The 10 Commandments of Good Governance in edges

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Due to the banking crisis of 2008, the question of how edges can protect themselves against future failures has attracted the attention of regulators, banking experts and business media. An important area is the need for better transparency, mainly regarding remuneration in the banking sector, and how boards of edges should enhance their corporate governance practices to reduce the chances of a repeat of the credit crunch.

The recent publication of Central Bank of Egypt draft Code of Corporate Governance for edges marks a meaningful step in this course of action. edges together with their respective boards should pay close attention to the corporate governance guidelines.

There are several tips and recommendations for good governance obtainable for the board of edges. in addition, I consider the following `10 commandments` are central in establishing a sound governance regime:

1-Set the right tone at the top.

The main concerns for the board should include guiding, approving and overseeing the banks strategic objectives, corporate values and policies. This could be achieved by developing a code of conduct for the bank employees, management, and board members. Likewise, the board should clearly define areas of responsibility, authority levels and reporting lines within the bank.

2-Adequate qualifications of board members

The board should have adequate knowledge and experience applicable to each of the material financial activities the bank intends to pursue to permit effective governance and oversight of the bank.

To ensure that non-executive directors have the knowledge and understanding of the business, the board should provide thematic business awareness sessions on a regular basis and each director should be provided with a tailored induction, training and development to be reviewed yearly with the chairman. Similarly, appropriate arrangements should be made for executive board members in business areas other than those for which they have direct responsibility.

Non-executive directors are promoted to use more time in the business to ensure that they can participate effectively to strategy and other board decisions.

3-Appoint independent non-executive directors

To foster an independent component within the board, edges must consider that independent directors should constitute a meaningful membership of the board, and that the board should have at the minimum three independent, non-executives directors. Larger edges may have a higher proportion of non-executive directors.

Non-executives directors should be able to devote sufficient time to the role in order to estimate risk and ask tough questions about strategy.

In UK, there are recommendations for edges to appoint a senior independent director (SID) whose role is to provide a sounding board for the chairman and serve as a trusted intermediary for the non-executive directors, when necessary.

4-Establish board-risk governance

edges should establish a board risk committee to work in tandem with existing audit committee. The risk committee would concentrate on risk strategy and management, free from any conflict with demands placed on audit committees. The risk committee would report regularly (as part of the annual report) on risk strategy and risk management. The risk committee has authority to seek external advice to test its risk management assumptions, particularly in the context of risk related to meaningful banking transactions.

Given the importance of an independent risk management function, edges should appoint a chief risk officer (CRO) with sufficient authority, stature, independence, resources and access to the board. This executive should be reporting to both the risk committee and internally to the CEO. Removal of the CRO should be unprotected to board discussion and public disclosure.

5-Expand scope of the remuneration committee

The scope of the remuneration committee should be expanded to cover all aspects of remuneration policy on a bank-wide basis with particular focus on the risk size. The remuneration committee is responsible to review the compensation philosophy and major compensation programs.

In order to reduce the perceived excessive risk-taking within edges, this committee will also be expected to approve the links between performance targets and pay or bonus schemes. at the minimum half of bonuses should be paid in the form of a long-term motive scheme.

6-Develop Information Technology (IT) governance

IT governance provides the structure that links IT processes, resources and information to the banks strategies and objectives, enhances effective board decision-making and creates greater transparency and accountability. IT governance ensures that related risks are properly identified and managed. The board needs to approve IT expenditures and provide adequate oversight over all aspects of IT governance, including procurement, outsourcing, the efficiency of systems and procedures, IT security, customer data protection and adequacy of anti-fraud and anti-money laundering systems.

7-enhance efficiency by board evaluation

The board and board committees should be unprotected to a formal and demanding performance evaluation with external facilitation of the time of action every three years. The evaluation statement should either be included as a dedicated section of the chairmans statement or as a separate section of the annual report, signed by the chairman. Where an external facilitator is used, this should be indicated in the statement, together with their name and other meaningful details for the shareholders.

8-Manage conflicts of interest effectively

edges should establish information barriers (Chinese walls) between the different departments so that decisions by staff in one department are made in ignorance of secret information obtainable to staff in other departments which might affect their decision. Conflicts by board members or senior executives should be disclosed to the edges compliance officer. A good corporate governance practice is to put in place and disclose a conflicts of interest policy.

9-Monitor the governance of edges clients

It is important for edges that their clients apply the principles of good governance. edges may consider that it is in their own best interest to check the governance framework and practices of their corporate borrowers. already in circumstances where a bank cannot directly influence the governance practices of their borrowers, it can have an important influence by leading by example.

10-Track possible governance failures

edges should have in place a policy setting out adequate procedures for employees with concerns about the integrity of the banks operations or its staff (so called whistle blowing policy). Employees should be able to communicate their concerns with corporate protection from retaliation from the management. The procedure should ease the flow of secret and direct or indirect communication to the board (or Audit Committee) outside the internal chain of command. The formation of proper communication channels would allow bank staff to discuss their concerns in confidence without fear of retaliatory action.

Conclusion

Good corporate governance is crucial for todays complicate and dynamic banking ecosystem to ensure long-term sustainability and trust of stakeholders including regulators, investors, clients and employees. consequently, it should be grown and practiced regularly within edges at board and executive management levels. Remember; Corporate governance is like a muscle, should be exercised or it will atrophy!

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