1.1 Policy Statement. 1.2 Purpose

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1 SUBJECT: Corporate Governance Policy APPROVED BY: Board of Directors APPROVAL DATE: 25 July, 2016 EFFECTIVE DATE: 6 September, 2016 SCOPE: Butterfield Group POLICY SPONSOR: General Counsel and Group Chief Legal Officer NEXT REVIEW DATE: 6 September, ] Policy Statement It is the policy of Butterfield Group (the Group ) to exercise strong corporate governance practices that enhance shareholder value, safeguard depositors interests, ensure appropriate disclosure and transparency and promote the long-term growth and financial viability of the Group. The Board of Directors (the Company Board ) of the Bank of N.T. Butterfield & Son Limited (the Company ) will strive to maintain the success and continuity of the Group s business through ongoing monitoring to ensure that the Group s activities are conducted in a legal, responsible and ethical manner. 1.2 Purpose The Group is committed to following the rules of its regulators and supervisors in both form and substance, and dealing with Stakeholders in a fair and equitable manner. This Corporate Governance Policy (this Policy ) shall guide the actions of directors, management and employees of the Group. 1.3 Corporate Governance Responsibilities The responsibilities of the Company Board include, but are not limited to, the following: a. To fulfill its duty of care by acting on a fully informed basis, in good faith, with due diligence and in the best interest of the Group; b. To set the Group s tone at the top by promoting the Butterfield Code of Conduct and Ethics, maintaining high ethical standards in their dealings with Stakeholders and promoting the Group s culture of helping individuals, families and businesses protect, grow and optimize their financial well-being; c. To ensure the integrity of the Group s accounting and financial reporting systems, including independent audits, and that appropriate systems of control are in place;

2 d. To understand the Group s operational structure, products and services to ensure that an adequate and effective system of internal controls is established and maintained to mitigate risks and protect shareholder value; e. To oversee the process of disclosure and communications to ensure the timely and accurate disclosure of all material matters, including the Group s financial situation, performance, operating results, governance structures, material risks and policies relating to business ethics and supervisory reporting; f. To set and enforce lines of authority, clearly articulate responsibilities and establish accountability for management throughout the Group to ensure the integrity of reporting and monitoring of control systems; g. To challenge management to operate within set strategies in such matters as risk appetite; h. To provide guidance to the boards of directors of the subsidiaries of the Company (the Subsidiary Boards ) regarding risk appetite; i. To establish Company Board Committees ( Committees ) and nominate qualified Company Board Committee members; j. To select, compensate, and where necessary, replace key executives, and oversee succession planning to ensure the success and continuity of the Group s business; and k. To recognise the importance of continuing education for directors and to commit to providing such education through continuing educational programs, including reviewing the strategic plans, key policies and practices, financial statements, changes in relevant laws and regulations, and other materials on subjects that would assist directors in discharging their duties The responsibilities of the Chairpersons of the Company Board and Subsidiary Boards include, but are not limited to, the following: a. To manage the affairs of the Company Board or Subsidiary Boards, as applicable, including ensuring that the Company Board or Subsidiary Boards, as applicable, are organised properly, functioning effectively and meeting their obligations and responsibilities; and 2

3 1.3.3 The responsibilities of the Secretaries of the Company Board and Subsidiary Boards include, but are not limited to, the following: a. To distribute information at least five business days in advance, if practical, to permit adequate preparation regarding items requiring Board and/or Committee approval; and b. To archive and maintain in safe storage all Company and Subsidiary Board, Committee and committee of each Subsidiary Board ( Subsidiary Board Committees ) agendas, supporting documents, meeting minutes, and any other relevant documentation The responsibilities of the directors of the Subsidiary Boards include, but are not limited to, the following: a. To fulfill their duty of care by acting on a fully informed basis, in good faith, with due diligence and in the best interest of the Subsidiary and the Group; b. To set the Subsidiary s tone at the top by promoting the Butterfield Code of Conduct and Ethics and maintaining high ethical standards in their dealings with Stakeholders; c. To ensure the integrity of the Subsidiary s accounting and financial reporting systems, including independent audits, and that appropriate systems of control are in place; d. To understand the Subsidiary s operational structure, products and services to ensure that an adequate and effective system of internal controls is established and maintained to mitigate risks and protect shareholder value; e. To oversee the process of disclosure and communications to ensure the timely and accurate disclosure of all material matters including the Subsidiary s financial situation, performance, operating results, governance structures, material risks and policies relating to business ethics, and supervisory reporting; f. To set and enforce lines of authority, clearly articulate responsibilities and establish accountability for management in the Subsidiary to ensure the integrity of reporting and monitoring of control systems; 3

