Annual Governance Report Union National Bank-Egypt 2016 Compliance & Governance Department
Report Contents Vice Chairman Foreword 1. Introduction 1.1 Objective 1.2 Commitment to Comply with Corporate Governance 1.3 Application of Corporate Governance Principles 2. UNBE Achievements during 2016 in Strengthening the Corporate Governance Approach 3. Framework 4. Board of Directors (BODs) 4.1 Board of Directors Composition 4.2 Independent and Non-Executive Board Members 4.3 Board Secretary 4.4 Board Meetings 4.5 Board Committees - Executive Committee - Audit Committee - Risk Committee - Salaries and Remunerations Committee - Governance and Nominations Committee 5. Executive Management 5.1 Credit Committee 5.2 Assets and Liabilities Committee 5.3 Information Technology Committee 5.4 Human Resources Committee 6 UNBE Organization Structure and Succession Plan 7. Risk Management 8. Internal Control System 8.1 Internal Audit 8.2 Compliance 9. External Audit Conclusion 1
Dear UNB-E Shareholders Greetings, In compliance with Governance Rules issued by Central bank of Egypt on July 5 th, 2011 we have submitted annual Governance report of UNB-E For the year 2016 which is considered fundamental base to move towards the development of Governance concept and contents within the bank. During 2016 and in view of establishing a new era of Governance within UNB-E, we have reviewed and updated our existing Governance practices at several levels starting from reviewing Board of Directors structure and its related Committees, passing though the adoption of Board Members Self- Evaluation Standards due to the role of this practice in promoting transparency rules within UNB-E and ending up with the assessment of professional code of conduct rules. In the occasion of Governance report submission for year 2016, we would like to assure our vigilance in UNB-E to apply best international practices in this field placed by Basel Committee, international governance rules, the Organization for Economic Cooperation and Development and other concerned international institutions, along with our full concern to abide by the Governance guidelines issued by Central bank of Egypt. Sincerely, Mohamed Nasr Abdeen Vice Chairman Chairman of Governance Committee 2
1. Introduction UNB -E considers Governance is a key factor to enhance organization image, both internally and externally, through a commitment to Corporate Culture that motivates board of directors(bods), executive managers and all employees to maximize the efficiency of Compliance with sound principles of conduct, by ensuring returns on investment and long term productivity growth. 1.1 Objective The Board of Directors (BODs) and Executive Management believe that Governance is essential element to enhance shareholders trust, specifically minority shareholders and stakeholders, by increasing the level of transparency and disclosure about ownership structure and control, in addition of providing information exchange methods, and the implementation of effective monitoring system for strategic business management. Hence, UNB-E is directed to enhance Governance concept. 1.2 Commitment to comply with Governance principles The BODs, Executive Management, and Officers commit themselves to the Governance principles and to follow its best practices as detailed in the Governance Manual, in order to achieve banks objectives and to maintain its interests. Periodically, the Board ensures that UNB- E complies with the principles of Governance concept, review and updates the professional codes of conduct for the purpose of updating its governance practices to comply with regulatory requirements. The Board also promotes the institutional values, policies and other internal procedures that apply to all members of the BOD, Executive Management and staff of UNB Egypt. 1.3 Implementation of Corporate Governance Principles Based on BODs vigilance to apply proper Governance rules within UNB-E, as per Governance manual issued by Central Bank of Egypt. Hence, the roles and responsibilities of the BODs are segregated from the functions of Executive Management, whereby the Board assumes the overall supervision and provides strategic direction through the review and the approval of the strategic initiatives, policies and main objectives, while the daily affairs are carried out by the Executive Management. 3
2. UNBE Achievements during 2015, in Strengthening the Corporate Governance UNBE vision focus on Corporate Governance principles, which is recognized as a valuable part of its culture and its daily and strategic practices, and in order to develop the relationship with the customers to improve the confidence of the existing and potential investors, the BODs has made further efforts to promote concept of transparency, disclosure, and to foster culture of corporate governance within the bank The productive result of the continuous efforts during 2016 was the development of corporate governance principles within UNBE through the preparation of a corporate governance manual During 2016, we worked on continuing the implementation of the s strategic plan which was initiated during 2015 as Risk Management Department prepared a comprehensive plan for risk structuring, and initiated the Credit Rating Policy as a mechanism to assess the credibility of juristic entities and individuals. Risk Management Department also prepared exhaustive document describing how to address Basel requirements, taking into account the requirements of CBE. Based on Executive