IFC Corporate Governance Knowledge Publication 11 FOCUS Guidance for the Directors of Banks Richard Westlake, MA (Oxon.) Foreword by Léo Goldschmidt ©Copyright 2013. All rights reserved. International Finance Corporation 2121 Pennsylvania Avenue, NW, Washington, DC 20433 The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. The material in this work is protected by copyright. Copying and/or transmitting portions or all of this work may be a violation of applicable law. 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IFC Global Corporate Governance Forum Focus 11 About The Author Richard Westlake is based in New Zealand, where he established Westlake Governance, an international governance advisory business, in 1999. He has more than 20 years’ experience as a board chair and director and currently chairs several boards in different sectors. He has spent more than 30 years in the banking industry: • As a money market dealer for a subsidiary of Chase Manhattan Bank; • Corporate banking roles in New Zealand and Australia; • Chief operating officer for Barclays PLC in New Zealand; • Chief executive of a New Zealand regional bank; and • Independent director of Kiwibank Ltd, and chair of the bank’s finance, audit and risk committee from its establishment in 2002 until 2011. Richard is keenly sought after as a facilitator and presenter of director development programs in New Zealand and internationally. Most recently he worked with IFC’s Global Corporate Governance Forum on training-of-trainers programs in Indonesia, aimed particularly at building governance capability in the banking sector in Indonesia and East Asia. Before moving from England to New Zealand, Richard gained his MA at Oxford University, where he won a Rowing “Blue” in the 1973 Oxford versus Cambridge Boat Race. He trained as a fighter pilot in the Royal Air Force, and his first leadership appointment, at age 22, was running a 4,500-person refugee camp in Cyprus. Richard is an Accredited Fellow of the Institute of Directors in New Zealand and an International Fellow of Mudara – Institute of Directors in Dubai, United Arab Emirates. He is married with four adult children. Preparation and publication of the Governing Banks was made possible with the support of the Development Bank of Austria (OeEB). II FOCUS 11 Guidance for the Directors of Banks Table of Contents Foreword ........................................................................................................................................ IV A Note from the Author .................................................................................................................. V Glossary ....................................................................................................................................... VII 1. Introduction ..................................................................................................................................1 2. Where Banks Fit in the Corporate Governance Framework .....................................................3 3. The Unique Role of Banks ..........................................................................................................10 4. Governing Risk ............................................................................................................................15 5. Board Structures and Directors’ Duties ....................................................................................27 6. Effective Board Decision Making ..............................................................................................40 7. Conclusion ...................................................................................................................................50 8. Postscript .....................................................................................................................................51 Annex 1. The Basel Accords ...........................................................................................................52 Annex 2. Defining an Independent Director ...............................................................................54 Annex 3. Board Committees ..........................................................................................................55 Annex 4. Recommended Readings and References ....................................................................60 Guidance for the Directors of Banks FOCUS 11 III Foreword The world is already accustomed to the remarkable publications series of the IFC Global Corporate Governance Forum. This new Guidance for the Directors of Banks is a perfect complement to Governing Banks, published in 2010. Much has changed since the late and greatly missed Jonathan Charkham wrote a first version more than a decade ago, and these changes warranted a thorough review. No better specialist could have been found for this review than Richard Westlake. The breadth of his knowledge, the wealth of his experience, and an unmistakable pedagogical talent combined to make this a most useful tool for the enlightenment of bank directors. The reader will find in it not only many wise considerations regarding the assumption of a directorship in general, but also and more specifically the fundamentals that underpin a directorship in a bank, as distinct from other industries, together with a practical review of the elements that should be borne in mind to carry out that function properly and effectively. The book is both comprehensive and concise, its style is appealing, and its ability to present sometimes complex issues with simplicity makes it eminently accessible to the lay as well as the learned. It also reflects the author’s profound understanding of his profession as well as a rarer quality, common sense, that so many lack — as was evidenced once more during the global financial crisis. And finally it displays exceptional modesty, as for example where in his introduction Richard Westlake merely suggests that in addition to its main target audience — directors new to banking, new to holding a position on a bank board, or even new to ever holding a directorship — experienced directors of banks “may find the book a useful refresher.” I for one, retired after 40 years as a practicing banker, having also chaired my national banks’ association and taught banking at university, took the greatest of pleasure and derived much benefit from being privileged to read the manuscript of this excellent compendium. Léo Goldschmidt Member of the IFC Global Corporate Governance Forum’s Private Sector Advisory Group Léo Goldschmidt has been a banker for more than 40 years. He continues to hold independent directorships in a number of companies and societies, including the European Corporate Governance Institute. He has participated in numerous corporate governance activities worldwide by chairing, among others, the Corporate Governance Committee of EASD (European Association of Securities Dealers), serving on the Organisation for Economic Co-operation and Development Corporate Governance Task Force, taking part in World Bank- OECD Roundtables, and giving lectures on corporate governance. IV FOCUS 11 Guidance for the Directors of Banks A Note from the Author Last year IFC Global Corporate Governance Forum invited me to write an updated version of Guidance for the Directors of Banks (Guidance 2, published in 2003).1 In the 10 years since the late Jonathan Charkham CBE wrote the first edition, the banking sector has seen the most dramatic business cycle in living memory — the almost unprecedented asset price boom that for many commodities and assets ended abruptly in about 2007, followed by the most sudden and deepest financial “meltdown” since the Great Depression of the 1930s. The effects of this financial crisis continue to dominate the economies of many countries. I was delighted to be asked, but no assignment of this type is the work of only one person. First, I must thank Alexey Volynets and Ralitza Germanova from the Forum for their confidence in me, and their advice throughout the project. José Cruz-Osorio, Forum consultant, provided some excellent references and case studies and feedback. I also thank the reviewers, Léo Goldschmidt (a banker and renowned corporate governance practitioner), Gian Piero Cigna (Senior Counsel, EBRD), YRK Reddy (international consultant in strategy