Commercial Bank of Ceylon Ltd.	B+
Analyst : Det Norske Veritas Rating Scale: A+, A, A-, B+, B, B-, C+, C, C-, D Date: February 9, 2007

DNV's Approach

A Corporate Responsibility (CR) Risk Mapping outlining the main business conduct, environmental, social and employment risks for the Bank was undertaken. Using our proprietary methodology the identified risks were mapped against their potential to affect defined value drivers:

• Brand and reputation
• Regulation and litigation
• Human capital
• Operational efficiency
• Access to markets

The rationale behind our methodology is to provide an estimate of the potential effect on the value of Commercial Bank that individually identified impact areas may have. This means each impact area is weighted according to its likelihood to effect value; risks with high potential value impacts are weighted more highly than others making the need for a proactive management approach apparent. Following the Risk Mapping, the quality of the management approach to each risk area is assessed and an overall rating on a scale of A+ to D is given.

Risk Assessment

Our assessment shows that the majority of Commercial Bank's exposure to CR related risks relate to direct impacts that lie within the Bank's boundaries. The main direct impacts derive from its banking operations in their entirety. The Bank has direct influence over its employment policies, the provision of services and its business conduct. These impacts all have a significant potential to affect the reputation of the Bank, its competitive advantage and its operational efficiency.

Rating Summary

The Bank has identified most of its significant CR risks and is starting to actively manage them at a corporate level. Key risks relating to market-place, business conduct and human resources are all being individually managed as a matter of good business practice. These key risk areas all have strong policy definition and awareness throughout the organisation.

Commercial Bank is a signatory to the UN Global Compact. This internationally recognised set of principles is a suitable vehicle for a company of Commercial Bank's size to use as an overarching policy for the management of CR risks. However, despite awareness of the UN Global Compact being raised through internal publications, interviews within the organisation indicated that attentiveness to the existence of the UN Global Compact and how key areas such as credit policy could be used to address the aspirations of the UN Global Compact do not appear to have been explicitly made.

Commercial Bank has itself identified that it could lose potential business opportunities if it fails to properly evaluate situations with consideration for non-financial aspects. This is the key to strategic consideration of CR and the realisation that decisions sometimes need to be taken from a medium to long term viewpoint.

By closing gaps in verification and assurance mechanisms, benchmarking against best practices, the setting of clear objectives and targets, and undertaking stakeholder disclosure in line with best practices Commercial Bank will be able to further embed CR into its overarching strategy and business practice.

Impact Areas and Management Evaluation

Outline of risk The market-place can be sensitive to a number of issues relating to mis-selling (client information), responsible lending and marketing. Customer service provision through access to branches, suitability of products and monitoring and complaint resolution procedures is also key to the market-place.

Evaluation of management response
Whilst no explicit policies addressing market-place risks are evident, Commercial Bank's approach to such issues is ensconced within its Vision statement "To be the preferred financial services organization in Sri Lanka, having an international presence by the year 2011" which will require a sound approach to the risks identified above. The Bank's Code of Ethics further identifies the requirements for sensitive use of client information and the importance of communication. Whilst unwritten, interviews confirmed that the Bank's policy towards marketing is one of caution and prudence, limiting the potential for mis-selling. The thorough training programmes that are evident within the Bank equip personnel with the knowledge and understanding of the Bank's products.

Complaint resolution mechanisms for customers are in place. It is the nature of Sri Lanka that complaints are often made to senior personnel within a company, and Commercial Bank does not appear to be an exception to this rule. Complaints received in this manner are reportedly responded to within three days. In addition to the emphasis placed on employees to conduct business in an ethical manner, customer data is protected by IT security although elements such as conducting regular Ethical Hacking could be considered.

Every three years a customer feedback survey is completed, the next is due in 2007. The results of these surveys are generally favourable. A key outcome of the last survey identified the perception that staff was not too friendly. As a result, training programmes were changed to incorporate the need to put a "human face" on the Bank's activity.

Market risks are currently identified within the internal risk register and as such are subject to the internal compliance process.

The Bank discloses its tariff systems on its website and as a matter of course when taking new accounts. Disclosure and KPIs regarding other issues such as level and nature of complaints, timeliness of response etc. are not readily available or regularly monitored by the Bank.

Recruitment and Retention

Outline of risk Positioning of business as employer of choice through attractive contractual agreements on remuneration, on-the-job training & development, employee participation in decision-making, lack of transparency in remuneration systems, incentive structures, brain drain: loss of business/knowledge through loss of key personnel.

