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These Guiding Principles1 incorporate 17 elements considered desirable in facilitating effective of financial institutions. The principles are categorised into seven groups:

GROUP 1 – Cooperative Principles GROUP 5 – Compensation GROUP 2 – Board Practices GROUP 6 – Disclosure and transparency GROUP 3 – Senior GROUP 7 – Role of GROUP 4 – and Internal Controls

1 While best efforts have been made to develop the Guiding Principles to recognize both the and civil law legal systems, the principles should be adapted to ensure they align appropriately with the legal system applicable in the jurisdiction.

other relevant , including any Board COOPERATIVE PRINCIPLES candidates and the CEO where the members elect same, should provide for full disclosure Guiding Principle 11 and be readily available. In addition, election MEMBERS’ RIGHTS AND OBLIGATIONS processes should be objective, transparent and The values of a cooperative consistent with the CFI’s by-laws. (“CFI”) should be based on the following seven 3. Member Economic Participation cooperative principles: Members contribute equitably to, and 1. Voluntary and Open Membership democratically , the capital of their are voluntary organisations, open cooperative. At least part of that capital is to all persons able to use their services and usually the common property of the willing to accept the responsibilities of cooperative. Members may receive limited membership, without gender, social, racial, compensation, if any, on capital subscribed as a political or religious discrimination. condition of membership and, in order to build capital reserves, a may be paid in the 2. Democratic Member Control form of patronage or bonus shares. Members Cooperatives are democratic organisations allocate surpluses for any or all of the following controlled by their members, who, where purposes: developing their cooperative, possibly applicable, actively participate in setting their by setting up reserves, part of which at least and making decisions. Men and women would be indivisible; benefiting members in serving as elected representatives are proportion to their transactions with the accountable to the membership. In primary cooperative; and supporting other activities cooperatives members have equal voting rights approved by the membership. (one member, one vote) and cooperatives at other levels are also organised in a democratic 4. Autonomy and Independence manner, which may provide for proportional Cooperatives are autonomous, self-help voting based on investment/ownership. The organisations controlled by their members. If Board should oversee the development and they enter into agreements with other implementation of strategies that will result in organisations, including governments, or raise member attendance and participation in capital from external sources, they do so on General Meetings. The meeting agenda and terms that ensure democratic control by their members and maintain their cooperative autonomy. 1 While Guiding Principle 1 is a restatement of The International Cooperative Alliance revised , clarification has been provided regarding these principles in the Cooperative Financial Institution context. 1 5. Education, Training and Information ensure transactions with related parties are Cooperatives provide education and training for subject to appropriate restrictions. In their members, elected representatives, discharging these duties, directors may rely on managers, and employees so they can reports, advice, and other information provided contribute effectively to the development of by the CFI’s employees, lawyers, consultants their cooperatives. They inform the general and committees of the board of which the public and opinion leaders – particularly young director is not a member, unless the director people - about the nature and benefits of co- has knowledge which would make such reliance operation. unreasonable or in bad faith. These corporate 6. Cooperation among Cooperatives values are communicated through a code of Cooperatives serve their members most conduct that articulates acceptable and effectively and strengthen the cooperative unacceptable behaviors. movement by working together through local, Oversight of national, regional and international structures. The board or, where applicable, members 7. Concern for Community should select and, when necessary, replace Cooperatives work for the sustainable senior management and have in place an development of their communities through appropriate succession plan. In carrying out its policies approved by their members that should role of oversight, the board should: additionally promote social responsibility and  Meet regularly with senior management member education on cooperative and financial  Monitor actions to ensure they are consistent issues. with the strategy and policies approved by the board, including the risk The board should ensure that these cooperative tolerance/appetite; principles are incorporated into governance  Question and review critically explanations policies and practices. and information provided;  Set performance standards consistent with long term objectives, strategy and financial BOARD PRACTICES soundness of the CFI and monitor performance against the standards; and Guiding Principle 2  Ensure management’s knowledge and RESPONSIBILITIES OF THE BOARD expertise remains appropriate for the nature The board has overall responsibility for the of the and the CFI’s risk profile. cooperative financial