4 g. To challenge the Subsidiary management to operate within set strategies, including an established risk appetite; h. To establish Subsidiary Board Committees and nominate qualified Subsidiary Board Committee members to ensure a formal and transparent Subsidiary Board nomination and election process and to seek the guidance of the Company Board in these considerations; i. To select, compensate, and where necessary, replace key executives of the Subsidiary, and oversee succession planning to ensure the success and continuity of the Group s business; and j. To recognise the importance of continuing education for directors and to commit to providing such education through continuing educational programs including reviewing the strategic plans, key policies and practices, financial statements, changes in relevant laws and regulations, and other materials on subjects that would assist directors in discharging their duties The responsibilities of the committees of the Company and Subsidiary Boards include, but are not limited to, the following: a. To provide oversight and assessment of specialized functions, and advise the Company or Subsidiary Boards, as applicable The responsibilities of the Chairpersons of the Company and Subsidiary Board Committees include, but are not limited to, the following: a. To manage the affairs of the Company or Subsidiary Board Committees, as applicable, ensuring that the Committees are organised properly, functioning effectively and meeting their obligations and responsibilities to the Company or Subsidiary Board, as applicable; and b. To ensure the performance of, at a minimum, an annual review of the Company or Subsidiary Board Committee s Terms of References, as applicable The responsibilities of the executive committees of the Company Board and Subsidiary Boards (the Executive Committees ) include, but are not limited to, the following: 4

5 a. To oversee and assess the day-to-day management of business areas and advise the Chief Executive Officer ( CEO ) or Subsidiary Managing Director, as applicable; and b. To consider the occasional rotation of the chairmanship and membership of the committees The responsibilities of the Chairpersons of the Executive Committees include, but are not limited to, the following: a. To manage the affairs of the applicable Executive Committee, ensuring it is organised properly, functioning effectively and meeting its obligations and responsibilities; and b. To perform, at a minimum, an annual review of the applicable Executive Committee s Terms of Reference The responsibilities of the CEO include, but are not limited to, the following: a. To sustain an ethical culture of integrity and legal compliance; b. To clearly define the Group s organisational structure and managerial accountabilities; c. To approve all chairperson positions for the applicable Executive Committee; d. To approve final amendments of the applicable Executive Committee Terms of Reference; and e. To emphasize and communicate the importance of strong control functions within the Group and to promptly address and correct reported corporate governance control deficiencies The responsibilities of the Subsidiary Managing Directors of the Company include, but are not limited to, the following: a. To sustain an ethical culture of integrity and legal compliance; b. To clearly define the Subsidiary s organisational structure and managerial accountabilities; 5

6 c. To approve all chairperson positions for the respective Subsidiary Executive Committee; d. To approve final amendments of the respective Subsidiary s Executive Committee Terms of Reference; e. To emphasize and communicate the importance of strong control functions within the respective Subsidiary and to promptly address and correct reported corporate governance control deficiencies; and f. To keep the respective Subsidiary Board fully informed by providing it with appropriate and timely communication and internal reporting of the respective Subsidiary s performance The responsibilities of Executive Management of the Company include, but are not limited to, the following: a. To establish a management structure that promotes accountability, while remaining cognisant of its obligation to oversee the exercise of such delegated responsibility; and b. To keep the Company Board fully informed by providing it with appropriate and timely communications, and internal reporting of the Group s performance The responsibilities of the Policy Sponsor include, but are not limited to, the following: a. To implement policies and standards to provide appropriate oversight over the Group s corporate governance control systems The responsibilities of employees of the Group include, but are not limited to, the following: 1.4 Adherence a. To communicate any problems or control deficiencies in operations, instances of non-compliance with the Butterfield Code of Conduct and Ethics or Insider Trading Policy and illegal actions or unethical practices pursuant to the Whistleblower Policy. Employees at all levels are required to be familiar with, and adhere to, Group Policies, Standards, applicable Procedures and Guidelines. 6

7 1.5 Consequence of Policy and Standard Violations It is the responsibility of every employee, as a condition of employment, to comply with the published Policies of the Group. When appropriate, management may pursue disciplinary action in the event of violations of policies, up to and including dismissal. It is also the responsibility of every employee to report any suspected violations of Standards or Procedures established in support of the published Policies of the Group to his or her Division/Department Head (who may wish to consult with the Group General Counsel, the Subsidiary Head of Compliance, Internal Audit or Human Resources) and in accordance with the Whistleblower Policy. Reports may be oral, electronic (including anonymously) or written. 1.6 Amendment and Interpretation This Policy is in addition to and is not intended to change or interpret any law or regulation or the Company s governing documents (as amended from time to time) or any Committee Terms of Reference reviewed and approved by the Company Board. This Policy is subject to modification from time to time by the Company Board. 1.7 Reference Standard A Governance System Standard B Company Board of Directors Standard C Subsidiary Boards of Directors Standard D Company and Subsidiary Board Committees Standard E Executive Committees Standard F Sub-Committees 7

