May 28, 2014

Subsidiary Corporate Governance Training: FINCA Latin America

Introductions

Jason PlummerCarin Robinson

Training Agenda

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Introduction – Interim Regional Director Stefan Queck

Training Objectives Jason Plummer, PwC

Introduction to Corporate Governance Jason Plummer, PwC

Review Updates to FINCA Policy Jason Plummer & Carin Robinson, PwC

Introduction: Case Study All

Break

Discussion: Case Study All

Directors’ Duties & Responsibilities Carin Robinson, PwC

Director Protection & Support Carin Robinson, Dan Smith

Board Organization & Management Carin Robinson, PwC

Concluding Thoughts Jason Plummer, PwC

Next Steps Sona Gandhi

A message from FINCA’s CEO, Rupert Scofield

Introduction from FINCA’s Latin America Interim Regional Director, Stefan Queck

Training Objectives:Who will benefit from this training?

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• Current and prospective Subsidiary Directors and Committee Members

• FINCA Subsidiary Management

• Other staff who are participants and customers of FINCA’s governance process

Training Objectives:Why are we providing the training?

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• Present FINCA’s updated global corporate governance standards

• FINCA Subsidiaries, their Boards and Subsidiary Management may set more rigorous governance standards, based on FINCA’s global governance standards.

• If there are discrepancies between FINCA’s standards and local law, local law should always be followed.

• Provide guidelines for the scope and authority of FINCA’s Subsidiary Boards, Committees, and Subsidiary Management

• Ensure consistency in how FINCA global strategies are achieved by Subsidiary Boards

Training Objectives:What will I learn today?

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At the end of this training, you will be able to:

• Recognize the responsibilities and duties of Directors and Committee Members

• Identify potential consequences or risks of poor governance

• Understand best practice approaches to corporate governance

• Understand FINCA’s corporate governance policies in practice

• Understand the escalation process for non-compliance with corporate governance policies

Introduction to Corporate Governance

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Today’s Governance Landscape

• Shifting governance landscape industry-wide, in response to the economic crisis and emerging regulations

• Shifting governance landscape at FINCA, in response to the evolving Subsidiary structure and changes in stakeholder standards (e.g. investors, lenders, regulators)

• Greater stakeholder focus and legal/regulatory requirements

• FINCA’s Double Bottom Line

o Compliance with financial performance requirements

o Challenge of staying focused on social goals

• Transformation

o Requires more formal governance structures and functions, previously executed informally

o Subject to regulation of banking authorities

o Must be prepared to respond to regulatory directives or inquiries properly and promptly

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Why is good governance important to FINCA?

Compliance with Governance Standards:

Updates to FINCA’s Subsidiary Corporate Governance Policy Manual

Review of FINCA’s Subsidiary Governance Policies

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Developed interview questions based on high risk and priority areas identified by FINCA

1:1 discussions with FI MT members and other key stakeholders, facilitated by PwC• Other key stakeholders: other Board Directors, Audit

Committee Chairs, Subsidiary Management Team Members (including CEOs, CFOs, COOs), Global Audit and Risk Mgmt

Summarized key points and recurring themes, to be addressed in Subsidiary corporate governance policy manual

Subsidiary Board RolesOversight & Independence

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Board

Independence

Conflicts of Interest

Board Eligibility,

Selection and Composition

Oversight

Authority & Decision-making

Information Flow &

Communication

Committee Structure &

Scope

Authority & Decision-Making

Authority & Decision-makingManagement Roles and Responsibilities

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Reporting and information to enable Board Governance

Management

Board / Board Committees

1st Line of Defense 2nd Line of Defense 3rd Line of Defense

Managem

ent C

ontrols

Internal C

ontrol M

easures

Risk ManagementFinance/Accounting

OperationsLegal

ComplianceHR

Internal Audit

External Stakeholders

External A

uditorOperational functions own all controls and activities to support FINCA’s mission. Board governance should focus on current capabilities and organizational structures that enable the mission and manage key risks associated with achieving that mission.

Practices and structures to enable objectives,

management, monitoring and controlling key risks

Monitor performance and management effectiveness

including escalating deviations and challenges

Independently assess and report on management effectiveness and

compliance with requirements

Authority & Decision-makingSubsidiary Board & Management Accountability

• Subsidiary Management is accountable to its Subsidiary Board

• Subsidiary Boards are accountable to Subsidiary Shareholders (or Members)

• Subsidiary Shareholder structure varies across Subsidiaries• The majority Shareholder of all Subsidiaries is either FMH or the

Coop; minority Shareholders may consist of other FINCA entities, FINCA employees, or third-party entities

• FINCA’s MT is responsible for providing oversight on behalf of Subsidiary Shareholders (i.e., legal responsibility via FMH/FI MSA)

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Authority & Decision-makingSubsidiary Board Oversight & Key Activities

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• Board books – Agendas, meeting topics, policies and procedures, board resolutions, management reporting requirements

• Bylaws – Approval of bylaws clearly defining the Subsidiary Board’s roles and responsibilities, and compliance with bylaws

• Approval of policies – Approval of key HQ and Subsidiary policies

• Board committee reports – Periodic reports of Board Committees overseeing specific activities or operations; Board may delegate oversight but this delegation must be clearly defined.

