In a post-oil and value-added tax (VAT) era, UAE banks are under tremendous pressure to maximise efficiencies. In this context, strong corporate governance and organisational culture play a transformative role in steering banks to success.
The emergence of new regulations — including Basel, IFRS and those issued by the UAE Central Bank — are paving the way for increased transparency, professionalism and objectivity in the banking industry.
In relation to this, strong corporate governance culture has emerged as one of the main pillars of growing and maintaining the UAE’s development agenda of building a sustainable economy. This has been further reinforced in the Federal National Vision, Abu Dhabi’s Economic Vision 2030 and Dubai’s Vision 2021.
As the banking industry has the ability to facilitate these goals (that is, ensuring overall financial stability), regulators are viewing corporate governance reforms in high regard. To address this, local regulators have recently released guidelines on corporate governance, aligned to global leading ones. Key among these is a strong focus on the quality and diversity of a bank’s board of directors.
The board of directors plays a critical role in shaping an organisation’s corporate governance framework while ensuring that appropriate mechanisms are in place to protect shareholder interests and drive organisation’s long term growth and performance.
In the UAE, boards of directors are expected to possess the adequate expertise and working knowledge of all key functions and businesses of the bank to be in a position to conduct business within the boundaries set by the risk profile of the bank.
It is probably no longer enough for board members to just have a simple understanding of regulatory updates like VAT or IFRS 9. They also need to better understand how emerging technologies such as fintech, regulatory technology (regtech), blockchain, can contribute to disrupt future banking operations and the financial sector in general. Boards of directors at banks still have ample opportunities to reshape their business models, and by leveraging technology, they can develop products that create further competitive advantage.
To strengthen governance by the board even further, banks must also develop a skills matrix that includes knowledge and experience in financial reporting and internal controls, strategic planning, risk management, and corporate governance standards.
The skills matrix, which should ideally be completed by the board, can include specialist requirements for capital markets, risk management, audit, finance, regulatory compliance and information technology (IT). Some banks in the UAE have started to appoint directors in accordance with the expertise requirements in the matrix.
Some of the largest banks in the UAE already have a well-defined and transparent board selection and nomination process. Qualifications, skills and experience requirements are discussed and agreed at the bank’s board nomination and remuneration committee, prior to the appointment of a new candidate, to ensure that the board collectively possesses a diverse set of skills.
Smaller, local banks on the other hand have yet to formalise such a process and will now have to further professionalise the board nomination and selection process to ensure compliance with the new regulations.
Another important focus area when it comes to corporate governance is compensation practices related to the senior management. Senior management’s compensation must be based on the performance of the bank and should account for the bank’s risk profile and the risks’ time horizon. Employment contracts must also include provisions to allow for the adjustment of compensation based on realised risks.
The one common thread through the myriad of regulatory and innovation challenges facing the banking sector today is that an adequate response is only possible if an organisation has a strong and positive corporate culture.
The 2007-2008 global financial crisis revealed that a less than desirable culture characterised by professional misconduct, ethical lapses, and compliance failure, was rampant at the time. Banks now realise that mere ‘hard controls’ are not enough. Some banking regulators, such as the Dutch Central Bank, have responded by incorporating culture considerations into their supervisory (oversight) guidance.
Given the current industry challenges, it is probably the right time for financial firms to look within and assess their internal culture and values, and how these are reflected across the organisation.
The responsibility to set the tone of the culture within an organisation lies with the board members and senior management as the leadership is directly responsible for establishing and maintaining the firm’s culture.
There is proof that there are positive developments in corporate governance practices and organisational culture in the UAE. Local policymakers are laying down broader reporting guidelines and standards. Now, more than ever, banks need to be forward-looking and ensure that they are correctly positioned to comply with and take advantage of the changing regulatory environment if they are to stay successful in the long term.
Maryam M Zaman is a director at KPMG in the Lower Gulf.