Well, it's not a crisis, right?

1. Corporate governance performance measures: is the right time for getting essentials reconsidered? Well, it's not a crisis, right? Ukrainian Academy of Banking of the National Bank of Ukraine International Competition in Banking: Theory and Practice Sumy, 24. May 2012 Serhii V. Leonov Professor, Doctor of Economics, Head of the Chair of Finance @Maryna Brychko PhD candidate, Department of International Economics, Ukrainian Academy of Banking of the National Bank of Ukraine

2. "Measurement is the first step that leads to control and eventually to improvement. If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you can't control it, you can't improve it."- H. James Harrington

3. Agenda • Specific corporate governance issues in Italy and Ukraine: comparative analysis • Critical analysis of contemporary Corporate Governance measures • Construction of the Index of Corporate Governance Development in Ukraine

4. Specific corporate governance issues in Italy and Ukraine: comparative analysis Why does it matter? The benefits of corporate governance practices vary based on bank and country characteristics, neither of which is well understood. Governance is not one-size fits all.

5. Specific corporate governance issues in Italy and Ukraine: comparative analysis Italian commercial bank “Mediobanca” Ownership level General shareholders meeting Board of Statutory Auditors Steering and monitoring level Independent auditors President Board of Directors Executive level Internal Control Committee Executive Committee Appointments Committee Chief Executive Officer Remuneration Committee General Manager

6. Specific corporate governance issues in Italy and Ukraine: comparative analysis Ukrainian commercial bank “First Ukrainian International Bank” General shareholders meeting Ownership level Audit Commission Supervisory Board Steering and monitoring level Credit Council Internal Audit Service Management Board Management committee on asset and liability Executive level Committee on tariffs and conditions Department of strategic projects and process Chairman of the Board Credit Committee Operational risk committee Program integration committee Technology committee

7. Specific corporate governance issues in Italy and Ukraine: comparative analysis Italian commercial bank “Mediobanca” Ukrainian commercial bank “First Ukrainian International Bank” Ownership level General shareholders meeting General shareholders meeting Audit Commission Board of Statutory Auditors Steering and monitoring level Supervisory Board Independent auditors Credit Council Internal Audit Service President Management Board Management committee on asset and liability Board of Directors Committee on tariffs and conditions Executive level Internal Control Committee Department of strategic projects and process Chairman of the Board Credit Committee Executive Committee Operational risk committee Appointments Committee Chief Executive Officer Program integration committee Remuneration Committee Technology committee General Manager

8. Critical analysis of contemporary Corporate Governance measures “All models are wrong, but some are useful.” George E. P. Box (1979) • All models are “wrong” in the sense of being a simplifiedrepresentations of some reality. • Gompers, Ishii and Metrick (2003) G-index (GIM) • – Classic article; 800 citations on SSRN • – Create a governance index as a proxy for the strength of shareholder rights and corporate governance practices • – Study the empirical relationship between their index and corporate performance • – Deciles rankings of companies • “Dictatorship portfolio” • Highest management, lowest shareholder power • “Democracy portfolio” • Lowest management, strongest shareholder rights

9. Critical analysis of contemporary Corporate Governance measures “All models are wrong, but some are useful.” George E. P. Box (1979) • Some models are more wrong than others. • Board Effectiveness Rating (BER) (2002) • Market and Industry Indices (2000) • Corporate Governance Quotient (CGQ) (2002) • Board Accountability Index (BAI) • Why? • subjective estimation; • based on international corporate governance principals and do not fit the situation of a specific country; • not adopted to specifics of banking sector; • deemphasize takeover defenses; • can't insist on reliability of those indexes, etc. • “But some are useful.”

10. Construction of the Index of Corporate Governance Development in Ukrainian banks ICGDUAH = 1/3 ICGD1 + 1/3 ICGD2 + 1/3 ICGD3, Where: ICGDUAH – Index of Corporate Governance Development in Ukrainian banks ICGD1 – Corporate Governance Quality ICGD2 – Ability to cope with risks ICGD3 – Profitability

11. Construction of the Index of Corporate Governance Development in Ukrainian banks

12. Why it’s wrong? Has local character Why it’s useful? • Considerate special aspects of banking activity, geographic region and market • ICGD (or it components) could be used for the ongoing measuring (monitoring) of corporate governance at the national level and to assess the level of corporate governance development in a separate bank.

13. In summary… Key stuff "Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful." - Box and Draper, Empirical Model-Building