## Quis custodiet ipsos custodes? Who guards the guardians? (wpiea2019293-print-pdf) ## Source details **Canonical URL:** [Quis custodiet ipsos custodes? Who guards the guardians? (wpiea2019293-print-pdf)](https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019293-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2019/wpiea2019293-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2019/wpiea2019293-print-pdf.pdf.json) --- ### I. Introduction — context, costs, and purpose - Central banks combine a sovereign public policy mandate ("central") with a complex balance sheet ("bank"); recent balance sheet expansion since the Global Financial Crisis increased management complexity and unwinding needs. - Robust governance arrangements are necessary to ensure sound and effective decision-making. - IMF Executive Board policies recognizing central bank governance: - Safeguards Assessments (policy adopted in 2002; governance focus emphasized since 2010; renewed during the 2015 Policy Review). - Framework for Enhanced Engagement on Governance (2018) — assesses Central Bank Governance and Operations among seven State functions. - Costs of governance failures: - Reputational damage. - Severe financial impact potentially giving rise to losses which could amount to percentage points of GDP. - Excessive external oversight by political bodies, leading to reduced autonomy, constrained mandate, and policy ineffectiveness. - Paper scope: - Contextualize Board oversight within central bank governance and decision-making structures (sections II and III). - Focus on legal design variables providing a robust legal foundation for effective Board oversight (section IV), with major emphasis on composition-related variables and Fund staff advisory practices. - Data sources: legal analysis of central bank laws across IMF membership (Annex 1 methodology and database); summary of Fund Legal Department advisory practices. - Three central legal design questions: - How are the activities comprising Board oversight defined in central bank laws? - What legal forms do Oversight Boards take? - How is Board oversight legally exercised? - Caveat: Sound legal frameworks are necessary but not sufficient; governance also depends on people, institutional culture, and rule of law. - Exclusions: personal autonomy of Oversight Board members beyond eligibility/incompatibility criteria and role of audit/sub-committees. ### II. Governance, decision-making structures, and oversight — conceptual framework - Governance definition and components: - Governance = ensemble of structures and arrangements by which an organization makes decisions in pursuit of its mandate. - Four constitutive and interrelated components: i. Mandate; ii. Autonomy; iii. Transparency and Accountability; iv. Decision-Making Structures. - Formal legal basis: - Central bank governance established in or pursuant to the "central bank law" (organic law); secondary instruments (by-laws, internal regulations) provide procedural detail. - Mandate — scope, limits, and legal nature: - Mandate constituted by what is required, allowed and prohibited by law; comprises Objectives ("why"), Functions ("what"), Powers ("how"). - Typical objectives: price stability, financial stability, support for government economic policies. - Typical core functions: (i) monetary policy formulation/implementation, (ii) exchange rate policy implementation, (iii) holding/management of official foreign reserves, (iv) promotion of payment system soundness. - Autonomy — four sub-concepts: - institutional autonomy; - functional autonomy; - personal autonomy; - financial autonomy. - Accountability and Transparency: - Central banks accountable to State institutions and the public; transparency required for accountability, but disclosure should not threaten financial stability or security of banknote distribution. - Decision-Making Structures answer: “what” (responsibilities), “who” (bodies), “how” (procedures). - Four distinct decision-making responsibilities to allocate in law: - Public Policy Formulation (sovereign). - Regulatory Decision-Making (sovereign). - Executive Management (day-to-day). - Oversight (budget approval, financial reporting, internal controls, audit, risk management). ### III. Oversight — scope, definition, and context (what, who, how) - Definition: - “Oversight” = the decision-making responsibility through which an organization and its stakeholders ascertain and ensure that the organization is well managed. - Focus: operate within legal boundaries; be financially and operationally sound; use financial resources effectively and efficiently; be transparent and accountable. - Focus of paper: internal Board oversight exercised by an internal decision-making body — the “Oversight Board” — acting on behalf of the State and society. - Distinctions: - Internal Board oversight distinct from external State oversight, civil society monitoring, internal management oversight, and central bank oversight of external financial structures. - Board oversight is a decision-making activity; without decision-making powers it would be monitoring only. - Typical Oversight Board decision-making powers (Table 1 summary): - General: adopt internal organizational policies (Internal Controls Framework; Budget Execution Framework; Financial Reporting Framework; Audit Framework; Risk Management Framework; Official Foreign Reserves Management Framework; Human Resources Framework; Procurement Framework; IT Security Framework; Code of Conduct/Code of Ethics; Compliance Framework). - Specific: approve Annual Budget; approve Organizational Structure; approve Annual Financial Statements; appoint External Auditor(s); appoint Chief Internal Auditor; appoint senior executives (sometimes); approve Major Agreements and Contracts (sometimes). - Interaction rules: - Oversight should not overlap with or unduly constrain Executive Management, Public Policy Formulation, or Regulatory Decision-Making. - Permitted interactions include oversight over policy consequences (e.g., adequacy of risk management, provisioning), and monitoring of policy formulation (non-binding). - Rationale for internal Oversight Board (four reasons): - i. Alignment of incentives. - ii. Avoid political substitution. - iii. Reinforce internal checks and balances. - iv. Lead by example for supervised institutions. ### IV. Legal design variables — the “Who?” (composition and eligibility) - Four critical legal design variables: - i. Requirement of a non-executive majority on Oversight Boards. - ii. The chair of the Oversight Board (executive vs non-executive). - iii. Presence of Public Sector Board members. - iv. Eligibility criteria for non-executive Board members. - Majority of non-executive members: - Rationale: Oversight Board must be sufficiently autonomous from executive management; executives should not control or dominate Oversight Board. - Country practice and statistics (preserve exact figures): - 75% of central banks with a Board of Directors have a non-executive majority (112 Boards of Directors with majority of non-executives, 75%). - In the whole central banking community, out of the 170 central banks that have Oversight Boards, 132 have a majority of non-executives, which corresponds to 78% of these institutions. - Boards of Directors with Executive Majority: 38 central banks or 25%. - Entirely Executive Boards of Directors: 22 central banks, i.e. 15% of all Boards of Directors. - Staff recommendation: Fund staff strongly advocates a majority of non-executive members; structural conditionality under Fund-supported programs has been adopted to modify laws to provide such a majority. - Caveat: non-executive majority necessary but not sufficient; complementary design features needed (access to information, eligibility criteria). - Size of the Oversight Board (Box 2): - Empirical practice across IMF membership: - Average number of members serving on Oversight Boards: 8.38. - Median number of members: 8. - Supervisory Boards are on average smaller than Boards of Directors; biggest cohort of Boards of Directors has 7 members; highest percentage of Supervisory Boards has 5 members. - Corporate literature anchor: Boards of 8 to 9 members most effective (Lipton and Lorsch 1992). - Recommendation: allow varying size via statutory minimum and maximum of non-executive Board members to safeguard non-executive majority; fixed numbers recommended when Board also formulates public policy/regulation. - Chair of the Oversight Board — practice and guidance: - Influence of chair via agenda setting and casting vote; executive chairs can provide unified policy representation but risk executive dominance. - IMF membership practice: - Of central banks with a Board of Directors: 88% have an executive chair; 12% have a non-executive chair. - Boards without monetary policy formulation responsibilities: 84.61% Executive Chair; 15.38% non Executive Chair. - Boards with monetary policy formulation responsibilities: 86.73% Executive Chair; 13.26% non Executive Chair. - Notable: 13% of Boards with monetary policy formulation responsibilities have a non-executive chair. - Staff advice: nuanced; non-executive chair supported cautiously where Board does not formulate monetary policy; where Board does formulate monetary policy, executive chair (Governor) understandable but remedies suggested to mitigate dominance (e.g., annual meeting under non-executive chair to review executive performance). - Presence of Public Sector Board members: - Country practice (exact figures): - 98 Oversight Boards (58 % of them) have 0% Public Sector officials with voting rights. - 20 Oversight Boards (11.5 % of them) have Public Sector officials on Boards in the 10 to 15% band. - 41 Oversight Boards (23.6 % of them) have a concentration of Public Sector Board Members of 20% and more. - 4 central banks do not have Oversight Boards (oversight assumed by governmental body outside the central bank). - Concerns: - Presence of Minister of Finance or senior civil servants can create a “chilling effect” on decision-making and risk politicization of both policy and oversight decisions. - Staff advice: - Strong opposition to politicians/civil servants in bodies charged with monetary policy formulation (especially with voting rights). - Advise against Public Sector membership in Boards that formulate other public policies or regulatory decisions. - For pure Oversight Boards, minimize number of Public Sector officials; minor presence less damaging but risks remain. - Legal approach: use incompatibility criteria to prohibit politicians and civil servants from appointment; accept academics as common exception. - Flexibility for very small/low capacity countries: qualitate qua appointments, remove nationality requirements, allow attendance by teleconference. - Eligibility criteria for non-executive members: - Role: ensure non-executive members are individually and collectively “fit” to perform duties; mitigate competence gaps vis-à-vis executives. - Country practice (exact distribution): - 89 central banks with Weak EC, 54% - 43 central banks with No or Irrelevant EC, 26% - 18 central banks with Moderate EC, 11% - 6 central banks with Strong EC, 4% - 8 central banks where the EC is N/A, 5% - Overall: 132 central banks with insufficient eligibility criteria, 80% - Definitions: - “No or Irrelevant” EC: no mention of professional experience or education. - “Weak” EC: focuses on education or some professional experience, but not both combined. - “Moderate” EC: combines education and some minimum professional experience. - “Strong” EC: education plus robust minimum professional experience including senior positions and diversity of skills. - Common weaknesses: vague descriptors (“professionally capable”, “well-known capacity”); imprecise fields; non-objective requirements (“good manners”, “patriotism”). - Staff recommendations: - Require advanced university degree in relevant fields (economics, finance, law, audit, engineering, IT); - Minimum years of professional experience; - Minimum years of experience in senior positions. - Complement legal requirements with onboarding, training, and political accountability to improve appointment quality. ### V. Procedural aspects — the “How?” (meetings, quorum, initiatives) - Procedural aspects to cover in law: - Minimum number per annum and periodicity of Oversight Board meetings: - For most central banks, 5 to 10 ordinary meetings per year, with respectively bimonthly or monthly meetings, seems sufficient. - Quorum, including minimum presence of non-executives: - Quorum should require a minimum number of non-executive directors larger than total number of executive members to avoid executive majority in practice. - Decision-making and voting procedures: - Majority voting typical; tie-breaking vote allocated to chair; consensus by law not recommended. - Some laws require super-majorities for certain decisions. - Right of initiative to call meetings and table agenda items: - Good practice: allow, for example, two directors to call a meeting and permit each director to table agenda items; avoid exclusivity by the Governor. - Empirical risks undermining non-executive majorities: - Four factors enabling de facto executive dominance: 1. Non-executive majorities often narrow: 29 Boards of Directors have a non-executive majority of one to two non-executives. 