8 STANDARD A: GOVERNANCE SYSTEM A1.1 Background The Group s governance system provides a structure to establish Group objectives and monitor performance. The governance system is intended to foster effective oversight, transparency, sound governance and promote the Butterfield Code of Conduct and Ethics. A1.2 Standard A1.2.1 Oversight Achieving sound governance requires oversight by several distinct parties, including the Company Board, Subsidiary Boards and individuals not involved in the day-today management and supervision of business areas and internal control functions. This allocation of oversight duties and responsibilities ensures that there are no gaps in reporting lines and that an effective level of management control is extended to all levels of the Group and its various Subsidiaries. A1.2.2 Key Personnel Key personnel must be fit and proper for their jobs. In selecting key personnel, the Company Board and Subsidiary Boards must evaluate possible candidates as to expertise, qualification and integrity, and any potential for conflicts of interest. Aspects to focus on include skills and experience in relevant financial operations and compliance and commensurate with the intended activities, and no record of criminal activities or adverse regulatory judgments making them unfit to occupy important positions. All decisions on key personnel must be taken in accordance with the Butterfield Code of Conduct and Ethics. Management contributes to the Group s corporate governance by overseeing line managers in specific business areas and activities consistent with established policies, standards and procedures. Management must be willing and able to exercise effective control over the activities of employees. A1.2.3 Butterfield Code of Conduct and Ethics The Butterfield Code of Conduct and Ethics serves as an organisation-wide standard for the conduct of all employees, setting the framework for the exercise of judgment in dealing with varying and often conflicting constituencies. In addition to providing an overall framework for ethical conduct that goes beyond compliance with the law, 8

9 the Butterfield Code of Conduct and Ethics sets clear limits on the pursuit of private interests. A1.2.4 Internal and External Control Functions The Company Board, Subsidiary Boards, management, and Policy Sponsors shall effectively utilise the work conducted by the internal audit function, external auditors and other internal control functions. These functions, including independent, competent and qualified auditors, as well as risk management, compliance, legal and other related functions, achieve a number of important objectives across all levels of the Group. These functions ensure the sound operation and performance of the Group. The Group has established appropriate control functions, including systems for internal and external audit, risk management, financial and operational control and legal. Specific controls of critical functions and business areas are defined within the Group Policy Management Framework, and in documented procedure manuals. Control functions are not merely policies or procedures exclusively performed at a certain point in time, but rather, functions continually operating at all levels within the Group. Although the Company Board, Subsidiary Boards and Policy Sponsors are responsible for establishing an effective control culture, and overseeing and monitoring its effectiveness on an ongoing basis, each employee within the Group must be a willing, committed and active participant of these processes. The Company and Subsidiary Boards shall require the timely correction of problems identified by internal and external control functions of management and Policy Sponsors. A1.2.5 Reporting Illegal or Unethical Practices The Group has established confidential procedures and safe-harbors for reporting suspected or known illegal practices and unethical behavior, as set forth in the Whistleblower Policy. Employees should closely examine such policy and report concerns pursuant to its terms. A1.2.6 Executive Compensation The Company Board shall ensure that compensation policies and practices are consistent with the Group s corporate culture, long-term objectives and strategy, and control environment. A1.2.7 Know Your Structure 9

10 Disclosure of the Group s structure makes its objectives and nature transparent. Organisational charts reflecting all majority-owned entities, Subsidiary Boards and business lines must be documented and kept current. Documented organisational charts must also exist for Company Board, Subsidiary Board and Executive Committees. Appropriate levels of internal reporting and communication to the Company Board and Subsidiary Boards, and vice versa, must exist in respect to all material risk and other issues that may affect the Group. A1.2.8 Company Board Committee Composition Board Committees are vital elements of the governance system. As such, Board Committee members must be fit and proper for their roles, and capable of exercising judgment independent of the views of management or inappropriate outside interests. To promote adequate oversight, Board Committee composition must include a majority of members not involved in the day-to-day management of business areas, including a sufficient number of qualified independent and non-executive members, to mitigate potential conflicts of interest and provide added assurance to shareholders and other Stakeholders. Additionally, occasional rotation of Board Committee membership and chairmanship should be considered. A1.2.9 Director Orientation and Continuing Education The Company Board shall establish, or identify and provide access to, appropriate orientation programs, sessions or materials for newly elected directors for their benefit either prior to or within a reasonable period of time after their nomination or election as directors. The orientation will include presentations by senior management to familiarise new directors with the Group s strategic plans, its significant financial, accounting and risk management issues, its compliance programs, the Butterfield Code of Conduct and Ethics, its principal officers, and its independent auditors. In addition, new members to a Committee will be provided information relevant to the Committee and its roles and responsibilities. All continuing directors are also invited to attend any such orientation programs. The Company Board believes it is appropriate for directors, at their discretion, to have access to educational programs related to their duties as directors on an ongoing basis to enable them to better perform their duties and to recognise and deal appropriately with issues that arise. The Company will provide appropriate funding for these programs. In addition, directors will receive periodic reviews of the Group s business and may visit Group facilities as part of their ongoing review of the Company and its operations. 10

