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NATIONAL BANK CORPORATE GOVERNANCE PRACTICES

The text in this section shows in detail how Bank practices comply with the Canadian Securities Regulators Guidelines with respect to corporate governance.

Details:

Summary of the Corporate Governance Practices of the Bank

In June 2005, the Corporate Governance Guidelines of the Canadian Securities Administrators (the “CSA Guidelines”) came into force. The Bank, which keeps abreast of developments in this area at all times, complies fully with these new rules. Corporate governance practices are, in fact, an essential component of the Bank’s operations. The Bank’s policies and practices comply with the best practices approved by specialized corporate governance bodies, as shown in the statement of the Bank’s corporate governance practices set out below.

Board of Directors

Composition of the Board

  • Independence of Directors
    Definition. The Bank complies with the definition of “independence” pursuant to the CSA Guidelines with respect to both the independence of members of the Board and of members of the Audit and Risk Management Committee.

Independent majority. The majority of the directors, including the Chairman of the Board, are independent. The independence of the directors is determined annually by the Board, based on the recommendations of the Conduct Review and Corporate Governance Committee, in light of the regulations in force and corporate governance best practices. The information provided by the directors in a semi-annual questionnaire listing all the relevant data is also used in determining independence. The independent members of the Board meet in camera after each regularly scheduled meeting of the Board.

Non-independent directors. At the end of the most recently completed financial year and as at the date of the Management Proxy Circular in connection with the Annual Meeting of March 8, 2006 (the “Circular”), the Conduct Review and Corporate Governance Committee was of the opinion that 11 of the 14 Bank directors were independent. The three non-independent directors are Lawrence S. Bloomberg and Réal Raymond, employees or Officers of the Bank or of one of its subsidiaries, as well as Gérard Coulombe, a partner of Desjardins Ducharme, L.L.P., a law firm that provides legal services to the Bank and its subsidiaries for which it receives remuneration.

Outside board memberships. The Bank lists all the boards on which its directors serve. In the “Information on Nominees for Election to the Board of Directors” section, it discloses the names of the public companies on whose boards each director currently serves or has served in the previous five years. The Board issued a directive under which all directors must notify the Chair of the Conduct Review and Corporate Governance Committee before accepting an invitation to serve on another board. Together with the Chairman of the Board, the Chair of the Conduct Review and Corporate Governance Committee assesses whether directors will be involved in conflict of interest situations or apparent conflicts of interest and whether they remain capable of performing their functions as a director of the Bank.

  • Nomination of Directors and Re-election
    Charter of Expectations. The Board has created a Charter of Expectations in order to formally set out the requirements of the Board concerning directors, both in terms of individual characteristics and their contribution to the Board. The Charter of Expectations describes in particular the aptitudes considered in nominating a director and recommending an existing director for re-election, if applicable. It also states the requirements for ensuring that directors discharge their duties adequately and effectively. The Charter of Expectations advocates individual knowledge and qualifications that fit with those of the other directors so that the Board can properly fulfill all the aspects of its role.

Nomination. The Conduct Review and Corporate Governance Committee, in cooperation with the Chairman of the Board, administers the nomination process for new directors and forwards its recommendations to the Board. This Committee is entirely composed of independent directors. The Committee recommends the nomination of new directors meeting the following main selection criteria: expertise enabling them to make an active, informed and profitable contribution to the management of the Bank, the conduct of its business, and its orientation and development, availability, a reputation for honesty and integrity, an understanding of regional, national and international issues and a personal contribution that complements that of the other members of the Board. The Board’s expectations for new directors are discussed with potential candidates prior to their nomination in order to ensure that they are sufficiently available and competent to properly fulfill their role.

Re-election. The Conduct Review and Corporate Governance Committee also annually assesses the eligibility and availability of directors who are candidates for re-election. Thus, barring any exceptional circumstances, a director may not have his mandate renewed for more than 15 successive years. The computation of a 15-year tenure commences in 1998 for directors serving on the Board at that time.

