Corporate Governance. Statement on BOARD OF DIRECTORS

Transcription

1 Statement on Corporate Governance BOARD OF DIRECTORS Highest Standards of Corporate Governance The Board of Directors has always upheld the highest standards of corporate governance to safeguard the interest of all stakeholders, which include depositors and customers, shareholders and investors, employees and the community. The Board subscribes to the belief that self regulation in tandem with observance of statutory requirements and market regulations are pivotal to sound corporate governance. The Board is fully dedicated to ensuring that the structures and procedures which are well in place in Public Bank to support excellent corporate conduct, will continue to exist not only in their present form but will continually be enhanced and fortified. Public Bank s corporate conduct has been adjudged exemplary by investors and analysts, and more significantly, by the very Stock Exchange on which it is listed. The highlight of the testimony to Public Bank s consistently outstanding standards of corporate governance is the KLSE Corporate Excellence Award 2002 for the Main Board which Public Bank received, this being the third consecutive year that Public Bank has received this prestigious Award from the Kuala Lumpur Stock Exchange, since receiving the inaugural KLSE Corporate Excellence Award 2000 for the Main Board. The resounding affirmations of Public Bank s outstanding standards of corporate governance are as follows: Public Bank received the inaugural KLSE Corporate Excellence Award 2000 for the Main Board, and the KLSE Corporate Sectoral Award 2000 in the Main Board Finance and Closed-End Fund Category. Public Bank received the KLSE Corporate Excellence Award 2001 for the Main Board (second consecutive year), and the KLSE Corporate Sectoral Award 2001 in the Main Board Finance and Closed-End Fund Category (second consecutive year). Public Bank received the KLSE Corporate Excellence Award 2002 for the Main Board (third consecutive year). Public Bank was the winner of the inaugural Malaysian Business Corporate Governance Award

2 Annual Report Statement on Corporate Governance The six (6) Independent Non-Executive Directors through their varied experience and qualification in economics, accounting, law, banking, and business management provide effective contribution and support to the functions of the Board. Role and Responsibilities of Board The Board maps out the Bank s medium-term and long-term strategies, and is responsible for reviewing the Management s action plans, as well as setting the annual budget for the Bank. Compliance with Best Practices in Corporate Governance The Board of Directors has taken measures to ensure that Public Bank fully complies with the Best Practices in Corporate Governance as identified in the Malaysian Code on Corporate Governance. Board Balance The Public Bank Board consists of nine (9) Members of whom two (2) hold Executive Office. There are six (6) Independent Non-Executive Directors; as such, two-thirds of the Board are Independent Directors, thereby bringing objective, independent judgement to the decision making process of the Board. None of the Directors represents the interest of large or major shareholders of the Bank. Tan Sri Dato Sri Dr. Teh Hong Piow, who was re-designated as Non-Executive Chairman with effect from 1 July 2002, and the two (2) Directors holding Executive Office namely Datuk Tay Ah Lek who is the Managing Director and Dato Lee Kong Lam who is the Executive Director, are veterans and professionals in the banking and finance industry, having been in this line from the onset of their careers. They collectively possess a total of 131 years of expertise and experience in banking and finance. The Board prescribes the minimum standards and approves significant policies relating to the management of credit risks and other areas of the Bank s business. The Board s other primary duties include regular oversight of the Bank s business operations and performance, and ensuring the existence of effective infrastructure and internal controls to measure and manage business risks in general and specifically, operational, credit, market and liquidity risks. The roles of the Chairman and the Managing Director are distinct and separate. The Board has set up the Board Executive Committee to manage Public Bank in all aspects of its business. The Board Executive Committee comprises the following: Board Executive Committee Chairman : Tan Sri Dato Sri Dr. Teh Hong Piow Members : Datuk Tay Ah Lek Dato Lee Kong Lam The Co-Chairman, Tan Sri Dato Thong Yaw Hong, being a senior Independent Non-Executive Director, avails himself to provide clarification on issues which may be raised by shareholders and investors at Public Bank's general meetings. 24

