Corporate Governance Guide for Banks (2018)

www.cbi.iq | cbi@cbi.iq Corporate Governance Guide for Banks Central Bank of Iraq (CBI)

Introduction To keep pace with international developments and strengthen the corporate governance system by applying best practices in the banking sector, the Central Bank of Iraq has been keen on establishing and implementing corporate governance principles through structural, legislative, and supervisory developments aimed at limiting risks to the banking sector. Investors increasingly prefer banks with sound governance structures, which define the relationship between the Board of Directors and executive management to protect depositors' and shareholders' funds, while emphasizing disclosure and transparency. Accordingly, this Guide was prepared in accordance with internationally recognized best practices, based on relevant Iraqi laws and international standards issued by the International Finance Corporation (IFC), the Organisation for Economic Co-operation and Development (OECD), the Basel Committee on Banking Supervision, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the Islamic Financial Services Board (IFSB). It aims to assist banks in strengthening general governance frameworks and good management, as well as helping Board members and executive management supervise and monitor bank activities, ensuring the protection of depositors', shareholders', and stakeholders' rights.

• The Guide was reviewed and updated on November 7, 2018. The Guide consists of six sections: Section One covers the general framework; Section Two, the Board of Directors; Section Three, the Sharia Board; Section Four, Committees; Section Five, Executive Management; and Section Six, fundamental structures for supervision, transparency, and disclosure. The CBI extends its gratitude to the IFC for its cooperation with the committee responsible for reviewing the Guide, as well as its continuous support in bank governance.

Table 1: Abbreviations & Terms

1. CBI: Central Bank of Iraq.
2. Bank: Banks licensed by the CBI, including commercial and Islamic banks.
3. Board: Bank's Board of Directors.
4. General Assembly / Exceptional General Assembly: General Assembly of shareholders.
5. Sharia Board: Sharia Supervision Board in the Islamic bank.
6. Bank's Capital: Paid-up capital.
7. AML Office: Anti-Money Laundering and Counter-Terrorist Financing Office.
8. IFC: International Finance Corporation.
9. OECD: Organisation for Economic Co-operation and Development.
10. AAOIFI: Accounting and Auditing Organization for Islamic Financial Institutions.
11. IFSB: Islamic Financial Services Board.

Table 2: Definitions

1. Corporate Governance for Banks: Comprehensive systems defining relationships between the Board, executive management, shareholders, and other stakeholders. It covers how the Board directs and monitors activities, influencing strategy determination, risk management system, bank operations, balancing responsibility to shareholders with depositor/stakeholder protection, compliance with laws/regulations, and disclosure/transparency practices.
2. Appropriate: Minimum requirements for Board members, Sharia Board members (in Islamic banks), and executive management.
3. Executive Management: Senior staff as per Article 1 of Banking Law No. 94 of 2004, aligned with CBI instructions and the bank's organizational structure.
4. Interested Parties (Stockholders): Any party with an interest in the bank, e.g., depositors, shareholders, employees, creditors, customers, clients, relevant regulatory authorities, and government bodies.
5. Qualifying Holding: Any natural or legal person/group intending to contribute >10% of the bank's subscribed capital. The CBI must be notified at least 10 days prior to execution, either individually or as a group.
6. Related Person: All persons specified below: (a) Related per Article 1 of Banking Law No. 94/2004; (b) General Manager or deputy for two years post-tenure; (c) External auditor throughout tenure and two years after contract ends; (d) Any natural/legal person with a contractual relationship during the contract period.
7. Associated Group: Individuals or companies linked by kinship or influential economic interests.
8. Independent Member: Board member with full independence from management and the bank, meaning impartial decision-making based on all relevant information without influence from management or external parties.
9. Executive Member: Board member who is also part of the executive management, participates in daily operations, and receives a monthly salary.
10. Non-executive Member: Board member linked (e.g., related person) who provides opinions/technical advice, does not participate in daily operations, and receives no monthly salary.
11. Cumulative Voting: A voting method for electing Board members at the General Assembly meeting, where each shareholder's votes equal their share count. They may allocate all votes to one candidate or distribute them among chosen candidates without duplication. Its main goal is increasing minority shareholders' representation and limiting a specific shareholder's control over Board seats.

Section One: General Framework of the Guide Article 1: Scope of Application

1. This Guide applies mandatorily to all banks operating in Iraq from its issuance date.
2. Foreign bank branches are exempt from all articles pertaining to the Board of Directors and Committees.

