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Operational risk appetite and how to detect when your organisation is close to breach its pre-defined levels

Posted on by aldopuch

By Manoj Kulwal, Eureka Financial Faculty

An organisation may have several business units and the activities of each unit may be unique e.g. a bank may have a retail banking and commercial banking business units. Each business unit will be exposed to a set of risks that may influence its ability to achieve its objectives. It may also be exposed to some risks that may also influence the ability of other business units or the overall organisation to achieve their objectives.

The type and level of risk exposures for a business unit may continuously change due to various factors such as decisions undertaken, organizational factors, changes in the external environment and crisis/incidents. The senior executives responsible for the business unit’s performance need to continuously review whether the risk exposures are within the pre-defined risk appetite. Other stakeholders such as operational risk group, internal auditors, risk committees and board members would also be typically interested in periodic assurance on the alignment of risk exposures of various business units with their pre-defined risk appetite.

What approaches do you use in your organisation to detect whether a business unit is close to breaching its operational risk appetite or when this has already been breached?

I have documented some common approaches here to get the discussion started.

If you want to learn about effective operational risk management strategies and best practices attend a 2 day workshop conducted by Manoj Kulwal, organised by Eureka Financial on 23-24 of June 2016 in London.

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Eureka Financial is a market leader in banking and finance and corporate education. We offer over 100 public and in-company training courses in risk management and regulatory, corporate governance, banking and asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

 

Posted in Banking Operations, Operational Risk Management, Risk Management | Tagged , | Leave a comment

Calculating IRB formula for capital requirements in Basel II – The HangZhou Constant

Posted on by aldopuch

By: Fred Vacelet, Eureka Financial Faculty

The Basel II text, in its IRB (Internal Rating Based) formula for capital requirements, ignores a few unpleasant properties of the calculations when PDs are low: capital requirements negative, division by 0, non-monotonicity, to name but a few.

Above a PD of 0.03% (the minimum for non-public entities), we note with delight that the curve is monotonically increasing in LGD, PD and M. This is what we intuitively expect. The potential for the capital requirement to be negative was dealt with swiftly: in that case, please set it to zero.

If we hold all the PD within a reasonable range, the curve bears all the poetry contained within the lips of Mona Lisa: mysterious enough to reveal no naughty thoughts, curvy enough, and smiling enough to tell that so much work and re-work had gone into its painting: for short, the start of a legend. Resemblances stop there, as the curve, unlike the painting, is monotonic, and shows little or nothing that was not expected. That is, for its visible part.

Calculating IRB Formula, Basel II

For sovereigns and supranational entities including the host of the Basel Committee, the PD is set to a Kelvin-type absolute zero (pure zero, not close to 0, not 10 to the power -99, but just zero as if impossible, unthinkable, no-go, taboo). Over-cynical minds will point out that it would have been politically incorrect if not blasphemy to suggest that a G10 government would ever fail. However, the fair laws of mathematics came to their rescue. The good old myth that countries and empires cannot fail makes the world believe that the probability of failure of the US is the Kelvin-type of absolute zero. Let us see a quick comparison with the Roman Empire, falling in A.D. 476 after some 1200 years of a remarkable success: assuming that the times of expected and actual death have coincided, the PD will have been 0.083%. For such a civilisation, it does not compare well with Enron, rated AAA, with a PD of 0.01%, who has had the sad privilege to go within a year from AAA to D with no return.

The curve, however, starts to be badly-behaved when we bring the PD into lower ranges, let alone when Excel and its rounding capabilities are used (you can find an Excel spreadsheet with the curve at: http://flevy.com/browse/business-document/risk-weighted-asset-rwa-calculator-228). We first have the extreme discomfort of a zero denominator at the point where PD equals EXP((0.11852-SQRT(2/3))/0.05478): close to 0.00029%, corresponding to a failure for some 340,000 years of existence. Even before that infamous point in the curve, the curve is decreasing, meaning that the higher the PD, the lower the capital to hold.

