Shaping Up To Global BankingShaping Up To Global Banking

Ethics in the Banking IndustryEthics in the Banking Industry

Philip ArmstrongPhilip ArmstrongENF Corporate GovernanceENF Corporate Governance

20 May 200320 May 2003

Business Process for GovernanceBusiness Process for Governance

• Governance Requires Board to ExerciseGovernance Requires Board to Exercise Leadership Leadership EnterpriseEnterprise Integrity Integrity JudgmentJudgment

• Achieved by:Achieved by: Purpose and Values Purpose and Values Strategy Strategy Monitoring & Evaluation Monitoring & Evaluation

• Accomplished through:Accomplished through: Compliance with Laws, Regulations, Codes Compliance with Laws, Regulations, Codes Account to Shareowners Account to Shareowners Respond to Legitimate Interests of StakeholdersRespond to Legitimate Interests of Stakeholders Regularly Evaluating Business Objectives and CriteriaRegularly Evaluating Business Objectives and Criteria

Distinguishing the Two ConceptsDistinguishing the Two Concepts

• Corporate GovernanceCorporate Governance

““An effective system of corporate governance must strive to channel the An effective system of corporate governance must strive to channel the self-interestself-interest of managers, directors and the advisors upon whom they of managers, directors and the advisors upon whom they rely into rely into alignmentalignment with the corporate, shareholder and public interest.” with the corporate, shareholder and public interest.”

Ira MillsteinChairman, Private Sector Advisory Group, GCGF

• EthicsEthics““A company’s ethics refer to the A company’s ethics refer to the principlesprinciples, , norms norms and and standardsstandards that it that it

promotes for the guidance and conduct of its activities, internal promotes for the guidance and conduct of its activities, internal relations and interactions with external stakeholders, relations and interactions with external stakeholders, in accordance in accordance

with established valueswith established values.”.”

King Report on Corporate Governance for South Africa 2002

Basis of King II GuidelinesBasis of King II Guidelines

• Set of PrinciplesSet of Principles, not Prescribed Guidance!, not Prescribed Guidance!

• Number of Number of Principles are AspirationalPrinciples are Aspirational

• Focus on Focus on QualitativeQualitative Reporting & Conduct Reporting & Conduct

• Converge International Converge International Local Priorities Local Priorities

• Broad Application in EconomyBroad Application in Economy All Companies Listed on Stock ExchangeAll Companies Listed on Stock Exchange Banks and Financial InstitutionsBanks and Financial Institutions Public Sector and Local AuthoritiesPublic Sector and Local Authorities

• Regulatory Response to RecommendationsRegulatory Response to Recommendations

Primary Focus of PrinciplesPrimary Focus of Principles

• Boards and DirectorsBoards and Directors

• Risk Management and Internal Control AssuranceRisk Management and Internal Control Assurance

• Integrated Sustainability ReportingIntegrated Sustainability Reporting EconomicEconomic EnvironmentEnvironment Social, Social, Including Organisation IntegrityIncluding Organisation Integrity

• Issues of Auditing and AccountingIssues of Auditing and Accounting

• Issues of Enforcement and ConformanceIssues of Enforcement and Conformance

Nexus of RecommendationsNexus of Recommendations

Board = Focal Point Board = Focal Point

of Corporate Governance Systemof Corporate Governance System

Responsible for Responsible for TotalTotal Process of Risk Process of Risk

Going Concern ValidationGoing Concern Validation

CommunicationCommunication InternalInternal ExternalExternal

Respectability Integrity

Performance

Conformance

Defining the Governance SystemDefining the Governance System

• Common Law SystemCommon Law System Fiduciary Duty of Good Faith and HonestyFiduciary Duty of Good Faith and Honesty Duties of Care, Skill, and LoyaltyDuties of Care, Skill, and Loyalty

• Legislative and Regulatory FrameworkLegislative and Regulatory Framework• King II Examines Relationship between:King II Examines Relationship between:

Law and Regulations Law and Regulations = = PrinciplesPrinciples of Prescriptive Conduct of Prescriptive Conduct Companies ActCompanies Act Banks ActBanks Act JSE Securities ExchangeJSE Securities Exchange Financial Markets RegulationsFinancial Markets Regulations

Governance Governance = = PracticePractice of Preferred Behaviour of Preferred Behaviour

• Sets Value System for THE CORPORATIONSets Value System for THE CORPORATION

Key Pillars of GovernanceKey Pillars of Governance

BUT in South Africa….BUT in South Africa….

