ADCB

Corporate
Governance Report

ADCB aspires to high standards of corporate governance. Over recent years, the Bank has sought to enhance and improve its corporate governance standards and framework, emphasising transparency.

We believe high standards of corporate governance are a key contributor to the long-term success of a company, creating trust and engagement between the company and its stakeholders. Striving to deliver exemplary governance is a core aspect of the Bank’s strategic intent. We have clear, well-­understood governance policies, procedures and practices throughout the Bank. In this Corporate Governance Report, we outline the Bank’s corporate governance framework, including the role and responsibilities of the Board and each of its Committees. We continue to review and develop this framework in light of changes in the Bank’s businesses, best practices and the external environment.

GOVERNANCE AT ADCB

As part of the Bank’s commitment to removing ‘clutter’ from its annual report, the Bank reports to shareholders on corporate governance by publishing: (a) this report, which contains only information that is material, relevant and has changed since the most recent annual report; and (b) detailed information, which is available on the Bank’s website at http://www.adcb.com/about/corpgovernance/overview.asp.

Please visit our website for an overview of the Bank’s governance framework and policies and practices, including the Bank’s corporate governance code, code of conduct, disclosure standards, communication with shareholders, and investor relations.

External recognition

The Bank’s ongoing achievements in corporate governance resulted in the Bank receiving the ‘Best Bank Corporate Governance Award’ from World Finance magazine in 2013. The award is in recognition of ADCB’s achievements in corporate governance and is an affirmation of the Bank’s commitment to upholding the highest standards of transparency and accountability.

THE BOARD
The Board’s agenda in 2013

The Bank’s Board has adopted a rolling Board agenda. The rolling agenda ensures that certain big-picture items, including long-term planning, strategy, operational plans, succession planning, performance against budget and strategic targets, and human resources are discussed by the Board on a regular basis. This provides a structural framework for the Board’s oversight.

In 2013, the Board focused on the following:

  • defining and debating strategy;
  • risk management, market trends and developments, new business opportunities, and the impact of regulatory developments;
  • assessing each of the Bank’s divisions and its performance against set targets that contribute to the achievement of the Bank’s overall strategy; and
  • improving governance structures and processes and maintaining a governance framework that adds value to the business.

Eight Board meetings were held in 2013. The Board also had an off-site strategy meeting to debate and refine the Bank’s strategy. Senior and middle management were invited to Board and strategy meetings to further enhance the Board’s engagement with the management and the business. Regular tours were made to various divisions and branches of the Bank to enhance the Board’s awareness and contributions.

Strategy Setting

The Board of Directors is responsible for determining the Bank’s strategic direction. In 2013, the Board of Directors and the management team met to discuss and refine the Bank’s strategy. In order to deliver against these objectives, management has developed a detailed set of strategic plans that operate across the Bank’s businesses.

The Directors set the strategic direction of the Bank (with due consideration given to risk tolerance, shareholder expectations, business development opportunities and other macro-economic factors), which senior management then uses to design the Bank’s annual strategic plan and prepare the annual budget for Board approval. Thereafter, senior management provides regular updates to the Board of Directors to monitor progress against budget and strategy and permit any necessary modifications or adjustments in strategic direction.

Please see further details in the Strategy section of this annual report.

Board Oversight of Risk Management

Responsibility for setting our risk appetite and for the effective management of risk rests with the Board of Directors. Acting within an authority delegated by the Board, the Board Risk & Credit Committee (BRCC) has overall responsibility for oversight and review of all risk types — credit, market, operational, liquidity, fraud, reputational risks, etc. It periodically reviews and monitors compliance with the Group’s overall risk appetite and makes recommendations thereon to the Board.

Its responsibilities also include reviewing the appropriateness and effectiveness of the Group’s risk management systems and controls, overseeing the Management Risk Committees and ensuring that the Bank’s risk governance is supportive of prudent risk-taking at all levels in the Bank.

Please see further details in the Risk Management section of this annual report.

Corporate
Governance Report

Corporate Governance Structure
discipline-risk-board

THE BOARD’S
ADVISER

In January 2013, the Bank appointed Gerry Grimstone as an Adviser to its Board of Directors. The appointment of Gerry Grimstone provided the Board with an experienced outside perspective. In 2013, Gerry Grimstone attended four Board meetings, the Board strategy sessions and a meeting of the Board’s Nomination, Compensation & HR Committee. Gerry Grimstone made contributions in many areas, most particularly in strategic discussions, Board reporting and effectiveness, assessment of the performance of senior management and rewards.

STRUCTURE AND COMPOSITION

Please see details at http://www.adcb.com/about/corpgovernance/overview.asp.

PERFORMANCE EVALUATIONS

An effective Board is crucial to the success of the Bank. To assess the performance of the Board, the Board undergoes a rigorous performance evaluation annually.

The Board recognises that board evaluations are an essential component of good governance. The Bank conducts an in-house Board evaluation every year. In line with global standards, the Bank engages an independent external consultant to perform the evaluation every third year. In late 2012, the Bank engaged Professor Andrew Chambers to perform an evaluation of the Bank’s Board. Prof. Chambers is a leading academic expert in governance and holds numerous senior advisory and Board roles. Prof. Chambers performed his evaluation late in 2012 and delivered his recommendations early in 2013.

The material recommendations of Prof. Chambers’ report related to, amongst other things:

  1. the format and independence of management’s reports to the Board;
  2. Board members’ self-assessment;
  3. Board oversight of the Bank’s sustainability initiatives; and
  4. enhancements to the Bank’s public disclosures about the Board and its activities.

APPOINTMENT, RETIREMENT AND RE-ELECTION

According to the Bank’s articles of association:

  • All Directors are required to seek re-election by shareholders every three years, and one-third of the Board must seek re-election on an annual basis.
  • Abu Dhabi Investment Council has the right to elect such number of Directors as is proportionate to the percentage of the Bank’s share capital that it holds (as at 31 December 2013, 58.08%).
  • Details of the Board Members’ current terms of office and, where relevant, their election by Abu Dhabi Investment Council, are set out in the table under ‘Board Membership and Attendance’.