11 A CEO Evaluation and Management Succession The Company Board, through the Compensation & Human Resources Committee, will conduct an annual review of the performance of the CEO to ensure that the CEO is providing the best leadership for the Company in the long- and short-term. If the CEO serves as the Chairman of the Company Board, then a Lead Outside Director may be appointed to preside over the Company Board or Committee thereof when it meets for this purpose. The Company Board will conduct an annual review of succession planning and evaluate and nominate potential successors to the CEO. The CEO should at all times make available his or her recommendations and evaluations of potential successors, along with a review of any development plans recommended for such individuals. The Corporate Governance Committee will have the responsibilities of the Company Board under this paragraph and should make an annual report to the Company Board on succession planning and work with the entire Company Board to evaluate and nominate potential successors to the CEO. In addition, the Company Board, with input from the CEO and other members of management as appropriate, will review annually the Company s program for management development and succession planning for executive officers other than the CEO. The Company Board will also review succession candidates for executive officers other than the CEO or other senior managers as it deems appropriate. A Director Access to Officers and Employees Directors have full and free access to officers and employees of the Company. Any meetings or contacts that a director wishes to initiate may be arranged through the CEO or the Secretary or directly by the director. The directors will use their judgment to ensure that any such contact is not disruptive to the business operations of the Company and does not inappropriately disclose any confidential or sensitive information in the possession of the director and will copy, to the extent not inappropriate, the CEO on any written communications between a director and an officer or employee of the Company. 11

12 B1.1 Background STANDARD B: COMPANY BOARD OF DIRECTORS The Company Board is ultimately responsible for providing appropriate oversight to ensure the financial soundness of the Group and the adequacy of the Group s corporate governance system. In this capacity, the Company Board must set the general strategy and policies of the Group and its Subsidiaries, and determine what governance structure best contributes to an effective chain of oversight. In exercising adequate oversight over the Group s activities, the Company Board must be fully aware of material risks and issues affecting its entities, at all times. B1.2 Standard B1.2.1 Administration The Company Board shall have a minimum of six (6) meetings during the course of the fiscal year (four (4) quarterly meetings, one (1) strategic planning meeting, and one (1) budget meeting). The quorum necessary for the transaction of business of the Company Board shall be five (5) individuals, a majority of whom shall be independent, non-executive directors. The Secretary of the Company Board shall record meeting attendance for individual directors, to assess performance of their responsibilities. Additionally, the Secretary of the Company Board shall keep written minutes for all meetings and have minutes formally reviewed, approved and retained as permanent records. New directors must undergo orientation aimed at familiarising members with the Group s business, industry and corporate governance practices, including internal policies and significant regulatory requirements. Directors will have ongoing access to the advice and services of the Secretary of the Company Board, who is responsible for ensuring that the Company Board procedures are followed and that applicable rules and regulations are observed. To further their duties, directors may take independent, professional advice if necessary, at the Group s expense. The intention to seek independent advice must be communicated in advance to the Company Board Secretary. B1.2.2 Compensation It is recommended that a meaningful portion of non-executive directors compensation is in the form of common shares of the Company for as long as they remain on the Company Board, to ensure the Company Board pursues objectives that are in the best interest of the Group and its shareholders. Company Board compensation guidelines that align compensation incentives with the long-term 12

