Bank Governance

Corporate governance refers to the set of rules and incentives through which the management of a company is directed and controlled.1 Corporate governance frames the distribution of rights and responsibilities among management, the board of directors, controlling shareholders, minority shareholders, and other stakeholders and provides the structure for setting, implementing, and monitoring company objectives. A firm committed to good corporate governance has an empowered board, a solid internal control environment, high levels of transparency and disclosure, and shareholder rights that are well defined and protected.2 Banks have some specific corporate governance issues. Their stakeholders vary more widely than those of other private companies, including not only shareholders but also, and perhaps more significantly, depositors and the general public. Banks deliberately take and intermediate financial risk to generate revenue and serve their clients, leading to an asymmetry of information, less transparency, and a greater ability to obscure existing and developing prob- lems. They can also quickly change their risk profile, so weak internal controls can rapidly cause instability. As a result, sound internal governance for banks is essential, requiring boards to focus even more on assessing, managing, and mitigating risk. Good governance also complements financial supervision and is an integral part of effective risk-based oversight.3 Governance failures in the crisis The central irony of the governance failures that became apparent in the crisis is that many took place in some of the most sophisticated banks operating in some of the most developed governance environments in the world, such as the United States and the United Kingdom.download