Declaration of the application of corporate governance in Bank BPH in 2010, which is appended to Bank BPH 2010 Financial Statements

Transcription

1 Declaration of the application of corporate governance in Bank BPH in 2010, which is appended to Bank BPH 2010 Financial Statements Introduction 2010 was an important year for Bank BPH, with plenty of changes and challenges. At the end of 2009, Bank BPH merged with GE Money Bank SA based in Gdansk. The merger was one of the key factors shaping Bank BPH s operations, and it was followed by an operational integration, a significant project last year. The large number and complexity of changes triggered by the merger required particular commitment from the Bank s management. The second significant challenge was improving financial performance, as the end of 2009 and the beginning of 2010 brought further macroeconomic changes and a deterioration in the Bank s financial standing. These factors forced the Bank s Management Board to review its strategic plan and to adopt a new Remedy Plan. Its development, and then implementation and monitoring were an important aspect of the Bank s operations during this period. The third important event was the change in the position of the President of the Management Board, due to the retirement of Józef Wancer. The recruitment process was conducted by ad hoc Nomination Committee, a special body launched for this purpose by the Supervisory Board. The Committee nominated Richard Gaskin as candidate for the position of the Management Board President, and in December 2010 Richard Gaskin was appointed as President of the Bank s Management Board, effective from the moment the appropriate consent is granted by the Polish Financial Supervision Authority. Until that time, Richard Gaskin will be performing his hitherto function of the Vice-President of the Management Board, and acting as President of the MB. All the above-mentioned factors impacted the Bank s operations over the past months. Still, the Bank s Management Board and the Supervisory Board attached a lot of importance to the bank s rules of ethics and its compliance with corporate governance best standards. The Bank reconfirmed its commitment to ethical norms and standards, as defined in the General Electric Group s code of conduct entitled The Spirit & The Letter. Bank BPH complies with the rules of corporate governance included in the Best practices of companies listed on the WSE adopted in 2007 and its revised version on May 2010 (full version of the document is available at: applying due diligence in respecting and implementing these standards. In 2010, the Bank complied with all the requirements of the Best practices, and its activities were transparent, fair and respectful of all shareholders, regardless of the number of shares they possess. In the aftermath of the global crisis, many decision-makers started broad discussions over changes in corporate governance standards and rules and their importance for ensuring stable growth of business, including banking business. Bank BPH s management has been watching these developments closely and adjust the Bank s internal regulations and practices to new requirements on the ongoing basis. 1. Investor relations For over 16 years, Bank BPH has been a public company listed on the Warsaw Stock Exchange (WSE) and in its Global Deposit Certificates were traded on the London Stock Exchange.

2 Due to the merger, which took place at the end of 2009, Bank BPH issued 66, 876, 197 shares of E series for GE Money Bank s shareholders. In March 2010, the Management Board of the Warsaw Stock Exchange decided to allow these shares to trade on the primary market as of 31 March As a result of the merger, GE Capital s share in Bank BPH s ownership structure grew from 71.03% to 89.16%. The more concentrated ownership structure of the Bank reduced the liquidity of its shares on the WSE. The total 2010 turnover amounted to 3, 717, 969 shares, which is 4.9% of the total number of the Bank s shares. This means a greater than 33% drop in average trading volume as compared to In 2010, Bank BPH s shares were included in a prestigious RESPECT Index, which groups companies famous for their corporate governance and social corporate responsibility. Due to changes in the methodology of defining the Index s composition, by which the basic pre-selection criterion for further evaluation became share liquidity, the WSE decided that starting from January 2011, Bank BPH would be excluded from the Index. As a publicly-owned company, Bank BPH runs a coordinated policy of communication with all capital market players: investors, analysts, Moody s Investors Service Ltd rating company, on the basis of the following rules: transparency, reliability, cohesion and equality, credibility, high quality and data comparability. In 2010, Bank BPH maintained active relations with market analysts and minority investors. The Bank organized Management Board conferences to mark publication of quarterly financial results, as well as individual meetings of the Management President and Vice-President responsible for the Financial Division in the Bank s seat. Last year Bank representative also participated in an international conference. The Bank diligently delivers on its information obligations stemming from the fact that it is a publicly held company. It provides all investors and analysts with equal access to information by publishing timely and regular reports as well as through telephone, or the Investor Relations section at the Bank s internet site. An important element of the Bank s communication process is publication of its Annual Report, which has been recognized by the Competition Board of the Institute of Accounting and Taxes and WSE for the fourth consecutive year. In last year s competition, Bank BPH received third prize for the Annual Report according to International Financial Reporting Standards (The Best Annual Report 2009) in the category of Banks and Financial Institutions. Investor Relations Department is the organizational units responsible for investor relations (tel.: , investor.relations@bph.pl). A special section at Bank BPH s website is dedicated to investors: which is kept updated in two languages versions. 2. General Shareholders Meeting activities, basic competencies, shareholders rights and their execution The General Shareholders Meeting (GSM) is convened and organized in line with the regulations included in the Commercial Companies Code, the Bank s By-Laws and the GSM Rules of Procedure.