Majority voting. The Bank also adopted a policy whereby any nominee for election as a director at the Annual Meeting of Shareholders, for whom the number of votes withheld exceeds the number of votes cast in his or her favor, will be deemed not to have received the support of shareholders, even if he or she is elected. A director elected in such circumstances must immediately tender his or her resignation to the Conduct Review and Corporate Governance Committee, which will submit a recommendation to the Board. Within 90 days of receiving the final voting results, the Board will issue a press release announcing the resignation of the director or explaining the reasons justifying its decision not to accept the resignation.

  • Orientation and Continuing Education
    Directors follow an orientation and continuing education program so that they can become familiar with and broaden their knowledge of the operations of the Bank and its subsidiaries. The program is composed of three parts: orientation of new directors, continuing education in the form of training sessions and presentations made by different professionals, and individual meetings between directors and executive officers. The program provides an overview of the Bank, how it functions, its operations and its main challenges.

Presentations. Presentations are made to directors on various aspects of the Bank’s operations during regular Board meetings. During the most recently completed financial year, directors attended presentations regarding wealth management in the Personal Banking segment, regulatory developments concerning the Act and the bank/insurance sector, the Bank’s strategic planning, banking partnerships, the role of the Board in managing certain risks, as well as sources and use of capital.

Orientation. As part of their orientation program, new directors receive training concerning, in particular, the functioning of the Board and the Bank’s vision, main segments and business challenges, the audit and control system and the Bank’s client base and human resources. The new directors also participate in training sessions in the form of meetings with the Bank’s Executive Committee members, the President and Chief Executive Officer, and the Chairman of the Board.

Directors’ Handbook. Directors are also given a Directors’ Handbook, which describes the responsibilities and obligations of directors, the Bank’s organizational structure, the mandates of the Board and its committees as well as the mandates of the Chairman of the Board and the committee Chairs. In addition, it contains the Bank’s Code of Professional Conduct.

  • Size of the Board
    The Committee is responsible for reviewing the size of the Board from time to time in order to ensure its effectiveness based on the competencies, aptitudes and experience sought by the Board, for developing and periodically reviewing the selection criteria for directors so as to reflect regulatory requirements, expectations and current and future needs of the Board, and for reviewing the existing procedures from to time to time so that the said criteria can be applied. This year, the Board is composed of 14 directors, and the Committee and the Board are of the opinion that this number is appropriate since the required competencies, knowledge, skills and qualifications can be brought together while promoting open discussion and a spirit of cooperation among directors.

Mandate of the Board

During the most recently completed financial year, the Board reviewed and amended its mandate so as to adequately reflect what the Board does and how, while ensuring compliance with new regulations. The Board’s complete mandate is provided in Schedule B of the Circular.

