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30 Group of Thirty
Toward
EffEctivE GovErnancE of Financial insTiTuTions
The views expressed in this report are those of the Working Group on
Corporate Governance and do not necessarily represent the views of all
individual members of the Group of Thirty.
ISBN 1-56708-156-8
Copies of this paper are available for $49 from:
The Group of Thirty
1726 M Street, N.W., Suite 200
Washington, D.C. 20036
Tel.: (202) 331-2472
E-mail: [email protected]; www.group30.org
Toward
EffEctivE GovErnancE of Financial insTiTuTions
30 Group of Thirty
Table of conTenTs
Abbreviations ...........................................................................................................................................................................................................................4
Foreword.........................................................................................................................................................................................................................................5
Acknowledgements ..........................................................................................................................................................................................................7
Corporate Governance Working Group....................................................................................................................................................9
Executive Summary .........................................................................................................................................................................................................11
Insights and Recommendations for Enhancing Governance Effectiveness of Financial Institutions ........................................................................................................ 19
Chapter 1: Addressing the Essential Question of Function ..........................................................................................27
Chapter 2: The Vital Role of Boards of Directors ......................................................................................................................31
Chapter 3: Risk Governance: A Distinctive and Crucial Element of FI Governance.......................45
Chapter 4: Deep Commitment to Governance: A Requirement from Management .....................53
Chapter 5: The Role and Responsibility of Supervisors...................................................................................................59
Chapter 6: Relationships between FI Boards and Long-term Shareholders .........................................69
Chapter 7: The Impact of Values and Culture on Behaviors and Decisions ............................................75
Group of Thirty Members 2012 ...................................................................................................................................................................... 83
Group of Thirty Publications since 1990 ............................................................................................................................................ 87
4
abbreviaTions
CEO chiefexecutiveofficer
CRO chiefriskofficer
FI financialinstitution
FSA FinancialServicesAuthority(UK)
FSB FinancialStabilityBoard
G30 GroupofThirty
HR humanresources
IT informationtechnology
OECD OrganisationforEconomicCo-operationandDevelopment
SIFIs systemicallyimportantfinancialinstitutions
5
Foreword
Weak and ineffective governance of systemically
important financial institutions (SIFIs) has been
widely cited as an important contributory factor
in the massive failure of financial sector decision
makingthatledtotheglobalfinancialcrisis.Inthe
wakeof the crisis, financial institution (FI) gover-
nance was too often revealed as a set of arrange-
ments that approved risky strategies (which often
produced unprecedented short-term profits and
remuneration),wasblindtotheloomingdangerson
the balance sheet and in the global economy, and
therefore failed to safeguard the FI, its customers
andshareholders,andsocietyatlarge.Management
teams,boardsofdirectors,regulatorsandsupervi-
sors,andshareholdersallfailed,intheirrespective
roles,toprudentlygovernandoversee.
On the subject of governance as it applies to
FIs,muchhasbeenwrittenandsaidinthepastfew
years.Notableamongthesestatementsarethe2009
Walkerreport(A Review of Corporate Governance
in UK Banks and other Financial Industry Entities)
andtheBaselCommittee’sPrinciples for Enhancing
Corporate Governance(2010).Manydomesticregu-
latorsandstockexchangeshavealsoweighedinwith
newrequirementsandguidelinesforgovernance.The
GroupofThirty (G30) applauds theseprior initia-
tivesandsupportsnotonlythespiritoftheirconclu-
sionsbutalsomanyofthedetailedrecommendations
theycontain.Thecombinationofthesereports,self-
scrutinybythefirmsthemselves,andpressurefrom
regulatoryoverseershasalreadyyieldedsubstantial
changes in governancepractice across the financial
servicesindustryandaroundtheglobe.
Whywould theG30wish toadd itsownvoice
to the body of work already available, in light of
progressbeingmade?
�� First,nooneshouldpresumethatFIgovernance
isnowfixed. It is truethatboardsareworking
harder; supervisors are asking tough questions
and preparing for more intensive oversight;
managementhasbecomemuchmoreattunedto
riskmanagementandtosupportingtheoversight
responsibilities of the board; and shareholders,
to some degree, are taking a deeper look into
their role in promoting effective governance.
Nevertheless, as this report highlights, highly
functional governance systems take significant
timeandsustainedefforttoestablishandhone,
andtheG30’sinputcanhelpwiththateffort.
�� Second, inamodern economy,business leader-
ship represents a large concentration of power.
Thesocialexternalitiesassociatedwiththebusi-
nessofsignificantfinancialinstitutionsgivethat
poweramajoradditionaldimensionandunder-
score thecritical importanceofgoodcorporate
governanceofsuchentities.
�� Third,wenotethatthepriorreportsandguidance
almostalwayscomefromanationalorregional
perspective(theBaselCommitteereportbeinga
notableexception),whichisunderstandableasa
practicalmatter,butcuriousgiventhedistinctly
global nature of the SIFIs, which are appropri-
atelythefocusofattention.
Accordingly, in late spring of 2011, the G30
launched a project on the governance of major
Toward EffEctivE GovErnancE of Financial insTiTuTions
6
financial institutions. The project was led by a
SteeringCommitteechairedbyRogerW.Ferguson,
Jr.,withJohnG.Heimann,WilliamR.Rhodes,and
Sir David Walker as its vice-chairmen. They were
supportedby11otherG30members,whopartici-
pated inan informalworkinggroup.Requests for
interviewswentoutfromtheG30tothechairsof41
oftheworld’slargest,mostcomplexfinancialinsti-
tutions—banks, insurance companies, and securi-
tiesfirms.Inanextraordinaryresponse,especially
inlightofthepressuresoneachofthesecompanies,
36 institutionssharedtheirperspectivesandexpe-
riences through detailed discussions with board
leaders, CEOs, and selected senior management
leaders. In addition, the project team held discus-
sionswithaglobalcrosssectionofFIregulatorsand
supervisors.Themajorityof these interviewswere
conductedinperson,allundertheChathamHouse
Rule,1whichencouragescandor.
