Sheet 1: Overall Instructions

	
	

		
CG Toolkit for banks, NBFIs and MFIs
To adequately answer the three CG related questions at the CIP stage, namely: 

1a) Was a CG Officer Consulted on the Potential CG Risks of the Deal?
1b)  Is a CG Officer to Be Involved During Due Diligence?
2.) Is a CG Review to Be Drafted for the FP by the investment team?

the investment team has to conduct a rapid risk screening for each of the five CG risk areas (commitment, board structure, control environment, transparency & disclosure, shareholder rights). Of note is that start-up deals under project finance and SPVs (mainly in the Energy Department), as well as investments in funds are entirely exempted from this exercise.

The CIP CG Rapid Risk Screening Tool is the tool prepared to complete this exercise as outlined below. The information can either come from the KYC-file or the annual report of the client.  It is not foreseen to conduct an additional research specifically on CG, yet if the answer to a question is not known it also counts as 'true', i.e. a potential risk.  Of note is further that the risk indication may not be the same as the final risk level attributed at FP stage. The indicators are, however, identical (1=high; 2=moderate; 3=low).

The overall risk indication should guide the investment team focus its forthcoming due diligence on the key CG risk areas.  It also has two direct implications at the CIP stage: i) in case there are at least three high (1) risk areas, a CG Officer should be consulted and, depending on the outcome of the consultation, may decide to get involved already during the due diligence process; ii) in most other cases, a CG Review should be undertaken. If there is not at least one high (1) risk area, a CG Review does not have to be undertaken if the proposed loan amount is under 5% of the client's balance sheet. 

Only very few deals require a consultation with the CG Officer (more than three high risk areas or a direct equity or mezzanine investment at or above 15% ownership for FMO).  His or her involvement already during due diligence may be likely if one of the two scenarios is given but depends on the CG Officer's decision based on the consultation. In case of the CG Officer's involvement, the deliverable at FP stage is his or her direct responsibility. The deal team is of course free to consult with the CG Officer in all other cases as well. In case that it only turns out after due diligence that there are indeed three or more high risk areas, which were not properly identified during the CIP stage, the deal team has to again consult the CG Officer to contemplate his or her involvement.

While the CG Officer may only be directly involved in half a dozen deals every year, most deals should have a CG Review undertaken by the investment team regardless of the number of high risk areas. Except for the exceptions mentioned above, namely i) green-field or start-up deals and ii) investments in funds, only loans equal or under 5% of the client's balance sheet (AND) are further exempted--but only if not one single or more high CG risk indication(s) exists.
	
	

		
In case of a CG Review, the CG Progression Matrix and the Questionnaire guide further arriving at a final risk level  attribution for each of the categories mentioned in the CG Result Matrix for the FP stage. Of note is that the levels of the CG Progression Matrix do not translate directly into the risk attribution of 1: high risk; 2: moderate risk; and 3: low risk.  The IO needs to consider the overall size, industry and growth trajectory of the client among other factors to make this final judgment.  Also the strength of the regulatory environment, in particular on CG, can affect the final score in each of the categories. The CG Progression Matrix in principle lends itself more to identify potential mitigations for the particular risks identified rather than assessing the risk level.
	
	

		
The CG Result Matrix should be finally filled out as integral part of the FP proposal. There should not only be a final (and potentially different)  risk attribution to each category  (1=high; 2=moderate; 3=low) but also a qualitative description as to what these CG risks are--at least where the risk is moderate.  Also, any deviation in the final risk attribution from the risk indication in the CIP CG Rapid Risk Screening should be explained as well as original 'unknowns'. Of note is that CG risks need to be assessed for each and every of the five categories, the average score is only indicative of the overall risks involved and may be misleading if the company scores very well on some areas.

In the final conclusion part of the CG Result Matrix, the investment team could either suggest risk mitigation for identified risks or additional steps needed to be taken to eventually mitigate the CG risks identified (such as involvement of the CG Officer, a CG consultant, etc.). At times, the investment team may decide to simply suggest the acceptance of existing risks, in particular if there is no internal champion within the client that would facilitate the improvement on their governance practices or if the regulatory environment does not allow for improvements.
	
