Corporate Governance

Title of the PPR Board of Directors
11 December 2007
 
Authority
Effective Date
Current Document: Board of Directors’ Decision No. BD2007-08-01, dated 11 December 2007
 
History
Amended Document: Necessary amendments, related to Internal Audit Charter approved by the Board of Directors’ Decision No. BD2008-13-01, dated 6 August 2008
 


CORPORATE GOVERNANCE POLICY

A. FOUNDATIONS FOR EFFECTIVE CORPORATE GOVERNANCE

B. AUTHORITY AND RESPONSIBILITY
 

1. Role and Functions of the Board of Governors
2. Role and Functions of the Board of Directors
3. Role and Functions of Senior Management
4. Delegation of Authority
5. Transparency and Accountability
6. Disclosure of Information
7. Complaints Receipt and Retention Mechanism


C. EXECUTION

D. INTERNAL AND EXTERNAL AUDIT; CONTROL FUNCTIONS
 

1. Internal and External Auditors

 

2. Control Functions: Compliance, Evaluation, Risk Management

A. FOUNDATIONS FOR EFFECTIVE CORPORATE GOVERNANCE

 

The Corporate Governance provides a framework for decision making from among available choices under conditions of risk and uncertainty, and for evaluation of the consequences of these decisions.

 

In practical terms, effective corporate governance guidelines have a direct impact on the Bank’s ability to obtain favourable credit ratings (affecting cost of funds), prevent high employee turnover (affecting human resources costs), and presenting a good public image of the Bank (affecting public and corporate good will towards the Bank).

 

The Basel Committee on Banking Supervision issued in February 2006 the document “Enhancing Corporate Governance for Banking Organizations”, whereby adapts for banking institutions the OECD Principles of Corporate Governance, which were adopted in 2004.

 

The OECD principles define corporate governance as involving “a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.”

 

The Basel Committee document states that “From a banking industry perspective, corporate governance involves the manner in which the business and affairs of banks are governed by their boards of directors and senior management, which affects how they:

o Set corporate objectives;
o Operate the bank’s business on a day-to-day basis;
o Meet the obligation of accountability to their shareholders and take into account the interests of other recognised stakeholders;
o Align corporate activities and behaviour with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations.”

 

This document is prepared in the light of Basel Committee principles with regard to corporate governance in banking sector. (For reference please see the latest edition of the Basel Committee documents with regard to Corporate Governance.)


B. AUTHORITY AND RESPONSIBILITY
 

The Bank's governing constitution is the Articles of Agreement (the Agreement) establishing the ECO Trade and Development Bank (the Bank), which provides that the Bank will have a Board of Governors, a Board of Directors, a President, Vice Presidents (President and Vice-Presidents form the Senior Management), Auditors, Inspectors and such other officers and staff as may be considered necessary.

 

1. Role and Functions of the Board of Governors

 

All the powers of the Bank are vested in the Board of Governors.2 Except for the powers and functions specifically reserved to it by the Agreement; the Board of Governors has delegated the exercise of its powers to the Board of Directors while retaining overall authority. The Board of Governors has overall supervisory authority over the entire activity of the Bank. The Governors represent in the Bank the Member States as shareholders interested in mandate fullfilment and maximization of shareholder value.

 

2. Role and Functions of the Board of Directors

 

Subject to the Board of Governors' overall authority, the Board of Directors is responsible for the direction of the Bank's general operations.

 

Under Article 17, the Board of Directors shall be responsible for the operation of the Bank and for this purpose, shall in addition to the powers assigned to it expressly by the Agreement, exercise all the powers delegated to it by the Board of Governors, and in particular take decisions concerning the business of the Bank and its operations in conformity with the general directions of the Board of Governors.

 

Directors shall discharge their duties in the interest of the Bank professionally and impartially as well as independent from Senior Management or political influence in conformity with the Article 22 of the Agreement. Furthermore, in order to strengthen the prohibition of political activity and to underline the independent and impartial character of the decision making process that shall take into consideration only the best interest of the Bank according to its purpose, Article 22 paragraph 3 of the Agreement states that: “Each Member of the Bank shall respect the international character of his duty and shall refrain from all attempts to influence any of them in the discharge of their duties.”

 

The Board of Directors is ultimately responsible for the operation and financial soundness of the Bank.

 

The Board of Directors is non- resident. Its activity is governed by two documents in addition to the Agreement: (i) “Rules of Procedures of the Board of Directors”; and (ii) the “By-Laws” of the Bank, both approved by the Board of Governors.