Please see further details at http://www.adcb.com/about/corpgovernance/overview.asp.

DIRECTORS’ INDEPENDENCE

The Bank considers that during 2013, the Bank’s independent Directors represented more than one-third of the Board; and throughout 2013, the majority of Members of the Board Audit & Compliance Committee were independent.

Please see further details, including the Bank’s independence criteria, at http://www.adcb.com/about/corpgovernance/overview.asp.

INDUCTION AND PROFESSIONAL DEVELOPMENT

In 2013, Aysha Al Hallami and Omar Liaqat were appointed to the Bank’s Board of Directors. They were given formal induction and orientation with respect to the Bank’s vision, strategic direction and core values, including ethics, corporate governance practices, financial matters and business operations. The management facilitated their visits to the Bank’s departments and key branches to get familiar with the Bank’s operations. Additionally, a series of induction meetings were arranged for them with key executive management members. Please see: http://www.adcb.com/about/corpgovernance/overview.asp for additional information concerning the Bank’s induction programme for newly appointed Directors.

MATTERS RESERVED TO THE BOARD AND INFORMATION DISSEMINATION

Please see details at http://www.adcb.com/about/corpgovernance/overview.asp.

MEETINGS

In 2013, the Board of Directors met regularly, and Directors received information between meetings about the activities of Board and management committees, and developments in the Bank’s business. There were eight Board meetings and 48 Board Committee meetings in 2013. The table above gives details of each Director’s attendance at meetings of the Board and Board Committees in 2013.

BOARD COMMITTEES

The memberships and chairmanships of the Board’s Committees are reviewed on a regular basis to ensure suitability and compliance with other requirements, and rotated as needed. Changes made in 2013 are reflected in the table below, entitled ‘Board Membership and Attendance.’

CORPORATE
GOVERNANCE REPORT:

Board membership and attendance
In addition to the below, during 2013 the Board appointed several short-term ‘special committees’ with authority to consider certain subjects. In particular, they considered the future strategy of the Bank’s Indian branches and the Bank’s buy back strategy.
Name Status Expiration of current term of office Board Audit & Compliance Committee Corporate Governance Committee Risk & Credit Committee Nomination, Compensation & HR Committee
Meetings: 8 Meetings: 9 Meetings: 5 Meetings: 28 Meetings: 6
Eissa Mohamed Al Suwaidi Director 1 2014 C 7 C 25 C* 6
Mohamed Sultan Ghannoum Al Hameli Director 1 2016 M 8 M 24 M* 6
Ala’a Eraiqat Director N/A M 8
Mohamed Darwish Al Khoori Director 1 2014 M 8 C 9
Khalid Deemas Al Suwaidi Director 2015 M 5 M** 3 M 5 M** 1
Mohamed Ali Al Dhaheri Director 1 2016 M 7 C* 5 M** 8 M* 3
Abdulla Khalil Al Mutawa Director 2015 M 8 M* 5 M** 8 M* 4
Sheikh Sultan bin Suroor Al Dhahiri Director 2015 M 4 M 1
Omar Liaqat Director 1 2016 M* 5 M* 6 M* 4
Aysha Al Hallami Director 1 2016 M* 6 M* 6 M* 17
Khaled H Al Khoori Director 2015 M* 8 M** 2 M* 18
Jean-Paul Villain Director 1 2014 M** 1 M** 1
Salem Mohd Al Ameri Director 1 2016 M** 1 M** 2 C**
C Chairman M Member * Chairman/Member (from April 2013) ** Member (until April 2013) 1 Elected by Abu Dhabi Investment Council

OTHER PRACTICES AND POLICIES
RELATED PARTY TRANSACTIONS

Details of all transactions in which a Director and/or other related parties might have potential interests are provided to the Board for its review and approval. Where a Director is interested, the interested Director neither participates in the discussions nor votes on such matters. The Bank’s policy is to, so far as possible, only engage in transactions with related parties (including Directors) on arm’s-length terms.

CONFLICTS OF INTEREST

As at 31 December 2013, as a result of written declarations submitted by each of the Board Members, the Board was satisfied that the other commitments of the Directors do not conflict with their duties, or that where conflicts may arise, the Board is sufficiently aware and appropriate policies are in place to minimise the risks.

DIVIDEND POLICY

The Bank has not adopted a formal dividend policy.

INTERNAL CONTROLS

In 2013, the Board of Directors, through the Board Audit & Compliance Committee, conducted a review of the effectiveness of the Bank’s system of internal control covering all material controls, including financial, operational and compliance controls, and risk-management systems. The Board Audit & Compliance Committee has received confirmation from management that the Bank’s internal controls have been assessed to be effective and operating as designed, and that management has taken or is taking the necessary action to remedy any failings or weaknesses identified.

Please see details at http://www.adcb.com/about/corpgovernance/overview.asp.

AUDIT ARRANGEMENTS

The external auditors were initially appointed at the 2011 Annual General Meeting (AGM), and at the 2012 and 2013 Annual General Assembly PricewaterhouseCoopers (PwC) were re-appointed as the external auditors of the Bank on the recommendation of the Board of Directors. Bank policy restricts their tenure to no more than seven consecutive years. Bank policy also restricts the tenure of the individual audit partner within the firm to no more than five consecutive years, unless exceptionally approved by the Board Audit & Compliance Committee. The Bank’s external auditor is paid on a fixed annual fee basis, as approved by the shareholders at the AGM. In 2013, fees paid to external auditors for audit work conducted during the 2013 year totalled AED 1,566,000 for the audit of UAE business and its subsidiaries. A further AED 901,557 was paid to PwC for non-audit work. All non-audit work performed by PwC was preapproved by the Board’s Audit & Compliance Committee.

INTERNAL AUDITS, REGULATION AND SUPERVISION

Please see details at http://www.adcb.com/about/corpgovernance/overview.asp.

DISCLOSURE ENHANCEMENT

The Bank is committed to high standards of transparency. In 2013, the Bank worked on enhancing its disclosures on risk, remuneration, and its Islamic Business and Islamic governance.

