corporate governance at deutsche bundesbank general definitions (1/4): “generally, good corporate...

Corporate Governance at Deutsche Bundesbankat Deutsche Bundesbank

Christoph Stute, 28 - 29 March 2012

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� Some general definitions (1/4):� “Generally, good corporate governance for an organization

can be defined as the establishment of institutional arrangements that ensure that the organization pursues its statutory goal”

Central Bank Governance and framework at the Bundesbank

March 2012

statutory goal”

� “Corporate governance is about promoting corporate fairness, transparency and accountability. The corporate governance structure specifies the distribution of rights and responsibilitiesof the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.”

� Some general definitions (2/4):� "Corporate Governance is concerned with holding the balance

between economic and social goals and between individual and communal goals. “

� „[…] Its [a central bank’s] operational independence depends


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� „[…] Its [a central bank’s] operational independence depends on its transparency, accountability and track record. If the public supports its policy objectives, it will have its independence. In my personal opinion, it is not laws that grant the central bank independence, but its moral authority that safeguards it.“ […]

� Some general definitions (3/4):� Most central banks do quote the central bank law to describe

their objectives, but only very few central banks have a mission statement and also publish it. It is desirable, wherever possible, to publish well defined objectives. A well defined


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possible, to publish well defined objectives. A well defined strategic process goes hand in hand with the definition of objectives. A well defined strategic planning and monitoring process is key for good internal governance, […].


� Some general definitions (4/4):� The corporate governance framework is there to encourage the

efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.”possible the interests of individuals, corporations and society.”

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� totality of legal rules and other recommendations r elated to good and accountable corporate management, e. g.

– accounting rules

– internal audit

– external audit– external audit

– board and management work

– role of the owners

– transparency

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� Role of Corporate Governance:

– allow to fulfil statutory functions of central bank

� “Regular“ Corporate Governance principles remain va lid for CBs as well


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CBs as well

� BUT specific central bank solution to specific central bank challenges (e. g. because of independence)


� unique challenges to the Bundesbank

– broad and diffuse range of stakeholders

– relationship between Bundesbank and their “owners” (the public) is intermediated through politicians with own interests

– no competition or threats of takeover, which punish weak

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– no competition or threats of takeover, which punish weak management in private sector

– disparate range of policy functions, which complicates the evaluation of the performance

– “product” is price stability � public good � “free-rider problem”

� some control mechanisms not applicable


� Different corporate governance problems in the past

� Typical issues at central banks in the past:

— remuneration of bank officials (Dutch pensions)

— biased regulatory decisions (Fazio)

control over governor appointments (Slovenia)

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— control over governor appointments (Slovenia)

— code of conduct (Welteke)

�� Identification of the following key aspects


transparency

Corporate Governance

code of conduct

data protection

audits of the owners

internal audits

common identitybehaviour of staff

strategic planning

Corporate Governance

anti-fraud

anti-money laundering

data protection

public procurement

internal audits

cost accounting

external audits

anti-corruption

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Framework

1. Set of central bank tasks

2. Rules for decision-making bodies2. Rules for decision-making bodies

3. Legislative and governmental issues

4. Transparency, credibility, accountability

5. Stakeholders

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1. set of central bank tasks: Deutsche Bundesbank

Key objectives (and range of tasks)


� maintain price stability (monetary policy)

� stability of the financial and monetary system (financial and banking supervision)

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supervision)

� hold and manage the foreign reserves of the Federal Republic of Germany (asset management)

� arrange for the execution of domestic and cross border payments, built confidence in the euro (cash management)

� contribute to the stability of payment and clearing systems (cashless payments)

1. set of central banks tasks:

common functions of central banks (according to BIS survey)


� monetary policy

� exchange rate

� supply of reserve money accounts for

� development of the financial sector

� foreign exchange reserve management

banks

� oversight of the payments system

� stability of the financial system

� government’s banker

� distribution and circulation of banknotes

� general economic advice

� quasi-fiscal and economic development functions

� consumer protection

� performance evaluation difficult

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Implementation/status quo at Deutsche Bundesbank : decision-making rules

� Lean structure: Executive Board as sole governing board, discharging several functions