3 GSM is an organ that adopts key decision concerning the Bank s activities. The General Shareholders Meeting takes place in Bank s seat or in Warsaw. The General Shareholders Meeting may be ordinary or extraordinary. In line with BPH By-Laws, the ordinary General Shareholder s Meeting should take place annually, no later than June. The General Shareholders Meeting is convened by the Management Board within 6 months after the end of the trading year. The Extraordinary Shareholders Meeting is convened in cases defined by legal provisions and BPH By-Laws, as well as in situations when the Bank s authorities or people authorized to convene GSM deem it necessary. BPH General Shareholders Meeting is convened at least twenty six days before its planned date by a relevant notice on the BPH website and in the current report. The points of GSM agenda are first presented by the Management Board to the Supervisory Board for opinion. The points raised by the shareholders are also presented by the Management Board to the GSM. The Members of the Supervisory Board and the Management Board take part in the GSM enabling them to provide substantial answers to questions posed at the meeting. Draft resolutions presented for adoption at the General Shareholders Meeting and other important materials are presented to the shareholders along with the Supervisory Board s justification and opinion before the General Shareholders Meeting (as long as such drafts and materials were received within the timeframe allowing for opinions). These documents are presented to the shareholders in advance so that they can acknowledge and assess them. In line with the provisions of the Commercial Companies Code, changes to the Bank s By-Laws require a resolution of the General Shareholders Meeting, proper entry into the register and consent of the Polish Financial Supervision Authority in cases indicated by the Banking Law. The By-Laws do not provide for any other possibilities for introducing such changes. In line with the code of commercial companies, the resolution on changes to the by-laws is adopted by a threefourths majority of votes. The Ordinary General Shareholders Meeting took place on 1 June The meeting adopted the 2009 Financial Statements of Bank BPH and the Banking Group for 2009, the Bank Management Board s Report on the Bank s and its Group s operations and the Bank Supervisory Board s Report. The General Shareholders Meeting adopted a decision on 2009 profit distribution. The members of the Bank s Supervisory Board and Management Board were granted discharge from their duties. Due to the expiry of Supervisory Board s term of office, the General Shareholders Meeting also appointed the Supervisory Board for a new term (details to be found in the chapter devoted to the Supervisory Board) and approved its remuneration rules (details in the chapter on remuneration policy). General Shareholders Meeting (1 June 2010) in numbers: The Supervisory Board of 13 members was elected for a term of office of 3 years 9 Management Board and 8 Supervisory Board members were present 14 resolutions were adopted Candidates to the SB were made public 25 days before the GSM Shareholders with the total number of shares were represented at the meeting, exercising voting right from shares, accounting for % of the total number of votes from all issued and registered Bank s shares. The Bank s management were sufficiently represented to enable substantive answers to the questions posed at the meeting, while information on the excused absence of the remaining members of the Management and Supervisory Boards was provided to the shareholders present at the meeting. In line with best practice VI.1, the General Shareholders meeting allowed journalists to report on the GSM. A representative of the external auditor was also present at the GSM, to answer any potential questions of the shareholders concerning the financial statements presented and the chartered auditor s opinion.

4 Bank BPH shareholders and shares As at 31 December 2010, the Bank s shareholding structure was as follows, and it has not changed by the date of conclusion of this report: SHAREHOLDER S NAME SHARES VOTES AT GSM number % number % GE Investments Poland Sp. z o.o., with top dominant entity being , ,74 General Electric Company Selective American Financial Enterprise, with top dominant entity being General Electric , ,21 Company DRB Holdings B.V. (the Netherlands), with top dominant entity being General Electric , ,21 Company Clients of BZ WBK AIB Asset Management , ,02 Other shareholders , ,82 Total All of Bank BPH s shares are ordinary bearer shares and contain no special control rights. Bank BPH s By-Laws do not contain any restrictions on the transfer of ownership for securities issued by the Bank. Similarly, Bank BPH By-Laws provide no restrictions on the execution of the voting rights, and do not allow for separation of capital rights related to securities from these securities as such. It should be noted that currently General Electric Company holds directly and indirectly over 89% of the Bank s shares. On 21 December 2009, GE received consent from the Polish Financial Supervision Authority to exercise no less than 66% and no more than 75% votes at Bank BPH General Shareholders Meeting. 3. The Bank s Supervisory Board The basic function of the Supervisory Board is to exercise supervision over the Bank s activities in all areas. The activities of the Supervisory Board are regulated by the Supervisory Board s Rules of Procedure, and its functions are precisely defined in the Bank s By-Laws. In particular, the Supervisory Board s duties include, inter alia: appointment and dismissal of all Management Board member representing the Bank s in the issues between the Management Board and the Bank, concluding and changing contracts of Management Board members, adopting the Rules of the Supervisory Board and Management Board, requesting from a relevant Bank s organizational unit a review or control of specific areas of the Bank s activities, defining policies and rules of credit competencies along with relevant procedures for the Bank s decision-making organs, selection of the chartered auditor to audit the Bank s financial statements,