3 The Board of Directors has always upheld the highest standards of corporate governance to safeguard the interest of all stakeholders, which include depositors and customers, shareholders and investors, employees and the community. Board Meetings and Supply of Information to the Board Board meetings are held once every month to review Management reports on the progress of business operations and minutes of meetings of the various Board Committees as well as Management Committees, and to consider and if deem fit approve proposals that require the sanction of the Board In addition to monthly Board meetings, special Board meetings are convened on an ad-hoc basis to review and approve Public Bank s quarterly financial statements; and to deliberate corporate proposals and other matters that require the Board s urgent decision. The agenda for Board meetings, together with detailed reports and proposition papers to be tabled at the Board meeting, are circulated to all the Directors for their perusal and consideration well in advance of the Board meeting date. Senior Management staff as well as advisers and professionals 2002 appointed to advise on corporate proposals, may be invited to attend Board meetings to provide the Board with their views and explanations on certain agenda items tabled to the Board, and to furnish their clarification on issues that may be raised by the Directors. The Directors are updated by the Company Secretary on new statutory as well as regulatory requirements relating to the duties and responsibilities of Directors, including policy guidelines issued by Bank Negara Malaysia that concern their discharge of duties as Directors of a financial institution. All Members of the Board have ready and direct access to the advice and services of the Company Secretary, and the Directors may seek external professional advice if required by them. The attendance of all the Directors at Board meetings held during the financial year ended 31 December 2002 well surpassed the minimum requirements stipulated by Bank Negara Malaysia and the Kuala Lumpur Stock Exchange. 25

4 Annual Report Statement on Corporate Governance 26 Appointment to the Board The proposed appointment of new Member(s) of the Board is recommended by the Nomination Committee to the Board for their concurrence before the application on the proposed appointment(s) is submitted to Bank Negara Malaysia for prior approval. The Nomination Committee comprises mainly of Independent Non-Executive Directors and its composition is as follows: Nomination Committee Chairman : Tan Sri Dato Sri Dr. Teh Hong Piow Vice Chairman : Tan Sri Dato Thong Yaw Hong Members : Dato Yeoh Chin Kee Tengku Abdul Rahman ibni Sultan Haji Ahmad Shah Al-Mustain Billah Haji Abdul Aziz bin Omar The terms of reference of the Nomination Committee are as follows: To consider and recommend to the Board technically competent persons of integrity with a strong sense of professionalism and who foster and practise the highest standard of banking and finance in the country for appointment, subject to the approval of Bank Negara Malaysia ( BNM ), as: a) Members of the Board of Directors b) Chief Executive Officer ( CEO ) c) Members of Board Committees To review the performance of Members of the Board; the CEO and Members of Board Committees; and to assess the effectiveness of the Board and Board Committees as a whole and the contribution of each individual Director. To recommend to the Board, upon review and subject to the approval of BNM, the extension of appointment of Members of the Board and the CEO upon the expiry of their respective terms of appointment as may be approved by BNM. To review the required mix of skills and experience and other qualities, including core competencies, which Non- Executive Directors should bring to the Board. To review the Board structure and size, and the balance of appointments between Executive Directors and Non- Executive Directors. To recommend to the Board, the policy on period of contract of service of the Executive Directors and the CEO. To recommend to the Board, the upgrading and promotion of the CEO. To review and recommend to the Board, the terms of reference of Board Committees. To review the adequacy of committee structures of Board Committees. Such other responsibilities as may be delegated by the Board from time to time. Directors Remuneration The Remuneration Committee reviews annually the performance of the Executive Directors and furnishes recommendations to the Board on specific adjustments in remuneration including reward payments commensurate with the respective contributions of the Executive Directors for the year. The determination of the remuneration of Non-Executive Directors is a matter for the Board as a whole. The Directors are paid annual fees and attendance allowances for Board meetings that they attend. The Remuneration Committee comprises primarily of Non- Executive Directors and its composition is as follows: Remuneration Committee Chairman : Tan Sri Dato Sri Dr. Teh Hong Piow Vice Chairman : Tan Sri Dato Thong Yaw Hong Members : Datuk Tay Ah Lek Dato Yeoh Chin Kee Haji Abdul Aziz bin Omar The terms of reference of the Remuneration Committee are as follows: To review annually and recommend to the Board the Company s overall remuneration policy for Senior Management staff and Executive Directors to ensure that rewards commensurate with their contributions to the Bank s growth and profitability, and that the remuneration policy supports the Bank s objectives and shareholders investments. To review annually the performance of the Executive Directors and recommend to the Board specific adjustments in remuneration and/or reward payments, if any, reflecting their contributions for the year. Keeps abreast of the terms and conditions of service of Executive Directors including their total remuneration package for market comparability, and reviews and recommends changes to the Board whenever necessary. Keeps abreast of the remuneration packages for Members of Board Committees to ensure that they commensurate with the scope of responsibility held, and reviews and recommends changes to the Board whenever necessary. To review and recommend to the Board the terms and award of employees share options for Senior Management staff and Executive Directors.