13 interests of shareholders must be documented, maintained and approved by the Company Board. B1.2.3 Company Board Composition The Company Board must reflect an appropriate composition of directors who are capable of exercising judgment independent of management influence or inappropriate external interests. The number of directors that constitutes the Company Board will be fixed from time to time by a resolution adopted by the Company Board in conformity with the Company s Amended & Restated Byelaws. The Corporate Governance Committee of the Company Board shall periodically review the size of the Company Board to ensure that the current number of directors most effectively supports the Company. Independence and objectivity are enhanced by including a majority of qualified independent non-executive directors capable of providing perspectives from other businesses and insight into local conditions, and serving as a significant source of management experience. Directors shall be appointed at each Annual General Meeting to hold office until the next Annual General Meeting or until a successor is elected. The Company Board has a key role in identifying potential directors with the appropriate knowledge, competencies and experience to complement existing Company Board skills. In selecting directors, the Company Board must evaluate possible candidates as to expertise, qualification and integrity, and any potential for conflicts of interest that might affect their judgment, including membership of other boards of directors. The nomination process benefits from full disclosure of the experience and background of candidates. In identifying potential Company Board directors, the Company Board, through its Corporate Governance Committee has the responsibility to ensure that all policies, practices, guidelines and/or procedures do not permit any form of discrimination. The Company Board, through its Corporate Governance Committee also has the responsibility to ensure that all decisions with regard to recruitment, appointment, retention, and retirement of Company Board members are made without regard to race, religious beliefs, gender, sexual orientation, marital status, ancestry or place of origin. To further promote independence of the Company Board, a clear division of responsibility should exist in the separation of the Company Board Chairman and the CEO roles. 13

14 B1.2.4 Director Independence The Company Board should include an appropriate combination of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals may dominate the Company Board s decision making. The majority of the Company Board shall be composed of nonexecutive directors determined by the Company Board to be independent. The Company Board should identify in the annual report each non-executive director it considers to be independent, and any framework under which this assessment has been conducted. The Company Board should determine whether the director is independent in character and judgment and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director s judgment. The Company Board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director: a. has been employed by the Group within the last five years; b. has, or has had within the last three years, a material relationship with the Company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the Group; c. has received or receives compensation from the Group, other than directors fees, participates in the Group s share option or a performancerelated pay scheme, or is a member of the Group s pension scheme; d. has close family ties with any of the Group s advisers, directors or senior employees; e. holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; or f. represents a significant shareholder, which shall include a holder of 10% or more of the outstanding voting share capital of the Company. A material relationship is a relationship that could, in the view of the Company Board, be reasonably expected to interfere with the exercise of a director s independent judgment and includes an indirect material relationship. Directors must disclose whether they, directly, indirectly or on behalf of third parties, have a material relationship or interest in any transaction or matter directly affecting the Group that could affect their judgment. Disclosure to the Company Board may be 14

15 made through advanced notice or at a scheduled Company Board meeting. Where a material relationship or interest is declared, the involved director must not be involved in any decision involving such transaction or matter. A director will be deemed not to be independent if the Company Board finds that a director has undisclosed material business arrangements with the Group which could, in the Company Board s view, jeopardize the director s judgment. Each of the principal Board Committees must contain a majority of independent, nonexecutive directors, and the Audit Committee must be composed of solely independent, non-executive directors. The Company Board s Corporate Governance Committee will have oversight responsibility on behalf of the Company Board for the application of this Standard B, including supervision of the annual self-assessment process. B1.2.5 Requisite Approvals and Notifications Requisite approval from, and notification to, the Company Board strengthens the governance system and allows the Company Board to retain full and effective control of the Group. No request or notification shall go to the Company Board except with prior notification to the Secretary of the Company Board. There must be an established process to document matters requiring prior approval from, and notification to, the Company Board. This schedule of matters must be periodically reviewed by the Company Board and made available upon request to the Secretary of the Company Board. The Company Board must approve various matters, including but not limited to: Board and Management a. Any appointment to or removal from the Company Board; b. Appointment or removal of the CEO, the Secretary of the Company Board or Executive Vice Presidents and above; c. Board Committees composition and Terms of Reference; d. Fees of non-executive directors; 15

16 Secretarial a. Calling shareholders meetings; b. Delegating the Company Board s powers (by resolution or power of attorney); c. Allotting, repurchasing for cancellation or otherwise and/or forfeiting securities of the Company; d. Vetting and seeking approval from the Chairman of the Company Board for scheduling of matters outside the normal course of business; Business Control a. The adoption of the Company Code of Conduct and Ethics and Insider Trading Policy; b. The adoption of this Policy; c. A framework for internal control functions and financial and operational control systems; d. Risk policy and Capital Assessment and Risk Profile ( CARP ) procedures, including risk appetite of the Group; Finance a. Annual budgets; b. Capital-raising actions and activities; c. Annual and quarterly accounts and accounting policies; d. Approval, and recommendation for approval to shareholders, of the appointment or removal of auditors; e. Prospectuses, offer documents and listing agreements; f. Dividend policy, including setting of record dates; 16