There is a point below which the curve starts to exhibit its awful sides. We take the poetic licence to call the result the HangZhou constant, the point at which the first-order derivative turns to zero. The HangZhou constant, found to be approximately 0.0008745%, corresponds to every sovereign being bankrupt every 114,000 years. Whilst this comes short of eternity, this is more than enough to satisfy the ambitions of a few visionary members of the dictators’ club, whose main Nazi representative declared himself satisfied with 1000 years, and achieved a mere but bloody and tragic 12 of them. This is also more than enough quarterly periods to accommodate the horizon of modern democracies.

With a PD below the HangZhou constant, better use another function. A linear function will be a good start, providing us with the pleasures of:

  • Simplicity (over-simplicity, you might add? A spline will satisfy more people, as it avoids breakdown in derivatives at the HangZhou point)
  • monotonicity
  • continuity with the high-PD curve
  • concavity (granted, of 0, but not negative)

Sovereign models must not assume a PD of zero, but some methodological and practical issues can be avoided by the use of sovereign PDs always higher than the HangZhou constant. Politically, some hurdles remain for the use of the HangZhou constant: banks not wanting to add to their capital requirements, sovereign borrowers wanting to issue more and more debt, and few if any people happy to have yet another change in regulatory requirements.

If you want to learn more about Basel II / III and risk management and stress testing attend one of our upcoming courses in London: Basel III & New Advances in Regulation and Enterprise-wide Risk Management & Stress Testing conducted by Fred Vacelet.

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Eureka Financial is a market leader in banking and finance and corporate education. We offer over 100 public and in-company training courses in risk management and regulatory, corporate governance, banking and asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Banking Regulations, Basel II / III, Risk Management | Tagged , | Leave a comment

Corporate value destruction: economics versus corporate governance

Posted on by aldopuch

By: Seamus Gillen, Eureka Financial Faculty

I remember once discussing with George Alagiah, long-time journalist and BBC presenter, his views on value destruction. He said he had come to realise that ‘it all boiled down to economics’, which reminded me of President Clinton’s comment that “it’s the economy, stupid!”

I had a different view, and after we had discussed the issue, I realised that my analysis had been partly incomplete (though so also had his!) I had argued that ‘it all boils down to governance’, and once I had recalibrated my thinking, came to a conclusion which has stood me in good stead since that discussion some five years previously.

Corporate Governance failures

Strategic Corporate Governance Programme

Value destruction occurs inside companies for economic reasons when the company’s strategy, and business model, fails to be sufficiently flexible to cope with changes in economic circumstances. A rather pointed example of this is the oil sector, where the price of a barrel of oil has, over the past year, fallen from over $100 to under $30. I work with many oil companies and, even if the risk of a fall in the value of oil had appeared on their risk registers, few of them had envisaged that it would actually happen, so drastically, and with such catastrophic consequences.

The inability of the oil sector to have foreseen the phenomenon, and to have planned for it, has resulted in significant amounts of value destruction through stranded or mothballed assets, massive job lay-offs, a screeching halt in capital investment, and so on.

Many people would argue that corporate governance failures could not possibly have the same effect, and impact, but that is wrong. Compliance Week recently published its top five list of ethical and compliance failures in 2015. The list brings home the consequences of a company being prepared to accept low standards of governance and, in these specific cases, an unprofessional attitude towards ethical policies and processes.

Compliance Week suggests the most egregious forms of ethics and compliance failure were evidenced in – wait for it – VW, Petrobras, FIFA, Toshiba and Deutsche Bank. Whether or not we agree with that list – let’s face it, there was a lot of competition – these are five excellent case studies of how value is destroyed inside companies by weaknesses in cultures and controls. (You can see my own analysis of the VW scandal as it unfolded on my website – www.valuealpha.com. I thought my analysis then was gloomy, but the situation has deteriorated even more since I posted those articles).

As a result of the corporate governance failures inside these companies we have seen regime change (ie lots of board and director heads have rolled), significant share price shock, very large regulatory sanctions and fines, massive damage to reputation and brand, and a loss of customer and stakeholder trust so severe that the repercussions have been felt far and wide – in the case of Petrobras, for example, reaching into the heart of government.