Board OversightProvide independent oversight to ensure management deploys structures and processes to enable its strategy and function as an effective and efficient steward for the funds entrusted to the Subsidiary.

Duty of Care - Informed & diligent business decisions; know the issues and risks associated with Subsidiary strategies

Duty to Monitor – Prevent harm to the Subsidiary and the parent company:• Oversight and validation of management

effectiveness; effective control systems• Awareness of broader and long-term trends

Key Board Activities

Subsidiaries should be headed by a Board that directs, governs and is in effective control of the Subsidiary.

• Oversee programs for managing risk and controls/compliance• Review & approve substantial transactions• Establish committees and appoint members • Ensure proper corporate & financial records are maintained• Approve CEO, COO, CFO and other positions per SGPM• Provide direction & oversight of Subsidiary strategy & progress• Oversee & evaluate Subsidiary operations• Approve operating and capital expense budgets, reserves, write-offs and

investment policies• Review & make recommendations to Shareholders regarding substantial

changes• Approve financial approval authorities & banking accounts/signatories

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Authority & Decision-makingSubsidiary Board Responsibilities: Oversee, not Manage

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Authority & Decision-Making Fulfilling Subsidiary Board Responsibilities

IndependenceEnsuring reporting is free from conflict and is independent from management bias

Key considerations:• Clear roles and responsibilities

– Defined charters/bylaws and responsibilities for the Board and Committees

• Conflicts of interest – Policies and processes to evaluate any potential conflict of interest (e.g. events where Board or management has a personal stake); formal disclosure

• Independent Board executive sessions – Board discussions without management present

• Periodic reporting – Review reporting to the public and stakeholders to ensure accuracy and appropriateness

Ensure Board reporting lines and access to management enable the Board to obtain an independent assessment of management

Key practices include:• Strategy setting – Review annual

plan and evaluate performance metrics

• Management access – Provide direct access to the Board for key management functions

• Internal and/or external audits – Obtain periodic independent assessments of controls and processes

• Stakeholder feedback – Provide ways to obtain feedback and validate performance

• Self evaluation – Evaluate capabilities to meet Board purpose

Oversight of Key RisksEnsure alignment of reporting and information provided to the Board enables oversight of key risks and keeps the Board informed about the status of the Subsidiary

Key risks include:• Financial – Financial stewardship,

efficiency, fraud prevention and accurate financial reporting

• Legal/Compliance – Tax compliance and legal compliance of the Subsidiary

• Ethics and Conduct – Timely investigation of reported concerns

• Reputation – Due diligence of partnerships with third parties

• Operational – Protection of donor and beneficiary information

Board Access

Detailed below are tactical practices that should be considered to achieve effective governance and to ensure that Boards can fulfill their responsibilities successfully.

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Subsidiary Management:

• Clarity of where responsibilities and authority start and end

• Sense as to whether level of board engagement is appropriate: oversight without micromanaging

• Evaluation of management performance

• Approaches to dealing with questions and requests for additional information

FINCA International:

• Boards are sole custodian of control as far as regulators are concerned

• However, FINCA as the majority shareholder has a place in setting overarching policy and strategy

• FINCA and the Subsidiary must work in close coordination and make sure Directors are on board with regard to strategic decisions

Authority & Decision-makingBoard Relationship with Subsidiary Management and FI

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Role Play #1

Discussion:

• What did you notice about this scenario? What immediately caught your attention?

• What do you think about the decision being raised by the Subsidiary’s CEO (Bob)? Which Board member do you agree with (Katie or Scott)?

• How would you suggest to resolve this disagreement?