The report is the responsibility of the G30
SteeringCommitteeandWorkingGroupandreflects
broad areas of agreement among the participating
G30 members, who took part in their individual
capacities.AllG30members(asidefromthosewith
current national official responsibilities) have had
the opportunity to review and discuss preliminary
drafts.Thereportdoesnotreflecttheofficialviews
of those in policy-making positions or leadership
rolesintheprivatesector.
Thereportiswide-ranginginitscoverageofthe
compositionandfunctioningofFIboardsandthe
roles of regulators, supervisors, and shareholders.
Thefocusisonpotentiallyuniversalcorethemesbut
acknowledgesdifferencesincustomsandpracticein
differentpartsoftheworld.Asregardsapproaches
to total compensation, we do not address this
subjectindetailinthisreport;theG30commends
theFinancialStabilityBoard’sPrinciplesforSound
Compensation Practices and fully supports their
implementation.2
TheG30undertook its initiativeoneffectiveFI
governanceinthehopeandexpectationthatFIboard
andseniormanagementleaderscouldshareaction-
ablewisdomontheessenceofeffectivegovernance
andwhatittakestobuildandnurturegovernance
systems that work. We hope this report provides
ameasureof insightandsustenance to thosewith
policymaking and operational responsibilities for
effective governance in the world’s great financial
institutions.
1 Therulestatesthat“Whenameeting,orpartthereof,isheldundertheChathamHouseRule,participantsarefreetousetheinformationreceived,butneithertheidentitynortheaffiliationofthespeaker(s),northatofanyotherparticipant,mayberevealed.”
2 Thecompletelistofprinciplescanbefoundathttp://www.financialstabilityboard.org/publications/r_090925c.pdf.
JacobA.Frenkel
Chairman of the Board of Trustees
Group of Thirty
Jean-ClaudeTrichet
Chairman
Group of Thirty
7
OnbehalfoftheentireGroupofThirty(G30),we
would like to express our appreciation to those
whose time, talent, and energy have driven this
projecttosuccessfulfruition.First,wewouldliketo
thankthemembersoftheSteeringCommitteeand
WorkingGroup,whoguidedtheworkateverystage
andaddedtheiruniqueinsight.
Special recognition must go to the men and
womenofthefinancial,regulatory,andsupervisory
institutionswhomwe interviewed,whogenerously
and candidly shared their perspectives and experi-
encesandwhoseinsightconstitutestheheartofthis
report.Participatingfinancialinstitutionshavetheir
headquarters in 16 different countries on six con-
tinents. From all points on the globe, these senior
leaders strongly testify to the role effective gover-
nancecanplayinsecuringthesafety,soundness,and
performanceoftheglobalfinancialsystem.
No project of this magnitude can be accom-
plished without the committed effort of a strong
team. The G30 extends its deep appreciation to
TapestryNetworks;projectdirectorTomWoodard;
andteammembersMarkWatson,DennisAndrade,
acknowledgemenTs
and Christopher McDonnell. For this project,
Tapestry Networks carried out the core research
and drafted reports for review by the G30. They
organizedandconductedmorethan80interviews,
the vastmajority inperson. In addition, the team
drewonmorethan70additional interviewswith
directors, supervisors, regulators, and executives,
conducted as part of Tapestry’s normal course
of business. Tapestry’s work was conducted in
collaborationwithErnst&YoungLLP,underthe
leadershipofCarmineDiSibio,vice-chairofglobal
financial services; and William Schlich, global
leaderofbankingandcapitalmarkets.TheG30is
gratefulforErnst&Young’svitalsupport.TheG30
also thanks the other colleagues from around the
worldwhoprovidedtheirinformalfeedbacktothe
textasitdeveloped.
Finally,thecoordinationofthisprojectandmany
aspects of report production had their logistical
center at the offices of the Group of Thirty. This
projectcouldnothavebeencompletedwithoutthe
effortsofexecutivedirectorStuartMackintosh,Meg
Doherty,andEmilyMcGrathoftheG30.
RogerW.Ferguson,Jr.
Chairman,WorkingGrouponCorporateGovernance
JohnG.Heimann WilliamR.Rhodes SirDavidWalker
Vice-chair Vice-chair Vice-chair
9
sTeering commiTTee
chairman
roger w. Ferguson, Jr. PresidentandCEO,TIAA-CREFFormerChairman,SwissReAmericaHoldingCorporationFormerViceChairman,BoardofGovernorsoftheFederalReserveSystem
vice chairmen
John HeimannSeniorAdviser,FinancialStabilityInstituteFormerU.S.ComptrolleroftheCurrency
william r. rhodesPresidentandCEO,WilliamR.RhodesGlobalAdvisorsSeniorAdvisor,CitigroupFormerSeniorViceChairman,Citigroup
sir david walker SeniorAdviser,MorganStanleyInternationalFormerChairman,MorganStanleyInternationalFormerChairman,SecuritiesandInvestmentsBoard,UK
working group
corporaTe governance working group
Jacob a. FrenkelChairmanoftheBoardofTrustees,
GroupofThirtyChairman,JPMorganChaseInternationalFormerChairman,GroupofThirtyFormerGovernor,BankofIsraelFormerProfessorofEconomics,
UniversityofChicagoFormerCounselor,DirectorofResearch,
InternationalMonetaryFund
geoffrey l. bellExecutiveSecretary,GroupofThirtyPresident,GeoffreyBellandCompany,Inc.
