Financial Sector Governance The Role of the Public and Private by yurtgc548


									Financial Sector Governance:
                  The Role of the Private Sector

 Finance Forum 2002: Aligning Financial Sector
                  Knowledge and Operations

                            Michael Pomerleano
             Financial Sector Development Dept.
                                The World Bank
Strengthening Financial Sector Governance in Emerging Markets
Overview by Robert E. Litan, Michael Pomerleano, and V. Sundararajan
A clinical approach to each specialized
industry in the financial sector
n   Banks and in particular State Banks…blurred
    distinction between private and public FS
n   Asset-Management Companies …blurred
    distinction between private and public FS
n   Public Pension Fund Management …blurred
    distinction between private and public FS
n   Mutual Funds / Collective Investment Vehicles
n   Capital markets: Effective measures in capital
    markets to exert governance over corporates
Why does corporate governance in banks
warrant special attention?

n   Banks are funded by depositors & their failure
    may have systemic impact
n   Operating in an increasingly competitive, volatile
    global environment
n   Facing major strategic crossroads (e.g., new
    technology, consolidation, globalization,
n   Cases during the Asian financial crisis of boards
    of directors under-performing
Bank Governance: The Basle Guidelines Issued in

    n Intended complement The OECD’s Corporate Governance
    n Focused on the unique issues related to corporate governance
      of banks and set out the key elements of corporate governance
      in banks
    n To encourage practices which can strengthen corporate
      governance under diverse structures -e.g. as regards the
      relative role of the board of directors & management. Document
      does not promote a particular governance structure (e.g., Anglo-
      Saxon vs. German models)
    n To assist supervisors in promoting the adoption of sound
      corporate governance practices by banking organizations in
      their countries
The Basle guidelines

n   1: Strategic objectives & corporate values should be established
n   2: Clear lines of responsibility & accountability should be set &
n   3: Board members should be qualified, understand clearly their role
    & not be subject to undue influence from management or outside
n   4: There should be appropriate oversight by senior management
n   5: Work conducted by internal & external auditors should be
    effectively utilized
n   6: Compensation approaches should be consistent with the bank’s
    ethical values, objectives, strategy & control environment
n   7: Corporate governance should be conducted in a transparent
    Issues in State Banking
    Corporate Governance of Banks: Concepts and International Observations (Jerry
    Caprio and Ross Levine)

n    The situation. More than 40% of the world’s population live in countries in which most
     bank assets are held by state-owned banks
n    What are the implications? Government ownership thwarts competitive forces, limits
     effectiveness of government supervision; banking market suffers from opacity, need to
     improve accounting, auditing, credit information
n    Illustrative solutions
       n Contestability of markets lessens reliance on family or conglomerate relationships
       n Incentives matter: legal and bankruptcy frameworks

n    Select countries solutions:
           • U.S. has published a book with guidelines for the Board of Directors (The OCC guide for bank
             directors). Thailand, Oman, and East Africa reported that they have recently released guides.
           • Education/ training for corporate directors re their obligations by a local institute of corporate
             directors. Switzerland reported that there is a local institute of corporate directors that offers
             training. Thailand, Philippines and Fiji advised that they recently established local institutes of
           • HKMA issued a guideline on corporate governance in locally incorporated authorized
             institutions in May 2000. HKMA recommendation 5 : The board of each bank should establish
             an audit committee with written terms of reference specifying its authorities and duties; the
             audit committee should be made up of non-executive directors, the majority of whom should
             be independent
           • MAS requires banks to separate financial and non-financial businesses; to change their audit
             firms every five years
Asset-Management Companies
OBSERVATIONS (David C. Cooke, Managing Director, Barents Group, KPMG)

n   The situation.
    n  Following the East Asia crisis, IBRA in Indonesia controlled 70% of financial
       sector assets in Indonesia. Similarly Danaharta in Malaysia, Kamco in
   n Often mission statement has conflicting objectives: restore financial stability,
       minimize taxpayer losses, etc.
   n Governance of AMCs impacts pace of problem resolution; responsibilities
       poorly defined; oversight committees not sufficiently separated from
n Solutions: Provide for independent and informed oversight committee to
  articulate policy objectives, review performance.
   n Areas of Oversight authority typically include approval of: Operating
       policies, Budget and funding proposals, Operating board members, Outside
       auditor, May also include approval of significant NPL transactions.
    n   Provide an independent operating board with authority to manage AMC activities
    n   Transparent reporting
    n   Encourage stakeholders participation in corporate governance
Public Pension Fund Management and Governance
(Governance Issues In Public Pension Fund Management Gregorio Impavido)