DIVERSITY

During 2013, Aysha Al Hallami was appointed as a Director. Aysha Al Hallami is the first woman to be appointed to the Bank’s Board of Directors. This is in line with international trends and the Bank’s efforts to promote greater diversity at the Board level, and it also corresponds with the government’s efforts to empower Emirati women.

The Bank’s Board is aware of the advantages of all types of diversity. A diverse board is likely to make better decisions.

ARTICLES OF ASSOCIATION

The Bank’s articles of association are available on the Bank’s website at http://www.adcb.com/about us/corporate governance.

CORPORATE
GOVERNANCE REPORT:

MANAGEMENT COMMITTEES
The Management Executive Committee is supported by the following other management committees:

Committee Name # of meetings held in 2013 Responsibilities of the committee
Management Executive (MEC) 48 Most senior management committee; oversight of all of the Bank’s businesses and operations.
Senior Management (SMC) 8 Administration, governance, change management, strategy and project updates and dissemination of information. Pre-screening of certain matters before MEC review.
Assets & Liabilities (ALCO) 7 To make investments and execute asset/liability transactions within delegated limits and to guide MEC and the Board on other investments and asset/liability transactions above those limits.
Management Risk & Credit (MRCC) 54
(50 regular MRCCs and 4 strategic MRCCs)
To approve credits within delegated limits, to consider risk strategy issues, and to set and recommend risk policies; to guide the MEC, Board Risk & Credit Committee and the Board on credits and above those limits and on general risk and risk policy issues.
Recoveries (MRC) 6 To approve recoveries within delegated limits and to guide MEC and the Board on recoveries above those limits.
Capital Expenditure Committee (CEC) 9 To review and approve project capital expenditure within delegated limits, and accordingly guide and advise the MEC and Board on project capital expenditure.
Liabilities, Product Performance & Cross-Selling Committee (LICO) 18 To approve the pricing and marketing of Bank’s products and services (within the Bank’s strategy).
Management HR Committee (MHRC) 6 To act as a forum for prior screening, discussion and recommendation of all human resources–related matters that ultimately appear before the MEC.
Financial Performance Management Committee (FPMC) 10 To monitor financial performance of the Bank’s business lines.

REPORTS OF THE BOARD COMMITTEE CHAIRMEN

1
AUDIT & COMPLIANCE COMMITTEE
Composition as at 31 December 2013:
Mohamed Darwish Al Khoori (Chairman),
Aysha Al Hallami,
Abdulla Khalil Al Mutawa,
Omar Liaqat
Secretary: Rami Raslan

Statement from the Chairman of the Audit & Compliance Committee

Dear Shareholders,

During 2013, the Audit & Compliance Committee continued focusing on integrity and transparency of the Bank’s financial statements, and the effectiveness of the Bank’s internal audit, internal controls and compliance functions, in addition to reviewing the work provided by the Bank’s statutory auditors, PricewaterhouseCoopers.

The Audit & Compliance Committee was composed of four Non-executive Directors, the majority of whom were considered by the Bank to be independent. The Chairman of the Committee was an independent Director with relevant qualifications and experience.

The Committee held nine meetings in 2013, during which the Committee discussed, reviewed and worked on the following matters:

  • overseeing and continuously assessing the effectiveness of the financial reporting and disclosure process;
  • monitoring the choice of accounting policies, principles and judgments;
  • overseeing regulatory compliance and development of the Bank’s compliance function;
  • overseeing and continuously assessing the effectiveness of the external audit process;
  • monitoring internal controls;
  • approving the annual audit plan;
  • discussing the annual audited financial statements with management and the external auditor, and, in particular, considering the appropriateness of the Bank’s specific and general provisions;
  • overseeing the performance and activities of the internal audit function;
  • reviewing audit issues raised by the internal and external auditors and management’s responses;
  • evaluating the external auditor’s qualifications, performance and independence;
  • discussing risk-management policies and practices with management; and
  • reporting regularly to the Bank’s Board of Directors.

The Committee regularly met separately with the external auditors and internal auditors in the absence of the Bank’s management.

The views of the external and/or internal auditors were solicited when required.

The Board approved the 2013 annual accounts, at the Committee’s recommendation, based upon the external auditors’ report and the Committee’s view that, as a whole, the accounts accurately reflected the Bank’s performance in 2013 and that they are fair, balanced and provide the information required by shareholders to assess the Bank’s performance. No significant issues were considered by the Committee with respect to the 2013 accounts.

The Board Audit & Compliance Committee has received confirmation from management that the Bank’s internal controls have been assessed to be effective and operating as designed, and that management has taken or is taking the necessary action to remedy any failings or weaknesses identified.

The Committee considers that it made positive progress during 2013 towards meeting its responsibilities.

LOOKING AHEAD TO 2014
The Audit & Compliance Committee shall continue to focus on its governance responsibilities in 2014.

Mohamed Darwish Al Khoori
Chairman of the Board’s Audit
& Compliance Committee

2
CORPORATE GOVERNANCE COMMITTEE
Composition as at 31 December 2013:
Mohamed Ali Al Dhaheri (Chairman),
Khalid Deemas Al Suwaidi,
Omar Liaqat,
Sheikh Sultan bin Suroor Al Dhahiri
Secretary: Rami Raslan

Statement from the Chairman of the Corporate Governance Committee

Dear Shareholders,

During 2013, the Corporate Governance Committee continued to oversee the development of the Bank’s governance policies. In particular, the Committee engaged the Bank’s divisions to assess their development of certain key governance themes, and oversaw the Board evaluation and implementation of policy adjustments arising from that evaluation.

The Corporate Governance Committee monitors local and international best practices regularly, and reviews and makes recommendations to the Board to enhance the Bank’s governance practices in order to achieve high standards of corporate governance.

The Committee adopted a rolling agenda for 2013 that focused on, amongst other things, remuneration governance, risk governance, organisational transparency, Islamic banking governance, financial disclosure, and product governance.

