Corporate governance performance measures:

is the right time for getting essentials reconsidered?

Well, it's not a crisis, right?

@Maryna BrychkoPhD candidate,

Department of International Economics, Ukrainian Academy of Banking of the National Bank of Ukraine

Ukrainian Academy of Banking of the National Bank of UkraineInternational Competition in Banking: Theory and Practice

Sumy, 24. May 2012

Serhii V. Leonov Professor, Doctor of Economics, Head of the Chair of Finance

"Measurement is the first step that leads to control and eventually to improvement. If you

can't measure something, you can't understand it. If you can't understand it, you

can't control it. If you can't control it, you can't improve it."

- H. James Harrington

• Specific corporate governance issues in Italy and Ukraine: comparative analysis

• Critical analysis of contemporary Corporate Governance measures

• Construction of the Index of Corporate Governance Development in Ukraine

Agenda

Why does it matter?

The benefits of corporate governance practices vary based on bank and country characteristics, neither of which is well understood.

Governance is not one-size fits all.

Specific corporate governance issues in Italy and Ukraine: comparative analysis

General shareholders meeting

Board of Statutory Auditors

Independent auditors

Steering andmonitoringlevel

Ownership level

President

Appointments Committee

Remuneration Committee

Internal Control

Committee

General Manager

Executivelevel

Board of Directors

Executive Committee

Chief Executive Officer

Italian commercial bank “Mediobanca”

Specific corporate governance issues in Italy and Ukraine: comparative analysis

Steering andmonitoringlevel

Ownership level

General shareholders meeting

Supervisory Board

Management Board

Audit Commission

Credit Council

Internal Audit Service

Chairman of the Board

Department of strategic projects

and process

Committee on tariffs and conditions

Credit Committee

Operational risk committee

Management committee on asset and liability

 

Program integration committee

 Technology committee

Executivelevel

Ukrainian commercial bank “First Ukrainian International Bank”

Specific corporate governance issues in Italy and Ukraine: comparative analysis

General shareholders meeting

Board of Statutory Auditors

Independent auditors

Steering andmonitoringlevel

Ownership level General shareholders

meeting

Supervisory Board

Management Board

Audit Commission

Credit Council

Internal Audit Service

Chairman of the Board

Department of strategic projects

and process

Committee on tariffs and conditions

Credit Committee

Operational risk committee

Management committee on asset and liability

 

Program integration committee

 Technology committee

President

Appointments Committee

Remuneration Committee

Internal Control

Committee

General Manager

Executivelevel

Board of Directors

Executive Committee

Chief Executive Officer

Italian commercial bank “Mediobanca” Ukrainian commercial bank “First Ukrainian International Bank”

Specific corporate governance issues in Italy and Ukraine: comparative analysis

Critical analysis of contemporary Corporate Governance measures

“All models are wrong, but some are useful.”George E. P. Box (1979)

All models are “wrong” in the sense of being a simplified representations of some reality.

• Gompers, Ishii and Metrick (2003) G-index (GIM)

– Classic article; 800 citations on SSRN– Create a governance index as a proxy for the strength of shareholder

rights and corporate governance practices– Study the empirical relationship between their index and corporate

performance– Deciles rankings of companies• “Dictatorship portfolio”

Highest management, lowest shareholder power• “Democracy portfolio”

Lowest management, strongest shareholder rights

Some models are more wrong than others.

Board Effectiveness Rating (BER) (2002)Market and Industry Indices (2000)Corporate Governance Quotient (CGQ) (2002)Board Accountability Index (BAI)

Why?

subjective estimation; based on international corporate governance principals and do not fit the

situation of a specific country; not adopted to specifics of banking sector; deemphasize takeover defenses; can't insist on reliability of those indexes, etc.

“But some are useful.”

Critical analysis of contemporary Corporate Governance measures

“All models are wrong, but some are useful.”George E. P. Box (1979)

Construction of the Index of Corporate Governance Development in Ukrainian banks

ICGDUAH = 1/3 ICGD1 + 1/3 ICGD2 + 1/3 ICGD3,

Where:ICGDUAH – Index of Corporate Governance Development in Ukrainian banksICGD1 – Corporate Governance Quality ICGD2 – Ability to cope with risksICGD3 – Profitability

ICGD1 - Corporate Governance Quality

Shareholder rights (6 indicators)

Supervisory board (5 indicators)

Financial Disclosure and Executive Remuneration (9 indicators)

Board of Directions (4 indicators)

Audit (4 indicators)

Progressive practices (4 indicators)

ICGD2 – Ability to cope with risks (5 indicators)

ICGD3 – Profitability (5 indicators)

Construction of the Index of Corporate Governance Development in Ukrainian banks

Why it’s wrong?

Why it’s useful?

Has local character

• Considerate special aspects of banking activity, geographic region and market

• ICGD (or it components) could be used for the ongoing measuring (monitoring) of corporate governance at the national level and to assess the level of corporate governance development in a separate bank.

Key stuff

"Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful."

- Box and Draper, Empirical Model-Building

In summary…