2. Non-executive positions tend to be vacant more often and for longer periods than executive positions. 3. 130 of the 148 Boards of Directors are chaired by an executive with casting vote in ties. 4. (Re-)appointment of Directors sometimes depends on Governor assessment, aligning Directors with Governor. - Best practice: include legal provision establishing a quorum that always consists of a non-executive majority. - Board composition guidance: - Majority of minimum three non-executives for smaller Boards. - Larger Boards should strive for a minimum four-member non-executive majority. - Model Board sizes for Boards vested with Oversight Only (stylized examples preserved): - Small Size / Simple Economy: - 5 Non-Executives; 2 Executives; optional 2 more Non-Executives; 4 Member Quorum with 3 Non-Executives. - Medium Size / Not-too-complex economy; OR Small Size with extensive mandate; OR Large Size with narrow mandate: - 7 Non-Executives; 3 Executives; optional 3 more Non-Executives; 6 Member Quorum at least 4 Non-Executives. - Large Size / Highly complex economy and extensive mandate: - 8 Non-Executives; 4 Executives; optional 4 more Non-Executives; 7 Member Quorum at least 5 Non-Executives. - Practical items for secondary instruments (By-Laws, Rules of Procedure): - Teleconference meetings; attendance of advisors/technical staff; recording of decisions. ### VI. Institutional forms, prevalence, and historical notes - Historical transition: - 1668 - 1945: Owners private; legal forms included “Societe anonyme”; decision-making bodies included Governor/Executive Board; Board of Directors; General Assembly of Shareholders. - 1945 – Today: Owners State; legal form organic law/public law entity; decision-making bodies: Governor/Executive Board; Board of Directors/Supervisory Board; sometimes Policy Formulation Committee. - Some central banks still have private shareholders (examples in source). - Typology of Oversight Boards: - Two principal models preserved: - Boards of Directors: combine executive and non-executive directors; three subtypes: majority non-executive; majority executive; only executives. - Supervisory Boards: composed only of non-executive members; charged exclusively with oversight. - Definitions used by paper: “Board of Directors” = any Oversight Board combining executive and non-executive members; “Supervisory Board” = Oversight Boards exclusively composed of non-executives. - Prevalence and quantitative breakdown (exact figures preserved): - Survey universe: 174 central banks surveyed; only 4 have no Oversight Board. - Composition breakdown: - 20 Supervisory Boards, 12% - 98 Boards of Directors with Monetary Policy, 58% - 52 Boards of Directors without Monetary Policy, 30% - 150 Boards of Directors, 88% - Additional prevalence statement: - 12% (20) of central banks’ Oversight Boards are Supervisory Board-type; 88% (150) are Board of Directors-type. - Monetary policy responsibilities: - 58% of surveyed central banks’ Oversight Boards combine oversight and monetary policy formulation responsibilities. - Executive management models and concentration (exact figures preserved): - Counts and percentages: - "20 central banks with Collegialmodel, 12%" - "7 central banks with Hybrid - more collegial model, 4%" - "1 central bank with Hybrid -inconclusive model, 1%" - "116 central banks with a Presidentialmodel, 72%" - "18 central banks with a Hybrid -more presidentialmodel, 11%" - "134central banks with executive management highly concentrated in the Governor, 83%" ### VII. Staff’s advisory practice and recommended legislative drafting techniques - Three legislative drafting techniques to define Oversight Board responsibility: - First: include a strong, explicit general statement in central bank law that the Oversight Board is responsible for overseeing executive management; require executive management to take executive decisions within frameworks/policies adopted by the Oversight Board; impose a duty for the Oversight Board to verify compliance with internal organizational policies. - Second: include a comprehensive listing of oversight-related decision-making powers covering both general powers (internal organizational policies, accounting, audit, risk, HR) and specific powers (approval of budget and financial statements, appointment of external auditors/chief internal auditor). - Third: include explicit prescriptions on provision of information to the Oversight Board; require executive management to report regularly and provide all information necessary for proper exercise of duties (but not beyond appropriate confidentiality limits). - Examples of well-drafted provisions: - Norges Bank Section 5: Supervisory Council supervises Executive Board; "right of access with respect to all of the Bank’s affairs" and may conduct investigations deemed necessary. - BEAC Article 32: detailed Oversight Policies and Oversight Decisions including adoption of policies on internal/external audit, financial reporting framework, approval of investment/risk policies for Official Foreign Reserves, adoption of budget and oversight of execution, appointment of external auditors. - Circumscribing oversight to protect public policy formulation: - Techniques: (a) limit oversight powers to aspects enumerated in Table 1; (b) clarify that where conflict occurs, policy formulation takes precedence. ### VIII. Four legal outcomes legislatures should pursue (policy recommendations — preserved wording) - Establish an Oversight Board: - "Central bank laws should systematically set up Oversight Boards, as these bodies are key to the good governance of central banks. Otherwise, oversight will directly be exercised by government, thus impeding on the central bank’s autonomy." - ...that is Well-Designed: - Supervisory Boards (non-executive only) or Boards of Directors (executive + non-executive). - For Boards of Directors: non-executive directors should have a sufficiently robust majority; consideration for a non-executive chair with due regard to the role an executive chair can play when the Board is charged with public policy formulation. - For both types: minimize Public Sector officials; formulate strong eligibility criteria. - ...with a Strong Oversight Mandate: - Central bank laws should set out an explicit general responsibility of the Oversight Board to oversee executive management and explicit decision-making powers to (i) formulate internal organizational policies and (ii) take specific oversight decisions. - ...Buttressed by Strong Oversight Procedures! - Procedural aspects contributing to high quality decision-making include periodicity of meetings, decision-making modalities (majority and quorum), and the right of initiative to call meetings and table agenda items. - "For Board of Directors, a quorum that requires a non-executive majority for oversight decisions would be a good practice." ### IX. Methodology and temporal scope (Annex I — key facts) - Initial research presented at the fifth High-Level Forum on Central Bank Governance (Dubai, 28-30 January 2019). - Comparative analysis expanded to the entire IMF membership (except Nauru, Vanuatu and Palau); includes more than 1 central bank per country in some cases and regional central banks. - Reviewed 174 central bank acts contained in laws or treaties; also reviewed related statutes, codes, by-laws, internal regulations, and public reporting. - Statistical data used for this paper is the one publicly available on May 1, 2019. *Source: wpiea2019293-print-pdf (IMF working paper excerpt).* ### References ............................................................................................................. ### Quis custodiet ipsos custodes? Who guards the guardians? ### I. INTRODUCTION - Central banks combine a sovereign, complex public policy making mandate ("central") with an equally complex balance sheet ("bank"), distinguishing them from other governmental agencies and commercial banks. - Recent expansion of many central banks' balance sheets in response to the Global Financial Crisis and its aftermaths has increased management complexity, including eventual unwinding needs. - Robust governance arrangements are necessary to ensure sound and effective decision-making in central banks. - Two IMF Executive Board policies explicitly recognize central bank governance: - Safeguards Assessments (policy adopted in 2002; since the 2010 review has stressed governance focus and was renewed during the 2015 Policy Review)3. - Framework for Enhanced Engagement on Governance (2018), which assesses Central Bank Governance and Operations among seven State functions4. - Costs of governance failures for central banks: - Reputational damage. - Severe financial impact potentially giving rise to losses which could amount to percentage points of GDP. - Possible excessive external oversight by political bodies, leading to reduced autonomy, constrained mandate, and policy ineffectiveness. - Definition and role of Board oversight: - Board oversight is the decision-making responsibility through which an internal body—the Oversight Board—ensures the central bank is well-managed. - Oversight Boards are the "last line of defense" in internal governance, critical for (i) holding internal decision-making accountable and (ii) ensuring management is appropriate, legally compliant, and financially and operationally sound. - Gap in attention: - Board oversight and its legal design features have not been central in policy or academic research; existing international standards (e.g., IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (1999)) refer only indirectly to Board oversight5. - Academic research largely focuses on monetary policy decision-making; some publications address Board oversight from an economic perspective6. - Purpose and scope of the paper: - Contextualize Board oversight within central bank governance and decision-making structures (sections II and III). - Focus on legal design variables providing a robust legal foundation for effective Board oversight (section IV), with a major emphasis on composition-related variables where current IMF membership practices and Fund staff advisory practices are summarized. - Data