Friday, 2 August 2013

Central Bank of Ireland - Corporate Governance Code refresh

The Irish approach to corporate governance in financial services, at least up until the onset of the financial crisis in 2006/07, resembled something of an all-you-can-grasp buffet for a select number of executive golf club pals and octogenarian ex-politico Non-Executive Directors (NEDs), having their voting arms operated a la Weekend at Bernies.

Ireland pre-2007 - Waking NED?
The new FSA-flavoured approach brought in by Matthew Elderfield in 2009 (elaborated on here) fortified by the findings of a devastating 2011 report summarising the truly horrid governance practices in the Irish banking industry, has led to a change of regulatory tack at the Central Bank of Ireland that represents the biggest volte-face in Europe since the Macarena.

Alongside PRISM, a piece of revolutionary work in the assessment of financial institutions by supervisory bodies, the CBoI also made substantial changes in areas such as Annual Compliance Statements, Fitness and Probity of directors, Risk Appetite Statements.

All of this ran off the back of Mr Elderfield's first major gig in 2010, a full revamp of the Corporate Governance Code, which could hitch a ride off the back of the work of the FSA and CEIOPS (at the time!) and deliver a more substantial suite of obligations to a cabal of directors who, after feasting on carrots for years, desperately needed the stick.

This makes the release of yesterday's consultation on the Corporate Governance code a touch baffling, as the ink is barely dry on 2010's effort - it perhaps reflects that the regulator has reached optimum staffing levels if they can review it so regularly! Having said that, the level of divergence from accepted CG practices in the UK was flagged by Grant Thornton back in 2011 as being substantial, so a point-in-time revamp should not be so unwelcome, regardless of the proximity to the last one, and of course, all of this activity was too late to prevent Quinn Insurance from going down.

They emphasise that this review takes into account developments in the Solvency II space, as well as on-the-ground experience and publications from other parties of interest. Of particular note was their emphasis that, where national regulations are not as stringent as relevant EU or international one (or indeed vice versa?), the most onerous one should be complied with. In a number of instances around corporate governance, this will mean the CBoI outranking Solvency II as the more onerous of the two!

While these are proposals rather than stitched-on changes at this point, the CBoI doesn't have a great track record for backtracking these days. Highlights for me were;

Risk Committees

  • Require a majority of NEDs on Risk Committees, and must be chaired by a NED
Committees in general
  • Require the Risk Committee and Audit Committee chairs to sit on each other's committees
  • Require the Remuneration Committee chair to sit on the Risk Committee
  • In High Impact firms, the Risk Committee and Audit Committee Chair may not be the same person
  • Must be at least 3 members of Risk Committees and Audit Committees
Chief Risk Officers
  • They note that it is "Generally accepted best practice" to have a CRO who, amongst other tasks, is charged with "...facilitating risk appetite setting by the Board". In addition;
  • All "High Impact" firms will be required to appoint a specialist CRO
  • Firms with a lower PRISM rating may have a CRO who is shared with another control function, "...provided that there is no conflict of interest between the two roles". Can't help but feel that this might rule out CRO/Chief Actuary dual roles, but allows for CRO/Head of Compliance and CRO/Head of Internal Audit, which would be to the chagrin of the Society of Actuaries in Ireland!
  • CRO to have direct access to the Chairman of the Board
Board Meeting frequency
  • Seem to acknowledge that the compulsory 11 meetings per year for High Impact firms may be a touch much, so are looking for comments
  • Also acknowledge that compulsory 1 meeting per calendar quarter is a bit constrictive for the smaller firms, so may relieve this to be pragmatic
Chairman and CEO
  • Some of the restrictions around number of roles held at any one time to be relieved for smaller firms, but seemingly only to populate inter-Group roles.
Board Diversity
  • Acknowledges that, while the debate in the EU is gender-centric, that diversity of all types is a worthy target for Boards, but falls short of compelling firms to do anything at national level, choosing to seek comments and wait for the supra-national activity to drive any compulsion. This seems to fit with the thinking of Irish directors published back in 2011 i.e. no "Golden Skirt" quotas.
  • "...appropriate Risk Culture" makes its way in (6.3), perhaps cognisant of the FSB's proposals
  • Built in a piece which allows for video-conferencing rather than physical attendance at meetings (7.5)
  • Board responsibilities updated (13.1)
  • Compulsory Board skills matrix (14.9)

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