The Committee held five meetings over the course of 2013. Amongst other things, in 2013 the Corporate Governance Committee worked on the following matters:

  • reviewing the results of the 2012 Board evaluation and the adoption and monitoring of the action plan arising from it;
  • reviewing and recommending amendments to Board and management committees’ terms of reference;
  • reviewing and recommending amendments to the Bank’s governance policies;
  • engaging the Bank’s divisions and various businesses in its governance framework and providing guidance on enhancing governance practices;
  • Directors’ professional development programmes;
  • ongoing review of international developments in corporate governance and assessment of Bank practices;
  • considering corporate governance sponsorships;
  • publication of corporate governance information;
  • making recommendations to the Board and Board Committees on governance matters; and
  • considering internal Bank initiatives to embed corporate governance within the organisation.

The Corporate Governance Committee plays an advisory role, reporting its recommendations to the Board for final approval. The Committee considers that the Bank has developed a robust governance framework, appropriate for the size and status of the Bank. However, there remain areas for improvement.

The Committee considers that positive progress was made during 2013 in the implementation of the Bank’s corporate governance initiatives. The Bank’s ongoing achievements in corporate governance resulted in the Bank receiving the ‘Corporate Governance Award — UAE’ from World Finance magazine in 2013. The award is in recognition of ADCB’s achievements in corporate governance and is an affirmation of the Bank’s commitment to upholding the highest standards of governance. The Bank also supported various governance initiatives that were aimed at raising awareness in the SME sector, by seconding its professionals to speak at several conferences.

LOOKING AHEAD TO 2014
The Committee’s agenda for 2014 will reflect its ongoing commitment to governance across the Bank through a series of deep-focus sessions into governance matters including, amongst other things, ethics & compliance, bribery & fraud, strategy governance, risk governance, IT governance, sustainability & corporate social responsibility, and procurement governance.

Mohamed Ali Al Dhaheri
Chairman of the Board’s Corporate Governance Committee

3
NOMINATION, COMPENSATION & HR COMMITTEE
Composition as at 31 December 2013:
Mohamed Sultan Ghannoum Al Hameli (Chairman),
Eissa Mohamed Al Suwaidi,
Abdulla Khalil Al Mutawa,
Mohamed Ali Al Dhaheri
Joint Secretaries: Ali Darwish, Rami Raslan

Statement from the Chairman of the Nomination, Compensation & HR Committee

Dear Shareholders,

During 2013, the Nomination, Compensation & HR Committee focused on the Bank’s remuneration framework, Board skills and composition, and HR policies.

The Nomination, Compensation & HR Committee met six times during 2013 and considered the following:

  • selection and nomination of Directors;
  • Directors’ remuneration and fees;
  • CEO performance evaluation and remuneration;
  • Bank’s remuneration policy for Directors, senior management members and staff;
  • variable pay scheme governance;
  • implementation of variable pay schemes in line with the international best practices;
  • compensation survey findings and position of the Bank’s pay practices against the market;
  • compensation and variable pay recommendations;
  • long-term incentive plans;
  • succession planning for Directors and senior management;
  • UAE Nationalisation strategy;
  • Ambition University — learning and development aligned with business strategy;
  • HR policies and practices; and
  • retention plans.

The Bank’s Emiratisation strategy has been amended and expanded in scope. It includes creative and impactful initiatives developed in partnership with government bodies and world-class education providers to ensure that the Bank attracts, selects and retains the best of the available UAE national talent, and contributes to the skill development of young UAE nationals.

The Committee commissioned an independent review of the Bank’s variable pay schemes in 2012 and, during 2013, oversaw the implementation of certain changes recommended by those independent consultants. The changes were aimed at aligning the Bank’s remuneration practices with evolving global best practices. In addition, the Committee consulted the Board’s advisor on remuneration strategy and governance. The Committee considers that the Bank’s remuneration policies are appropriate for the Bank’s current size and status, and that its remuneration governance adheres to evolving global standards.

The Bank’s HR team has designed and operates a succession plan aimed at ensuring that the key jobs across the organisation are continuously backed up by a pool of experienced and engaged high-potential employees. The Committee considers succession planning at the Bank’s senior management levels.

The Committee considers that it made positive progress during 2013 towards meeting its responsibilities.

LOOKING AHEAD TO 2014
In 2014, the Committee shall continue to fulfil its governance responsibilities. Amongst other things, it will focus on UAE nationals strategy, staff retention plans, variable pay, benchmarking Board fees, Directors’ independence, performance recognition rewards, succession planning, and applicable international remuneration, compensation and human resources best practices.

Mohamed Sultan Ghannoum Al Hameli
Chairman of the Board’s Nomination, Compensation & HR Committee

4
RISK & CREDIT COMMITTEE
Composition as at 31 December 2013:
Eissa Mohamed Al Suwaidi (Chairman),
Mohamed Sultan Ghannoum Al Hameli,
Khaled H Al Khoori,
Aysha Al Hallami,
Secretary: Rami Raslan

Statement from the Chairman of the Risk & Credit Committee

Dear Shareholders,

During 2013, the Risk & Credit Committee comprised four Non-executive Directors.

The Committee oversaw management’s administration of the Bank’s credit portfolio, including management’s responses to trends in credit risk, credit concentration and asset quality, and received and reviewed reports from senior management (and appropriate management committees and credit units) regarding compliance with applicable credit risk–related policies, procedures and tolerances. The Committee also assisted the Board in fulfilling its oversight responsibilities with regard to the risk appetite of the Bank, risk-management framework and the governance structure that supports it.

Over the course of 2013, the Committee held 21 meetings and considered a wide range of matters, from credit commitments to risk policies, strategies and new products, with increasing emphasis on risk strategy and policy issues. The Committee:

  • considered major credit decisions;
  • assisted the Board to define the risk appetite of the Bank and monitored the independence and effectiveness of risk management functions throughout the Bank;
  • considered the Bank’s key risks, including concentration and sectoral credit exposures;
  • ensured the adequacy of infrastructure, resources and systems to maintain a satisfactory level of risk management discipline;
  • exercised oversight of management’s responsibilities, and reviewed the risk profile of the Bank to ensure that risk exposure conforms to the risk appetite determined by the Board;
  • monitored the independence of risk management functions throughout the Bank;
  • ensured the existence of a pervasive risk-awareness culture throughout the Bank;
  • reviewed issues raised by Internal Audit that might impact the risk-management framework; and
  • revised credit limits and country limits to ensure that risk exposure conforms to the risk appetite determined by the Board.