5 approval of specific Management Board s resolutions on i.a. the Bank s directions of development, strategic plans and annual financial plans. In line with the Bank s By-Laws, the Supervisory Board should consist of five to fourteen members appointed by the General Shareholders Meeting for a joint term of three years. The Supervisory Board selects its own Chairman, along with the first and second Deputy Chairman. The selection is made with an absolute majority of votes cast by the SB members present at the meeting in a secret ballot, unless all the present members agreed to an open ballot. Supervisory Board members may exercise their duties in person only. Supervisory Board members can be dismissed at any time. Mandates of SB members expire in case of death or resignation. Should the number of Supervisory Board members drop below five, the Bank s Management Board is obliged to immediately convene a General Shareholders Meeting with the intent to complete the SB s composition. Past members of the Supervisory Board can be re-elected. In 2010, changes to the Supervisory Board s Rules of Procedure, aimed at i.a. standardizing and accelerating the decision-making processes of the Investment Committee were adopted. As at 1 January 2010, the Supervisory Board was made up of the following composition: Wiesław Rozłucki Chairman, Robert Charles Green First Deputy Chairman Dmitri Stockton Second Deputy Chairman, Aleš Blažek, Beata Gessel-Kalinowska vel Kalisz, Denis Hall, Lesław Kuzaj, Sławomir Mirkowski, Des O Shea, Mathias Seidel, Tomasz Stamirowski, Dorota Podedworna- Tarnowska, Agnieszka Słomka-Gołębiowska. The General Shareholders meeting on 1 June 2010 appointed the Supervisory Board for the next three-year term of office in the unchanged composition. As at 31 December 2010, the composition of the Supervisory Board was as follows: Wiesław Rozłucki (62) Chairman Robert C. Green (44) First Deputy Chairman Dmitri Stockton (46) Second Deputy Chairman Former President of the Management Board of the Warsaw Stock Exchange ( ). He graduated from the Foreign Trade Department at the Warsaw School of Economics and holds Ph.D. in economic geography. He worked for, inter alia, the Ministry of Finance and the Ministry of Privatization. He cofounded the Polish Institute of Directors. W. Rozłucki is actively engaged in corporate governance movement in Poland. He is currently a supervisory board member of a couple of public companies, including TP SA and TVN. GE Senior Vice-President, Financial Director of Global Banking. He graduated from the Maryland University, DC in USA. During his twenty-years career in GE he took part in international projects in a number of key business areas, e.g. he was Financial Director of GEMB (Retail Finance) and GE European Equipment Finance Ltd. In the United Kingdom, as well as deputy president and audit group manager in GE Capital Corporation USA. President and CEO of GE Global Banking. He graduated from the Financial Management Program and holds licentiate in accounting from the North Carolina State University. He has been working for General Electric since 1987, first as Financial Management program member and then he dealt with, inter alia, capital audit, risk management and business development. In 2001 Dmitri Stockton became CEO of GE Capital Bank in Switzerland. In 2005 he was promoted to the position of GE Head for Central and Eastern Europe and then received a nomination to become Deputy President function directly

6 Aleš Blažek (38) Beata Gessel Kalinowska vel Kalisz (46) Denis Hall (55) Lesław Kuzaj (58) Sławomir Mirkowski (39) Des O Shea (55) Dorota Podedworna- Tarnowska (35) Wilfried Mathias by Jeff Immelt. Legal counsel, GE Global Banking. He graduated from the Law faculty at the Charles University in Prague. Before employment in General Electric, we worked as legal counsel for White&Case and Citigroup, where he dealt with, inter alia: mergers and acquisitions, restructuring, debt and capital markets and banking. In GE Global Banking he is responsible for legal assistance, compliance and GE Money relations with state authorities in the European countries in which GE Global Banking is present. Legal counsel, managing partner of GESSEL attorneys at law. She is the author of numerous publications on mergers and acquisitions and economic arbitration. She occupies a number of prestigious functions, e.g. since 1999 she has been arbitrator of at the Court of Arbitration of the National Commercial Chamber. In 2005, she was appointed vice-president of the Court of Arbitration at the Polish Confederation of Private Employers Lewiatan, her appointment as President of the Lewiatan Court has been announced recently. Head of Banking Risk and Compliance in GE. He has been in the banking industry since 1974, working for, inter alia, Barclays, Citibank, Deutsche Bank and dealing with banking risk. In 2007 he joined GE Money, first as Risk Manager for Europe, Middle East and Africa (EMEA), and then he took over responsibility for global management of banking risk. GE Regional Director, Central Europe. He graduated from the Academy of Economics in Krakow. He co-founded the First Polish-American Bank. He joint GE in 1992, first as General Manager in Poland and then as Supervisory Board member of General Electric Mortgage Bank, President of Expander Sp. z o.o. and GE Investments Poland. Owner of Finserv. Audyt i Doradztwo, an auditing and counseling company. He graduated from the Academy of Economics in Poznan and the Controlling School in Katowice. In 2001 he became chartered auditor authorized to audit financial statements. Since 2007, he has been member of the National Chamber of Statutory Auditors. In he was partner in the auditing and counseling company Grant Thornton Frąckowiak Sp. z o.o. Chief Commercial Officer in GE Capital Global Banking. In 1977 he graduated from the University College Cork and in 1981 he obtained qualifications and membership in the Institute of Chartered Accountants in Ireland. He has worked for GE for over 11 years during which he has held senior positions in risk management, sales and marketing, business development and in the management of GE s Joint Venture s Banking relationships. Currently, he is responsible for Global Banking s JV s and business development. Doctor of economics. She works as assistant professor in the Collegium of Business Administration at the Warsaw School of Economics. She is a specialist and author of many publications about corporate finance management and financial market instruments. In the past, she was also consultant in the Ministry of State Treasury. She worked in supervisory boards of various companies as member and vice-president. Head of Retail Risk in GE Capital Global Banking.

7 Seidel (52) Agnieszka Słomka- Gołębiowska (34) Tomasz Stamirowski (42) He obtained his MBA in Cass Business School in London and graduated from the Moscow State Institute of International Relations. He joint GE in 1998 and occupied various global managerial functions in risk management. Doctor of economics. Holds PhD in Economics and MSc. in Finance and Banking from Warsaw School of Economics, as well as MBA from the French Institute of Management. She also studied in Denmark, Austria and US. She works as an Associate Professor at the Warsaw School of Economics. Since Director of the Department in the Industrial Development Agency responsible for corporate governance, restructuring and privatization Professor Assistant at the University of Muenster, Germany, consultant in Arthur Andersen. In the past she sat on the supervisory board of non-public companies. She received prestigious awards including Alexander von Humboldt Fellowship and Polish- American Fulbright Fellowship. The author of numerous articles in professional journal and books on corporate governance. Partner and President of the Management Board of Avallon Sp. z o.o. He graduated from the Foreign Trade Faculty at Łódź University and the Faculty of Management at the University of Grenoble (France). Since 2001 he has been President of the Management Board of Avallon Sp. z o.o, a company managing private equity fund and Avallon MBO S.A. (investment entity). Independent Supervisory members In line with the best standards and provisions of Good practices of companies listed at WSE, the Bank s By-Laws state that at least 30% Supervisory Board members should be independent. According to Bank BPH By-Laws, independent Supervisory Board members should be free from any links to the Bank, its shareholders or employees, which links may have a significant impact on the independent member s capacity to adopt impartial decisions. At the same time, the Supervisory Board is obliged to assess the independence of its members annually, on the basis of declarations submitted by them. 54% Independency structure 46% independent members independent members affiliated with a strategic investor During the reporting period, declarations of independence were submitted by the following people: Beata Gessel-Kalinowska vel Kalisz, Sławomir Mirkowski, Dorota Podedworna Tarnowska, Wiesław Rozłucki, Agnieszka Słomka-Gołębiowska and Tomasz Stamirowski. At its meeting of 26 April 2010, the Supervisory Board analyzed the submitted declarations of independence and deemed all the above-mentioned members independent. Independent members are appointed to the function of the SB Chairman and Audit Committee Chairman. The Supervisory Board s composition varies. Over 50% of SB members are Polish nationals, while others have American, British, Irish, German and Czech nationality. As for education, most of SB members are graduates of economic faculties, as well as law. 23% of SB members are women.