sources: - Overview of current practices among the entire IMF membership based on legal analysis of central bank laws and instruments; Annex 1 details methodology and database. - Summary of long-standing advisory practices of the Fund’s Legal Department, reflecting practical country-specific applications in absence of a formal substantive international standard7. - Three central legal design questions the paper seeks to answer: - How are the activities comprising Board oversight defined in central bank laws? - What legal forms do Oversight Boards take? - How is Board oversight legally exercised? - Caveat: - Sound legal frameworks are necessary but not sufficient for sound governance; governance depends on rules and people and broader institutional culture and rule of law. Human behavior is influenced by structural and procedural aspects of the environment8. - Exclusions: - The paper does not address certain variables such as the personal autonomy of Oversight Board members (beyond eligibility and incompatibility criteria) and the role of audit and specialized sub-committees; these issues are regarded as meriting separate treatment9. ### II. GOVERNANCE, DECISION-MAKING STRUCTURES AND OVERSIGHT: A CONCEPTUAL FRAMEWORK - Two concepts to frame Oversight Boards within governance: - Decision-making structures (often equated with governance) are a core component but not the entirety of governance. - Decision-making structures of central banks have multiple conceptual components; oversight must be analyzed within that lens. - Visual sequencing presented in Figure 1: From Governance to Oversight (Source: IMF staff). A. Governance - Governance definition: - Ensemble of structures and arrangements by which an organization makes decisions in pursuit of its mandate. - Good governance balances effectiveness (can decisions be taken adequately, effectively, and timely?) with soundness (are decisions appropriate, legally well-founded, and aligned with institutional objectives?). - Formal legal basis: - Central bank governance is established in or pursuant to the "central bank law," which operates as the organic law of the central bank. - Secondary legal instruments (by-laws, internal regulations, codes of conduct) provide detailed aspects of decision-making procedures. - For regional monetary unions, governance features may be in treaties; constitutions typically include only limited provisions. - Substantive components: - Central bank governance is composed of four constitutive and interrelated components: - i. Mandate; - ii. Autonomy; - iii. Transparency and Accountability; and - iv. Decision-Making Structures.11 - Relationship to corporate governance: - The paper’s concept of central bank governance is broader than corporate governance definitions such as the Basel Committee on Banking Supervision’s (BCBS) corporate governance for banks (which focuses on relationships among management, board, shareholders, and stakeholders and allocation of authority and responsibility). 1. Mandate - (Section begins with a quote attributed to Mario Draghi, 2012: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”) - Mandates are the first constitutive element of central bank governance and shape the scope and objectives of decision-making; the paper proceeds to elaborate mandate-related analysis in subsequent sections. *Italic: Source: wpiea2019293-print-pdf - References (excerpt).* ### 15. The mandate is the core of a central bank’s governance: it shapes the autonomy, ### 15. The mandate is the core of a central bank’s governance: it shapes the autonomy, ### Mandate: scope, limits, and legal nature - The mandate is constituted by the sum of what is required, allowed and prohibited by the central bank law; actions beyond the mandate are vulnerable to political and legal challenges. - Central banks are public law institutions that fulfil sovereign functions delegated by the State; the root of “mandate” (Latin mandare) connotes both “to send” and “to instruct.” - Legal principles: central banks are authorized only to do what the law requires and allows, explicitly or implicitly (“implied/incidental powers”); some laws explicitly prohibit certain operations. - Central bank mandates comprise three related concepts: - Objectives (“why”): goals the central bank should aim to accomplish. Typical objectives include price stability, financial stability and support for the economic policies of the government. - Functions (“what”): areas of activity to achieve objectives. Typical core functions: (i) formulation and implementation of monetary policy, (ii) implementation of exchange rate policy, (iii) holding and management of a country’s official foreign reserves, and (iv) promotion of a well-functioning payment system. - Powers (“how”): specific legal tools to implement functions. Powers can be of a private law nature (e.g., authorization to conclude financial contracts) or public law nature (e.g., imposition of minimum reserve requirements). ### Autonomy: dimensions and functional variation - Central banks must enjoy a high level of autonomy vis-à-vis political institutions and private economic interests to be effective. - Autonomy is commonly analyzed through four related but distinct sub-concepts: - institutional autonomy: the institution should not be influenced by the State or private third parties in its decision-making in the performance of its functions (e.g., through ministerial instructions); - functional autonomy: capability to implement its functions without direct governmental interference (e.g., prior approval of central bank decisions); - personal autonomy: key decision makers (Governor, members of Executive Boards, Monetary Policy Committees and Oversight Boards) are autonomous from political and private economic interests; - financial autonomy: capability to pursue its mandate by way of the financial means required to do so. - The level of autonomy can differ by function: - Monetary policy formulation requires the highest level of autonomy. - Bank resolution (if entrusted to the central bank) can operate at a lower level of autonomy when State financing rescues systemically important institutions. - Fiscal agency implies that the State, as principal, instructs the central bank as agent. ### Accountability and Transparency - Because central banks exercise sovereign functions that remain the final responsibility of the State, robust accountability and transparency mechanisms are critical counterbalances to autonomy. - Central banks are commonly required to be accountable to State institutions (Executive, Legislative and Judiciary) and the public. - For accountability to work, central banks must be subject to robust transparency requirements informing stakeholders about policy-formulating decisions and financial position. - Oversight Boards enable high levels of transparency and strong accountability (for example, by establishing financial reporting standards and internal controls). - Transparency requirements should be reasonable and not disproportionate so as not to hinder mandate fulfillment (e.g., Freedom of Information rules should not force disclosure that risks financial stability or security of banknote distribution). ### Decision-Making Structures: responsibilities, bodies, procedures - Decision-making structures answer three questions: - “what” must be decided? (decision-making responsibilities); - “who” must decide? (decision-making bodies); - “how” are decisions made? (decision-making procedures). H3: Decision-Making Responsibilities - Central bank laws need to allocate four distinct decision-making responsibilities: - Public Policy Formulation (sovereign): formulation of entrusted public policies—typical areas include monetary policy, exchange rates (within government-formulated exchange rate regime), financial stability, payment systems soundness, and statistical information collection/production/distribution. - Regulatory Decision-Making (sovereign): adoption of generally binding norms (“regulations,” “rules,” or “directives”) and individually binding decisions (e.g., fines for breach of minimum reserve obligations). - Executive Management: day-to-day management, including appointment/promotion/dismissal of staff, implementation of entrusted public policies, entering financial and non-financial contracts, and legal representation of the central bank. - Oversight: responsibility for oversight (subject of the paper), including budget approval, financial reporting, internal controls, audit, and risk management. H3: Decision-Making Bodies - Typical bodies and their standard allocations: - Governor or Executive Board (presidential or collegial model): normally entrusted with executive management; in many central banks also charged with public policy formulation; often responsible for individual regulatory decision-making. - Board of Directors or Supervisory Boards: generally entrusted with oversight responsibilities; often also charged with public policy formulation and general regulatory decision-making; in some cases entrusted with major individual regulatory decision-making (e.g., grant/withdraw banking license). - Specialized Policy Formulating Committees: sometimes allocated one or more public policy formulation responsibilities (most commonly monetary policy); in rare cases also charged with certain general regulatory decision-making responsibilities. H3: Decision-Making Procedures - Procedures determine modalities for decision execution: meeting frequency, quorum, majority required, transparency measures (e.g., publication of minutes), obligation to give reasons, and confidentiality of deliberations. - Procedural rules are often established via a pyramidal legal framework: - Constitution (possible), - Central Bank Law: basic rules, - By-Laws: secondary rules (more detailed), - Internal organizational regulations and/or decisions: tertiary rules (most detailed). - By-Laws and internal regulations are easier to adopt and more flexible; political institutions often have a stake in procedural modalities (for example, By-Laws approval sometimes requires Minister of Finance consent). *Source: IMF staff (content unit: wpiea2019293-print-pdf - 15. The mandate is the core of a central bank’s governance: it shapes the autonomy,)* ### 4. General Legal Principles ### 4. General Legal Principles ### General legal principles for allocating decision-making responsibilities - Central bank laws should comply with three general legal principles when allocating decision-making responsibilities to decision-making bodies (paras. 26–30): - “No Gaps, No Overlaps”: laws should allocate comprehensively and with precision all decision-making responsibilities to and between the central bank’s decision-making bodies to allow the institution to function effectively (para. 27). - Well drafted laws should avoid gaps and overlaps. Example technique: allocate “residual powers”—the powers not explicitly allocated in the central bank law—to one specific decision-making body (para. 27). - “Checks and Balances”: laws need to provide for robust checks and balances to avoid excessive concentration of power that may hinder sound decision-making (para. 28). - Example: While “presidential models” of executive management can enable swift and unified decision-making, they can evolve into “imperial” management where the Governor’s powers are insufficiently checked. - Empirical note: "83% of central banks of the Fund membership have an executive management structure that is highly concentrated in the person of the Governor" (para. 28). - Lack of sufficiently strong checks and balances can cause problematic policy making, corruption and other malpractices; appropriate rules on composition (e.g., majority of non-executives in Oversight Body) and the chair can buttress checks and balances (para. 29). - “Unicity”: the central bank should be one and indivisible as a legal entity; avoid fractured decision-making where bodies take non-coherent or contradictory decisions, which can occur when aspects of a specific responsibility are allocated to two non-hierarchically related bodies (para. 30). *Italicized footnote in source: See, for State-owned enterprises, paragraph 4 of the G20/OECD Principles of Corporate Governance, 2015.