5 Directors Training The Members of the Board keep abreast with developments in the financial industry by their attendance at conferences and seminars organised by Bank Negara Malaysia. All Members of the Board have attended the mandatory accreditation programme organised by the Research Institute of Investment Analysts Malaysia. Directors are encouraged to attend continuous education programmes and seminars to keep abreast with developments in the market place. In addition, seminars and conferences organised by the Securities Commission, Kuala Lumpur Stock Exchange, relevant Regulatory Authorities, and professional bodies on areas concerning Directors responsibilities and corporate governance issues are notified to the Board, for their participation at such seminars and conferences. Re-Election of Directors Pursuant to Section 129(2) of the Companies Act, 1965, the Directors who are over the age of seventy (70) years retire at every annual general meeting and shall be eligible for reappointment to hold office until the next annual general meeting. In accordance with the Articles of Association of Public Bank, one-third of the Directors shall retire from office at every annual general meeting and be eligible for re-election. The Articles provide that all Directors shall retire from office once at least in each three (3) years but shall be eligible for reelection. COMMITTEES The Board has set up several Board Committees as well as various Management Committees to assist the Board. The functions and terms of reference of the Board Committees and Management Committees, as well as authority delegated by the Board to these Committees are clearly defined. The Committee structure is as follows: Board of Directors Board Committees Major Management Committees Board Executive Committee Human Resource Committee Audit Committee Loans Committee Nomination Committee Credit Risk Management Committee Remuneration Committee Operational Risk Management Committee Risk Management Committee Assets and Liabilities Management Committee Share Investment Committee Information Technology Committee 27

6 Annual Report Statement on Corporate Governance Board Committees Board Executive Committee Manages the Bank in all aspects of its business. Implements strategic business and policies as approved by the Board of Directors. Identifies, formulates and prioritises strategic issues and charts strategic directions for action by the Management and staff. The Board Executive Committee holds meetings with Heads of Divisions and Senior Management staff twice every week. Audit Committee The terms of reference of the Audit Committee are set out under the Audit Committee Report. The Audit Committee meets at least once a month. Nomination Committee The terms of reference of the Nomination Committee are set out in the paragraph on Appointment to the Board in this Statement on Corporate Governance. The Nomination Committee meets as and when required. Remuneration Committee The terms of reference of the Remuneration Committee are set out in the paragraph on Directors Remuneration in this Statement on Corporate Governance. The Remuneration Committee meets as and when required. Risk Management Committee Assists the Board of Directors to oversee the overall management of all risks covering market risk management, liquidity risk management, credit risk management and operational risk management. Reviews and evaluates the adequacy of overall risk management policies and procedures. Ensures that there is adequate risk reporting of core business activities. The Risk Management Committee holds monthly meetings. Major Management Committees Human Resource Committee Formulates human resource policies and practices for the Bank and wholly owned subsidiaries of the Bank. Deliberates and decides on human resource operational issues which do not fall within the ambit of authorised individual officers. The Human Resource Committee holds meetings twice a month. Loans Committee Approves loan applications which are beyond the discretionary powers of authorised senior officers. Recommends loan applications which are beyond its discretionary powers for the approval of higher authorities. Recommends credit policies and direction of lending. The Loans Committee holds weekly meetings. Credit Risk Management Committee Evaluates and assesses the adequacy of strategies to manage the overall credit risk associated with the Bank's activities. Assists the Board of Directors in its supervisory role on the management of credit risk. Evaluates risks under stress scenarios and the capacity of the capital to sustain such risk. The Credit Risk Management Committee holds monthly meetings. Operational Risk Management Committee Assists the Board of Directors in the management of operational risk. 28

7 Oversees the formal development of operational risk management policies encompassing all business activities, and ensuring the development of policy manuals, processes, procedures and practices. Evaluates and assesses the adequacy of controls to manage the overall operational risks associated with business activities including physical/premises security. The Operational Risk Management Committee holds monthly meetings. Assets and Liabilities Management Committee Develops the framework and sets the objectives for the asset and liability management function. Develops adequate policies, procedures and internal control measures for the carrying out of the asset and liability management function. Oversees the management of the Bank's liquidity. The Assets and Liabilities Management Committee holds monthly meetings. Share Investment Committee Formulates policies, strategies, and other matters relating to share investment. Reviews the Bank s share investment portfolios and takes necessary measures to improve its value, profitability and risk. The Share Investment Committee holds quarterly meetings. ACCOUNTABILITY AND AUDIT Financial Reporting The Board aims to present a balanced, clear and meaningful assessment of Public Bank s and the Public Bank Group s financial positions and prospects in all their reports to shareholders, investors and the Regulatory Authorities. Early releases of announcements on quarterly financial statements and the press releases accompanying these results announcements reflect the Board s commitment to give timely and up-to-date disclosures of Public Bank s and the Public Bank Group s performances. The Board is assisted by the Audit Committee to oversee Public Bank s and the Public Bank Group s financial reporting processes and the quality of financial reporting. The Responsibility Statement by the Directors on the annual audited financial statements of Public Bank and the Public Bank Group is set out on page 139. Internal Control The Board has overall responsibility for maintaining a system of internal controls that provides reasonable assurance of effective and efficient operations, and compliance with laws and regulations, as well as with internal procedures and guidelines. Information Technology Committee Establishes objectives, policies and strategies for computerisation in the Public Bank Group. Develops long-term strategic plans for computerisation of the Public Bank Group. The Information Technology Committee holds monthly meetings. 29

