Why Corporate Governance Matters — and How to Get It Right

Article excerpt

Byline: Barbara A. Rehm

Say the words "corporate governance" and most people yawn. So it's probably no shock that a recent Group of 30 report on the topic came and went without much mention.

That's unfortunate because getting governance right is essential to the safe, sound and successful operation of a financial institution. It's the framework the people in charge of a company use to ensure accountability and transparency; it's how they balance the varying demands of shareholders, customers, employees and regulators.

Without solid corporate governance, a bank is rudderless in a sea of competing interests, so efforts to improve it are central to reforming our financial system.

The Group of 30 is a force-field of economic and financial policymakers, past and present, domestic and international. It's all the men who have been influencing financial services policy for decades: Paul Volcker, Gerry Corrigan and Bill Dudley; Adair Turner, Jean-Claude Trichet and Mario Draghi; Larry Summers, Ken Rogoff and Martin Feldstein. The list goes on and it doesn't get any less impressive.

This group of heavyweights decided to take a close look at corporate governance and issued 80 pages of analysis and recommendations last month.

"Toward Effective Governance of Financial Institutions" pulls no punches. Consider this from the foreword: "In the wake of the crisis, financial institution governance was too often revealed as a set of arrangements that approved risky strategies (which often produced unprecedented short-term profits and remuneration), was blind to the looming dangers on the balance sheet and in the global economy, and therefore failed to safeguard the financial institution, its customers and shareholders, and society at large. Management teams, boards of directors, regulators and supervisors, and shareholders all failed, in their respective roles, to prudently govern and oversee."

The project was launched about a year ago under the meticulous eye of Roger Ferguson, the former Federal Reserve Board vice chairman who now leads TIAA-CREF. Ferguson worked closely with John Heimann, a former comptroller of the currency now with the Financial Stability Institute; Bill Rhodes, the legendary Citigroup executive; and David Walker, a former British regulator who is now a senior advisor at Morgan Stanley International.

The Group of 30 sent pros from Ernst & Young and Tapestry Networks to personally interview executives and directors at 36 of the world's largest financial services firms about their company's governance.

The report is chock full of ideas for executives, regulators and even shareholders, but it's prime target is directors. The board is the linchpin because it controls three factors critical to a company's success: business strategy, risk appetite and the selection of key officers, including the chief executive.

"Boards that permit their time and attention to be diverted disproportionately into compliance and advisory activities at the expense of strategy, risk, and talent issues are making a critical mistake," the report states.

Boards "must take a long-term view that encourages long-term value creation in the shareholders' interests, elevates prudence without diminishing the importance of innovation, reduces short-term self-interest as a motivator, brings into the foreground the firm's dependence on its pool of talent, and demands the firm play a palpably positive role in society."

That's quite a daunting list, and I doubt there is a bank board in this country that isn't drowning in compliance issues such as implementing the Dodd-Frank Act and addressing the myriad "matters requiring attention" flagged by examiners.

So I'd like to devote this column to a list of questions this report ought to spark in the minds of bank executives and directors.

For instance, is your board focused on the important issues, the ones that matter to the company's long-term vitality? …