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Authority & Decision-makingCommon Board & Management Disputes

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Who has authority to make decisions

How fast to grow and where Which products to offer Which client segments

to prioritize

How to price products What

technology/investments to make

What profit targets/allocation are

appropriate

What level of executive remuneration is

appropriate

How to finance the Subsidiary How to handle crisis

Authority & Decision-makingSubsidiary versus Parent: Strategy & Management

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FI MT

• Establish the global Mission & Vision• Establish global Strategic Plan• Approve Subsidiary Strategic & annual Operating Plans to ensure alignment with the global

Strategy• Approve extensions of Subsidiary activity into new business or products, or modifications to

existing products per the SGPM

Subsidiary Shareholders (i.e. FI MT)

• Establish the Mission & Vision of the Subsidiary• Approve extensions of Subsidiary activity into new business, product or geographical areas• Approve any acquisitions, mergers or transformations to a new legal status• Approve the dissolution and liquidation of all or any material part of the Subsidiary’s business

Subsidiary Board

• Approve the Subsidiary’s Strategic Plan• Approve the Subsidiary’s annual Operating Plan• Approve the establishment or closure of Branch Offices• Approve the hiring or removal of the Subsidiary CEO, CFO, COO per SGPM• Oversee Subsidiary operations, ensuring prudent management, sound planning, adequate

accounting and internal controls, compliance with local law• Review performance against Subsidiary strategy, priorities, ensuring needed remedial

actions are taken

Excerpts from FINCA’s Schedule of Matters Reserved

Information Flow & Communication

Information Flow and CommunicationRoles & Responsibilities

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• Develop and Execute Strategic and Operating Plan

• Regular reporting to the Board on performance and operating matters

• Raise issues, questions or red flags

• Provide independent oversight on strategy execution

• Take into account global strategy as well as Subsidiary goals

• Escalate issues to FI MT (generally Board Chair or RD, but not only) in the event of circumstances significantly impacting strategy execution at the Subsidiary level or could impact FINCA network

• Develop and Communicate Global Strategic Plan

• Monitor FINCA Network Performance

• Approve Subsidiary Strategic Plans

• Address issues significantly affecting subsidiary or network strategy

Subsidiary Management

Subsidiary Board

FI MT

Information Flow and CommunicationEscalating Governance Issues

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• The Board Chair (or Regional Director) is responsible for the escalation of corporate issues, as necessary, to the FINCA International Management Team.

• The Committee Chair is responsible for escalating corporate issues, as necessary, to the Board Chair and Subsidiary Board.

• Issues Board and Committee Chairs should escalate to the FI MT include:

Non-compliance with FINCA’s corporate governance standards Non-compliance with FINCA’s global policies and strategy Issues of ongoing concern, liquidity, fraud Subsidiary risks relating to significant regulatory issues, anti-bribery or

corruption

In the event that a Board Chair does not appropriately escalate a critical issue, Directors may inform FINCA’s Executive Office and Office of General Counsel.

Committee Structure & Scope

Governance through Committees

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• Workhorses of the Board

• Should meet before formal board meetings

• Report progress and findings to the Board in an oral report at Board meetings

• Provide committee meeting minutes to the Board (often inserted into Board package)

• If a Committee is seeking a decision from the Board, the Committee Chair should arrange adequate time on the agenda and circulate information to the Board in advance

• Committee Chairs should discuss issues for consideration with the Board Chair and CEO before taking to the full Board

FINCA’s Committee Structure

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• Required Committees: Audit and Asset Liability (ALCO), others required per local law• Members must be approved by the Executive Office and formally appointed by the

Board (and as required by local law)

• Other committees may be established as required by local law or recommended by the Board Chair; additional committees and their members must be approved by the Executive Office and formally appointed by the Board

• Boards must approve the Chair for each of its Committees

• Minutes must be taken at each Committee meeting

• Standard charters for each Committee must be developed by the Committee and approved by the Board

• Committees are not decision making bodies, unless designated by Committee Charter or Board resolution; role is to provide oversight and to make recommendations to the Board

Role Play #2

Discussion:

• What did you notice about this scenario? What immediately caught your attention?

• Were there examples of good governance? Bad governance?

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Audit Committee Oversight & Activities

• Provide oversight of Risks that may have material impact on Subsidiary financial performance

• Review and recommend External Auditor and Audit report for Board approval

• Maintain relationship with External Auditor

• Oversight of Legal and Regulatory Compliance

• Oversight of Internal Audit (plan, budget, reports, management responses)

• Oversight of Financial Controls and Reporting

• Partnership with Subsidiary Management Boards to promote effective Committee oversight

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Areas of Oversight Annually evaluate the independent auditor's

qualifications, performance, and independence

Consider and review the Subsidiary’s adequacy and effectiveness of internal controls

Review the Company’s financial statements

Review policies and procedures with respect to transactions between the Subsidiary and officers and directors, or Subsidiaries of officers or directors, or transactions that are not a normal part of the Subsidiary’s business, and review and approve related-party transactions

Consider and review any significant findings by the independent auditor or the Internal Audit representative during the year and management’s responses

Committee Activities

The Audit Committee should be primarily concerned with financial related issues and with reporting of financials.