guillermo de la dehesaDirectorandMemberoftheExecutive
Committee,GrupoSantanderFormerDeputyManagingDirector,
BancodeEspaña
Toward EffEctivE GovErnancE of Financial insTiTuTions
10
richard a. debsAdvisoryDirector,MorganStanleyFormerPresident,MorganStanleyInternationalFormerCOO,FederalReserveBankofNewYork
arminio FragaFoundingPartner,GáveaInvestimentosChairmanoftheBoard,BM&FBOVESPAFormerGovernor,BancoCentraldoBrasil
gerd HäuslerChiefExecutiveOfficer,BayerischeLandesbankMemberoftheBoardofDirectors,
RHJInternationalFormerManagingDirectorandVice
Chairman,Lazard&Co.FormerCounselorandDirector,
InternationalMonetaryFundFormerManagingDirector,DresdnerBankFormerMemberoftheBoard,
DeutscheBundesbank
william mcdonoughFormerVice-Chairman,Bankof
AmericaMerrillLynchFormerChairman,PublicCompany
AccountingOversightBoardFormerPresident,FederalReserve
BankofNewYork
guillermo ortizPresidentandChairman,GrupoFinancieroBanorteFormerGovernor,BancodeMéxicoFormerChairmanoftheBoard,Bank
forInternationalSettlementsFormerSecretaryofFinanceand
PublicCredit,Mexico
ernest sternPartnerandSeniorAdviser,TheRohatynGroupFormerManagingDirector,JPMorganChaseFormerManagingDirector,WorldBank
ernesto ZedilloDirector,YaleCenterfortheStudyofGlobalizationFormerPresidentofMexico
Zhou XiaochuanGovernor,People’sBankofChinaMemberoftheBoardofDirectors,Bank
forInternationalSettlementsFormerPresident,ChinaConstructionBankFormerAssistantMinisterofForeignTrade
project director
Thomas m. woodard,TapestryNetworks
experts
william schlich,ErnstandYoung
mark watson, TapestryNetworks
dennis andrade,TapestryNetworks
christopher mcdonnell,TapestryNetworks
Jon Feigelson, TIAA-CREF
stuart mackintosh,GroupofThirty
*Allthemembersparticipatedintheprojectintheirindividualcapacities.Theviewsexpresseddonot
necessarilyreflectthoseoftheinstitutionswithwhichthemembersareaffiliated.
11
What ismeant by“governance” in the context of
afinancial institution(FI)?3Corporategovernance
is traditionally defined as the system by which
companiesaredirectedandcontrolled.TheOECD
Principles of Corporate Governance(2004)defines
corporategovernanceasinvolving
“a set of relationships between a company’s manage-
ment, its board, its shareholders and other stake-
holders. Corporate governance also provides the
structure through which the objectives of the com-
pany are set, and the means of attaining those objec-
tives and monitoring performance are determined.” 4
Inthecaseoffinancialinstitutions,chiefamong
theotherstakeholdersaresupervisorsandregulators
chargedwithensuringsafety,soundness,andethical
operation of the financial system for the public
good. They have a major stake in, and can make
animportantcontributionto,effectivegovernance.
Goodcorporategovernancerequireschecksand
balancesonthepowerandrightsaccordedtoshare-
holders,stakeholders,andsocietyoverall.Without
checks,we see thebehaviors that lead todisaster.
Butgovernanceisnotafixedsetofguidelinesand
procedures;rather,itisanongoingprocessbywhich
the choices and decisions of FIs are scrutinized,
management and oversight are strengthened and
streamlined, appropriate cultures are established
and reinforced, and FI leaders are supported and
assessed.
eXecuTive summary
wHy governance maTTersThe global economic crisis, with the financial
servicessectoratitscenter,wreakedeconomicchaos
andimposedenormouscostsonsociety.Thedepth,
breadth,speed,andimpactofthecrisiscaughtmany
FI management teams and boards of directors by
surprise and stunned centralbanks,FI regulators,
supervisors,5andshareholders.
Enormousthoughtanddebatehasgoneintodis-
coveringwhatcausedtheglobalfinancialcrisisand
how to avoid another. In his much-quoted 2009
reportonthecausesofthecrisis,LordAdairTurner,
chairoftheUK’sFinancialServicesAuthority(FSA),
citedsevenproximatecauses:(1)large,globalmacro-
economicimbalances;(2)anincreaseincommercial
banks’ involvement in risky trading activities; (3)
growth insecuritizedcredit; (4) increased leverage;
(5) failure of banks to manage financial risks; (6)
inadequatecapitalbuffers;and(7)amisplacedreli-
anceoncomplexmathandcreditratingsinassessing
risk.6Acriticalsubtexttothesesevencausesisaper-
vasivefailureofgovernanceatalllevels.
Moregenerally,mostobservershaveagreedthat
acombinationof“light touch”supervision,which
relied too heavily on self-governance in financial
firms, and weak corporate governance and risk
management at many systemically important
financial institutions (SIFIs) contributed to the
3 Inthisreport,“financialinstitutions”aredefinedtoincludelargebanks,insurancecompanies,andsecuritiesfirms.
4 Organisation for Economic Co-operation and Development, OECD Principles of Corporate Governance (Paris: Organisation for EconomicCo-operationandDevelopment,2004),11.
