BSP tightens governance standards for banks, other financial institutions

The Bangko Sentral ng Pilipinas (BSP) has adopted tighter corporate governance standards for banks and non-banks aimed at promoting prudence and greater accountability.

The central bank’s Monetary Board (MB) has amended the corporate governance guidelines, raising the bar on the expectations from the board of directors and risk management systems of BSPsupervised financial institutions (BSFIs).

“The policy change, which is anchored on the fundamental principle that the tone of good governance should come from the top, sets out enhanced requirements on the membership composition of the board,” the BSP said.

The regulator said nonexecutive directors including independent directors should now comprise majority of the board of directors to make sure it is comprised of a collective mix of individuals who possess the expertise and competence to effectively manage the financial institution.

The BSP also increased the prescribed number of independent directors to one-third of the members of the board from 20 percent, or two directors, whichever is higher to promote an environment that fosters critical exchange of views and exercise of objective judgment.

On the other hand, consistent with the proportionality principle, the BSP retained the existing requirement for simple rural banks to have only one independent director.

Under the new guidelines, an independent director may only serve for a maximum cumulative term of nine years and that a non-executive director may concurrently serve as director in a maximum of five publicly listed companies.

Under the previous 5-2-5 rule, an independent director would have an initial term of five years, a cooling off period of two years, and could be reelected again for another five years.

The new policy also provides the positions of chairperson and chief executive officer should not be held by one person to promote independence of the board from management and to support an environment where the board can sufficiently challenge the actions of those involved in operations.

In exceptional cases when the chairperson and the CEO is held by one person as approved by the MB, a lead independent director should be appointed.

Overall, the BSP expects the members of the board to promote a culture of good governance by adopting policies and displaying practices that maintain a balance between rewarding effective and efficient performance and upholding consistent adherence with the values of the organization.

The duties and responsibilities of the board of directors were streamlined highlighting accountabilities in shaping the corporate culture and values; setting out objectives and strategies and oversight on management’s implementation thereof; appointing key members of senior management and control functions; overseeing the corporate governance framework; and adopting a robust risk governance framework.

The regulator also defined the supervisory expectations and minimum prudential requirements on risk governance and compliance functions.