Audit Committee Composition

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• Minimum of 3 committee members

• At least one member with financial & accounting experience (preferably from the Finance department) at a level commensurate with complexities/scope of operations

• Regional Internal Controls Manager is invited guest (policy TBD)

Audit CommitteeAuthority & Decision-Making

Delegation:• Boards have not formally assigned decision-making authority to the Audit

Committee.* The current FINCA Audit Committee Charter does not delegate decisions

to the Audit Committee. The Committee is responsible for providing recommendations only.

* E.g. per FINCA policy, the Audit Committee can provide recommendations but does not have the authority to approve write-offs.

Reporting to the Board:• Issues that arise with respect to the quality and integrity of the financial

statements• Compliance with legal or regulatory requirements • Performance and independence of the external auditor• Significant Committee activities, issues and related recommendations

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• Institute formal information sharing & synthesization between Audit Committees and Internal Audit to promote awareness and mitigation of risks

* from Sub ACs up to the FMH-FI Board (as appropriate) * across regions so we can learn from one another

• Before Subsidiary AC meetings, institute regular pre-meetings for the AC Chair, Regional Internal Audit Manager and the Subsidiary Internal Audit Manager

• Increase standardization of AC meetings across regions

• Consider creating a separate board committee delegated to reviewing and monitoring Subsidiary risk, if Boards have not already done so, to comply with local law

* The quality of risk conversations falls short of what an adequate risk discussion should look like.

* There is significant duplication in Board and Committee reporting and monitoring of risk.

Audit CommitteeRecommendations

Risk CommitteeOversight & Activities

* Execute risk management strategies as defined by FI

* Effectively managing risk to support FINCA’s mission:

– Building resilience

– Strengthening operations to be able to take on opportunities

Areas of Oversight

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Risk Appetite, Risk limits:

Oversee and monitor the maintenance of risks within the risk appetite

Enterprise Risk Management (ERM):

Oversee and monitor ERM to assure proper management of risk

Adequacy of the risk management function:

Monitor and assure the adequacy of resources for the function of risk management

Risk Compliance:

Review and monitor compliance with all policy requirements and its risk governance as pertaining to risk management, compliance, internal controls, and regulatory matters

Approve policies pertaining to compliance related to the above

Risk Reporting:

Assure adequate risk reporting at both FI and subsidiary levels, and for both the management teams and board of directors

Committee Activities

A Risk Committee should be responsible for oversight of risk management and all risks across the organization (i.e. strategic, market, credit, operational, regulatory, political, reputational, etc) – not just financial risk.

ALCOOversight & Activities

• Govern and monitor Financial Risk, including:

• Liquidity (Funding) Risk

• Interest Rate Risk

• Foreign Exchange Risk

• Review metrics related to Credit, Lending and Operational Risk that impact Financial Risk

• Monitor compliance with FINCA policy and lender covenants

• Evaluate and recommend capital structure decisions and manage capital adequacy

• Report material finds and submit recommendations for Board approval

Areas of Oversight

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Determine funding needs (based on discussion of funding pipeline provided by CMG)

Determine if communication with lenders needs to take place and agree on outline and accountability for communication with CMG representative

Complete the CMG funding request form, inclusive of:

CurrencyMaximum acceptable rates for any currency requestedDecisions on hedging activities

Decide on future asset allocation into USD or local currency assets based f/x position, hedging and asset allocation options

Prepare capitalization plan (for subsidiary Board/Shareholder), for term of at least 3 years

Determine counterparty limits and submit to subsidiary Board for approval

Assess quality of financial information provided by subsidiary finance department

Committee ActivitiesThe Audit Committee should be primarily concerned with financial related issues and with reporting of financials.

ALCO Composition

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• Standing members are designated via FINCA’s ALCO charter:

• Subsidiary CEO (Chair)

• Subsidiary CFO (Secretary)

• Hub Representative (prepares agenda and gathers materials for distribution)

• Capital Markets Group (CMG) representative

• Treasurer

• Must have a FI Operations representative (either the Regional Director, Deputy Regional Director or Global COO)

ALCOAuthority & Decision-making

Delegation:• Decisions on future asset allocation into USD or local currency, assets based

f/x position, hedging and asset allocation options and activities

Reporting to the Board:• Prepare capitalization plan for Subsidiary Board/Shareholders• Determine counterparty limits and submit to Subsidiary Board for approval• Report summary of risk issues and decisions taken at the Subsidiary ALCO in

the subsequent Subsidiary Board materials

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Board Eligibility, Selection, and Composition

Board EligibilityQualifications for FINCA Boards

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• Significant experience in functions relevant to the Subsidiary’s business, including: Finance, Risk/Compliance, Legal, Information Technology, Human Resources and/or Marketing

• Expertise in microfinance, strategic management and/or an understanding of the local business or regulatory environment