2. Rules for decision-making bodies

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discharging several functions

� High responsibility of Head of Departments

� No Supervisory or other policy boards – nevertheless, typical functions of these boards are conducted in other ways (e. g. through Federal Court of Auditors)

� Advisory Board in regional offices (exchange of information to keep in touch with local economy; no decisions)



� Code of conduct for the executive board

– Duties of a member of the executive board

– Contract of employment and Bundesbank Act also define a


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– Contract of employment and Bundesbank Act also define a framework for members of the executive board

– External officer monitors compliance with these rules

– Bundesbank´s President is also subject to code of conduct for the members of the Governing Council (ECB)

� Internal rules to smooth work (rules for meetings, allocation of duties)

� Appointment of members of executive board



� Conclusion: Lean set-up has proven appropriate for needs of the Bundesbank in Germany in the past!


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Bundesbank in Germany in the past!

� Circumstances are different in every country! Possible further considerations:- specialisation benefits- internal accountability structure-operational efficiency / degree of complexity-availability of suitable board members / experts


BIS-report (2009): Sample of 47 central banks


3.11


Key questions for set-up of decision-making


3.11

BIS-report (2009)


Implementation/status quo at Deutsche Bundesbank


� Legal form: Founded in 1957 („Bundesbank Act“); Art. 88 German Constitution; European Treaty

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Constitution; European Treaty

� Ownership: fully owned by state/public sector

� Full independence e. g. in monetary policy issues; personal, organisational and budgetary aspects; no lending to public sector

But: Assessments of Federal Court of Auditors (“Bundesrechnungs-hof”), compliance with “Haushaltsgrundsätzegesetz”


Ownership of a central bank

2 Key aspects in Central Bank Governance and framework at the Bundesbank

� Public versus private � Public versus private ownership

� Vast majority publicly owned

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� No supervisory board at Deutsche Bundesbank

� But: certain surveillance/control through public authorities, e. g.:

Federal Court of Auditors and Ministry of Finance get:

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Federal Court of Auditors and Ministry of Finance get:

•annual accounts

•standard cost accounts

•investment plan

•comparison budgeted figures vs. actual costs and investments

•auditors report

Parliament (Bundestag, Lower House) gets parts of these figures, too.




Federal Court of Auditors – Organization

� National Court of Auditors (BRH) is a supreme federal authority

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� National Court of Auditors (BRH) is a supreme federal authority

� independent body for government auditing

� subject only to law

� Status of the BRH and its members is guaranteed by the German constitution (Independent like a judge)

� Submission of an annual report (public) to the Parliament and to the Government




Federal Court of Auditors – Tasks

� examination of the financial management of the federation, its

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� examination of the financial management of the federation, its property funds and federal undertakings (public sector is obliged to conduct its business economically and efficiently)

� audit mandate also covers social security institutions and the activities of the federation in private-Iaw enterprises (federation is shareholder)

� BRH may at any time submit special reports on matters of major significance to the Parliament and to the Government




Federal Court of Auditors – Types of audits

� Common / general audit

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� Common / general audit

� Audit of a project

� Audit to gain information on a topic

� Audit on a topic at several institutions

� Audit to control the results of former audits

� Audit of the "Annual Accounts”

� Audits according to the procedures of the Federal Budget Code


Implementation/status quo at Deutsche Bundesbank : External Audits


� External auditors are appointed by the executive board

� Agreement with the Federal Court of Auditors and compliance with

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� Agreement with the Federal Court of Auditors and compliance with Eurosystem rules (“Good practices for the selection and mandate of external auditors“)

� External auditors audit the annual accounts; annual publication

� Report of external auditor serves as a basis for the audit of the Federal Court of Auditors


Implementation/status quo at Deutsche Bundesbank : Internal Audits


� Independent and objective monitoring and advice

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� Assistance to the Executive Board

� Systemic monitoring approach to ensure an effective risk management, monitoring and control system

� Covers all business areas




� Internal Control / Control Activities in particular and the Internal Control System in general are embedded into a company‘sprocesses .

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processes .