Article 2: Bank's Specific Corporate Governance Guide Given the importance of corporate governance and compliance with international standards and best practices, banks must:

1. Form a Board-emanating committee named "Corporate Governance Committee" (detailed in the Committees section).
2. The committee prepares a bank-specific governance guide approved by the Board, aligning with the CBI's minimum requirements.
3. The bank publishes its specific guide on its website and ensures all employees and Board members review it.
4. The bank may cooperate with consulting bodies to obtain advice and assistance in implementing new requirements according to best governance practices.

Section Two: Board of Directors Article 3: Composition of the Board

1. Board members are elected at the General Assembly meeting for a term not exceeding four years, subject to CBI approval. Re-election is allowed once for an additional term.
2. The Board must have at least seven members elected via cumulative voting, with no fewer than three independent members or one-third of the Board, plus a minority shareholder representative (who may be an independent member).
3. The Board elects a President and Vice-President from among its members.
4. The Vice-President assumes the President's duties in case of absence or inability to preside.
5. At least one female member is preferred on the Board.

Article 4: Qualifications and Independence of Board Members 4.1 Selection Criteria 4.1.1 Meets legal requirements under Banking Law No. 94/2004 and Companies Law No. 21/1997 (and amendments). 4.1.2 Two-thirds of Board members hold bachelor's degrees or higher and possess banking work experience. 4.1.3 Is not a director or manager in another Iraqi bank, unless authorized as General Manager, Regional Manager, or Executive. 4.1.4 May be a non-resident and/or non-Iraqi national. 4.2 Independence Conditions 4.2.1 Not a partner or employee of the bank's external auditor in the three years preceding election, nor related to the lead audit partner. 4.2.2 Not a lawyer, legal auditor, or advisor to the bank. 4.2.3 Does not hold, nor does any company where he is a board member, owner, or major shareholder (>5% of capital), nor guarantee bank loans exceeding the same percentage. 4.2.4 Not a board member in more than five joint-stock or commercial companies (personally, as representative, or both). 4.2.5 Not an executive at the bank or another bank, nor a General Manager/Executive in another bank. 4.2.6 Not an employee of the bank or its affiliated parties in the three preceding years. 4.2.7 Has no kinship to any Board member, senior management, or affiliated parties up to the fourth degree. 4.2.8 Not a major shareholder in the bank or its representative. 4.2.9 Does not directly or indirectly (including family members/related parties) own >5% of shares in any company.

Article 5: Board Meetings

1. The Board must hold at least six meetings per year as needed.
2. Meetings are held at the bank's headquarters; if unavailable, they may be held elsewhere in Iraq provided all members attend or submit written excuses.
3. Members must attend personally; video/phone attendance is permitted with the President's approval (usable for up to two absences per year).
4. If absences reach three or more times annually, the President must notify the General Assembly to take appropriate action.
5. Quorum is met with 50% attendance or four members (whichever is higher).
6. Decisions are made by majority vote; the President's vote prevails in case of a tie.
7. Board resolutions are signed by all attending members (personally or via video/phone) and the Company Secretary, stamped with the bank's seal within 10 working days. The Board is responsible for and monitors its decisions.
8. The Company Secretary must accurately record meeting minutes, note any objections raised by members, retain all minutes (audio/video recorded and stored), and ensure proper documentation.
9. Executive management must provide detailed information for agenda items at least five working days before the meeting date, with the President verifying this beforehand.

