Parliamentary Commission on Banking StandardsWritten evidence from Handelsbanken

Board Composition, Role and Effectiveness

1. Svenska Handelsbanken AB (along with subsidiaries, the “Bank”) is a Swedish joint-stock banking company listed on NASDAQ OMX Stockholm. As such the Bank adheres as concerns selection, recruitment and succession of board members to the Swedish Corporate Governance Code (the “Code”). The latest version of the Code came into force in February 2010. The operations of the Bank in the United Kingdom are performed through branches organised in three regions. Each region has a board consisting of internal personnel.

2. As concerns the distinction between executive and non-executive directors, the Bank adheres to the rules laid down in the Code which i.a. concern the distinction between dependent and independent directors. They, in summary, say that “A director’s independence is to be determined by a general assessment of all factors that may give cause to question the individual’s independence of the company or its executive management.” The Board has 12 directors of which nine are deemed independent in relation to the Bank and its management.

(a)As concerns the individual responsibilities of the independent directors it should be noted that directors do not have a specific mandate to “challenge” specific aspects of the Bank’s business. They are free to challenge any aspect they would choose to challenge.

(b)It should in this context be noted that corporate governance practices are likely to differ between the United Kingdom and Sweden, and that the composition of the Board is one such aspect.

3. As explained above, the independent directors do not have a specific role of exercising challenge. Their resources have not changed since 2007.

4. They face no particular constraint. However, please see above.

5. The full Board has on average nine meetings per year. The Board also has three committees (for credit, audit and remuneration issues) which have a number of meetings during the year. All members of the Board receive material ahead of the Board meetings and those who are members of the committees receive material ahead of committee meetings. This enables preparations beforehand and effective meetings. The members of the Bank’s Board have diverse professional backgrounds from various industries and the Board has members from several of the countries where the Bank conducts business. Please also see pages 49–65 in the Annual Report 2011 of the Bank (enclosed).1

6. The Chairman of the Board performs an effectiveness review of the Board annually. The 2012 review is currently ongoing (October/November) through questionnaires and dialogue with the individual directors. Last year’s review concluded that the Board is functioning well and that the work is effective. The nomination committee (which consists of representatives of large shareholders, in accordance with the Code) is informed of the results of the review and the nomination committee also performs additional review activities. Please also see pages 54–55 in the Annual Report 2011 of the Bank (enclosed).2

Risk Governance

7. In its decision about risk tolerance the Board has considered level of risk, long term focus, sustainability (ability to provide services even under stressed conditions) and earnings volatility.

The tolerance for risk is generally very low. The only risk that the Bank actively takes is credit risk, where risk tolerance is low. Credit risks should only be entered into with well known clients where the Bank has or is developing long term relationships and that are located within the geographical area in which branch bearing the client responsibility operates. Strong emphasis is put on collateral of high quality. The credit risk shall be easy to understand/non complex.

All other risks are kept as low as possible and are entered into only to the extent that is necessary to support client needs. The focus is to create profits through margins and fees and not through risk taking.

These views on risk tolerances are codified in Board policies. They are also reflected in the risk limits set by the Board.

The risk tolerance and risk limits are monitored through extensive regular reporting on all relevant risks to the Board and also to the audit committee of the Board. All major loans are also approved in the Board credit committee.

The following changes to the governance structure have been made since 2007:

Board level policies have been further developed to get more detailed and comprehensive regarding risk tolerance, risk control, remuneration, risk measurement and funding.

The responsibilities of the Board audit committee and the Board remuneration committee have been extended to cover a broader set of risk related issues.

The role of the CRO and the risk control function within the Bank has been clarified and further developed both on the group level and on local risk control within business functions. As a part of this, divisions of responsibility between risk control, compliance and finance departments have been developed.

Additional risk limits have been introduced.

Responsibility for funding and risk management of liquidity risk, interest rate risk and FX risk has been centralised to one unit, the treasury department.

