Corporate Governance in the Panamanian Banking System

Corporate governance is defined by guidelines that seek to regulate and organize the relationships between the various stakeholders within an entity.

By: Ana Silvia Velásquez Chin

The concept of Corporate Governance, originally, was conceived while making an analogy between governing a State and governing companies or corporations. Some people trace Corporate Governance’s origins to the 17^th century, while others credit the great economist Adam Smith with conducting the first studies on the subject matter, even though the term itself hadn’t been coined yet. We do know that there is evidence of the use of similar analogies in papers published during the start of American corporations and the first railroad companies in Germany. It is believed that the first known use of the term “Corporate Governance” was by academic Richard Eells in the United States in the 1960’s, but its use wasn’t popularized until the 1980’s.

The concept arrived in Panama as an inevitable effect of the wave of privatizations in Latin America, Europe, particularly after the dissolution of the Union of Soviet Socialist Republics (USSR), and the opening of the Asian market, as well as the integration of capital markets as a result of globalization. Finally, in 2001, the Superintendency of Banks of Panama (the “SBP”) adopted the concept of “Corporate Governance” and through Agreement No. 4-2001 of September 5, 2001, created guidelines to be followed by locally licensed banks with the goal of strengthening Panama’s position as a world-recognized financial center. This Agreement was repealed and replaced by Agreement 5-2011 of September 20, 2011, which in turn has been modified 4 times, the most recent one being in 2023. On the other hand, the National Securities Commission, now known as the Superintendency of the Securities Market (the “SMV”, its acronym in Spanish), issued Agreement 12-2003 by which it advises on guidelines and principles of good corporate governance for companies registered before said entity. The guidelines are of voluntary compliance, but adherence to the same is positively viewed by potential investors as well as other market participants.

In Agreement 5-2011, the SBP defines Corporate Governance as “the set of rules that guide relationships between the entity’s management, its directors, shareholders and/or the owners of the bank’s shares and other interested parties to provide the structure through which goals and the steps to achieve those goals are set, as well determining a monitoring system”. We understand, therefore, that corporate governance is defied as guidelines that seek to regulate and organize relationships between the different interested parties within an entity to achieve certain objectives.

In accordance with the provisions of Agreement 5 of 2011, it is considered that, in order to have good corporate governance, a bank must have, as a minimum, the following elements: 

• Documents establishing corporate values, strategic objectives, codes of conduct and other behavioral guidelines, together with evidence of their existence, compliance, and communication to the entire organization.
• Corporate strategy against which the overall performance of the bank and the contribution of all levels of the corporate structure can be measured.
• Clear assignment of responsibilities and corresponding decision-making authorities, considering the individual competency requirements necessary to exercise those responsibilities, as well as a hierarchy of approvals required at all levels of the structure, including the board of directors.
• The establishment of a mechanism for interaction and cooperation between the board of directors, senior management and internal and external auditors.
• Adequate systems of controls including risk management functions independent of business lines and other checks and balances.
• Prior approval, monitoring and special verification of risk exposures, particularly for facilities granted under sound banking practice criteria where conflicts of interest exist.
• Documents containing approved policies for recruitment, induction, continuous and updated staff training, financial & administrative incentives.
• Existence of internal and public information flows/channels to ensure transparency of the corporate governance system, at least with respect to the following:
  1. Structure of the board of directors (size, membership, qualifications, and committees), bylaws and their disclosure to shareholders.
  2. General management structure (responsibilities, reporting lines, qualifications, and experience).
  3. Basic organizational structure (line of business, legal structure, holding company and banking group).
  4. Nature and extent of transactions with related parties and members of the banking group.

• System of direct supervision by each hierarchical level component of the organizational structure to the component immediately below (hierarchically) including functions not involved in the day-to-day management of the bank.
• External and internal audits not linked to senior management and the board of directors, as the case may be.

The agreement, in subsequent articles, provides further insight into how banks can properly manage their corporate governance. It states that the bank should ensure that it structures its board of directors in accordance with the guidelines set out in the agreement, which will be discussed further in a future publication. In addition, a specific induction process for new board members should be established and followed. Banks should also ensure early access to information relevant to decision making in accordance with the agenda of the meeting and establish criteria for confidentiality and transparency of information. The attendance required for board meetings to be held must be met and the necessary formalities for holding meetings and making decisions must be complied with.

The requirements of adequate corporate governance are not limited only to the banking entity in question, but also extend to the owners of bank shares of banks whose own supervisor is the SBP. These shareholders must maintain a corporate governance structure that ensures the strategic orientation of the banking group, the effective control of the board of directors and its accountability to the shareholders. The board of directors of the shareholder entity should ensure that sound corporate governance practices are applied at the group level and should ensure compliance with, at a minimum, the following:

• Establish internal control policies, principles, standards, and procedures to ensure adequate risk management (at group level).
• Ensure full transparency in terms of veracity, reliability, and integrity of the group’s financial and operational information.
• Ensure the financial health of the group
• Maintain at the disposal of the SBP information about its activities and operations when required.
• Develop and implement policies related to the treatment of conflicts of interest at the group level.
• Adopt procedures to carry out transactions with parties related to the group in an appropriate manner.
• Ensure that group companies have adequate corporate governance structures in compliance with applicable legislation and guidelines.
• Adopt policies and procedures to mitigate risks that may affect the continuity of the operation of the companies of the banking group or put their depositors’ funds at risk, whether generated by their shareholders, senior management, directors, or officers.

A corporate governance structure that complies with the requirements described above denotes order and seriousness, and turns the entity (in this case, the bank) into a company with its own identity, as well as reflecting a sense of responsibility to/with the actors involved in its operation – from the board of directors to the depositors. Through these guidelines, the SBP seeks to ensure that the banks it supervises remain within international standards and thus maintain the competitiveness required for Panama to maintain (or improve) its position as the region’s financial center.