Governance
Corporate Governance & the Banking Crisis
Wayne Dass, CFA
Recent history in the financial sector has revealed grave shortcomings in corporate governance.“ While strong corporate governance may be able to carry a weak bank through very difficult times,” the author argues,“ weak governance … can easily wreck a financially strong bank, even in the best of times.” This article suggests areas for improvement, including an examinaton of the role of the Board, an embrace of aggressive Enterprise Risk Management, improvements in regulatory frameworks, and, last, but far from least, a greater role for independent and professional rating agencies.
The 2008 financial crisis revealed deep shortcomings in corporate governance. Indeed, perhaps when they were most needed, existing governance standards failed to provide the required checks and balances that are so critical to engender sound business practices in both financial and non-financial firms. Lest we waste the crisis as they say, I would like to shine a light on some key governance issues with particular reference to banks, which in my view remain as relevant today as they were in the pre-crisis period.
The Role of the Board: Boards are simply not as effective as they should be: A key function of a bank’ s board is to monitor the effectiveness of the bank’ s management practices and initiate changes as needed. This monitoring of governance by the board also includes a continuous review of the internal structure of the bank to ensure that there are crystal clear lines of accountability for management throughout the institution, as well as integrity in the bank’ s accounting and reporting systems, and appropriate systems of risk management, financial and operational control.
The research shows that this internal aspect of governance did not receive the attention it deserved by boards of financial institutions in the build-up to the crisis, and is probably still the case post the crisis. The impact of this was that the reliability and independence of reports coming to the board were called into question due to a lack of proper separation between line management or profit centres and risk management or control functions. To be clear I am not advocating‘ micro managing’ by the board, which by the way in my view are two of the most misused words in management discussions today, but rather it is about encouraging boards to be more comprehensive and effective in their monitoring of governance and governance structures in the company, thereby ensuring that they are being fed with reliable and accurate reports for decision-making.
Another issue which caused problems worldwide and is certainly relevant to the Caribbean is the dominance of boards by the CEO, which may have had the effect of stifling critical enquiry and challenge essential for objective, independent judgement. The strength of the Chair is obviously called into question here and it is important for the Chair to play a key role in ensuring that the board tackles the most important issues facing a company and that all members are comfortable to raise issues and concerns at all points in time.
Yet another issue is multiple directorships, a common feature in the Caribbean. The issue here is that board members should be able to commit themselves effectively to their responsibilities, and service on too many boards can interfere with the performance of board members. In my opinion the Chairman is best placed to judge this, not only from the track record of attendance by the member, but also from the quality of contributions when he or she does attend. I am sure we are all familiar with the super director who attends board meeting without diligently reading the prepared board papers and“ shoots from the hip” throughout the meeting much to the dismay and pain of senior management who might have spent countless hours preparing these papers. The question of availability of suitable candidates in the Caribbean always arises, but I believe the aim of including not only experienced CEOs of other companies but also senior executives, both male and female, with expertise in specific areas widens the pool.
The quality of board members is a particular concern for banks, as fit and proper person tests often do not fully address the issue of competence. Going forward, for banks and financial companies where board members are subject to a fit and proper
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