CORPORATE GOVERNANCE Regulatory expectations and current good practice

CORPORATE GOVERNANCE Regulatory expectations and current good practice Charles Cattell The Cattellyst Consultancy

“Accidents don’t happen by accident!”

Concerns stemming from the crisis • The nature of the financial system • Adequacy of capital and liquidity • Attention to risk • Quality of governance • Culture within firms • The Walker Review – A review of corporate governance in UK banks and other financial industry entities – Individual – Collective The Cattellyst Consultancy 3

Governance initiatives Corporate Governance Code EC Green Paper Following Walker Higgs Guidance FSA - effective governance The Cattellyst Consultancy 4

UK Corporate Governance Code Comply or explain • • • Leadership Effectiveness Accountability Remuneration Relations with shareholders The Cattellyst Consultancy 5

Main principles - leadership • Board is collectively responsible for long term success • Clear division between running the board and running the business • Chairman is responsible for leadership and ensuring board effectiveness • NEDs should constructively challenge and help develop proposals on strategy The Cattellyst Consultancy 6

Main principles - effectiveness • Board and committees to have appropriate balance of skills, experience, independence and knowledge of company • Formal, rigorous and transparent procedure for appointing new directors • All directors should allocate sufficient time to discharge responsibilities effectively • All directors should be induced and regularly update/refresh their skills and knowledge • Board information to be supplied in a timely manner and appropriate quality • Formal and rigorous annual evaluation of board and individuals • All directors should submit to regular re-election The Cattellyst Consultancy 7

Main principles - accountability • Present balanced and understandable assessment of position and prospects • Board to determine risk appetite and maintain risk management and control systems • Formal and transparent arrangements for applying risk management and control principles and maintaining relationship with auditors The Cattellyst Consultancy 8

Main principles – remuneration and shareholder relations • Remuneration to attract and motivate directors of required quality. Executive directors’ remuneration to reflect corporate and individual performance • Formal and transparent policies for fixing remuneration • Dialogue with shareholders based on mutual understanding of objectives • AGM should be used to communicate with investors and encourage participation The Cattellyst Consultancy 9

Improving Board Effectiveness (Higgs Guidance ) • Roles – Board – Chair – Senior independent director – Executive directors – Non-executive directors – Company secretary • Decision-making • Board composition • Directors’ skill base – Induction – Development • Evaluating performance – Board – Individual directors • Communications – Shareholder – Other stakeholders The Cattellyst Consultancy 10

EC Green Paper Corporate governance in financial institutions and remuneration policies 1. 2. 3. 4. 5. 6. Boards of directors Risk related functions External auditors Supervisory authorities Shareholders Effective implementation of corporate governance principles 7. Remuneration 8. Conflicts of interest The Cattellyst Consultancy 11

FSA – effective governance The mighty Handbook More principles-based regulation The Cattellyst Consultancy Outcomesfocused regulation Intensive, intrusive 12

FSA’s scrutiny of governance • Practical effectiveness of board, management and organisational structures • Evidence of depth of discussion and understanding, challenge and risk-based decision making • Formulation of risk appetite and subsequent monitoring of performance • Quality of reporting and MI with evidence of understanding and subsequent actions/feedback • Approach to culture, incentives and remuneration – Firms should understand their culture and the risks posed by the wrong culture – Regulatory focus on The implications Cattellyst Consultancyof unacceptable culture 13

Approved Persons intensification • Significant Influence Functions (SIFs) – SIF approval process • Thorough verification of suitability • Greater proportion of pre-approval interviews – Ongoing supervision of SIFs – Competence and capability of SIFs in key roles • • Chairman Senior Independent Director Chairs of committees Finance, risk and internal audit functions The Cattellyst Consultancy 14

What SIFs can expect (on approval and at ARROW) • Competence proportionate for role • Relevant technical competencies • Relevant non-technical skills and behaviours • Recognition of gaps and willingness to address them • FSA will examine – Awareness of responsibilities of being an Approved Person – Understanding of role and contribution in managing risks – Knowledge, skills and experience – Motivation and capacity The Cattellyst Consultancy 15

“Intensive and intrusive” in practice • Closer scruitiny of governance structure, business model and effectiveness of risk management • More enforcement action against senior management for incompetence • More demanding due diligence and greater challenge to firms and individuals when appointing SIFs • Increased granularity of Approved Persons regime and greater clarity about competencies • Enhanced training of FSA’s supervisory staff • FOS stance now has strong consumer bias The Cattellyst Consultancy 16

Any questions? The Cattellyst Consultancy 17

Discussion points 1. What are the principal corporate governance challenges faced by friendly societies? 2. How is the post-crisis corporate governance agenda likely to impact on friendly societies? 3. What steps should societies take to ensure that the members of their boards / committees of management have appropriate skills, knowledge and expertise? The Cattellyst Consultancy 18

CORPORATE GOVERNANCE Regulatory expectations and current good practice Charles Cattell The Cattellyst Consultancy 01737 555515 07778 405239 charles@cattellyst. co. uk