� To maintain its independence and objectivity, Internal Audit is not embedded into operational processes . It is the task of Internal Audit to assess the processes and the control procedures, whereasthe Internal Control System is the totality of those controlprocedures.




Types of auditswork unit audits and branch audits

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� work unit audits and branch audits� cross-processual� compliance and general controls� similar to each other

� process (work area) audits� cross-functional� processes, activities and process controls


Implementation/status quo at Deutsche Bundesbank : public access to internal information


� Bundesbank is subject to a freedom of information act

Public has in principle the right to get internal information and

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� Public has in principle the right to get internal information and documents

� Nevertheless, many exceptions

� Information are chargeable


Implementation/status quo at Deutsche Bundesbank : range of transparency


� Bundesbank publishes a wide range of documents

• Monthly report

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• Monthly report

• Annual report

• Financial stability report

• Research papers

• Speeches of Executive Board members

• Education tools

• etc


Implementation/status quo at Deutsche Bundesbank : efficiency


� Bundesbank has done several steps to enhance efficiency

• structural reform (2002)

•• first strategic cycle (2002 – 2007)

• reduction of the number of branches by 60 %

• reduction of staff members by 30 %

• reduction of management staff by 40 %

• second strategic cycle (2008 – 2012)

• continue the consolidation process (extended until 2015)

• raise the Bundesbank’s profile

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5. Stakeholders

Implementation/status quo at Deutsche Bundesbank : anti-fraud measures


� Compliance Officer and compliance framework

Procurement rules

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� Procurement rules

� Tense system of internal rules concerning the cash management (including video recording at workplaces)

5. Stakeholders

Implementation/status quo at Deutsche Bundesbank : anti-corruption


� Rules for civil servants concerning gifts

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Rules for civil servants concerning gifts

� Officer to prevent corruption

� Rules of the government regarding the prevention of corruption in the public administration

� Criminal law

5. Stakeholders

Implementation/status quo at Deutsche Bundesbank : anti-money laundering


� Bundesbank is subject to an act against money laundering (“Geldwäschegesetz”)

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(“Geldwäschegesetz”)

� Officer to prevent money laundering

� Identification measures in place, e. g.

• Identification of depositors

• Central database of depositors

5. Stakeholders

Implementation/status quo at Deutsche Bundesbank : behaviour of staff


� Statutory obligations and other rules, e. g.

– neutral fulfilment of duties

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– neutral fulfilment of duties

– prohibition to accept gifts

– duty to announce secondary employments

– professional discretion

– behaviour after work

� Code of Conduct for Employees

5. Stakeholders

Implementation/status quo at Deutsche Bundesbank : common identity


� corporate design

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corporate design

� staff journal

� sport facilities

5. Stakeholders

Implementation/status quo at Deutsche Bundesbank : procurement matters


March 2012

� Bundesbank is subject to federal procurement law

� Neutral choice of contract partners

� Potential partners can appeal a neutral office if they feel their rights hurt


� Independence is the autonomy of a central bank in r espect to:

– personnel aspects

–– financial and budgetary aspects

– organisational aspects

– lending to the public authorities

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� Good Corporate governance framework and independenc e

– Clear specification of the objectives of the centra l bank

– Clear division of responsibilities between the cent ral bank – Clear division of responsibilities between the cent ral bank and the government

– Widespread perception in the country that central b ank is well run

– central bank autonomy must be used responsibly

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Board related rules – Appointment rules

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Board related rules –Appointment rules

� Appointment by the President of the Federal Republic of Germany (formal act)

� Nomination of the President, the Vice-President and one further member by the Federal Governmentby the Federal Government

� Nomination of three members by the Bundesrat (nomination right rotates from one member state to the other � informal agreement)

� Consultation of the Executive Board is obligatory, but no right to refuse candidate

Board related rules –Appointment rules

� Terms of office

– Maximum 8 years, minimum 5 years

� Appointment and resignation of members published in the federal gazettefederal gazette

� Government has no right to dismiss a member of the Executive Board

� No formal dismissal procedures

Board related rules – Code of conduct – Code of conduct

Bundesbank’s code of conduct

� Executive Board approved code of conduct on 14 July 2004

� In cases of doubt the advise of the Bundesbank’s Corporate Governance Compliance Adviser shall be sought (Mr. Uwe H. Schneider, widely acknowledged professor from a university)Schneider, widely acknowledged professor from a university)