8 Annual Report Statement on Corporate Governance The size and complexity of Public Bank s and the Public Bank Group s operations involve the acceptance and management of a wide range of risks. The nature of these risks means that events may occur which would give rise to unanticipated or unavoidable losses. Public Bank s system of internal controls is designed to provide reasonable but not absolute assurance against the risk of material errors, frauds or losses occurring. During the financial year, the Board has through the Risk Management Committee carried out the ongoing process of identifying, evaluating and managing the key operational and financial risks facing Public Bank and the Public Bank Group. The effectiveness of the Bank s system of internal controls is reviewed periodically by the Audit Committee. The review covers the financial, operational and compliance controls as well as risk management. The Statement on Internal Control, which provides an overview of the state of internal control within the Public Bank Group, is set out on page 62. Audit Committee In addition to the duties and responsibilities set out under its terms of reference, the Audit Committee acts as a forum for discussion of internal control issues and it contributes to the Board s review of the effectiveness of the Bank s internal control and risk management systems. The Audit Committee also conducts a review of the internal audit functions i.e. its authority, resources and scope of work. It also ensures that no restrictions are placed on the scope of statutory audits and on the independence of the internal audit functions. The minutes of the Audit Committee meetings are tabled to the Board for noting and for action by the Board where necessary. The activities of the Audit Committee during the year are set out under the Audit Committee Report on page 58. Relationship With External Auditors The Audit Committee meets with the external auditors at least twice a year to discuss the audit plan, annual financial statements and their audit findings. It also meets with the external auditors whenever it deems necessary. These meetings are held without the presence of the Executive Directors and Management. COMMUNICATION WITH SHAREHOLDERS AND INVESTORS Public Bank has always recognised the importance of transparency and accountability to its shareholders and investors. A key channel to reach out to shareholders and investors is the annual report of Public Bank. Not only are the contents informative but there is a continuing effort by Public Bank to improve the contents in line with developments in corporate governance practices. At the same time, Public Bank continues to make the annual report more reader-friendly, including increasing font size for printing the annual report. The main forum for dialogue with shareholders is Public Bank's general meetings. Shareholders who attend the Public Bank general meetings are encouraged to raise questions pertaining to the subject matters of such general meetings. The Chairman of Public Bank presents a comprehensive review of the Public Bank Group s financial performance for the year at each annual general meeting and copies of the review are available to shareholders on request. Providing timely information to shareholders and investors is also important in terms of the effectiveness of such communications. As such, Public Bank not only makes timely public announcements through the Kuala Lumpur Stock Exchange of all major developments within the Public Bank Group but Public Bank also strives to make the quarterly financial results announcements on a timely basis, after the approval of the financial results has been received from Bank Negara Malaysia. 30

