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MB Strengthens Governance Standards for Financial Institutions


The Monetary Board (MB), in its meeting held on 20 January 2012, approved the revised guidelines strengthening BSP’s governance standards for supervised financial institutions as part of its continuing efforts to implement corporate governance reforms in the financial industry.  The guidelines are largely patterned after the Basel Committee on Banking Supervision paper “Principles for Enhancing Corporate Governance”, which was issued in light of the lessons learned in the 2007 financial crisis. 

The guidelines emphasize the need for the board of directors (BOD) of BSP supervised financial institutions to enhance its ability to exercise objective judgments and to ensure that there is a strong system for checks and balances in the entity.  Measures toward this end were introduced covering specific areas such as, board composition, independent director requirements, membership in board committees and specific duties and responsibilities of the BOD.

First, supervised entities are advised to select members of the BOD from a broad pool of candidates and to have sufficient number of non-executive members in the board.  Non-executive members, as defined in the guidelines, refer to those who are not part of the executive committee or involved in the day to day management of operations.  Moreover, supervised financial institutions are encouraged to appoint a chairperson who is a non-executive, whenever possible.

Second, the guidelines increased the requirement on the minimum number of independent directors from two (2) to having at least 20% but not less than 2.  It also adopted the term limits for independent directors prescribed by the Securities and Exchange Commission for public and listed companies.  The SEC, in particular, prescribed that an independent director can only be elected as such in only five (5) companies of the conglomerate.  Moreover, the SEC is also prescribing a 5-2-5 rule, wherein an independent director can only serve as such in the same company for five (5) consecutive years.  The term may be extended for another five (5) consecutive years only after a two-year (2) "cooling off" period.  After serving for ten years, the independent director shall be perpetually barred from being elected as such in the same company.  Under the approved governance guidelines of the BSP, the foregoing rules shall apply to all types of banks. 

Third, the guidelines explicitly prohibit the Chief Executive Officer, Chief Financial Officer and/or Treasurer from being part of the audit committee so as to prevent personnel holding said positions from exercising undue influence on the decision of the said committee.  Moreover, the guidelines require at least one (1) independent director to be a member of the risk oversight committee (formerly risk management committee) and that the chairperson of said committee be a non-executive member.  The guidelines further provide that the chairperson of the corporate governance committee be an independent director.

In applying the principle of proportionality, on the other hand, the MB relaxed existing regulations for non-complex banks by requiring them to constitute at a minimum, only the audit committee from the existing requirement of constituting at least three (3) committees (i.e., audit, corporate governance and risk oversight).  In this regard, all universal and commercial banks shall be considered as complex while thrift, rural and cooperative banks shall be considered as non-complex, unless the BSP declares otherwise. 

Finally, to ensure that the systems for checks and balances remain effective, the guidelines require non-executive board members to conduct regular meetings with the external auditor and heads of the internal audit, compliance and risk management functions.

BSP’s expectations relative to noted common governance issues and concerns in its supervised entities were also set-out in the governance guidelines.  For instance, BSP expectations and requirements concerning supervised entities belonging in conglomerate structures either as parent company or a subsidiary/affiliate of a non-regulated parent company were provided.  In particular, in the case of a parent company bank, the basic principle that applies is that its board of directors shall have the overall responsibility for ensuring consistent adoption of corporate governance policies and systems across the entire group.  In cases where the bank is a subsidiary/affiliate of a non-BSP regulated parent company, on the other hand, its board of directors should ensure that it complies with the governance policies, practices and systems of the parent company as well as meets the standards and requirements set forth under existing laws, rules and regulations.  Under both cases, supervised entities are required to disclose to the BSP all entities in the group as well as all significant transactions between entities in the group involving any BSP-regulated institution.  These requirements are intended to provide the BSP a better appreciation of the interaction and dependencies of entities, including a supervised financial institution, belonging to the same conglomerate.  

Also, the guidelines required universal/commercial banks to appoint a Chief Risk Officer (CRO) and clarified the reporting line for said position.  Specifically, CROs may report to the President or Senior Management but shall have direct access to the board and the risk oversight committee without any impediment.  In order to ensure the independence of said position, the guidelines provide that the performance ratings of the CRO should be confirmed by the BOD and that the replacement of the person holding this position should be reported to the BSP. 
The approved guidelines are the first of a three-part issuance on corporate governance, which will be followed by issuances governing internal controls and risk management, respectively.   The three-part governance package is expected to be completed this year.

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