Corporate Governance: Implications for Financial Services Firms
Darwish, Nisreen, Brewer, Elijah, III, Evanoff, Douglas D., Chicago Fed Letter
When corporate governance is effective, it helps safeguard shareholders, customers, and employees without hindering appropriate risk-taking. But when it is ineffective, it can have a disastrous impact on these key stakeholders and on the long-term viability of the enterprise. This year's Conference on Bank Structure and Competition brought some of the nation's top policymakers and bankers together to discuss corporate governance reform and the role of financial firms and regulators.
On May 7-9, 2003, the Federal Reserve Bank of Chicago hosted its 39th annual Conference on Bank Structure and Competition. This year's conference focused on the effectiveness and appropriate role of boards of directors, shareholders, creditors (including banks), financial regulators, accounting standards, and disclosure rules in governing the behavior of corporate managers. Recently, a number of highly publicized events have highlighted the importance of having an effective corporate governance structure. Once-revered companies such as Arthur Andersen, Enron, Tyco, and WorldCom have been severely damaged, in some cases beyond repair, by failure to follow appropriate corporate governance principles. Thousands of jobs and billions of dollars of value have been lost. Financial services firms have been affected through their credit exposures to firms that followed questionable accounting practices, as well as through their own corporate governance practices.
In his opening remarks, Chicago Fed President Michael H. Moskow emphasized that the recent examples of corporate malfeasance have "led to greater investor skepticism and increased uncertainty in the equity and credit markets." This "uncertainty affects asset prices and can negatively impact the economy," he added.
The corporate governance system can be defined as the interactions among shareholders, managers, boards of directors, and outside auditors and analysts, together with the laws, regulations, and institutions that govern their actions. When this system is effective, it helps safeguard shareholders, customers, and employees without hindering appropriate risk-taking. But when it is ineffective, it can have a disastrous impact on these key stakeholders and on the long-term viability of the enterprise.
Key questions that were addressed during the conference include:
* How should we reform our corporate governance structure?
* What should financial firms be doing to address these reforms?
* How should financial regulators respond? Is there the potential for overreaction?
* What best governance practices exist in the industry? Are they transferable? Does the structure of bank boards significantly affect the extent of corporate governance?
A special theme panel on these issues, featured Susan Schmidt Bies, governor, Board of Governors of the Federal Reserve System; Elizabeth A. Duke, vice chairman, American Bankers Association, and senior vice president, South Trust Corporation; Randall S. Kroszner, member, President's Council of Economic Advisors and University of Chicago; Katherine Schipper, member, Financial Accounting Standards Board; and Kenneth Scott, Ralph M. Parsons Professor of Law and Business Emeritus, Stanford Law School. Other sessions addressed the financial services regulatory and legislative agenda, future directions for the financial markets, banking relationships and corporate behavior, and the potential for extracting information from market and accounting data.
In his keynote address to the conference, Federal Reserve Board Chairman Alan Greenspan was optimistic about both the future of financial services and the state of corporate governance, notwithstanding recent events. Our system of corporate governance "has evolved over the past century to more effectively promote the allocation of the nation's savings to its most productive uses. And, generally speaking, the resulting structure of business incentives, reporting, and accountability has served us well. …