The funds transfer pricing system has been developed to fully reflect liquidity risk. For reference the risk and capital management report 2011 is enclosed to these answers.3

8. The CRO reports to the CEO and the CFO. The risk control function has also got a reporting responsibility to the Board. The risk control is organised in two levels, the group risk control and local risk control (within each business line and geographic area). The CRO is guided by policies and guidelines from the Board and the CEO. The heads of local risk control departments report to both the head of the business line and to the CRO. The appointment of heads of local risk control departments as well as decisions about resources, are approved by the CRO.

Employees involved in risk control and risk related activities (risk takers) only receive fixed salary. They have no variable compensation.

Shareholder Engagement

9. Generally speaking there has during the last five years been a change in attitude towards Handelsbanken from many current and potential shareholders among institutional investors. Handelsbanken’s business model and cautious attitude towards risk (which have been in place during a long time) have during the financial crisis proved to be successful and highly appreciated among the investors. We strongly feel that the financial market over the last few years has come to understand and appreciate Handelsbanken’s business model to a much higher degree.

In relation to shareholders’ activities in connection with the Annual General Meetings, the Bank has not experienced any changes in the level of shareholder engagement during the last five years.

Remuneration reforms

10. It should be noted first in this context that variable compensation has always been very limited in Handelsbanken. For example, in 2011 variable compensation constituted only 1.5% of total salaries.

During 2011 the Bank reshaped the remuneration policy to avoid rewarding risk taking with variable compensation. So, for the very limited number of employees who receive variable compensation [see pt.13 below], we now defer between 40% and 60% of variable compensation for between three and five years. Deferred compensation can be adjusted before pay-out, and this is assessed using a number of criteria where risk and compliance form a major part. No further reforms are planned during 2013.

Communicating standards

11. The Bank has a number of policies and guidelines issued by the Board that concern these issues. The most relevant overall are the Ethical guidelines for the Handelsbanken group (enclosed with these answers). The ethical guidelines as well as other related policy documents (such as on conflicts of interest, bribery and improper influence) are reviewed by the Board annually.

These ethical guidelines refer to a “special internal document called Our Way”, a personal copy of which is presented to each employee when they join the Bank. This document, which has been used for decades, describes the Bank’s guiding principles, corporate culture, and resulting decentralised operating model, stressing the importance of individual responsibility and independent thought and action on the part of each employee. Our Way is used as an everyday reference point for employee discussions and decisions throughout the Bank.

12. The main principle is that it is a part of the responsibility of all managers to monitor staff standards. The Bank has a thorough process in which all employees are evaluated annually by their managers (on all levels). The evaluation is discussed between the employee and the manager and forms the basis for an action plan for the employee for the coming year. One essential part of this evaluation is how the employee manages to live up to Handelsbanken’s principles.

In addition, Handelsbanken’s departments for compliance, risk control and internal audit regularly control the adherences to internal rules.

13. Please see above. As regards incentives, it is important to note that in Handelsbanken “fixed salary only” is the standard, and that variable compensation is very unusual. The fixed salary only principle applies to more than 95% of the employees, and is applied without exception to senior management, all staff involved in the Bank’s granting of credits, and employees in the Bank’s control functions.

14. Considering the Bank’s strong culture and low personnel turnover, the room for deviations from the standards is low.

15. At present, we do not affiliate centrally to a professional body or institute in the UK, although we keep this position under review as our operations develop. It can be noted that average “per employee” years of banking experience in one of Handelsbanken’s UK branches will be substantially higher than those within a comparable High Street bank branch. A typical account manager will have worked in banking for around 20 years, and is therefore more than likely to be a member, personally, of one or other professional body or institute. A commonly held qualification would be the “ACIB”.

All of our UK personal banking account managers hold a requisite UK mortgage advice qualification, details of which the Bank monitors centrally for compliance purposes.

In addition, Handelsbanken is a full member of the British Bankers Association, the Association of Foreign Banks, and the UK Payments Council.

Staff Responsibilities

16. A high ethical standard and moral code is one important part in the Bank’s corporate culture.

Being a “culture bearer” is also one of the wage-setting factors, and as such, one aspect of good performance.

Incentives to identify and report risk include:

Strong risk culture and very low tolerance for risks, losses and costs.

No bonuses or other reasons to hide risks.

Strict view on breaches of limits, internal rules and risk tolerance—to hide risks is a severe breach of loyalty.