5 Weattemptthroughoutthereporttodistinguishtheregulatoryfunctionfromthesupervisoryfunction.TheregulatorsetstherulesandregulationswithinwhichFIsareobligedtooperate,whilethesupervisoroverseestheactionsoftheboardandmanagementtoensurecompliancewiththoserulesandregulations.Confusionarisesbecauseboth functionsareoftenperformedwithin the same institution (forexample, theU.S.FederalReserveandtheUKFinancialServicesAuthority).
6 AdairTurner, The Turner Review: Regulatory Response to the Global Banking Crisis (London:FinancialServicesAuthority,2009).
Toward EffEctivE GovErnancE of Financial insTiTuTions
12
2008meltdownintheUnitedStates.Inseveralkey
markets,deregulationandmarket-basedsupervision
werethepoliticalorderofthedayascountriesvied
for global capital flows, corporate headquarters,
and exchange listings. Regulators also missed
the potential systemic impact of entire classes of
financialproducts,suchassubprimemortgages,and
ingeneralfailedtospotthelargesystemicrisksthat
hadbeengrowingduringtheprevioustwodecades.
Inthiscontext,boardsofdirectorsfailedtograsp
the risks their institutions had taken on. They did
notunderstandtheirvulnerability tomajorshocks,
or they failed to act with appropriate prudence.
Management, whose decisions and actions deter-
minetheorganization’sriskstatus,clearlyfailedto
understandandcontrolrisks.Inmanycases,spurred
onbyshareholders,bothmanagementandtheboard
focusedonperformancetothedetrimentofprudence.
Effectivegovernance isanecessarycomplement
to rules-based regulation. The system needs both.
Carefullycraftedrules-basedregulationsconcerning
capital,liquidity,permittedbusinessactivities,and
so forth are essential safeguards for the financial
system,whileeffectivegovernanceshapes,monitors,
andcontrolswhatactuallyhappensinFIs.
Ineffective governance at financial institutions
wasnotthesolecontributortotheglobalfinancial
crisis, but it was often an accomplice in the
context of massive macroeconomic vulnerability.
Effectivegovernancecanmakeasignificantpositive
differencebyhelpingtopreventfuturecrisesorby
mitigatingtheirdeleteriousimpact.Inotherwords,
therewards for investment ineffectivegovernance
aregreat.
a call To acTionEach of the four participants in the governance
system—boardsofdirectors,management,supervi-
sors, and (to an extent) long-term shareholders—
needs to reassess their approach to FI governance
and take meaningful steps to make governance
stronger.Thisreportoffersacomprehensivesetof
concrete insights and recommendations for what
eachparticipantneedstodotomakeFIgovernance
functionmoreeffectively.
TheG30isacutelyawarethattheagendasofFI
boards and supervisors are crowded, yet we urge
themtocontinuetogiveeffectivegovernanceoneof
theirhighestpriorities.
�� The financial sector needs better methods of
assessing governance and of cultivating the
behaviorsandapproachesthatmakegovernance
systems work well. Board self-evaluation, espe-
ciallywhenfacilitatedorledbyanoutsideexpert,
canyieldimportantinsight,butitissoberingto
considerthatin2007,mostboardswouldlikely
havegiventhemselvespassinggrades.
�� Supervisors now aspire to understand gover-
nanceeffectivenessandvulnerabilities,butadmit
tohavingmuchtolearn.
�� Governance experts often describe what good
governancelookslike,butgivelittlethoughtto
how to measure or achieve high-performance
results.
Giventherolethatinadequategovernanceplayed
in the massive failure of financial sector decision
making that led to the globalfinancial crisis, it is
naturalthatsupervisorsandstockexchangesarenow
payinggreatattentiontogovernancearrangements.
Thisattention,asapracticalmatter,oftenfocuses
on explicit rules, structures, and processes—best
practices—thatgovernanceexpertsoftenbelieveare
indicative of effective governance. Consequently,
compliancewithbestpracticeguidelineshasbecome
veryimportanttoboardsandtooverseerscharged
withmonitoringandencouraginggoodgovernance.
The G30 hopes this report will contribute
meaningfully to thebodyofknowledgeongover-
nance and will be a useful tool for those tasked
withshapinggovernancesystems.
Group of Thirty
13
THe essenTial quesTion oF FuncTion
Well-implemented governance structures and
processes are important, but whether and how
well they function are the essential questions.
Althoughthetemptationtojudgegovernanceeffec-
tiveness by the extent of conformance to a set of
perceived best practices can be overwhelming, it
is also counterproductive. Most studies of gover-
nance agree that it is end behaviors, much more
thanframeworksandstructures,thatmatter.“Box-
ticking”neitherimprovesgovernancenoraccurately
assesses it. Any arrangement can fail, but failures
aremoreoftencausedbyundesirablebehaviorand
valuesthanbybadstructuresandforms.
Anexaminationofgovernancearrangementsat
36 of the world’s largest FIs reveals awidediver-
sityofapproaches,drivenbydifferencesinculture,
law, institution-specific circumstances, the people
involved, and precedent. This diversity is a good
thing,sinceitmeansthatthegovernanceapproaches
are tailored to address the unique circumstances
ofeachFI.Greaterhomogeneitywould likely lead
to poorer governance because the constraints that
wouldhavetobeintroducedtoensurehomogeneity
wouldreduceFIs’freedomtooptimize.
Thissuggeststhatallpartieswithastakeinthe
design, operation, and assessment of governance
systemsmustconcentrateontheessentialquestion
offunctionandlettheissueofformrecede.