• Sufficient time and availability to devote to the affairs of the Subsidiary

• High standards of integrity, commitment, independence of thought, judgment

• For Latin America only: Proficient in Spanish

• For FI employees only (exceptions determined by Nominating Committee):o Full-time FINCA employee for 1 yearo Senior manager or Director, or a trusted advisor to senior management

Board SelectionNominating process

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• Consultation with Subsidiary Management and Boards on ongoing basis to identify desired skill sets or gaps given the Subsidiary strategy

• Consideration of the level of diversity among Directors – gender, ethnicity, and other perspectives that may be relevant

• Ongoing evaluation of capabilities and participation / attendance of current Directors to determine areas for improvement

• Mandatory re-nomination process for Board members every 3 years

Board CompositionSelection criteria

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• Majority of Directors must be FINCA staff unless prohibited by local law

• Maximum of 3 positions to be held, implemented by December 2015 (exceptions include Regional Directors and Committee Chairs)

• Independent External Directors will not be required, unless required by local law; otherwise will be based on risks and strategic opportunities

• Conflicts of interest to be removed to the extent possible, taking into consideration what is going to work best for FINCA

FINCA’s Challenges:

“Overboarding” is becoming an issue in some cases:

• How many boards can an individual effectively serve on?

• Does service on multiple boards develop experience and a wealth of knowledge that is brought to each board served, or will this be lost?

Role Play #3

Discussion:

• What did you notice about this scenario? What immediately caught your attention?

• Did Nadya act appropriately?

• What is her role as a Director?

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Conflicts of InterestProviding proper independence

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• Regional Director as Board Chair Recommended as Chair unless not permitted under local law

• Supervisor relationships Avoid intra-departmental supervisory relationships (by December

2015)

• Subsidiary Management as Directors Leverage knowledge and expertise by sitting on another region’s

Boards

Case Study: Introduction

• Subsidiary Management believes they are in an opportunistic market and seek to expand their program quickly and reach a maximum number of clients.

• Subsidiary Management believes they can accomplish this growth by expanding their products, but need the ability to respond quickly to the market place and offer new competitive products timely.

• Specifically, Subsidiary Management believes larger individual loans could fuel growth.

• Subsidiary Management looks to grow this segment to account for 25% of the overall loan portfolio in the Subsidiary.

• Subsidiary Management will reduce efforts of smaller loan review and approval, to allow for more diligence for the larger loan reviews.

Case StudySubsidiary Expansion

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How would you respond to this scenario as:• a Director on the Subsidiary Board?• the Shareholder – FINCA International?• the Subsidiary Management Team?

Case StudyStakeholder Perspectives

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BREAK

• Does Subsidiary Management need to consult with anyone prior to developing and rolling out new products/services? Who and Why?

• What questions should be asked of Subsidiary Management by the Subsidiary Board? Subsidiary Audit Committee? Subsidiary ALCO?

• What other considerations should be discussed or contemplated?

Case StudyDiscussion

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Directors’ Duties & Responsibilities

What are my duties as a Subsidiary Director?

Every Director has a duty to:

• Act within the powers conferred by the Subsidiary’s bylaws

• Promote the success of the company and benefit Shareholders

• Exercise independent judgement• Exercise reasonable care, skill and diligence• Avoid any conflicts of interest or duties• Declare any interest in a proposed or existing

transaction or arrangement

Directors are given wide powers to oversee Subsidiaries and are expected to exercise their judgment in doing so. Directors face potentially serious penalties if they breach

these duties.55

Other considerations:Directors should be aware of other laws and regulation that may apply to them:  

• Corporate Law• Banking Regulations • Disclosure and

transparency • Health and Safety• Employment Law• Data Protection

As a Director, you need to be comfortable that these risks are being managed.

Demonstrating Good GovernanceDirectors’ Responsibilities

Commitment to accountability, sometimes termed the fiduciary responsibility of Directors, must infuse the performance of individual board members. Board members should:

Know the mission, purpose, and goals of the Subsidiary and its policies and products

Understand the Subsidiary’s strengths and weaknesses

Prepare for, attend, and actively participate in board and committee meetings

Ask substantive questions and resolve not to remain silent

Review and understand the Subsidiary’s financial statements, KPIs and related information

Avoid making uninformed decisions

Challenge when necessary but support the majority view once a decision is made

Maintain confidentiality

Maintain objectivity, personal integrity, and ethical standards 56

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Staying InformedBoard Education

Directors must also stay abreast of the many new issues facing companies, while keeping up with their ongoing oversight responsibilities. FINCA’s Boards should address emerging trends and issues in the business environment as part of its ongoing discussions.

Directors must make informed decisions on behalf of FINCA by: Applying your knowledge Understanding your role

as a Director Acting within FINCA

policy Understanding the

issues on the agenda

*Expect to spend at least 1 day reading board materials and preparing, and 1 or 2 days for committee meetings and discussions in between board meetings.