DisciplineDiscipline IndependenceIndependence Social ResponsibilitySocial Responsibility

Stakeholder ApproachStakeholder Approach

TR

AN

SP

AR

EN

CY

AC

CO

UN

TA

BIL

ITY

RE

SP

ON

SIB

ILIT

Y

FA

IRN

ES

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Corporate Governance FrameworkCorporate Governance Framework

Source: Corporate Governance: A Framework for Implementation [World Bank] Source: Corporate Governance: A Framework for Implementation [World Bank]

InternalInternal ExternalExternal

ShareholdersShareholders

Board of Directors

Management

Core Functions

Reports toAppoints &

monitors

Operates

PrivatePrivate

StakeholdersStakeholders

Reputational Agents• Accountants• Lawyers• Credit Rating Agencies• Investment Bankers• Financial Media• Investment Advisors• Research• Governance Analysts

RegulatoryRegulatoryStandards• Accounting• Auditing• Other

Laws and Regulations

Financial Sector• Debt• Equity

Markets• Competitive factor • Product markets• FDI• Corporate control

Board Governance StandardsBoard Governance Standards

• Tone at the Top!Tone at the Top!

• Underlying Principles of Probity and ConductUnderlying Principles of Probity and Conduct

• Intellectual Independence of Board ProcessesIntellectual Independence of Board Processes

• Director Appointments & Management Selection Director Appointments & Management Selection

• Conflicts of Interest and Insider Dealing Conflicts of Interest and Insider Dealing

• Handling Information and ConfidentialityHandling Information and Confidentiality

• Disclosure, Reporting and CommunicationDisclosure, Reporting and Communication

• Professional Development and Ethical StandardsProfessional Development and Ethical Standards

• Effective Articulation of Corporate ValuesEffective Articulation of Corporate Values

The Board and its CompositionThe Board and its Composition

• Benefits of Unitary Board Structure Benefits of Unitary Board Structure

• Separation of Chairperson and CEOSeparation of Chairperson and CEO Role of the Chair – Role of the Chair – Runs the BoardRuns the Board Role of the CEO – Role of the CEO – Runs the CompanyRuns the Company

• Categories of DirectorCategories of Director Executive Executive Non-executive Non-executive Independent NEDIndependent NED

• Criteria for Selection and Issues of CompositionCriteria for Selection and Issues of Composition

• Basis and Depth of Induction and OrientationBasis and Depth of Induction and Orientation

• Defining Responsibilities Defining Responsibilities Board Charter Board Charter

General PrinciplesGeneral Principles for Committeesfor Committees

• Aid to the BoardAid to the Board• Focus on Specialised Areas of ResponsibilitiesFocus on Specialised Areas of Responsibilities• GenerallyGenerally NONO Executive PowersExecutive Powers• Defined Terms of Reference and LimitationsDefined Terms of Reference and Limitations• Chaired by “Independent” NEDChaired by “Independent” NED• PredominantlyPredominantly NEDs NEDs • Need for Sensible CompositionNeed for Sensible Composition

Audit Committee and Financial LiteracyAudit Committee and Financial Literacy Expert Resources to Support ActivitiesExpert Resources to Support Activities Reporting to the Board and Ultimate ResponsibilityReporting to the Board and Ultimate Responsibility Regular EvaluationRegular Evaluation

