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Corporate Governance & The Financial Crisis

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CORPORATE GOVERNANCE AND THE FINANCIAL CRISIS
SUMMARY OF OECD CONCLUSIONS AND EMERGING GOOD PRACTICES TO ENHANCE IMPLEMENTATION OF THE PRINCIPLES

Introduction

At Majlis Partners we believe that the pragmatic approach for Financial Institutions (“FI’s”) within GCC is to learn from the mistakes and wisdom of others. This OECD document draws on the painful experience of FI’s across the globe and the lessons drawn from that experience by the governments of 30 countries. The result is a collection of insightful findings which are factually based and have universal application.

GCC FI’s should benchmark their own corporate governance against the OECD Conclusions in order to identify areas which could or should be strengthened.

Majlis Partners has the expertise to deliver this benchmark for your FI and to recommend, where appropriate, the improvements that are suitable for your company, reflecting its unique circumstances.

One size does not fit all.

For more information please contact:
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Tel.: +971 50 456 1644

Summary

The OECD Conclusions document was created to assist companies and policy makers in implementing the OECD Principles more effectively. There is no single silver bullet delivering a universally applicable solution and both the Principles and these Conclusions need separate assessment for each company, properly reflecting its size and complexity.

Laws and regulations are only part of the answer. It is necessary for responsible Boards to voluntarily implement applicable standards. To wait for more legislation is to misunderstand the Principles.

In general terms, weaknesses in remuneration, risk management, Board practices and the approach by shareholders on exercise of their rights all played an important role in the development of the financial crisis. However the existing OECD Principles remain adequate and appropriate; the real challenge was their ineffective implementation. There were too many examples of box-ticking by corporations. Regulators should now promote an outcomes-based approach.

Regulators need to review the capacity of supervisory, regulatory and enforcement authorities, together with the clarity of their objectives and inter-agency co-operation. Furthermore if supervisory bodies issue governance codes, they have to be monitored and enforced.

Executive remuneration should be the responsibility of the Board that should set strategic goals, risk appetite and a compensation structure that meets a small number of performance metrics. Boards should be alive to the possibility of managers having too much influence over performance-based remuneration and promoting pay schemes that encourage excessive risk-taking, not long-term performance. Are the non-executive directors on Boards sufficiently skilled and experienced to do this?

Boards must establish and oversee enterprise–wide risk management systems that are compatible with the company’s strategy and risk management. Before the crisis, focus was on internal controls for the purpose of financial reporting. Consequently, risk management became divorced from corporate strategy and its implementation. This was encouraged by the absence of international standards for risk management. Boards must ensure that the FI has clear lines of responsibility and accountability throughout the organization.

Boards need improved support in key areas such as risk, clear rules around conflicts of interest, focused development of individual directors and collective Board evaluation including technical and professional competence to introduce an objective perspective and benchmark best practice.

Board composition and working practices should reflect the complexity of the organization and ensure Boards do not become acquiescent, too friendly or interlocking. The role of Chairman and CEO must be separated. The non-executive directors must have experience and character to deal with the integrity of financial and non-financial reporting,-related party transactions, conflicts and remuneration. They have to respond to the threat of Board dominance by a strong CEO who may stifle critical enquiry and objective challenge.

The importance of the role of the Chairman of the Board has to be recognised- they are the single most important person in ensuring that the Board is effective, principally through smart agenda management, ensuring the Board is focused on the most important issues including strategy, risk, succession ethics and shareholders.

Institutional shareholders have a broader role to play. They have been historically passive and reactionary and where they were active, frequently aligned with short term behaviours. Solutions include the disclosure of voting records; however the proliferation of investor types and the diverse objectives of ownership present a real challenge to finding a workable solution.

We would be delighted to assist with your corporate governance challenge.

For more information please contact the Corporate Governance Department of Majlis Partners