Mr Marcus Killick

Chief Executive Officer

The Financial Services Commission

Gibraltar

Overview of areas covered in this presentation

Structure of the board

Independence

Board Committees

Evaluation of performance

Boardroom Behaviour

Conflict of interest

Role of the Regulator

Structure of the Board

Chairman

Management

Chief Executive

Directors

Structure of the Board The Board should be diverse.

The structure should allow for the board to work effectively and collaboratively as a team. Boards with 8-12 members are ideal

Facilitates constructive debate

There should be a balance of expertise, skills and experience

Appointment of Non Executive Directors “NEDs”

Distinction between roles In particular, the board should have a clear division of

responsibilities and the posts of Chairman and Chief Executive should not be combined in one individual

Role of the Chairman Runs and leads the board in the determination

of its strategy

Ensures board has adequate information to perform its role

Ensures effective relationships are maintained

Ensures the right and common values

Role of the CEO Leading the executive directors and the senior

executive team in the day to day running of the firm.

Chairing the Executive Committee and communicating its decisions/recommendations to the board.

Ensuring effective implementation of board decisions.

Regularly reviewing the operational performance and strategic direction of the firm.

Ensures effective communication with shareholders

Role of the Non Executive Director There is no distinction between the position of

executive and non executive directors. If a breach of duty is to be attributed to a board on the basis that all of its members were present at a meeting which had approved a wrongful act, then the liability of each director is joint and several and no allowance is made for the fact that some are part timers and may have acquiesced in a situation which they did not fully understand

Re Lands Allotment Co. (1894) 1 Ch 616 63 LJ Ch 291 CA

Role of the NED The NED role is complex and demanding.

It requires skills, experience, integrity, and particular behaviours and personal attributes

Integrity and high ethical standards – these are a prerequisite for all directors

Sound judgement and an inquiring mind.

The effective NED NED’s should:

question intelligently;

debate constructively;

challenge rigorously; and

decide dispassionately

Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

Satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.

Be responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning.

Independence of Directors A director’s independence may be compromised for a variety of

reasons including if he/she: Is an employee of the company or group within the last five

years; Has material business relationship with the company has received or receives additional material remuneration

from the company has close personal relationships holds cross-directorships represents a significant shareholder; or has served on the Board for more than nine years from the

date of his first appointment. The board should be aware of these circumstances and make a

conscious decision to record where any of these, or other reasons, may lead to the director not being considered to be independent.

Examples of the types of Board Committees and the functions each committee should undertake Useful to look at the ICSA Terms of Reference published for Improving Board Effectiveness which can be found online at the following URL; http://www.icsaglobal.com/about-icsa/latest-from-icsa/article/icsa-publishes-new-terms-of-reference

Board Committees Committees play an important

role in the governance process.

The board can effectively governs through clearly mandated board committees, accompanied by monitoring and reporting systems.

Each committee should have specific written terms of reference issued by the board and adopted in committee.

The exact compliment of committees will vary from firm to firm

Risk Nomination

Audit Remuneration

Nomination Committee Formal and transparent process for the appointment of new directors to the board

Before making an appointment, evaluate the balance of skills, knowledge and experience on the board

Give full consideration to succession planning

Regularly review the structure, size and composition (including the skills, knowledge and experience) of the board

Should consist of a majority of executive directors

Recommend appointments to the board

Audit Committee Review accounting principles, policies and practices

Ensure all financial statements follow accounting practice and give an accurate representation of the companies situation

Scope, examine and follow up audits (especially on controls)

Develop and monitor internal audit

Consider the appointment and remuneration of auditors

Should consist of non executive directors

Remuneration Committee Approve service contracts for executive directors (and senior management)

Recommend to the board the remuneration for executive and senior management

Review and recommend employee share schemes

Review pensions

Approve arrangements for retirement or termination

Chairman of the board (if independent) may be a member but not chair.