The common features of these governance failures are a weak and sometimes poisonous culture, inadequate operational controls, managers both permitting and sometimes encouraging rule-breaking, and an attitude to bribery and corruption completely out of sync with what customers, the public, regulators and politicians consider acceptable.

This week’s announcement that Adidas was prematurely ending its contract with the athletics world governing body (IAAF) because of a doping scandal – losing that body an estimated $30m in revenue – is just the most recent example of a governance failure.

The good news is that there are many well-run companies which are creating value by having a strong, positive culture, a board and a management team exhibiting a leadership of integrity, effective controls in place, and well-thought through incentivisation schemes which encourage appropriate behaviour.

I suppose the point I would make now to George Alagiah is that, while companies cannot always control economic developments, they can certainly control their governance systems.

If you want to improve corporate governance within your organisation and learn about the best current practices, attend a 2 day Strategic Corporate Governance course conducted by Seamus Gillen.

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Eureka Financial is a market leader in banking and finance and corporate education. We offer over 100 public and in-company training courses in risk management and regulatory, corporate governance, banking and asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Business Management, Corporate Governance, Risk Management | Tagged | Leave a comment

Eureka Financial launches new edition of popular Family Office & Wealth Management Programme

Posted on by aldopuch

Press Release: 27 Oct 2015, London

The world leader in business and finance professional training courses has announced the launch of the latest edition of its popular Family Office and Wealth Management programme.

Eureka Financial, a world leader in business and finance training courses, has launched the latest edition of its popular Family Office and Wealth Management programme. The team at the company states that this course attracts family members and family office representatives from around the world, giving them the opportunity to explore the best strategies for preserving family wealth and managing a modern family office. The new edition of training will run in London on the 3rd and the 4th of December 2015 as a 2 day practical programme.

Setting up a single-family office

This popular course is conducted by a family office expert with many years of practical international experience providing services for high net worth clients across the globe. Eureka Financial explains that the course will focus on the latest market trends and effective wealth preservation strategies, helping participants understand the latest changes in the wealth management sector. Attendees in this particular programme generally include heads and members of multi and single family offices, family members, wealth managers, private bankers, client relationship managers, financial planners and heads of business development.

Some of the main topics that will be covered during the course include: setting up and structuring of family office, family governance mechanisms, intergenerational wealth transfer, dealing with complex family structures, tax management and advisory, investments of passion, mobility of wealth and the family business, philanthropy and many, many more. Full details of course content can be obtained by visiting the Eureka Financial website or contacting the training provider’s customer support team. Those wishing to attend the training course can enjoy an Early Bird special price on enrolment until the 30th of October 2015, and can also obtain discounts for groups of 2 or more people.

“We are proud to announce the launch of the latest edition of our extremely popular Family Office and Wealth Management programme,” commented Aldona Puchalska, Director of Eureka Financial, “This particular course is always in high demand from our clients, with participants travelling to train with us from many parts of the world. Our previous editions attracted family representatives and family office professionals from Europe, Middle East, Africa, Asia and Latin America. We even had representatives of royal families from different parts of the world. We are also pleased to announce that those wishing to attend can currently benefit from a significant discount for early registration until the 30th of October.”

In addition to its training in the areas of family office and wealth management, Eureka Financial offers a range of public and in-company banking and finance courses. Other training programmes that are running in London in the period from October to December include Corporate Governance, Investment Performance Measurement, UCITS Funds, Equity Valuation, FATCA Compliance and many more. Those interested in obtaining full details of all the banking and finance courses that Eureka Financial runs can request a brochure by completing a simple form on the training provider’s website.

For more details of the programme go to Family Office and Wealth Management website or contact us on enquiry@eurekafinancial.com

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Family Office, Private Banking, Wealth Management | Tagged , , | Leave a comment

Understanding Money Laundering

Posted on by aldopuch

By Stanley Epstein, Eureka Financial

Defining Money Laundering

Money laundering is a subject that often is misunderstood by the general public.

The goal of many criminal acts is to generate a profit for the individual or a group that carries out the crime. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. Once successfully processed it enables the criminal to enjoy these ill-gotten gains without jeopardizing their source.