* --- ### III. OVERSIGHT — scope, definition, and context (paras. 31–41) - Section objectives: (1) define and contextualize oversight as a decision-making responsibility (“what?”), (2) discuss which decision-making body should be entrusted with this responsibility (“who?”), and (3) stress procedural importance (“how?”) (para. 31). A. What is Oversight? - Definition (para. 32): - “Oversight” is the decision-making responsibility through which an organization and its stakeholders ascertain and ensure that the organization is well managed. - Focus areas of oversight: ensuring the organization operates within legal boundaries, is financially and operationally sound, utilizes financial resources effectively and efficiently, and is transparent and accountable to stakeholders. - Focus of the paper (para. 33): - The paper focuses on oversight as exercised by an internal decision-making body—the “Oversight Board”—as part of broader internal oversight; this internal Board oversight is exercised on behalf of the State and ultimately society. The Broader Context (paras. 34–41) - Distinctions emphasized: - Internal Board oversight is distinct from external oversight by State institutions, monitoring by civil society, internal management oversight, and central bank oversight of external financial structures (paras. 34, 35, 38–40). - Board oversight is inherently a decision-making activity; without decision-making powers it would amount to mere monitoring (para. 41). --- ### External oversight (paras. 35–37) - Nature and scope: - The State, as principal and owner of central bank capital, has a fundamental right to exercise external oversight through Executive, Legislature and Judiciary, sometimes assisted by external councils, government commissioners, or Supreme Audit Bodies (para. 35). - The scope of external oversight can be wide, from public policy appropriateness to legality of actions (para. 35). - Limits on external oversight (para. 35): - External oversight should be limited because: - A major component of oversight is entrusted to an internal body of the central bank. - External oversight must be balanced with autonomy; substitution by State institutions would risk State influence on public policy formulation and regulatory decision-making. - State institutions may lack expertise and access to confidential information to justify overly broad oversight powers. - External oversight may include decision-making (para. 36): - Examples: requirement for Minister of Finance approval of By-Laws, appointment of external auditors, constitution of special reserves. - Appropriately designed external decision-making can be acceptable. - Typical limitation: State institutions often can assess and judge but not substitute their decisions for those of the central bank; e.g., Executive and Legislature can assess monetary policy but typically cannot take or instruct monetary policy decisions; Judiciary typically reviews legality but legislation may limit the scope of that review (para. 37). --- ### Monitoring vs. Oversight (para. 38) - Monitoring by civil society: - Monitoring allows verification that a central bank exercises powers appropriately but does not confer decision-making powers; this distinguishes monitoring from both external and internal oversight. --- ### Internal oversight and Board oversight (paras. 39–41) - Internal oversight: - Oversight Boards play a core role in overseeing top management; internal oversight also includes executive management oversight over staff via senior and mid-level managers (para. 39). - Financial sector oversight: - Distinct concept: central bank oversight over external financial structures (e.g., financial institutions, payment systems) relates more to supervisory functions and operational risks rather than internal Board oversight (para. 40). - Board oversight as decision-making responsibility (paras. 41–42): - Board oversight entails the power to adopt key general and specific institutional decisions. - General decisions: adopt internal organizational policies and regulations. - Specific decisions: operationalize internal policies via specific oversight decisions; in some countries includes opening/closing branches, acquisition of premises (para. 42). - Table 1 (summarized) — Decision-making powers of Oversight Boards: - General: Internal Organizational Policies — Internal Controls Framework; Budget Execution Framework; Financial Reporting Framework; Audit Framework; Risk Management Framework; Official Foreign Reserves Management Framework; Human Resources Framework; Procurement Framework; IT Security Framework; Code of Conduct/Code of Ethics; Compliance Framework. - Specific: Oversight Decisions — Approval of Annual Budget; Approval of Organizational Structure; Approval of Annual Financial Statements; Appointment of External Auditor(s); Appointment of Chief Internal Auditor; Appointment of senior executives (sometimes); Approval of Major Agreements and Contracts, incl. purchases of premises (sometimes). --- ### Interaction between Board oversight and other decision-making responsibilities (paras. 43–48) - Importance and benefits (para. 43): - Effective Board oversight lessens the probability the institution operates outside its mandate, avoiding political criticism, costly litigation and reputational harm. - A highly qualified Oversight Board can play an advisory role to other decision-making bodies, enhancing decision quality. - Need for circumscription (para. 44): - Board oversight must be circumscribed to avoid overlap with or undue constraint on the three other decision-making responsibilities, especially when the Oversight Board differs from the body charged with those responsibilities. - Interaction with Executive Management (paras. 45–46): - Oversight should focus on executive management’s exercise of decision-making powers, ensuring they operate appropriately within strategies and binding internal policies formulated by the Oversight Board. - Internal policies set benchmarks for performance checks. - Oversight Boards should not inappropriately meddle or micromanage executive management; excessive proximity would hamper the Board’s autonomy from management. - Interaction with Public Policy Formulation (paras. 47–48): - Board oversight should not constrain or superpose itself on public policy formulation. - Public policy formulation is allocated by law to the most competent decision-making body; oversight by another body via binding decisions would amount to “second guessing.” - The central bank remains accountable to State institutions via external oversight. - Two permitted interactions: - Oversight over policy consequences (e.g., ensuring financial statements fairly reflect the central bank’s situation; ensuring risk management and internal controls for foreign reserves are commensurate with portfolio size and complexity; ensuring own funds are sufficient to mitigate financial risk). - Some laws entrust the Oversight Board with “monitoring” policy formulation, but such monitoring lacks binding general and specific decisions and thus more closely resembles monitoring than oversight as defined in this paper. - Interaction with Regulatory Decision-Making (para. 48): - Same principles: Oversight Board should not constrain regulatory decision-making but can oversee consequences (e.g., provisioning for litigation costs from regulatory challenges) and monitor broad regulatory developments. --- ### B. To whom the Oversight responsibility is entrusted: the Oversight Board (paras. 49–50 and subpoints) - Core rule: Under “No Gaps No Overlaps,” every central bank should have an internal decision-making body entrusted with exercising the oversight responsibility; this body should be appropriately designed and different and sufficiently independent from executive management (para. 49). - Four reasons to allocate oversight to an internal body (para. 50 and subpoints i–iv): - i. Alignment of incentives: An internal oversight body aligns incentives with institutional goals and avoids conflicts of interest from external bodies that might pursue other ends not in the central bank’s interest; internal Boards also formulate internal policies influencing institutional performance (para. 50.i). - ii. Avoid political substitution: Without an internal body, external political bodies may fill the vacuum, but they often have less relevant skills, inside knowledge, and a higher tendency to impede central bank autonomy for political reasons (para. 50.ii). - iii. Reinforce internal checks and balances: Allocating oversight internally strengthens checks and balances within the central bank, contributing to robust governance (para. 50.iii). - iv. Lead by example for supervised institutions: Central banks that supervise financial institutions should impose robust governance standards on supervisees; to credibly impose such standards, central banks should adhere to similar internal governance quality, including strong Oversight Boards with final responsibility over internal controls (para. 50.iv). *Italicized source attribution: Content derived from "4. General Legal Principles" (wpiea2019293-print-pdf).* ### 51. This brings us to an important question of this paper: Do all central banks have an ### This brings us to an important question of this paper: Do all central banks have an Oversight Board? ### Historical development and institutional forms - Early central banks: Amsterdamse Wisselbank, the Swedish Riksbank and the Bank of England (17th century) and the dawn of central banks in the 19th century. - Historic transition (summary from Table 2): - 1668 - 1945 - Owners: Private - Legal Form: “Societe anonyme”; Public Law Company; Public Law Entity - Legal Instruments: Organic Law; Company Law; By-Laws - Decision-Making Bodies: CEO (“Governor”)/Executive Board; Board of Directors/Supervisory Board; General Assembly of Shareholders - 1945 – Today - Owners: State - Legal Form: Organic law; Public Law Entity - Legal Instruments: Organic law - Decision-Making Bodies: CEO (“Governor”)/Executive Board; Board of Directors/Supervisory Board; (Policy Formulation Committee) - Historical notes: - During the 17th–19th century period almost all central banks were established by the State, by or pursuant to their Organic Laws, in the form of companies owned by private shareholders and at least partially governed by company law. - After the Great Depression and World War II, many new central banks were established as State-owned and public law entities; older central banks were, to a large extent, nationalized. - Some central banks still have private shareholders (examples listed in source): Belgium, Greece, Italy, Japan, South Africa, Switzerland, Turkey and the USA (for the 12 Federal Reserve Banks; not the Board of Governors). ### Typology of Oversight Boards in central banks - Two principal models (distinction preserved as in source): - Boards of Directors - Stem from Franco-British legal tradition. - Combine non-executive and executive directors (and can be chaired by either). - Often combine oversight with policy formulation and regulatory decision-making. - For this paper, Boards composed only of executives also fall in this category. - Three subtypes: - (i) Boards of Directors with a majority of non-executives and a minority of