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Transition Report 2013 Stuck in transition?

CH3 180sq

Facts at a glance

ALMOST
25
years after the start of the transition process, economic institutions in the transition region are, on average, still weaker than in other countries with comparable levels of income.

0.5 The correlation between measures of democracy and regulatory quality in a global sample of countries.

Cover 180sqV2

 

THE
3
-year period prior to accession saw a peak in terms of institutional improvements in EU accession countries.

OVER
33%
of Kyrgyz SMEs say that unofficial payments are required in everyday business.


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Economic institutions

Annex 3.1. A new dataset on the corporate governance of banks

Table A.3.1.1 shows the main findings of an assessment of the corporate governance of banks in 16 countries in eastern Europe and Central Asia conducted by the EBRD’s Legal Transition Team. The assessment focused mainly on internal corporate governance arrangements, particularly the role and composition of boards. It analysed the legal and regulatory framework, its implementation by supervisors and the practices developed by the systemically important banks in each country. All data relate to 2011.

The assessment was based on questionnaires completed by banks, regulators, banking associations and law firms, complemented by additional research on relevant legislation and banks’ disclosures, as well as face-to-face interviews in some countries.

The table grades each aspect considered in the assessment using a colour system:

  • dark green: fit for purpose and close to best practices;
  • pale green: generally adequate, but would benefit from further reform;
  • yellow: some positive elements, but in need of overall reform;
  • red: needing significant reform.

Major shortcomings include a lack of transparency in succession and nomination processes, the unclear role of independent directors on boards and boards’ committees, and the poor non-financial disclosure offered by banks.

A detailed description of the study and its findings will soon be presented by the EBRD.

Assessment of the corporate governance of banks

Table A3.1.1
The strategic and governance role of the board
Issues Albania Armenia Azerbaijan Bosnia & Herz. Bulgaria Croatia FYR Macedonia Georgia Hungary Kazakhstan Moldova Romania Russia Serbia Tajikistan Turkey
Strategic role of the board
Does the legal framework establish a coherent governance system for banks?                                
Do boards have a sufficiently active role in developing and approving the strategic objectives and the budgets of their banks?                                
Do boards effectively review and evaluate management performance against agreed budgetary targets?                                
Governance role of the board
Do boards effectively shape the governance framework and corporate values throughout their organisation?                                
Are boards of subsidiaries in a position to effectively control the operation of their banks?     n/a               n/a   n/a   n/a n/a
Is there adequate transfer of good practice between parents and subsidiaries?     n/a               n/a   n/a   n/a n/a
Boards' composition and functioning
Issues Albania Armenia Azerbaijan Bosnia & Herz. Bulgaria Croatia FYR Macedonia Georgia Hungary Kazakhstan Moldova Romania Russia Serbia Tajikistan Turkey
Size, composition and qualification
Is the size of boards adequate?                                
Is the board sufficiently independent from management and controlling shareholders?                                
Are the duties of directors to their banks, shareholders and stakeholders clearly set out?                                
Do boards provide adequate inductions and professional development to their members?                                
Is the process for directors' succession and nomination sufficiently transparent?                                
Functioning and evaluation
Are the responsibilities, powers and terms of reference of boards and boards' committees clearly defined and documented?                                
Are boards and boards' committees supported by a senior company secretary?                                
Do boards evaluate their performance and discuss the outcomes of such evaluation?                                
Risk governance
Issues Albania Armenia Azerbaijan Bosnia & Herz. Bulgaria Croatia FYR Macedonia Georgia Hungary Kazakhstan Moldova Romania Russia Serbia Tajikistan Turkey
Are boards and their risk committees sufficiently involved in setting the risk appetite and monitoring the risk profile of banks?                                
Do banks appoint and empower senior chief risk officers?                                
Do senior executives have a sufficiently integrated firm-wide perspective on risk?                                
Are boards in a position to effectively review risk management?                                
Internal control
Issues Albania Armenia Azerbaijan Bosnia & Herz. Bulgaria Croatia FYR Macedonia Georgia Hungary Kazakhstan Moldova Romania Russia Serbia Tajikistan Turkey
Internal control framework
Does the organisational structure of banks include clearly defined and segregated duties for key officers and effective delegation of authority?                                
Are there enough checks and balances to ensure the independence and integrity of financial reporting?                                
Are conflicts of interest (including related party transactions) effectively managed?                                
Have banks established effective and independent internal audit departments?                                
Do banks establish effective compliance departments to ensure that they comply with regulatory obligations?                                
Do boards and their audit committees effectively oversee and regularly review the effectiveness of the internal control systems?                                
Audit committee
Do boards establish audit committees?                                
Are audit committees fully independent?                                
Do audit committees include at least one member with substantial auditing or accounting experience?                                
External auditor
Is external auditor independence upheld by boards and their audit committees?                                
Incentives and compensation
Issues Albania Armenia Azerbaijan Bosnia & Herz. Bulgaria Croatia FYR Macedonia Georgia Hungary Kazakhstan Moldova Romania Russia Serbia Tajikistan Turkey
Remuneration policy
Do boards and their remuneration committees have a sufficient role in shaping the compensation systems of their banks?                                
Is remuneration meritocratic and linked to firm and individual performance?                                
Is senior executive compensation aligned with prudent risk management?                                
Transparency
Issues Albania Armenia Azerbaijan Bosnia & Herz. Bulgaria Croatia FYR Macedonia Georgia Hungary Kazakhstan Moldova Romania Russia Serbia Tajikistan Turkey
IFRS
Is IFRS required by law or regulation?                                
Corporate governance reporting
Do banks report regularly on corporate governance matters?                                
Do banks publish key governance information on their websites?                                
Do listed banks report and explain their compliance with a corporate governance code? n/a   n/a             n/a         n/a  
Is disclosure proportionate to the size, complexity, ownership structures and risk profiles of banks?                                

Source: EBRD survey of corporate governance of banks.
Note: Colours correspond to the degree of compliance with the best practice. Dark green corresponds to practices that are fit for purpose; pale green indicates practices where some reform is needed; yellow indicates practices that contain some elements of best practice but are in need of overall reform; red corresponds to practices that are in need of significant reform.

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