New Corporate Governance Regulations

New corporate governance guidelines highlight theinformed and to understand the nature of balance
need for banks to review and refresh the functioningsheet risks the bank may be facing, and what liquidity
of their boards. The Central Bank of the UAE hasassumptions that have been made governing adverse
recently published an extensive and revised set ofconditions.
guidelines for bank directors and, although they are aAs most banks are both complex businesses
revision of earlier guidelines, they come at a verycomprising very different business units with different
important time. Globally investors who sawrisks profiles and highly leveraged institutions, the
unparalleled loss in the value of their investments inresponsibilities on the bank directors are particularly
banks during the financial crisis are questioningonerous.
whether board directors understood the risk theirThe role of the chairman The guidelines highlight both
institutions were exposed to, and are calling forthe "soft" and "hard" responsibilities of a bank's
corporate governance to be improved in order tochairman. "Soft" responsibilities include, for instance,
ensure that similar crises can be avoided in the future.the creation of an environment in which board
The new guidelines highlight the importance of themembers are empowered to voice dissenting
composition of the board and the valuable roleopinions, and to call for appropriate information in
non-executive directors have to play. They stressorder to make sound decisions. The chairman should
the role and responsibility of the board in setting clearalso ensure that a relationship of trust is established
strategies and objectives based on a comprehensivewith the CEO, and that directors have both a
understanding of the risks an institution runs. Thecomprehensive induction, as well as on-going
guidelines also suggest that in the light of the newopportunities to learn about all aspects of the
guidelines banks need to review the performance andinstitution for which they are responsible.
structure of their boards.The role of the board The guidelines further
Key lessons*emphasize the role of the board in setting strategic
- Define the purpose and objectives of the bankdirection, supervising management and ensuring
- Establish Board committees needed for monitoringadequate controls and reporting. They emphasize
and control purposesthat it is important for the board to formally state
- Ensure accountability and transparencythe powers and responsibilities, that are reserved for
- Strike the desired balance between wealth creationa board, and to follow appropriate and transparent
and controlsprocedures. Every board member should also be clear
- Rigorous process to ensure that decision making isabout the bank's purpose, values and ethical
properly managed.standards. One of the most substantial challenges
*Corporate Governance Guidelines, Central Bank ofidentified in the guidelines is the board's responsibility
UAEto find the right balance between information and
The updated guidelines Corporate governance,decision making. Many board packs resemble
according to the Organization for Cooperation andtelephone directories in size and weight, and it is
Development (OECD), defines the relationshipunrealistic to expect board members to effectively
between a company's management, its board,exercise their judgment in such circumstances. The
shareholders and other stakeholders. It relates toguidelines suggest that an effective board should be
both the accountability of boards and how directorsexpected to respond to short, focused papers of
can influence and improve the performance of thenot more than six pages each.
bank. In banks, more than in other institutions, theBoard performance evaluationFinally, the guidelines call
challenge is to achieve sustainable wealth creationfor the performance of bank boards, their
though appropriate management of the risks involvedcommittees and members to be evaluated at least
in financial intermediation.once a year. The purpose of these evaluations should
"Good governance is essential for the long termbe to make the board more effective, and to
success of a bank, and good governance dependsreassure stakeholders of the soundness of the
largely on the skills, experience and knowledge of theinstitution's corporate governance. Although the
directors. If a bank fails, it affects the wholeCentral Bank has obviously not published any findings
economy, so directors are the guardians of financialon the quality of corporate governance in banks in
stability," says HE Sultan Bin Nasser Al Suwaidi,the UAE, the guidelines note that "most banks
Governor of the Central Bank of UAE.following these guidelines will be making fundamental
The guideline from UAE banks build on earlierchanges to their structures and process over the
guidelines published by the Central Bank, thosenext few years".
established by the Dubai International Finance CentreBoard performance evaluation - key questions?
(DIFC), and the anticipated corporate governance- Has the board set performance objectives and
provisions in the listing rules for Abu Dhabi.achieved them?
The role of directors- Has the board played a meaningful role in the
The revised guidelines place considerable emphasis ondevelopment of strategy?
the role of directors and emphasize that, once- Has the board ensured effective risk management?
appointed, they are responsible to all shareholders- Does the board have the right mix of skill and
rather than to any specific group. Equally important isknowledge and an appropriate combination of
the role of independent non-executive directors, whoindependent and non-executive directors?
can exercise their judgement unaffected by conflicts- How is the relationship between the board and
of interest and be of "independent mind... who aremanagement?
able to stand their ground". At the same time, bank- Is the board dealing with the right issues?
board members need to understand the line between- Does the board get the right information to
management and the board, and should not beunderstand and address the issues, with sufficient
involved in the executive committee of the bank.meetings of the right duration?
The biggest challenge faced by bank board's relates- Do the board have the right sub-committee's
to how directors exercise their responsibilities and(strategy, risk, audit etc) and do they function
judgment in fulfilling their key roles:effectively? The corporate governance of banks,
Strategy: Constructively challenge and help developwhich is under the international spotlight, is a theme
strategy Performance: Monitor and reporting ofthat has also been championed by the Hawkamah,
management's performance against the definedthe institute for corporate governance at the DIFC.
strategy Risk: Defining a risk appetite and ensuringFor the past two years Hawkamah has been running
that it is achieved through robust systems andan annual corporate governance award, and in 2008
processes People: Ensuring appropriate reward andthe winners were National Bank of Oman (1st Prize)
incentives for senior executivesand Qatar National Bank (2nd Prize). Hawkamah and
In most instances, boards will need to create specificUAB have also made awards to Burgan Bank and
sub committees to address these areas effectively.Bank Dhofar for their continued distinguished
Further, given the performance of the financial sectorcorporate governance practices. Nominations for this
over the past 18 months, questions must be askedyear's awards close at the end of August. Given
as to whether strategies were realistic, and whetherrecent events, investors will be paying a lot more
they encouraged excessive risk taking in order toattention to the outcomes this year.
maintain market share and return. Boards need to be