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