The Co-operative Bank plc (“Co-operative Bank”) is authorised and regulated by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.
Article 96 of the Capital Requirements Directive (CRD IV) requires Co-operative Bank to publish a statement, on its website on how it complies with the requirements of Articles 88 to 95 of CRD IV.
The Board has collective responsibility for the long term success of the Bank. Its role is to provide leadership of the Bank within a framework of prudent and effective controls which enables risk to be assessed and managed. It sets the Bank’s values and standards and ensures that its obligations to its shareholders, customers and other stakeholders are understood and met.
The Board sets the Bank’s strategy and approves plans presented by management for the achievement of the strategic objectives it has set. It determines the nature and extent of the significant risks it is willing to take in achieving its strategic objectives and is responsible for ensuring maintenance of sound risk management and internal control systems.
The Bank’s Chairman is a Non-Executive Director who leads the Board in the determination of its strategy and in the achievement of its objectives. The Chairman takes personal responsibility for organising the business of the Board, ensuring its effectiveness and setting its agenda. The Chairman has no involvement in the running of the day to day business of the Bank. His role is to facilitate the effective contribution of Directors, constructive relations between the Executive and Non-Executive Directors, ensure Directors receive accurate, timely and clear information and that there is effective communication with shareholders. The division of responsibilities between the Chairman and the Chief Executive is clearly defined and approved by the Board.
The Board has approved a schedule of Matters Reserved for the Board and authorities delegated to the Chief Executive Officer (CEO). The full schedule of Matters Reserved for the Board is available on the Bank’s website. Such reserved matters include decisions on strategic and long term objectives, the approval of published financial statements, major acquisitions and disposals, significant investments and other capital expenditure, and approval of the Bank’s risk appetite and it’s Risk Management Framework.
Implementation of the strategy set by the Board and the management and day-to-day running of the Bank is delegated to the CEO, with oversight by the Board, with the exception of the Matters Reserved for the Board. The CEO has direct charge of the Bank on a day to day basis and is accountable to the Board for the financial and operational performance of the Bank. The Executive team, under the leadership of the CEO, is responsible for the management of the Bank. It is the responsibility of the Executive team to implement the strategic objectives as agreed by the Board.
The Board has a continuing focus on Directors’ commitments overall and considers at each meeting of the Board and more frequently as required directors’ interests including other directorships, situations which may give rise to potential or actual conflicts, and their time commitments in relation to the Bank.
All the Non-Executive Directors have considerable experience and make valuable contributions to the Bank. The Non-Executive Directors constructively challenge and help develop proposals on strategy and bring strong, independent judgement, knowledge and experience to the Board’s deliberations. The Non-Executive Directors are of sufficient calibre and number that their views carry significant weight in the Board’s decision making.
Directors’ Induction and Continuing Development
All newly appointed Directors undertake a structured induction programme which is designed to provide them with key business information about the Bank, and includes briefing sessions with members of the Executive team and a branch visit. As part of the approved person’s process an individual training plan is designed for each Director which is reviewed periodically. The Board holds collective training sessions which are scheduled at regular intervals in close proximity to Board meetings and during each financial year. In addition to formal training sessions, the Directors, where appropriate, have one-to-one sessions with members of the Executive. The Chairman’s role is to address the development needs of the Board as a whole, with a view to developing its effectiveness. He ensures that the Directors’ professional development needs are identified and that they are adequately informed about the Bank and their responsibilities as Directors. A number of external consultants provide from time to time professional advice to the Board. There is an agreed procedure by which the Directors may take independent professional advice at the Bank’s expense in furtherance of their duties.
The Board has established Board Committees, namely, the Audit Committee, the Risk Committee, the Values & Ethics Committee, the Nomination Committee, and the Remuneration Committee.
All Board Committees have terms of reference describing the authority delegated to them by the Board. Each of these Committees has a role in ensuring the effective oversight by the Board of the Bank and its subsidiaries. The terms of reference for Audit Committee, Risk Committee, Values & Ethics Committee, Nomination Committee and Remuneration Committee can be found here.
It is the role of the Nomination Committee to review and make recommendations: on the composition of the Board; on succession planning for Executive Directors, Non-Executive Directors and certain Senior Executives; identifying and nominating candidates for Board vacancies; and on the evaluation of candidates for the Board.
The Nomination Committee keeps under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace.
