of senior management” (BIS in ‘Principles for Enhancing Corporate Governance’, October 2010, p.7).
Core Principles for Effective Bank Supervision: Principle 14
Banks should have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations. (Basel Committee on Banking Supervision)
Corporate laws identify the responsibilities of the board of directors with respect to corporate governance principles to ensure that there are effective controls over every aspect of risk management.
These controls are the responsibility of the board of directors and deal with organizational structure, accounting procedures, checks and balances and safeguarding of assets and investments. More specifically, these address:
•Organizational structure: definitions of duties and responsibilities including clear delegation of authority (for example, clear loan approval limits), decision making procedures, separation of critical functions (for example, business origination, payments, reconciliation, risk management, accounting, audit and compliance)
•Accounting procedures: reconciliation of accounts, control lists, information for management.
•Checks and balances (or “four eye principles”): segregation of duties, cross checking, dual control of assets and double signatures.
•Safeguarding assets and investments: including physical controls
To achieve a strong control environment, the board of directors and senior management of a bank should understand the underlying risks in their business and are both committed to, and legally responsible for, the control environment. (Basel Committee on Banking Supervision)
1.1.2 Steps to Establish a Board of Directors
In order to establish the board, companies may refer to the widely used PDAC (Plan-Do-Check-Act) model. Using PDAC, the process to create a board has to go through following stages of linear and natural progression:
Each of the above stages is defined in more details in the following sections.
1.2 RESPONSIBILITIES OF THE BOARD
To promote safe and sound operating practices, it is imperative that the Board assumes its role independent of the influence of the Management. Members of the Board should know their responsibilities and powers in clear terms. Further, it should be ensured that the Board focus on policy making and general direction, oversight and supervision of the affairs and business of the company and does not play any role in the day-to-day operations, as that is the role of the ‘Management’.
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
The following gives accounts of Board’s responsibilities as defined by various international bodies and best practices and concludes with the responsibilities identified in the Code of Corporate Governance of Bahrain.
•Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders
•Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly
•The board should ensure compliance with applicable law and take into account the interests of stakeholders
•The board should fulfill certain key functions, including:
•Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.
•Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
•Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.
•Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.
•Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.
•Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.
•Overseeing the process of disclosure and communications.
•The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management.
•Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration.
•Board members should devote sufficient time to their responsibilities.
•In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information. (OECD Principles of Corporate Governance – 1999)
•Split role of Chairman and Chief Executive Officer. (Kings Committee on Corporate Governance – 1994)
•Board to have formal schedule of matters and to meet regularly. (Cadbury Committee – 1992)
Common Wealth Association’s Principles are summarized as below:
Board should:
•Ensure that corporation will continue as a going concern
•Exercise leadership, enterprise and judgment in directing the business
•Set objectives and strategies of the organization
•Ensure development of key policies and their implementation
•Monitor, evaluate and review the aims, strategies, policies, etc.
•Form committees in key areas and ensure their functionality
•Ensure company’s adherence to laws of the land, regulations and best practices