executive members; - (ii) Boards of Directors with a majority of executives and a minority of non-executive members; - (iii) Boards of Directors composed only of executives. - Supervisory Boards - Stem from Germanic company law tradition (Aufsichtsrat). - Composed only of non-executive members and chaired by a non-executive. - Charged exclusively with oversight. - Internal to the central bank as decision-making bodies (“organs”) of the central bank. - Fundamental distinctions (Table 3 summary): - Board of Directors: combines executive and non-executive “directors”; can be chaired by executive or non-executive; combines oversight with other decision-making responsibilities (policy-making and/or regulatory); French and British tradition. - Supervisory Boards: includes only non-executive “members”; chaired by non-executive; charged exclusively with oversight; Germanic tradition. - Definitions used in the paper: - “Board of Directors” = any Oversight Board that combines executive and non-executive members, regardless of its formal name. - “Supervisory Board” = Oversight Boards exclusively composed of non-executives, regardless of their formal name. - Note: some laws label bodies differently from their functional composition (examples in source: BEAC, Comoros, Denmark, Albania). - Corporate governance distinction and hybrid realities: - Corporate law labels: “dual board” (Supervisory Board + Executive Board) vs “unitary” or “single” board (Board of Directors overseeing a Governor/CEO). - In practice, central banks exhibit hybrids: Boards of Directors overseeing Executive Boards; Supervisory Boards overseeing a single Governor (examples: Iceland and Suriname). ### Prevalence and quantitative breakdown (survey results) - Survey universe and headline: - Of 174 central banks surveyed, only 4 have no Oversight Board. - Composition breakdown (exact figures and percentages from source): - 20 Supervisory Boards, 12% - 98 Boards of Directors with Monetary Policy, 58% - 52 Boards of Directors without Monetary Policy, 30% - 150 Boards of Directors, 88% - Additional prevalence statement: - 12% (20) of central banks’ Oversight Boards consist of a Supervisory Board-type of structure, whereas 88% (150) of a Board of Directors-type of structure. - Monetary policy responsibilities: - A majority (58%) of the surveyed central banks’ Oversight Boards continue to combine oversight and monetary policy formulation responsibilities. ### How Board oversight is conducted: procedural importance - Oversight is exercised through procedural rules that specify: - How regularly the Oversight Board meets; - Who sets its agenda; - How it takes decisions; - How the Oversight Board interacts with specialized committees (in particular the Audit Committee). - Procedural rules matter: without robust procedural rules, Board oversight will struggle to be effective. - In legal frameworks, the procedural aspect is sometimes ignored relative to establishment of decision-making bodies — this is a mistake. ### Legal design issues: scope and clarity of oversight responsibilities (the “What?”) - Core issue: - The Oversight Board’s capability to oversee executive management depends on the adequacy, exhaustiveness, clarity and precision with which its oversight responsibilities are legally established and defined in the central bank law. - Risks when legal empowerment is weak: - Executive management can challenge attempts to establish effective oversight, including the legitimacy of the Oversight Board, even where organic law makes the Oversight Board the supreme decision-making body. - The problem is exacerbated when the body charged with executive management is also granted residual powers — then the Oversight Board is competent only for powers explicitly allocated to it by law. - Common deficiencies in statutes: - Vague general statements (e.g., the Board “will administer the central bank” or is responsible for “strategic planning”) that do not robustly empower oversight. - Enumerations of oversight powers that are too narrow (e.g., limited to approval of annual financial statements or appointment of external auditors). - Situations where other decision-making bodies (typically executive management) are competent for oversight-related decisions (e.g., approval of financial statements), undermining the Oversight Board’s practical oversight capacity. *Source: IMF staff (content unit: wpiea2019293-print-pdf).* ### 63. Staff’s Advisory Practice—Fund staff advizes that the robust legal definition of the ### Staff’s Advisory Practice—Fund staff advizes that the robust legal definition of the ### Three legislative drafting techniques to define Oversight Board responsibility - First: include a strong and explicit general statement in the central bank law that the Oversight Board is responsible for overseeing executive management. - Draft the general statement from the perspective of the Oversight Board, listing oversight over executive management as an explicit responsibility of the Oversight Board. - Complement with provisions requiring executive management to take executive decisions within the frameworks and policies adopted by the Oversight Board. - Complement with a general duty for the Oversight Board to verify that the central bank is discharging its functions in accordance with internal organizational policies and frameworks determined by the Oversight Board. - Second: include a comprehensive listing of relevant oversight-related decision-making powers of the Oversight Board. - Listing should cover both: - General powers to formulate internal organizational policies and issuance of internal regulations and other legal instruments relevant to sound administration (such as on accounting, audit, risk management, human resources, etc); and - Specific decision-making powers that allow the Oversight Board to operate as an effective check on executive management (such as approval of budget and financial statements, appointment of external auditors and chief internal auditor). - Third: include explicit prescriptions on the provision of information to the Oversight Board, unless dealt with otherwise. - Require executive management: - i. to report regularly to the Oversight Board on the delivery of its executive tasks as well as on occurrences that have a significant effect on administration or operations of the central bank; - ii. to provide the Oversight Board with all information which the latter deems necessary for a proper exercise of its duties (but not beyond what is appropriate, e.g. the Oversight Board should not have access to confidential information related to micro-prudential supervision). ### Examples of well-drafted provisions (Box 1) - Norges Bank - Section 5 example: Supervisory Council supervises the Executive Board to ensure management and control of the Bank’s administration and operations are satisfactory, appropriate procedures established, activities conducted in accordance with legislation, agreements, decisions and other regulatory frameworks. - “The Supervisory Council has the right of access with respect to all of the Bank’s affairs and may conduct any investigations it deems necessary in order to fulfil its responsibilities under the Act.” - BEAC (Banque des Etats de l’Afrique Centrale) — Article 32 examples: - Oversight Policies: - Art. 32.3: Board of Directors adopts policies on internal and external audit, compliance and risk management, and oversees implementation. - Art. 32.4: Board of Directors charged with control, including internal controls, with assistance of the Audit Committee. - Art. 32.6: Board empowered to adopt financial reporting framework and implementing measures. - Art. 32.20: Board authorized to approve investment and risk policies for the Official Foreign Reserves. - Oversight Decisions: - Art. 32.7: Board empowered to adopt the budget and oversee execution, with assistance of the College of Censors. - Art. 32.8-9: Board adopts annual financial statements and annual report. - Art. 32.18: Board power to approve any agreement that goes beyond day-to-day management. - Art. 69: External auditors are appointed by the Board of Directors. ### Circumscribing oversight to protect public policy formulation - Legal oversight responsibilities must be robust yet circumscribed to avoid hindering public policy formulation responsibilities of the central bank. - Techniques to preserve policy formulation: - (a) limit the specific oversight powers to the aspects enumerated in Table 1; and - (b) clarify that where a conflict with policy formulation could occur, policy formulation takes precedence over the oversight decisions. ### Oversight Boards — key legal design variables ("Who?") - Four legal design variables critical to effective oversight capability: - i. The requirement of a non-executive majority of Oversight Board members; - ii. The chair of the Oversight Board; - iii. The presence of Public Sector Board members; and - iv. The role of eligibility criteria for non-executive Board members. ### Majority of non-executive Board members — issue and legal rationale - Issue: - Core purpose of Oversight Board is to oversee executive management; Oversight Board must be sufficiently autonomous from executive management. - Executives (Governor, Deputy-Governors, Executive Directors) should not control or dominate the Oversight Board. - Legal mechanism: - Require the Board of Directors be composed of a majority of non-executive Directors, because Board decisions are typically adopted by majority of members present. ### Definitions and distinctions - Non-executive Director: central bank equivalent of “outside directors” defined in Black’s Law Dictionary: “a member of a corporate board of directors who is not a company officer and does not participate in the corporation’s day-to-day management.” - Non-executive vs Independent: - “Non-executive” relates to relationship between a director and executive management. - “Independent” relates to relationship between a director and significant shareholders; not practically relevant in State-owned central banks (except possibly Public Sector directors). ### Country practice and statistics - Survey findings: - A significant majority (75%) of central banks with a Board of Directors have a non-executive majority of members (112 Boards of Directors with majority of non-executives, 75%). - In the whole central banking community, out of the 170 central banks that have Oversight Boards, 132 have a majority of non-executives, which corresponds to 78% of these institutions. - Problems remaining: - Boards of Directors with Executive Majority: 38 central banks or 25% have Boards of Directors with an executive majority. - Entirely Executive Boards of Directors: 22 central banks, i.e. 15% of all Boards of Directors, are entirely executive. - Legal Uncertainty on Executive/Non-Executive Status: some laws create “Boards” composed of Governors and Deputy Governors plus “Directors” who appear non-executive on paper but are actively involved in day-to-day management. ### Caveats on statistics and varying board compositions - The 78% figure is based on maximum legal size of Oversight Boards. Many laws include varying board size and composition provisions that may reduce the actual percentage of Boards with a non-executive majority: - Boards without size of membership set by law; - Boards with minimum to maximum number of non-executives; - Boards with a minimum but no maximum number of non-executive members; - Boards with a maximum but no minimum number of non-executive members; - Boards having a chair that may be either an executive or a non-executive; - Boards that do not specify the mix of executives or non-executives serving on it. ### Staff’s advisory practice and recommendations - Fund staff strongly advocates a majority of non-executive members on Oversight Boards. - The Fund’s Executive Board has adopted structural conditionality under Fund-supported programs to modify members’ central bank law to provide for such a majority. - Where Directors are too involved in executive management, two recommended options: - Convert the existing Board into a well-structured Oversight Board by requiring a majority of Directors to withdraw from executive assignments; or - Create a Supervisory Board above the executive “Board of Directors” and assign oversight responsibilities to the former. - Legal-technical design of a non-executive majority should be considered with: - Size of the Board (see Box 2); and - Quorum (see Box 3). - Caveats on non-executive majority: - A majority of non-executive members is a necessary building block but not a panacea; limitations include asymmetric information and less know-how among non-executives. - Design features such as access to information and eligibility criteria can mitigate but not entirely remove limitations. - Well-designed eligibility criteria can bring complementary expertise (e.g., on cyber security). *Source: IMF staff text (extract).