Clear division of responsibility—it is very clear who is responsible and the individual/department has to deal with problems at an early stage.

Management of losses and risk related problems are handled by the unit that bears the responsibility for the client or risk in question. The person/unit therefore has strong incentives to detect, report and deal with problems at an early stage.

17. Risk culture is important also in this respect. Introduction of new technology, offering greater automation, is done with great care because of the risk of lost judgment and sense of responsibility. Because of this, the Bank does not use scoring based credit decisions with any of its UK customers. The clear division of responsibility has also been important to deal with this issue, since it makes it more difficult to blame other departments, models or false information for poor decisions. If you have the full responsibility, you cannot blame anybody else.

18. Handelsbanken has a single Group corporate goal: to achieve a higher return on equity than peer banks in our home markets including the UK. The Bank’s two keys to achieving this goal are more satisfied customers and lower costs. Thus, for 40 consecutive years, the Bank has achieved its goal through a focus on developing long-term customer relationships. Handelsbanken’s decentralised business model is built to support this: as the people in the Bank with the clearest understanding of their customers’ needs and circumstances, branch staff are given a high degree of local decision-making responsibility. There are no central sales or volume targets which could colour the advice they give to their customers.

Branch profitability is measured regularly, and customer satisfaction is also measured regularly through independent survey (currently at regional level in the UK, but at branch level in Sweden where customer numbers allow this). Client-facing staff, responsible for these long-term relationships, therefore have an incentive to ensure product quality and—when needed—to put pressure on product owners. As a result, living up to this is also a part of our wage-setting factors and one aspect of good performance.

In addition, our all-employee profit-sharing scheme “Oktogonen” has been an essential pillar of the Bank’s business model since 1972, steering employees to focus on long- term customer satisfaction. Oktogonen is a foundation into which an equal allocation of profits is made for each employee if the Group achieves its corporate goal in a given year. Governed by employee representatives, the Oktogonen Foundation invests these sums predominantly into Handelsbanken shares, making employees collectively one of the Bank’s largest owners, with representation on the Handelsbanken Board. Employees cannot access their accumulated allocations and investment growth before the age of 60, thus steering employees towards a long-term perspective in their everyday customer decision making.

(See The Oktogonen Foundation, background summary, enclosed with these answers.)

Risk and Compliance Functions

19. The compliance function in Handelsbanken is an independent control function for the Bank in order to ensure compliance with external and internal regulations as well as best practice.

Compliance shall on an independent basis monitor compliance, and report and assess compliance risks. This includes giving advice and support with regard to any questions related to compliance, informing on new or amended regulation as well as on the risks related to non-compliance. Compliance will also perform controls in order to ensure compliance within the Bank.

Compliance activities are based on a compliance control plan which is prepared on anannual basis. The plan is prepared with a risk based approach whereby highest priority is given to areas where compliance risk is deemed to be the highest.

All processes and routines in the Bank should be monitored with a risk based approach. Compliance risks in the entire group are reported to the CEO (quarterly) and to the Board (semiannually).

20. Handelsbanken does not work with financial incentives. The compliance staff are incentivised by the focus given on compliance in the Bank. Focus is also given by the compliance control plans and by the quarterly reporting made by the compliance officers in the Bank.

Finally, Central Compliance makes an annual evaluation of each compliance function in the Bank.

21. “Good administrative order” is, and has always been, fundamental to Handelsbanken. This has fostered a corporate culture where compliance is given high priority. The Bank has a good understanding that breaches in compliance may lead to sanctions which may cause fines and it may also lead to bad-will, which is bad for the business.

Internal Audit Function

22. The objective of Internal Audit is to provide added value and to improve the Bank’s operations by using a systematic approach in assessing the effectiveness of the procedures for risk management, internal governance and control and ensuring that they are fit-for- purpose.

This is done by examining

that material risks in the operations are identified and managed satisfactorily;

that material financial, management and operational information is reliable, correct and provided in time;

that the operations comply with policies and instructions and also applicable laws and regulations and are subject to high ethical and moral standards;

that resources are obtained based on the economic circumstances and are used efficiently and protected in a satisfactory manner;

that the operations’ plans and goals are achieved;

that work to improve the operations permeates its work with governance and control; and

that important new laws and regulations are identified and managed in a satisfactory manner.