Throughout 2013, the Committee conducted risk strategy and policy meetings on a frequent basis (seven meetings were held focusing only on risk strategy and ‘policy issues’, and risk strategy issues were considered on an ‘as required’ basis during other meetings), with the objective of discussing and reviewing strategies, policies, frameworks, models and procedures that lead to the identification, measurement, reporting and mitigation of material risks.

The Committee considers that it made positive progress during 2013 towards meeting its responsibilities.

LOOKING AHEAD TO 2014
For 2014, the surrounding economic environment will continue to shape the Committee’s agenda. The Committee will continue to assess and reassess the Bank’s risk profile, strategy and appetite dynamically. The 2014 schedule contemplates eight focus-sessions on risk strategy and policy issues.

Eissa Mohamed Al Suwaidi
Chairman of the Board’s Risk & Credit Committee

CORPORATE
GOVERNANCE REPORT:

DIRECTORS’ REMUNERATION AND INTERESTS IN THE BANK’S SHARES
DIRECTORS’ SHAREHOLDINGS AS AT 31 DECEMBER 2013
Shareholding in ADCB
As at 31 December 2012 As at 31 December 2013 Change in shareholding
Abdulla Khalil Al Mutawa 2,347,277 2,347,277 0
Ala’a Eraiqat*** 1,009,063 2,200,000 1,190,937
Aysha Al Hallami* 0 0
Eissa Mohamed Al Suwaidi 0 0 0
Khalid Deemas Al Suwaidi 0 0 0
Khaled H Al Khoori 0 190,000 190,000
Mohamed Ali Al Dhaheri 0 0 0
Mohamed Darwish Al Khoori 837,325 837,325 0
Mohamed Sultan Ghannoum Al Hameli 0 0 0
Omar Liaqat* 0 0
Sheikh Sultan bin Suroor Al Dhahiri 2,835,147 2,835,147 0
Jean-Paul Villain** 6,012
Salem Mohd Al Ameri** 0
*Appointed as directors in April 2013
**Ceased to be directors in April 2013
***Excluding 892,176 unvested restricted units in the Bank’s LTIP scheme of which (1) 409,064 will vest on 31 December 2014 subject to early vesting, and (2) 483,112 will vest on 31 December 2015 subject to early vesting.
BOARD COMMITTEES’ FEES
Members Nomination, Compensation & HR Committee Board Risk & Credit Committee Audit & Compliance Committee Corporate Governance Committee Board Committee meeting fees (2013) Board Member remuneration (paid in 2013 for the year 2012) Total
Sessions attended Amount Sessions attended Amount Sessions attended Amount Sessions attended Amount
Eissa Mohamed Al Suwaidi 6 4,000 25 5,000 149,000 750,000 899,000
Mohamed Sultan Ghannoum Al Hameli 6 5,000 24 4,000 126,000 625,000 751,000
Khaled H Al Khoori 18 4,000 2 6,000 84,000 500,000 584,000
Mohamed Darwish Al Khoori 9 7,500 67,500 500,000 567,500
Abdulla Khalil Al Mutawa 4 4,000 8 4,000 5 6,000 78,000 500,000 578,000
Mohamed Ali Al Dhaheri 3 4,000 8 4,000 5 5,000 69,000 500,000 569,000
Sheikh Sultan bin Suroor Al Dhahiri 1 4,000 4,000 500,000 504,000
Khalid Deemas Al Suwaidi 1 4,000 3 6,000 5 4,000 42,000 500,000 542,000
Aysha Al Hallami 17 4,000 6 6,000 104,000 0 104,000
Omar Liaqat 6 6,000 4 4,000 52,000 0 52,000
Jean-Paul Villain* 1 4,000 4,000 500,000 504,000
Salem Mohd Al Ameri* 2 6,000 12,000 500,000 512,000
Total 791,500 5,375,000 6,166,500
*Board Committee Members until April 2013
Note: Ala’a Eraiqat (Board Member and Chief Executive Officer) has waived his right to receive Board fees.

REMUNERATION POLICY

Directors’ remuneration is set annually by the Board following delegation by the Bank’s shareholders. Any proposals for changes are considered by the Nomination, Compensation & HR Committee prior to obtaining Board and, if necessary, shareholder approvals. According to federal laws and the Bank’s articles of association, Directors may not receive any remuneration in respect of a year where the Bank does not achieve net profits.

Please see further details at http://www.adcb.com/about/corpgovernance/overview.asp.

BOARD REMUNERATION

Board member remuneration paid during 2013 (per meeting)
Director fees (AED per annum)*
Chairman of Board 750,000
Vice Chairman 625,000
Director 500,000


Board Committee meeting fees paid for attendance in 2013
Fees for attendance at Board Committee meetings (other than Audit & Compliance Committee) Fees for attendance at Audit & Compliance Committee meetings
Committee Chairman AED 5,000 AED 7,500
Committee member AED 4,000 AED 6,000


OTHER BENEFITS

As at 31 December 2013, the Bank’s Directors were not eligible for any bonus, long-term or other incentive schemes. Directors do not receive any pension benefits from the Bank.

Please see further details at http://www.adcb.com/about/corpgovernance/overview.asp.

REMUNERATION & REWARD AT ADCB
GUIDING PRINCIPLES

In line with ADCB’s commitment to sound governance and promotion of long-term sustainable shareholder value, ADCB’s objective is to provide transparency to shareholders and other stakeholders about its remuneration principles and incentives.

  • ADCB supports levels of remuneration necessary to attract, retain and motivate staff of the calibre necessary to lead, manage and serve in a competitive environment. However, ADCB seeks to avoid paying more than necessary for this purpose and has practices and policies in place which promote effective risk-management.
  • ADCB seeks to ensure that remuneration packages reflect duties and responsibilities, are fair and equitable, and incorporate clear and measurable rewards linked to corporate and personal performance. Rewards will be based only on the results of a rigorous appraisal process.
  • As far as possible, bearing in mind market trends and constraints, remuneration shall align the interests of ADCB’s staff with the interests of shareholders and other stakeholders, and shall blend short- and long-term incentives. Performance-related elements shall be designed to minimise staff turnover and to give staff incentives to perform at the highest levels, whilst recognising the need to promote effective risk-management.