Article 6: Duties and Responsibilities of the Board

1. Approve comprehensive strategic plans, vision, mission, goals, and core values aligned with the General Assembly's direction, then direct executive management to implement them while monitoring, evaluating, and adjusting as needed.
2. Supervise executive management performance, ensure financial soundness and liquidity, and approve periodic supervision/monitoring policies.
3. Approve a policy for monitoring/reviewing executive management performance using Key Performance Indicators (KPIs) and Key Result Parameters (KPRs) to measure progress toward institutional goals.
4. Ensure the bank has policies, plans, and procedures covering all activities, aligned with relevant legislation, communicated to all administrative levels, and regularly reviewed.
5. Define the bank's "Core Values", establish clear responsibility/accountability lines for all activities, and reinforce a culture of high ethical standards, integrity, and professional conduct among executives.
6. Assume responsibility for the soundness of all bank procedures, including financial status, reputation, CBI compliance, regulatory requirements, stakeholder consideration, and operation within legal/internal policy frameworks with continuous effective supervision.
7. Monitor the implementation of General Assembly decisions.
8. Submit final accounts, financial statements, and a comprehensive annual plan implementation report to the General Assembly for discussion and approval.
9. Ensure compliance with international standards across all bank activities and operations.
10. Discuss and approve annual plans and budgets related to bank activities, monitoring their implementation.
11. Form Board committees and select members from within or outside the Board.
12. Approve executive management appointments, evaluate/monitor performance periodically, supervise/accountability them, and obtain clear explanations regarding accountability matters.
13. Appoint/dismiss the Internal Auditor, determine remuneration/rewards, and evaluate performance.
14. Approve internal control systems annually, ensure Internal Auditor (and Sharia Internal Auditor for Islamic banks) coordinates with External Auditor to review these systems at least once yearly, and include confirmation of adequacy in the annual report.
15. Ensure the independence of the External Auditor (Accountant) from start to finish.
16. Approve an effective risk management strategy, monitor implementation (including acceptable risk levels), ensure the bank is not exposed to excessive risks, verify familiarity with operational environment-related risks, and confirm adequate tools/infrastructure exist to identify, measure, control, and monitor all risk types.
17. Ensure the bank applies fundamental "Good Governance" principles as per "Good Governance Rules and Internal Control System" (Instruction No. 4/2010).
18. Ensure adequate and reliable "Management Information Systems (MIS)" covering all bank activities.
19. Promote a governance culture, encourage employees and executive management to apply practices and attend training courses, incentivize clients (especially corporations) to adopt governance rules in risk assessment based on strengths/weaknesses, and verify that the bank's credit policy incorporates corporate governance for clients.
20. Ensure alignment with "Sustainability Principles" detailed in Appendix 1 of this Guide.
21. Take measures to clearly separate powers between shareholders with "Qualifying Holdings" and "Executive Management", enhancing sound governance by establishing mechanisms to limit the influence of major shareholders.
22. Approve an organizational structure defining clear administrative hierarchy.
23. Define executive authorities for bank operations (whether General Manager or Executive Management), covering banking operations, credit granting, signing transfers/checks/guarances/capital adequacy/borrowing/mortgages/letters of guarantee.
24. Approve and annually review the executive management succession plan.
25. Ensure executive management monitors the official AML Office website for daily terrorist financing frozen asset lists, and promptly notifies the AML Office and Exchange Control Department at CBI if a listed person is identified.
26. Evaluate the Board's overall performance at least annually and present results to the General Assembly via a Board evaluation system including, as a minimum: 26.1 Setting specific objectives and defining the Board's supervisory role in achieving them, measured periodically. 26.2 Using Key Performance Indicators (KPIs & KPRs) derived from strategic objectives and annual work plans to measure executive management performance. 26.3 Communication between the Board and shareholders, ensuring its periodicity. 26.4 Periodicity of Board meetings with executive management. 26.5 Member's role/tasks, attendance commitment, performance comparison with other members, and obtaining "back Feed" from the concerned member to improve evaluation.
27. Provide CBI with semi-annual information regarding boards/management of subsidiary companies (inside and outside Iraq), plus any amendments.
28. Oversee the quality of disclosure, transparency, and information regarding the bank.

Article 7: Duties and Responsibilities of the Board Chair

1. Build constructive relationships between the Board, executive management, shareholders, and other stakeholders.
2. Encourage expressing opinions on discussed issues, especially those with divergent views, fostering discussion and voting.
3. Ensure members sign meeting minutes.
4. Identify and meet Board members' needs regarding continuous professional development, allowing new members to attend an "Orientation Program" to learn about bank activities.
5. Invite the CBI to attend General Assembly meetings at least 15 days in advance for representation nomination.
6. Ensure the CBI is notified of any material information.

Article 8: Selection and Appointment of the CEO

1. The Board appoints one of its members as CEO.
2. The appointed CEO must meet minimum conditions: 2.1 Meets legal requirements under Banking Law No. 94/2004 and Companies Law. 2.2 Full-time dedication to daily banking operations. 2.3 Holds at least a Bachelor's degree in Finance/Banking, Business Administration, Accounting, Economics, Law, or banking-related fields. 2.4 Possesses integrity and good reputation. 2.5 Has actual executive management experience in banks per CBI controls and instructions.
3. The CEO is responsible for executing Board decisions within delegated authorities.
4. The roles of Board Chair and CEO/General Manager cannot be combined.