The areas to be covered by Internal Audit’s examination are documented in an audit plan which must be based on materiality and risk. The Head of Internal Audit is responsible for formulating the audit plan after obtaining the operations’ view of material risk areas. The audit plan is established by the Board’s audit committee.

23. The audit organisation is shown in the enclosed chart. The management group of Internal Audit consists of the heads of the five central audit groups: CRR Retail Banking, CRI International and Group Finance, CRT Capital Markets, CRS Subsidiaries and Personnel and CRD IT and also the person responsible for coordinating audit of Compliance and Governance. In addition there are 13 audit groups in the branch office operations, one for each regional bank.

The Head of Internal Audit reports to the Board and provides regular reports to the audit committee of the Board.

The Internal Audit function consists of around 95 employees. The Head of Internal Audit is responsible for the size of the Internal Audit function. The audit resources are described in more detail in the audit plan which is established by the audit committee.

24. Internal Audit will be subject to a regular follow-up of quality by an independent external party. In addition, the Bank’s external auditors perform annual quality assessments of Internal Audit in order to be able to use Internal Audit’s work in the external audit work. The audit committee performs an annual assessment of Internal Audit.

On-going Corporate Governance Developments

25. The overall governance principles of the Bank have remained largely unchanged for the last 40 years with an emphasis on decentralisation, individual responsibility and effective internal control. This model has proven highly successful for the Bank, and although Handelsbanken closely follows the development of corporate governance principles, the Bank’s decentralised model is not going to change within the foreseeable future.



The Oktogonen Foundation is a profit-sharing foundation, with 22,000 unit-holders across ten countries. All unit-holders are, or have been employees of Handelsbanken.

Background and Purpose

In the early 1970s, incoming Chief Executive Jan Wallander set out a single, simple corporate target for Handelsbanken—that each year the bank would attain a better return on equity than its competitors. Wallander believed that employee commitment was the central factor in achieving this target, and this confidence in individual employees created Handelsbanken’s unique spirit.

Where Handelsbanken successfully achieved this new target, it was reasonable that all employees share some of the profits, since all had contributed to this positive outcome. Thus, in 1973, all employees received their first equal ‘unit’ in the newly formed foundation, named Oktogonen. The board decided to continue making allocations to Oktogonen for every year the company target was achieved, with a limit set so that allocations could not be unreasonably high.

Equal Appreciation for all Employees

The ongoing purpose of Oktogonen since this initial allocation has been to share part of the bank’s profits with its employees collectively, in recognition of the integral role they play in generating its profits. It is not a bonus, since all employees, regardless of salary level or position, get an equal foundation unit (ie the same monetary value in absolute terms), with the individual employee unable to affect their personal allocation.

Thinking and Acting for the Long-Term

In line with Handelsbanken’s corporate philosophy, Oktogonen operates on a very long-term basis; no employee is able to withdraw his or her units before the age of 60. This lengthy period between unit allocation and payment encourages a long-term approach to profitability, which we have shown can best be achieved through a clear focus on long-term customer satisfaction, cost and risk management. It fosters a culture of “lifelong” employment and increasing staff commitment and ownership.

Ownership and Power

The Oktogonen Foundation holds more than 10% of Handelsbanken shares, which indirectly makes Handelsbanken’s employees one of the two largest shareholders. This sense of ownership is a strong reason why employees care about the bank and its success.

A Genuine win win’ Employee Reward Scheme

Handelsbanken has attained a better return on equity than the bank’s competitors in every single one of the 40 years the foundation has been in operation, while the bank´s finances and international rating are both outstanding. These achievements are due to the motivation and efforts of the bank’s employees, which Handelsbanken rewards, not with short-term individual bonuses, but with one long-term, collective profit-share scheme, consistent with the corporate ethos and culture of the bank.

26 October 2012

1 Not printed. Online at:

2 Not printed. Online at:

3 Not printed. Online at:$file/riskkaphant_pelare3_feb11_eng.pdf

Prepared 24th June 2013