Behaviorappearstobekey,andafocusonright
behaviors means a shift from the “hardware” of
governance(structuresandprocesses)tothe“soft-
ware” (people, leadership skills, and values). This
meansaskingquestionssuchas:Howdoestheboard
bothengageandchallengemanagement?Howdoes
itsupportmanagementinovercomingkeydifficul-
ties?Are interactions open and transparent? Does
management help the board understand the real
issues?WhatistheattitudeoftheCEOtowardthe
board? Is the relationship between the CEO and
thechair(wherethoserolesaresplit)aconstructive
one?Areissuespresentedtotheboardinawaythat
isamenabletotheapplicationofbusinessjudgment?
Whatunderlyingorganizationalcultureandvalues
drivebehaviors—andhowcanadesiredculturebest
besupportedandreinforced?
The art of governance is in making different
forms function well and adjusting the form to
enhancefunction.Ittakesmatureleadership,sound
judgment, genuine teamwork, selfless values, and
collaborative behaviors—all carefully shaped and
nurturedovertime.
THe board
Boards of directors play the pivotal role in FI
governance through their control of the three
factors that ultimately determine the success
of the FI: the choice of strategy; the assess-
ment of risk taking; and the assurance that
the necessary talent is in place, starting with
the CEO, to implement the agreed strategy.
The2008–2009financialcrisisrevealedthatmanage-
mentatcertainFIs,withtheknowledgeandapproval
oftheirboards,tookdecisionsandactionsthat led
toterribleoutcomesforemployees,customers,share-
holders, and the wider economy. What should the
boardshavedonedifferently?Toanswerthatques-
tion,itishelpfultoconsiderthemandateofboards.
Boards control the three key factors that
ultimatelydeterminethesuccessofanFI:thechoice
ofbusinessmodel(strategy),theriskprofile,andthe
choiceofCEO—andbyextensionthequalityofthe
top-managementteam.Boardsthatpermittheirtime
andattentiontobediverteddisproportionatelyinto
complianceandadvisoryactivitiesattheexpenseof
strategy,risk,andtalentissuesaremakingacritical
mistake.Aboveallelse,boardsmusttakeeverystep
possibletoprotectagainstpotentiallyfatalrisks.
FIboardsineverycountrymusttakealong-term
viewthatencourageslong-termvaluecreationinthe
shareholders’ interests, elevates prudence without
Toward EffEctivE GovErnancE of Financial insTiTuTions
14
diminishingtheimportanceof innovation,reduces
short-term self-interest as a motivator, brings into
theforegroundthefirm’sdependenceonitspoolof
talent,anddemandsthefirmplayapalpablypositive
roleinsociety.
The importance of mature, open leadership by
a skillful board chair cannot be overemphasized.
Effectivechairscapitalizeonthewisdomandadvice
ofboardmembersandmanagementleadersandon
theboard’sinteractionswithsupervisorsandshare-
holders, individually and collectively. Good chairs
respect each of these vital constituents, preside,
encouragedebate,anddonotmanagetowardapre-
determinedoutcome.
risk governance
Those accountable for key risk policies in FIs,
on the board and within management, have
to be sufficiently empowered to put the brakes
on the firm’s risk taking, but they also play a
critical role in enabling the firm to conduct
well-measured, profitable risk-taking activi-
ties that support the firm’s long-term sustain-
able success.
Inthefinancialservicessectormorethaninother
industries, risk governance is ofparamount impor-
tance to the stability andprofitabilityof the enter-
prise. Without an ability to properly understand,
measure, manage, price, and mitigate risk, FIs are
destinedtounderperformorfail.Effectiveriskgover-
nancerequiresadedicatedsetofriskleadersinthe
boardroomandexecutivesuite,aswellasrobustand
appropriateriskframeworks,systems,andprocesses.
The history of financial crises, including the
2008–2009 crisis, is littered with firms that col-
lapsedorweretakentothebrinkbyafailureofrisk
governance.Themostrecentfinancialcrisisdemon-
stratedtheinabilityofmanyFIstoaccuratelygauge,
understand, andmanage their risks. Firmsgreatly
understatedtheirinherentrisks,particularlycorre-
lations across their businesses, and were woefully
unprepared for the exogenous risks that unfolded
duringthecrisisandafterward.
managemenT
Management needs to play a continuous pro-
active role in the overall governance process,
upward to the board and downward through
the organization.
The vast majority of governance and control pro-
cesses are embedded in the organizational fabric,
which is woven and maintained by management.
Theboard isdependentonmanagement for infor-
mationand for translating sometimeshighly tech-
nicalinformationintoissuesandchoicesrequiring
businessjudgment.Governancecannotbeeffective
withoutmajorcontinuing input frommanagement
inidentifyingthebigissuesandpresentingthemfor
discussionwiththeboard.
Management needs to strengthen the fabric of
checks and balances in the organization. It must
deepen its respect for the vital roles of the board
andsupervisorsandhelpthemtodotheirjobswell.
Itmustreinforcethevaluesthatdrivegoodbehavior
through the organization and build a culture that
respectsriskwhileencouraginginnovation.
supervisors
Supervisors that more fully comprehend FI
strategies, risk appetite and profile, culture,
and governance effectiveness will be better
able to make the key judgments their man-
date requires.
Supervisors have legally defined responsibilities
relating to risk control; fraud control; and confor-
mance to laws, regulations, and standards of
conduct. Supervisors now seek a deeper and more
Group of Thirty
15
nuanced understanding of how the board works,
howkeydecisionsarereached,andthenatureofthe
debatearoundthem,allofwhichrevealmuchabout
thefirm’sgovernance.MostFIboardsapplaudthis
expansion in the supervisors’ focus from control
processdetailsto includeabroadergraspof issues
andcontext.Tobeeffective,however,thisexpansion
requiresregularinteractionamongseniorpeoplein
supervisoryagenciesandboardsandboardmembers.