� Code of conduct was published in the federal gazette (Bundesanzeiger)


� Similar to the code of conduct of the ECB which app lies to

– All members of the Governing Council

– Appointed alternates– Appointed alternates

– Agreed on 16 May 2002

– Published in the Official Journal of the European Communities


� Main aspects and content

– Basic principles

– Acceptance of gifts

– Invitations to events

–– Lectures and speeches

– Secondary activities

– Honorary posts

– Advise from the Corporate Governance Compliance Adviser

– Publication of renumeration

Code of Conduct – Basic principles

(1) The members of the Executive Board shall perform the functions arising from statutory provisions, the organisational statute of the Deutsche Bundesbank, their contract of employment or the nature of the office entrusted to them independently, impartially and selflessly.

(2) In the performance of their duties they shall act without regard to self-interest. They shall avoid situations liable to give rise to a personal conflict of interests and shall disclose to the Board any personal conflicts of interests that are unavoidable.

Code of Conduct – Basic principles

(3) They shall conduct themselves at all times in a way that maintains and promotes the Bundesbank’s reputation and the public’s trust in the Bundesbank.

(4) They shall be pledged to secrecy about the affairs and facilities of (4) They shall be pledged to secrecy about the affairs and facilities of the Bundesbank as well as its business operations. They may not testify or make statements in or out of court without permission even after they have left the service of the Bundesbank.

Code of Conduct – Acceptance of gifts

(1) As bearers of public office, the members of the Executive Board may not accept benefits. In the course of carrying out their duties they may not demand, accept or accept a promise of such benefits either for themselves or a third party.

(2) An impermissible benefit within the meaning of subsection (1) does not obtain if the Executive Board has previously approved the acceptance of such a gift. If prior approval is not possible or inappropriate, the member shall notify the Executive Board accordingly and seek the Board’s approval. No approval is required if the material value of the gift does not exceed €150.

Code of Conduct – Acceptance of gifts

The member shall notify the Executive Board of gifts with a material value of more than €150 where a refusal appears inappropriate in the light of special circumstances surrounding the presentation or national or international custom would dictate against such a refusal. When notifying the Executive Board, the member should suggest how the gift might be used. The member should suggest how the gift might be used. The Executive Board shall decide on its use.

Basic principles (1.) are to be observed when accepting gifts.

(3) The acceptance of benefits from public authorities, foreign central banks or supranational organisations is permissible. Basic principles (1.) are to be observed when accepting such benefits.

Code of Conduct – Invitations to events

(1) Members of the Executive Board may accept invitations to conferences, receptions or cultural events including appropriate hospitality if the member’s participation in the event accords with the fulfilment of his duties or is in the interests of the Bundesbank. This applies equally to the spouses or registered partners of Executive Board members when they are also invited and their Executive Board members when they are also invited and their accompaniment of the Board member concerned is in the interests of the Bundesbank or is consistent with internationally accepted custom. Any travel and overnight accommodation expenses, including those incurred by the accompanying spouse or registered partner, which arise in connection with the said participation shall be borne by the Bundesbank unless the organiser of the event assumes travel and accommodation costs within reasonable limits.

Code of Conduct – Invitations to events

(2) The acceptance of invitations from public authorities, foreign central banks or supranational organisations is permissible. subsection 1 sentences 2 and 3 apply mutatis mutandis.

(3) Basic principles (1.) are to be observed when accepting invitations to events.to events.

(4) The members of the Executive Board shall notify the Executive Board at the latest by 31 January of the events which they attended in the previous year.

Code of Conduct – Lectures and speeches

(1) No fees shall be accepted for lectures and speeches which are deemed to be part of the main duties of the Executive Board member concerned because they arise in connection with the office conferred on him or are to be seen as part of the public relations work of the Bundesbank or of his representation of the interests of the Bundesbank.interests of the Bundesbank.

Travel and overnight accommodation expenses arising directly in connection with such lectures and speeches may be borne by the organiser of the event concerned within reasonable limits.