Strategy: Consider megatrends, FINCA network, customer experience, and third parties

Emerging Technologies and Products: Tap new avenues for revenue and growth that fit into the FINCA overall Vision and Mission

Risk Oversight: Understand the top risks of the Subsidiary, Emerging Risks, and how management is identifying, assessing, managing, monitoring, and reporting on those risks.

The Talent Pipeline: Having the right skills and the experience for the future, including in the board room

Corporate Ethics and Compliance: Gauging the Compliance Atmosphere and Regulatory Changes

The Financials: Keying in on complex transactions, transformation, and performance

Stakeholder Communication: Ensuring appropriate timing and content for engaging other stakeholders on emerging discussions

Director Protection & Support

Director ProtectionDo I have Director & Officer Liability Insurance?

• Director protection, including D&O insurance, apply to business decisions by Directors, but not for breach of duties

• Every Director of a FINCA Subsidiary shall be entitled to indemnification from the relevant Subsidiary to the fullest extent allowable under applicable law

• D&O coverage is available should the relevant Subsidiary not be able or permitted by law to indemnify you

• FINCA’s network policy covers all FINCA Subsidiaries

• The policy is subject to: Applicable laws and regulations Certain deductibles, caps and other limitations

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Director SupportWho can I go to for help?

Executive Office and OGC

• Ensures communication and dissemination of global strategies and policies

• Manages approval process and suitable level of discussion

• Acts as an interface between HQ and Subsidiary Boards for intra-group discussions

• Provides technical input and guidance

• Prepares documentation as needed

• Circulates for signature and co-ordinates execution of resolutions

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Board Chair (or RD)

• Ensures transparency of activities and engagement between meetings

• Follows up on open items or issues raised by Directors

Corporate Secretary

• Provides governance advice to Directors as needed

How you as a Director can help

• Apply any direct knowledge you have of the business that may impact documents you sign

• Tell the Executive Office if you are resigning from a particular board or if your employment details change

• Identify and confirm any potential conflicts of interests, e.g. external directorships

• If you have any concerns, we can facilitate further discussion

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Board Organization & Management

Board Organization & ManagementRed Flags

Do meetings finish on time?

Are Directors rarely absent?

Are meetings thorough in discussion?

Are you presented with strong analysis and thorough reports?

Does the Board receive effective, concise presentations?

Are Directors sufficiently provided with needed information?

Are you presented with sufficient time before the Board meeting to prepare?

Are you only told what Management wants you to be told?

Is information kept confidential within the boardroom?

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Board OrganizationSubsidiary Bylaws

• Establishes the Corporate Governance rules of a Subsidiary (also to referred to as “Charter” or “Articles of Association”)

• Typically outlines the duty and structure of a Board: • Number of members• Committees of the Board• Frequency of meetings• Permission to meet telephonically• Board voting requirements• Quorum

• Acts as a governing document that establishes the day-to-day operating procedures for the Board

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Board OrganizationSubsidiary Board Books

A complete Board Book should include:

• Meeting agenda

• Minutes of previous meeting

• Reports/Minutes of Board Committees

• Management report

• Standard financial and operating reports, including key financial and social performance indicators

• Additional information related to issues for discussion during the meeting

*Management should strike a balance between communicating needed information and avoiding extraneous detail.

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Board ManagementEffective Board Meetings

• The Subsidiary CEO ensures that the board package is sent five working days before the meeting

• All Directors review the package before arriving at the meeting

• All Directors are present because the meeting date was fixed well in advance

• The agenda is clear. It balances routine oversight and treatment of special issues, and schedules time for an Executive Session

• Committee chairs give succinct, substantive reports

• The Chair, though conscious of time management, seeks to air all views, and assists the group in reaching consensus on decision issues.

• If new issues are raised, this is briefly discussed and follow-on steps are determined

• The Subsidiary CEO supplies information as needed to advance the discussion

• Discussions are candid, and almost all the Directors speak

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Board ManagementExecutive Sessions

The Board should reserve certain discussions and decisions for itself via Executive Sessions. Examples of issues to address in Executive Sessions include:

Management Performance Executive Selection and Compensation Raising of additional capital Borrowing decisions Appointment of external auditors and external legal counsel Payment of dividends; distribution of profits Transformation and intention to bring on new investors Major investments such as a new software/MIS system Mergers and acquisitions

The standard board agenda should designate a time for an executive session in order to create consistency around this practice.

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Board ManagementSetting the Agenda: Key Success Factors

• A balance between the reviews of past performance and discussion of forward-looking issues

• Ample time for debate on open-ended and strategic issues; adequacy of meeting time

• Not too much time on routine reporting or administrative matters

• Mix of presentation versus discussion

FINCA Challenges:

• Resolutions are placed at the bottom of the agenda so they are discussed in a rush. Results in rubber stamping boards.