	

		


	
	

		
CG-T.002-8.0.
	



Sheet 2: Explanation for CIP

	
	
	
	
	
	

		
CG Sections in CIP
		


		


		


		


		


	
	

		


		
Explanation
		


		


		


		


		


	
	

		
To adequately answer the three CG-related questions at the CIP stage, the investment team has to conduct a quick risk screening for each of the five areas outlined below. Of note is that start-up deals under project finance and SPVs (mainly in the Energy Department), as well as investments in funds are entirely exempted from this exercise.

The CIP CG Rapid Risk Screening Tool is the tool prepared to complete this exercise as outlined below. The information can either come from the KYC-file or the annual report of the client.  It is not foreseen to conduct an additional research specifically on CG, yet if the answer to a question is not known it also counts as 'true'.  Of note is further that the risk indication may not be the same as the final risk level attributed at FP stage. The indicators are, however, identical (1=high; 2=moderate; 3=low).

The overall risk indication should help the investment team focus its forthcoming due diligence on the key CG risk areas.  It also has two direct implications at the CIP stage: i) in case there are at least three high (1) risk areas, a CG Officer should be consulted and, depending on the outcome of the consultation, may decide to get involved already during the due diligence process; ii) in case that there is at least one high (1) risk area, a CG Review should be undertaken even if the proposed loan amount is under 5% of the client's balance sheet.

Only very few deals require a consultation with the CG Officer (as mentioned, more than three high risk areas or a direct equity or mezzanine investment at or above 15% ownership for FMO).  His or her involvement already during due diligence may be likely if one of the two scenarios is given but depends on the CG Officer's decision based on the consultation. In case of the CG Officer's involvement, the deliverable at FP stage is his or her direct responsibility. The deal team is of course free to consult with or involve  the CG Officer in other cases as well. In case that it only turns out after due diligence that there are indeed three high risk areas, which were not properly identified during the CIP stage, the deal team has to again consult the CG Officer to contemplate his or her involvement.

While the CG Officer may only be directly involved in half a dozen deals every year, most deals should have a CG Review undertaken by the investment team regardless of the number of high risk areas. Except for the exceptions mentioned above, namely i) green-field or start-up deals and ii) investments in funds, only loans equal or under 5% of the client's balance sheet (AND) are further exempted if no high CG risk indication exists.
		


		


		


		


	
	

		


		


		


		


	
	

		


		


		


		


	
	

		


		


		


		


	
	

		


		


		


		


	
	

		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		
1a.) Was a CG Officer Consulted on the Potential CG Risks of the Deal?
		


		


		


		


		


		


	
	

		
The consultation needs to take place if 
√ direct equity or mezzanine investment at or above 15% ownership, or
√ at least four high risk indications.

In all other cases the involvement of a CG Officer at this stage is on a voluntary basis.
		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		
If 'yes' under 1a.) then answer the question below; if 'no' under 1a.) go to 2.) directly:
		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		
1b.)  Is a CG Officer to Be Involved During Due Diligence?
		


		


		


		


		


		


	
	

		
Indicate 'yes' if 
√ based on the consultation, the CG Officer decided to be part of the due diligence.

Indicate 'no' if 
√ the CG Officer decided not to be part of the due diligence.
		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		
If 'no' under 1a.) or 1b.) then answer the question below, otherwise no need to answer the below:
		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		
2.) Is a CG Review to Be Drafted for FP by the investment team?
		


		


		


		


		


		


	
	

		
Indicate 'yes' if 
√ direct equity or mezzanine investment, or
√ loan amount is above 5% of the balance sheet of the client, or
√ at least one high risk indication.

Indicate 'no' if 
√ green-field or start-up project, or
√ investment in fund, or
√ if no 'yes' indication as above.
		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		
The CIP CG Rapid Risk Screening (below): Five questions are posed under each of the five risk areas (commitment, board structure, control environment, transparency  &disclosure, minority shareholder rights).  If three to five questions under each risk area are answered with 'true', a high (1) risk area is identified.  If one to two questions are answered with 'true', then a moderate (2) risk area is identified.  Finally, if no question is answered with 'true', only a low risk area is identified.  Each risk area is evaluated separately.
		


