By Peter Douglas Sheerin Nairobi, September 2013

1. The 2nd East African Community Regional Credit Information Sharing Conference Credit Reporting Corporate Governance By Peter Douglas Sheerin Nairobi, September 2013

2. Agenda • The Critical Element. • Corporate Governance – What is it? • The complexity of credit reporting for corporate governance. • Role and responsibilities of BOD. • Avoiding conflicts of interest. • Case studies. • Qualities of BOD. • Challenges. • Compliance officer. • Documentation. Code of Corporate Governance/Board Charters • Role of GM. • Consequences of things going wrong. • Responsibility of Regulators. • Summary.

3. Corporate Governance must underpin one critical element. Public 3rd Party data providers Lenders Policymakers Credit Reporting institutions must be seen as a “Trusted Third Party” by all stakeholders. Public at Large Regulators Institutions sharing data cross border

4. What is Corporate Governance? • Corporate governance covers a broad range of issues of allocation of control rights within a firm, in other words, the governance defines how the authority is exercised and the quasi-rents generated by firm are allocated among different classes of stakeholders. (1) • Governance arrangements of credit reporting service providers and credit reporting data providers should ensure. • Accountability, transparency and effectiveness in managing the risks associated with the business and fair access to the information by users.(2) • 1. World Bank Group definition. • 2. General Principle 3 of the General Principles on Credit Reporting

5. Credit reporting systems lend themselves to certain peculiarities • Complicated legal and regulatory framework (often with multiple laws – Data protection, bank secrecy…) • Hub and spoke models and cross border data transfers • Monopolistic tendencies due to mandatory sharing/inquiry requirements, market size • Mandatory minimum capital/price and product approval • Handling of sensitive and personal data • Weak/uninformed users and consumers vis-à-vis bureau operators • Lack of capacity in regulator/overseer • Privately owned entities working on public interest issues • Diverse ownership structures with potential conflicts of interest • Multi Bureau environment requires collaborative approach (data formats, frequency of contribution etc) rather crush competitor approach Driving need for strong corporate governance measures

6. Credit reporting systems involve complex interactions that call for strong corporate governance procedures Banks & other Credit Providers Courts Contract enforcement Legislative framework Regulators Monitoring & Compliance Credit provision Law Companies office & Collateral Registries Fixed & movable collateral Credit Bureaus Information, risk assessment Indebtedness Business Consumers Consumer Financial Protection Bureau or similar institution

7. What are some relevant Corporate Governance measures for bureaus? • Instituting a Board of Directors • Creation of a Compliance/Internal Audit Function • Policies and procedures manuals/Corporate Governance Code Reputation and image, supported by a good corporate governance framework is a key element of a Credit Bureau’s success. Companies that respect the rights of shareholders, data providers, members, subscribers, and the public will enjoy greater public confidence and goodwill.

8. What is the Role of the Board of Directors? • “Together with guiding corporate strategy, the Board is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation. In order for boards to effectively fulfill their responsibilities they must be able to exercise objective and independent judgment. Another important board responsibility is to oversee systems designed to ensure that the corporation obeys applicable laws, including tax, competition, labour, environmental, equal opportunity, health and safety laws.” (1) • “The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed.(2) • 1. Principles of Corporate Governance, the Organisation for Economic Co-operation and Development (OECD) • 2. The UK Financial Reporting Council

9. Responsibilities of Board of Directors

10. Avoiding conflicts of interest Directors must not let their personal interests conflict with their duties to the company. • In most jurisdictions, directors are required to avoid conflicts of interests. • May find themselves in a position where there is a potential conflict between their personal interests and their duties to the company. • Must always prefer the company‘s interest to their own – unless shareowners or constitution permit otherwise. • Director must report to the company any benefits from transactions in which they have an interest - even if the director took no part in the decision in question. • Independent directors who bring certain specific skills while remaining independent can bring balance to Board

11. Case study – Conflict of interest. • Director appointed by FI was part of technical vendors selection panel. • Panel required to make unanimous recommendation. • Caused unnecessary delays and expense by refusing to endorse candidate selected by other 5 participants. • Finally disclosed that FI was funding alternative technical vendor.

