Corporate Governance: Myth, or reality?
Media Room
The year 2015 was one of the most complicated years for Armenia’s banks.
What awaits the country’s banking system next year? What is corporate governance’s role in the efficiency of the ban’s activities? And why are the banks interested in improving the practice of corporate governance?

Chairman of the Management Board-General Director of Armenia’s Ameriabank CJSC, Artak Hanesyan, spoke about the aforesaid in the following interview with Armenian

Mr. Hanesyan, it is not the first year that the topic of corporate governance is discussed. Moreover, corporate governance is often perceived as a formality. In your view, what is the role of corporate governance in the efficiency of bank operations?

The practice of corporate governance is the primary condition for the efficiency of bank operations. A clear separation of the functions and responsibilities between all management structures, information transparency, internal control, and risk management are components of a bank’s corporate governance. The companies, for which access to international capital markets is important from the strategic perspective, must meet all requirements of international standards for corporate governance.
But regardless whether or not a bank is entering international capital markets, truly following international standards solely brings benefit to the bank, since it directly impacts the efficiency of the bank’s operations, and its ability to confront difficult situations.
Let me give some examples. Let us say the unclear separation of the powers of a company’s board of directors and executive management can result in the fact that the board of directors would have a negative impact—in different ways—in the company’s daily management. The decisions, which should be promptly adopted at the level of executive management of the company, are either put off or adopted in an untimely fashion due to and intervention by the board of directors. On the other hand, if the board of directors does not properly perform its functions of risk management, the company’s strategic development, and timely approval of the processes and business plans, this company would face major difficulties, at the very least. Corporate governance system increases a company’s operational nature, ability to achieve results, and accelerates the decision-making process.
The second key factor is the risk management. Companies which have a precisely operating corporate governance system identify and assess all the risks which are connected with the activity of the given company: timely measures are taken to reduce them, and thus the risks reduce and the efficiency level of bank’s operation gets higher.
And, definitely, the transparency of bank operation, the actual credibility of the reports, access of information to the clients and shareholders, etc. are very important. All this enhances the confidence towards the bank. And the final objective of the corporate governance system is confidence building.

How would you describe the corporate governance situation in Armenian banks now? Should the banks themselves work in the direction of improving corporate governance system or everything should be regulated by legislation and documents of the Central Bank?

As compared to the corporate governance in different branches of the country, I’m quite sure that the corporate governance of the Armenian banking system is on a relatively better level.
Moreover, corporate governance practice is more developed in our banks than in some post-Soviet countries in our region. But, of course, I won’t insist that the corporate governance in the Armenian banking system is in line with the international standards. We still have a lot to do in that direction.
As to the regulation and improvement of the corporate governance, this requires both legislation and normative acts. In terms of corporate governance, there are lots of regulating and normative requirements for the banks on both local and international level. Several years ago, the Central Bank of Armenia adopted a number of relevant regulations with the view of the proper implementation of the normative acts relating to the corporate governance. There are various international documents which regulate and describe the best practice in that direction. But the most important thing is for the legislative requirements of the best practice to be carried out in practice. Anything can look wonderful on a paper, but not be applicable in practice. In fact, efficient corporate governance positively impacts the bank’s financial indicators and its long-term strategic stability. Therefore, the conception of the necessity of corporate governance and the work of exactly banks in its improvement is very important.

What basis does Ameriabank build its corporate governance system on?

We attach great importance to the external corporate governance. Several years ago we even ordered external analysis of Ameriabank’s conformity to the demands of the best international standards. The UK Listing Authority (UKLA), which regulates the activity of open joint-stock companies, was taken as a basis. The report on conformity to international requirements was presented to us on the basis of analysis results.
I must say that the normative acts adopted by us then, as well as Ameriabank’s actual activity were mainly in line with UKLA requirements. But there was a need to fill up certain gaps. This specifically related to enhancing the role of independent directors in the Board. We had one independent director in the Board of Directors here in Ameriabank. Pursuant to the UKLA standards, at least two members of the Board of Directors should be independent. And because we wish to conform not only to the requirements of Armenian legislation, but also to the best international practice, we adopted a decision on expanding the composition of Ameriabank’s Board of Directors starting from next year, making two members of the Board of Directors independent.
Apart from this, under the international requirements, the board should be supported by at least three committees: audit, remuneration and nomination committees. I think it’s apparent what the audit committee deals with. The remuneration Committee submits the remuneration policy to the Board so that the latter discusses and agrees on it, proposes amount and order of the compensation for executive leadership, as well as the amount of bonuses. The nomination committee discusses issues related to the independent members of the Board of Directors, nomination of external professional consultants, as well as their remuneration and functions. The committee doesn’t make any decisions: it only makes recommendations to the Board on [corresponding] decisions. We have already adopted internal normative documents, which regulate both the functions and the composition of separate committees. The independent members of the Board of Directors must by all means be represented in the committees. And only an independent member of the Board of Directors can become the chairman of the audit committee. Next year Ameriabank will start applying all UKLA standards in practice.

The year 2015 was complicated for the banking system. How would you assess Ameriabank’s activity in the current year?

Armenian banking system started 2015 with certain problems. You are aware of the fact that in late 2014 the Armenian dram depreciated against the US dollar by 16 percent, which was accompanied by 30 percent decrease in the volume of private dram transfers, as well as up to 20 percent increase in the normative of mandatory provisioning of funds obtained in foreign currency.
Further depreciation of Armenian dram and deterioration of the overall economic sphere was expected. Fortunately, the reality proved to be much better than the expectations.
As to Ameriabank, we continue to occupy leading positions in the market not only by quantitative but also qualitative indicators: As of the end of the third quarter of the current year, we come the first in Armenia’s banking system according to asset value, credit exposures and responsibility towards the clients, and the second according to the profit amount. We are among the leaders of the banking system according to such indicators as profitability and expenditure efficiency coefficient (ratio of expenses against profits). The quality of bank assets somewhat reduced in 2015. But we are in a better position according to this indicator as compared to the overall market.

2015 is coming to its end. We would like to hear your forecast about the results of the year and the trends of banking system development in 2016

In my opinion, we reached the lowest limit this year, and despite the fact that the next year will be rather complicated and tense, certain positive trends are expected both in the [sphere of] economy and banking system. I don’t see any extraordinary challenges and dangers of further depreciation of dram against dollar. I think 2015 was the most difficult year in terms of the quality of bank assets, and in 2016 the quality of assets will either improve or it will stay at the same level. I think there will be no deterioration. I’d like to remind that starting from 1 January 2017, the decision of Armenia’s Central Bank on the increase in the amount of normative capital will come into force. With this regard, I think we will see several acquisition and merger transactions, and the long-awaited consolidation in the bank sector will finally take place. Consequently, we will have a more efficient and reliable banking system which will be attractive for investments. 
Updated 14.12.2015, 9:51
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