Where the refusal of a fee appears inappropriate in the light of special circumstances or national or international custom would dictate against such a refusal, the fee concerned shall be forwarded to the Bundesbank.

Code of Conduct – Lectures and speeches

(2) If there are doubts about whether the delivery of a given lecture or speech falls within the scope of subsection 1, the member concerned shall seek the advice of the Bundesbank’s Corporate Governance Compliance Adviser and obtain, where necessary, a decision by the Board.decision by the Board.

Code of Conduct – Secondary Activities

(1) The members of the Executive Board shall not hold any paid office, run any business or practise any profession other than their office at the Bundesbank.

(2) Membership of a supervisory board or similar body of a business enterprise requires the approval of the Executive Board. Such enterprise requires the approval of the Executive Board. Such approval shall be refused if the company itself or an affiliated enterprise is subject to supervision or oversight by the Bundesbank, is a service provider or supplier of the Bundesbankor is a potential bidder for the award of a contract.

Membership of supervisory boards or similar bodies of business enterprises shall be disclosed in the Bundesbank’s Annual Report.


(3) Paid or unpaid work for a specified period as arbitrator, trustee, expert or the like may be approved by the Executive Board if the time required to perform this work does not impair the member’s performance of his official duties and no conflicts of interest are to be expected. Fees and the reimbursement of expenses must be be expected. Fees and the reimbursement of expenses must be commensurate with the work performed and remain within customary bounds. Subsection 2 sentence 2 shall apply mutatis mutandis.


(4) Lectures and speeches which do not fall within the scope of section 4 (1) as well as literary and scholarly work undertaken by members of the Executive Board shall generally be approved. When performing such work, the members of the Executive Board shall make it clear that they have written the contributions in a personal capacity and that they do not necessarily reflect the personal capacity and that they do not necessarily reflect the views of the Bundesbank. Subsection 3 sentence 2 shall apply mutatis mutandis.

(5) The members of the Executive Board shall notify the Executive Board at the latest by 31 January of the secondary activities which they performed in the previous year, including the remuneration and other compensation received in connection therewith.

Code of Conduct – Honorary posts

(1) The holding of honorary posts requires approval. This shall be granted in the case of posts of an academic or charitable nature provided professional interests are not impaired. If the holding of an honorary post is in the interests of the Bundesbank, any travel and overnight accommodation expenses arising in connection with this shall be borne by the Bundesbank.this shall be borne by the Bundesbank.

(2) The members of the Executive Board shall notify the Executive Board at the latest by 31 January of the expense allowances which they have received in connection with the holding of honorary posts within the meaning of subsection 1 sentence 2 in the previous year.

Code of Conduct – Advice from the Corporate Governance Compliance Adviser

In cases of doubt the Executive Board shall seek the advice of the Bundesbank’s Corporate Governance Compliance Adviser prior to the granting, or withholding, of approval pursuant to section 2 to 6. This equally applies to the members of the Executive Board when interpreting and applying this Code of Conduct.interpreting and applying this Code of Conduct.

Code of Conduct – Publication of remuneration

The remuneration received by each member of the Bundesbank’sExecutive Board in the previous year shall be published in the Bundesbank’s Annual Report; the sum concerned shall be broken down into pensionable salary, non-pensionable remuneration and lump-sum expense allowance.lump-sum expense allowance.

Board related rules – Code of practice– Code of practice

Board related rules – Code of practiceRole of the President and Vice-President

� The President– invites the other board members to the meeting– chairs the meeting– signs letters of general importance– gets letter of general importance from the other

board members� The Vice-President

– acts on behalf of the President in his absence– signs letters of special political importance jointly

with the President

Board related rules – Code of practicemembers in the day-to-day business

� The Executive Board members− sign the letters with general importance of the

business areas under their responsibility

− shall cooperate with the board members that take over the responsibility for their business areas in case of their absence

− decide on cost measures in their business areas

Board related rules – Code of practiceRules applicable to the entire Executive Board

� The Executive Board members– must align his/her public statements to the decisions

of the Executive Board

– coordinate their important dates, travels outside Germany and public appearances