Evaluation of management response
Commercial Bank clearly recognises that its employees are its main asset. As such there is a comprehensive suite of policies and procedures in place to identify, recruit and through taking a market leading approach, retain its employees. These policies and procedures are found in a combination of the employee guide book and the collective agreement.

Recruitment at the bank tends to be through its `trainee' schemes whereby school leavers and business graduates are taken into the Bank and progress through a one to three year course combining educational and vocational processes. Discussions with the Bank indicated that it receives approximately 15,000 applications for c. 200 positions made available every year. As such, career progression is subject to a well defined policy and procedure, clearly mapping progression through competence based criteria. In terms of remuneration it is the Bank's policy that all salary grades should be pegged to the 75th percentile with an aggressive variable pay element. Other benefits are all at levels dictated by legislation as a minimum. In many cases these are higher than legislative requirements, representing Commercial Bank's position as the leading local bank.

Other training appears well structured and defined training programmes are in place for different grades (trainee, junior executive, executive, senior executive) whereby requisite procedural and technical knowledge is delivered approximately three times per year to those newly promoted to a higher grade. The frequency and availability of refresher training is not as apparent.

Whilst no defined CR training is delivered, CR related articles are a regular feature within the Bank newsletter "COM Pulse" which ensure a level of awareness amongst employees.

Commercial Bank currently employs 3,415 at the end of 2006, which is predicted to rise by 1,000 by 2011. The bulk of this growth will occur at the junior `entry' level positions further enhancing the need for the Bank to continue its current recruitment and retention practices. Turnover is considered to be lower than the industry average, further demonstrating Commercial Bank's apparent commitment towards its employees.

Aspects of HR are currently included in the risk register, particularly skills development and turnover rates and as such programmes in place to address these issues form part of the internal compliance framework.

There is limited disclosure in external reporting with regard to certain employee KPIs such as gender diversity but in terms of internal transparency it is clear that employment policies and processes are clearly communicated by the HR department with requisite checks and balances.

Business Conduct

Outline of risk Impacts associated with the industry concern business practices including, potential conflicts of interest, biased credit assessment procedures, abusive commercial practices, fair competition and insider and market time trading. As a company increases its global presence, employees are exposed to differing business practices that can compromise the integrity of a company or an individual. Anti-money laundering legislation is now a feature of the global financial markets.

Evaluation of management response
In terms of policies addressing this impact area, Commercial Bank has a disclosed code of ethics which, although not benchmarked against international standards, addresses all key issues. The Code is comprehensive in nature and, as well as outlining the Bank's key policies, it provides context around the issues and also takes the reader through a number of case studies and examples of potential situations that may arise. This is considered to be an example of good practice. Through interviews it is apparent that business conduct is seen as a key factor in the maintenance of Commercial Bank's brand and as such is focused on and reinforced at every opportunity through a zero tolerance approach.

The expectation on employees is communicated at the commencement of employment and employees at various levels perform annual `sign-off' of business conduct as part of the internal compliance framework. At the lending officer level a certificate of assurance is required and these cascade up to the senior management level and a requirement for a certificate of propriety to be completed annually.

Figures are available for the number of employees terminated for having breached the Bank's standards. Best practice in disclosure is to disclose the number of employees found to have breached Company standards and also to make estimates of the amount of business turned down by the Bank due to business ethics concerns.

Strategic Positioning

Outline of risk Procedures for managing major restructuring, branch closures, and termination of employment, collective bargaining, engagement in high-level dialogue on long-term strategic staffing issues including training to address long-term skills gap and staff demographics.

Evaluation of management response
Commercial Bank has almost 100% employee representation, the majority of which is through the Ceylon Bank Employees Union (CBEU). Although it should be noted that no discussion with employee representatives took place in the scope of this assessment, the management of Commercial Bank considers itself to have excellent relationships with union organisations. To illustrate this, Commercial Bank quotes the fact that it signed its most recent Collective Agreement with the CBEU one full day before the previous agreement expired. Reportedly, this is the first such time that this has occurred in the country's banking sector.

There is one nominated union representative at each branch, and monthly forums are held with employee representatives. During 2006, the Bank underwent a major restructuring of its pension scheme and it is apparent that this was conducted in a frank and open manner with ample communication, involvement of the employees and opportunities to feedback into the process. The Bank is aware of its need to address a potential gap in its senior grades for 2011 and as such commenced a programme of 360 degree feedback for approximately 30 individuals during the year. It is intended to extend the scope of this programme to include more employees with a view to determining a clear succession planning process for key positions.

