Skills, Independence, Competence and ‘Fit and Proper Person’ Tests

In Chapter 26 of the Stage 2 Key Code and Advanced Handbook for the governance of Australian major banks, we examine skills, independence, competence and the ‘fit and proper person’ tests. This begins with the requirements for ASX listed entities including the independence test and the ASX listed entities disclosure and factors of independence. We present the existing governance variables based on the independence ingredient and find that independence may be associated with less bank-specific knowledge. We apply this to bank-specific variables exhibiting a deficiency in banking industry knowledge and competence with a coverage/rating of −4/50.00 rprox. We also find that ‘pro-shareholder boards’ performed worse during the crisis. We turn then to the OECD findings on independence and competence and construct a governance variable based on the OECD recommendations for independence and bank-specific skills, competence and professional qualities with a coverage/rating of +7/87.50 rprox – the [NEDBankSkillsMon] (+) variable. We continue with governance variables based on the OECD recommendations on separation of the CEO and Chairperson roles and governance variables based on the OECD recommendations on the ‘fit and proper person’ test by supervisory authorities. Governance variables are constructed for APRA’s Prudential Standard 520 Fit and Proper including governance variables for fit and proper policy, additional requirements for Head of a group, responsible persons and senior managers. We examine the criteria for fit and proper persons and the process for assessing fit and proper persons. There is a whistleblowing provision for the fit and proper policy. A responsible person who is not fit and proper is not to hold a position including the information to be provided to APRA. We conclude with governance variables based on the OECD recommendations on continuing training.