Op-Ed: Framework of Iranian Banks’ Corporate Governance

As the Iranian banks move to connect to their international peers, some fundamental structural reviews are called for in order to strengthen their corporate governance and realign their organizational structure to ensure they are in line with the latest global standards.

As with any organization, a complete delineation and segregation of duties are essential to its sound operation. This principle becomes even more important in the case of banks and financial institutions. The soundness and safety of banks are essential to its stability and central to its economic health.

Global banks have an established organizational structure with set departments and a known function. The roles and responsibility of each department are clearly defined and established. Furthermore, they are characterized by a strong corporate governance framework.

The corporate governance structure comprises an administration and control system founded on the existence of an administrative body (the board of directors) and the board of auditors. Corporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management. Design, implementation and operation of a sound internal control system are a vital component of a strong corporate governance culture.

Typically, a bank's organizational structure consists of the following distinct departments with their own unique functions and responsibilities:

Board of Directors: The board has overall responsibility for the bank, including approving and overseeing the implementation of the bank’s strategic objectives, governance framework and corporate culture. The board is also responsible for the oversight of senior management.

It has the ultimate responsibility for the bank’s business strategy and financial soundness, key personnel decisions, internal organization and governance structure and practices, as well as risk management and compliance obligations.

The board should ensure that the bank’s organizational structure enables the board and senior management to carry out their responsibilities and facilitate effective decision-making and good governance. In order to meet and achieve these goals and expectations, it is imperative that the board members are experienced, competent and possess the required know-how.

Treasury Department: The Treasury Department is responsible for managing funds and liquidity of the bank, its balance sheet and capital position.

Different Lines of Business (LOBs): These include retail banking, corporate banking, high net worth/ private banking and residential mortgages.

Each of these LOBs obtains funding from the Treasury Department based on the prevailing transfer pricing model and operates in their predefined market and client sector.

Risk Management: Banks should have an effective and independent risk management function, under the direction of a chief risk officer, with sufficient authority, independence, resources and access to the board. The independent risk management function is a key component of the bank’s second line of defense.

Compliance Department: The bank’s board of directors is responsible for overseeing the management of the bank’s compliance risk. The board should approve the bank’s compliance approach and policies, including the establishment of a permanent compliance function.

Internal Audit: The internal audit function provides independent assurance to the board and supports board and senior management in promoting an effective governance process and the long-term soundness of the bank.

Operations Department: The Operations Department is responsible for supporting the bank's clients across the various lines of business, including client onboarding, settling transactions, confirmations, payments and reconciliations.

Finance Department: The Finance Department is responsible for the integrity and soundness of the bank’s books and records, and tasked with producing the bank’s financial statements.

Information Technology: The Information Technology Department is charged with establishing, monitoring and maintaining information technology systems and services across the bank. The department is in charge of providing, maintaining and upgrading technology platforms for the various business activities of the bank.

Credit Department: The Credit Department has a major role in the banking system, as lending is one of the key activities of the bank and involves credit risks and potential losses. The department’s key role is to identify, assess and manage the credit risk inherent in all transactions.

Legal Department: The Legal Department's key role is to provide counsel and legal advice that supports the firm's activities and protects its franchise.

Human Resources:  The Human Resources Department provides advice and insight to attract, retain, reward and develop a talented workforce, giving employees the support and tools they need to succeed.

In summary, effective and strong corporate governance and proper organizational structure of the banks are vital to their satisfactory functioning and accountability to their shareholders, clients and market participants.

The Central Bank of Iran notified Basel III principles on corporate governance to Iranian private banks and credit institutions in May, as part of the regulator's mandate to incorporate global standards. It is hoped that the regulator will further push the implementation of corporate governance and organizational structure in Iranian banks.