Supervisorsneedtobroadentheirperspectivesto
includeFIstrategy,people,andculture.Theyshould
focustheirdiscussionswithseniormanagementand
theboardontherealissues—throughbothformal
and informalcommunications.But theymustalso
maintain their independence and accept that they
will at best have an incomplete picture. Similarly,
supervisors must not try to do the board’s job or
sooverwhelmtheboardandmanagementthatthey
cannotguidetheFI.
Supervisorshaveauniqueperspectiveonemerging
systemic, macroprudential risks and can compare
andcontrastoneFIwithothers.Thisisvitalinfor-
mationtodevelopandshare.
Unfortunately, in the policy-making debate,
the qualitative aspect of supervision is sometimes
overshadowed by quantitative, rules-based regula-
tory requirements. Clearly, new capital, liquidity,
andrelatedstandardsareessentialtoamorestable
global financial architecture, but enhanced over-
sightoftheperformanceanddecision-makingpro-
cessesofmajorFIsisalsoessential.
sHareHolders
Long-term shareholders can and should
contribute meaningfully to effective FI
governance.
Shareholders can contribute meaningfully to the
effective governance of FIs. Most institutional
shareholders do not have seats on the board but
shouldnonetheless,totheextentpossible,beactive
in oversight of governance, commensurate with
theirownershipobjectives.Boardsandmanagement
teamsshouldbeencouragedtoengageseriouslywith
shareholders, listen closely, and factor shareholder
perspectivesintodecisions.
values and culTure
Values and culture may be the keystone of
FI governance because they drive behaviors
of people throughout the organization and
the ultimate effectiveness of its governance
arrangements.
Suitable structures and processes are a necessary
but not a sufficient condition for good gover-
nance,whichcriticallydependsalsoonpatternsof
behavior.Behavioralpatternsdependinturnonthe
extent to which values such as integrity, indepen-
denceofthought,andrespectfortheviewsofothers
areembeddedintheinstitutionalculture.
In a great FI, positive values and culture are
palpablefromtheboardtotheexecutivesuitetothe
frontline.Values and culture drive people to do the
right thing even when no one is looking. Valuesand
cultureareafundamentalaspectofthegovernance
system,whichmakesthemlegitimateandimportant
dimensions of inquiry for supervisors. Values and
culture are also important areas for consideration
and inquiry by boards. While these soft features
defy quantitative measurement, they cannot be
ignored.Anyonespending time inanorganization
quicklydevelopsaclearsenseofwhatdrivesit:most
newemployeesunderstandthevaluesandcultureof
theinstitutionwithinayear,andmanyfigureitout
withinjustafewmonths.Theyinstinctivelyobserve
howvaluesandcultureinfluenceday-to-daybusiness
decisionsandpersonnelchoices.Supervisorscando
likewise.
Toward EffEctivE GovErnancE of Financial insTiTuTions
16
cHanging THe way we THink abouT governanceTheG30isnotthefirsttoreachtheconclusionthat
properbehaviorsare thekey toeffectiveFIgover-
nance.But this report endeavors todescribe those
essential behaviors and to provide implementable
ideasforengenderingthem.
The key to changing the way people behave
is to change the way they think. Accordingly, the
paramountaimofthisreportistopromoteamong
boardmembers,management leaders, supervisors,
and shareholders a practical and productive way
of thinking about effective governance. Only by
changingthewaypeoplethinkaboutgovernancecan
wesuccessfullyinducethespecific,tailoredchanges
thatwillenhancegovernanceineachinstitution.
Forexample,FIleaderswouldgovernandsuper-
visors and shareholders would assess governance
differentlyiftheybelievedthefollowing:
�� Governanceisanongoingprocess,notafixedset
ofguidelinesandprocedures.
�� DiversityofgovernanceapproachesacrossFIsis
avirtue,notavice.
�� Togetdeeperanddeeper into thedetailsofall
partsofthebusinessmaybeachoicesomeboards
willmake,butendlessdetailisnotaprerequisite
forboardeffectiveness.Boardswillneedtodig
deepselectively,asnecessaryforunderstanding.
�� Boardindependenceandchallengeshouldbring
ahighqualityandvalue-additivecontributionto
board deliberation and is not evidenced by the
numberof timesadirector saysno tomanage-
ment.
�� Havingsmallerboardsthatrequiregreatertime
commitmentfromtheirmembers isafarbetter
approachthanhavinglargerboardsthatrequire
onlymodesttimecommitment.
�� Non-executivedirectors,sometimescalled“out-
sideboardmembers,”mustbringanindependent,
externalperspective.
�� Effectivelybalancingrisk,return,andresilience
takes judgment. Ifa risk is toocomplicated for
awell-composedboard tounderstand, it is too
complicatedtoaccept.
�� Management’skeygovernancemandateistogive
thedirectorsthebestmeansofunderstandingthe
businessissuesuponwhichjudgmentisrequired.
�� The best board in the world cannot counter-
balance a weak internal control and risk
managementarchitecture.
�� Supervisorsneedadeepandnuancedunderstand-
ing of each FI’s strategy, governance approach,
culture,leaders,andissues.
�� Institutional shareholders will not prevent the
nextcrisis,buttheycanandshouldengagemore
productivelyingovernancematters.
�� Values and culture are theultimate“software”
thatdeterminesthebehaviorsofpeoplethrough-
outtheFIandtheeffectivenessofitsgovernance
arrangements.
