Role of the management boards, supervisory boards, audit committees, statutory auditors and supervision authorities in the supervision of capital adequacy DISCLAIMER The views expressed in this publication do not necessarily reflect the views of KNF Piotr Staszkiewicz* * Head of the unit, Financial Supervision of Investment Institution Commission of Financial Supervision KNF, Poland

Goals Usage of Agent theory for PFSA risk management Identification of conflicts in risk management Market segmentation for review Practical areas Over the market risk identification Group management

Typical structure Shareholder [ultimate] – [stock exchange] Proxy shareholder General Meeting Supervisory Board – Audit committee – Remuneration committee Management Board – Risk compliance officer Supervisor Role PFSA

Typical structure Group Shareholder [ultimate] – Group Proxy shareholder General Meeting Supervisory Board – Audit committee – Remuneration committee – ? Group cross committee Management Board – Risk compliance officer – Group risk boards (reporting) Supervisory panel Supervisor Role PFSA Operational risk Recognition of the risk imposed on the company due to compliance with group standard not actual risk profile of a single comp.

Typical structure – solo owner Shareholder [solo owner] General Meeting [100% solo owner] Supervisory Board [family] Management Board [solo owner] – Risk compliance officer [system overwritten] Supervisor Role PFSA to the third parties – stakeholders Error in risk transmission mechanism

Typical structure some tips Owner motivation profile usually have the highest impact on risk behavior Attach risk ownership as high as possible to create an initial impact (mainly during implementation) Typical problem – Lack of legal provision Solution – Oxley Act implementation in EU – Audit risk committee – Notice: a difference between US corporate government structure (non executive directors vrs supervisory board)

Shareholders role Approve the goals vision and high level strategy including the risk appetite Ones a year High level non technical approach Motivation (typical value less risk profile) Initiate correction action External audit addressee FSA impact – In case of diluted shareholding (thought the exchange) stability overview Concerns – Proxy shareholding, emergency capital planning issues – Ability to follow professional reports e.g. audit – Project disclosures issues

Supervisory board role Approves high level policy documents – Risk management policy – Contingence capital plans – Risk apprise – Materiality level (material) risk overview – Dealing with audit issues (thought the audit committee) FSA impact – Formal action overview (documentation) – Frequency – Follow up policy – Information flow – Ability to maintain holistic approach – Pro-active role – Competence level – Legal responsibility

Supervisory board role II Tools applied – Budget approval – Reports on demand – External services approval High level minutes FSA impact – Communication – Moral suasion – Limited legal responsibilities

Management board Full responsibility limited by owner (group) and supervisory body behavior Liable to – Set up measurement system – Set up control system – Risk aggregation – Risk decomposition – Daily risk application FSA impact – Communication – Moral suasion – Limited legal responsibilities + FSA audit & control Legal enforcement (individual and company), fines, remuneration withholding, licenses individual and company recall Correction decision (must be an material misconduct) SREP/BION Business impact

Audit commitee Oxley act Initially to address audit weaknesses Practically covers capital and financial instruments risk issues Key aspects – Independence – Professional knowledge Advisory body Function could be transferred to the supervisory board FSA impact – Professionalism assessment – Independence assessment – Risk planning and addressing ability Action plan addressee External auditor: – Key weaknesses letter

Remuneration committee Anti crisis response Limit the imbalance for the remuneration Social responsibilities FSA impact – Practice to be gain

Groups committees Significant owner influence, difficult to trace, difficult to trace the legal and business responsibility FSA impact – Issues on split between the consolidated base supervision and local base supervision – Colleges – International cooperation

Groups committees Significant owner influence, difficult to trace, difficult to trace the legal and business responsibility FSA impact – Issues on split between the consolidated base supervision and local base supervision – Colleges – International cooperation

Statutory auditors Forms – Public audit – Due diligence reports – Group public audit – Group internal audit – Quality audits (iso) Covers – Risk definition – Opinions – Advisory issues FSA impact – Fee disclosure – Obligation to notify the qualification – Cross check with disclosure on the capital adequacy maintenance – Substantive work assumption – Early warning memos

Supervision of capital adequacy Changes to 2011/2012 process (overview) Addressee : supervisory board Inclusion technical meeting Strong issue regarding the unification of: -Internal capital model -System of internal control