Corporate governance expectations of the board of directors in regulated firms

Corporate Governance and the Expectations of Regulated Firms and their Board of Directors

Over the last number of years, there has been an increased regulatory focus on the role and responsibilities of a regulated firm's Board of Directors (Board), specifically regarding culture, behaviour and risk management. This focus is expected to further intensify with the advent of the proposed Individual Accountability Framework (IAF) and the Senior Executive Accountability Regime (SEAR).

What are the expectations of Boards in the context of a regulatory environment with an obligation on the collective and individuals to take and evidence reasonable steps when discharging their responsibilities?

Outlined below, are areas a Board should demonstrate they are providing oversight of and challenge to management in their day to day responsibilities. 

The key areas that should feature on the agenda of Boards and their directors are:

Setting strategy

A crucial role of the Board is to set and approve the firm's strategy. Of particular importance is that the Board must ensure:

  • The strategy is aligned with its approved risk appetite, and
  • It oversees the strategy implementation by the firm's executive directors and senior management.

Regulatory expectation

The Board can demonstrate its strategy:

  • Considers the customer impact of its strategy;
  • Is aligned with its risk management framework and risk appetite. In practice, this also means that Boards can demonstrate that its strategy incorporates and addresses the firm's regulatory obligations;
  • Is monitored throughout the period for which the strategy is relevant and that it contributes to the firm making appropriate decisions that are aligned with a sustainable business model;
  • Has been allocated sufficient time and resources for development, discussion and implementation at a non-executive director, executive director and senior management level.

Culture

It is the responsibility of the Board to define and maintain oversight of its firm's culture. This includes ensuring it clearly defines the behaviours and values it expects of itself and all individuals representing the firm.

Regulatory expectation

It is expected that a firm's culture and behaviours will be unique to each firm. It must also clearly reflect the importance of a culture of risk awareness and ethical behaviours. Furthermore, it is expected that the Board, non-executives specifically will play an important role in overseeing and ensuring management embed the firm's defined culture and behaviours.

Risk management and risk appetite

As already referenced, a firm's strategy must be aligned with its risk appetite. As a result, an appropriately defined, tailored and measurable risk management framework and risk appetite are crucial to facilitate the Board to define a fit for the purpose strategy.

It is the responsibility of the Board to approve its risk appetite and utilise it to monitor and ensure management implement the strategy within the firm's risk appetite.

Regulatory expectation

It is expected that the Board can demonstrate that its risk appetite:

  • Has been understood, reviewed and challenged before its approval;
  • Is actively monitored by it and senior management to ensure the firm remains within its risk appetite.
  • Is utilised to identify potential and actual events that require the firm to take appropriate proactive and reactive actions to ensure:
    • The firm remains within or returns to its risk appetite;
    • Its risk management and control framework is fit for purpose; and
    • The firm escalates and reports appropriate issues internally (i.e. within Board and management committees) and externally (e.g. the Central Bank of Ireland).

Board composition

An indicator of an effective Board is one that has an appropriate balance of:

  • Executive directors, non-executive directors and independent non-executive directors; and
  • Experience, knowledge and capacity, that is aligned with the firm’s strategy and operations.

Such, that it can evidence it is capable of (and does so in practice) maintaining oversight of management in their day to day actions and responsibilities.

Regulatory expectation

Firms are expected to adhere to the CBI's industry-specific corporate governance codes and guidance.

Roles of executive and non-executive directors

Whilst executive directors have management responsibilities for which they are directly accountable to the Board. They do have additional responsibilities. It is also their responsibility to manage the day to day business and operations of the firm in the pursuit of achieving its strategy approved within its risk appetite.

The responsibilities of non-executive directors mean they must both support and oversee management's actions. Specifically, that management's actions are aligned with the achievement of the strategy.

Regulatory expectation

It is expected that executive and non-executive directors can demonstrate and evidence that they are taking reasonable steps in the discharging of their roles and responsibilities, as outlined in their terms of reference and individual role descriptions. 

Knowledge and experience of non-executive directors

Collectively non-executive directors need to have relevant knowledge and industry experience to understand the firm's business model and key risks. Furthermore, this experience and knowledge need to be sufficient to allow them constructively and critically challenge and oversee the actions of executive directors and senior management.

Regulatory expectation

It is expected that non-executive directors can demonstrate to internal and external stakeholders the level and type of challenge and oversight of management actions. Furthermore, it is expected that a firm's non-executive directors will have a diversity of experience and/or backgrounds accompanied by the capability to obtain third party expertise in areas where there may be a knowledge and experience gap.

Management information and transparency

A fundamental element required to allow the Board to perform its role and responsibilities is that management provides it with management information (MI) in a timely, accurate, and complete manner. Furthermore, this MI should be aligned with providing the Board with oversight of management actions to achieve the approved strategy and operate within the approved risk appetite.

Regulatory expectation

It is expected that the Chair of the Board, the Chair of Board sub-committees and other non-executive executive directors play an active role in defining and stipulating the type and frequency of MI the committees should receive. This is important, as it is this MI and reporting that Chairs of committees and non-executive directors will rely on when reviewing and challenging the actions of management and supporting them in demonstrating they are taking reasonable steps in the performance of their role and responsibilities.

From a management perspective, it is expected that they will exercise due skill, care, and diligence to prepare this MI, and they will also escalate relevant issues and/or topics to the Board that require its attention.

Succession planning  

Succession planning is a key tool to ensure that a Board continues to have the appropriate mixture of knowledge, industry experience and tenure to operate effectively.

Regulatory expectation

It is expected that at least annually, Boards will critically assess its effectiveness, alongside its directors' knowledge, experience and tenure, to ensure it remains fit for purpose. A key aspect of this annual exercise is to ensure a succession plan addresses the unexpected loss of key individuals and medium/longer-term replacements.  

How we help our clients and how we can help you

Mazars has a team of corporate governance and culture experts that regularly assist the Boards of financial services firms in the following areas:

Corporate Governance Consultancy: We regularly support established firms and firms seeking authorisation from the Central Bank of Ireland in designing and implementing a fit for purpose corporate governance target operating model.

Culture Consultancy and Advisory: We have significant experience in the performance of culture audits of Irish firms utilising our Mazars Global Culture assessment tool. In addition, we have worked with a number of firms in redefining and implementing their culture and behaviours.

Independent Board Effectiveness Reviews:

We frequently facilitate and perform board effectiveness reviews. It is considered good practice for firms to commission an independent board effectiveness review at least once every three years.

Corporate Governance Assurance Reviews: We assist firms regularly in assessing the design and operating effectiveness of a firm's corporate  governance and oversight arrangements

The first IAF awareness and readiness survey report

Mazars and the Compliance Institute surveyed the compliance institute members to measure the level of preparedness, views and expectations of financial services professionals and their preparedness for the impending for the IAF and SEAR.

Download the survey results

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