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Hong Kong Monetary Authority revises its guidance on corporate governance of locally incorporated authorised institutions
REGULATORY NEWS
Christopher Clarke
Adrian Elms
http://www.dlapiper.com/hong-kong-monetary-authority-revises-its-guidance-on-corporate-governance-of-locally-incorporated-authorised-institutions-09-05-2012/
On 3 August 2012, the Hong Kong Monetary Authority (HKMA) issued a revised version of the Supervisory Policy Manual Module on "Corporate Governance of Locally Incorporated Authorised Institutions" (Revised Module) as a statutory guideline under Section 7(3) of the Banking Ordinance.
The existing module sets out the HKMA's supervisory expectations in respect of the corporate governance policies and practices of locally incorporated authorised institutions (AIs). It covers the roles and responsibilities of the board of directors of an AI and its senior management, and sets out a range of sound governance principles and practices.
The purpose of the Revised Module is to strengthen these existing supervisory guidance and requirements by incorporating new international standards developed in response to the lessons of the global financial crisis, including in particular the Basel Committee on Banking Supervision's Principles for Enhancing Corporate Governance 2010.
Major changes
Role of the board in risk governance
The HKMA requires AIs to have adequate risk management systems to identify, measure, monitor, and control each of eight inherent risks, namely: credit, market, interest rate, liquidity, operational, reputation, legal and strategic risk.
In fulfilling this responsibility, the board should:
Approve and establish an overall risk strategy (including a clearly articulated risk tolerance/appetite) that is commensurate with its operations and strategic goals, risk management and compliance capabilities
Approve key risk management policies and oversee management in developing policies and practices to manage risk in accordance with the board's strategy and the AI's risk tolerance/appetite
Establish a risk management function with adequate authority, stature, independence, management support and resources to perform its duties
Establish an overall remuneration policy to be in line with the AI's risk tolerance/ appetite and long-term interests, and
Promote effective risk management.
The board's responsibilities for appointing and overseeing senior management
The HKMA recognised that appointment of competent management is key to achieving the objective of a soundly and effectively run AI. While the board is ultimately responsible for the conduct and financial soundness of an AI, the senior management are responsible and accountable for running the AI on a day-to-day basis.
In this regard, the Revised Module requires the board to adopt a formal document setting out clearly the role, responsibilities, accountability and reporting lines of senior management and the board's role in monitoring senior management performance, and formulate performance objectives for senior management and put in place effective systems of control to monitor their performance against the objectives on a continuing basis.
The board's role in setting corporate values and standards
The HKMA recognised that satisfactory levels of ethical and professional behavior of staff is key to ensuring that the AI's business is carried on with integrity and prudence.
Therefore, the board is required to establish a set of professional standards and values that promote ethical and responsible professional behavior amongst the staff (particularly senior management and members of the board), reflect these standards and values in the AI's code of conduct and policies, and demonstrate consistently that they are strongly committed to high ethical and professional standards.
The board should also establish, implement and maintain effective policies to identify actual and potential conflicts of interest so that they can be prevented or properly managed.
Additional Guidance
Functioning and organisation of the board
The Revised Module provides additional guidance regarding the functioning and organisation of the board to ensure that its governance practices and procedures for its own work are well defined, documented and regularly assessed. This additional guidance includes:
Composition of the board. In the case of licensed banks, either one-third or three of their board members (whichever is higher) should be independent non-executive directors. Other AIs are encouraged to appoint at least three independent non-executive directors, but in any case their board is expected to include an appropriate number of independent, or at least non-executive, directors.
Formation of nomination committees and risk management committees. AIs are encouraged to establish a nomination committee to identify individuals suitably qualified to become board members and select or make recommendations to the board on appointment or re-appointment of directors, in particular the chairman and chief executive. A risk management committee is also strongly encouraged to be established to advise the board on the AI's overall risk appetite/tolerance and risk management strategy, and for overseeing senior management's implementation of that strategy.
Role of the chair. The chair is expected to lead the board and be responsible for the overall effective functioning of the board. The chair should ensure that board decisions are taken on a sound and well-informed basis and in the best interest of the AI. In exceptional cases where the chair is also the chief executive, there should be measures in place to minimise any adverse impact on the working of the board.
Commitment of board members. Directors, including non-executive and independent directors, are expected to contribute actively to the work of the board in order to discharge their responsibilities. A greater time commitment should be expected of the person appointed to the chair given its important role and responsibility.
Board training. To help board members acquire, maintain and deepen their knowledge and skills in order to fulfill their responsibilities, the board should ensure that its members are provided with tailored orientation and on-going training to familiarise them with their role and responsibilities, the AI's business strategy and operations, corporate values, governance and internal control framework, taking into account recent products and markets development, and any changes in laws, regulations and supervisory standards.
Regular assessment. To support board performance, it is good practice for the board to undertake regular assessments of the effectiveness of the board as a whole and the contribution make by each individual director to the effectiveness of the board. The board should also assess its own governance practices and procedures to determine any improvements that may be needed, and make any necessary changes.
