Shaping Up To Global Banking
Ethics in the Banking Industry
20 May 2003
Philip Armstrong
ENF Corporate Governance
Business Process for Governance
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Governance Requires Board to Exercise
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Leadership
Enterprise
Integrity
Judgment
Achieved by:
 Purpose and Values  Strategy  Monitoring & Evaluation
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Accomplished through:
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Compliance with Laws, Regulations, Codes
Account to Shareowners
Respond to Legitimate Interests of Stakeholders
Regularly Evaluating Business Objectives and Criteria
Distinguishing the Two Concepts
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Corporate Governance
“An effective system of corporate governance must strive to channel the
self-interest of managers, directors and the advisors upon whom they
rely into alignment with the corporate, shareholder and public interest.”
Ira Millstein
Chairman, Private Sector Advisory Group, GCGF
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Ethics
“A company’s ethics refer to the principles, norms and standards that it
promotes for the guidance and conduct of its activities, internal
relations and interactions with external stakeholders, in accordance
with established values.”
King Report on Corporate Governance for South Africa 2002
Basis of King II Guidelines
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Set of Principles, not Prescribed Guidance!
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Number of Principles are Aspirational
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Focus on Qualitative Reporting & Conduct
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Converge International  Local Priorities
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Broad Application in Economy
 All Companies Listed on Stock Exchange
 Banks and Financial Institutions
 Public Sector and Local Authorities
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Regulatory Response to Recommendations
Primary Focus of Principles
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Boards and Directors
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Risk Management and Internal Control Assurance
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Integrated Sustainability Reporting
 Economic
 Environment
 Social, Including Organisation Integrity
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Issues of Auditing and Accounting
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Issues of Enforcement and Conformance
Nexus of Recommendations
Performance
Board = Focal Point
of Corporate Governance System
Respectability
Responsible for Total Process of Risk
Going Concern Validation
Communication
 Internal
 External
Conformance
Integrity
Defining the Governance System
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Common Law System
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Fiduciary Duty of Good Faith and Honesty
Duties of Care, Skill, and Loyalty
Legislative and Regulatory Framework
King II Examines Relationship between:
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Law and Regulations = Principles of Prescriptive Conduct
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Companies Act
Banks Act
JSE Securities Exchange
Financial Markets Regulations
Governance = Practice of Preferred Behaviour
Sets Value System for THE CORPORATION
Key Pillars of Governance
FAIRNESS
RESPONSIBILITY
ACCOUNTABILITY
TRANSPARENCY
BUT in South Africa….
 Discipline
 Independence
 Social Responsibility
Stakeholder Approach
Corporate Governance Framework
Internal
External
Shareholders
Private
Regulatory
Standards
Stakeholders
Board of Directors
Reports to
Appoints &
monitors
Management
Operates
Core Functions
Reputational Agents
• Accountants
• Lawyers
• Credit Rating Agencies
• Investment Bankers
• Financial Media
• Investment Advisors
• Research
• Governance Analysts
• Accounting
• Auditing
• Other
Laws and Regulations
Financial Sector
• Debt
• Equity
Markets
• Competitive factor
• Product markets
• FDI
• Corporate control
Source: Corporate Governance: A Framework for Implementation [World Bank]
Board Governance Standards
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Tone at the Top!
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Underlying Principles of Probity and Conduct
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Intellectual Independence of Board Processes
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Director Appointments & Management Selection
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Conflicts of Interest and Insider Dealing
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Handling Information and Confidentiality
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Disclosure, Reporting and Communication
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Professional Development and Ethical Standards
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Effective Articulation of Corporate Values
The Board and its Composition
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Benefits of Unitary Board Structure
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Separation of Chairperson and CEO
Role of the Chair – Runs the Board
 Role of the CEO – Runs the Company
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Categories of Director
 Executive
 Non-executive
 Independent NED
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Criteria for Selection and Issues of Composition
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Basis and Depth of Induction and Orientation
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Defining Responsibilities  Board Charter
General Principles for Committees
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Aid to the Board
Focus on Specialised Areas of Responsibilities
Generally NO Executive Powers
Defined Terms of Reference and Limitations
Chaired by “Independent” NED
Predominantly NEDs
Need for Sensible Composition
 Audit Committee and Financial Literacy
 Expert Resources to Support Activities
 Reporting to the Board and Ultimate Responsibility
 Regular Evaluation
Other Components of Governance
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Understanding and Managing Risk
 Internal Processes of Assurance
 Understanding External Risk Exposures
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Assurance Processes
 Internal Audit – Management Monitoring
 External Audit – Shareowner Reporting
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Sustainability of Corporation and Reporting
 Going Concern Validation
 Economic Indicators – Key Risks/Key Performance
 Environmental, Health, Safety, Human Capital
Engaging Stakeholder Dialogue
Internal
scoping +
preparation
ENTRY PLAN
Stakeholder
+ issues
mapping
Identify
stakeholders
for dialogue
Report +
communicate
DELIVER
LISTEN
Implement +
measure against
indicators
Dialogue 1 –
understand
expectations
Dialogue 2 –
discuss responses
+ indicators
Identify gaps
and develop
responses
DECIDE
Source: British American Tobacco – Social Report 2001/2002
Framework for Value System
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Set Corporate Moral Values
 Internal  Code of Ethics
 External  Statement of Business Principles
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Identify  Corporate Values & Mission Statement
Communicate  Business Principles / Codes
Build/Maintain Responsible Decision-taking Culture
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Feedback Gathering and Analysis
Allocation of Functional Responsibilities
Education and Training
Performance Reviews and Standards
External Assessment and Validation
Isn’t this the REAL Issue!
“I have no problem with Ethical Issues.
I merely ask myself whether I would mind if my old mother
read about this in the Press.”
Company Chairman of a major British public company
per Pocket Director, Prof. Bob Tricker
Nexus between Ethics & Governance
BOARD
Laws
Regulations
Codes
Accountability to Corporation
Shareowners
Spirit of Transparency
Stakeholders
 Culture of Accountability
 Integrity & Public/Community Trust
Global Standards & Initiatives
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UNEP Finance Initiative
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London Principles
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UN Global Compact
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Global Reporting Initiative
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Accountability 1000 Assurance Framework
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Financial Stability Forum
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Basel Accord I/II
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Specific Investor Criteria
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Ethical Pressure Groups, etc.
Licence
to
Operate
“With great power
comes great
responsibility”
Uncle Ben to Spiderman
Law/Regulation
Industry & Market Standards
Political opinion
Public opinion /
confidence
Banking
Industry Reputation
Institution
Media
Pressure groups
Individual Attitudes: customers, suppliers, consumers,
employees, investors and community