Management offer, the strategic plan of staff succession and the development of leadership skills were enhanced through the implementation of several development programs to support talented staff to assume leadership positions in the over the coming years. Since sound governance requires continuous improvement and development, we are working on to strengthen internal controls procedures within the bank to assure its efficiency. Taking into consideration Key Risk Indicators (KRI) and Key Control Indicators (KCI) as the implementation of these indicators contributed effectively in strengthening the internal controls within the bank. Based on Executive Management adoption to strengthen existing internal control tools, guiding principles, were placed to promote Chinese Walls concept as well as disclosure of conflict of interests concept. In light of our commitment to combating money laundering and terrorist financing, and in accordance with the instructions issued by the CBE, the Bank is preparing to launch a project for the integration of advanced international automated systems that efficiently assist in combating money laundering and terrorist financing and adequately detect suspicious transactions. Furthermore, consistent mechanisms were implemented to enhance information confidentiality of customers by restricting access to information and data except to relevant departments. Also, 4
electronic controls were implemented to prevent any unnecessary l access to such information through the implementation of Need to Know principle. Also, It is worth to mention the effective role of Quality Management department (enhancing of Quality Management Concept)in receiving and handling customers complaints in order to solve them and to build up trustworthy relationship between UNBE and customers seeking to provide banking service with higher standard. Moreover, Caring from UNBE about adoption of its Social Responsibility, UNBE has sponsored many social activities that directly contribute in developing individuals and society in different fields. 3-Framework Based on the Governance project that has been applied in UNB-E, which included integrated and interrelated phases to achieve the proper application of such project, taking into consideration the laws and regulations issued in The Arab Republic of Egypt, specially Central Bank,Banking sector and Money Law Number 88 for year 2003 and supervision instructions issued by Central Bank of Egypt(CBE), as the project included at that time the application of comprehensive measures of governance which contained the preparation of overall policies, procedures, manuals, organizational structure and accurate job descriptions, the determination of the powers and responsibilities, the internal and external reporting requirements and the roles, responsibilities and charters of the BOD and its committees as well as the roles and responsibilities of the executive committees. The optimal application of sound Governance within UNB- E provides assurance to the BODs with regards to the internal monitoring of the bank s practices, and confirms the permanent commitment of the BODs to the development of Governance practices to suit and cope with the changing needs and conditions. Hence, the resolutions of the BODs relevant to Governance support their commitment through the ongoing review of Governance practices, while working to periodically implement the necessary adjustments to comply with local and international requirements in this respect. In this context, the submitted annual Governance report aims to ensure a transparent disclosure of the Governance practices applied by UNB-E, which embodies bank values and policies that all parties must abide by. The report includes the capital structure, control, shareholders rights, equality, status of BODs charter and its Committees, systems, related parties transactions policy rotation, and the periodic review of the principles of professional code of conduct, in order to ensure the application of best professional practices that meet the needs and objectives of UNB-E. 5
4. The Board of Directors The BODs monitors and guides UNB-E strategy through the approval of the various policies, including the investment and credit policies, whether originated directly by the BODs or through the Board Committees. The BOD also ensures that UNB-E adopts effective policies and rules that illustrate the functions and responsibilities of the Board, along with defining the duties of its members. These policies and rules are developed in compliance with the provisions of applicable laws, with the possibility of being amended from time to time. The BODs also administers the development and implementation of the code of conduct for its members, explaining their roles and responsibilities in establishing the principles of ethical behavior. The BODs is convened at least six times per year to review and approve the annual budget, capital expenditures and business plans. Moreover, the BODs regularly monitors bank progress towards achieving its strategic goals and objectives, and recommends the necessary adjustments where applicable. As part of its duties, the BODs also ensures the implementation of an internal control system, including Risk Management, Internal Audit, and Compliance. 4.1 The Board of Directors Composition In conformity with UNBE Articles of Association and in accordance with valid laws and regulations, (9) members of the BOD are elected or nominated for three years renewable for the same period. Members of the BOD have the requisite expertise and management skills that qualify them to conduct their duties towards the Bank s best interests. 4.2 Independent and Non-Executive Board Members UNBE BODs is composed of (9) members (2) of them are executive members, and (7) members are non executive and Independent members. The BODs has completed the evaluation of the Board s performance as a whole, as well as the performance of its members using the self-assessment criteria in the evaluation. 6