The Board of Directors has the following broad authority and related responsibilities:
• Approve and periodically review strategies and policies of the Bank;
• Set acceptable limits for risks undertaken by the Bank and ensure the Senior Management takes the necessary steps to identify, measure, monitor and control those risks;
• Ensure the effectiveness of the internal controls system;
• Approve the Organizational Structure;
• Ensure adequate functional/departmental/divisional segregation of duties (e.g. transaction origination, assessment of adequacy of documentation, monitoring after origination, approval of disbursement and actual disbursement, etc) and avoidance of conflict of interest;
• Avoid participation in day-to-day management of the Bank, in order to provide effective and objective oversight of the Senior Management;
• Board Members are expected to maintain appropriate level of expertise and promote Bank safety and soundness;
Provide incentives for long-term financial sustainability;
• Avoid excessive focus on short-term profitability and volumetric targets when is not given adequate consideration to risk factors and mandate fulfilment;
• Approve budgets;
• Evaluate performance of Senior Management;
• Provide governance, guidance and oversight to Senior Management;
• All financial proposals are subject to the approval of the Board of Directors.

The Audit Committee

 

The members of the Committee shall be appointed by the Board of Governors on the basis of their background, education and/or experience in accounting or related financial expertise which provides a thorough understanding of financial, accounting and auditing functions, as well as their integrity and their independence from the Bank's Management.

 

The Audit Committee’s main task is to ensure that the Bank’s financial statements reflect the Bank’s actual financial structure as well as the Bank’s internal audit and compliance system work properly that covers all risk areas of the Bank.

 

Authorities and responsibility of the Committee are set out in the Establishment of Audit Committee document.

 

3. Role and Functions of Senior Management

As regards the role of Management and internal relations within the banking organization, issues which are subject to what is known in the Bank as Corporate Governance Part II, the Basel Committee guidelines state that:
“Senior management is responsible for delegating duties to the staff and establishing a management structure that promotes accountability, while remaining cognisant of senior management’s obligation to oversee the exercise of such delegated responsibility and its ultimate responsibility to the board for the performance of the bank”,
and:
“Senior management consists of a core group of individuals, including, for example, the chief financial officer and division heads, who are responsible for overseeing the day-to-day management of the bank. These individuals should have the necessary skills to manage the business under their supervision as well as have appropriate control over the key individuals in these areas”,
and further:
“Senior managers contribute a major element of a bank’s sound corporate governance by overseeing line managers in specific business areas and activities consistent with policies and procedures set by the bank’s board of directors. One of the key roles of senior management is the establishment, under the guidance of the board of directors, of an effective system of internal controls. Even in very small banks, for example, key management decisions should be made by more than one person (“four eyes principle”).”

From the above, it becomes evident that the corporate governance in the Bank is collectively reflected by the way in which: (i) the Bank is structured; (ii) its business activities are planned, conducted and controlled; and (iii) the role, functions, authorities and responsibilities which are assigned to the executive body and staff are defined.

 

4. Delegation of Authority

 

A key internal challenge is managing the delegation of authority from the Bank’s shareholders down to the level of day-to-day decision making. The starting point for internal allocation of authorities is the Agreement.
According to Article 20 and 21 of the Agreement, the Management of the Bank consists of the President, and the Vice President(s).

 

• Article 20, para 4: “The President shall be the legal representative of the Bank.”
• Article 20, para 5: “The President shall be chief executive of the Bank and shall conduct, under the direction of the Board of Directors, the current business of the Bank. He shall be responsible for the organization, appointment and dismissal of the officers and staff in accordance with rules and regulations adopted by the Bank.
• Article 21: “At least three Vice-Presidents shall be appointed by the Board of Directors on the recommendation of the President. Each shall be a national of each respective founding member country, and shall hold office for a term of five (5) years exercise such authority and perform such functions in the administration of the Bank, as may, from time to time, be determined by the Board of Directors. In the absence of the President, one of the Vice-Presidents nominated by the President shall exercise the authority and perform the function of the President…”
These articles stipulate that the Vice Presidents, in addition to the President are entitled to executive authority delegated directly by the Board of Directors.

 

It is standard industry and corporate practice that the Vice Presidents executive level in turn delegates authority to the level of line managers according to the latter’s areas of expertise provided that the control is being ascertained.

 

In addition, for the purposes of allocating authorities to run the current business of the Bank, the Board of Directors can also create committees and other subsidiary bodies.