17 Operations a. Strategic plans and objectives; b. Major plans of action; c. Adoption of profit plans; d. Adoption of redundancy policies; e. Adoption of remuneration policies; f. Rules for employee retirement plans and retirement of members of the Company Board; g. Formations, acquisitions and divestitures of subsidiaries, associated companies or branches in excess of 5% of the Group s assets; h. Major capital expenditures in connection with the acquisition of fixed assets in excess of 5% of the Group s net assets; i. Investments outside the ordinary activities of the Group in excess of 5% of the Group s net assets; and j. Transaction(s) with a loss exposure in excess of 25% of the Group's available capital resources, provided, however, that the requisite approval for this item may be given pursuant to a valid resolution of the Risk Policy & Compliance Committee, provided, further, such approval is reported to the Company Board at its next regularly scheduled meeting). The Company Board must be notified in advance of the following matters: Board and Management a. Appointment or removal of Senior Vice Presidents, Vice Presidents, or those with equivalent rank in the Subsidiaries; b. Changes to management structure, lines of accountability and titles of members of the Group s senior management; Secretarial 17

18 a. Disclosure of directors conflict of interests; b. Major litigation involving the Company; Operations a. Significant changes in policies in respect of insurance, corporate security, treasury, credit and other aspects of risk management; and b. All situations in which an executive officer requests the appeal of a decision of the Credit (Executive) Committee. B1.2.6 Risk Policy, Appetite and Profile The Group s risk policy, appetite and profile are closely related to corporate governance and strategy because they specify the types and degrees of risk that the Group is willing to accept in pursuit of its goals. The Company Board must, on an annual basis, formally review and endorse the key components of the CARP procedures. The Company Board has an ongoing responsibility for ensuring and demonstrating to supervisors and regulators that the risk policy, the level, distribution and composition of capital, the control framework and the Group s strategic planning are appropriately integrated and consistent with the established and documented risk appetite and profile. The Company Board must develop a Risk Appetite Statement that encapsulates the consideration of various risk scenarios, establishing tolerance or target levels for these risks. To embed the desired aggregate risk profile within the Group, risk appetite must seamlessly transfer from Head Office to all Subsidiaries and from Subsidiaries to all business lines. Where the Group outsources key functions, the accountability of directors and management is not delegated to the entities providing the outsourced services, but remains with directors and management. 18

19 C1.1 Background STANDARD C: SUBSIDIARY BOARDS OF DIRECTORS Each Subsidiary Board, under the guidance of the Company Board, is responsible for providing appropriate oversight of their entity s business. The Subsidiary Boards have overall responsibility for the proper stewardship of the Subsidiary in all its undertakings. The Subsidiary Boards shall meet at regular intervals throughout the year to discharge their responsibilities for all important aspects of the Subsidiary s affairs. In any instance where a conflict arises between this Standard C and applicable law, the latter will take precedence. C1.2 Standards C1.2.1 Administration Subsidiary Boards shall establish a formal meeting schedule and record meeting attendance of individual directors to assess performance of their responsibilities. Additionally, Subsidiary Boards will keep written minutes for all meetings and have minutes formally reviewed, approved and retained as permanent records. New directors must undergo orientation aimed at familiarising themselves with the applicable Subsidiary s and the Group s business, industry and corporate governance practices, including internal policies and significant legal and regulatory requirements. C1.2.2 Compensation It is recommended that a meaningful portion of non-executive directors compensation be in the form of common shares of the Company for as long as such directors remain on the Subsidiary Board, to ensure the Subsidiary Board pursues objectives that are in the best interest of the Subsidiary and its shareholders. C1.2.3 Subsidiary Board Composition Subsidiary Boards shall have an appropriate composition of directors who are capable of exercising judgment independent of management influence or inappropriate external interests. Subsidiary Board composition will be defined by local legislation and must include a minimum and maximum number of directors. Independence and objectivity are enhanced by including a sufficient number of qualified non-executive or external independent directors capable of providing perspectives from other businesses and insight into local conditions, and serving as a significant source of management experience. 19

20 To promote Subsidiary Board independence, a clear division of responsibility must exist in the separation of the Subsidiary Board Chairman and Managing Director roles. Directors shall be appointed for specific terms and be re-appointed, approved or terminated, as the case may be, as directed by jurisdictional legislation. Subsidiary Boards have a key role in identifying potential directors with the appropriate knowledge, competencies and experience to complement existing Subsidiary Board skills. In selecting directors, the Subsidiary Board must evaluate possible candidates as to expertise, qualification and integrity, and any potential for conflicts of interest that might affect their judgment, including membership of other boards. The nomination process benefits from full disclosure of the experience and background of candidates. C1.2.4 Subsidiary Director Independence Following in the Company Board s example, Subsidiary Boards should include an appropriate combination of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals may dominate the Subsidiary Board s decision making. The majority of the Subsidiary Board shall be composed of non-executive directors determined by the Subsidiary Board to be independent. The Subsidiary Board should identify each non-executive director it considers to be independent, and any framework under which this assessment has been conducted. The Subsidiary Board should determine whether the director is independent in character and judgment and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director s judgment. The Subsidiary Board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director: a. has been employed by the Group within the last five years; b. has, or has had within the last three years, a material relationship with the Company or Subsidiary either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the Group; c. has received or receives compensation from the Group, other than directors fees, participates in the Group s share option or a performancerelated pay scheme, or is a member of the Group s pension scheme; 20