• Agendas dive into the detail instead of pulling out the headlines and reviewing major issues at the beginning.

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Annual Board Meeting• Performance to date in implementing strategic plan• SWOT & key risk analysis• Annual plan• Audit plan, including management letter from

external auditor and meeting with external auditors• Annual budget• Management compensation• Evaluation of management information systems

(MIS)• Risk management parameters (credit limits,

borrowing limits, others)• Staff development plans, including succession

planning• Approval of financial statements• Board development plans (evaluation of existing

board, growing skill base, recruiting new members)

Board ManagementSample Meeting Agendas

Quarterly Board Meeting• Call to Order & Attendance

• Review of Meeting Agenda

• Review of BoD Resolutions & Previous Minutes

• Report on Action Items from Prior Meeting

• Major Matters Arising (i.e. Headlines)

• YTD Performance Overview (Snapshot)

• Review of Financial Performance, Operational

Performance, Social Performance

• Key Risk Items

• Committee Reports (Audit Committee, ALCO)

• Governance Items: BoD resolutions, new conflicts of

interest, training, reporting needs, etc.

• Other Business (may include country developments,

market environment, departmental reports,

transformation status, compliance, etc.)

• Q(X) Priorities & Work Plan

• Adjournment

SAMPLES

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Board ManagementAnnual Calendar to Drive the Agenda

Review and Approve:• Subsidiary Audit Process and Plan• Subsidiary Strategy • Subsidiary Budget• Subsidiary Operating Plan • Subsidiary Financial Statements

Conduct:• Compensation Review• Self-Evaluation • Shareholder meetings where needed

Annually

Review:• Report/updates from the Subsidiary

CEO• Report on performance and strategic

issues/developments• Q(X) Strategic Focus(specific to that

meeting)• Update on one key operational area

Conduct:• ALCO meetings, Audit Committee

meetings• Subsidiary Board of Directors

meetings

Quarterly

• Detail strategic priorities to be discussed at each of the quarterly meetings during the year (e.g. Q1 on Governance and Risk, Q2 on Personnel/Management, Q3 Audit & Strategic Planning, Q4 Annual Budget & Plan)

• Each Board meeting could also include an annual update on one key operational area (topic could be selected by the Board Chair or the Subsidiary CEO)

SAMPLE

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Board ManagementRoles & Responsibilities

Board Chair (or RD)•Provide leadership to the Board to oversee the Subsidiary

•Chair meetings of the Board after developing the agenda with the Subsidiary CEO

•Discuss key issues confronting the Subsidiary with the Subsidiary CEO

•Help guide key board actions such as those on Subsidiary strategy and priorities

•Mediate and resolve differences amongst the Board, preferably through discussion that ultimately results in consensus

•Ensure that the Board carries out its mandate

Subsidiary CEO

•Help the Board to govern more and to manage less (avoid board capture)

•Articulate the Subsidiary’s strategy and work with the Board, whose role is to review, modify as necessary, and approve the strategy

•Structure materials for the board meetings to focus on policy and strategy issues

•Deliver to the Board, and to its Committees as appropriate, standard financial and operational reports to monitor performance and progress

•Get material to the Board in a timely fashion

•Be available to answer questions before and during committee and board meetings

•Maintain ongoing contact with the Board Chair to keep the Chair informed of, and to consult about, major developments

Corporate Secretary

•Attend all meetings of the Subsidiary Board of Directors

•Distribute Board meeting agenda to the Directors along with any supplemental materials and reports in conjunction with the Subsidiary CEO

•Take meeting attendance as a part of the standing agenda and report attendance to the Executive Office on a quarterly basis

•Keep detailed minutes of the Board and distribute final, approved copy to Directors and OGC

•Keep other legal and statutory company records as required

•Ensures compliance with corporate governance policies, local law, and any follow up required of the Board

•Work with the Subsidiary CEO and Board Chair to ensure Board resolutions are carried out

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Wrap-up & Close

Concluding Thoughts

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Better governance will create:

• Clarity around the role, responsibilities and legal duties of Directors

• Efficient and collaborative decision-making, carried out at the right levels

• Strategic alignment of FI and Subsidiary Boards

• Control and visibility around legal delegations

• Smoother flow of information, greater transparency & awareness of issues

• Improved Board diversity

• Higher levels of Director engagement

Next Steps

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1. Obtain your feedback on today’s training and make adjustments

2. Provide further governance training at upcoming regional meetings, with participation from Subsidiary Management

3. Roll out updated Subsidiary Corporate Governance policy manual

4. Conduct financial literacy assessment to determine individual training needs

5. Create Subsidiary-specific orientation materials for new Directors with Subsidiary support

Appendix 1: Observations & RisksAuthority & Decision-Making

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• Purpose and accountability of Subsidiary Boards not always clearly defined / understood