TOTAL REWARD — KEY COMPONENTS

An employee’s rewards at ADCB are made up of:

FIXED PAY

This part of pay is fixed and based on the market rate for each role. It is influenced by each individual’s contribution over the year, and any fixed-pay reviews will depend on the achievement of employee’s objectives and overall performance level. Fixed pay is made up of a basic salary and a general allowance.

Key Management Fixed Pay

In 2013, Key Management (defined as CEO and his direct reports) received fixed pay, which included basic salary and other allowances (excluding cash and deferred variable pay awards as detailed on page 62) amounting to AED 27,056,384.

ALLOWANCES

Allowances include a social allowance (for UAE nationals), job-specific allowances (such as a teller allowance, a remote area allowance and a shift allowance), and grade-based allowances (such as an education allowance) and are paid in addition to fixed pay.

BENEFITS

Examples of our employee benefits include leave fare, private medical insurance, life assurance cover and annual leave.

VARIABLE PAY

Employees may receive variable pay in addition to fixed pay. It is based on each individual’s performance over the year. Variable pay is not always payable, and the amount received may change from year to year. Although individual award amounts are dependent on individual performance, variable pay is also aligned to the business function’s performance as well as the Bank’s overall performance.

2012/13 Variable Pay Awards

For performance in 2012, the following awards were made to employees in 2013:

  • Cash variable pay awards of AED 120,102,745
  • Deferred compensation plan awards of AED 47,500,000
  • of this, AED 25,262,500 was allocated to Key Management in cash and AED 22,237,500 in deferred compensation.

ADCB’S BANK-WIDE VARIABLE PAY FRAMEWORK

In 2012, the Bank completed an extensive review of its variable pay (VP) practices, which it had commenced in 2011, and implemented several key changes aimed at improving remuneration governance and alignment with global best practices.

ADCB’s Variable Pay Framework & Governance — Key Facts

Aligns individual, business functions, & Bank-wide performance. Yes
Differentiates between different functions of the Bank to ensure alignment to the relevant market. Yes
Includes a deferred compensation plan. Yes
Currency of deferred compensation. Cash & Shares
Duration of deferred compensation plan. 3 years
Awards subject to thresholds, caps, clawback rules, malus clause, and deferral & retention provisions. Yes
Employs remuneration professionals experienced in the governance of all types of compensation and benefits. Yes
Designed in conjunction with, and reviewed by, independent external advisors reporting directly to the Nomination, Compensation & HR Committee. Yes
Conducts regular external benchmarking to ensure alignment to evolving global best practices. Yes
Constantly monitors the developments in remuneration governance and revises practices to ensure all VP plans evolve in line with the Bank’s needs and external developments. Yes
Designed to avoid excessive risk-taking. Yes
Active involvement of Risk in the review of VP plans. Yes
Minimum Shareholding Rule for Key Management. Yes
Aligns employees with the long-term performance of the Bank. Yes


ISLAMIC BANKING GOVERNANCE

The Islamic banking business at Abu Dhabi Commercial Bank PJSC (ADCB) is managed under the ‘ADCB Islamic Banking’ (ADCB IB) brand, offering shari’ah-compliant financial solutions to Consumer Banking, Wholesale Banking and Treasury clients. It is an independently managed business comprising the Islamic Banking Department (IBD), a business unit of ADCB, and Abu Dhabi Commercial Islamic Finance PJSC (ADCIF), a wholly owned subsidiary of ADCB. ADCB IB and ADCIF are regulated by the Central Bank of the UAE and supervised by an independent Fatwa & Shari’ah Supervisory Board (FSSB). ADCB IB commenced business in September 2008, and ADCIF was established in 2009.

Shari’ah governance is carried out under the guidance of a three member FSSB, which operates in accordance with the Islamic Financial Services Board (IFSB) standards and guidelines as laid out by the Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI). Through a retainer agreement, Dar Al Shari’ah Financial Consultancy Company provides day-to-day support and assistance on shari’ah-related matters and coordinates between ADCB IB & FSSB. Fatwas (edicts) are issued by the FSSB for all products and services as well as bespoke structured deals to certify compliance with principles of shari’ah. This includes approving the product structure including the underlying Islamic contract, legal documentation, operational process flow and all associated product literature. The product Fatwas issued by the FSSB are published on the Bank’s website and displayed at the Bank’s branches.

ADCB IB maintains a separate set of general ledgers to ensure that the books of accounts for the Islamic business are accounted for separately and there is no mingling of Islamic funds with conventional funds. The Bank’s consolidated accounts include the results of ADCB IB and ADCIF and are separately disclosed in the notes.

Risk
Management

RISK GOVERNANCE FRAMEWORK


Siacipline Risk Board

EFFECTIVE RISK MANAGEMENT AND CONTROLS

Effective management of risk is important for any bank and fundamental to our strategy. We are looking to create a more efficient, lower-risk, UAE-based retail and commercial bank. We maintain a conservative business model embodied by a risk culture with a prudent appetite for risk.

The Bank’s approach to risk rests on an effective control framework and a strong risk management culture that guides our employees’ approach to work and the way they do business. Our risk appetite is driven by our strategy and approved by the Board. This risk appetite is then embedded within policies, authorities and limits across the Bank.

RISK CULTURE

Identification, assessment and management of risk are the responsibilities of every staff member within the scope of their work and assignments. Our standards set the tone from the top and are central to our approach to balancing risk and reward. Personal accountability is reinforced by our ADCB Values, with staff expected to act with integrity in conducting their duties.



RISK MANAGEMENT ACTIVITY LEVELS
STRATEGIC LEVEL

Risk management functions performed by senior management and Board of Directors:

  • Definition and identification of material risks
  • Ascertaining the Bank’s risk appetite
  • Formulating strategy and policies for managing risks
  • Independent review and challenge structures
  • Establishing adequate systems and controls to ensure that overall risk remains within acceptable levels and the rewards compensate for the risk taken.