21 d. has close family ties with any of the Group s advisers, directors or senior employees; e. holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; or f. represents a significant shareholder. A material relationship is a relationship that could, in the view of the Subsidiary Board, be reasonably expected to interfere with the exercise of a director s independent judgment and includes an indirect material relationship. Each of the principal Subsidiary Board Committees must contain a majority of independent, non-executive directors. The Subsidiary Board s Corporate Governance Committee will have oversight responsibility on behalf of the Subsidiary Board for the application of this Standard C, including supervision of the annual self-assessment process. C1.2.5 Risk Policy, Appetite and Profile To support the Group s risk policy, appetite and profile, Subsidiary Boards must, on an annual basis, formally review and endorse the key components of all locally produced CARP procedures, Internal Capital Adequacy Assessment Process ( ICAAP ), or equivalent. Subsidiary Boards have an ongoing responsibility for ensuring and demonstrating to supervisors and regulators that the risk policy, the level, distribution and composition of capital, the control framework and the Subsidiary s strategic planning are appropriately integrated and consistent with the established and documented risk appetite and profile. Subsidiary Boards must develop a Risk Appetite Statement that encapsulates the consideration of various risk scenarios, establishing tolerance or target levels for these risks. A consolidated version of each Subsidiary s CARP/ICAAP procedures are produced by the Group and made available upon request to the Bermuda Monetary Authority, the Group s home regulator. C1.2.6 Code of Best Practice Subsidiary Boards and their individual members strengthen the Group s governance system by: a. Applying standards of professional conduct and high corporate values for itself, management and employees through the Butterfield Code of Conduct and Ethics; 21

22 b. Communicating corporate values throughout the organisation to guide the Subsidiary s ongoing activities, on a consistent basis; c. Structuring the Subsidiary Board in a way, including size, that promotes efficiency and real strategic discussion; d. Possessing adequate collective knowledge of material financial activities being pursued; e. Committing sufficient time and energy to fulfill their responsibilities; f. Finding the right level of involvement in strategic planning and implementation, and avoiding participation in day-to-day management; g. Documenting a formal schedule of matters specifically reserved for their approval or requiring their prior notification; h. Documenting procedures for directors to, in furthering their duties, take independent, professional advice if necessary, at the Subsidiary s expense; i. Documenting procedures for directors to have ongoing access to the advice and services of the Secretary of the Subsidiary Board, who is responsible for ensuring that the Subsidiary Board procedures are followed and that applicable rules and regulations are observed; j. Promoting the Subsidiary s sustainability and soundness by understanding and complying with governing regulatory environments, and ensuring an effective relationship with regulators is maintained; k. Avoiding conflicts of interest, or the appearance of conflicts, in their activities with, and commitments to, other organisations; l. Agreeing in advance contingency arrangements to adopt when conflicts of interest arise which would make them incapable of properly fulfilling their duties; m. Completing a formal annual self-assessment of the Subsidiary Board s performance relative to this Policy, as well as performance reviews of individual directors, the Subsidiary Board Chairman, and Subsidiary Board Committees based on criteria that includes clearly defined strategic and personal goals and objectives; 22

23 n. Periodically assessing the effectiveness of the governance system to identify weaknesses and implement corrective action; o. Aligning compensation for Subsidiary Board Committee members and key executives to the Subsidiary s long-term business strategy to avoid excessive risk-taking and overdependence on short-term performance; p. Exercising due diligence in the oversight of external auditors; and q. Setting clear limits for the Subsidiary Board and key executives on the pursuit of private interests that might conflict with their terms of services and duties to the Group and the Subsidiary. 23