8 Thanks to such diversity, the Supervisory Board is able to view matters at hand from different points of view. Primary professional activity scientific activities activities in the area of legal business auditor According to the Bank s By-Laws, resolutions on any benefits provided by the Bank and its related entities for the Management Board members, consent for the Bank to conclude an agreement with an entity related to the Bank, SB or MB member or entities related to them, as well as the selection of a chartered auditor to audit the Bank s financial statements should not be adopted without consent of the majority of independent members. Supervisory Board activities in 2010 In 2010, the Supervisory Board held 8 meetings and adopted 62 resolutions. Permanent committees operating within the Supervisory Board (Remuneration, Audit, Risk and Investment Committees) supported the Supervisory Board in delivery on its duties ad performance of its statutory functions. The Ad Hoc Nomination Committee launched on 26 February 2010 to select candidates for the position of Bank BPH Management Board President was responsible for the selection of a candidate for Management Board President. Activities of all the Committees are presented in a later part of the Report. Last year, the Supervisory Board was very active. It was monitoring key areas of the Bank s operations on regular basis, but first and foremost it analyzed in detail and accepted Bank BPH s new strategic objectives, which will mark its development directions in the nearest future. The Supervisory Board approved the Remedy Plan presented by the Management Board and then oversaw its implementation. The Supervisory Board was also assessing operational merger progress on an on-going basis. Candidate selection process for the President of the Management Board Candidate selection process for the President of the Management Board was conducted in compliance with top corporate governance standards. Immediately after learning about the planned retirement of Mr. Józef Wancer, the President of the Management Board, the Ad Hoc Committee was launched for the purpose of selecting candidates to the position of Bank BPH SA Management Board President. The Committee s task was to coordinate the process of candidate selection for the position of the Management Board President (with definition of candidate profile and selection criteria, the actual selection and presentation to the Supervisory Board). The Ad Hoc Committee was composed of two SB members related to the strategic investor and two independent SB members. In its work, the Committee was assisted by an executive search company. The Supervisory Board was informed on on-gogin basis about the progress of the Committee s work. The Committee was also in touch with the Office of the Polish Financial Supervision Authority, to inform it about the status of work. As an effect of its work, the Committee unanimously appointed Mr. Richard Gaskin as candidate to the position of the Management Board. On 16 December 2010, the Committee s recommendation was adopted unanimously by the Supervisory Board, which appointed Richard Gaskin as President of the Bank s Management Board, provided that a relevant consent is obtained from the Polish Financial Supervision Authority. The Committee was liquidated when the SB adopted the above-mentioned resolution. In line with its competencies, the Supervisory Board also dealt with personnel issues. The key personnel-related decision concerned change at the position of Management Board President. On 31 July 2010, Józef Wancer resigned from this function. The Supervisory Board appointed an ad hoc selection committee. Following a unanimous recommendation, in December 2010 the Supervisory Board appointed Mr. Richard Gaskin as President of the Bank s Management Board, effective from the date of relevant consent to be granted by the Polish Financial Supervision Authority.

9 As far as personnel-related issues are concerned, due to resignations of Management Board members and the decision to reengineer the Bank s business platform as well as related changes to its organizational structure, the Supervisory Board appointed new MB members responsible for the Sales Division, Strategy Division, Operations Division, IT, Services, Quality and Security Division. The Supervisory Board operates in an efficient way, fulfilling all the obligations stemming from the Bank s By-Laws. The Supervisory Board operates on the basis of framework work plan, adopted at its first meeting in The Supervisory Board prepared and presented to the GSM all required documents, it reported on its work and presented brief assessment of the company s standing, as well as reports on audits of Management Board reports. The Supervisory Board opinionated all the topics, which were then subject to GSM discussions. Supervisory Board members had a high participation rate at its meetings of 87.5%. Evaluation of Supervisory Board s work At its meeting of 16 February 2010, the Supervisory Board presented formal assessment of its 2010 work. The document, whose full contents will be presented to the shareholders in the GSM materials, reads as follows, inter alia: The Supervisory Board concluded that it was actively supporting the Bank s Management Board in the performance of its key tasks ( ) Its co-operation with the Bank s Management Board was smooth and there were no difficulties detected. Documents presented to the Supervisory Board were considered without undue delay.( )Thanks to varied experiences and circles represented by the Supervisory Board s members, the discussions the SB conducted contributed to the best possible decisions, benefiting all the shareholders. In the light of the above, the Supervisory Board states that it will face up to the challenges ahead of it.. Attendance of Supervisory Board s members at individual meetings is presented in the table below. Audit Committee (AC) The rules of Audit Committee activities stem directly from its Rules of Procedure, which are appended to the Supervisory Board s Rules of Procedure and comply with the requirements of the of the law dated 7 May 2009 on chartered auditors and their authorities, entities authorized to audit financial statements and public supervision. In line with the Rules of Procedure, at last two