MANAGEMENT (MACRO) LEVEL

Risk management activities performed by middle management or units devoted to risk reviews

  • Encompasses risk management with a business area or across business lines

TRANSACTION (MICRO) LEVEL

Risk management activities performed by individuals who take risk on the Bank’s behalf such as front office and loan origination functions.

  • Involves ‘on the line’ risk management, where risks are actually created.
  • Risk management in these areas is confined to following operational procedures and guidelines set by management.

RISK GOVERNANCE AND OWNERSHIP

ADCB strongly believes in a disciplined approach to managing its risk framework and has actively fostered an organisation-wide culture of prudent risk management. All risk management reviews, decisions and actions are based on an approved enterprise-wide risk management strategy framework supported by:

  • a documented risk appetite statement;
  • a comprehensive set of policies and procedures;
  • clearly enunciated broad underwriting criteria by segment; and
  • a risk governance structure incorporating sufficient in-built challenges, checks and balances.

Our risk management framework fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. Integral to our risk management framework are risk appetite, stress-testing, and the identification of top and emerging risks, all of which are discussed below.

RISK PERFORMANCE OVERVIEW 2013

In 2013, our risk focus was on successfully completing, firmly embedding and building upon the various risk initiatives undertaken in the last four years. We embarked upon building a market-leading enterprise risk management framework in 2009, with the aim of entrenching this risk consciousness in the DNA of the organisation, a process whose success we have measured through risk culture surveys conducted at the early stage of the implementation and following completion of the process.

2013 was characterised by changing regulations and intense market competition. The year-end was buoyed with increased market confidence resulting from the Dubai Expo 2020 announcement. The risk management philosophy at ADCB has been to be nimble in this volatile market environment without losing sight of our overall risk philosophy.

Since the last downturn, several risk initiatives have been launched so as to onboard learning from the past and to position the Bank strongly for the next upturn. The single most important initiative was the drive to change the ‘risk culture’ of the Bank so as to make ADCB a more risk-aware and risk-responsive bank. This was addressed by measures across several fronts — credit & risk training, changes to organisational structure, process enhancements, new systems initiatives, introduction of new risk tools and measures, and, last but not the least, through improved risk communication. The results as demonstrated by a third-party independent survey indicate that ADCB is in the top quartile across several risk culture dimensions — compared to international benchmarks as well as its own historical indicators.

In terms of training, besides ongoing internal training covering all aspects of risk policies, methods, concepts and tools, we completed a Bank-wide credit training, drawing in key staff from across all parts of the underwriting chain and covering the end-to-end underwriting process.

In terms of our risk management practices, we have continuously upgraded our capabilities through risk tools such as RAROC (Risk Adjusted Return on Capital). This enables the Bank to measure risk versus revenues using actual data, exposure and portfolio analyses techniques, with accessibility of data to the rank and file, standardised stress tests, projected ratings, economic capital computation, portfolio level returns, etc. All these tools today form an integral part of our credit-decision and pricing process.

Our disciplined approach to risk management and adherence to policies have contributed to our weighted-average portfolio ratings improving by 1 notch over a 15-month period along with a reduction of both single obligor, sector, revenue and deposit concentrations, a trend which constituted a key pillar of our risk strategy.

RISK MANAGEMENT GOVERNANCE STRUCTURE

Our risk governance structure emphasises and balances strong central oversight and control of risk with clear accountability for, and ownership of, risk within each business unit. Under ADCB’s approach to risk governance, the business primarily owns the risk that it generates and is equally responsible for assessing risk, designing and implementing controls, and monitoring and reporting their ongoing effectiveness to safeguard ADCB from exceeding its risk appetite. The Credit & Risk Group and the Internal Audit function, both with independent reporting lines to the Board, constitute the second and third lines of defence, respectively.

ADCB’s risk governance model has at its apex the Board-level Risk Committees supported at the Management level by several management-level risk committees, which collectively oversee the overall risk profile of the Bank and its portfolio. These Committees are actively supported by the Credit & Risk Group, the Internal Audit Group and Business Units concerned.

Ultimate responsibility for setting our risk appetite and for the effective management of risk rests with the Board of Directors. Acting within an authority delegated by the Board, the Board Risk & Credit Committee (BRCC) has overall responsibility for oversight and review of all risk types — credit, market, operational, liquidity, fraud, reputational risks, etc. It periodically reviews and monitors compliance with the Group’s overall risk appetite and makes recommendations thereon to the Board. Its responsibilities also include reviewing the appropriateness and effectiveness of the Group’s risk management systems and controls, overseeing the Management Risk Committees and ensuring that the Bank’s risk governance is supportive of prudent risk-taking at all levels in the Bank.

The BRCC receives, on a regular basis, portfolio-level briefings from the Group Chief Risk Officer and also regular reports on risk management, including our portfolio trends, policy parameters, key risk indicators, results of stress-testing, and changes to the assumptions, liquidity measures, capital adequacy and planning, and is authorised to investigate or seek any information relating to any activity within its terms of reference. The BRCC also conducts ‘deep dive’ reviews on a rolling basis of different sections of the consolidated group risk information report.

RISK MANAGEMENT REVIEW

ADCB PRIMARY RISK CATEGORIES
 
Reference note in audited financial statements
Credit risk Credit risk reflects the risk of losses because one or more counterparties fail to meet all or part of their obligations towards the Bank. Credit risk also includes concentration risk. Note 41
Market risk Market risk is the risk that the Bank’s income and/or value of a financial instrument will fluctuate because of changes in market-risk factors such as interest rates, foreign exchange rates, equity prices, commodities prices and options volatilities. Note 45
Operational risk Operational risk is the risk of loss arising from system failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. Note 46
Liquidity risk Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. Note 43
Capital risk Capital risk is the risk that the Bank has inadequate capital resources: to ensure capital requirements set by the Central Bank of the United Arab Emirates; to safeguard the Bank’s ability to continue as a going concern and increase the returns for the shareholders; and to maintain a strong capital base to support the development of its business. Note 50

ADCB’S APPROACH TO RISK MANAGEMENT

Risk management objectives are clearly defined and communicated across the Bank. The framework is comprehensive and is cascaded down from the Board of Directors to the individual business lines. This framework aims to be flexible enough to incorporate new businesses that the Bank wishes to undertake while ensuring that risks are simultaneously proactively managed within the Bank.