institution (“CFI”), The board should ensure the organisational including approving and overseeing structure facilitates effective decision making implementation of strategic objectives, risk and . This includes regularly strategies, adopting best corporate governance reviewing policies and internal controls to practices and values, and oversight of determine areas needing improvement, as well management. The board should approve and as identifying and addressing significant risks monitor the overall business strategy, taking and issues. into account long-term financial interests, and exposure to and ability to manage risk Guiding Principle 3 effectively. In discharging these responsibilities, BOARD QUALIFICATIONS the board should take into account the interests The CFI should set out expectations desired of members, other relevant stakeholders and, regarding qualifications, for example, work where permitted, non-member depositors and experience, education, business oriented borrowers, and ensure an effective relationship degrees and professional designation and is maintained with its . training requirements for directors. Where Corporate Values and Code of Conduct appropriate, each director should conduct an The board should lead in establishing the ‘tone annual self-assessment to confirm competency at the top’ and in setting professional and and identify potential areas for growth and ethical standards and corporate values that development. Board members should be and promote integrity for itself, senior management remain qualified, when appropriate for their and other employees. The officers and board positions, including through training. They committee members owe a duty to the CFI to should have a clear understanding of their role operate the institution with reasonable in corporate governance and be able to exercise prudence and in the best interests of the CFI sound and objective judgment about the affairs and its members. The directors owe the of the CFI. members a duty of fair dealing with respect to Qualifications issues of membership, ownership and corporate The board should possess, individually and governance. In addition, the board should collectively, appropriate experience,

2 competencies and personal qualities, including Role of Directors professionalism and personal integrity. Directors provide an important service to the Training CFI and to fellow members, who have entrusted The board should ensure board members have them to oversee the . To best access to programmes of tailored initial and carry out their duties, directors should: ongoing education on relevant issues. The board  Undertake appropriate established training should dedicate sufficient time, budget and requirements other resources.  Regularly attend Board meetings and prepare Composition for them by reviewing all material provided The CFI should have an appropriate composition  Actively participate at board meetings and of board members, for example, taking into question management so they fully consideration demographics, geography, and understand their reports and actions professional qualifications. This is achieved by  Ensure that the best interest of the CFI are identifying and nominating candidates to ensure considered in all Board decisions appropriate succession planning and  Ensure management has developed, and the strengthening itself to meet the CFI’s long term Board approved with member participation oversight needs. Recruiting members from a where appropriate, all policies and broad population of candidates helps to procedures required under applicable enhance board perspective and ability to legislation exercise objective judgment independent of  Where appropriate, ensure an appropriate senior management and personal interests. In Enterprise Risk Management Framework has identifying potential board members, the board been established based on the size, should ensure candidates are qualified to serve complexity and risk profile of the CFI as board members and are able to commit the  Fully understand the limits imposed on the necessary time and effort to fulfil their CFI’s business powers under applicable responsibilities and to undertake any required legislation and the CFI’s by-laws, articles and training requirements within the timeframes policies established by the CFI.  Ensure controversial decisions involving conflicts of interest are carefully documented Guiding Principle 4  Review examination reports and other reports BOARD’S OWN PRACTICES AND STRUCTURE prepared by external parties and external The board should define appropriate auditors’ reports to identify and correct governance practices for its own work and have deficiencies in the operation of the CFI and to ensure the best possible performance; and in place the means to ensure such practices are  Develop a common view among Board followed and periodically reviewed. The board members before making a public comment should conduct an annual self-assessment to regarding controversial issues that concern review and improve its performance, and the the CFI. performance of Chairs and individual directors. Board Committees Organisation and Functioning of the Board The board should establish such committees as The board should maintain, and periodically may be required in its jurisdiction and may update, organisational rules, by-laws, or other establish other committees to have specialised similar documents setting out its organisations, responsibilities, for example, committees for rights, responsibilities and key