* ### Box 2. What is, and should be, the size of the Oversight Board? ### Box 2. What is, and should be, the size of the Oversight Board? ### Arguments from the corporate governance and central bank literature - Factors in favor of small Boards: - Financial cost of having too many directors. - Lack of enough qualified candidates to fill positions for large boards. - Boards are more effective in smaller settings as it is harder to coordinate a bigger board with regards to everyone’s schedules or that it takes exponentially more time for the Board to take decisions as it becomes larger (Berger 2006). - Ensuring a diverse and informed discussion on matters stemming from inside the Bank, (e.g. presence of management and representative of employees when HR matters discussed). - Providing informed and balanced monitoring and advising to executive management on matters typically outside the bank, including commercial, agricultural, gender, regional and sometimes ethnical issues. - Avoids dilution of individual members’ voice or responsibilities and gives Board members a greater sense of ownership and responsibility. - Avoids the temptation from Board members to freeride on the information brought to meetings by others (Sibert); However, such behavior may be limited given that their decisions are “probably the most important things that members do in their lives.” (Blinder). - Board can dedicate more time to tackle issues in greater detail if discussing limited to a smaller number of Board members. - Small boards are likelier to identify and act on poor performance of executive management (Lublin) and (Yermack). - The greater the openness of the national economy the smaller the Board (Berger, Nitsch and Lybek). - Factors in favor of large Boards: - Marginal gains in added expertise tends to be smaller as the board size increases given that individuals’ participation diminishes. - The increased diversity of views brought by a larger setting may alleviate the groupthink fallacy arising in boardrooms (Colesa, Daniel and Naveen). - Larger Board combined with anonymous voting may provide insulation from political pressure (Berger, Nitsch and Lybek). - Larger Boards are relatively insulated from political pressures when new board members are nominated by politicians on a staggered basis. (Nathan, A. and Groman, D.). - The more complex the national economy or the exchange rate regime, the larger the Board as the complexity of its decisions increases, (Berger, Nitsch and Lybek). - The more responsibilities are entrusted to the Board, the larger the Board, as its members may only be present in a certain number of Committees of the Board (Berger, Nitsch and Lybek). - Commercial banks’ board size is positively correlated with banks’ performance (Adams and Mehran). - Authoritative anchor from private firm literature: - It was found—for private firms—that Boards of 8 to 9 members are most effective (Lipton and Lorsch 1992). ### Empirical practice across IMF membership - Current IMF membership survey statistics: - Average number of members serving on Oversight Boards: 8.38. - Median number of members: 8. - Supervisory Boards are on average smaller than Boards of Directors: the biggest cohort of Boards of Directors has 7 members, while the highest percentage of Supervisory Boards has 5 members. - Historical comparators: - Lybek, T., and Morris. J., observed in 2003 that 46 percent of the Oversight Boards had 7 to 9 members. - Aufricht, H., noted in the 1960s average and median numbers of respectively 10.94 and 9. - Observed trend: - A small decrease in size over a longer period of time is observed relative to the 1960s figures. ### Recommendations on flexibility and composition - Suggested approach: - Allowing for a varying size of Board membership via a statutory requirement setting a minimum and maximum number of non-executive Board members provides calculated flexibility while safeguarding the non-executive majority. - Exception where fixed numbers are recommended: - When Boards of Directors are charged, in addition to oversight, with public policy formulation and/or regulatory decision-making, a more balanced representation of executives and non-executives is needed to sufficiently guarantee consideration of the “inside view” of the central bank in the decision-making process. In such instances, the recommendation is to have a fixed number of non-executive Board members. ### Chair of the Oversight Board — issues and country practice - Key issues: - The chair can significantly influence Board function via technical powers (setting agenda, casting vote in ties) and human factors (reputation, visibility, hierarchical superiority of an executive chair over Deputy-Governors). - Executive chairs (e.g., the Governor) can provide a unified and clear guidance on monetary policy stance and present the central bank’s inside view, which markets may find beneficial when the Governor is the visible public face of policy. - Potential downside: an executive chair can create excessive executive dominance over the Board, potentially reducing autonomy of oversight. - Corporate governance trend: - Increasing push toward separation of chair and CEO in many jurisdictions and corporate governance codes (examples cited: King III Report principle; UK Corporate Governance Code Provision 9). - OECD summary: “Nearly two-thirds of the jurisdictions with a one-tier board system require or encourage the separation of the board chair and the CEO.” - IMF membership practice (surveyed): - Of central banks with a Board of Directors: - 88% have an executive chair. - 12% have a non-executive chair. - Boards without monetary policy formulation responsibilities: - 84.61% Boards with Executive Chair. - 15.38% Boards with non Executive Chair. - Boards with monetary policy formulation responsibilities: - 86.73% Boards with Executive Chair. - 13.26% Boards with non Executive Chair. - Notable observation: 13% of Boards with monetary policy formulation responsibilities have a non-executive chair. - Country-level regulatory environment (summary figures reported): - 23 Countries with Voluntary separation of Board Chair and CEO, 16% - 29 Countries with No requirement for the separation of banks' Board Chair and CEO, 21% - 9 Countries did not answer, 6% - 69 Countries with Mandatory separation of banks' Board Chair and CEO, 49% - 11 Countries with Comply or Explain provisions, 8% - 80 Countries Require or encourage the separation of banks Board Chair and CEO, 57% - Staff’s advisory practice (nuanced approach): - Where countries have switched to a non-executive chair for a Board of Directors that is not entrusted with monetary policy formulation, Fund staff has cautiously supported this move while warning of risks (e.g., a nominally non-executive chair becoming too involved in executive management). Legal clarity on representation of the central bank is needed. - For central banks whose Boards of Directors are entrusted with monetary policy formulation, staff has warned that a robust substantive and procedural role for executive management in public policy formulation is critical. In such cases, an executive chair (the Governor) is understandable, but staff has suggested remedies to mitigate excessive executive dominance — for instance, requiring the Board to meet at least once per year under a non-executive chair to discuss performance of executive management. - Practical delineation suggested: the Governor should represent the central bank when rendering accounts on monetary policy decisions, while the non-executive chair of the Board should represent the central bank when rendering accounts on the Board’s oversight activities. ### Presence of Public Sector Oversight Board Members - Historical context: - Since the two World Wars central banks have commonly involved Public Sector officials in decision-making; many central banks had (and a few still have) senior civil servants on their Oversight Board (often the highest-ranking civil servant in the Ministry of Finance or the Treasury). - Some central bank laws have allowed the Minister of Finance (or representative) to attend Board meetings, sometimes with, sometimes without, a vote. - Theoretical defence: - With the State as the main shareholder and recapitalization guarantor of modern central banks, there is an argument for State oversight over executive management at the highest internal governance level via Public Sector Board Members. - Alternative coordination view: - While coordination of monetary and fiscal policy is sometimes advanced as a reason for Public Sector members, the text notes there are better mechanisms for coordination (for instance, a formal committee between the central bank and the Ministry of Finance). *Source: Box 2, wpiea2019293-print-pdf.* ### 90. However, such presence raises fundamental concerns about both the personal and ### wpiea2019293-print-pdf - 90. However, such presence raises fundamental concerns about both the personal and ### Personal and institutional autonomy concerns - Presence of the Minister of Finance and senior civil servants—irrespective of whether they have voting rights or not—can lead to a “chilling effect” on central bank decision-making: decision-making bodies of the central bank could internalize political expectations or constraints, even if this is not the best way to achieve the central bank’s objectives. - The fact that Public Sector Board members are only one or a few of a larger “college” does not modify this conclusion, because the Minister of Finance or his/her representative(s) speak with the full might of the political powers behind their opinion. - Influence is greater when Public Sector Oversight Board members have a say in the dismissal or re-appointment of other Board members. - The risk is salient not only for public policy formulation (e.g., to lower policy interest rates before an election or to lower the cost of debt service) but also in oversight contexts (e.g., profit retention and dividend allocation decisions). ### Country practice: composition of Oversight Boards - A large majority of central banks have no or only a small minority of voting members from the Public Sector serving on their Oversight Boards. - Exact counts and percentages: - 98 Oversight Boards (58 % of them) have 0% Public Sector officials vested with voting rights serving on them. - 20 Oversight Boards (11.5 % of them) have Public Sector officials on Boards in the 10 to 15% band. - 41 Oversight Boards (23.6 % of them) have a concentration of Public Sector Board Members of 20% and more. - Note: 4 central banks do not