12. Case study – Breach of confidentiality • Board was considering RFP bids. • Two bids shortlisted. • Director forwarded copy of complete bid including financials to other bidder. • Director tabled fresh bid at board meeting and spoke in support. • Chairman rejected bid and selection process recommenced – additional cost and delay.

13. Case study 3 – Failure to act in best interests of company • Board appointed independent adviser to undertake selection process. • Refused to accept recommendations of independent advisor. • Selected non preferred vendor which notwithstanding substantially more expensive. • Successful vendor had made secret approaches to directors.

14. Case study 4 – Corporate Governance within regulator. • Legislation provided for very prescriptive requirements to obtain license. • Bureau invested substantially in staff, hardware/software/premises • Submitted application that complied with all requirements. • Regulator did not process application within timelines set out in legislation – resulting in substantial delays, additional expense and concern that unfair treatment may continue into the future

15. Qualities of an effective BOD • Must be able to exercise objective and independent judgment. • Must have sufficient experience and expertise to take critical decisions with potentially significant impact to the bureau. • Must have sufficient decision-making powers and capacity to implement decisions • Must have appropriate sub-committees (remuneration, audit/compliance etc)

16. Challenges faced by BOD (Ex. 1) • In general the BOD must seek to ensure the company’s prosperity and long-term financial viability. This has implications for: • Choice of business model • Pricing • New membership • Technical vendor partnership

17. Challenges faced by BOD (Ex. 2) In general the BOD must collectively direct the company’s affairs (entrepreneurial leadership of the company)

18. Challenges faced by BOD (Ex. 3) In general the BOD must monitor and control executive management (develop a framework of prudent and effective controls)

19. Challenges faced by BOD (Ex. 4) In general the BOD must ensure the board’s moral and ethical commitment in areas such as bribery, corruption, political activity, gifts, etc.

20. Compliance Officer

21. Corporate Governance documents.

22. Code of corporate governance A Code of Corporate Governance is a key foundational document. Code should document the company‘s principles related to its:

23. Board charters typically include

24. Critical Role of the GM.

25. New transparency adds challenges – Will something similar happen in SSA? From July 21, 2011 through June 30, 2013, the CFPB received approximately 176,700 consumer complaints, including approximately 36,300 credit card complaints, 85,200 mortgage complaints, 25,700 bank accounts and services complaints, 6,000 private student loan complaints, 5,700 consumer loan complaints, 14,200 credit reporting complaints, and 300 money transfer complaints.

26. Potential costs consequences of getting it wrong • Woman awarded over $18million in dispute over credit report errors with Equifax • Julie Miller tried to rectify the errors eight times over a two year period • Information from another person with the same name was inserted into her credit report

27. Legislative penalties • Disqualification as director or officer • Suspension of license. • Cancellation of License. • Fines. • Imprisonment All of which could result in claims by shareholders for compensation.

28. Responsibility of regulators in a complex environment. • Regulators have the legislative duty to license and oversee credit bureaus. • Requires knowledge and understanding of their roles and responsibilities. • Staff capacity, policies, processes and procedures needed. • Transparency of deliberations and outcomes. • Role is the enforce legislation and to represent all stakeholders – particularly the public at large.

29. Summary. • Good corporate governance is critical. • Legislative environment can challenge. • Boards must represent shareholders whilst at same time reflect stakeholder interests. • Boards and management can be supported by robust processes, procedures and reporting. • Regulators must develop capacity and understanding to oversee complex environment. • Important that “trusted 3rd party” status is not put in jeopardy. • Consequences for business and individuals can be serious.

30. Which would you rather be?

31. Thank you! Comments? Questions?