activities. Taking compensation, nominations, , into account its size, the frequency of meetings governance, ethics, and compliance. Each and use of committees, the board should committee should have a charter or other structure itself in a way so as to promote instrument setting out its mandate, scope and efficiency, sufficiently deep review of matters, working procedures. Committees should and, robust, critical challenge and discussion of maintain appropriate records of their issues. To support board performance, the deliberations and decisions. Where appropriate board should carry out regular assessments of based on the size, complexity and risk profile of both the board as a whole and of individual the CFI, board members may also have a seat board members. on Executive Committees, for example, the Role of the chair Asset Liability Committee (ALCO). The chair should ensure board decisions are taken on a sound and well-informed basis and The audit (or supervisory) committee is should encourage and promote critical typically responsible for the financial reporting discussion. This includes ensuring dissenting process; providing oversight of the CFI’s views can be expressed and discussed within the internal and external auditors; approving or decision-making process. recommending to the board for their approval

3 the appointment, compensation and dismissal of external auditors, reviewing and approving the SENIOR MANAGEMENT audit scope and frequency; receiving key audit reports; and ensuring senior management is Guiding Principle 5 taking necessary corrective actions in a timely ACTIVIES ALIGNED WITH BUSINESS STRATEGY manner to address control weaknesses, non- The (CEO)/General compliance with policies, laws and Manager/Manager or, where applicable, senior and other problems identified by auditors. In management reports directly to the board and addition, the audit committee should oversee is responsible for the day to day operations of the establishment of policies and the CFI, implementing board-approved plans to practices. achieve desired strategic objectives and Risk Committee reporting on results. The board, through the It is appropriate for many CFIs, especially where chair, typically communicates directly to the warranted by their size, complexity or risk CEO who may be supported by a senior profile, to have a board-level risk committee or management team. Senior management is equivalent. The risk committee is typically responsible for ensuring the management and responsible for advising the board on the CFI’s staff of the CFI apply the processes, procedures overall current and future risk and controls necessary to prudently manage the tolerance/appetite and strategy and for risk and for providing the overseeing senior management’s with timely, relevant, accurate and complete implementation of that strategy. This should information to enable it to assess that include strategies for capital and liquidity delegated responsibilities are being discharged management, as well as for credit, , effectively. Under the direction of the board, operational, compliance, reputational and other senior management should ensure the CFI’s risks. To enhance the effectiveness of the risk activities are consistent with the business committee, it should receive formal and strategy, risk tolerance/appetite and policies informal communication from the CFI’s risk approved by the board. Senior management management function and should, where contributes to sound corporate governance appropriate, have access to external expert through personal conduct and by providing advice, particularly in relation to proposed adequate oversight of those they manage. strategic transactions, such as mergers and Senior management is responsible for amalgamations. delegating duties to staff and should establish a management structure that promotes The board should have a formal written conflict and transparency. Senior of interest and an objective compliance management should implement, consistent with process for implementing the policy. The policy the direction given by the board, appropriate should include: systems for managing the risks – both financial  A member’s duty to avoid to the extent and non-financial – to which the CFI is exposed. possible activities that could create conflicts of interest of the appearance of conflicts of interest; RISK MANAGEMENT AND  A review or approval process for members to INTERNAL CONTROLS follow before they engage in certain activities so as to ensure that such activity will not create a conflict of interest; Guiding Principle 6  A member’s duty to disclose any matter that EFFECTIVE INTERNAL CONTROLS AND RISK may result, or has already resulted, in a MANAGEMENT FUNCTION conflict of interest; Cooperative financial institutions should have  A member’s responsibility to abstain from an effective internal controls system and a risk voting on any matter where the member may management function, such as a chief risk have a conflict of interest or where the officer or equivalent, with appropriate member’s objectivity of ability to properly qualification, expertise, sufficient authority, fulfil duties to the CFI may be otherwise stature, independence, resources and access to compromised; the board.  Adequate procedures for transactions with Risk management generally encompasses: related parties to be made on an arms-length  Identifying key risks; basis; and  Assessing these risks and measuring exposure  The way in which the board will deal with any to them; non-compliance with the policy.

