World class: Abdul Samad and FIDE CEO Lim Lai Hong. FIDE FORUM is committed to develop world-class directors in the financial services sector.


IN the evolving financial services industry (FSI), regulations for more independent directors and stringent corporate governance have made it crucial to have qualified and accountable directors on the boards of financial institutions.

Financial Institutions Directors’ Education (FIDE) FORUM chairman Tan Sri Dr Abdul Samad Alias says corporate governance has always been there except that during the good times, there has been less focus.

However, during the global financial meltdown in 2008 sparked by the United States sub-prime mortgage crisis, the issue of governance became heightened.

Abdul Samad, who is the founding board member of FIDE FORUM since 2010, points out that everybody was surprised that the FSI in the US went through such an upheaval, as did the United Kingdom in cases such as Northern Rock.

The US entered a deep recession, resulting in nearly nine million workers being out of jobs and sparking a spiral in US housing prices, which fell about 30%. Banks were also shut down during the crisis.

Directors, as stewards of a company or financial institution, must know the long-term and short-term risks facing the financial institution, says Abdul Samad, who is also the chairman of Perbadanan Insurans Deposit Malaysia (PIDM).

“If the company is selling a product, and if your own members do not understand what that product is, then the board member is not exercising his oversight,” he says.


 

He cites what had gone wrong in the US. When the financial institutions repackaged all the bad assets and rating agencies graded them as triple A, there must surely be something wrong, he recalls. However, the community accepted it and this spiralled downwards into a crisis.

“What makes your organisation keep making profit in a sustainable manner in the long term is important.

“It is a matter of stewardship. If you are on the board, you are responsible to look after the long-term interests of the company, and serve the well-being of the stakeholders’ interests.

“When there is a failure like that, questions arise – where are the board, auditors, corporate governance people and regulators?” he adds.

FIDE FORUM is an alumni organisation for directors who have completed the FIDE Core Programme organised by The Iclif Leadership and Governance Centre.

In an interview with StarBizWeek, Abdul Samad and FIDE FORUM chief executive officer Lim Lai Hong explain a range of issues from the accountability of directors to corporate governance and the evolving landscape in financial institutions, in terms of regulatory issues and technology.

Other areas are the impact from the emergence of financial technology (Fintech), FIDE FORUM’s Directors Register of board talent, and Bank Negara rules for directors and independent directors.

Abdul Samad says the director has to serve the interests of the community, especially being members of the FSI, in the long term because the community has given the right to the banks to collect deposits.

“It is all the more important that directors focus on maintaining financial institutions’ sustainability and financial stability,” he says.

So, the question arises as to whom should the directors be ultimately responsible to, especially in difficult, complex and controversial issues? Is it the company, shareholders, public or the Government?

Abdul Samad replies that the director must be responsible to all and his or her duty must be above the self. Directors are the custodians of financial stability and they are all aware of their responsibilities as stated in the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA).

Lim adds that board composition is very important due to the collective decision-making based on the information gathered.

“The board of directors must get the information from the management and not give up until you get the answer, they must have inquisitive minds and sound judgement. That is their role as a ‘check and balance’. That is why FIDE FORUM seeks to promote good governance practices and ensure a good supply of board talent,” she says.

Abdul Samad adds that the board is an oversight to the entrepreneurial role of the CEO to ensure good governance.

“If you are the CEO of the company, you should not be on the board of the company. If you are, there will be a conflict and who is going to check on you?” he asks.

Meanwhile, Lim also says this is about independence. “You must have the courage to say ‘no, even if you are the only one on the board’.”

She points out that the FSI is entrusted and given the opportunity to collect deposits and insurance premiums. The fiduciary duties of the directors are high.

“They are expected to perform in the interest of the stakeholders, depositors, participants, policyholders and the public. The regulation and heightened supervisory framework are also there because you are given the right to collect money from the public,” she adds.

On Bank Negara’s rules issued early in August where CEOs of financial institutions are prohibited from taking over as chairman of the board of directors, Abdul Samad adds: “If the CEO is of known quality, then it would be a waste to not give him the chance to lead a financial institution. Of course, there should be a cooling period.”