– inform the President’s secretary when they are out of office

– are not allowed to get loans by the Bundesbankwithout a decision of the Executive Board

Board related rules – Code of practiceRules applicable to the entire Executive Board

� invitations to meeting normally have to be in written form

� agenda and necessary documents shall be distributed the working day before the meetingthe working day before the meeting

� proposals shall include statements related to impacts on costs and personal resources, to alternatives as well as to the compliance with legal rules

Board related rules – Code of practice Rules applicable to the entire Executive Board

� proposals shall be signed by the responsible board member and the respective head of department

� minutes of the meetings have to be prepared

monthly and annual reports shall be forwarded to all � monthly and annual reports shall be forwarded to all board members in due time

� executive board decides about the representatives of the Bundesbank in committees etc. (President has a veto right)

Board related rules – Code of practice Organisational statute of the Bundesbank

� The executive board – acts with common responsibility– advises the President for his actions as member of

the Governing Council of the ECB– decides about the distribution of tasks among the – decides about the distribution of tasks among the

board members (president has a veto right)– members inform each other in an appropriate way– meets regularly every week– takes decisions on the annual accounts, the

budgetary and investment planning only with all members

Board related rules – Code of practice Organisational statute of the Bundesbank

� The executive board

– takes only decision when at least half of the members attend the meeting

– takes decision with simple majority– takes decision with simple majority

– vote of the president decides if no majority is found

– establishes committees to give advise, to coordinate and to prepare decisions

– decides on the establishment of service centres

– decides on the branch network

� actual framework of voting rights� in general: one person, one vote� in financial questions: weighted votes

» governors of the NCBs: weighted with the capital key

Voting right in the Governing Council of the ECB

» Executive Board member of the ECB: weighted with zero

� when the Eurosystem grows a detailed rotation scheme will be applied (applicable if there are more than 21 me mbers)

Anti -fraud rulesAnti -fraud rulesAnti-corruption rules

Definition of fraud

� Intentional deception made for personal gain or to damage another individual

� Non-compliance with law, internal rules

� Personal advantage

� Done on purpose� Done on purpose

� Harm the employer

Definition of fraud

FinanceFinanceReputationReputation

StaffStaff

Anti-fraud rules in the cash area

� Sensitive area of a central bank

� Rules and measures needed for

– Cashier’s work

– Cash procession

–– Cash storage

– Cash transportation

� Examples

– Four-eyes-principle

– Video technique

– Rules of behaviour

Anti-fraud rules in other areas

� Procurement area

� General behaviour

� Market operations

Anti-corruption rules

Definition

� Corruption

– Damage of the national economy and of the national community

– Damage to the employer

– Interference of fair competition– Interference of fair competition

– Interference of trust in the smooth and proper functioning of the political system

� Strict prosecution

� prevention

Anti-corruption rules at the Bundesbank

� Guideline for prevention of corruption at the Bunde sbank

– Federal guideline which was adapted to the needs of the Bundesbank

– Controlling department identifies on a yearly basis organisational units which are at risk for corruptionorganisational units which are at risk for corruption

�Usage of risk analysis resulting in changes of the organisational set up or in a change in staff

�Examples: banking supervision, cash function, procurement


� Multiple control layers

– Involvement of additional controls by staff members of the respective organisational unit

– Adequate samples

� Transparency of decision-making process

– Clear competencies, reporting, IT-supported control of processes, detailed and comprehensive documentation of the whole business process


� Human resources provisions

– Selection of staff with high deligience

– Job rotation

� Contact person for prevention of corruption

– For staff and for citizens (without using official channels)

– Gives advise and information to staff

– Observes if there are hints for corruption


� Internal Audit

– Measurements are audited in the context of regular or, if necessary, ad hoc audits

– Might give recommendations

� Special instructions for staff

– Internal rules for staff (especially for staff working in areas which are identified to be at risk, code of behaviour)


� Supervision

– Superior supervises staff and pays attention to signs of corruption

Guiding principles for the award of contract� Guiding principles for the award of contract

– Respect competition

– Public tender

– Separation of planning, awarding and invoicing

corporate governance at deutsche bundesbank general definitions (1/4): “generally, good corporate...

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