n   The situation. 81% of world labor force covered by partially funded or PAYG
    public schemes; Pension spending can reach 15% of GDP; Implicit pension
    debt up to 200% of GDP (Transition economies); Publicly managed pension
    reserves up to 55% of GDP (Malaysia).
n   In numerous countries multiple objectives; governance structure is murky, and
    performance of PPFM is poor
n   What are the implications? Identify good governance practices and distill into
    governance guidelines aimed at reducing the political influence risks that are
    associated with central, public pension fund management.
n   Solutions:
     n Only one objective: portfolio investing and maximizing returns for retirees.
     n Development of a satisfactory set of governance guidelines tailored to public
        pension funds
         • Governors independent and fit and proper; Governors' responsibility defined by
           fiduciary law; accountable for fund performance (e.g.,- Ireland, Canada)
         • Independent performance evaluations should be conducted by external and
           independent entities on a regular basis.
         • Internal controls should be established to avoid conflict of interests.
Mutual Funds
(Mark St. Giles and Sally Buxton, Cadogan Financial)
n   The situation.
    n   In the US investment fund assets represent 50% of GDP, whereas in
        Europe 25%. In the transitional economies funds have been used for
        privatization. Collective investment schemes can become increasingly
        important financial institutions in developed countries
n   Types of CIS governance structures
    n   Corporate style mutual funds are found mostly in the U.S. and a few
        emerging markets, and dominate in terms of value of assets. Directors
        have a fiduciary responsibility to look after the interests of investors.
    n   75% of collective investment schemes by number are held in the trust
        or the contractual form, and are found mostly in developing countries.
    n   The trust: made by trust deed between a management company and a
        trustee.The trustee has the fiduciary responsibility
    n   The contractual fund: where investors contract with the management
        company. Protected by a combination of contract law, regulation and
        the actions of the depositary, which plays a quasi trustee role.
Mutual Funds II
n   No evidence that any one fund legal structure provides
    improved fund governance
n   Tentative solutions.
    n   Ability to exit a fund creates competitive commercial pressure
         Ø Transparency is critical to leveling the playing field, pressure funds
           to perform
         Ø Regulation for fair competition
n   But…. probably
    n   Better governance structure when fund management is
        separate from oversight with independent corporate directors
    n   Regulation and enforcement are needed
How Effective are Capital Markets in Exerting
Governance on Corporates
Lessons of Recent Experience with Private and Public, Legal Rules Cally
Jordan, The World Bank and Mike Lubrano, IFC

n   Pressures of Capital Markets will Improve Governance of Corporates and
    Improvements in Corporate Governance will Promote Development of
    Capital Markets. How?
n   Changes designed to facilitate better governance are not a "silver bullet" .
    Solutions are inextricably linked to a constellation of legal practices,
    institutions, and corporate governance structures.
n   “Legal Families” Matter “…legal families appear to shape legal rules, which
    in turn influence financial markets” (La Porta, et al)
n   Hostile takeovers are a strong disciplinary force in U.S. markets. They
    relied on a rather well developed high-yield bond market, that was been a
    source of funding for acquiring firms. However takeovers are not prevalent
    in emerging markets.
n   Importance of private rules for governance. Adopted ex ante by contract,
    often underpinned by voluntary codes of conduct, or through ex post
    enforcement through contractual dispute resolution, including arbitration, or
    through market discipline.
Next steps
n   The program is a a start…
n   We do not have readily available answers
n   Considerable work is needed to develop specific
    measures geared to the individual industries…
    while recognizing the unique circumstances of
    developing countries.
n   Ideally, a follow up collaborative research effort of
    the WB/IMF/Brookings
n   Financial Sector Governance Assessments?

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