When a criminal activity generates substantial profits, the individual or group involved must find a way to maintain control the funds without attracting the attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

Money Laundering

If you want to learn more about identifying and preventing money laundering and anti terrorism financing attend a 2 day practical course in London and Dubai. 

Through money laundering, these assets can be ‘washed’ so that they appear to have a legitimate origin enabling them to be retained permanently or recycled to fund further crimes.

Money laundering got its name from a string of laundries that the Mafia used in the United States as a front for their illegal business.

Just as soap and water are used for cleaning clothes money laundering uses a three phased process of ‘placement, layering and integration’ to ‘clean’ these illegal proceeds or ‘dirty money’.

Money laundering may look like a polite form of white collar crime, but it is the companion of brutality, deceit and corruption. The process deprives governments of tax revenues, thereby raising the relative burden of honest citizens. Because of rapid movements of large amounts of money, normally stable financial institutions can become undermined, threatening the savings and retirement funds of thousands of innocent people.

According to UNODC (United Nations Office for Drugs and Crime) it is estimated that the annual value of money that is laundered globally is between 2% and 5% of global GDP. In cold hard numbers this puts the amount at between US$800 billion and US$2 trillion. This is a really frightening set of numbers.

3 Stages of Money Laundering Process

So how is money laundered? Well, generally a three stage process is used. These stages are called placement, layering and integration. We now look at these in a little greater detail.

Placement

Placement is the physical disposal of the initial proceeds derived from the illegal activity. The first step is to introduce cash into the financial system.

The money launderers use various vehicles to do this e.g. deposits, money transfers, purchases of monetary instruments such as travelers’ cheques, bank cheques or money orders, foreign currency conversions etc. They may also use insurance companies, brokerage accounts, credit cards and other financial services to achieve this.

Layering

Layering is the separating illicit proceeds from their source by creating complex layers of transactions designed to disguise the audit trail and provide anonymity.

Layering is like a shell game – many transactions and conversions take place to blur the trail back to the original crime. This may include investments, purchases of goods and services, cashing cheques, using several smaller cheques to purchase a bank transfer and so on.

Integration

Integration is the provision of apparent legitimacy to criminally derived wealth. The laundered proceeds re-enter the financial system, appearing as normal funds.

Integration is the final stage of the money laundering process. This is when the criminal re-introduces the funds into the legitimate economy with an apparently legitimate origin. Examples include investing in a company, purchasing real estate, luxury goods, etc.

The fight against money laundering

In recent year there have been a number of new developments in the global financial system that have made combating money laundering much more difficult.

These difficulties have been fueled by issues such as ‘dollarization’ (i.e. the use of the US dollar in transactions), black markets, the general trend towards financial deregulation, and the creation of new havens of financial secrecy (though the latter is today being shrunk by a huge international effort to curb tax evasion).

If you want to learn more about identifying and preventing money laundering and anti terrorism financing attend a 2 day practical course in London and Dubai. 

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Anti-Money Laundering | Tagged | Leave a comment

FATCA – 6 basic concepts you need to know

Posted on by aldopuch

By Stanley Epstein, Eureka Financial

The United Sates’ Foreign Account Tax Compliance Act (FATCA) was written into law in March 2010 and became operative on 1 July 2014. The objective of the legislation was to ensure that United States taxpayers with foreign bank accounts and certain types of offshore (that is non-US) assets complied with American tax conventions. How this was to be achieved was to require foreign (i.e. non-US) financial institutions to report directly to the IRS on US taxpayers who hold accounts with such institutions. A withholding penalty was to be imposed on the foreign financial institution for not reporting.

FATCA Compliance Training

If you want to learn more about FATCA, its requirements, how to comply with the regulation and set up effective reporting system attend our 1 day intensive course in London – FATCA Training.

Throughout the world, tax systems are usually based on the place of residence of the taxpayer. The United States’ system is different – the basis for individual taxation is based on citizenship. This results in the US IRS chasing its nationals irrespective of where they live for a slice of their worldwide earnings. Most US taxpayers may end up owing nothing as they get a credit for what they pay to foreign tax collectors. However, there is a hassle factor in having to do the paperwork (or paying someone to do it). What FATCA has done is to introduce new reporting requirements on banks anywhere in the world that serve Americans.