4.3 Board Secretary The BODs has appointed a Secretary of the Board who is entrusted to record, coordinate and register all Board s meetings, in addition to the custody of records, books and reports are sent and received by the Board. The Secretary s functions also include the distribution of information and coordination among members of the Board and between the Board and stakeholders within the bank, including shareholders, Executive Management and staff,, 4.4 Board Meetings The BODs meetings are held regularly or when invited by the Chairman, the invitation for the Board meeting should be communicated to all members at least one week prior to the meeting, in this regard any member can add a subject to the meeting s agenda. Also, The Articles of Association provide detailed information about the attendance, quorum, voting and meeting requirements. The Board should periodically meet in order to ensure that it is adequately fulfilling its roles and responsibilities. The Board meeting should be held at least once every two months. 4.5 Board Committees There are five sub- specialized committees assist the board to adopt its responsibilities and duties These Committee submit their reports directly to the board, these committees are: Executive Committee The Executive Committee is composed based on article number 82of law # 88 for year 2003,and its duties established based on article number 29 of executive regulation of said law. The Executive Committee reviews overall credit and investment portfolios, and approves credit facilities exceeding the authorized ceiling set for the Executive Management up to the committee s limit as delegated by the Board. The committee reviews, on quarterly basis, the status of pending litigation matters and recommends required actions that should be taken towards impaired loans. Audit Committee The main role of Audit Committee is to review financial data ; ensure effectiveness of the Internal Control system and the performance of Internal Audit, External Audit, Compliance, Combat of Money Laundering and Terrorist Financing within UNBE. 7
For the purposes of confirming the adherence to transparency and independence principle, the Internal Audit division and Compliance department report directly to the Audit Committee where as the Chiefs of both the Audit and the Compliance are responsible to submit reports and observations to the Committee on a quarterly basis and as needed. Risk Committee The Risk Committee establishes, implements and monitors UNBE risk management strategy and defines risk policies which regulates Risk Department work. It reviews procedures and framework of Risk Department, defining its roles and its responsibilities The committee also monitors risk management activities from several perspectives: operational, credit, market, strategic, reputational and any other risks the bank could be exposed to it. The Committee ensures that operations comply with CBE policies, procedures and audit recommendations, It also provides strategic direction during crisis. Salaries and Remunerations Committee The committee is responsible to determine the remunerations of the top executives and to submit its proposals regarding board members remunerations The committee should concerns with internal control functions in terms of rewarding based on achievement without affecting the independence of internal control functions. It also analyzes results of salaries level paid by bank and compares it with other peers to ensure bank ability to attract and retain best calibers. The committee prepares clear and written policies regarding salaries and remunerations and periodically reviews and reassess them matching with risk level exposure,clarifying the basis on which said policies established on. Governance and Nominations Committee This committee is responsible for the following : - Periodical evaluation of Governance system within the bank. - Suggestion of suitable amendments on Governance policy which is approved by the board. - Preparing Governance report on regular basis. - Reviewing bank annual report specially Disclosure items. - Studying and taking into consideration CBE audit remarks regarding Governance system within the bank. - Recording, documenting, and following up Board assessment reports. - Submitting suggestions regarding the nomination of independent board members,and hiring or membership renewal or excluding of board member. 8