 

At the operational level, the authority of conducting the current business of the Bank must be delegated significantly in order to achieve this goal effectively. Given time pressures, increasing specialization within the Bank’s Divisions, and the sheer volume of decisions to be taken in day-to-day management, no one person can assume overall authority, as well as underlying direct and personal responsibility for all activities pertaining to the mandate and objectives of the Bank, including those related to the protection, utilization and growth of the shareholder’s equity.

 

4.1 The President

 

The President is the Chief Executive Officer and Chairman of the Board of Directors. As stated in Article 20 of the Agreement, the President shall conduct, under the direction of Board of Directors, the current business of the Bank. He is appointed by and accountable to the Board of Governors, and reports to the Board of Directors.

 

The President’s functions can be defined more specifically as follows:

 

• Ensuring compliance with the Agreement and policies approved by the Board of Governors and the Board of Directors;
• Chairing the Board of Directors and recommending policies and operational and financial proposals;
• Conducting, as the Chief Executive, the current business of the Bank under the direction of the Board of Directors;
• Being responsible for the organization, appointment and dismissal of officers and staff, under the provisions of Articles 20 of the Agreement;
• Directing the creation, promotion and review of the Bank’s overall institutional development;
• Promoting the Bank’s image within the international financial community;
• Exercising the authorities related to the Bank’s activities;
• Overseeing the functional divisions of the Bank, following the hierarchical line of command as delineated in the Organizational Chart of the Bank and the delegated authority to the Vice-Presidents;
• Issuing administrative orders regarding the internal functioning of the Bank;
• Exercising administrative authority over the departments reporting directly to the President’s office, including the allocation of the divisional budget among them.

 

4.2 The Vice Presidents

 

The next level of executive authority related to the conducting of the current business of the Bank rests with the Heads of Division, who are the Vice Presidents.

 

They are appointed by and thus are accountable to the Board of Directors and report to the President.

 

The Vice Presidents are authorized to make operational decisions following their functional responsibilities as determined by the Board of Directors. More specifically the Vice Presidents, subject to provisions of policies and procedures approved by the Board of Directors are authorized to take decisions on all matters, pertaining to their domains of responsibilities, unless these matters are explicitly reserved for the Board of Governors, Board of Directors, the President or pertain to the Terms of Reference of a Committee.

 

The Vice Presidents have executive and oversight authority over the activities of (day-to-day running of) their divisions.

 

They also have the authority to delegate certain powers to their Head of Departments, following departmental procedures, manuals and job descriptions.

 

Conditional on the above, Administrative Order 2007/003 dated May 18, 2007 “Designation of professional staff members who can represent and bind the Bank” lays down the list of matters for exercising such authorities by the Vice Presidents with respect to their functional domains.

 

4.3 The Committees

 

Important role in the authority allocation blueprint of the Bank belongs to the Committees. Committees are hierarchically horizontal bodies of the Bank, mandated by the Board of Directors with specific decision-making authorities. The rights of the members of the Committees are defined in each Committee’s “Terms of Reference”.

 

The Board of Directors has created the following committees with decision-making authority:

 

4.3.1 The Management Committee

 

It is comprised of the President as Chairman and the Vice Presidents.

 

It is the main committee of the Bank and has the mandate to consider and decide on all issues pertaining to key aspects of the Bank’s strategy, structure, operation, risk management and performance. All other Committees established in the Bank have a subsidiary role and report to the Management Committee.

 

With respect to the operations of the Bank, the Management Committee has the authority to:

 

• Consider for approval trade, corporate, project finance and related financing applications and rollovers that have reached Final Review phase, in case such proposals have not been approved by consensus in the Credit Committee. Establish specific parameters (policies, limits, targets, guidelines), to be endorsed by the Board of Directors, within which tactical and operational financing decision making must take place,
• Approve changes to the manuals that prescribe how operations are to be analysed, approved, administered and monitored,
• Approve remedial management strategies, restructuring and rescheduling for problem operations,
• Establish ad-hoc and/or permanent Working Groups for dealing with specific issues of interest,
• Approve rules, regulations, methodologies and procedures necessary for the implementation of strategies, policies and guidelines approved by the Board of Directors and/or Board of Governors.

4.3.2 The Credit Committee

 

Its composition is approved by the Board of Directors. The Board of Directors shall review the composition and the effectiveness of the Credit Committee at intervals not longer than four years.

