On 8th November 2010 The Central Bank of Ireland issued the Corporate Governance Code for Credit Institutions and Insurance Firms which sets out minimum statutory requirements to be put in place by banks and insurance companies in regard to the corporate governance structures of their institutions.

The purpose of the Code is to ensure that there are robust corporate governance arrangements in place so that the boards of these institutions are in a position to deal with risk and challenges and to avoid or minimise the risk of future crisis.

The Code is a significant step in adopting tough Corporate Governance rules and go further than provisions in other jurisdictions. On the announcement of the new Code, The Head of Financial Regulation, Matthew Elderfield, said ‘The buck stops with the Board of Directors. We need to learn the lessons of the financial crisis by improving corporate governance practices in the financial services sector in Ireland.  These rules deliver stronger standards for banks and insurance companies operating in Ireland.   These requirements are more demanding than those in place in other jurisdictions as we have decided that in the area of corporate governance we do not want to simply match best practice internationally but wish to set a higher standard. It’s time to bring fresh blood into the board room, which brings more challenge, asks more awkward questions and devotes more time to assessing risk.  Depositors, policyholders and, indeed, Irish taxpayers have the right to expect no less from the guardians of their money.’

The main requirements of the Code include:

  • Boards must have a minimum of seven directors in major institutions and a minimum of five in all others;
  • Requirements on  the role and number of independent non-executive directors;

Criteria for director independence and consideration of conflicts of interest;

  • Limits on the number of directorships which directors may hold in financial and non financial companies to ensure they can comply with the expected demands of board membership of a credit institution or insurance company;
  • Clear separation of the roles of Chairman and CEO;
  • A prohibition on an individual who has been a CEO, director or senior manager during the previous five years from becoming Chairman of that institution;
  • A requirement that board membership is reviewed at a minimum every three years;
  • A requirement that boards set the risk appetite for the institution and monitor adherence to this on an ongoing basis;
  • Minimum requirements for board committees including audit and risk committees;
  • A requirement for an annual confirmation of compliance to be submitted to the Central Bank.

The Code will apply to existing directors and boards with effect from 1 January 2011. Those institutions which may need time to implement changes to systems and structures to become compliant will be given until 30 June 2011 to do so. Where changes to the Board are necessary, this period will be extended to 31 December 2011 to identify and assess suitable candidates with appropriate experience and diversities.

Failure to comply with the requirements may be subject to supervisory action and disciplinary procedures by the Central Bank, including sanction under the Administrative Sanctions Framework, criminal prosecution or the Central Bank using its new regulatory powers to refuse to appoint directors, or to suspend, remove or prohibit directors under the Central Bank Reform Act 2010.

The ISE has recently issued a consultation paper on the implementation of a new corporate governance code for Irish Listed Companies. The purpose of the code is to improve the corporate governance standards in Ireland of Irish Listed Companies along with the new UK Combined Code.

Conclusion

All Credit Institutions and Insurance Undertakings should act immediately to address the new Corporate Governance to determine what changes are required to the institution’s current corporate governance structures and board membership. Corporate Governance is not just about rules and structures but more importantly it is about the behaviour of boards and their members and how they act.

Main Provisions of the Code

The main provisions of the Corporate Governance Code for Credit Institutions and Insurance Undertakings are as follows:-

General Requirements

  • The Board retains responsibility for corporate governance within the institution and senior management are to play an important role.
  • All institutions shall have robust governance arrangements which include a clear organisational structure and the system of governance shall be subject to regular internal review. 

Composition of the Board

  • The board shall have a minimum of 5 directors, the majority of the board being independent non-executive directors and subsidiaries of groups shall have at least two independent non-executive directors.
  • Each member of the board shall have sufficient time to devote to the role of director and associated responsibilities and the board shall indicate a time commitment expected from directors in letters of appointment.
  • The number of directorships of a Director of credit institutions and insurance undertakings held by a director shall not exceed five and directorships held outside of a credit institution and insurance undertakings shall not exceed eight directorships, however, the institution can make a case to the Central Bank to allow more directorships.
  • On appointment of directors, the board should consider possible conflicts of interest of the new Directors and Directors shall not participate in any decision where a reasonably perceived conflict of interest exists.
  • Institutions shall review board membership at least every three years and formally review membership of any person who is a member for nine years or more.

Chairman

  • Chairman to have relevant financial services expertise, qualifications and background or undertake training to perform this function.
  • The Chairman and CEO roles shall be separate and the Chairman be an independent non-executive director and be proposed for reappointment on a annual basis and cannot hold position of Chairman or CEO of more than one credit institution or insurance undertaking.
  • Chairman shall seek approval of the Central Bank prior to being appointed as a director.
  • CEO, executive director or member of senior management cannot be appointed as Chairman for 5 years after ceasing that role.