5 Executive Management The MD relies on a number of multi-functions internal committees in the execution of his functions, and based on Governance project, UNBE formed several specialized committees. The Committees meetings are authenticated if quorum number of attendees is completed, including the chairman of the committee or his deputy. If any member is absent, an alternative member must be nominated to attend the meeting. Below is an example of these committees : 5.1 Credit Committee The Credit Committee reviews, recommends and implements approved credit policies and procedures. The Committee reviews the delegated authorities related to credit,and recommends amendments to the BODs where appropriate. It also escalates its decisions to the Executive Committee of the BODs regarding credit facilities which exceed its authority. The Committee also assumes the responsibility to review and approve investment products approves. It also monitors and reviews the performance of all the investment portfolio activities. In addition, the Committee monitors and reviews risk exposures, for compliance with the approved investment limits and ratios. The Committee also provides investment and credit risk reports to the Board. 5.2 Assets and Liabilities Committee The committee reviews and recommends the strategies, policies and procedures related to Asset Liability management across the bank and submit related recommendations. It also monitors and reviews Treasury performance and products, including investment portfolios; interest rate risk; liquidity risk; and foreign currencies exchange risk. The Committee also ensures compliance with Treasury s limits and ratios, and oversees pricing policy. It also monitors monthly financial performance, budget targets and market share targets against performance. 5.3 Information Technology Committee The Information Technology Committee is responsible to establish IT authenticated standards across UNBE and to align all IT activities across the to meet business plans and objectives. The Committee also formulates and monitors the implementation of the annual IT strategy, including arrangement of budgets and operating expenditure assigned to IT projects and services. It is also the responsibility of the Committee to prioritize the management of IT projects and to monitor the progress towards their implementation. 9
In addition, this committee monitors and reports on the aspects related to technology key performance indicators (KPIs) and key risk indicators (KRIs), in addition it makes relevant recommendations to executive Management about the enhancement of information system and its efficiency. 5.4 Human Resources Committee The Human Resources Committee handles all Human Resources matters, including manpower planning, recruitment, performance evaluation, promotions, disciplinary actions, benefits review. The Committee also handles the integrated performance management and development, learning and training initiatives, staff rewarding and recognition, and the implementation of staff suggestion schemes. The Committee regularly reviews the Human Resources policies and recommends changes, as needed. 6. Organizational Structure and Leadership Succession Plan As part of the ongoing Corporate Governance project which started in 2011, UNB-E prepared the new organizational structure that complies with regulatory requirements and to cover future plans of internal and external growth. The new organization structure played an integral role in the expansion of UNB-E as well as the development of its financial services. UNBE developed and enhanced Leadership Succession Plan for bank staff by developing their professional skills. UNB-E is concerned to provide bank staff with proper banking experience to enable them to perform their duties and to qualify them to occupy leading positions in the future. 7 Risk Management It is common within banking activities to be exposed to determined level of risk which is mitigated through various specific mechanisms for risk assessment and control. The success of risk management in UNB-E is generated from the ability to focus on the roles and responsibilities defined for the BODs, various committees, Executive Management, and Staff. Risk management is considered an important element for UNB-E to ensure continued profitability, and every employee in the is responsible for dealing with potential risks when carrying out his/her duties. Risk policies and procedures are shaped within the bank to indentify and analyze risk exposure level to eliminate its consequences and to permanently identify and assess risk reasons in order to take proper actions to deal with them. 10
The BOD assumes full responsibility for the development of risk strategy and implementation of the relevant principles, frameworks and policies. The Risk Committee is considered the ultimate executive authority vested to deal with the various risk aspects. It undertakes the formulation and review of the risk management strategy, evaluates the activities of Risk Management Division and control mechanisms, assesses and determines operational, credit, market, strategic, legal, and reputational risks. Risk Committee also ensures the implementation of practical plans to monitor and manage these risks. In order to achieve the strategic objectives of UNB-E, Risk Management Division has presented a comprehensive plan covering risks structure, prepared the credit rating policy, created a mechanism to assess the credit worthiness of companies and individuals, and prepared an ample document on addressing Basel requirements, taking into account Central Bank of Egypt (CBE) requirements. 8. Internal Control System The BODs assumes full responsibility for UNB-E internal controls system whereby specific policies, guidelines and controls covering the entire transactions have been devised. Moreover, placing limits between responsibility and performance monitoring, in addition to the implementation delegation and authorization concept on all banking operations and clear policy for segregation of duties and dual control. UNB-E Executive Management is considered responsible for the overall control of these systems in coordination with the concerned divisional and branches Managers. Internal Audit Committee, on behalf of the BODs performs on a regular basis, a review of internal controls framework and assesses the internal systems through the evaluation of processes carried out by the Internal Audit and Compliance in addition to the reviews that the external auditors conduct. The BODs ensures existence of effective internal controls based on the recommendations and advices presented by the Audit division and Compliance department. 11