4  Monitoring the risk exposures and determining reporting systems should be dynamic, the corresponding capital needs on an ongoing comprehensive and accurate, and board reports basis; designed carefully to ensure information  Monitoring and assessing decisions to accept regarding risks is conveyed in a concise and particular risks, risk mitigation measures and meaningful manner. whether risk decisions are in line with the board-approved risk tolerance/appetite and Guiding Principle 9 risk policy; and EFFECTIVE USE OF AUDIT AND INTERNAL  Reporting to senior management, and/or CONTROL FUNCTIONS having unfettered access to the risk The board and senior management should use committee and/or board as appropriate, on the work conducted by functions, all items noted above. external auditors and functions in an effective manner. The board should Guiding Principle 7 recognise that independent, competent and IDENTIFICATION AND MONITORING OF RISKS qualified internal and external auditors, as well ON AN ONGOING BASIS as other internal control functions, are vital to Risks should be identified and monitored on an the corporate governance process. The board ongoing basis, and the sophistication of the and senior management can enhance the ability CFI’s risk management and internal control of the internal audit function to identify infrastructures should keep pace with any problems with a CFI’s governance, risk changes to the CFI’s risk profile (including its management and internal control systems by: growth), and to the external risk landscape.  Encouraging internal auditors to adhere to Risk analysis should include both quantitative national and international professional and qualitative elements. In addition to standards; identifying and measuring risk exposures, the  Requiring audit staff have skills risk management function should evaluate commensurate with the business activities possible ways to manage these exposures. and risks of the CFI; Cooperative financial institutions should have  Promoting the independence of the internal an approval process for new products that auditor; includes an assessment of the risks.  Recognising the importance of the audit and As part of its quantitative and qualitative internal control processes and communicating analysis, where appropriate, the CFI should also their importance throughout the CFI; use forward-looking stress tests and scenario  Requiring the timely and effective correction analysis to better understand potential risk of identified internal audit issues by senior exposures under a variety of adverse management; circumstances. In addition to these forward-  Engaging internal auditors to judge the looking tools, CFIs should also regularly review effectiveness of the risk management actual performance after the fact relative to function and the compliance function, risk estimates (i.e., backtesting) to assist in including the quality of risk reporting to the gauging the accuracy and effectiveness of the board and senior management, as well as the risk management process and making necessary effectiveness of other key control functions; adjustments. and  Receiving appropriate assurances that risks Guiding Principle 8 are being effectively identified, monitored ROBUST INTERNAL COMMUNICATIONS and managed, including non-compliance with Effective risk management requires robust applicable legislation. For example, that the internal communication within the CFI about CFI has developed and implemented effective risk across the organisation and through processes to ensure compliance with anti- reporting to the board and senior management. money laundering legislation including “know Sound corporate governance is evidenced, your customer” requirements. among other things, by a culture where senior The board and management are responsible for management and staff are expected and the preparation and fair presentation of encouraged to identify risk issues. The CFI’s financial statements in accordance with risk exposures and strategy should be applicable accounting standards in each communicated throughout the CFI both jurisdiction, as well as the establishment of horizontally and vertically with appropriate effective internal controls related to financial frequency. Information should be reporting. The CFI should maintain sound communicated to the board and senior control functions, including an effective management in a timely, complete, compliance function that, among other things, understandable and accurate manner so they routinely monitors compliance with laws, are equipped to make informed decisions. Risk corporate governance rules, regulations, codes 5 and policies to which the CFI is subject and to Transparency is essential for sound and ensure deviations are reported to an effective corporate governance. It is appropriate level of management, and, in case challenging for members, depositors and other of material deviations, to the board. Senior relevant stakeholders to hold the board and management should promote strong internal senior management accountable when there is controls and should avoid activities and insufficient transparency. practises that undermine their effectiveness. The CFI should disclose relevant and useful information that supports the key areas of COMPENSATION governance identified in these guiding principles. The disclosure should be proportionate to the size, complexity, structure Guiding Principle 10 and risk profile of the CFI, and, at a minimum, ACTIVE OVERSIGHT meet any disclosure requirements applicable in Compensation should be a key component of a its jurisdiction. CFI’s governance and risk management. The board should actively oversee the design and ROLE OF SUPERVISORS operation of the compensation system, and should monitor and review it to ensure it operates as intended. Board members who are Guiding Principle 13 actively involved in the design and operation of GUIDANCE ON EXPECTATIONS the compensation system should be Supervisors should provide guidance to CFIs on independent with appropriate knowledge about expectations for sound governance by compensation arrangements and the incentives establishing guidance or rules consistent with and risks that can arise. The board should the principles set forth in this document, and monitor and review outcomes to ensure the requiring CFIs to have robust governance compensation scheme is operating as intended. strategies, policies and procedures. Where Owing to the importance and sensitivity on the appropriate, supervisors should industry subject of compensation, where appropriate, best