9 In order to reach a wider audience of shareholders and investors, information relevant to shareholders and investors and disclosed to the public are also available on the Public Bank website at Shareholders and investors therefore have timely and convenient access to information on the Public Bank Group, be it corporate developments, quarterly financial results announcements, press releases or Public Bank s annual report. INVESTORS RELATIONS A key channel of communications with investors and the investment community, both domestically and internationally, is the Public Bank Group s investor relations activities. The Public Bank Group has a strong following amongst institutional investors and a direct communication channel with such investors exists in the investor relations functions of the main listed companies in the Public Bank Group. Public Bank, Public Finance and JCG Holdings Ltd each has an on-going investor relations programme involving Senior Management personnel. Senior Management Personnel in Investor Relations Activities Public Bank Datuk Tay Ah Lek, Managing Director Mr Leong Kwok Nyem, Senior General Manager, Treasury & Corporate Operations Encik Nasaruddin bin Arshad, Group Economist Mr Wong Jee Seng, General Manager, Finance & Risk Management Encik Zulkifli bin Mohd Ali, Director, Corporate Structure Public Finance Mr Lam Kam Yin, Senior General Manager Mr Tony Yong Heng Thong, Director, Finance Division JCG Holdings Ltd Mr Tan Yoke Kong, General Manager Mr Lee Huat Oon, Deputy General Manager One of the main activities of these investors relations functions is the meetings held with equity research analysts, fund managers of institutional investment funds and large institutional shareholders of Public Bank, Public Finance and JCG Holdings Ltd. Other activities include participation in road shows, corporate days, investor conferences and forums, both domestically and internationally, and in teleconferences with analysts and fund managers. Direct communications with the investment community provide opportunities for the Public Bank Group s management to explain announcements made on corporate developments besides addressing issues that investors may have or need to be clarified with respect to the business or operations of the Group. At the same time, it allows the Public Bank Group to gauge the views of the investment community on the Group and its activities. In 2002, Public Bank held approximately 230 meetings with equity research analysts, fund managers and investors, participated in 2 corporate days and made presentation in 5 investor conferences or forums, including the annual KLSE Investor Week. As a result of the active investor relations activities of the Public Bank Group, the number of stock brokerages or equity research companies which cover the main listed companies in the Public Bank Group is high. This can be seen from the number of contributors to the Thomson Financial Institutional Brokers Earnings System (I/B/E/S) Earnings Estimates. JCG Holdings Public Bank Public Finance Ltd No. of contributors to I/B/E/S Earnings Estimates 31

10 Annual Report Corporate Governance RISK Management Effective risk management is an essential element to ensure the Public Bank Group s continued profitability and enhancement of shareholder value, particularly in today s rapidly changing financial markets both internationally and domestically. Risk management thus remains a key element in the Public Bank Group s overall strategy with a focus on an integrated enterprise-wide risk management infrastructure with the establishment of a dedicated Board Committee known as the Risk Management Committee to ensure that the major areas of risks are controlled and co-ordinated effectively. Notwithstanding the above, continued emphasis has been given to further enhance the risk management infrastructure and capabilities, riskreturn management and proactive risk management culture on an enterprise-wide basis. KEY DEVELOPMENTS IN 2002 The Public Bank Group also recognises that risk management is changing continuously, in response to changes in industry structure resulting from consolidation and liberalisation of the banking environment, new products and channels, and the impending introduction of the New Basel Capital Accord (Basel II). Public Bank Group had, in 2002, enhanced its risk management infrastructure further with the implementation of the following: Risk Management Committee (RMC) The RMC, one of the proposed Board Committees under the Financial Sector Masterplan, was set up and approved by the Board of Directors (Board) in 2002 to further enhance corporate governance. The RMC is chaired by an independent non-executive director and is independent of the business units and trading units. The RMC is responsible for the management of all risks covering credit risk management, operational risk management, market risk management and liquidity risk management within the Public Bank Group. The RMC s other key roles are to ensure disciplined and consistent application of integrated enterprisewide risk management principles and the establishment of key risk management policies to control the major areas of risk. Operational Risk Management Committee (ORMC) The ORMC was set up and approved by the Board in The ORMC's key role is to assist the Board in overseeing the management of operational risks within the Public Bank Group. In conjunction with the setting-up of the ORMC, an Operational Risk Management Department was set up to improve operational risk management and to provide support to the ORMC in carrying out its functions. 32