Article 9: Duties and Responsibilities of the Company Secretary The Board must define the Company Secretary's duties, including:

1. Attending all meetings, recording discussions, proposals, objections, reservations, and voting on draft resolutions, ensuring audio/video or other suitable means record all notes, with signed minutes/records (video) preserved and documented.
2. Presenting agenda items with concise summaries, stating executive management's and committees' opinions, linking documents/priorities to each item, and submitting them to the President for approval.
3. Providing each member with a sufficient summary of bank operations upon election/appointment or upon request.
4. Consulting with any new member (assisted by the Legal Advisor/Manager) regarding Board duties/responsibilities, especially legal/regulatory requirements, clarifying roles, authorities, tenure, and meeting schedules, plus providing relevant banking laws and CBI instructions.
5. Scheduling Board meetings with the President's approval.
6. Ensuring members sign meeting minutes, following up on executed decisions, and tracking postponed agenda items from previous meetings.
7. Receiving reports from Board-related committees and presenting them to the Board.
8. Numbering decisions sequentially throughout the year (Decision No., Session No., Date).
9. Ensuring compliance with all legal requirements regarding Board affairs.
10. Providing signed meeting minutes to the CBI.
11. Regarding shareholders and General Assembly meetings: Communicating with shareholders, assisting in organizing GA meetings.
12. Maintaining shareholder-specific data.
13. Preparing for General Assembly meetings and cooperating with Board-emanating committees.
14. Sending invitations to shareholders, the CBI, and the Companies Registrar.
15. Ensuring attendance of Board members, executive management, and the external auditor.
16. Maintaining General Assembly meeting records.

Section Three: Sharia Board Article 10: Sharia Supervision Board in Islamic Banks

1. Foreign Islamic bank branches must appoint a local Sharia board of at least three members, subject to the same conditions and duties outlined in this Guide.
2. The Sharia board cannot be dissolved or any member dismissed without a reasoned Board decision by a two-thirds majority, after issuing a notice with justification and a correction period, hearing the Sharia board's (or dismissed members') opinions, obtaining General Assembly approval, and securing CBI consent.
3. Sharia Board Meetings: 3.1 The Sharia board must hold at least six meetings annually to monitor the bank's Sharia compliance. 3.2 The Sharia board must meet with the Board, Sharia Audit Department, and External Auditor quarterly to discuss matters of common interest. 3.3 Members must attend personally; video/phone attendance is permitted with the President's approval (usable for up to two absences per year). 3.4 If absences reach three or more times annually, the President must notify the General Assembly to take appropriate action.
4. Duties and Responsibilities of the Sharia Board: 4.1 Monitor bank operations for Sharia compliance, reviewing processes to ensure freedom from prohibited elements. 4.2 Issue opinions and approve all contracts, transactions, agreements, products, services, investment policies, and policies governing relations between shareholders and investment account holders (including profit distribution, loss bearing post-approval, revenue allocation to investment accounts, and disposal of non-Sharia-compliant income). 4.3 Review and approve Sharia-related policies and guidelines to ensure the adequacy and effectiveness of internal Sharia supervision systems. 4.4 Advise bank staff and promote awareness of Islamic Sharia principles, rulings, and Islamic financing tools. 4.5 Propose necessary Sharia training courses for staff in coordination with Human Resources. 4.6 Attend General Assembly meetings and present the Sharia board's report (by the Chair or authorized member) for approval. 4.7 Formulate and advise on the bank's compliance with Sharia principles, including: 4.7.1 Reviewing and approving the annual internal Sharia audit report submitted to the Audit Committee by the Internal Sharia Audit Department. 4.7.2 Issuing semi-annual and annual compliance reports detailing the effectiveness of internal Sharia controls, identifying significant weaknesses in control/sharia supervision systems. Semi-annual reports are submitted to the Board; annual reports to the General Assembly, with copies sent to CBI. 4.8 Issue opinions on the bank's establishment contract and articles of association, ensuring alignment with Sharia principles. 4.9 Recommend to the Board the appointment/dismissal of the Internal Sharia Audit Department Head, with final decision subject to CBI approval. 4.10 Issue opinions on the Sharia legality of funds paid for capital increases, considering it a condition for validity. 4.11 The Sharia Board Chair must ensure CBI is notified of any material information that could negatively affect the soundness of any board member. 4.12 Draft an advisory guide detailing how affiliated administrative institutions submit fatwa requests to the Sharia Supervision Board, conduct meetings, verify actual compliance with issued decisions, and ensure written records are preserved both physically and electronically.
5. The Sharia Board has a Secretariat performing the following duties: 5.1 Schedule Sharia board meetings in coordination with the Chair and notify members. 5.2 Verify that executive management submits detailed information on bank activities and relevant agenda items sufficiently before the meeting. 5.3 Attend and record all Sharia board meetings, discussions, proposals, and any raised reservations, ensuring all notes are preserved, documented, and recorded (audio/video).