ADCB defines risk appetite as the level of risk it is normally willing to accept while pursuing the interests of our major stakeholders, including our clients, shareholders, employees and regulators. The Bank has adopted its risk appetite statement keeping in mind its role as a key Abu Dhabi Government-owned bank of systemic importance in the UAE. As a result, we are committed to maintaining a strong balance sheet throughout market cycles and to delivering operational service excellence to meet the expectations of our major stakeholders, including our clients, shareholders, employees and regulators. The balance sheet will be characterised by strong liquidity, superior asset quality and a strong capital structure that supports our risk-taking activities, and the asset base will generate a sustainable income stream that is adequate to absorb potential losses, cover all costs, and provide a fair market return to its shareholders without exhibiting undue volatility or sharp changes in trend.

KEY RISK APPETITE PRINCIPLES

To achieve this overarching risk objective, the Bank has the following key risk-appetite principles:

  • Limit overall obligor concentrations and manage sector concentrations
  • Increase granularity of overall portfolio with healthy risk-adjusted returns
  • Fundamentally improve the ‘core engine’ by investing in core business
  • Predefined risk-reward hurdle for all new business
  • Strong drive to improve credit quality in both the existing and new-to-bank portfolios

ADCB has meticulously applied these risk principles in its day-to-day operations to achieve the following results:

Metric 2013
Top 10 obligor concentration Reduced by 7%
Granular business growth Increase of AED 5,287 mn in granular businesses
Portfolio rating New 2013 bookings in corporate book are 4 notches better than the portfolio average.

ADCB has expanded its high-level risk appetite definitions to be more granular at the level of the business unit, and this is expressed both in qualitative and quantitative terms. ADCB’s risk appetite is quantified in terms of maximum loss-taking ability, capital adequacy rates and also liquidity norms that the Bank wishes to maintain under various stress scenarios.

ADCB’s approach to the risk management process comprises four basic components: identification and assessment of risk, measurement of risk, control of risk, and the monitoring and reporting of risk. Understanding, identification and ­management of risk are essential elements for a successful risk management function.

ADCB is primarily exposed to credit risk due to the nature of our portfolio compositions. Our risk-weighted assets (RWA) by risk type are as follows:

Credit RWA AED 134,760 mn
Market RWA AED 4,890 mn
Operational RWA AED 7,217 mn

RISK MANAGEMENT:

RISKS FACED BY ADCB

Analysis, evaluation, acceptance and management of risks or combinations of risks are an integral part of every activity we do.

Some principal risks that the Bank believes could cause its future performance to differ materially from expectations are described in the table below. However, other factors could also adversely affect the Bank’s performance, and so the risks discussed in this report should not be considered to be a complete set of all potential/emerging risks and uncertainties. For a more full description of the risks faced by the Bank, please see the risk factors set out in the Bank’s latest prospectus, found online at http://www.adcb.com/about/investorrelations/financialinformation/adcbsecurities.asp.

The Bank’s approach to identifying, assessing, managing and reporting risks is documented in various policies, processes and standard operating procedures (SOPs).

ADCB’s Specific Risk Factors are:

Risk Category Description Risk management
Increase in non-performing loans due to macroeconomic deterioration. Deteriorating macroeconomic conditions can have an impact on ADCB’s performance and its credit risk profile. The Bank attempts to mitigate this risk by diversifying its portfolio and managing concentrations.

In 2013, every member of the Management Executive Committee has concentration management as part of their performance objective

The ADCB risk strategy focuses on growth of granular businesses, and risk parameters are set to encourage granular growth with an improvement in average portfolio quality.

Quality of credit portfolio due to macroeconomic deterioration ADCB’s credit portfolio can worsen due to quality of bookings. ADCB has underwriting guidelines and minimum credit acceptance criteria to ensure that the quality of bookings improve the portfolio quality. For instance, in 2012, due to disciplined credit process, the portfolio rating improved by 1 notch.
Changes in regulations and laws ADCB is a highly regulated entity, and changes to applicable laws or regulations, the interpretation or enforcement of such laws/regulations, or the failure to comply with such laws/regulations could have an adverse impact on ADCB’s business. The Bank closely watches the key regulatory developments in order to anticipate changes and impact on business.

ADCB participates in regulatory consultative meetings to enhance the financial supervisory framework. ADCB is an active member of various forums such as UAE Banks Federation and actively tries to influence regulations.

Regulatory compliance is closely monitored by the Risk and Audit areas under the oversight of the Board-level risk committees.

Interest rate risk Interest rate risk is the risk resulting from exposures to changes in the level, slope, curvature of yield curves and the volatilities of interest rates. Interest rate risk is controlled by measuring interest rate sensitivity in both the Banking Book and the Trading Book. In addition, stress-test metrics and limits are in place to control the exposure. Swaps are entered on a regular basis to hedge the interest rate risk.
Funding risk Funding risk is the risk that the Bank is unable to achieve its business plans due to its capital position, liquidity position or structural position. Funding is diversified, and it is raised through both retail and wholesale operations. In addition, business is required to self-fund all new operations. We also strive to maintain a large portion of our funding as sticky deposits.
Information security risk Information security risk is the risk of loss of confidential information and disruption of processes due to unavailability of IT systems and may cause financial damage. The Bank proactively identifies top organisational information security risks by continuous evaluation of threats and benchmarking Information Security controls against leading industry standards.

An information risk heat map that maps the bank’s protection mechanism against ever-evolving cyber threats is in place and continually updated. Knowledge from a variety of sources like published research, security forums and regional events are utilised to keep this mechanism relevant.

A comprehensive technology risk management programme covers classification of assets, identification of vulnerabilities and assessment of the risks of all internal assets that enables prioritising and mitigating the internal risks. All internal systems and applications undergo regular security testing, which ensures the effectiveness of security controls.