11 Malaysian Accounting Standards The Public Bank Group has implemented the requirements of the Malaysian Accounting Standards Board (MASB) 24 on the disclosure and presentation of financial instruments for the financial year ended 31 December 2002 which is in line with the MASB s move towards fair value accounting in order to bring Malaysian companies closer to the international financial reporting framework, as well as offer greater transparency to shareholders and investors. This disclosure of fair value of financial instruments has improved the understanding of the nature and use of financial instruments and the risks associated with them. Public Bank has also evaluated the impact of the imminent fair value measurement standard i.e. MASB Exposure Draft 35, which will revolutionise the way financial assets and liabilities are measured, on its income statement and balance sheet. Basel II In October 2002, Public Bank participated in the Basel II Third Quantitative Impact Studies (QIS 3) co-ordinated by Bank Negara Malaysia based on the Standardised approach. The consolidated results of all participating financial institutions in the QIS 3 will be used as input towards finalising the Basel II which is expected to be by the end of 2003 and to be complied with by the G-10 countries by the end of The new regulatory capital framework under Basel II has adopted a more extensive and complex approach in making the capital adequacy ratio more risk driven and the participation in the QIS 3 has not only enabled Public Bank to gauge the quantitative impact on its capital adequacy requirements based on Basel II but also to be ready for the changes with the eventual implementation of Basel II. One of the key effects of the implementation of Basel II is that the capital requirements of financial institutions will be more reflective of the counterparty/customer risk of the financial institutions. OVERALL RISK MANAGEMENT FRAMEWORK The Public Bank Group believes that there must be clear accountability and responsibility for the risk management process. The current risk management framework within the Group is based on the following 6 broad principles which outline the principal risk management and control responsibilities as shown in the structure chart on the following page: 1. The Board is ultimately responsible for the management of risks. The Board through the Risk Management Committee maintains overall responsibility for risk oversight within the Public Bank Group. 2. The Risk Management Committee is responsible for the risk oversight for the major areas of risk covering credit risk, operational risk, market risk and liquidity risk. The Risk Management Committee is responsible for the establishment of risk policies. 3. The other dedicated committees, namely, the Credit Risk Management Committee is responsible for overseeing credit risk, the Operational Risk Management Committee for operational risk and the Assets & Liabilities Management Committee for market risk and liquidity risk. 4. The dedicated independent risk management and control functions, namely, the Risk Management Division, the Credit Administration & Supervision Division and the Operations Control Department are responsible to ensure the implementation of risk policies and to monitor compliance with the risk policies. They are also responsible for the identification, measurement and monitoring of risks. 5. The Business Risk Units are responsible for implementing the risk policies and complying with the risk policies. They are to ensure that their day-to-day business activities are carried out within the risk parameters set. 6. The Audit Committee s key role, through Internal Audit Division, is to provide an independent assessment of the adequacy and reliability of the risk management processes, and compliance with risk policies and regulatory guidelines. 33

12 Annual Report Corporate Governance The committees (i.e. the Audit Committee, the Risk Management Committee, the Credit Risk Management Committee, the Operational Risk Management Committee and the Assets & Liabilities Management Committee) scope of functions currently covers the Bank Negara Malaysia regulated entities of the Public Bank Group namely, Public Bank, Public Finance and Public Merchant Bank. JCG Holdings Ltd. based in Hong Kong SAR, has its own Audit Committee, Assets & Liabilities Management Committee and Credit Committee, which is responsible for the formulation of credit policies and the management of credit risk. OVERALL RISK MANAGEMENT FRAMEWORK Board of Directors Establish Risk Policy Risk Management Committees Ensure Implementation of Risk Policy and Monitor Compliance Risk Management Committee Credit Risk Management Committee Operational Risk Management Committee Assets & Liabilities Management Committee Independent Risk Management and Control Functions Internal Audit Division Risk Management Division Credit Administration & Supervision Division Operations Control Department Audit Committee Business Risk Units Implement and Comply with Risk Policy Retail Operations Treasury and Capital Market Operations Corporate Lending Investment Banking Share Broking and Fund Management Islamic Banking 34

13 KEY COMMITTEES INVOLVED IN RISK MANAGEMENT Key Committee and Members Audit Committee (AC) The AC is chaired by the Co-Chairman of Public Bank, an independent non-executive director and the other five members are all independent non-executive directors. The AC meets at least once a month. Risk Management Committee (RMC) The RMC is chaired by the Co-Chairman of Public Bank, an independent non-executive director and the members are: Chairman of Public Bank Managing Director Executive Director Non-Executive Director The RMC holds monthly meetings. Credit Risk Management Committee (CRMC) The CRMC is chaired by an independent non-executive director and the members, all of whom are independent of credit approving functions, are: Group Chief Internal Auditor Group Economist Head of Finance & Risk Management Head of Credit Administration & Supervision Key Functions Ensures maintenance of system of internal controls and compliance with laws and regulations as well as with internal procedures and guidelines. Provides independent and objective reports on the management records, accounting policies and controls to the Board. Oversees the management of all risks covering credit risk management, operational risk management, market risk management and liquidity risk management. Reviews and evaluates the adequacy of overall risk management policies and procedures. Ensures that there is adequate risk reporting of core business activities. Evaluates risk under stress test scenarios. Promotes a proactive risk management culture so that risk management processes are applied in the day-to-day business and activities. Credit Risk Oversees the development of credit policies encompassing all products and businesses. Monitors, assesses and advises on the credit risk portfolio composition. Evaluates credit risk under stress scenarios and the capacity of capital to sustain such credit risks. Assesses risk-return. The CRMC holds monthly meetings. 4. Operational Risk Management Committee (ORMC) Operational Risk The ORMC is chaired by the Executive Director and the members are: Oversees the development of operational risk management policies encompassing all business activities, and Group Chief Internal Auditor ensuring the development of policy manuals, processes, Head of Finance & Risk Management procedures and practices. Head of Banking Operations Evaluates and assesses the adequacy of controls to Head of Credit Administration & Supervision manage the overall operational risks associated with the Head of Card Services & Support business activities. Head of Information Technology Reviews reports on significant fraudulent cases and lapses in operational risk management processes. The ORMC holds monthly meetings. Ensures that there is adequate and prompt reporting in respect of operational risk management. 35