Thelistaboveisnotcomprehensive.Thebodyof
the report contains a host of insights and recom-
mendationswiththepotentialtoshapethinkingon
effectivegovernance.
***
Group of Thirty
17
reporT sTrucTure and core messagesThisreportiscomposedofsevenchapters,preceded
byalistofkeyrecommendations.Thechaptersub-
jectsandmessagesareasfollows.
1. Addressingtheessentialquestionoffunction
�� Well-implemented governance structures
and processes are important, but whether
andhowwelltheyfunctionaretheessential
questions.
2. Thevitalroleofboardsofdirectors
�� BoardsofdirectorsplaythepivotalroleinFI
governancethroughtheircontrolofthethree
factorsthatultimatelydeterminethesuccess
oftheFI:thechoiceofstrategy;assessment
of risk taking; and the assurance that the
necessarytalentisinplace,startingwiththe
CEO,toimplementtheagreedstrategy.
3. Risk governance: A distinctive and crucial ele-
mentofFIgovernance
�� Those accountable for key risk policies in
FIs,ontheboardandwithinmanagement,
have to be sufficiently empowered to put
the brakes on the firm’s risk taking, but
theyalsoplayacriticalroleinenablingthe
firm to conduct well-managed, profitable
risk-takingactivitiesthatsupportthefirm’s
long-termsustainablesuccess.
4. Deepcommitmenttogovernance:Arequirement
frommanagement
�� Managementneedstoplayacontinuouspro-
activeroleintheoverallgovernanceprocess,
upwardtotheboardanddownwardthrough
theorganization.
5. Theroleandresponsibilityofsupervisors
�� Supervisors that more fully comprehend FI
strategies,riskappetiteandprofile,culture,
and governance effectiveness will be better
able to make the key judgments their
mandaterequires.
6. RelationshipsbetweenFIboardsandlong-term
shareholders
�� Long-term shareholders can and should
contribute meaningfully to effective FI
governance.
7. The impactofvaluesandcultureonbehaviors
anddecisions
�� Values and culturemaybe thekeystoneof
FIgovernancebecausetheydrivebehaviors
of people throughout the organization and
the ultimate effectiveness of its governance
arrangements.
19
THe essenTial quesTion oF FuncTion
Well-implemented governance structures and
processes are important, but whether and how
well they function are the essential questions.
1. Diversity in governance approaches reflects
unique circumstances. Everywhere, from the
United States to Europe to China to Brazil to
Australia,thereisconvergencearoundthecore
roles of the board, management, supervisors,
andshareholders.However,thespecificsofthose
roles vary substantially fromfirm tofirm, and
fromcountrytocountry,sometimessubtlyand
sometimesquitestarkly.FIstailortheirspecific
model to optimize effectiveness under unique
circumstances.
2. Governance systems are defined by both hard-
ware and software. Governance systems are
built around a defined architecture comprising
both “hardware” (for example, organization
structures and processes) and “software” (for
example, people, skills, and values). The soft-
waremakesthehardwarefunction.
3. Effective governance depends on people and how
they interact. Effectivegovernance comesdown
topeopleandhowtheyinteract,whetherinthe
boardroom,boardcommitteemeetings,manage-
mentmeetings,ormeetingswithsupervisorsand
shareholders.FIsneedtoadoptgoodgovernance
practices,andtheycanlearnfromtheexperiences
ofothers,butwhatworksbest inonesituation
may not work at all in another. FIs can tailor
governance arrangements, but if they have the
wrongpeople,orifthosepeoplebehaveindys-
functionalways,thearrangementsdonotmatter.
THe board
Boards of directors play the pivotal role in FI
governance through their control of the three
factors that ultimately determine the success
of the FI: the choice of strategy; assessment of
risk taking; and assurance that the necessary
talent is in place, starting with the CEO, to
execute the strategy.
Well-functioningboardsscrupulouslydischargethe
following10essentialtasks:
1. Fashion a leadership structure that allows the
board to work effectively and collaboratively
as a team, unified in support of the enterprise.
StructuresdifferfromoneFItoanother.Thereis
noidealtemplate.Boardswith8to12members
are best positioned to encourage candor and
facilitateconstructivedebate.
2. Recruit members who collectively bring a balance
of expertise, skills, experience, and perspectives
and who exhibit irreproachable independence
of thought and action. Memberswithexperience
in the CEO role, in finance, and in regulation
are particularly valuable. Credentials notwith-
standing,interpersonalchemistryisanessential
determinantofaboard’ssuccess.
3. Build, over time, a nuanced and broad under-
standing of all matters concerning the strategy,
risk appetite, and conduct of the firm, and an
understanding of the risks it faces and its resili-
ency. Allboardmembersshouldreceivestructured
inductionandongoingtraining.Thecleartrend
towarddeeperengagementbetweendirectorsand
managementandbetweendirectorsandexternal
constituentsistobeapplauded.
insigHTs and recommendaTions for enHancing governance eFFecTiveness
of Financial insTiTuTions
Toward EffEctivE GovErnancE of Financial insTiTuTions
20
4. Appoint the CEO and gauge top talent in the
firm, assuring that the CEO and top team possess
the skills, values, attitudes, and energy essential to
success. AverygoodCEOispreferabletoa“star”
CEO.Theboardmustconfirmtheappointment
of independent members of the executive team,
includingthechiefriskofficers(CROs)andhead
of internal audit, and shouldbe consultedwith
respecttootherveryseniorappointments.Boards
should maintain a focus on talent development
andsuccessionplanning,whicharecriticalcom-
ponentsoforganizationalstability.