10 Committee members, including its chairperson, are independent Supervisory Board members. Additionally, the AC Chairperson complies with the criteria defined in the above-mentioned law. The tasks of the Audit Committee pertain to supervision over the Bank s financial reporting, internal audit and risk management. The Committee also monitors chartered auditor s work. The AC possesses a broad set opf duties, e.g. it may demand that the Bank presents specific information, it should be informed about the way significant and extraordinary transactions are booked and has the right to invite the Bank s management Board President, the Head of the Internal Audit Department, other Bank s employees and representative of external auditor to its meetings. Recommendations and evaluations of the Committee are issued unanimously, and then presented to the Supervisory Board and the President of the Bank s Management Board. As at 31 December 2010, the Audit Committee consisted of the following people: Sławomir Mirkowski (Chairman) Aleš Blažek Robert Charles Green Dorota Podedworna-Tarnowska Wiesław Rozłucki Agnieszka Słomka Gołębiowska In 2010, the Audit Committee held 5 meetings. Date of Audit Committee Main points/ recommendations meeting 23 February internal audit report Conclusions on 2009 internal audit activities Review of 4Q 2010 financial statements and update on Remedy Program execution 25 March 2010 The Bank s financial statements and Management Board s report on the Bank s activities in 2009 with the chartered auditor s opinion and report Review of fees paid to external auditor Assessment of external auditor relations and independence AC opinion on 2010 Internal Audit Department s work plan and budget, and the strategic plan for Discussion on draft reports: Supervisory Board s report on the assessment of 2009 Bank s financial statements, Report on the assessment of the Management Board s report on the Bank s 2009 activities and general assessment of the Bank s standing, along with internal control system and risk management system for the Supervisory Board Compliance Department work plan for May 2010 Internal audit report after 1Q 2010 Discussion over the Bank s current financial performance Report on the compliance function, with special focus on branch control results after 1Q 2010 Information on remuneration of the Head of the Internal Audit Department. 23 August 2010 Review of the Bank s results after 6 months with account to delivery on the Remedy Program s provisions Review of mid-year financial statements (with CFO and KPMG representatives)

11 Information on KPMG recommendations presented in 2009 Management Letter and the Bank Management Board s replies Internal audit report after 2Q 2010 Report on the compliance function, with special focus on branch control results after 2Q 2010 Induction program: compliance function in Bank BPH with account compliance with regulatory bodies requirements and recommendations 4 November 2010 Review of the Bank s financial statements for 3Q 2010 Internal audit report after 3Q 2010 Report on the compliance function, with special focus on branch control results after 3Q 2010 Induction program: responsible lending and responsible banking rules implemented in Bank BPH. Remuneration Committee The Remuneration Committee issues opinions for the Supervisory Board in case of, e.g. approving and modifying contracts concluded with Management Board members, Management Board members remuneration, and legal disputes between the Bank and Management Board members, personnel issues and payment policy. The Committee s opinions are issued unanimously and they can be adopted in circular fashion. As at 31 December 2010, the Committee was composed of the following people: Dmitri Stockton (Chairman) Robert Green Des O Shea In 2010, the Committee held 4 meetings. The Committee met to discuss key issues of human resources management. In the course of the meetings, the following matters were discussed, inter alia: rules of reporting remuneration of Management Board s members, projected regulatory changes concerning remuneration of banks management boards and their potential impact of the remuneration structure in Bank BPH s Management Board. The Committee also issued 5 opinions between its meetings. Policy of remunerating Management Board s members Remuneration policy, based on substantial criteria, is a key element of any organization, and its objective is to recognize, interest and maintain employees, who provide valuable contribution to the company s strategic objectives. Its basic assumption is to create an environment to motivate employees to reach the highest attainable effects. Total remuneration of the Management Board s members includes a couple of elements: basic remuneration, floating elements, long-term incentives plans including i.a. stock options (GE program, based on General Electric shares) and additional benefits, such as medical care, company car, insurance against accidents and illness, and others Total remuneration of the Management Board s members was defined on the basis of their scope of obligations and years of work, to create a package that motivates and keeps these people within the organization. All of the above-mentioned remuneration elements are related to individual performance and the Bank s results. Each Management Board s member concluded a separate non-competition agreement. During

12 the non-competition period after the end of employment in the Bank, the Bank s Management Board member is obliged to abstain from committing to any competitive activity. Policy of remunerating Supervisory Board s members The rules on remunerating Supervisory Board s members are aimed at motivating them for active and efficient commitment to their functions. Given internal organization of Supervisory Board s work and the responsibility of its members, the remuneration was divided into the basic part and the so-called functional benefit. Monthly remuneration of the Bank Supervisory Board s member is 9 thousand PLN, while functional benefits range from 8 thousand PLN for the SB Chairman, 3 thousand PLN for the First and Second Deputy Chairman and Audit Committee Chairman and 2 thousand PLN for the Chairperson of other Committees. It was also decided that the Bank covers the costs of travel and accommodation of SB members related to SB meetings, SB committees and performance of other duties entrusted by the Bank s Supervisory Board. These rules were adopted as binding for the current Supervisory Board s term of office with the Resolution of the General Shareholders Meeting of 1 June Risk Committee The Risk Committee exercises control over risk management process in Bank BPH. The key aspects of its operations include management of credit, market and operational risk, as well as the Bank s compliance with external legal regulations. The Committee also issued decisions on credit decisions, relating to, inter alia, exposures exceeding specific limits and building up provisions higher than pre-defined limits. The Risk Committee is authorized to review binding internal regulations and to receive detailed information on them, as well as information on credit portfolio and all related indices, such as liquidity risk, interest rate risk and capital adequacy. The Committee also issues opinions on document related to risk management, which are then presented to the Supervisory Board for approval. As at 31 December 2010, the Risk Committee consisted of the following people: Denis Hall (Chairman) Des O Shea Mathias Seidel Dmitri Stockton In 2010, the Committee held 4 meetings. It dealt in detail with, inter alia, analysis of the impact of Recommendations T and S issued by the Polish Financial Supervision Authority, in particular on retail banking, adjustment of mortgage loans risk management strategy to Recommendation S requirements and analysis of the Bank s funding sources and stress tests results pertaining to this area. The Committee was also informed about credit portfolio quality and changes to the Bank s internal policies. Regardless of the above-mentioned issues, and in line with its competencies, the Risk Committee issued opinions on customer credit exposures exceeding relevant competence levels. Investment Committee The Investment Committee issues opinions on investments as well as purchases of all types of services and projects, with value over 2 million PLN. All Management Board s motions concerning investment spending, requiring the Supervisory Board s consent, must be first evaluated by the Investment Committee. As at 31 December 2010, the Committee was composed of the following people:

13 Mathias Seidel (Committee Chairman) Aleš Blažek Beata Gessel Kalinowska vel Kalisz Agnieszka Słomka-Gołębiowska Tomasz Stamirowski In 2010, the Bank s Management Board presented nine motions to be opinionated by the Investment Committee. They concerned, inter alia: terms of co-operation with the Credit Information Bureau, conclusion of agreement with medical services supplier for the Bank s employees, refurbishment of the Bank s head office in Warsaw and continuation of cooperation with the company rendering customer care services. All the projects received positive opinions from the Committee. With the view to standardize and accelerate opinions issued by the Investment Committee, the Supervisory Board changed its rules, by, inter alia, defining specimen application form for the Committee s opinion and issuing the opinion of a majority of committee members. Ad hoc Nomination Committee for the selection of the President of the Bank s Management Board The Committee was launched on 26 February 2010 due to the information provided by Józef Wancer, President of the Bank s Management Board, of his intention to resign from his function in the second half The Committee was composed of the following people: Dmitri Stockton (Ad hoc Committee Chairman), Des O Shea Agnieszka Słomka-Gołębiowska Wiesław Rozłucki. The Committee s composition did not change during its operations. The Committee s task was to coordinate the process of selecting candidate(s) to the position of the President of the Management Board. In particular, the Selection Committee was obliged to define the profile and criteria of selecting candidates and then appointing the candidate and presenting him/her to the Supervisory Board. During its 5 meetings, the Committee defined, inter alia, selection criteria and candidate s profile. The Committee members discussed the selection progress on regular basis, co-operated with executive search company, and participated in candidates interviews. The Committee also informed Bank BPH Supervisory Board on the progress of its work and was in touch with the office of the Polish Financial Supervision Authority to inform it about consecutive phases of the process As an result of its work, the Selection Committee unanimously appointed Mr. Richard Gaskin as candidate to the position of the Management Board President. On 16 December 2010, the Selection Committee s recommendation was adopted unanimously by the Supervisory Board, which appointed Richard Gaskin as President of the Bank s Management Board, provided that a relevant consent is obtained from the Polish Financial Supervision Authority. The Committee was liquidated when the SB adopted the above-mentioned resolution.

14 4. The Bank s Management Board The basic function of the Management Board is to manage the Bank s activities and to represent it externally. The Management Board consists of three to ten members appointed for a joint term of office of three years, including President, Vice-Presidents and members of the Management Board. Good knowledge of the Polish banking market, resulting from permanent domicile in Poland, good command of the Polish language and relevant experience in the Polish market should be characteristic of at least 50% of the Management Board members. In line with the Bank s By-Laws, at the KNF consent, Management Board members are appointed to hold responsibility for credit risk, corporate banking, as well as the President of the Management Board. The Management Board is appointed by the Supervisory Board, and its members are appointed upon request or opinion of the President of the Management Board. Within the confines of its responsibility, the Bank s Management Board is responsible in particular for adopting its strategy and the rules of cautious and stable Bank s management, and for ensuring transparency of its operations. Duties of the Management Board in particular relate to decision-making in real estate purchase and sales, bonds issue, exercising controls over the efficiency and effectiveness of risk management process and ensuring regular work of the internal audit system. Management Board s decisions are adopted in the forms of resolution, which are adopted by an absolute majority. In justified cases, Management Board s resolution may be adapted in circular mode, upon decision of the MB President or a person authorized by him/her. The work of the Management Board is led by the President, who represents the Bank and, inter alia, issues regulations on the Bank s internal activities, appoints tasks for Management Board s members and assesses their work. The President of the Management Board also convenes MB meetings and decides of their dates and agendas. Management Board s meetings can be held with the participation of at least 50% of its composition. Management Board s meetings can be attended by Supervisory Board s members at the SB consent or upon invitation from the Management Board. In 2010, the following changes were made to the Management Board s composition: On 8 January Józef Wancer informed of his intention to resign from the function of the Management Board President due to his planned retirement. The resignation was tabled on 21 May, effective as of 31 July 2010, On 8 January Kazimierz Łabno resigned from his function of the Vice-President of the Management Board responsible for Operations, IT, Settlements and Services Division, effective as of 31 January, due to his intention to continue his professional carrier outside of Bank BPH, On 8 January, the Supervisory Board appointed Richard Gaskin as Vice-President responsible for the Strategy Division (effective as of 25 January 2010), and Ron Malak a Vice-President responsible for Operations, IT, Settlements and Services Division, effective as of 12 February 2010, On 4 June 2010, Piotr Królikowski resigned from his function of Vice-President of the Bank s Management Board responsible for Retail Banking Division as of 31 July 2010, for personal reasons, On 9 July 2010, the Bank s Supervisory Board entrusted Richard Gaskin, Vice-President of the Management Board with obligations of the Management Board President for the period starting from 1 August 2010, i.e. the moment of Józef Wancer s resignation from this function, until the appointment of the new President of the Bank s Management Board. On the same day Supervisory Board appointed Grzegorz Jurczyk and Krzysztof Nowaczewski as Vice-President of the Management Board as of 1 August Grzegorz Jurczyk became Vice-President responsible for Retail Banking Division, while Krzysztof Nowaczewski was entrusted with the Operations Division,