 

The Credit Committee’s responsibility is to guide the Operation Teams through the approval process from Concept Clearance to Final Review, in conformity with the Bank’s Operations Cycle Policy and its attendant Operations Manual. It considers all matters related to the financing operations of the Bank and expresses opinions with respect to the appropriateness of the due diligence and appraisal process.

 

The Credit Committee rejects financing proposals that do not meet mandate/strategy criteria, are not economically/financially viable and sustainable, and/or are not in conformity with existing Bank regulatory framework.

 

The Credit Committee submits for approval by the Management Committee financing proposals that have reached Final Review phase, in case such proposals have not been approved by consensus in the Credit Committee.

 

Composition, functions, authority and responsibility of the Credit Committee are outlined in Financial Policies Chapter 4 and detailed in the “Credit Committee Composition, Terms of Reference and Procedures” document.

 

4.3.3 The Assets and Liabilities Committee (ALCO)

 

Its composition is approved by the BoD. It is the key institutional unit in the Bank’s financial management process.

 

ALCO is responsible for setting strategic direction in asset and liability risk management and establishes specific numerical limits, targets, and guidelines within which tactical and operational ALM decision-making must take place. The Committee is responsible for decisions on issues concerning the relationship between the Bank’s assets and liabilities - capital adequacy, liquidity, foreign exchange risk, interest rate sensitivity and off-balance sheet risks.

 

Functions, authority and responsibility of the ALCO are detailed in the “ALCO Composition, Terms of Reference and Procedures” document.

 

4.3.4 The Recruitment Committee

 

The composition of the Recruitment Committee is approved by the Board of Governors.

 

The members of the Recruitment Committee meets and develops the specific selection criteria for the vacancy, the evaluation system for interviews, and the set of interview questions to be used to assess how each candidate meets the selection criteria.

 

The members of the Recruitment Committee will independently evaluate each candidate according to the established evaluation system.

 

The Recruitment Committee makes its decision on the employment of the appropriate candidate.

 

Decisions are taken on the basis of a structured and independent evaluation of the applicants by all Committee members. The majority vote is the decision-making mechanism in the Recruitment Committee with a decisive vote of the Chairman in the case of split decisions.

 

The final decision concerning recruitment pertains to the President, in conformity with the provisions of Article 20, paragraphs 5 and 6 of the Agreement.

5. Transparency and Accountability

 

Transparency and accountability are integral elements of the Bank's Corporate Governance Policy. The corporate governance structure is further supported by a system of reporting, with information appropriately tailored for and disseminated to each level of responsibility within the Bank to enable the system of checks and balances on the Bank's activities to function effectively.

 

In addition, detailed information shall be available to permit Senior Management to monitor the implementation of strategies, business plans and the execution of budgets. This information aims at enhancing accountability throughout the organisation.

 

6. Disclosure of Information

The Bank's corporate governance structure is supported by appropriate financial and management reporting. The Bank shall present financial statements in its Annual Report, prepared in accordance with the International Financial Reporting Standards.

 

The Bank shall have in place a comprehensive Management Information System of reporting to the Board of Directors, in particular information referring to:

 

• Operations and investment pipeline; and
• Financial results

 

The Senior Management of the Bank, following the above-explained lines of responsibilities and allocation of authorities, is responsible for disclosing to the shareholders through the Board of Governors all relevant information, pertaining to its operations. Senior Management shall also regularly disclose to the Board of Directors relevant information, which shall be adequate in content and in format to enable the Board of Directors to accomplish its functions.

 

In its reporting the Bank aims at providing appropriate information on risk and performance of its activities. Industry best practice will guide the evolving disclosure practice.

 

There shall also exhibit openness and transparency in its dealing with other interested stakeholders and the general public. Disclosure of this information will occur in accordance with the Bank’s “Policy on Disclosure of Information”.

7. Complaints Receipt and Retention Mechanism
 

The Bank shall establish and maintain procedures for:

 

(i) the receipt, retention and treatment of complaints received by the Bank from any source, either internally or externally, in connection with any operations, accounting, or internal control matters; and
(ii) the submission by employees of the Bank, on a confidential and anonymous basis, of communications that involve any employee concerns regarding questionable operational, accounting or internal control matters.

C. EXECUTION

 

Corporate Governance rules and practices are determined by the structure and legal framework under which the Bank operates, the appropriateness of its code of conduct and the corporate culture. Therefore, the Bank shall strive to adopt rules and practices which are in compliance with the principles of effective corporate governance. The approved set of internal regulations governing essentially all main Bank activities (e.g. organization, financial management, investment policies, risk management, evaluation, procurement of goods and services, environment, recruitment, staff relations, etc), form the core body of internal legislation ensuring corporate governance in line with best practices.