have Oversight Boards; in those cases oversight over executive management is directly assumed by a governmental body outside the central bank and is largely if not exclusively populated by Public Sector officials. ### Fund staff’s advisory practice on Public Sector presence - Boards of Directors charged with Monetary Policy Formulation: - Fund staff has been strongly opposed to the presence of politicians and civil servants in the decision-making body charged with monetary policy formulation. - Opposition is stronger to presence with voting rights than to presence with voice but without voting rights. - Boards of Directors charged with policies other than Monetary Policy: - Fund staff has generally advised against membership of Public Sector officials in Boards that formulate other public policies (financial stability, payment systems, statistical policies) and regulatory decision-making (in particular payment systems oversight). - For central banks that are also banking supervisory authority, this position is supported by international standards. - Pure Oversight Boards: - Fund staff emphasizes having a highly skilled and as autonomous as possible set of members of pure Oversight Boards (Boards which are only charged with oversight). - A minor presence of Public Sector officials on pure Oversight Boards is considered less damaging to overall autonomy, though some forms of abuse (e.g., with regards to profit reservation versus distribution decisions) cannot be excluded. ### Legal approach: incompatibility criteria and legislative recommendations - Prohibiting the appointment of Public Sector officials to decision-making bodies is achieved through incompatibility criteria in the central bank law. - Currently, most central bank laws prohibit members of the Legislature and of the Executive branch as well as civil servants from serving on the Oversight Board; however, a significant number of central bank laws do not prohibit, or only partially prohibit, members of political bodies and the public administration from sitting on Oversight Boards. - Typical Fund staff recommendation: - Adopt legislative provisions that prohibit politicians (members of the Executive and the Legislative) as well as civil servants from being appointed to decision-making bodies of the central bank. - Common exception: acceptability of academics in public university institutions. - If a “first best” is not achievable, transitory measures to diminish influence of Public Sector officials: 1. Only allowing such officials to attend Board meetings without the right to take part in the debates. 2. Making their presence advisory and not a voting one. ### Flexibility for very small or low capacity countries - Fund staff displayed flexibility where talent pools for non-executive officials are very small: - Many eligible persons may sit on boards of supervised financial institutions (conflicted) or work for the State directly or indirectly (e.g., State-Owned Enterprises). - Mitigating measures advocated by Fund staff in such jurisdictions: - “In their capacity” (qualitate qua) appointments: e.g., directors-general of public debt management and economic planning units appointed in their official capacity. - Remove nationality requirements from eligibility criteria to allow appointment of foreign nationals and permit attendance via teleconference or similar arrangements to avoid costly travel. ### Eligibility criteria: issue and role - Eligibility criteria are positive legal criteria that must be met for central bank officials to be eligible for appointment; they differ from incompatibility criteria (negative legal criteria). - The role of strong eligibility criteria for executives (Governor, Deputy-Governors) is well recognized. - Risk: large competency gaps between executives and non-executives can cause dominance of executives over non-executives, weakening oversight; a non-executive majority is insufficient if non-executives lack expertise. ### Country practice: adequacy of eligibility criteria - Distribution of eligibility criteria in central bank laws: - 89 central banks with Weak EC, 54% - 43 central banks with No or Irrelevant EC, 26% - 18 central banks with Moderate EC, 11% - 6 central banks with Strong EC, 4% - 8 central banks where the EC is N/A, 5% - Overall: 132 central banks with insufficient eligibility criteria, 80% - Definition notes: - “No or Irrelevant” EC: central bank laws did not mention either professional experience or education. - “Weak” EC: law focuses on education or some professional experience, but not both combined. - “Moderate” EC: combined focus on education and some minimum professional experience. - “Strong” EC: encompasses education and robust minimum professional experience, including in senior positions, as well as rules to ensure diverse skillset in Oversight Boards. ### Common weaknesses in weak eligibility criteria - Professional experience requirements often too loosely drafted: - Vague depth descriptors: “professionally capable”, “shown capacity”, “well-known capacity”. - Vague fields of competence: “experience in business, professional or academic matters”, “selected from various occupations”. - Some laws set minimum education (e.g., university degree) but no professional experience. - Some laws use non-objective requirements (e.g., “good manners”, “patriotism”). - Others use imprecise qualifiers: “significant”, “ample”, “wide” experience or “eminent professional”. ### Fund staff’s advisory practice on eligibility and skills - General rule: non-executive Oversight Board members should individually and collectively be “fit” to perform their duties. - Skillsets depend on the Oversight Board’s responsibilities: - Pure Oversight Boards: broad skillset covering financial reporting, audit, finance, risk, legal, compliance and increasingly engineering (IT and cybersecurity). - Boards with additional public policy and regulatory responsibilities: broader skillset including macro-economics, monetary economics, banking and finance. - Examples of legislated diversity of skills: - Central Bank of Ireland: provision listing relevant knowledge areas (accountancy; actuarial science; banking; consumer interests; corporate governance; economics; financial control; financial regulation; financial services; insurance; law; social policy; systems control). - Mauritania Central Bank Law: provision requiring overall composition of each Board ensures a balance of the various technical skills required (Art. 28, 2nd). - Serbia: law requires “at least one member of the Council (...) with 10 years of work experience in accounting or auditing” (Art. 22 in fine). - In absence of clear good practice, Fund staff typically recommends central bank law require: - An advanced university degree in economics, finance, law, audit, engineering, IT; - A minimum number of years of professional experience; and - A minimum number of years of experience in senior position. ### Complementary measures and political realities - Introducing eligibility requirements in law can enhance professional quality but will not by itself ensure outcomes; non-legal initiatives matter (effective onboarding processes and training). - Appointment of central bank officials is inherently a political appointment; once minimum quality is met, other factors (gender, ethnic, geographic or religious diversity) may influence choices. - Growing complexity of central banks (cyber risk and Fintech) increases skills requirements for key officials; e.g., two central banks now have a Chief Fintech Officer. - Adequate political accountability mechanisms (e.g., before the Legislature) for appointing authorities can help prioritize professional skills in appointments. *Source: IMF staff.* ### 108. Issue—Most central bank laws include one or more procedural aspects related to the ### Issue—Most central bank laws include one or more procedural aspects related to the operation of the Oversight Board. ### Procedural aspects to be covered in law and governance instruments - Minimum number per annum and periodicity of Oversight Board meetings: - For most central banks, 5 to 10 ordinary meetings per year, with respectively bimonthly or monthly meetings, seems sufficient. - Audit Committee and other sub-committees (e.g., Remuneration Committee) will have additional meetings in between regular Oversight Board meetings. - Meeting frequency should be sufficient to ensure effective oversight but not so high as to incite the Board to engage in executive decision-making. - A Board vested with policy formulating responsibilities may need to convene more often than one without such powers. - Quorum, including minimum presence of non-executives: - Quorum should ensure sufficient members are present during deliberations and should require a minimum number of non-executive directors larger than the total number of executive members to avoid an executive majority in practice. - Importance of a sufficient size of the non-executive majority of Board members serving on the entire Board. - Decision-making and voting procedures, including majorities: - Most central bank laws lay down the principle of majority voting, with the tie-breaking vote allocated to the chair. - Some laws require consensus for decisions; requiring consensus by law or practice is not recommended as it may cause dominance by a single member (often the chair). - Some laws require special (super) majorities for certain important decisions. - Right of initiative to call meetings and table agenda items: - Laws often specify who can call a Board meeting; if only the Governor can call meetings or table agenda items, oversight can be thwarted. - Good practice: grant the right to call for a Board meeting to, say, two directors, and give each director the right to table an agenda item. ### Empirical findings and risks related to quorum and non-executive majorities - Narrow statutory non-executive majorities and practical impediments can cause executives to effectively control decision-making even where the law foresees a non-executive majority. - Four factors causing effective executive dominance even when law foresees a non-executive majority: 1. The non-executive majority calibrated in central bank laws is often very narrow. 29 Boards of Directors have a non-executive majority of one to two non-executives. 2. Non-executive Directors’ positions tend to be vacant more often and for longer periods than those of executive management, raising the actual ratio of executives to non-executives above the legal ratio. 3. 130 of the 148 Boards of Directors are chaired by an executive with a casting vote in case of a tie; if executives attending equal non-executives, executives retain voting power. 