The Committee shall:
- Evaluate the balance of skills, knowledge, independence, experience and diversity on the Board, and, in the light of this evaluation prepare a description of the role and capabilities required for a particular appointment. In identifying suitable candidates the Committee shall:
- use open advertising or the services of external advisers to facilitate the search
- consider candidates from a wide range of backgrounds
- consider candidates on merit and against objective criteria and with due regard for the benefits of diversity on the Board, including gender, taking care that appointees have enough time available to devote to the position
- For the appointment of a Chair, the Committee should prepare a job specification, including the time commitment expected, recognising the need for availability in the event of crises. A proposed Chair’s other significant commitments should be disclosed to the Board before appointment and any changes to the Chair’s commitments should be reported to the Board as they arise, and their impact explained in the next annual report.
- Prior to the appointment of a director, the proposed appointee should be required to disclose any other business interests that may result in a conflict of interest and be required to report any future business interests that could result in a conflict of interest.
- Ensure that on appointment to the Board, non-executive directors receive a formal letter of appointment setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside Board meetings.
- Review the results of the Board performance evaluation process that relate to the composition of the Board.
- Review annually the time required from non-executive directors. Performance evaluation should be used to assess whether the non-executive directors are spending enough time to fulfil their duties.
- Keep under review the Bank’s policy on diversity, including gender, and the measure of objectives that it has set in implementing the policy, and progress on achieving the objectives.
- Ensure the terms of reference are published on the Bank’s website.
The Committee shall also make recommendations to the Board concerning:
- Formulating plans for succession for directors and non-executive directors and in particular for the key roles of Chair and Chief Executive.
- The appointment of directors and non-executive directors.
- The appointment of the company secretary and the Chief Risk Officers, in consultation with other Board Committees.
- Suitable candidates for the role of Senior Independent Director.
- Membership of the Audit, Remuneration, Risk Committees and Values & Ethics Committee, and any other Board Committees as appropriate, in consultation with the Chairs of those Committees and in so doing have regard to the benefits of cross-committee membership and committee membership rotation to refresh committee viewpoint and support Directors’ continuing skills and professional development.
- The re-appointment of any non-executive director at the conclusion of their specified term of office having given due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required.
- The re-election by shareholders of directors under the annual re-election provisions of the UK Corporate Governance Code or the retirement by rotation provisions in the Bank’s Articles of Association, having due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required and the need for progressive refreshing of the Board (particularly in relation to directors being re-elected for a term beyond six years).
- Any matters relating to the continuation in office of any director at any time including the suspension or termination of service of an executive director as an employee of the Bank subject to the provisions of the law and their service contract.
All Non-Executive Directors are appointed to the Board for an initial term of three years but, under the terms of their appointment, are required to submit themselves for annual re-election at the Bank’s Annual General Meeting (‘AGM’). All current Directors offer themselves for election or re-election at each AGM.
Following recommendation from the Nomination Committee, the Board considered and approved a policy to promote diversity on the Board in recognition that a diverse Board represents the views of society, brings a wide range of skills and knowledge to the Board and enhances challenge and discussion from a diverse range of viewpoints. The policy includes a target for the representation of the underrepresented gender on the Board (currently women). The Board considers diversity of which gender diversity is one element to be an important part of the construction of the search mandates for new appointments to the Board. As the Board structure develops and further appointments are nominated by shareholders, we will continue to encourage those shareholders directly and through the executive search consultancies engaged in the search process, to reflect diversity in the lists of candidates nominated for the consideration of the Board.
The Remuneration Committee has the delegated responsibility to determine remuneration for the Executive Directors and the Executive Committee of the Bank, and to set and recommend to the Board for approval, the overarching principles and parameters of the Remuneration Policy across the Bank to ensure an overall coherent approach to remuneration for all employees. In addition, the Remuneration Committee ensures remuneration is compliant with the Prudential Regulation Authority’s Remuneration Code and the UK Corporate Governance Code.
The Remuneration Committee is comprised of non-executive directors and regularly consults with the Chief Executive Officer, Human Resources Director, General Counsel and Chief Risk Officer, all of whom may attend meetings of the Committee but are not present when their own remuneration or terms and conditions are being considered. The Head of Reward, Policy and Employee Relations also provides advice on compensation and benefits to the Committee. The General Counsel and Company Secretary advises the Committee on corporate governance. The Remuneration Committee receives support and advice from external advisors and, from time to time, will undertake due diligence to ensure that the advice it receives is independent.