• Decision making process centralized by FI Management

• Directors feel they have insufficient authority to make decisions at Subsidiary Board level

• Not everyone acknowledges that decision-making by FI Management required on certain group wide issues

• Inconsistent approach to decision-making - some Boards involved in management decisions; others have very little visibility of key issues

Observations

• Creation of rubber stamping Boards • Potential breaches of Subsidiary

Directors’ duties• Decisions may not be optimal or

strategically appropriate for all Subsidiaries

• Too much delegation could lead to inefficiencies and loss of span of control

Risks

• Some Subsidiary Boards receive incomplete or inaccurate information

• Board packs do not always have a consistent look and feel (although reporting is much more standardized)

• Some Subsidiaries act in silos with very little communication up to FI Management

• Board meeting pre-reads often provided to Directors at short notice

• Subsidiary Boards not always good at articulating the information they would like to see

• Board discussion does not address the big issues or very little discussion set for items to be voted on

Observations

• Potential breaches of Directors’ duties

• Directors exposed due to lack of knowledge of Subsidiary activity

• Ability of Directors to make informed and appropriate oversight decisions is impacted

Risks

Appendix 1: Observations & RisksInformation Flow & Communication

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• Insufficient clarity around the mandate of Committees and the interplay with Subsidiary Boards

• The role of Committees varies considerably between regions

• Committees sometimes make decisions and inform the Board

Observations

• Subsidiary Directors not always aware of all the issues and unable to make effective decisions

• Committees inadvertently become the decision-makers ahead of Subsidiary Boards

• Committees inadvertently take on the role of management

Risks

Appendix 1: Observations & RisksCommittee Structure & Scope

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• Boards’ perceived lack of independence due to intra-group and direct reporting relationships

• Perceived tendency for Subsidiaries to align with FI even when not in best interests

• Some Directors are able to exert greater influence over decision- making than others

• Subsidiary Management are sitting on each others’ Boards

Observations

• Potential breach of local laws if conflicts are not disclosed and authorized

• Inefficient use of key resources• Subsidiary Boards do not execute

their responsibilities• Quid pro quo in cases where

Subsidiary Management are Directors

Risks

Appendix 1: Observations & RisksConflicts of Interest

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• Centralized nominating process, with new members often announced before consultation with the Board

• Perception that Finance personnel are disproportionately over-represented

• Lack of clear guidelines around skills and attributes required of Directors

• Some Boards lack Directors with sufficient experience; others suffer from a lack of independence

Observations

•Subsidiary Board composition does not contain the necessary skill sets for that subsidiary•Individuals not suitably qualified to make the right decisions are appointed to Boards•Directors not comfortable exercising independent thought / judgement, or pressured into making decisions•Insufficient board diversity

Risks

Appendix 1: Observations & RisksBoard Eligibility, Selection & Composition

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Tier 1 - High Risk Unstable political environmentThreats of bribery and corruption Financially regulated High concentrationStrategic importance

Tier 2 - Medium Risk Complex transformation issuesBureaucratic legal system Tax residency considerations

Tier 3 - Low Risk Dormant Few assets Little/ no transactional activity

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Appendix 2: Sample Risk Tiering Approach

Appendix 2: ContinuedSample Risk Tiering Approach

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Risk profile

Governance High Medium Low

Company type Public Private Dormant

Minimum number of directors 6 4 3

Board quorum Any three directors Any two directors Any two directors

Independent director? At least 2 At least 1 Not required

Composition model

• CEO• CFO• COO• Head of Tax

• Country Head of Division • Country Finance Director • Country Business Representative

• Local Head of Division • Local Finance Director • Local Business Representative

Corporate Secretarial support General Counsel Company Secretary Deputy/ Assistant Secretary

Typical board meeting agenda items

• Regulatory requirements • Performance update • Operational risk review • Tax residency issues

• Operational performance • Sales activity • Transactional activity

• Annual compliance • Going concern status

Schedule of Matters reserved? Yes Yes No

Minimum number of board meetings 6 4 2

Live board meetings? Yes Yes No

Director training Annually Annually Once every two years

Committees Audit, Nomination, Remuneration Audit, Nomination None required

Appendix 2: ContinuedRisk Tiering: Typical legal entity characteristics

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Risk profile

High Medium Low

• Financially regulated • Operational activity • Strategically important • Significant asset base • Onerous legal obligations • Large global footprint • Tax residency risks • Consolidated accounting• External shareholders

• Non-operating • Holding company • Intra-group activity • Single ledger accounting• Internal shareholders • Few legal obligations

• Non-trading • No activity • Dormant accounts • Sole shareholder • Little/ no legal obligations