practices and emerging risks that are the CFI may elect to establish a Compensation relevant to the CFI’s business practices. Committee. The committee board members who are most actively involved in the design Guiding Principle 14 and operation of the compensation system REGULAR EVALUATIONS should be independent with substantial Supervisors should regularly perform a knowledge about compensation arrangements, comprehensive evaluation of a CFI’s governance including incentives and impact on performance policies, practices and procedures and behavior, and related risks. implementation of the principles that are proportionate to the size, complexity and risk Guiding Principle 11 profile of the CFI. Supervisors should have ALIGNED WITH PRUDENT RISK TAKING supervisory processes and tools for evaluating An employee’s compensation should be governance policies and practices. Evaluations effectively aligned with prudent risk taking. may be conducted through on-site inspections The CFI should ensure variable compensation is and off-site monitoring and should include adjusted to take into account the risks an regular communication with a CFI’s senior employee takes, considering all types of risk management, board and those responsible for over a timeframe sufficient for risk outcomes to the internal control functions and external be revealed. An appropriate compensation auditors program includes both quantitative risk When evaluating individual CFIs, supervisors measures and human judgment. Compensation should consider the need to adopt different should be symmetric with risk outcomes. approaches to governance that are proportionate to the size, complexity, structure and risk profile of the CFI. DISCLOSURE AND Supervisors should obtain information they TRANSPARENCY deem necessary to evaluate the expertise and integrity of proposed board members and senior management. The fit and proper criteria should include, but may not be limited to: (1) the Guiding Principle 12 contributions that an individual’s skills and ADEQUATE TRANSPARENCY experience can make to the safe and sound Governance should be adequately transparent operation of the CFI, including general to members, depositors and other relevant management skills and (2) any record of stakeholders. criminal activities or adverse regulatory

6 judgments that in the supervisor’s judgement for any remedial action should be proportionate make a person unfit to uphold key positions in to the level of risk the deficiency poses to the the CFI. Moreover, supervisors should require safety and soundness of the CFI. When the CFIs to have in place processes to review how supervisor requires remedial action, a timetable well the board, senior management and control should be established for completion. functions are fulfilling their responsibilities as Supervisors should have escalation procedures set out earlier in these principles. in place to adequately address the deficiencies Supervisors should evaluate whether the CFI identified where further action is warranted. has in place effective mechanisms through which the board and senior management Guiding Principle 17 execute their oversight responsibilities. In COOPERATION WITH OTHER addition to policies and processes, such JURISDICTIONS mechanisms include properly positioned and Supervisors should cooperate with other staffed control functions, such as internal audit, relevant supervisors in other jurisdictions risk management and compliance. In this regarding the supervision of governance policies regard, supervisors should assess the and practices. The tools for cooperation can effectiveness of oversight of these functions by include memorandum of understanding, the CFI’s board and ensure that the internal supervisory colleges and periodic meetings audit function conducts independent, risk-based among supervisors. Information shared should and effective audits, including periodic reviews be relevant for supervisory purposes and be of the CFI’s control functions and of the overall provided within the constraints of applicable internal controls. Supervisors should assess the laws. Special arrangements, such as a adequacy of internal controls that foster sound memorandum of understanding, may be governance and how well they are being warranted to govern the sharing of information implemented. among supervisors or between supervisors and other authorities. Guiding Principle 15 MONITORING Supervisors should supplement their regular evaluation of a CFI’s governance policies and practice by monitoring a combination of internal reports and prudential reports, The INTERNATIONAL CREDIT UNION including, as appropriate, reports from third parties such as internal auditors. Supervisors REGULATORS’ NETWORK (ICURN) created should obtain information from CFIs on their this document in March 2013 as guidance for governance policies and practices which should cooperative financial institutions to promote be updated at regular intervals and when enhanced governance. significant changes have occurred. Supervisors should collect and analyse information from Recognizing that CFIs operate in a wide CFIs with a frequency commensurate with the range of systems, the guiding principles may nature of the information requested, and its not always be applicable or relevant in all size, complexity and risk profile. For circumstances; ICURN encourages CFIs to monitoring and evaluation purposes, the supervisor should periodically review key focus on the guiding principles’ goals. internal reports of the CFI. To make These principles have been developed meaningful comparisons between CFIs, the using the Basel Committee on Banking supervisor may also require a standardised Supervision’s Principles for Enhancing supervisory reporting process, covering the data items the supervisor deems necessary. Corporate Governance. ICURN is grateful for the Basel Committee’s ongoing support, Guiding Principle 16 although it wishes to emphasise that this EFFECTIVE AND TIMELY REMEDIAL ACTION document was developed independently by Supervisors should require effective and timely the ICURN steering committee and is not remedial action by a CFI to address material deficiencies in its governance policies and endorsed in any way by the Basel Committee. practices, and should have the appropriate tools for this. Supervisors should have a range of tools at their disposal to address material governance deficiencies of a CFI, including the authority to compel appropriate remedial action. The choice of tool and the timeframe

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