		


		


		


	
	

		


		


		


		


		


		


		


		


	
	

		


		

 
		
		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		
	

		


		

 
 
 
 
 
 




Sheet 3: CG Rapid Risk Screening Tool

	
	
	

		


		
Evaluate each category separately:
three to five 'true' lead to a '1' 
one to two 'true'  lead to a '2' 
zero 'true' leads to a '3'. 
Each 'unknown' counts as 'true'.
Statements need to be answered based on today's facts and not future assumptions.
		
	

		
CIP Corporate Governance (CG) Rapid Risk Screening Tool
for banks, non-banking financial institutions or corporate microfinance entities
		
	

		
Client name:
		
	

		
Topic 
		
EVALUATION
		
RESULT
	
	

		
Commitment to CG
		


		


	
	

		
The FI is owned by an individual, directly or indirectly, that could dominate the decision-making process at the (supervisory) board or management level. 
		


		
No Data
	
	

		
A family has a significant stake (equal or more than 20%) in the FI and is involved at the (supervisory) board or management level.
		


		
	

		
There is room to believe that political influence is exercised at the (supervisory) board or management level.
		


		
	

		
There is resistence towards corporate governance improvement from the majority owners, the board, or senior management.
		


		
	

		
The FI has not assigned responsibility for CG internally (e.g., to a corporate secretary).
		


		
	

		
Structure and Functioning of the Board of Directors
		


		


	
	

		
The (supervisory) board is unusually large (more than 15 members) or unusually small (less than six members).
		


		
No Data
	
	

		

		Martin Steindl:
Non-executive means that the board member is not in an executive and full-time employment function with the FI.  Independence means that the director has no other significant relationship with the FI than his or her board seat, meaning that s/he is not a shareholder, supplier, former employee, related to or friend with the CEO, etc.
		The (supervisory) board has non-executive directors but the majority of these non-executives are not independent.
		


		
	

		
The (supervisory) board has neither one audit and risk committee nor a separate committee for each, audit and risk.
		


		
	

		
The (supervisory) board gets involved in day-to-day or other operational issues.
		


		
	

		
The (supervisory) board meets less than four times or more than 12 times a year.
		


		
	

		
Control Environment and Processes
		


		


	
	

		
There is no proper internal audit, risk management [for credit, market, liquidity, and operational risks] and compliance function.
		


		
No Data
	
	

		

		Martin Steindl:
These issues can either arise  in the implementation process or quality-wise or there are other issues with the internal reporting related to quality and frequency.
		Information has been provided (by the auditor, the FI or a third party) which indicates that the FI has issues with its Management Information System (MIS).
		


		
	

		
The Internal audit and risk function only have access to management and not to either a combined audit and risk committee or separate audit and risk committees.
		


		
	

		
The external auditor does not issue management letters.
		


		
	

		
The (supervisory) board's oversight of internal controls, internal audit, compliance and risk management is weak.
		


		
	

		
Transparency and Disclosure
		


		


	
	

		

		Martin Steindl:
'Weak' means neither Big Four nor second tier auditor with a solid reputation.
		The financial statements are audited by a 'weak' auditor.
		


		
No Data
	
	

		
The independence or quality of external audits is not sufficient because the external auditor has been engaged since many years or provides other significant services.
		


		
	

		
The audit opinion has been qualified in the past five years, or there have been material restatements.
		


		
	

		
Only local accounting standards are applied that vary significantly from IFRS.
		


		
	

		
No information on the (supervisory) board is available beyond their names with regards to experience, skills and other board seats (in the annual report or website).
		


		
	

		
Shareholders Rights
		


		


	
	

		
There are pyramid structures, cross-holdings or other complex shareholding arrangements.
		


		
No Data
	
	

		
Different share classes or differences between cash flow and voting rights exist.
		


		
	

		
The FI has no policies with respect to treatment of minority shareholders and changes in control.
		


		
	

		
There are other business activities of shareowners or members of the (supervisory) board that pose potential conflicts of interest.
		


		
	

		
There is no up-front and independent approval by the (supervisory) board or its audit committee on intra-group and related party transactions.
		


		
	

		


		


		


	
	

		
No other remarks
		
	

		


		


		


	
	

		
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