14 Annual Report Corporate Governance Key Committee and Members Key Functions 5. Assets & Liabilities Management Committee (ALCO) Market Risk and Liquidity Risk The ALCO is chaired by the Chairman of Public Bank and the members are: Serves as the primary oversight and decision-making body that provides strategic direction for the management Managing Director of market risk (particularly interest rate risk and foreign Executive Director exchange risk) and liquidity risk. Head of Retail Banking Formulates, reviews and approves policies and strategies Head of Treasury & Corporate Operations on the balance sheet structure and for market risk and Group Economist liquidity risk management. Head of Credit Control & Islamic Banking Ensures that market risk and liquidity risk are identified, Head of Finance & Risk Management measured and monitored. Head of Corporate Banking & Trade Finance The ALCO holds monthly meetings. INDEPENDENT RISK MANAGEMENT AND CONTROL FUNCTIONS Risk Management Division The Risk Management Division is independent of the business units and trading units. Develops and maintains sound risk management policies and procedures. The Risk Management Division is made up of the following departments and their respective functions are: Assets and Liabilities Management Department Reviews the balance sheet structure. Assesses the vulnerability of the net interest income to movements in interest rates. Quantifies interest rate risk exposure. Recommends appropriate strategies to the Assets & Liabilities Management Committee to enhance or optimise risk-return. Assists the Assets & Liabilities Management Committee in the management of market risk and liquidity risk. Credit Risk Management and Product Evaluation Department Reviews and evaluates risk-return of products and services. Reviews credit concentration and portfolio credit risk by customers, economic sectors and product types. Evaluates industry risk and monitors changes in the economic environment. Reviews counterparty limits for money market activities, standby letter of credit facilities, private debt securities and foreign exchange activities. Assists the Credit Risk Management Committee in the management of credit risk. Operational Risk Management Department Ensures operational risk management policy manuals, processes, procedures and practices are in place. Reviews regular reports on operational risk management to identify and report on areas of concern. Identifies operational risks inherent in new products and activities before they are introduced. Assists the Operational Risk Management Committee in the management of operational risk. 36

15 Internal Audit Division Monitors and evaluates business risk and internal controls. Monitors adherence to control procedures and policies. Conducts audits of all units and operations with the frequency of audits determined by the level of risk assessed. Submits the results of the audits to the Audit Committee for its review. Credit Administration & Supervision Division Oversees the credit review function and ensures reviews are conducted in accordance with the review guidelines. Monitors the quality of loans portfolio and quality of credit decisions through a review of all credit facilities approved. Implements effective credit control measures to prevent non-performing loans (NPLs). Closely monitors, controls and implements effective follow-up on weak loan accounts. Rehabilitates/restructures non-performing and close attention accounts to expedite recovery and prevent emergence of new NPLs. Operations Control Department The Operations Control Department is independent of Internal Audit Division. Carries out pre-emptive measures and control programmes to identify and prevent potential operational control lapses. Monitors the financial and operational activities of the business units. On-site inspection of the business units. Conducts regular review of the operational risk management processes. Conducts Operational Risk Management programmes to enhance staff knowledge on management of operational risk. BUSINESS RISK UNITS The major areas of risk which the activities of the Business Risk Units are exposed to are as follows: CREDIT RISK The potential loss of revenue and principal losses in the form of specific provisions as a result of defaults by the borrowers or counterparties through its lending, hedging, trading and investing activities. OPERATIONAL RISK The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. RISK SPECTRUM MARKET RISK The risk of loss arising from adverse movement in the level of market prices or rates, the three key components being interest rate risk, foreign currency risk and equity risk. LIQUIDITY RISK Liquidity risk relates to the ability to maintain sufficient liquid assets to meet financial commitments and obligations when they fall due at a reasonable cost. 37