Risk Committee

Advise the board on the firms overall risk appetite, tolerance and strategy

Oversee and advise the board on the current risk exposures of the company and future risk strategy

Review the firms capability to identify and manage new risk types

Consider and approve the remit of the risk management function

“It is best practise that the performance of the board as a whole, of its committees and of its members, is evaluated at least once a year... Companies should disclose in their annual report whether such performance evaluation is taking place.”

The Review of the role and effectiveness of non-executive directors 2003 (the Higgs Review)

Evaluation

Formal and rigorous annual

evaluation of its own

performance

and that of its committees

and individual directors.

Evaluation methods

Self evaluation

Peer evaluation

Evaluation by the chair

360 Feedback

External facilitator

When to choose external assistance? For new

chairmen

For old boards

When you have a

problem

When challenged

Every so often

“Appropriate boardroom behaviours are an essential component of best practice corporate governance; and that the absence of guidance

on appropriate boardroom behaviours represents a structural weakness in the current system”

Boardroom behaviours - A report prepared for Sir David Walker by the Institute of

Chartered Secretaries and Administrators (‘ICSA’)

Boardroom behaviour Appropriate board behaviour can be defined as functioning in accord with the

board's roles and responsibilities. Thus, board members should know the difference between governance and management.

Appropriate behaviour also has key characteristics, the first of which is respect—for the organization, the management the employees, and other members of the board. Respect is basic, but it doesn't always exist.

Respect leads to two additional behavioural characteristics that are needed: openness in the board discussions and confidentiality.

Conflicts of interest also fall in the category of behaviour. “There's no evil in conflict of interest; the evil lies in the hiding of it”. All boards need to have a policy about conflict of interest. Usually this policy requires all members to disclose potential conflicts and to abstain from voting on such matters.

Another behavioural element is distinguishing between the important and the unimportant. The board has limited time. If it spends hours and hours on trivial matters, it won't be able to address significant and strategic matters.

Conflicts of interests may arise where an individual’s personal or family interests and/or loyalties conflict with those of the firm. Such conflicts may create problems they can:

• inhibit free discussion; • result in decisions or actions that are not in the interests

of the firm; and • risk the impression that the firm has acted improperly.

Policy The development of a conflicts of interest policy

protects both the organisation and the individuals involved from any appearance of impropriety.

Board members should declare their interests, and any gifts or hospitality received in connection with their role in firm.

A declaration of interests form should be provided for this purpose, listing the types of interest you should declare.

To be effective, the declaration of interests needs to be updated at least annually, and also when any changes occur

Our Aim: To protect the reputation of Gibraltar by ensuring that the boards of licensees act in compliance with modern

standards of corporate governance, so significantly reducing the risks of failure and client loss

Why the regulatory focus on corporate governance? Virtually every failure in the current crisis has

stemmed from poor corporate governance/Board oversight

Lehman Brothers Holdings Inc

Northern Rock

RBS

MF Global

The basis for our perspective The FSC has not reinvented the wheel but rather uses

established and accepted principles such as:

A review of corporate governance in UK banks and other financial industry entities - (The Walker Review) (2009)

FRC Guidance On Board Effectiveness (2011)

FRC UK Corporate Governance Code (2012)

Not one size fits all Not all firms alike in size or complexity Some elements like board committees may not be

appropriate for small private companies however all firms should consider those elements applicable to them and apply them

Important to establish principles rather than proscriptive rules

Principles to be on a “comply or explain” basis Underlying everything is the principle that the FSC holds

the whole board accountable not just the executive members.

The problems with regulatory assessment of good corporate governance

It is subjective involving both quantitative and qualitative information

Board policies and procedures can be assessed;

Board papers and board minutes can be reviewed; Frequency of board meetings can be checked;

BUT Board behaviour cannot be objectively measured;

THEREFORE The role of the NED is vital to ensure the board operates effectively

Therefore the FSC encourages the appointment of NED’s and especially independent NEDs.