Corporate Governance in International Active Firms - Summary

Poor corporate governance of financial institutions was certainly an important contributing factor, among many, to the financial crisis. With some notable exceptions, many bank boards did very little to intervene in management’s strategy and risk policies. During the session the recurring theme was that regarding governance, it wasn’t the rules as much as the behaviours that made the difference. The analysis of the behaviour of the board and its integrity, expertise and transparency was the focus of much of the session. It was also clearly recognised that board structures and representation differed in various countries and that it was difficult to come up with more than principles that could apply across jurisdictions.

Conflicts of interest among different levels within the hierarchy of the banks were perceived as one of the main problems. Failures in governance, however, are difficult to address very specifically; effectively what is being asked is for boards to ‘do better’ and ‘be more engaged,’ something that is very difficult to do through regulation or legislation, as it is very difficult to ‘regulate behaviour’.

One theme was the balance between executive and non-executive board membership, together with the composition of boards. Too much diversity, and their education will be very time consuming; too little and there may be bias and a lower likelihood of challenging their peers. Much of the discussion centred on the value of expertise. There was, however, a clear consensus on the board’s need to challenge management decisions and views.

So how are the regulators going to interact with boards? To what extent and at which stage of the process should they be called upon?

The role of board committees was also discussed. The Chief Risk Officer (CRO) and Risk Committee, together with the Audit Committee were felt to need the most active and interventionist roles, as well as the most interaction with regulators. 

Everyone agreed that the board was in need of disclosure and increased information flows, not only within the company but also with regard to the whole market infrastructure.

Discussion then moved to litigation and sanctions as a tool for ensuring active governance by boards. Some felt that there should be greater civil and criminal liability for the directors, or alternatively, the increased use of sanctions. Litigation was perceived to be an extreme measure, but some felt that personal fines would be a more efficient and rapid way of ‘encouraging’ correct behaviour.

Lastly, the session touched on remuneration, and its link to governance and the crisis. Participants and the audience felt this issue was more about politics than governance.