Chief Executive Officer

  • CEO is top executive responsible for the institution’s operations, compliance and performance and serves as the main link between board  and the executive.
  • CEO can only act as CEO for one institution.
  • Renewal of CEO contract to be reviewed every 5 years.
     

Independent Non-Executive Director

  • The Independent Non-Executive Director shall clearly be identified in the annual report.
  • They shall have relevant skills, experience and knowledge (accounting, auditing and risk management) and provide an independent challenge to the executive directors.

Non-Executive Directors and Executive Directors

  • The role of executive directors is to propose strategies to the board and to execute agreed strategies to the highest possible standard.
  • The non-executive and executive directors shall have relevant skills, experience and knowledge (accounting, auditing and risk management) and dedicated support shall be available to them.

Role of the Board

  • The board is responsible for the effective, prudent and ethical oversight of the entity; setting the business strategy for the institution; and ensuring that risk and compliance are properly managed in the institution.
  • The board may delegate authority to sub-committees and management and have mechanisms in place for documenting and monitoring the exercise of delegated functions.

Appointments

  • Board is responsible for appointment of CEO and senior management, and non-executives.
  • Board shall define and document the responsibilities of the board of directors, board committees and senior management to ensure no single person has unfettered control.
  • Board review of board performance and individual directors annually and document the review.
  • The removal from office of the head of a Control Function shall be subject to prior board approval.

Risk Appetite

  • The Board is required to understand risks the institution is exposed to and establish a documented risk appetite of the institution and the risk appetite definition shall be comprehensive and clear to all stakeholders.
  • The board shall ensure that the institution’s remuneration practices do not promote excessive risk taking.

Meetings

  • The Board shall meet as often as is appropriate to fulfil its responsibilities and in any event shall meet at least quarterly.
  • Detailed minutes shall be prepared with all decisions, discussions and points for further actions being documented. Dissensions or negative votes shall be documented and details of board attention, the substance of discussions and their outcomes.
  • Establish a documented conflict of interest policy and may lead to changing board membership. 

Reserved Powers

  • The Board shall establish a documented schedule of matters reserved for decision.

Consolidated Supervision

The board shall exercise adequate control and oversight over the activities of its subsidiaries.

Committees of the Board

  • Establish an Audit and Risk Committee (Remuneration and Nomination Committees should be considered).
  • If board only has 5 members the full board may act as these committees.
  • Non-Executive Directors particularly independent non-exec directors, shall play a leading role.
  • Written terms of reference for committees and reviewed annually.

General requirements of Committees

  • A number of requirements for sub-committees including agenda, minutes, appointing committee members, attendance of members, cross committee membership, committees to report to the board.

Terms of Reference of Committees of the Board

  • The authority, functions, membership and reporting lines of the committees as well as meeting frequency, voting rights and quorums shall be clearly outlined in written terms of reference.

Audit Committee

  • The number of members shall be sufficient to handle size and complexity of the institution.
  • The committee shall be composed of non-exec directors’ the majority being independent and the Chairman of the committee shall be an independent non-executive director. The Chairman and CEO shall not be a member of the committee.

Risk Committee

  • The Risk committee shall be separate from audit committee with responsibility for oversight and advice on current risk exposures of the entity and future risk strategy.
  • Committee shall have a balance of executive and non-executive directors.
  • Role of committee to advise the board on risk appetite and tolerance for future strategy, the current financial position of the institution the capacity of the institution to manage and control risks within the agreed strategy.

Remuneration Committee

  • The number of members of the committee shall be dependent on the size of the institution.
  • Where possible all or the majority of the members shall be independent non-executive directors and Chairman of board shall not be Chairman of the committee.

Nomination Committee

  • The number of members of the committee shall be dependent on the size of the institution.
  • Where possible the majority the members shall be independent non-executive directors.
  • The committee shall make recommendations to the board on all new appointments of both executive and non-executive directors.

Compliance Statement

  • A compliance statement specifying whether the institution has complied with the Code shall be submitted to the Central Bank on an annual basis with the institution’s annual report.

Additional obligations for Major Institutions

  • The board shall have a minimum of seven directors and have a majority of independent non-executive directors and subsidiaries shall have at least three independent non-executive directors.
  • Number of directorships held by a director of a major institution shall not exceed three or more than five directorships in a non financial institution.
  • Every three years an evaluation by an external evaluator shall be undertaken.
  • The board shall meet at least 11 times during any calendar year at least once per calendar month for 11 months of the year.
  • Major institutions are required to establish Audit, Risk, Remuneration and Nomination committees.

Should you have any questions in relation to this article or should you have any Company Law or Company Secretarial queries please contact Kate Brennan on 059 9183888, This email address is being protected from spambots. You need JavaScript enabled to view it..

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Kate Brennan,
Head of Company Secretarial,
OmniPro,
Unit 3, South Court,
Wexford Road Business Park,
Carlow.

059 9183888
This email address is being protected from spambots. You need JavaScript enabled to view it.