelines, Central Bank of UAE
The updated guidelines Corporate governance, according to the Organization for Cooperation and Development (OECD), defines the relationship between a company’s management, its board, shareholders, and other stakeholders. It relates to both the accountability of boards and how directors can influence and improve the performance of the bank. In banks, more than in other institutions, the challenge is to achieve sustainable wealth creation through appropriate management of the risks involved in financial intermediation.

“Good governance is essential for the long-term success of a bank, and good governance depends largely on the skills, experience, and knowledge of the directors. If a bank fails, it affects the whole economy, so directors are the guardians of financial stability,” says HE Sultan Bin Nasser Al Suwaidi, Governor of the Central Bank of UAE.

The guideline from UAE banks builds on earlier guidelines published by the Central Bank, those established by the Dubai International Finance Centre (DIFC), and the anticipated corporate governance provisions in the listing rules for Abu Dhabi.

The role of directors

The revised guidelines place considerable emphasis on the role of directors and emphasize that once appointed, they are responsible to all shareholders rather than to any specific group. Equally important is the role of independent non-executive directors, who can exercise their judgment unaffected by conflicts of interest and be of “independent mind… who are able to stand their ground”. At the same time, bank board members need to understand the line between management and the board, and should not be involved in the executive committee of the bank. The biggest challenge faced by the bank boards relates to how directors exercise their responsibilities and judgment in fulfilling their key roles:

Strategy: Constructively challenge and help develop strategy Performance: Monitor and reporting of management’s performance against the defined strategy Risk: Defining a risk appetite and ensuring that it is achieved through robust systems and processes People: Ensuring appropriate reward and incentives for senior executives

In most instances, boards will need to create specific sub-committees to address these areas effectively. Further, given the performance of the financial sector over the past 18 months, questions must be asked as to whether strategies were realistic, and whether they encouraged excessive risk-taking in order to maintain market share and return. Boards need to be informed and to understand the nature of balance sheet risks the bank may be facing, and what liquidity assumptions have been made governing adverse conditions.

As most banks are both complex businesses comprising very different business units with different risk profiles and highly leveraged institutions, the responsibilities of the bank directors are particularly onerous.