The Committee works closely with Chairs of the Risk Committee, Audit Committee, and Values and Ethics Committee.
The Bank has one remuneration policy that is openly communicated and applied broadly consistently throughout the organisation. The policy has been designed to support recruitment, motivation and retention as well as to reward high performance provided it is achieved within the Bank’s plan and risk appetite, and is aligned with the principles of the Bank’s Values and Ethics Policy.
The principles set out in the policy inform remuneration decisions for all employees, not only Executive Directors and Material Risk Takers, and the Remuneration Committee takes into account pay levels and benefit arrangements throughout the Bank to ensure the arrangements remain appropriate. Remuneration packages may vary to take into account role-specific factors in different areas of the Bank and will be determined by reference to market levels, skills requirements and internal relativities.
It is crucial to maintain the link between remuneration, including variable pay, and the achievement of the Bank’s commercial objectives. The policy aims to reward short term progress and long-term success, fully incentivising the key objectives of the plan. All variable remuneration may be reduced or cancelled in circumstances including
• participant misbehaviour or material error;
• a material downturn in financial performance of the Bank or relevant business unit (malus only);
• a material failure of risk management of the relevant business unit or the Bank; and
• the Committee determines that the basis on which a participant was a ‘good leaver’ was incorrect.
The Committee has taken a collaborative approach in developing the policy, seeking feedback from the Chairs of the Risk, Audit and Values and Ethics Committees of the Board.
The Remuneration Committee receives and considers internal and external information as appropriate to guide decisions on remuneration including, but not limited to, the results of employee satisfaction surveys and feedback sought from internal stakeholders (such as the Chief Risk Office and Values and Ethics Committee) and external stakeholders.
A further consideration has been to ensure that the principles set out in the Bank’s Ethical Policy remain central to its decisions on pay, and that overall levels of remuneration should be proportionate and fully justified by performance and achievements.
In accordance with the Remuneration Code, the Bank’s shareholders approved in 2014 the flexibility to pay variable remuneration up to twice the amount of fixed remuneration. The Bank has engaged fully with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to design a framework which is strongly aligned to the regulatory regime.
The Remuneration Committee has the responsibility to oversee remuneration for staff identified as Material Risk Takers. These individuals are subject to the PRA Remuneration Code provisions which are applied in the remuneration arrangements of Material Risk Takers.
The Bank’s approach to any payments in the event of termination is to take account of the individual circumstances, including the reason for termination, any contractual obligations, outstanding incentives and pension scheme rules. The Remuneration Committee reserves the right to make any remuneration payments and payments for loss of office (including, where relevant, exercising any discretions available to it in connection with such payments) in satisfaction of existing contractual agreements.
Regulation will continue to evolve, and we have worked towards remuneration arrangements which can be adapted to comply with new rules, if required, and as the Bank progresses from recovery to stability. The Bank will continue to monitor regulatory developments, including the output from the EBA consultation in 2015, and any other future regulatory changes.
The Committee is committed to ongoing dialogue with shareholders and seeks the views of significant shareholders when any major changes are being contemplated and takes into account the views of significant shareholders when formulating and implementing the policy.
The key features of the remuneration policy are as follows:
- To develop the Annual Incentive Plan (AIP), strengthening its focus on the key short term goals required to support the Bank’s turnaround. The AIP will now be subject to deferral requirements for material risk takers, in line with regulatory requirements;
- To introduce a Long Term Incentive Plan (LTIP). Prior to separation, the Chief Executive Officer was eligible to participate in the LTIP of The Co-operative Group. The remaining legacy entitlement from such participation is reflected in the CEO’s current remuneration package and these obligations will be fulfilled by the end of 2015. A new LTIP was therefore essential to reward the achievement of financial and strategic goals vital to the recovery of the Bank and, in so doing, build value for the Bank’s investors; and
- All awards of variable pay must be subject to malus and clawback provisions in line with regulatory requirements. Any awards made on, or after, 1 January 2015 will be subject to clawback for up to seven years following the date of the award, or such longer period as may be required.
For the purposes of Article 89, the Bank operates in the United Kingdom.
Public Disclosure of Return on Assets
The Bank publically discloses within its annual report among its key indicators the Bank’s return on assets, calculated as net profit divided by total balance sheet.
The annual report is available here and the relevant disclosure can be found on page 2.