Diversity

Outline of risk Equal opportunities, discrimination in recruitment, promotion and dismissal; beyond traditional areas of gender, race and disability, increasing focus on religion, age, sexuality, family rights, HIV/AIDS. Diversity a key driver in servicing minority segments of society.

Evaluation of management response
The employee guide book explicitly addresses discrimination on the grounds of ethnicity, gender, religious or political opinion, language, caste, age or disability. It is not apparent what systems and checks are in place to ensure that this policy is implemented. There is no evidence that the diversity statement is actively followed or monitored in the recruitment and promotion of bank employees.

Publicly available disclosure on the diversity of Commercial Bank employees is limited to age only in the current annual report. Commercial Bank works with the Employers' Federation to obtain the services of physically challenged persons and approximately 8%-9% of its workforce is Tamil. This figure is proportionate to the population of Tamils within Sri Lanka. Female employees represent 27% of the total although this proportion reduces towards senior management positions.

Society and Community

Outline of risk A substantial proportion of the population, particularly in rural areas, do not use or have access to basic financial services. This can be due to a variety of reasons such as distrust of banks, poor credit histories or lack of financial awareness. Therefore access to products (branch network, customer and credit discrimination) and financial/debt management education are key areas to address. Tailoring of products and services for community groups e.g. low monthly deposits and retail-based micro finance for individuals/SMEs are increasingly seen as a necessity. Indirectly, through lending activities, impacts on the community can arise.

Evaluation of management response
There is no evidence of any policies in place that address the Bank's impact in the community. The Bank invests in community development programmes but this appears to be driven by government directives/expectations and tax saving benefits. There seems to be no formal system of identifying community needs and responding to them. In most of the cases, the Bank's initiatives are based on requests from government and 'philanthropy' rather than 'corporate responsibility'. This is by no means intended to detract from the actual philanthropic activities themselves which are beneficial to society and have made an impact for the communities involved.

Regarding access to financial services for the wider populace, Commercial Bank can be seen to be very proactive in its expansion strategy. Whilst the business case for opening new branches is most prevalent in justifying the expansion policy the Bank can also be seen to be opening up access to banking services in areas of Sri Lanka outside of the traditional strongholds of Colombo and South-West of the country which is beneficial to the economy as a whole. This, combined with policies such as supermarket and holiday banking enhance access to services whilst simultaneously enhancing the Bank's brand and market penetration.

Whilst a systematic process by which new products are determined and taken to market did not appear to be in place, it is evident that a `bottom-up' approach is taken towards servicing the needs of customers. Interviews confirmed that initiatives or potential new products are identified by branches that have the knowledge of their local clientele, and subsequently fed through the management chain to determine their suitability. Examples of increasing the accessibility to savings can be seen through savings products that can be commenced with as little as Rs. 100/- or child saving accounts that require no minimum or regular deposits. In recognition of this approach, anecdotal evidence tends to suggest that competitors often follow Commercial Bank's lead in these areas.

Commercial Bank's credit policy contains the objective to serve the legitimate credit needs of the community and to support the development efforts of the Government. There was little evidence provided as to how these aims are systematically addressed within the lending activities of the Bank although there is evidence of support for directed lending programmes.

Working Conditions

Outline of risk Office-based impacts - occupational health: small lifting operations, ergonomics, Repetitive Strain Injury (RSI), work/life balance, employee conduct and monitoring, stress related illnesses and long working hours are more of a risk in the corporate banking segment. Also potential target of terrorism and robberies making employee security a concern.

Evaluation of management response
A Health, Safety and Security policy reflects the Bank's broader statements on safety issues and security addressed in the employee guide book. It is not clear how the implementation of this policy is monitored but an occupational health unit within the Bank provides various programmes such as counselling services and stress management programmes for branch managers. Other issues such as ergonomics are addressed in order to comply with legislative requirements.

Grievance procedures are clearly defined within the collective agreements and as with all companies of a similar size and nature there are some cases passing through the grievance and tribunal procedures. It appears as if all employees are subject to due process and that procedures are followed.

The Bank has a policy of branch rotation, where for a number of business reasons, employees are expected to be transferred to different branches every five years. There is scope within the transfer policy for concessions and every effort to balance corporate versus individual needs is made. Relevant allowances and support structures are put in place for certain branch locations which are classified to identify difficult stations. This classification typically takes into account proximity to schooling and medical facilities amongst other things.