FIDE FORUM brought the board of directors up to speed on the developments in Fintech and what Fintech can do to the FSI through workshops.

Fintech can help the FSI meet its needs, as Fintech is designed to get people who are technology-savvy to get better response from using Fintech like in payment systems.

The community is taking using technology very positively. Hence, despite Fintech being a buzzword, knowing what it covers will provide the directors with better understanding.

Lim points out that FIDE FORUM promotes corporate governance through the four strategic thrusts. One is providing a platform for directors to network to discuss issues confronting the industry. When you put the directors together and learn from one another, the issues become real.

Abdul Samad adds that in banking, there is a change in the landscape in terms of technology, such as people-to-people lending. “If you don’t adapt or change, the youngsters will take their business elsewhere,” he says.

Lim agrees and says Fintech can also be seen as a destructor or as an opportunity.

Lim adds that currently, financial institutions source their directors from personal networks, references, or search firms. FIDE FORUM provides a bigger pool and creates a talent pool for the FSI. When financial institutions pick the candidates from the Register, they pick candidates who fulfil the requirements of the financial institution.

In the long term, FIDE FORUM hopes to meet the demands of the financial institutions. It has 20 board talents and wants to increase its pool. It expects some of its candidates from the Register to be appointed as financial institution directors soon.

FIDE FORUM’s criteria for board talent include several competencies - the person’s courage, global perspective and ability to manage ambiguity. Also, Abdul Samad points out that the director should be accountable to the board, the company and all the stakeholders.

Corporate governance, demand

Abdul Samad says because of the robust regulatory regime by Bank Negara, the corporate governance standard is very high and this has been acknowledged by directors from other jurisdictions.

He adds that these directors are surprised by the level of supervision by Bank Negara, which is very detailed and far-reaching.

“We are different from even some of the more advanced countries and some directors are surprised by the reach of Bank Negara. With that high standard, we are complementing it and want to make it higher so that Bank Negara and the regulation side of it can become a lighter touch,” he adds.

He foresees demand for good directors rising due to the requirements of the Securities Commission, Bursa Malaysia and Bank Negara. “I hope, through FIDE FORUM, we can build this pool of directors to meet this need,” he adds.

“There are about 86 banks, insurance companies and takaful operators who are members of PIDM. If there is a nine-year requirement, you have just to work it out. You can be sure that the number of directors who will have to rotate will be more and more, over time. We are working towards that, although we certainly cannot supply all the required numbers,” he says.

Lim, meanwhile, points out that there will always be demand for high-calibre independent directors. Hence, the Register throws the net wider to attract talent from other sectors.

FIDE FORUM also hopes other industries will take the cue. However, there is no template, no one-size-fits-all solution on who can be a director.

However, FIDE FORUM wants each director to understand the role and responsibility of a board director and hence raise the standards of corporate governance and the standard of directors in financial institutions.

Hopefully, PLCs will also have a similar approach. It is the awareness, where there is knowledge sharing on issues like Fintech and cyber threats.

Abdul Samad adds that these are real issues. Hence, directors should not bury their heads in the sand. When something hits, they would not know what to do. Otherwise, it will be too late.

Independent directors on boards of FIs

BNM’s rules also state FIs must have a majority of independent directors on their respective boards, based on the BNM rules.

Abdul Samad said FIDE FORUM is looking for directors with the right character, experience, competencies, traits and drivers.

“We are looking at a well-rounded person to be admitted to the Register in the hope that when he joins the board, he will maintain the basic traits that he has,” he adds.

He says as BNM regulations require more independent directors, FIDE FORUM will support by filling up the vacuum. Now, there are a number of qualified independent directors.

“Before FIDE Forum, it was hard to find and it was through word of mouth, or old boys’ network.

“Now we have the process of identifying the potential directors and we believe we can play a very strategic role in assisting FIs to select Board talent to serve on their boards. In summary, we are looking for directors who are independent and bring value to the board,” adds Abdul Samad.