The legal niceties of financial institutions being empowered in their home jurisdictions to provide this information has been neatly tied up in a series of inter-governmental agreements. In most cases (countries) banks report to their local tax authorities. This however is not the subject of this article. What we really need to clearly understand are six basic concepts that govern the FATCA regimen. These concepts are core issues and are the starting point in maintaining a suitably compliant account opening process.

Each of these concepts can be phrased in the form of a question.

What is a Foreign Financial Institution?

A Foreign Financial Institution (FFI) is any non-US entity that:

– Accepts deposits in the ordinary course of a banking or similar business,

– Holds as a substantial portion of its financial assets for the account of others,

– Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in any of the above, or

– Is an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a financial account.

What are Financial Accounts?

A Financial account is:

– Any depository account (holding a monetary balance) maintained by the financial institution,

– Any custodial account (holding a stock balance) maintained by the financial institution,

Any equity or debt interest in a financial institution that is an investment fund (other than those that are regularly traded on an established securities market), and

Any cash value insurance contract and any annuity contract issued or maintained by the financial institution.

What is a United States account?

This is a financial account held by a specified United States person or a United States owned foreign entity.

What is a United States owned foreign entity?

Any non-financial foreign entity (NFFE) with one or more substantial United States owner or owners. A “substantial” owners is defined as a specified United States person who owns more than 10% of the stock of a corporation or its capital or profits in the case of a partnership.

Who is a specified United States person?

Any United States person other than:

– A publicly traded corporation,

– The affiliates of a publicly traded corporation,

– A specifically exempted organization,

– The United States,

– A US State, the District of Columbia (DC) , or a United States possession,

Any bank defined in section 581 of the United States Code (“United States Code” is a consolidation and codification by subject matter of the general and permanent laws of the United States),

– A “REIT” (real estate investment trust),

A “RIC” (regulated investment company) or SEC registered company under Investment Company Act of 1940,

A common trust fund,

An exempt trust under section 664(c), (United States Code),

A dealer registered under the laws of the United States or a US state, and

A broker as defined in 6045(c) (United States Code).

The above list is of course the exemptions to being classified as a United States person. So if you’re legal status is not listed and you are a US citizen or resident you ARE a specified United States person.

What are the United States Indicia?

Indicia refers to the signs, indications, or distinguishing marks that will give clues as to whether an account owner is a United States person and has to be reported on under FATCA. For all FFI account holders the indicia of U.S. status is if she or he:

– Is a United States citizen or resident,

– Was born in the United States,

– Has a United States residence or mailing address,

– Has a United States telephone number,

– Has provided standing instructions to transfer funds to a United States based account,

Has granted power of attorney over the account to a person with a United States address,

Has a “care of” or hold mail address that is the sole address of account holder.

Positive indicia other than (a) – a United States citizen or resident, and (b) – evidence of birth in the United States, does not automatically include the account holder in the status of a United States person. Further investigation is required.

The above six concepts form the basis and starting point for the due diligence process in all Foreign Financial Institutions and a critical part of the new account opening process (onboarding).

If you want to learn more about FATCA, its requirements, how to comply with the regulation and set up effective reporting system attend our 1 day intensive course in London – FATCA Training. 

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Banking Operations, Banking Regulations, FATCA, Financial Markets, Private Banking, Regulation | Tagged , , , | Leave a comment

Here comes the MiFID II

Posted on by aldopuch

By Stanley Epstein, Eureka Financial

The original Markets in Financial Instruments Directive (MiFID) came into force in November 2007. MiFID brought competition to the trading procedures in the European Union. Under MiFID investment firms could operate throughout the EU on the basis of the ‘authority’ of their home EU Member State. MiFID also introduces a range of investor protection measures. In short MiFID became the cornerstone of the EU’s regulation of financial markets.

Banking Regulatory Training

During 2011 the European Commission agreed to a proposal for the revision of MiFID. The revisions are intended to take into account new developments in the trading situation since 2007 including new technological developments as well as a response to the 2008 financial crisis. The revised Directive and a new Regulation, are together commonly referred to as ‘MiFID II’.