15 On 23 July 2010, Mirosław Boniecki resigned from his function of the Vice-President of the Management Board as of 31 July 2010, On 16 December 2010, Bank BPH Supervisory Board appointed Richard Gaskin as President of the Bank s Management Board, effective from the moment the appropriate consent is granted by the Polish Financial Supervision Authority. Until that time, Richard Gaskin will be performing his hitherto function of the Vice-President of the Management Board, and acting as President of the MB. The current composition of the Management Board is as follows: Richard Gaskin (45) Acting President of the Management Board Grzegorz Dąbrowski (50) Vice-President of the Management Board Grzegorz Jurczyk (40) Vice-President of the Management Board Ronald James Malak (59) Vice-President of the Management Board Cezary Mączka (46) Vice-President of the Management Board Holds MBA of Henley Management College (United Kingdom). He started his professional carried in 1984 in British Lloyds Bank plc, and then he continued it in Ford Motor Company (Ford Credit) and 3M Ltd. He joined General Electric in In 2002, he became quality leader in GE Money in Switzerland. From 2003 to 2005 he worked as Managing Director in GE Capital Auto in the United Kingdom. In 2005, he was appointed President of GE Money Bank Russia and in 2009 he became President of GE Money Bank Russia and GE Money Bank Latvia. He graduated from the Warsaw School of Economics. He first worked for PBK, where he was responsible for, inter alia, trade finance, strategic customers and pricing policy. Between 2002 and 2007 in Bank BPH he was Managing Director of the Capital Macro-region Corporate Banking. Between November 2007 and January 2008 he worked for Bank Pekao (after integration of part of Bank BPH). Starting from January 2008, he has been with Bank BPH again, first as General Director of Corporate Banking and Real Estate Finance Area, and, upon KNF consent, as Vice-President of the Management Board. He graduated from Foreign Trade at the Warsaw School of Economics. In , he worked as consultant in Bain & Company, and in in Fiat Bank Polska S.A. Between , he was Management Board member and then Vice-President of Santander Consumer Bank s Management Board. In he was Sales Director for Car Products in Central and Eastern Europe at General Electric International. Between 2007 and 2009, he was Vice-President of the Management Board and Head of Sales Division in GE Money Bank, and after the merger with Bank BPH, became Managing Director of Indirect Distribution Area. He studied German and international business at Kent State University (Ohio, USA) and holds MBA from the Thunderbird School of Global Management (Arizona, USA). He joined GE in 2007 as President of GE Money Romania s Management Board. He came to GE from Citigroup, where he occupied a number of managerial functions, reaching the level of CitiFinancial General Director for Central and Eastern Europe. Between 1981 and 1992, he exercised managerial and analytical functions in the following American corporations: Progressive Corporation, Standard Oil Company and Colgate Palmolive Company. He graduated from the Faculty of Law at Gdańsk University and is licensed as prosecutor. He had his MBA at Gdańska Fundacja Kształcenia Menedżerów and Strathclyde Glasgow Business School. He joined GE in 2001, starting to gain experience in human resources. On 10 March 2008, he was appointed Vice-President of Bank BPH Management Board. Graduate of Pennsylvania State University (accounting) as well as New York University (MBA). He started working for GE in 1996, first as senior tax

16 George Newcomb (44) Vice-President of the Management Board Krzysztof Nowaczewski (37) Vice-President of the Management Board Carl-Normann Vökt (47) Vice-President of the Management Board manager and financial planning and analysis manager. Then he became CFO in GE Commercial Finance Healthcare Financial Services. In 2009 he continued his career in GE Capital Americas Equipment Finance as CFO. On 14 December 2009, he was appointed Vice-President of Bank BPH Management Board. He graduated from the Law and Administration Faculty at Mikołaj Kopernik University in Toruń and postgraduate studies in Banking and Finance. He holds MBA of Gdańska Fundacja Kształcenia Menedżerów and Strathclyde Glasgow Business School. He started working in GE Capital in Over the last 12 years, he occupied various managerial functions in the areas of Operations, Quality Management, Business Development and Sales. He graduated from Graz University. He also studied in Mexico. He worked for, inter alia, Bank Austria Creditanstalt S.A. Then he was Managing Director for credit area and General Director or Risk Management Division in Bank BPH, and in 2007 he became member of Bank BPH s Management Board. On 10 March 2008, he was promoted to the position of Management Board s Vice-President. Management Board s members co-ordinate and supervise The Bank s activities in line with the division of tasks, adopted by the Bank s Management Board. The composition of the Bank s Management Board is varied. Half of the Management Board s members are Polish nationals, and others are nationals of the USA, United Kingdom and Germany. As for education, the Management Board s members are graduates of economy, business and law. There are no women in the Management Board, but 33% of top managerial positions (which include Management Board and heads of key functions reporting directly to the President of the Management Board) are women. Division of competencies in the Management Board management structure During the period under discussion, the Bank s Management Board focused on changes to the every-day operational rhythm, with the view to adjust it to current challenges and priorities. To that end, regular Management Board s meetings were held to discuss key areas of the Bank s operations, on top of the regular weekly meetings devoted to current issues (including on-going financial situation monitoring in all customer and product segments). These areas included: risk management, retail banking, SME banking, corporate banking, new product launches and pricing policy. The Management Board also reviewed in detail the compliance issues. Also, at its meetings, the Management Board carried our regular detail