4. Under several central bank laws, the (re-)appointment of Directors depends upon the assessment of the Governor, potentially aligning Directors with the Governor (Keynes’ “beauty contest factor”). - Best practice recommendation: include a legal provision establishing a quorum that always consists of a non-executive majority. - Board composition guidance: - A majority of minimum three non-executives for smaller Boards is suggested as good practice. - Larger Boards should strive for a minimum of a four members non-executive majority. - Empirical distribution note (from figure description): counts of boards by size of non-executive majority shown with specific frequencies (e.g., 9, 31, 7, 24, 6, 2, 2, etc. in figure axis), indicating variation across membership. ### Model Board sizes for Boards of Directors vested with Oversight Only - Proposed models acknowledge Board size should reflect economy complexity and mandate scope; recommended implied increases often enlarge Boards by 1-3 members. - Stylized model examples (as presented): - Small Size or Simple Economy and narrow or typical central bank mandate: - 5 Non-Executives - 2 Executives - optional 2 more Non-Executives - 4 Member Quorum with 3 Non-Executives - Medium Size or not-too-complex economy regardless of the mandate; OR Small Size or simple economy and extensive central bank mandate; OR Large Size or Highly complex economy and narrow central bank mandate: - 7 Non-Executives - 3 Executives - optional 3 more Non-Executives - 6 Member Quorum at least 4 Non-Executives - Large Size or Highly complex economy and extensive or typical central bank mandate: - 8 Non-Executives - 4 Executives - optional 4 more Non-Executives - 7 Member Quorum at least 5 Non-Executives - Rationale: over the last 50 years, Board size has not expanded with increasing oversight complexity; Board size has actually decreased by 2 members on average. ### Examples of legal provisions and good drafting (Box 4) - Bank Negara Malaysia Act, Section 19 (5) example: - “At any meeting of the Board, the quorum shall be five directors, the majority of whom shall be (non-executive) directors (...) and decisions shall be adopted by a simple majority of the votes of the directors present and voting, provided that in the case of an equality of votes the chairman shall have a casting vote.” - Strength: quorum focuses on a non-executive majority. - Act on the Czech National Bank, Article 7 example: - “(1) (...) The Bank Board shall act by a simple majority of the votes cast. The Bank Board shall have a quorum if the Governor, or his nominee, and at least three other members of the Bank Board are present. In the event of a tie, the chairperson shall have the casting vote. (2) The Bank Board shall approve the Rules of Procedure of the Bank Board.” - Strength: law explicitly empowers the Bank to adopt more detailed Rules of Procedure. - Given their centrality to effective Board oversight, there is a strong argument to include most if not all key procedural items in the central bank law itself. ### Practical aspects to be specified in secondary or tertiary instruments - Items appropriate for By-Laws, internal decisions or Rules of Procedure: - Organizing Board meetings by teleconference. - Attendance of advisors and technical staff. - Recording of decisions of the Board. - These practical mechanisms are essential as the avenues through which oversight effectively takes shape and should not be ignored. ### Oversight in federal central banking systems and monetary unions - Federal central banking systems composed of several national/regional central banks (separate legal personality) plus a centralized entity (e.g., Federal Reserve System, European System of Central Banks). - Regional/national central banks: - The principles discussed apply to regional and national central banks. - The central entity may have a say in how Oversight Boards of constituent banks operate, introducing a second layer of oversight. - Central entity: - Legal design of the Oversight Board of the central entity depends on whether the central entity is a full-fledged central bank or a policy coordinating entity. - European System of Central Banks (ECB): - The ECB’s Governing Council can be considered the Oversight Board for the ECB. - Although a clear majority of the Governing Council is non-executive vis-à-vis the ECB, they are chief executives (Governors) of member national central banks—logical given the federal structure. - Federal Reserve System: - The Board of Governors is composed of 7 Governors who “shall devote their entire time to the business of the Board” (section 10.1 of the Federal Reserve Act) and can be considered executives for purposes of this paper; this does not raise oversight concerns because the Board is a policy coordinating entity and the 12 regional Reserve Banks have their own Oversight Boards. - Monetary unions with a unified common central bank: - Principles generally apply, but legal frameworks may depart from best practices to cater for union-specific design features; other legal mechanisms can mitigate attendant problems. - Example: BEAC (Central African States) - BEAC’s Board of Directors composed of 14 directors; Charter does not prohibit Public Sector officials from sitting on the Board and most directors are such officials. - The BEAC Charter includes mitigating mechanisms: - (i) detailed listing of oversight responsibilities and decision-making powers (Art. 32 and Box 1), - (ii) a robust legal basis for the Audit Committee (Art. 64), - (iii) an additional external oversight mechanism in the form of “censors” (Art 62-63). *Source: Excerpt from IMF working paper (content unit: wpiea2019293-print-pdf - pages 57–62).* ### 118. Well written central bank laws are critical to establish robust oversight within central ### 118. Well written central bank laws are critical to establish robust oversight within central banks ### Four legal outcomes legislatures should pursue - Establish an Oversight Board - "Central bank laws should systematically set up Oversight Boards, as these bodies are key to the good governance of central banks. Otherwise, oversight will directly be exercised by government, thus impeding on the central bank’s autonomy." - ...that is Well-Designed - Oversight Boards can be designed as Supervisory Boards (composed of non-executive members only, strictly focusing on oversight) or as Boards of Directors (combining executive and non-executive directors). - For Boards of Directors: - non-executive directors should have a sufficiently robust majority; - consideration could be given to appointing a non-executive chair, with due regard to the role an executive chair can play when the Board is charged with public policy formulation. - For both types of Boards: - the number of Public Sector officials should be minimized; - care should be given to formulate as strong as possible eligibility criteria. - ...with a Strong Oversight Mandate - Central bank laws should set out: - an explicit general responsibility of the Oversight Board to oversee executive management; and - explicit decision-making powers to (i) formulate the relevant internal organizational policies of the central bank and (ii) take specific oversight decisions. - ...Buttressed by Strong Oversight Procedures! - Procedural aspects that contribute to high quality decision-making include: - periodicity of meetings; - decision-making modalities (majority and quorum); - the right of initiative to call for meetings and table agenda items. - "For Board of Directors, a quorum that requires a non-executive majority for oversight decisions would be a good practice." ### Formal legal drafting: clarity and granularity - "Over and above these substantive legal aspects, from a formal legal perspective it is obvious that sufficient clarity and granularity in central bank laws are of utmost importance." ### Annex I — Methodology of charts and database construction (key methodological facts) - Initial research presented at the fifth High-Level Forum on Central Bank Governance (Dubai, 28-30 January 2019); audience included 10 governors and deputy governors, 18 central bank board members, and over 20 high-level officials from external auditors of central banks. - Initial comparative analysis covered central bank laws of 100 countries, focusing on 6 key legal governance metrics: 1. whether or not central banks have an Oversight Board; 2. for those with an Oversight Board, whether it is a Board of Directors or a Supervisory Board; 3. whether Oversight Boards were vested with monetary policy or not; 4. the number of non-executives on Oversight Boards; 5. the percentage of Public Sector officials on Oversight Boards (footnote: "We only included government representatives with a vote."); 6. whether or not the chair of the Oversight Board is executive or non-executive. - Subsequent widening for the IMF Working Paper: - material scope expanded to include eligibility criteria of non-executive Board members; - geographical scope expanded to include the entire IMF membership (except Nauru, Vanuatu and Palau). - includes more than 1 central bank per country in some cases (e.g., China with Macao or Hong Kong), national central banks of the ESCB as well as the ECB and three other regional central banks (BCEAO, BEAC and ECCB); notes some members do not have a central bank (e.g., Panama). - Coverage and sources: - Reviewed 174 central bank acts contained in laws or treaties. - Also reviewed banking acts and codes, civil codes, ordinances and decrees, prevention of conflict of interest laws, corporate governance codes, constitutions, secondary legal sources (By-Laws, internal regulations, internal rules of procedure of Oversight Boards, Memoranda of Understanding between central banks and Ministries of Finance). - Where legal frameworks yielded uncertain results, analysed current composition of Oversight Boards as reported on central bank websites and annual reports; included information acquired during IMF missions where available. - Temporal note: - "Such legal frameworks are suceptible to amendments and so the statistical results presented in this Working Paper will most likely vary at a future point in time. The statistical data used for this paper is the one publicly available on May 1, 2019." ### One-country database sample (Ukraine — selected figures preserved verbatim) - Country: Ukraine - Central Bank: National Bank of Ukraine - Central Bank Act: Law of Ukraine On the National Bank of Ukraine - Oversight Board: Yes: Article 8 & Article 9. - Forms noted in the sample table: - Supervisory Board (non-executive) - Board of Directors (executives & non-executives) - Excerpts of reported metrics (as shown in the sample): - "0/12 0 %" - "11/12 91.67%" - References to Articles: Article 7; Article 8; Article 9; Article 10; Article 12; Article 14; Article 18; Article 19. - Eligibility Criteria for Non-executive Board Members categories listed: - No or Irrelevant EC - Weak EC - Moderate EC - Strong EC - Descriptive distinctions included (e.g., "Focus on education and robust minimum professional experience, including in senior positions"). ### Presidential vs Collegial model of executive management — definitions and cross-country counts - Presidential model (key features) - central bank led by a single official (Governor, President, Chairman...) who is the Chief Executive Officer, tasked with the "day-to-day management of the affairs" of the central bank; - CEO often assisted by executive Vice-Governors or Deputy-Governors (or "Gerentes", in the Latin-American model), appointed by him and/or the Board; those deputies are under the CEO’s authority; - CEO’s tasks typically coupled with powers of external representation, signature of currency and contracts, validation of minutes and documents, staff hiring-promotion, and internal rule-making. - Collegial model (key features) - responsibility for executive management vests in an Executive Board directly; - all Executive Board members are collegially responsible for the affairs of the central bank; - CEO presides over the Executive Board but has otherwise few differing duties and responsibilities; Executive Board may delegate specific executive tasks to individual members; - in the purest form, the CEO may not even be listed among the decision-making bodies of the central bank. - Empirical counts and percentages (presented verbatim) - "20 central banks with Collegialmodel, 12%" - "7 central banks with Hybrid - more collegial model, 4%" - "1 central bank with Hybrid -inconclusive model, 1%" - "116 central banks with a Presidentialmodel, 72%" - "18 central banks with a Hybrid -more presidentialmodel, 11%" - "134central banks with executive management highly concentrated in the Governor, 83%" --- _Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019293-print-pdf.pdf_