  • Strategic Planning
    Under its mandate, the Board is responsible, in particular, for overseeing the Bank’s operations in relation to its business objectives and strategic plan. The Board therefore periodically reviews and approves the strategic plan in which the Bank establishes its mission, vision, objectives and strategy. In this regard, it considers business opportunities and related risks as well as business plans covering the Bank’s major activities. Thus, in the most recently completed financial year, presentations were made to the Board on three-year strategic plans for the various Bank segments. These presentations typically include strategic orientations and initiatives, related challenges and risks, and relevant financial considerations. They allow the Board to have an overview and a detailed picture of the current status and future projects of each Bank segment and of the Bank in general so that it can adequately and effectively oversee the Bank’s operations.
  • Oversight of Management
    The Board fulfills its oversight function of management by receiving regular reports from the various segments and through discussions with the senior management of these segments. It also oversees management, assisted by the Human Resources Committee, by relying on the performance appraisal of the President and Chief Executive Officer based on the objectives set at the beginning of the year and by studying the report presented by the President and Chief Executive Officer to the Board on the performance of executive officers. The Board, in particular, ensures as much as possible that the President and Chief Executive Officer and the other executive officers help create and maintain a culture of integrity within the Bank, notably by promoting the Code of Professional Conduct and related policies and through the performance review of senior management. It also oversees the training, development and succession planning process for senior management. The Board fulfills these obligations in conjunction with the Human Resources Committee.
  • Risk Management
    Together with the Audit and Risk Management Committee, the Board examines and approves the Bank’s overall risk philosophy and risk tolerance; it recognizes, identifies and understands the Bank’s main risks (including credit, market and operational risks as well as outsourcing risks) and ensures that appropriate systems are set up for the effective management of such risks. At least quarterly, the Audit and Risk Management Committee receives detailed reports from the Bank’s Risk Management sector on the sector’s activities, the general allowance for credit risk, impaired loans and loan losses, compliance with regulatory capital ratios and obligations under the Basel Accord. The Board annually reviews and adopts all the major policies concerning the Bank’s activity-related risks while ensuring their implementation. The Audit and Risk Management Committee converses on a regular basis, and in private, with the internal auditor and with the external auditor. For more information on risk management structure and systems, please refer to the “Risk Management Approach” section in the Bank’s 2005 Annual Report.
  • Communicating with Clients, Shareholders, Investors and the Public
    Information disclosure. The Board is an advocate of transparency in disclosing information to all shareholders, investors, clients and the general public. For this purpose, the Bank has ratified an information disclosure policy, which describes in particular the information to be disclosed, whether it is financial or other information, when it can be disclosed and by what means. It therefore establishes complete, accurate and timely disclosure procedures between the Bank, its clients, its shareholders, financial analysts, media and the general public and prohibits the selective distribution of information. The Bank also set up a Disclosure Committee whose mission is to ensure that information disclosure procedures and controls and internal financial reporting control procedures are implemented and operational. This Committee reviews the Bank’s disclosure policy on a regular basis and recommends it for approval to the Board.

Measures for recording reactions of stakeholders. The Board sees to it that measures are implemented to gather the reactions of all Bank stakeholders. The Bank responds to questions from shareholders, investors and financial analysts through the Investor Relations Department, the Corporate Secretary’s Office or National Bank Trust Inc., the Bank’s transfer agent and registrar. Clients with special concerns or needs may contact their branch or TelNat. If a complaint cannot be resolved through the regular administrative channels, clients may contact the Bank’s Ombudsman. Interested parties may contact the independent directors and the Chairman of the Board by e-mail at: boardofdirectors@nbc.ca. Moreover, the Bank has established the Policy for Reporting Irregularities Relating to Accounting, Internal Accounting Controls and Auditing Matters (the “Whistleblowing Policy”) and procedures concerning (i) the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters and (ii) the possibility for any person, including employees, to report any irregularity regarding accounting, internal accounting controls or auditing matters on a confidential and anonymous basis.

  • Internal Control and Management Information Systems
    The Board, in conjunction with the Audit and Risk Management Committee and the Disclosure Committee, examines audit and internal control processes and management information systems to ensure their integrity and effectiveness. Moreover, in cooperation with the internal auditor and management, the Bank’s policies and internal control mechanisms are reviewed regularly.
  • Corporate Governance
    Lastly, through the Conduct Review and Corporate Governance Committee, the Board is responsible for studying, preparing, implementing and overseeing the Bank’s corporate governance rules, policies and procedures.

Business Ethics

  • Code of Professional Conduct
    Application and content. The Bank has a Code of Professional Conduct (the “Code”), which sets out the obligations of its employees, Officers and directors relating to professional conduct, to the extent it applies to them. The Code contains, in particular, the duty to act honestly and with integrity, to follow the law, to treat others equitably and with respect, to keep information in the strictest confidence, to avoid conflicts of interest and to respect the organization. The complete Code of Professional Conduct is available in both English and French on the website of the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

Update and failure to comply with the Code. The Conduct Review and Corporate Governance Committee reviews the Code itself at least every two years and approves any updates. The Bank’s management must report any major violations of the Code to the Committee, and submit an annual report to the Committee on the procedure guaranteeing compliance with the Code. In the event of a breach of the Code by a director or an Officer, the Board will disclose the omission, particularly through a notice of material change filed with the Canadian Securities Administrators.

