M'sia central bank orders check on bankers’ bonuses

KUALA LUMPUR (The Star/ANN) - Central bank tells banks to stagger payouts to executives, aligning their rewards to the risk carried by financial institutions.

Banks have been told to stagger the variable bonuses of senior employees and deal-makers over a period of time in a move seen as putting the brakes on bankers earning handsome rewards and leaving the bank to carry all the risk.

Another major policy announcement by the Malaysian central bank, Bank Negara, is of a five-year cooling-off period for chief executives of banks before they can be appointed as chairman of the financial institution.

These were some of the measures announced by the central bank under its enhanced corporate governance measures on Wednesday.

The other salient points in the guidelines that are seen as improving governance and risk management of banks are:

• substantial shareholders cannot hold senior management positions;

• the board must approve and oversee a plan to weather a crisis when the financial system comes under stress; and

• boards cannot have more than one executive director unless there are special circumstances.

These standards are in addition to other measures such as boards having a majority of independent directors and the bank needing to have a clear whistle-blowing policy for employees to act on.

A banker said the guidelines on the remuneration standards meant that a person who brought in a deal for a bank would not be rewarded all at once in the annual bonus.

“He will need to wait and receive his or her bonus over time as the risk of the deal going bad dissipates. Effectively, the bank will not be carrying the risk alone. The person who brought in the deal must be held accountable to ensure that the deal is properly and fully carried out,” explained an observer.

Staggering the bonuses is already being adopted by foreign banks as part of the measures introduced in the United States after the 2008 financial crisis.

As for local banks, it is learnt that at least one financial institution had attempted to stagger the variable portion, but the initiative was met with a cool response from its employees.

In addition to staggering the variable portion of the bonuses, banks have also been told to have a mechanism to claw back the payout should there be a bad performance of the business unit or if the individual commits internal policy breaches.

There were a few key changes that stood out when Bank Negara issued its enhanced standards to raise the bar for corporate governance across financial institutions.

For the staggered remuneration, the central bank said that remuneration payout schedules must reflect the time horizon of risks and take account of the potential for financial risks to crystallise over a longer period of time.

“As such, a financial institution must adopt a multi-year framework to measure the performance of members of senior management and other material risk takers,” it said.

Meanwhile, the chairman of the board must not hold an executive position and must not have served as a chief executive officer of the financial institution in the past five years.

This would mean that the practice in the past, where the CEO or figure head of a bank is naturally appointed as the chairman of the bank, will be changed, moving forward.

For example, CIMB Group Holdings Bhd chairman Nazir Razak was the CEO of CIMB Bank from 2006 to 2014. Upon his resignation in 2014, he was redesignated as non-executive chairman of CIMB.

The same can be said about Public Bank Bhd’s founder and major shareholder Teh Hong Piow, who was subsequently appointed as chairman of Public Bank. Azman Hashim, who is the major shareholder and who had initially led AMMB Holdings Bhd, was also subsequently made its chairman.

Thirdly, the board of a financial institution must not have more than one executive director, unless the central bank approves otherwise in writing.

“The central bank may allow more than one executive director on the board of a financial institution if the chairman is an independent director and it is satisfied that the additional appointment will not compromise board effectiveness,” said Bank Negara.

Another element of the guidelines touches on measures to have a clear separation between the substantial shareholder of a company and the management. A substantial shareholder must not hold a senior management position, according to the central bank.

“This serves to preserve an appropriate separation between ownership and management of financial institutions in line with the broader responsibilities of a financial institution towards its depositors, investment account holders, policy holders and participants,” it said.

Lastly, it looks like the ultimate responsibility of a bank conducting its own “stress test” and its preparedness to weathering a financial crisis may soon fall into the lap of its board of directors.

The guidelines state that the board must oversee and approve the recovery and resolution as well as business continuity plans for the financial institution to restore its financial strength, and maintain or preserve critical operations and critical services when it comes under stress.

Significantly, this means that the board of directors needs to be ready with policies, safeguards or emergency measures so that it is able to survive various worst-case situations or crises that may come its way.

To prevent these things from happening, the board of directors must in advance put in place a “stress test” to ensure the bank is well-capitalised to handle any such untoward scenarios.

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