OSFI.CorpGov

Reading: “Corporate Governance,” September 2018, Section V and Annex B only.

Authour: Office of the Superintendent of Financial Institutions Canada (OSFI)

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BA Quick-Summary: Corporate Governance Strong Corporate Governance by the Board and Senior Management reduces OSFI’s supervisory burden and is critical in times of FRFI (Failure of Federally Regulated Institution) distress. Risk governance is the most important aspect of corporate governance. The Risk Appetite Framework (RAF) defines the level and type of risk a FRFI will accept and must be aligned with strategy, measurable, and embedded throughout the organization. Ongoing oversight of the RAF is required, including regular reporting by the CRO and Internal Audit, and clear action plans for any breaches.

Pop Quiz

• What does the mnemonic IMCO stand for?
• Hint: It comes from OSFI.MCT. (In My Crummy Opinion)

In Plain English!

Intro

FRFI stands for Federally Regulated Financial Institution. This reading is to communicate OSFI's expectations with respect to corporate governance of an FRFI. A general definition of corporate governance is as follows:

Corporate governance can be defined as the set of relationships between: Board of Directors, management, shareholders, other stakeholders

Good corporate governance should do 2 things:

• incentivize good corporate behavior
• enable monitoring of operations and performance

And the most important area of corporate governance is risk governance. (Risk is also the most important area for actuaries. That means actuaries are important not only in insurance companies, but in companies of all kinds. I keep reading more and more about actuaries who are taking their skills to nontraditional areas.)

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Risk Considerations

FRFI's aren't required to have a separate risk committee - it depends on the NSC of operations (Nature, Scale, Complexity). The CRO (Chief Risk Officer) would be part of senior management and their duties would include: (2015.Spring #4b)

• implementing risk management policy
• providing regular reports to (Board of Directors, Senior Management, risk committee)

Risk governance for a FRFI is embodied in the RAF (Risk Appetite Framework). It contains 3 items: (2015.Spring #4a)

RAS:	Risk Appetite Statement
RL:	Risk Limits
RR:	Roles & Responsibilities of those implementing the RAF

This exam question also asked for a description of 2 of these 3 items:

• RAS: reflects LEVEL of risk, and TYPE of risk FRFI is willing to accept to meet business objectives
• RL: refers to allocations of FRFI's (RAS) to:
  • risk categories (IMCO, remember that from OCFI.MCT???!!!)
  • business unit
  • LOB or product
• (In other words, you must assign a level of risk individually to each discrete element of the company's operations: risk category, business unit, LOB,...)

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BattleCodes

• Memorize:
  • defn of corporate governance
  • elements of the risk appetite framework

• Conceptual:
  • This reading highlights the concept of risk and that understanding & managing it is of central importance to the success of every company.

• Calculational:
  • none

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POP QUIZ ANSWERS

• IMCO stands for the 4 risk categories in OSFI.MCT: Insurance risk, Market risk, Credit risk, Operational risk