On January 28, 2013, the Office of the Superintendent of Financial Institutions (“OSFI”) released the final version of its revised Corporate Governance Guideline (the “Guideline”). The Guideline is a revision of the original Corporate Governance Guideline, which was published in 2003.
The Guideline outlines OSFI’s expectations with respect to corporate governance of federally-regulated financial institutions (“FRFIs”), subject to limited exceptions. The Guideline expressly addresses governance matters in the context of the unique nature, position and requirements of financial institutions (although the principles outlined may be instructive for issuers in other industries).
OSFI has recognized that there is no “one-size-fits-all” prescription, and the Guideline acknowledges that it should be applied by FRFIs with reference to and consideration of their own circumstances and characteristics, including size, ownership structure, nature, scope and complexity of operations, corporate strategy, and risk profile.
The Guideline, which supplements other regulatory requirements and guidelines (such as OSFI’s Supervisory Framework and Assessment Criteria, as well as relevant provisions of the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, and the Cooperative Credit Associations Act), focuses on the following areas of corporate governance:
1. the role of the board of directors
2. risk governance; and
3. the role of the audit committee.
The Role of the Board of Directors
Independence
The Guideline places particular emphasis on the separation of the role of the Chair from the CEO. The Guideline outlines processes for the independent discharge of the board’s oversight and supervisory obligations, and recommends that FRFI boards should document and approve a director independence policy that takes into consideration the specific ownership structure of the institution.
Responsibilities
The Guideline clarifies the essential duties of the board, specifically outlining the primary functions of the board requiring heightened attention, and provides guidance to distinguish the obligations of the board from the responsibilities of senior management. Board responsibilities include approval of matters such as the internal control framework, significant strategic initiatives and transactions, and business objectives, and review of senior management activities such as operational and business policies, and organizational structure. With respect to the senior management activities, the Board has a role in providing high level guidance to senior management through review and discussion.
Risk Governance
Noting that risk governance is a distinct and crucial element of corporate governance of FRFIs, OSFI recommends that FRFIs be in a position to identify major risks, assess their potential impact and have controls in place to adequately address these risks. To address this objective, the Guideline states that FRFIs should develop a Risk Appetite Framework (“RAF”) that is enterprise wide and tailored to its business objectives. The RAF must be approved by the Board and should contain a risk appetite statement, risk limits and an outline of the oversight plan to ensure proper implementation of the of the RAF. The RAF should guide the risk-taking activities of the FRFI, and all operational, financial and corporate policies, practices and procedures of the FRFI should support the RAF.
In connection with the development of the RAF, the Guideline states that an FRFI board should establish a dedicated risk committee (the “Risk Committee”) to oversee management on an enterprise wide basis. The Risk Committee should be guided by the RAF and should have a clear understanding of the types of risks to which the FRFI might be exposed. Risk Committee members should be non executives (i.e., members of the board who do not have management responsibilities) and an adequate number of the committee members should have sufficient knowledge in the risk management of financial institutions.
The Role of the Audit Committee
The Guideline clarifies and strengthens the role of the Audit Committee with respect to the FRFI’s external auditor. The Audit Committee, not senior management, should recommend to the shareholders the appointment, reappointment, removal and remuneration of the external auditor. The Guideline also clarifies that the Audit Committee should agree to the scope and terms of the audit engagement and approve the engagement letter. The Audit Committee should annually report to the Board on the effectiveness of the external auditor.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.