24 STANDARD D: COMPANY AND SUBSIDIARY BOARD COMMITTEES D1.1 Background The Company Board and Subsidiary Boards have authority to establish specialized committees to advise them. This Standard provides the guidelines under which such committees shall operate. D1.2 Standard D1.2.1 Specialized Committees Specialized committees of the Company Board and Subsidiary Boards focus on specific functions and provide meaningful leadership in specific areas. Company and Subsidiary Boards should identify key areas of supervision and establish specialized committees where appropriate to provide oversight, evaluate, recommend and/or approve those matters requiring Company Board or Subsidiary Board attention. Minimum key areas of Company Board and Subsidiary Board involvement are: a. Corporate governance; b. Internal and external audit functions; c. Compliance; d. Market, credit and operational risk; and e. Non-executive directors and, in the case of the Company Board, Executive Management s compensation. D1.2.2 Administration When specialized committees are created, their Terms of Reference, composition and working procedures must be well-defined and disclosed by the appropriate board to establish their purpose and duties. Organisational charts must be documented to display the committee s relationship to such board and facilitate assessment of effective committee structures across the Group. Committees must promote efficiency and real strategic discussion by having an adequate number and appropriate composition of members, and meeting regularly based on the documented schedule, but, at a minimum, quarterly. Written minutes must be maintained for all committee meetings, and formally reviewed, approved, and retained as permanent records. 24

25 D1.2.3 Terms of Reference Terms of Reference clarify Company Board and Subsidiary Board requirements and expectations of when and how committee responsibilities will be met. All committees require standardized, documented Terms of Reference that include the following standard sections: a. Name: identifies the committee name and its general objective. b. Mandate: establishes the committee s authoritative instructions and responsibilities. c. Members Quorum and Alternates: documents the list of members, including independent and non-executive member requirements, the number of attendees that comprise a quorum and whether alternates are allowed. d. Proceedings: outlines procedures for the regularity of meetings, recording of minutes and regular reviews of the Terms of Reference. e. Principal Duties: establishes all decision-making and approval authority. 25

26 STANDARD E: EXECUTIVE COMMITTEES E1.1 Background Executive Committees are established by the CEO or Subsidiary Managing Director to oversee the day-to-day management of business areas, ensure sound governance and the timely review of internal reporting. The Executive Committee established by the CEO represents the central decision-making and policymaking body of the Company. This Standard provides the guidelines under which the Executive Committees shall operate. E1.2 Standard E1.2.1 Administration When Executive Committees are created, their mandate, composition and working procedures must be well-defined and disclosed by the CEO or Subsidiary Managing Director to establish its purpose and duties. Organisational charts must be documented to display the committee s relationship to management and the Company Board and Subsidiary Board, as applicable, and facilitate assessment of effective Executive Committee structures across the Group. Executive Committees must promote efficiency by having an adequate number and appropriate composition of members, and meeting regularly based on the documented schedule, but at a minimum, monthly. Written minutes must be maintained for all committee meetings, and formally reviewed, approved, and retained as permanent records by each committee Secretary. E1.2.2 Terms of Reference Terms of Reference clarify requirements and expectations of when and how committee responsibilities will be met. All Executive Committees require standardized, documented Terms of Reference that include the following standard sections: a. Name: identifies the Executive Committee name and its general objective. b. Mandate: establishes the Executive Committee s authoritative instructions and responsibilities. 26

27 c. Members Quorum and Alternates: documents the list of members, the number of attendees that comprise a quorum and whether alternates are allowed. d. Proceedings: outlines procedures for the regularity of meetings, recording of minutes and regular reviews of the Terms of Reference. e. Principal Duties: establishes all decision-making and approval authority. f. Member List: states the members and the position each hold (for example, Chair). 27

28 STANDARD F: SUB-COMMITTEES F1.1 Background A committee of the Company Board or Subsidiary Board or the Executive Committee may delegate authority to a sub-committee to achieve certain objectives if provided for in the respective committee s Terms of Reference; however, the committee or any Executive Committee shall retain all responsibility for the sub-committee s mission and objectives and for the sub-committee s delegated work. No decision of a subcommittee shall be effective upon the Group unless it has been formally reviewed and approved by the committee that sponsored the sub-committee, and such committee has reported the sub-committee s work and decisions to the Company Board or Subsidiary Board, as applicable, or management as appropriate and has received approval. F1.2 Standard F1.2.1 Sub-Committee Administration a. Sub-committees are subject to the requirements under the Terms of Reference of the committee sponsoring the sub-committee. If a subcommittee is determined to have or need special delegated authority and responsibilities, such sub-committee should have its own terms of reference apart from the sponsoring committee s Terms of Reference. However, in no case shall the sub-committee s terms of reference exceed or otherwise violate the jurisdiction or authority of the sponsoring committee. b. Sub-committees must promote efficiency by having an adequate number and appropriate composition of members, and meet regularly based on a documented schedule. Written minutes must be maintained for all subcommittee meetings, and formally reviewed, approved, and retained as permanent records by each sub-committee secretary to be stored with Group Legal. c. Organisational charts must be documented to display the sub-committee s relationship to management and the Company Board or Subsidiary Board, as applicable, and facilitate assessment of effective sub-committee structures across the Group. d. From time to time, any committee may make use of management working groups. Working groups may be formal or informal, however all working groups should be provided with a clearly defined function and completion 28