How crisis led Cyprus to reinforce governance standards

29 August 2017


Pressures of international finance spurred Cypriot authorities to strengthen corporate governance.

Cyprus was one of the countries to be gravely affected by the financial crisis. As a result, it was cut off from the international financial markets and resorted to rescue packages financed by the International Monetary Fund, the European Commission and the European Central Bank (collectively known as the Troika).

During 2013, the two largest Cypriot banks requested state aid, mainly due to the capital shortfalls from the losses incurred on their sovereign debt holdings as a result of the Greek private sector involvement.

Further to that, the substantial exposure of the Cypriot banks to the Greek economy and the deterioration of the domestic economic conditions, had adversely affected the quality of the assets of the banks and led to a significant increase of the non-performing loans and the need for increased provisions.

“Reform and modernization of the framework of legal and corporate governance played a large part in the economic adjustment program”

Because of this, the Central Bank of Cyprus, in its banking supervisory role, required both banks to strengthen their corporate governance and risk management through tougher governance standards.

In addition to the central bank’s rules, and as a condition of the international financial support, the government was obliged to commit itself to a multifaceted economic adjustment program. Reform and modernization of the framework of legal and corporate governance played a large part in this.

Coming up short

The crisis revealed many shortcomings in corporate governance, particularly in the banking sector, with the collapse of Marfin Laiki Bank the most well-known example. The weak governance of the bank, as well as the strategic direction and unsound policies, were central to its collapse.

The communication with shareholders and other stakeholders was poor and the weak leadership and management led to the failure of the board to provide a balanced and clear assessment, and information on how the bank would achieve targets.

Nonetheless, the value of the personal share options of the executives, alongside pay and bonuses, steadily increased. This was despite the executives inability to productively use the resources of the bank and improve its financial performance. Another crucial issue was the independence of the board of Bank of Cyprus, a financial group.

More specifically, back in 2008, years before Marfin Laiki’s implosion, one of the largest developers in Cyprus and biggest debtors of Bank of Cyprus became chairman of the firm, at a time when the real estate bubble was in full swing in Cyprus.

The conflict of interest in one of the largest borrowers of the bank also being the chairman was acknowledged in an interview with him for Stockwatch in 2009.

Strengthening the system

Weaknesses in corporate governance practices in the Cypriot banking sector have been identified as an essential factor in the financial crisis in the island. To this end, a stricter framework and higher standards of corporate governance are required by all local entities, in order to promote correct behavior in the interests of all their stakeholders.

Cyprus is now looking to address the previous weaknesses in governance through recent changes to the Code of Corporate Governance and other developments.

Board structure

A one-tier board structure is a legal standard for all types of entities. However, the code states that every listed company should be headed and controlled by an effective board of directors.

This should include a balance of independent non-executive and other directors, so that no individual director or any small group of directors can dominate the decision-making process.

In addition, the roles of the chairman and chief executive should not be held by the same individual. The division of responsibilities between them should be clearly established, set out in writing and agreed by the board.

“The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board”

Gender diversity

There is an improved balance between men and women on boards, according to the latest statistics from the Cyprus Stock Exchange in April this year. There was a slight increase of the percentage of women participating on boards of companies listed on the regulated market (to 10%) and on the emerging companies market (to 16%) in Cyprus.

A significant increase is shown of women in managerial positions of Cyprus companies, not limited to the ones listed on the regulated market or the emerging companies market mentioned above. In general, the overall percentage of women on boards of Cyprus corporations has increased to 33%, a record high.


A formal and transparent procedure should be established by all Cypriot entities to develop a policy on executive directors’ remuneration and for fixing the pay packages of individual directors. It is important to note that directors should not be involved in the decision-making process of their remuneration in any way.

The code states that a remuneration committee should be established to make recommendations to the board on the context and level of remuneration and to determine specific packages.

The remuneration committee must consist exclusively of non-executive directors to avoid potential conflicts of interest and at least one of its members should have an appropriate level of experience and expertise of the remuneration policy.

The report on corporate governance to shareholders should also include a statement of the remuneration policy and the criteria followed, as well as details of the remuneration of both the executive and non-executive directors.

Disclosure requirements

In addition to the report on governance to shareholders, further disclosures are required for different types of entities. In particular, the Transparency Law requires more financial disclosures from legal entities whose transferable securities have been admitted to trading on a regulated market.

Quarterly financial reports, in the event of specific circumstances, as well as semi-annual financial reports containing interim financial statements by every issuer of shares or debt securities, are some of these.

“The banking crisis in Cyprus has made all local businesses and regulated authorities realize the importance of good corporate governance and risk management strategies”

Further disclosure obligations are imposed by the Market Manipulation Law to eliminate insider dealing and market manipulation.

In particular, section 11 of the Market Manipulation Law states that companies that deal in financial instruments traded on a regulated market have the obligation to publish inside information that directly concerns them and significantly affects the prices of the relevant instruments.

This inside information should be published, on time, on the website of the issuer and announced to the Cyprus Stock Exchange, which will then publish it on its website, and to the Cyprus Securities and Exchange Commission.

Cyprus Stock Exchange

In order to improve the current trends and turn compliance into an opportunity to improve the economic profile of local business and not just a bureaucratic burden, the Cyprus Stock Exchange has established an advisory committee.

This committee comprises representatives of local authorities and market participants, and is responsible for the submission of suggestions to the Council of Cyprus Stock Exchange in order to keep the governance code updated in relation to new local and international developments and practices.

It is important to note that these are only some of the changes to the code and recent governance developments. The banking crisis in Cyprus has been an important chapter for all local businesses and regulated authorities, through which all parties have realized the importance of good corporate governance and risk management strategies.


Article published in Governance & Compliance magazine, September 2017 issue (ICSA: The Governance Institute – UK). Find the publication here.