Other Components of Governance Other Components of Governance

• Understanding and Managing RiskUnderstanding and Managing Risk Internal Processes of AssuranceInternal Processes of Assurance Understanding External Risk ExposuresUnderstanding External Risk Exposures

• Assurance ProcessesAssurance Processes Internal Audit – Management Monitoring Internal Audit – Management Monitoring External Audit – Shareowner Reporting External Audit – Shareowner Reporting

• Sustainability of Corporation and ReportingSustainability of Corporation and Reporting Going Concern ValidationGoing Concern Validation Economic Indicators – Key Risks/Key Performance Economic Indicators – Key Risks/Key Performance Environmental, Health, Safety, Human CapitalEnvironmental, Health, Safety, Human Capital

Engaging Stakeholder DialogueEngaging Stakeholder Dialogue

Source: British American Tobacco – Social Report 2001/2002Source: British American Tobacco – Social Report 2001/2002

Internal scoping +

preparationStakeholder

+ issues mapping

Report + communicate

Implement + measure against

indicators

Dialogue 2 – discuss responses

+ indicators

Identify gaps and develop responses

Dialogue 1 – understand

expectations

Identify stakeholders for dialogue

LISTEN

DECIDE

DELIVER

ENTRY PLAN

Framework for Value System Framework for Value System

• Set Corporate Moral Values Set Corporate Moral Values Internal Internal Code of EthicsCode of Ethics External External Statement of Business PrinciplesStatement of Business Principles

• Identify Identify Corporate Values & Mission Statement Corporate Values & Mission Statement• Communicate Communicate Business Principles / Codes Business Principles / Codes• Build/Maintain Responsible Decision-taking CultureBuild/Maintain Responsible Decision-taking Culture

Feedback Gathering and AnalysisFeedback Gathering and Analysis Allocation of Functional ResponsibilitiesAllocation of Functional Responsibilities Education and TrainingEducation and Training Performance Reviews and StandardsPerformance Reviews and Standards

• External Assessment and ValidationExternal Assessment and Validation

Isn’t this the REAL Issue!Isn’t this the REAL Issue!

““I have no problem with Ethical Issues. I have no problem with Ethical Issues.

I merely ask myself whether I would mind if my old mother I merely ask myself whether I would mind if my old mother read about this in the Press.”read about this in the Press.”

Company Chairman of a major British public companyCompany Chairman of a major British public company

per Pocket Director, Prof. Bob Trickerper Pocket Director, Prof. Bob Tricker

Nexus between Ethics & Governance Nexus between Ethics & Governance

BOARDBOARD

LawsLaws RegulationsRegulations CodesCodes

Accountability to CorporationAccountability to Corporation

ShareownersShareowners StakeholdersStakeholders

Spirit of TransparencySpirit of Transparency Culture of AccountabilityCulture of Accountability

Integrity & Public/Community TrustIntegrity & Public/Community Trust

Global Standards & InitiativesGlobal Standards & Initiatives

• UNEP Finance InitiativeUNEP Finance Initiative

• London PrinciplesLondon Principles

• UN Global CompactUN Global Compact

• Global Reporting InitiativeGlobal Reporting Initiative

• Accountability 1000 Assurance FrameworkAccountability 1000 Assurance Framework

• Financial Stability ForumFinancial Stability Forum

• Basel Accord I/IIBasel Accord I/II

• Specific Investor CriteriaSpecific Investor Criteria

• Ethical Pressure Groups, etc.Ethical Pressure Groups, etc.

“With great power comes great

responsibility”

Individual Attitudes: customers, suppliers, consumers, Individual Attitudes: customers, suppliers, consumers, employees, investors and communityemployees, investors and community

Law/RegulationLaw/Regulation

Industry & Market StandardsIndustry & Market Standards

Industry ReputationIndustry Reputation

MediaMediaPressure groupsPressure groups

Public opinion / Public opinion / confidenceconfidence

Political opinionPolitical opinion

LicenceLicence

to to

OperateOperate Uncle Ben to Spiderman

BankingBanking

InstitutionInstitution