The European Parliament approved MiFID II in April 2014. The new measures will take effect from January 2017.

The changes that MiFID II will bring are substantial and are divided into eight categories. These are listed and summarized below.

Commodity Derivatives – while some elements of the existing directive have been adopted a new system of position limits and position reporting is to be introduced. The existing exemptions for commercial firms who trade commodity derivatives is being narrowed.

Transparency – the current pre- and post-trade transparency system only applies to shares traded on regulated markets. This will change and will be applied to non-equities as well (depositary receipts, ETFs, certificates and other similar financial instruments traded on a RM (regulated market) or MTF (multilateral trading facility)).

High frequency trading – specific provisions are being introduced that have been designed to ensure that high frequency trading (HFT) does not have a contrary effect on market quality or integrity.

Market structure – revisions to market structure have been designed to create comprehensive regulation of secondary trading that is fair, efficient and safe. Firms currently operating either multilateral trading systems (MTFs) or bilateral trading systems will need to consider how they fit into the new trading landscape.

Organisational requirements – there will be expanded requirements in respect of the management of firms, unambiguous organisational and conduct requirements relating to product governance arrangements and a prohibition on title transfer collateral agreements involving retail clients. All investment firms are going to be affected by the provisions relating to management bodies and will need to consider how their existing governance arrangements match up to the new requirements. Product governance and remuneration requirements will affect most investment firms.

Trade reporting – new requirements have been designed to resolve problems with the quality and availability of data that have been observed since the original directive was introduced. This will affect firms who currently offer consolidated data services.

Conduct of business rules – The revised legislation seeks to boost the levels of protection granted to different categories of clients will be enhanced by the new regulations.

Transaction reporting – The scope of the obligations for transaction reporting is being extended, while those of reports is being enhanced and an EU-wide system of Approved Reporting Mechanisms (ARMs) is to be introduced.

If you want to learn more about MiFID, its impact on trading, securities settlement and reporting or any other banking regulation currently affecting the sector, attend one of our training courses or organise an in-company session.

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Banking Regulations, Derivatives, Financial Markets, MiFID, Securities Settlement | Tagged , , , , , | Leave a comment

The Role and Duties of the Board of Directors

Posted on by aldopuch

By Stanley Epstein, Eureka Financial

Defining the role and duties of the Board of Directors

When we look at corporate governance we notice immediately that the focal point to which everything flows and from which everything emanates is the board of directors.

The board of directors (which I will simply refer to as the ‘board’) is the centre of gravity of all business enterprises. Depending on the nature of the business organisation the board may well go under a different name. The names that a board may appear under, include the ‘board of governors’, ‘board of managers’, ‘board of regents’, ‘board of trustees’, or ‘board of visitors’ etc. Irrespective of what it is called, for most businesses the board represents the head of the business organisation.

The role and duties of the Board of Directors

By definition a ‘board of directors’ is a body of members either elected or appointed who together oversee the activities of a company or an organisation.

This role puts the board right in the firing line when it comes to corporate governance. The board is central to the whole question of corporate governance.

The United Kingdom’s Cadbury Report of 1992 put it succinctly when they referred to the board as being ‘…juxtaposed between Shareholders on the one hand, and on the other, Managers of the entity.’ Put another way, it creates distancing between the ownership of the business (the shareholders) and the control of the business (the managers).

In the middle of these two extremities sits the board– a trustee for all the shareholders and the ‘commander’ for all the activities of the business.

The roles and responsibilities of the board is to provide leadership and strategic guidance while exercising control over the company. The board has to direct and control the management of the company while sitting in objective judgement over company affairs, totally independent of management. The board is accountable at all times to all the shareholders of the company.

3 main functions of the Board of Directors

The dimensions of the board’s responsibilities involves three separate functions – setting the direction, setting up controls and accountability. We examine each of these in turn.

Setting the direction involves:

– The formulation and review of policies, strategies, budgets and plans, risk management  policies, and high level HR policies,

– Setting the objectives of and monitoring performance, and

– The oversight of acquisitions, divestitures, projects, financial and legal compliance, etc.

