Shaping Up To Global Banking

1. Shaping Up To Global Banking Ethics in the Banking Industry 20 May 2003 Philip Armstrong ENF Corporate Governance

2. Business Process for Governance • Governance Requires Board to Exercise • Leadership • Enterprise • Integrity • Judgment • Achieved by: • Purpose and Values  Strategy  Monitoring & Evaluation • Accomplished through: • Compliance with Laws, Regulations, Codes • Account to Shareowners • Respond to Legitimate Interests of Stakeholders • Regularly Evaluating Business Objectives and Criteria

3. Distinguishing the Two Concepts • 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 • 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

4. Basis of King II Guidelines • Set of Principles, not Prescribed Guidance! • Number of Principles are Aspirational • Focus on Qualitative Reporting & Conduct • Converge International  Local Priorities • Broad Application in Economy • All Companies Listed on Stock Exchange • Banks and Financial Institutions • Public Sector and Local Authorities • Regulatory Response to Recommendations

5. Primary Focus of Principles • Boards and Directors • Risk Management and Internal Control Assurance • Integrated Sustainability Reporting • Economic • Environment • Social, Including Organisation Integrity • Issues of Auditing and Accounting • Issues of Enforcement and Conformance

6. Nexus of Recommendations Performance Board = Focal Point of Corporate Governance System Responsible for Total Process of Risk Going Concern Validation Communication Respectability Integrity  Internal  External Conformance

7. Defining the Governance System • Common Law System • Fiduciary Duty of Good Faith and Honesty • Duties of Care, Skill, and Loyalty • Legislative and Regulatory Framework • King II Examines Relationship between: • Law and Regulations = Principles of Prescriptive Conduct • Companies Act • Banks Act • JSE Securities Exchange • Financial Markets Regulations • Governance = Practice of Preferred Behaviour • Sets Value System for THE CORPORATION

8. Key Pillars of Governance BUT in South Africa…. • Discipline • Independence • Social Responsibility Stakeholder Approach

9. Corporate Governance Framework Internal External Shareholders Private Regulatory • Standards • Accounting • Auditing • Other • Laws and Regulations Stakeholders Board of Directors • Reputational Agents • Accountants • Lawyers • Credit Rating Agencies • Investment Bankers • Financial Media • Investment Advisors • Research • Governance Analysts Appoints & monitors Reports to • Financial Sector • Debt • Equity Management Operates • Markets • Competitive factor • Product markets • FDI • Corporate control Core Functions Source: Corporate Governance: A Framework for Implementation [World Bank]

10. Board Governance Standards • Tone at the Top! • Underlying Principles of Probity and Conduct • Intellectual Independence of Board Processes • Director Appointments & Management Selection • Conflicts of Interest and Insider Dealing • Handling Information and Confidentiality • Disclosure, Reporting and Communication • Professional Development and Ethical Standards • Effective Articulation of Corporate Values

11. The Board and its Composition • Benefits of Unitary Board Structure • Separation of Chairperson and CEO • Role of the Chair – Runs the Board • Role of the CEO – Runs the Company • Categories of Director • Executive  Non-executive  Independent NED • Criteria for Selection and Issues of Composition • Basis and Depth of Induction and Orientation • Defining Responsibilities  Board Charter

12. General Principles for Committees • Aid to the Board • Focus on Specialised Areas of Responsibilities • GenerallyNOExecutive 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

13. Other Components of Governance • Understanding and Managing Risk • Internal Processes of Assurance • Understanding External Risk Exposures • Assurance Processes • Internal Audit – Management Monitoring • External Audit – Shareowner Reporting • Sustainability of Corporation and Reporting • Going Concern Validation • Economic Indicators – Key Risks/Key Performance • Environmental, Health, Safety, Human Capital

14. Engaging Stakeholder Dialogue Internal scoping + preparation Stakeholder + issues mapping ENTRY PLAN 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

15. Framework for Value System • Set Corporate Moral Values • Internal  Code of Ethics • External  Statement of Business Principles • Identify  Corporate Values & Mission Statement • Communicate  Business Principles / Codes • Build/Maintain Responsible Decision-taking Culture • Feedback Gathering and Analysis • Allocation of Functional Responsibilities • Education and Training • Performance Reviews and Standards • External Assessment and Validation

16. 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

17. Nexus between Ethics & Governance BOARD Laws Regulations Codes Accountability to Corporation Shareowners Stakeholders Spirit of Transparency  Culture of Accountability  Integrity & Public/Community Trust

18. Global Standards & Initiatives • UNEP Finance Initiative • London Principles • UN Global Compact • Global Reporting Initiative • Accountability 1000 Assurance Framework • Financial Stability Forum • Basel Accord I/II • Specific Investor Criteria • Ethical Pressure Groups, etc.

19. “With great power comes great responsibility” Licence to Operate Uncle Ben to Spiderman Law/Regulation Industry & Market Standards Political opinion Industry Reputation Banking Institution Public opinion / confidence Media Pressure groups Individual Attitudes: customers, suppliers, consumers, employees, investors and community