16 Annual Report Corporate Governance KEY CONTROL MEASURES Credit Risk Experienced key personnel appointed to high level management committees, namely the Loans Committee and the Credit Risk Management Committee, to establish overall credit risk capacity, loans portfolio grading, collateral policies and prudent lending practices. A Credit Policy which documents the core credit processes including a comprehensive internal grading system called the Credit Risk Rating System, a Collateral Policy and policies on timely rehabilitation and restructuring of problematic and delinquent loans. The Credit Risk Rating System score sheets which include cashflow assessment in the overall credit grading scores are used to grade the quality of all commercial loans, business loans and consumer loans and to track the movement of credit risk profile to assist in the early detection of weak borrowers. Independent reviews of performing loans are carried out periodically as pre-emptive measures. Loans in arrears of three months and above would be under the direct purview of Credit Administration & Supervision Division, a function independent of the loan approval process, which would direct its efforts towards effective collection, restructuring and rehabilitation of delinquent loans. Post-mortem reviews are conducted on significant weak credit and delinquent accounts to rectify any weaknesses in credit approval and monitoring processes. Regular reporting to management and the Board on loans exposure, quality of loan portfolio, movements of NPLs and adequacy of specific provisions for NPLs. Stress tests are conducted quarterly to ensure that asset quality is still within acceptable levels even under stress scenarios. Benchmarking of asset quality against industry peers. Review of risk-return relationship of products. The Certified Credit Programme was launched to ensure a high level of competency amongst all credit personnel and this programme would eventually seek accreditation by the Institute of Bank-Bank Malaysia. Operational Risk Experienced key operational personnel appointed to the Operational Risk Management Committee to ensure all key operational risks are addressed. Business units are primarily responsible for operating within the operational risk management framework. Control and support units, which are independent of the business units, track risk levels through established systems and procedures, and ensure business units operate within the established policies, procedures, limits and thresholds set for key risk indicators. Comprehensive system of internal controls based on the principal of dual control, checks and balances, segregation of duties, independent checks and verification processes, segmented system access control and multi-tier internal transaction authorisation process. Comprehensive documentation of processes and procedures which are maintained up-to-date and available for reference online. Documented and regularly tested key back-up procedures and contingency plans, including disaster recovery and business resumption plans. Overall assurance on the adequacy and reliability of the operational risk management system by Internal Audit Division and Self-Compliance Audit Programmes conducted periodically by the business units. Post audit review and follow-up by Operations Control Department to ensure implementation of remedial actions. Review of reports on losses/claims/write-off due to frauds or control lapses and the actions taken. Review of new/enhanced manuals/processes/ procedures by Internal Audit Division and Risk Management Division before implementation. Review of insurance policies for adequacy of coverage. Benchmarking of customer service and operational efficiency against industry peers for improvement. 38

17 Market Risk Daily mark-to-market of trading positions and comparisons against pre-determined market risk limits. The market risk limits are set after taking into consideration risk appetite and the risk-return relationship. Trading positions and the respective limits are reported on a regular basis to management. Interest Rate Risk Interest rate risk refers to the volatility in net interest income as a result of changes in levels of interest rates and shifts in the composition of assets and liabilities. Key Control Measures Interest rate risk management process which regularly reviews the interest rate outlook, assesses the vulnerability of net interest income to movements in interest rates and develops strategies to mitigate interest rate risk. Mark-to-market valuations of investment and dealing securities are regularly reported to the Assets & Liabilities Management Committee and management. Interest rate risk is monitored through the interest rate sensitivity gap analysis i.e. the analysis of mismatches in interest earning assets and interest bearing liabilities, by currency, within specified repricing intervals. Simulations under favourable and unfavourable interest rate environments to estimate the potential impact on net interest income. The potential reduction on net interest income from unfavourable interest rate movements is monitored against the risk tolerance limits set by the Assets & Liabilities Management Committee. The exposure of the economic value to changes in interest rate is measured and monitored by duration-weighted methodology. Foreign Currency Risk Foreign currency risk refers to the risk which arises from adverse exchange rate movements on the foreign exchange positions taken from time to time. Key Control Measures Foreign exchange open positions are monitored against pre-determined position limits. Mark-to-market valuations are monitored against pre-determined cut-loss limit. Equity Risk The risk which arises from adverse movement in the price of equities on the equity positions taken from time to time. Key Control Measures Daily mark-to-market valuations of share investment portfolio which are regularly reported to the Share Investment Committee. Mark-to-market valuations are monitored against pre-determined cut-loss limit. Liquidity Risk Bank Negara Malaysia's New Liquidity Framework is used to assess liquidity based on the contractual and behavioural cash flow of assets, liabilities and off balance sheet commitments. Internal liquidity risk management policy is set to ensure that liquidity surpluses are within limits set so as not to have excessive liquidity surpluses which may result in loss of income opportunities. Established liquidity contingency funding plans are in place and can be implemented on a timely basis to minimise liquidity risks that may arise due to unforeseen adverse changes in the market place. 39