Actualidad Dominican Republic

Developments in corporate governance in the Dominican Republic

Monetary Board Regulation on corporate governance, approved by the Monetary Board, 2nd July 2015

Paloma del Val Tolosana Paloma del Val Tolosana, Secretary of the Board of Trustees of FMBBVA

On 14th September, the Monetary Board of the Dominican Republic published the new Corporate Governance regulation, amending the earlier Corporate Governance regulation that dated back to 2007. The second issue of Progreso discussed various aspects of the draft of this regulation.

It clearly represents progress, as from now on the minimum principles and guidelines are based on international standards and will serve to support financial intermediaries in their plans to adopt sounder corporate governance practices. The

implementation of such practices, however, will depend on the nature, size, complexity and risk profile of each business.

The Regulation is applicable to entities reporting as Multiple Banks, Savings & Loans Banks, Credit Corporations, Savings & Loans Associations, and also the Banco Nacional de Fomento para la Vivienda y la Producción, a state-run bank for housing and production.

It defines corporate governance as a set of minimum standards and principles regulating the design, integration and interaction between the Board of Directors and the Senior Management, shareholders, employees, related parties and other stakeholders. Good governance provides conflict management, management-risk mitigation and helps companies to achieve a more robust organisational system.

Compared to the previous regime, it establishes tougher rules for board members to be considered independent, requiring minimum proof of non-involvement with the institution and its shareholders over at least two years, during which such directors may not have received any remuneration from the institution. It also says that independent directors may be elected from among shareholders with less than 3% of the total share capital. However, it increases the maximum number of internal directors from one (in the earlier regulation) to two.

It introduces two best practices from international corporate governance standards, namely: (i) training programmes for directors, in order to keep their skills up to date so that they can meet the demands of their position, and; (ii) an assessment of the Board of Directors' performance.

The regulation is strict about the training programmes, requiring that the Board approve and submit their director-training plan to the supervisor each year. This plan must deal with subject matter regarding risks associated to financial activity, the mechanisms for assessing the results obtained and a preliminary timeline for the training sessions.

It incorporates criteria such as time of service, the committees on which each director sits and their contribution to board business in the now mandatory assessment of the board's performance. However, it does not include other matters recommended from international best practices, such as the methodology to be applied, the engagement of independent experts every few years to perform an external assessment, or the action plan that should ensue from the assessment, which should be approved and monitored by the Board itself.

The new regulation contains significant improvements in business transparency. It defines a Code of Conduct and Ethics which must be widely disseminated throughout the institution, and which must contain a clear description of the corporate values and rules with respect to conflicts of interest, the prohibition against working with competing companies, etc.

It does not regulate directors' remuneration, but simply establishes that this should reflect best international practices, and be adjusted to reduce unreasonable incentives to take risks that are not in the interest of the institution.

Another important development is considering the risk function as an essential area of control over the risk appetite and tolerance level approved by the Board, and of mitigation for the risks inherent to the institution's activity. This function must now always be headed by a chief risk officer (CRO).

In line with this, it establishes that an Integrated Risk Management Committee should be set up to ensure that the institution is aligned to the targets and strategies it has defined for itself.

The document gives detailed descriptions of the functions of the Audit Committee and the Appointments & Remuneration Committee, thereby making it mandatory for them to provide the three control functions in the institutions according to the principles of good governance.

It devotes an entire chapter to the regulation of the Senior Management. The most important change in that it requires internal management committees be set up: the Executive Committee, the Compliance Committee, and the Credit and Technology Committees.

The new regulation represents a substantial step forward, both in the terminology used and in the inclusion of practices in line with the latest corporate governance recommendations emanating from international circles over recent years (some of them already analysed in Progreso, such as the colombian New Country Code, the Code of good governance for publicly traded companies of Spain or the japanese Code of Corporate Governance). The financial institutions now face some hard work as they use the 90-day transition period to ensure that their rules are mainstreamed down throughout the entire organisation so that good governance becomes embedded in their culture.