 

Efficient and effective Corporate Governance is essential for safe and sound functioning of the Bank, and therefore its implementation through the set of policies, strategies, guidelines, rules, regulations, procedures, processes, systems and controls shall, inter alia, draw upon and rely on the sound practice papers issued by the Basel Committee in recent years, “which describe the roles of the Board of Directors and Senior Management in managing risk and underscoring the need for the banks to set strategies for their operations and establish accountability for executing these strategies. These sound practice papers have highlighted strategies and techniques for managing risk and include a number of common elements that are basic to sound corporate governance.” (“Enhancing Corporate Governance for Banking Organizations”)

 

Sound corporate governance at operational level consists of a number of elements outlined in the following table:

 

Management

Independent Auditing

Main Control Functions: (compliance, risk, evaluation)

Transparency and Accountability

Reporting rules

• CEO report

• Financial statements

• Budgets

Decision matrix

Operating Procedures

Financial Management

Organizational Structure

Position descriptions

Evaluation of CEO and top managers

Internal controls

Relationships with:

• Board of Governors

• Board of Directors

• Independent external and internal auditors

External Auditors

Engagement letter

Audit program

Final report

Auditor independence

Auditor rotation

Non-audit assignments

Relationships with:

• BoG

• BoD

• Management

 

Internal Audit Department

Evaluation:

· Internal control systems

· Control functions

· Risk management

· Governance process

Audit Committee

 

Program of activities

Control culture

Communication

Autonomy

Assignments

Reporting

Assessment

Relationships with:

· Other control functions

· Internal Audit

· Board of Directors

· Management

 

In addition, the Bank shall make all efforts (i) to identify the underlying risks it may face both in the short and long run, and (ii) to improve its ability to manage those risks.

D. INTERNAL AND EXTERNAL AUDIT; CONTROL FUNCTIONS
 

Compliance with the institutional framework of authority allocation shall be evaluated and monitored by the Internal Audit and Compliance Department. The External Auditors are expected to provide guidance for improvement of the corporate governance – internal allocation of authorities.

 

Periodic reports to the Audit Committee and BoD by the Management on various issues complement the Policy, ensuring thus transparency and accountability.

 

1. Internal and External Auditors

Internal Audit and Compliance Department: The Bank's Internal Audit and Compliance Department performs an independent, objective and consulting activity. It examines and evaluates the activities of the Bank as a service to the Audit Committee and President. The Internal Audit and Compliance Department reports functionally to the Audit Committee. It has the responsibility, inter alia, of satisfying itself that the internal audit process is adequate and efficient through reviewing the policy, the scope, the work programme and the reporting relating to the Internal Audit and Compliance Department. The primary objective of the Internal Audit activity is to help Audit Committee and President of the Bank discharge their responsibilities and accomplish the objectives of the Bank by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

 

The Internal Audit and Compliance Department carries out its work according to the Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors and the Information Systems Audit and Control Association (ISACA). Its authority and responsibility is defined in the Internal Audit Charter which is approved by the Board of Directors. Additionally, Internal Audit carries out any specific audit requests or investigations upon the request of Audit Committee and/or President.

 

External Auditors: The Board of Governors appoints the External Auditors on the recommendation of the Board of Directors, for one-year term, and they may be reappointed by the Board of Directors as per Article 26 of the Agreement. At the conclusion of their annual audit, the External Auditors provide a signed auditor's opinion on the truth and fairness of the Bank's financial statements and separate signed auditor's opinions for each of the Bank's special operations.

 

2. Control Functions: Compliance, Evaluation, Risk Management

 

The Audit Committee of the Bank should assess regularly the extent to which the Bank is managing its risks effectively. The control functions assist President in managing effectively the risks faced by the Bank. The scope and breadth of the activities of control functions are subject to independent, periodic review by the Internal Audit and Compliance Department.

 

The responsibilities of the Compliance function shall be carried out under a program of planned activities that cover: (i) review of policies and procedures; (ii) compliance risk assessment; and (iii) educating staff on compliance matters. In certain instances as the need for investigation may arise, the compliance function shall have the right to conduct investigation of all possible breaches.

 

The responsibilities of the Evaluation function shall be carried out under the authority given by the Post-Evaluation Policy.

 

Risk Management shall discharge its responsibilities in an autonomous manner, according to best practices and industry standards.



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