  • Conflict of Interest
    Duty to report. The directors have a duty to report any conflict of interest to the Chairman of the Board or to the Chair of the Conduct Review and Corporate Governance Committee. Directors do not participate in the discussions and abstain from voting when any decision is made by the Board regarding a company to which they are related.

Independent judgment. In order to ensure directors’ independent judgment during the review of operations and contracts in which a director or an Officer has a material interest, the Conduct Review and Corporate Governance Committee, in conjunction with the Chairman of the Board, reviews the directorships of directors by examining in particular the following aspects: the sector of the contemplated company, the business ties between said company and the Bank, the number of outside boards on which the director in question serves as well as the number of Bank directors already serving on the board of such company.

Measures to encourage and promote an ethical business culture. The Board advocates a culture of ethical business conduct and integrity throughout the Bank. In order to achieve this objective, it attributes great importance to compliance with the Code. Moreover, a Disclosure Committee was set up to ensure that financial information is adequately communicated. Lastly, the Bank implemented its Whistleblowing Policy.

Remuneration

  • Remuneration of Directors
    Principles. In order to provide adequate remuneration and recognize the ongoing and increasing complexity of the Bank’s business, the Board, on the recommendation of the Conduct Review and Corporate Governance Committee, has adopted a remuneration program for directors. The purpose of this program is to provide the Bank with the tools required to recruit and retain qualified individuals to serve as members of the Board and contribute to the Bank’s success. The program also aims to align the interests of the members of the Board more closely with those of the Bank’s shareholders. The Bank offers directors remuneration that is commensurate with that of its reference market.

Retainer and meeting fees. A retainer is paid to directors for serving on the Board. Committee members and committee Chairs, as well as the Chairman of the Board, receive additional remuneration. Board members are also paid fees for their attendance at meetings of the Board and of the committees on which they serve. For more information about the amounts allocated, please refer to the “Remuneration Paid by the Bank and its Subsidiaries to Directors” table and the “Record of Attendance and Remuneration of Directors” table of the Circular, which describe the remuneration paid to directors in the most recently completed financial year. In addition, the Bank and its subsidiaries reimburse directors for the expenses they incur to attend meetings.

Holding of shares or DSUs and share ownership requirements. Directors are required to hold Bank common shares or DSUs valued at not less than five times the amount of their annual retainer as a director of the Bank. A DSU is a right which has a value equal to the market value of a common share of the Bank at the time the DSUs are credited, i.e., quarterly, to an account in the director’s name. Additional DSUs are credited to that account when dividends are paid on common shares. DSUs can only be cashed when the director leaves the Board. Directors have five years from the date they take office to attain this level of shares or DSUs. A portion of the retainer for directors as well as part of the remuneration paid to committee members and Chairs must be paid in the form of Bank shares. Directors may choose to receive their annual retainer and meeting fees in the form of cash and/or common shares and/or DSUs. The number of shares and DSUs held by the directors is indicated in the “Information on Nominees for Election to the Board of Directors” section of the Circular.

Directors who are also Bank Officers. The directors of the Bank who are also Officers of the Bank do not receive any remuneration in their capacity as directors of the Bank or any of its subsidiaries.

Other remuneration paid to a director. During the most recently completed financial year, only one director received, directly from one of the Bank’s subsidiaries, remuneration other than that received in his capacity as a Bank director. Under a service contract entered into in November 2004 with National Bank Financial Inc., Lawrence S. Bloomberg serves as advisor to National Bank Financial Inc. and National Bank Financial Ltd. and, as such, received an annual retainer, commissions, a business development allowance and reimbursement for various administrative expenses incurred when carrying out his duties. For the financial year ended October 31, 2005, Mr. Bloomberg received a total of $636,178.