Setting up controls involves:

– Prescribing the various codes of conduct (sets of rules to guide behaviour and decisions in a specified situations) under which the business will be run (for the different aspects of the businesses activities),

– Overseeing the processes for proper disclosure and communication,

– Making sure that the right control systems are in place to protect the assets of the business, and

– Reviewing performance and where necessary realigning action initiatives to achieve the objectives of the business.

Accountability involves:

– Ensuring the creation, protection and enhancement of the business’ wealth and resources,

– Making certain that reporting on the activities of the business is both timely and transparent, and

– Safeguarding ‘good corporate citizenry’ which includes the discharge of stakeholder obligations as well as societal responsibilities without compromising in any way the goal of shareholder wealth maximization.

If you are interested in learning more about the role of the board and responsibilities of directors as well as the best corporate governance practices and the latest trends attend the next edition of the Corporate Governance Training Course. Eureka Financial also offers customised in-company sessions in any location worldwide as well as consulting and assessment sessions. Contact us for more details.

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Corporate Governance, Leadership | Tagged | Leave a comment

Top Hedge Fund Managers bet on London

Posted on by aldopuch

By: Bloomberg

London’s fund industry is bouncing back, and U.S. billionaires Steven A. Cohen and Ken Griffin are grabbing a piece of the action.

Griffin’s Citadel and Millennium Management, a hedge fund run by Israel Englander, have bulked up in London, where asset growth is outpacing the U.S. Point72 Asset Management, the family office that oversees Cohen’s wealth, is plotting a return to Europe’s financial hub by year-end, said a person with knowledge of the matter.

Hedge fund market in London

London lost ground with hedge fund investors earlier this decade as taxes rose on the highest earners and Europe’s debt crisis roiled markets. Now managers say trading opportunities are multiplying and dealmaking is picking up. Europe attracted $12.5 billion in the first half of the year, while funds focused on the U.S. had net outflows, according to a report from eVestment, a firm that tracks hedge funds.

“This is the first time London has looked really exciting for hedge funds since the European debt crisis in 2011,” said Ray Nolte, chief investment officer of SkyBridge Capital. The New York-based firm plans to boost investments in European hedge funds that seek to profit from events such as corporate restructurings, mergers and share sales.

The rebound is driving up demand for office space in Mayfair and other districts where hedge funds congregate. The industry’s growth contrasts with the bloodletting at Europe’s biggest banks, which are slashing thousands of jobs and closing trading desks in the face of tougher capital requirements.

To read the whole story go to: www.bloomberg.com

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

Posted in Family Office, Financial Markets, Hedge Funds, Investments | Tagged , | Leave a comment

Understanding Corporate Governance

Posted on by aldopuch

By Stanley Epstein, Eureka Financial

Not so long ago a successful company was simply one that was profitable. How that company was managed, the ethics of its owners and management were simply of no interest or consequence to the public at large.

Things have changed in the last couple of decades. It is no longer enough for a company to merely be profitable; it also needs to show good corporate citizenship through a whole host of practices and policies like environmental awareness, ethical behaviour and sound corporate governance practices.

Interest in the corporate governance practices of modern corporations, particularly in relation to accountability, increased dramatically following the high-profile collapses of a number of large corporations during the early 2000s, most of which involved accounting fraud, and then again after the recent financial crisis in 2008.

Understanding Corporate Governance

Continuing corporate scandals in various forms have sustained both public and political interest in the regulation of corporate governance.

In the U.S., the major scandals include Enron and MCI Inc. (formerly WorldCom). Their demise was the driver for the U.S. federal government passing the Sarbanes-Oxley Act (SOX) in 2002. This piece of legislation was intended to restore the public’s confidence in corporate governance.

Similar corporate governance failures in other countries such as Parmalat in Italy and Siemens in Germany stimulated increased regulatory and legal interest.

This article is a brief introduction to Corporate Governance. In it we are going to look at its definition, its foundations and core principles.