8.1 Internal Audit Internal Audit is an independent function within UNB-E, which has clear role shaped exclusively to add value to banking operations and to improve its efficiency. It is the responsibility of Internal Audit to determine and report on failures or weaknesses in banking operational process or system, in order to improve control and mitigate the risk. Internal Audit also reviews internal controls system of banking activities, by assessing the efficiency and effectiveness of the processes and the implemented procedures, and by ensuring compliance with the control mechanisms implemented by management. It also ensures compliance with all rules, regulations and internal procedures, and reviews the validity and reliability of the information that is provided to management. Internal Audit submits its reports directly to Audit Committee. 8.2 Compliance Monitoring of compliance with laws, provisions and standards is considered the common prominent responsibility of Executive Management and BODs. Compliance is an independent function, undertakes monitoring and reporting on Non-Compliance risks which include the risk of legal or legislative sanctions, financial fine, or damage to bank reputation as a result of failure to abide by the laws and regulations, code of conduct and the standards of good practices related Governance and banking activities. These legislations include but are not limited to, laws, CBE regulations and directives or any other authority the bank subordinates to it. Compliance responsibilities also include ensuring implementation of Anti Money Laundering and Combating Terrorist Financing legislations and laws. In order to enable Compliance function to carry out efficiently its duties and responsibilities, Compliance department is granted unrestricted authority to deal with all Compliance issues within banking activities, and to reach banking data, records, transactions as well as staff. 12
Improvement of Compliance issues awareness within the bank : As all inquiries related to banking regulations and laws are responded by compliance department, along with maintaining written directives about regulatory instructions. Moreover, training courses are held to train bank staff to enhance awareness about Combating Money Laundering,Terrorist Finance and Early Disclosure Policy Monitoring of suspicious financial and banking transactions: In order to prevent to be involved in any suspicious transaction related to money laundering and terrorist financing, Compliance department applies various effective and assertive control systems through ensuring adequate daily and monthly monitoring of all financial transactions and customer accounts in accordance with the instructions of CBE and the Financial Action Task Force (FATF) s Recommendations. It is worth to mention that during year 2016,no penalty of whatever nature was imposed on UNB-E due to the compliance with the regulatory requirements and directives., 9. External Auditors According to CBE law # 88 for year 2003, UNB- E General Assembly appoints an external auditor for maximum five fiscal years based on Audit Committee recommendation escalated to BODs, the General Assembly evaluates external auditors remuneration. Currently Baker Tilly and Ernst & Young were assigned to audit UNBE financial statements. The external auditors attend the General Assembly meetings to present their report and answer shareholders questions. Based on CBE instructions and in line with International Standards. the External Auditors conducts the audit of the financial statements quarterly and annually, and submit their financial reports to BODs and General Assembly based on implemented legal requirements. 13
Conclusion UNB-E is committed to respect the rights of all its stakeholders through the deploying of Governance culture within the bank and the adoption of the highest standards of transparency and integrity in all its dealings and disclosures. Moreover, to confirm our commitment to maintain the secrecy of our customers, shareholders and stakeholders information, a Chinese Wall Approach has been implemented, whereby the information is retained with the relevant internal party without being leaked out to other parties, unless for business purposes. UNB- E believes that stability is considered one of the main economic factors to achieve prerequisite successful business in short and long term. And in order to succeed in an active contribution towards the society, we constantly intend to assume responsibilities higher than those solely associated to profitability, as we apply Social Responsibility concept, and working on the continuation of business existence, in addition of developing a trust-worthy relationship with the customers and stakeholders through enhancing Governance components and managing bank risk exposure efficiently. Mohamed Nasr Abdeen Vice Chairman Chairman of Governance Committee 14