Employee surveys are conducted regularly and the last survey focused on commitment and received a 90% response rate. The findings from this survey were incorporated into the last round of strategic planning by the HR department. Disclosure surrounding working conditions is limited compared to what can be considered good practice. For example, similar organisations often report headline data from employee surveys as quantified evidence of employee policies and processes.

Bribery & Corruption

Outline of risk As a company increases its global presence, employees become exposed to differing business practices that can compromise the integrity of a company or an individual. The finance sector is ranked11 out of a list of 17 industries which are most likely to involve the payment of bribes in order to secure contracts according to Transparency International's (TI) 'Bribery Payers' Index.

Evaluation of management response
Commercial Bank's approach to business integrity and ethics is well ensconced in the day-to-day operations. Recently, particular emphasis can be seen to have been applied to the issue of money laundering due to recent regulatory changes. Guidelines on money laundering have been rolled out across all staff and various other controls are in place such as a limit on the value of transactions individuals are allowed to handle without permission form the line management. Reportedly, incidences reported to the ombudsman are rare and number less than three per year.

Environmental Impacts

Outline of risk
Office-based organisations generate significant amounts of waste and consume large quantities of natural resources, particularly energy, water and paper. These can be influenced through daily operational practices and strategically through the choice and design of new premises. Indirectly, environmental impacts and risks arise through lending activities, such as corporate, project and export financing. Environmental issues can increase the level of operational risk on a credit operation, particularly in high impact or heavily regulated sectors.

Evaluation of management response
Direct impacts of normal working capital financing on the environment are limited and as such, Commercial Bank's policies relating to the environment apply mainly to project lending propositions. There are some activities taking place where the Bank has identified its impact and is looking to minimise its effects. Paper waste is no longer incinerated but is now removed from site and recycled into office stationery which the Bank then purchases for its own use. The amount of paper waste leaving its premises in this manner does not appear to be recorded or monitored regularly. Being able to report quantified data such as this would be beneficial to the organisation in order to demonstrate its commitments and actions to its various stakeholders. There is no monitoring of energy use or emissions from Bank vehicles.

The branch expansion strategy is an area where Commercial Bank could minimise some of its direct environmental impact. Whilst most new branches are placed in leased premises, the Bank directly owns 32 and at least one new building is planned on an annual basis. Whilst quality aspects of both new buildings and retrofits are considered there are currently no environmental standards built into the project design stage (i.e. lighting, energy source, materials choice). All the Bank's buildings are now fitted with energy saving bulbs. The most recent new building incorporated disabled access which is now the Bank's minimum standard for projects.

Commercial Bank's credit policy includes commitment to not entertaining the financing of illegal or unethical activities and avoiding situations where there is a threat to the environment. As a minimum requirement, where required by law, projects that need an environmental licence are only granted credit once the licence is in place. Accordingly, Lending Officers obtain clearance from Central Environmental Authority (a local statutory body) whenever they feel that a particular lending proposal has an adverse impact on the environment. Where the impact of the lending proposal on the environment is severe, the Lending Officers go to the extent of seeking an independent opinion from an expert in the particular field. This element of project lending is supported by a number of checklists within the department covering approval criteria and all loan evaluation forms contain a standard set of questions on environmental issues covering pollution controls and management responsibilities. Commercial Bank conducts some directed lending towards environmental initiatives such as the 'e-Friends' Loan Scheme funded by the Japan Bank for International Cooperation.

Whilst international best practice considerations such as the Equator Principles and Principles for Responsible Investment are geared towards financial institutions of a larger and more international scale than Commercial Bank, the Bank did sign up to the UN Global Compact in 2002. Awareness of the UN Global Compact throughout the organisation has been raised through internal publications. However, interviews within the organisation indicated that attentiveness to the UN Global Compact and its requirements may not yet be fully embedded within the organisation. Some evidence of this is the fact that Commercial Bank is currently listed by the UN as being behind on its Communication on Progress and is at threat of being delisted from the participant list. Also the Bank disclosure on the UN Global Compact was not evident in the external publications.

Social Impacts

Outline of risk
Product: No discernible impact, no physical products. Issues of mis-selling etc. addressed in Market-place Human Rights:
Retail banks rarely infringe on human rights. Access to banking services is not a core human right. Risk slightly increased in corporate banking operations although the nature and scale of Commercial Bank's activities mean limited impacts.

Evaluation of management response
These impacts are not a major concern to Commercial Bank.
As discussed above, the Bank has previously signed up to the UN Global Compact but cannot demonstrate how considerations such as upholding human rights are being proactively managed beyond raising awareness amongst its employees.