  • Compensation of Officers
    The Human Resources Committee is responsible for determining the total compensation of the Officers of the Bank. It therefore regularly reviews the existing compensation plans so as to ensure that they promote the achievement of the Bank’s business objectives without, however, being prejudicial to its sustainability, solvency and reputation. The Committee examines and recommends that the Board approve the salary policy, the total compensation programs, the distribution method, and other employment conditions as well as any amendments that may be made to them from time to time. The Human Resources Committee is also responsible for examining the various components of Officer compensation, such as the salary increase envelope and individual increases, the annual bonus envelope and the long-term variable compensation envelope and awards, and for recommending that said components be approved by the Board. For more information about Officer compensation, please refer to the “Report of the Human Resources Committee” section of the Circular.

Board Committees

The Board is assisted by three committees in the performance of its functions: the Conduct Review and Corporate Governance Committee, the Audit and Risk Management Committee and the Human Resources Committee.

  • Independence
    The Board committees are composed exclusively of independent directors. After each regular committee meeting, they meet in camera, i.e., without the presence of members of management, who are invited from time to time to committee meetings. A list of committee members is found at the end of each committee’s report in the Circular.
  • Mandates
    Committee mandates. The committees reviewed their respective mandates in order to adequately reflect what they do and how, while ensuring compliance with new regulations. The mandate of each committee can be found in the “Corporate Information” section of the Bank’s website (www.nbc.ca).

Mandates of Board Committee Chairs. The Board also established mandates for the Chair of each committee in order to formalize and properly identify their respective responsibilities. These mandates establish their duties in holding committee meetings, their role regarding the composition and dynamics of the committees and their relationship with the senior management of the Bank.

Audit and Risk Management Committee. The summary of the financial literacy of the members of the Audit and Risk Management Committee, the policies and procedures for awarding contracts for non-audit services and a description of the fees paid to the auditor can be found in the “Report of the Audit and Risk Management Committee” section of the Circular.

  • External Advisors
    General powers. The Board committees have the necessary authorization to hire external consultants and set their remuneration, at the Bank’s expense.

Services of human resources consultants. The Human Resources Committee retained the services of human resources consultants during the most recently completed financial year. The names of these consultants, a description of their respective mandates and the fees paid to them can be found in the “Principles Governing Officer Compensation” section of the Circular.

Evaluation

  • Role of the Conduct Review and Corporate Governance Committee
    The Conduct Review and Corporate Governance Committee is responsible for implementing an evaluation process of the performance and effectiveness of the Board, its committees and the directors in executing their mandate. In the most recently completed financial year, the Board, through the Conduct Review and Corporate Governance Committee, reviewed and amended its evaluation process in order to update the process so as to gather more qualitative information and to bring the process into line with the responsibilities described in the mandates of the Board and its committees. The results are discussed at a meeting of the Conduct Review and Corporate Governance Committee, and a report is subsequently submitted to the Board. The self-assessment results allow the needs of the Board to be identified in terms of knowledge and expertise in certain specific areas.

Evaluation of the Board and its committees. The evaluation questionnaires of the Board and of its committees are sent to an outside firm, which compiles and analyzes the results in order to maintain privacy and confidentiality. The analysis is then sent to the Chair of the Conduct Review and Corporate Governance Committee, who discusses the analysis with the Committee members and then makes an overall report thereon to the Board. The Board evaluation questionnaire considers the main responsibilities of the Board as determined in its mandate, its operations, its composition and its relations with management. The evaluation questionnaire for Board committees covers basically the same aspects, addressing more specifically the functions of each committee, as described in their respective mandates.

Individual self-assessment. Individual self-assessment results are sent to the Chairman of the Board. One-on-one meetings are then held to expand on certain aspects considered in the evaluation questionnaire and based on the previously described Charter of Expectations for Directors. The Chairman of the Board is also subject to a review by all Board members as part of a process overseen by the Conduct Review and Corporate Governance Committee.