THE CENTRAL Bank has called on the island’s largest lender to re-jig its board so that no independent director serves for more than nine years, as part of a drive to improve corporate governance.
Central Bank sources yesterday said the CB chief's circular - sent earlier this month - was simply a reminder to the Bank of Cyprus (BoC) to enforce the regulations, but also to get the ball rolling with regard to coming changes to banking governance.
Under a regulatory administrative act (as amended in 2009), the board of directors “must explain why it considers a member as being independent...if they have been on the board for more than nine years subsequent to their initial appointment.”
Directors are of three types: executive, non-executive and independent non-executive. A non-executive director or outside director is a member of the board of directors of a company who does not form part of the executive management team. They are not employees of the company or affiliated with it in any other way and are differentiated from inside directors, who are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers).
Independent directors are distinguished from non-executive directors in that, unlike the latter, they are not allowed to hold shares in the company.
The Central Bank sources cited also the memorandum of understanding agreed between Cyprus and its international lenders, whereby authorities here undertook to pass legislation by the end of June 2013 to “strengthen governance by prohibiting commercial banks from lending to independent board members, including their connected parties, and removing any board members in arrears on existing debts to their banks, while lending to other board members will be prohibited above a certain threshold, which will be calibrated by the Central Bank of Cyprus.”
Moreover, the memorandum states, “loans and other credit facilities to each board member will be disclosed to the public. A majority of directors in banks’ boards will be independent.”
Affected banks must comply with the regulator’s circular, although it’s up to them to decide how. By way of example, independent directors with nine years’ service would either have step down or change their status to executive or non-executive directors.
The CB chief’s circular was sent to the BoC, where it’s understood that a number of independent board directors are nearing the nine-year threshold.
It was not sent to Popular Bank, which is currently state-controlled, nor to the co-operatives, not yet under the supervision of the CB.
Reports said the matter was set to be discussed during a BoC board meeting yesterday; the bank offered a “no comment” when contacted by the Mail. It neither confirmed nor denied receipt of the circular.
But reports over the weekend suggested the bank is well aware of it. Unnamed BoC sources told Politis, which broke the story, that there were sinister motives behind the move. They claimed the regulator wants to reshuffle the bank’s leadership to make it more amenable to increasing the stake of Russian businessman Dmitry Rybolovlev, the largest shareholder in the bank. The paper named the six board members that would be affected by the CB’s request.
Commenting on this, the same Central Bank sources yesterday told the Mail the “reaction, as seen in the press, has been blown out of all proportion. There is no conspiracy, we are merely asking that the law be applied.”
Meanwhile US-based firm Alvarez & Marsal is conducting a probe into the circumstances that led two of the nation’s banks to seek state support.
On June 25, Cyprus became the fifth of the euro area’s 17 member states to seek an international bailout, after Popular sought government backing for a €1.8 billion right offering. Two days later, BoC sought €500 million of government aid.