17 reviews of key projects, IT infrastructure, HR issues, Operations Division activities, fraud prevention and cost base. All these meetings enabled enhanced supervision over the key areas of the Bank s operations and contributed to better communication between individual units and faster decision-making in the Bank. Fixed Committees The Management Board may appoint fixed or ad hoc committee performing opinionating, consultation and decision-making functions. At the end of 2010, there were the following committees in Bank BPH: Assets and Liabilities Management Committee (ALCO) ALCO is responsible for developing market and liquidity risk management system. It adopts decisions and issues opinions relating to, in particular: the Bank s exposure to a given risk, debt issue, scope of money and capital market operations, approval of new products or modification of existing products from market and liquidity risk management perspective, and operational capital management. The Committee is also responsible for the Bank s pricing policy. ALCO accepts and recommends the Bank s funding plan. Product and Software Development Committee This is an opinionating body (for projects) and a decision-making body (in the scope of, inter alia, implementation, halting or concluding projects, prioritization of project portfolio, project technological implementation and regulatory compliance). Strategic Risk Management Committee It adopts decisions or presents opinions on strategic aspects of risk management within the framework of ICAAP n the Bank, and it exercises on-going supervision over capital management process. Credit Committee It adopts credit decisions and approves applications relating to, inter alia, special offers and other applications charged with credit risk. Operational Risk Committee It is a decision-making body appointed to ensure coherent and document system of operational risk management. The Committee, inter alia, monitors operational risk data. Compliance Risk Committee It is responsible for comprehensive supervision over on-going compliance risk and reputation risk management process. The Committee analyzes and monitors, inter alia, changes to legal provisions and regulatory guidelines, strategic investors standards. The Committee operates through the Bank s Management Board s meetings. 5. Compliance with legal provisions, norms and standards In its activities, Bank BPH is guided by top standards and code of ethics. Since 2008, Bank BPH has adopted GE s code of conduct called The Spirit & The Letter. This document defines key principles of ethical conduct, which are binding for all employees, directors, managers as well as consultants, agents, trade representatives, distributors and independent contractors. The rules presented in the code are aimed to help the employees recognize situations, where it may be necessary to consider appropriate conduct, to use advice and to adopt the best decisions for the Bank, our shareholders, customers and contractors. The code of conduct is an introduction to other important regulations in Bank BPH. The Bank operates by the principle that excellent financial performance and high corporate governance standards and compliance with code of ethics are not conflicting values indeed they reinforce each other. Therefore, the Bank implemented the highest GE Group standard related to responsible lending, vindication, customer complaints handling, new product launches through relevant Bank s units in the process of product development, its sales paths, customer service, products documentation and marketing materials. In 2010, the Bank adopted GE group s standards of responsible banking. This initiative aims at building customer relations based on transparency of banking products, services and processes

18 and assisting customers in case of change in their financial situation and problems with debt repayment. Implementing responsible banking standards, the Bank pays particular attention to the launch of the integrated system of sales quality management. To that end, it runs studies (the so-called Mystery Shopper) and post-sales call for individual products, it also analyzes categories of customer inquiries and complaints. These control tools play a key role in the assessment of product and processes compliance with sales standards and customers expectations. The Bank also has policies regulating its employees business activity outside of the Bank, the conflict of interests, accepting and offering gifts, notification of legal and ethical conduct breaches, investments in financial instruments by people related to the Bank or on behalf of the Bank. Bank BPH builds the culture of compliance, whereby the employees understand their obligations and may freely inform the Bank of their problems, with no fear of repression. The Bank promotes legal and ethical conducts, and in employees assessment and recognition, it accounts for their efforts towards compliance. 6. Internal audit and risk management in financial statements development The process of developing financial statements is one of the main tasks of the Financial Division, delivered upon in co-operation with other Bank s operational units. Financial statements are developed on the basis of the Bank s Main ledger, as well as analytical auxiliary books, which keep records of all economic events of the Bank, in line with the accounting policy approved by the Bank. Principal accounting rules are included in the Bank s Annual Stand alone Financial Statements in the part entitled: Rules of developing solo financial statements. Reporting platforms, integrated with the Bank s books and related through a number of interfaces to its operational systems, are used to develop financial statements. The platforms are used to develop both obligatory reporting, as well as management reporting, and thus they ensure data coherence between financial reporting and data used for management purposes. The processes of statement development are governed by procedures, which describe all significant phase of the process, name people performing them and describe built-up control measures. Similar to other Bank s processes, development of financial statements is subject to independent and objective assessment of the Internal Audit Department, and internal audit system. The internal audit system in Bank BPH consists of three levels: 1) Level 1: Internal audit measures implemented in individual banking processes, covering control measures built-up to individual baking processes, aimed at restricting the risks identified in the processes (e.g. control procedures, self-assessment, functional control, manual and automatic controls et cetera) Two types of control mechanisms are used in Level 1 in the development of financial statements: - technical numeric and logical control formulas in reporting systems, implemented at individual statement generation phases, whose main aim is to ensure completeness of data fed into the financial statements and their compliance with the Bank s Main Ledger - substantial analytical review of the reports, aimed at ensuring quality and regular presentation of financial data, based on specialists experience and their knowledge about economic events happening in the Bank

19 2) Level 2: Internal audit mechanisms applied regularly by selected Bank s organizational units appointed to manage specific banking risks. The objective of the audit is to assess efficiency of Level 1, 3) Level 3: Audit monitoring exercised by the Internal Audit Department (IAD), which consists in regular examination, assessment and improvements in internal audit mechanisms existing in the Bank and their practical application. The objective of the audit is to assess efficiency of Levels 1 and 2.