Corporate Governance Definition

Corporate governance in a broad sense is the mechanisms, processes and relations through which corporations, businesses, organizations, company’s or firms are controlled and directed. To make life simpler I will refer to all of these different organizations as ‘corporations’.

Corporate governance can be defined simply as “a system of rules, practices and processes by which a corporation is directed and controlled”.

In essence corporate governance involves balancing the interests of the many stakeholders in a corporation. These stakeholders include its shareholders, management, customers, suppliers, financiers, government and the wider community.

We can take this definition and expand it, taking it to the next level to provide greater granularity. Doing this our original definition of corporate governance can be expanded as follows:

“A system of rules, practices and processes by which a corporation is directed and controlledwith the focus on internal and external corporate structures with the intention of, monitoring the actions of management and directors and thereby, managing agency risks which may arise from the misdeeds of corporate officers”.

To undertake the corporate governance process an organisation needs to have the right governance structures, processes and mechanisms.

Governance structures identify the distribution of rights and responsibilities among different participants in the corporation.

Who are these participants? Generally (but not exclusively), these include the board of directors, managers, shareholders, creditors, auditors, regulators, and other ‘interested’ parties (who are referred to as ‘stakeholders’). This also includes the rules and procedures for making decisions in corporate affairs.

Corporate governance processes through which corporations’ objectives are set and pursued are in the context of the social, regulatory and the market environments.

Governance mechanisms include monitoring the actions, policies and decisions of corporations and their agents.

The agency risk mentioned in the expanded definition is the risk that the management of a corporation will use its authority for its own benefit rather than shareholders. An example is that of directors or managers who may elect to pay themselves higher salaries, which increases overhead, rather than to pay out extra profits as dividends. In a more sinister example, these directors or managers may actually steal the business’ money.

Corporate governance practices are affected by attempts to match up the interests of all stakeholders.

Main Corporate Governance Regulations

Current deliberations on corporate governance tend to refer to various principles that have been set out in a number of documents that have been published since 1990. There are three core ‘source’ documents for Corporate Governance Principals.

These documents are:

– The United Kingdom’s Cadbury Report of 1992,

– The OECD Principles of Corporate Governance (1998 and 2004), and

– The United States Sarbanes-Oxley Act of 2002.

The Cadbury and OECD reports present general principles around which businesses are expected to operate to assure proper governance.

The Sarbanes-Oxley Act, is an attempt by the United States federal government to transpose several of the principles recommended in the Cadbury and OECD reports into Federal law.

5 Core Principles of Corporate Governance

There are five core principles in the area of corporate governance. We will briefly examine them in more detail.

1. Rights and equitable treatment of shareholders

Corporations should respect the rights of shareholders and assist shareholders to exercise those rights. Shareholders can be helped to exercise their rights by open and effective communicating of information and by encouraging them to participate in general meetings of the corporation.

2. Interests of other stakeholders

Corporations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders. Included in this category are employees, investors, creditors, suppliers, local communities, customers, and policy makers.

3. Role and responsibilities of the board of directors

The board needs sufficient relevant skills and understanding to review and challenge management performance. The board also needs to be of adequate size and have the appropriate levels of independence and commitment.

4. Integrity and ethical behavior

Integrity should be a fundamental requirement in choosing corporate officers and board members – there should be no exceptions to this rule. Corporations should develop, publish and explain a code of conduct for their directors and executives that promotes ethical and responsible decision making.

5. Disclosure and transparency

Corporations should clarify and make publicly known the roles and responsibilities of board of directors and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the corporations should be timely and balanced to ensure that all investors have access to clear, factual information.

In this article I have provided a brief introduction into Corporate Governance, what it is and the tools that are used to facilitate its execution as well as the five core corporate governance principles.

If you are interested in learning about the best corporate governance practices and the latest trends attend the next edition of the Corporate Governance Training Course. Eureka Financial also offers customised in-company sessions in any location worldwide as well as consulting and assessment sessions. Contact us for more details.

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Eureka Financial offers over 100 public and in-company training courses in banking and finance, asset management, corporate finance and M&A, compliance, risk management,  investments, wealth management, soft skills and more. For more details visit: www.eurekafinancial.com

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