5 th Annual GCC Regulators’ Summit

1. 5th Annual GCC Regulators’ Summit Wednesday, 16 February 2011 Session Three: Board effectiveness – the need for development Simon Copleston, General Counsel & Board Secretary, ADCB

2. Contents 1 The financial crisis: How did Board (in)effectiveness contribute? 2 What makes an effective Board (group)? ADCB’s approach to Board effectiveness 3 Challenges and regulation 4 Governance actions taken by ADCB to date (selected) 5 6 Recognition of ADCB’s achievements

3. 1. The financial crisis: How did Board (in)effectiveness contribute? Various reports, including the “Walker Report” (UK Government report on governance failings at banks, and the European Union’s consultation) have concluded that, amongst other things: Board members devoted too little time and attention to fulfil their duties at Banks, and were often not sufficiently skilled. Board members were unable to voice their objections or question the CEO or management’s decisions. Boards lacked diversity and balance. Boards failed to evaluate their strengths and weaknesses. Boards poorly understood and exersized poor oversight and understanding of risk issues.

4. 3. What makes an effective Board (group)? Conventional management wisdom suggests that the combined intellect of a group (Board) can be greater than the sum of its parts – but only where the group is assembled in the right circumstances The aim is to assemble a group of people whose potential to work well together is maximised and give them the appropriate tools to make good decisions most of the time What are ‘the right circumstances’ to ensure that a Board (group) is effective? Need to maintain order and coherence Communication – but not so much that the group begins to identify with itself or its constituents too much, or with a position it has taken Appropriate size Diversity (gender? Sector?)and independence (including independence of mind) Popular leader, able to encourage debate and diversity of views – not overpowering No domination by any sub-group, individual or constituency Good information flow from management

5. 4. ADCB’s approach to Board effectiveness Popular, engaged Chairman, who encourages debate, diverse views and challenge. Commitment to rigorous governance, including annual evaluations. Role of Board Secretariat and management team – particularly in delivering clear information to the Board and avoiding ‘information overload’. A good Board can still be ineffective if it receives: Too much, too little, or the wrong or inaccurate information – or even the right information at the wrong time (i.e. not enough time to review). ADCB has a management team dedicated to corporate goverance – including a qualified corporate secretary acting as ‘Head of Corporate Governance’ – governance is not an add on to other roles. Annual strategy off-sites – encouraging open debate between board and management. Clear lines of authority between Board and management set out in single terms of reference for each level. Specialised area focus by Board committees. Annual Board evaluations since 2008 Facilitated by independent third party - every two years. Questionnaire and interview process - questions relate to (inter alia): Board strengths, weaknesses, challenges, composition, profile, competencies, strategy, oversight of risk management, role and functioning of corporate secretary, Board functioning, internal controls, role of the Chairman, functioning of committees. Responses are anonymous. Responses are aggregated and presented back to the Board. Points raised are followed up by the Bank’s dedicated management team.

6. 3. Challenges and regulation Board effectiveness – What are the major challenges to Board effectiveness in UAE? • In the GCC and UAE in particular, locating independent directors with strong professional experience, or sufficient time availability, is and will continue to be a challenge. • Adjusting the expectations of local shareholders to the requirements of corporate governance regulations and best practices – particularly with regard to independent directors, and the concept of independence. Refer to the discussion theme – “The importance of protecting shareholder interests” – There is continued confusion as to whether Directors can or should be acting as ‘representatives’ of shareholders. Could “Advisors to the Board” be an interim solution? • Maintaining the correct balance between the Board and the management – Board’s role in guidance and strategy, together with correct clear and appropriate delegated authorities. Avoiding ‘micro-management’ at Board level whilst maintaining appropriate oversight and risk management. Board effectiveness - Would more regulation be helpful, particularly in the Banking sector? • ADCB would welcome more governance regulation. Banks in UAE currently do not fall within the ambit of ESCA’s Corporate Governance rules. • ADCB is looking to take a lead role in encouraging local borrowers to improve their governance practices. Board effectiveness - Would it be worthwhile to make Board evaluations compulsory? Yes, conducted correctly, Board evaluations can add value and improve Board functioning.

7. 4. Governance - actions taken by ADCB to date (selected) • 2007 – review by IFC (a division of World Bank) and Board approval of ‘road map’ – a 3 year plan to achieve best practices. • 2008 • Reorganisation of Board committees – clear terms of reference, launch of ADCB’s ‘corporate governance website’ at www.adcb.com/aboutus, adoption of the Bank’s Corporate Governance Code and amendments to the Bank’s articles of association. • Reorganisation of management committees, including delegated limits. • First internal Board evaluation. • First annual board strategy offsite. • 2009 • Enhanced disclosures in the Board’s 2008 annual report. • First Board evaluation by third party facilitator. • 2010 • Enhanced disclosures in 2009 annual report. • Enhanced disclosures and detail provided to shareholders at 2010 aga. • Focus on governance at ADCB’s Islamic Bank – Meetaq. • 2011 • Enhanced disclosures in 2010 annual report, including Islamic and internal controls. • Further amendments to the Bank’s articles of association to be presented to 2011 AGA, particularly enhancing minority rights. • Consideration of appointing “Advisers to the Board”. • Preliminary steps taken to build governance into the Bank’s credit checks. • Focus on international best practices, including the Combined Code. • Numerous policies and procedures drafted and implemented. • Focus on ESCA Code compliance, even though Banks are exempted. • Focus on Board skills, training and evaluation. • Focus on draft Central Bank guidelines – already largely compliant.

8. 5. Recognition of ADCB’s achievements • In 2009, ADCB was rated ‘top bank in GCC’ according to a survey on liquidity, volatility and transparency by TNI / Hawkamah, and received the ‘Best Bank in UAE’ award for corporate governance from Hawkamah, the regional corporate governance institute • In 2010 and 2011, ADCB’s corporate governance was named ‘Best in UAE’ by the World Finance Awards • In 2009, ADCB was selected to be used as a case study for turn-around in corporate governance by IFC and World Bank, working in conjunction with ADCCG • In 2009, ADCB became the first bank in GCC to meet the extremely stringent disclosure and transparency requirements of the US capital markets when it successfully completed a ‘Rule 144A bond issue’ • ADCB has been regularly lauded by the local and international press for its commitment to governance and transparency and its documentation has been used as a model ADCB IS KNOWN AS A NATIONAL ‘LEADER IN GOVERNANCE’, BUT WELCOMES OTHER LOCAL COMPANIES TO JOIN ITS EFFORTS.