5. Take a long-term view on strategy and perfor-
mance, focusing on sustainable success. The
boardhasaninviolablecommitmenttothelong-
termsuccessofthefirm,whichshouldbeviewed
inafive-to-20-yeartimeframe.
6. Respect the distinction between the board’s
responsibilities for direction setting, oversight,
and control, and management’s responsibilities
to run the business. Itismisguidedanddangerous
to conflate the responsibilities of management
with those of the board. The board’s primary
responsibilities include: (a) reachingagreement
on a strategy and risk appetite with manage-
ment,(b)choosingaCEOcapableofexecuting
thestrategy,(c)ensuringahigh-qualityleader-
ship team is inplace, (d)obtaining reasonable
assuranceofcompliancewithregulatory,legal,
andethicalrulesandguidelinesandthatappro-
priateandnecessaryriskcontrolprocessesare
in place, (e) ensuring all stakeholder interests
are appropriately represented and considered,
and (f) providing advice and support to man-
agement based on experience, expertise, and
relationships.
7. Reach agreement with management on a strat-
egy and champion management once decisions
have been made. Thereisanimportantrolefor
theboard in strategy,but the realdevelopment
andanalysisisclearlyanexecutivefunction.The
boardchallengesanddiscussestheproposalwith
management,revisionsaremade,detailsaredis-
cussed, and eventually a strategy is hammered
outtowhichallarefullycommitted.
8. Challenge management, vigorously and thought-
fully discussing all strategic proposals, key risk
policies, and major operational issues. Effective
challengedemandsintegrityonthepartofboth
theboardandmanagement.Managementmust
accept the board’s prerogatives and respond
positively rather than defensively. Boards must
becarefulnottounderminetheirownprocesses
withdisingenuousmotives.Boardmemberswho
challenge just to have their challenge recorded
arenotactingintheinterestoftheinstitution.
9. Ensure that rigorous and robust processes are
in place to monitor organizational compli-
ance with the agreed strategy and risk appetite
and with all applicable laws and regulations.
Proactively follow up on potential weaknesses
or issues. Oversightandcomplianceareimpor-
tant functions of the board, but boards that
permit their time and attention to be diverted
disproportionatelyintocomplianceandadvisory
activitiesat theexpenseofstrategy,riskgover-
nance,andtalentissuesmakeacriticalmistake.
10. Assess the board’s own effectiveness regularly,
occasionally with the assistance of external
advisers, and share this assessment with the lead
supervisor. Boardsshouldconductperiodicself-
evaluationsthatincludecandidandconstructive
feedback on the performance of directors and
committees. They should discuss the findings
with their supervisors. Supervisors’ judgments
regarding governance effectiveness are better
informed with a rich understanding of the
board’sinternalfindings.
Group of Thirty
21
risk governance
Those accountable for key risk policies in FIs,
on the board and within management, must
be sufficiently empowered to put the brakes
on the firm’s risk taking, but they also must
enable the firm to conduct well-managed,
profitable risk-taking activities that support
the firm’s long-term sustainable success.
EffectiveriskgovernancewithinFIsrequiresseveral
actionsonthepartofboardsandmanagementteams:
1. Establish a board-level risk committee that
supports the board’s role in approving the
firm’s risk appetite and that oversees the risk
professionals and infrastructure. The risk
committee’s core mission should be to shape
thefirm’sriskappetitewithinthecontextofthe
firm’schosenstrategyand then topresent it to
the full board for approval. Itmust ensure the
risk culture supports the desired risk profile
and must ensure risk leaders and professionals
are capable, empowered, and independent. It
mustalsoensurethefirmhasthenecessaryrisk
infrastructureinplace.
2. Ensure the presence of a CRO who is indepen-
dent, has stature within the management
structure and unfettered access to the board
risk committee, and has the authority to find
the appropriate balance between constraint and
support of risk taking. TheCROmusthavethe
independence,skills,andstaturetoinfluencethe
firm’s risk-taking activities. The board should
approve the appointment of the CRO, and the
risk committee should annually review the
CRO’scompensation.
3. Determine a risk appetite that is clearly articu-
lated, properly linked to the firm’s strategy,
embedded across the firm, and which enables
risk taking. The FI’s risk appetite framework
should frame the choices regarding risks in
terms of the type of institution the board and
managementaretryingtobuildandsustain,and
it should clearly link risks and returns. To be
fullyeffective,theriskappetiteframeworkmust
beembeddeddeepwithinthefirmandlinkedto
keymanagementprocesses,suchascapitalallo-
cation decisions, new product and businesses
approvals,andcompensationarrangements.
4. Actively assess and manage the risk culture so
that it supports the firm’s risk appetite. Therisk
committeeandfullboardplayacriticalrole,with
management,inensuringthattheriskcultureis
consistentwiththefirm’sriskprofileaspirations.
ThetonesetatthetopofanFIisimportant,but
non-executivedirectorsalsoneed tobeattuned
totheculturedeepintheorganizationandhow
themessages at the top are communicated and
interpretedbyemployees.Theyshouldseekout
theviewsofsupervisorsandtheexternalauditor.
5. Ensure directors have access to the right level
of risk information so as to see and fully com-
prehend the major risks. FImanagementmust
strike a balance between being thorough and
concise in reporting to the board. They must
avoid overwhelming directors with details,
whilestillprovidingsufficientandunbiasedrisk
information.
6. Maintain robust risk information technology (IT)
systems that can generate timely, comprehensive,
cross-geography, cross-product information on
exposures. Ultimately, the quality of risk infor-
mation that FI boards and management teams
receive depends largely on the quality of the
organization’s IT systems. Ideally,FIsneed risk
IT systems that can gather risk information
quickly and comprehensively, producing esti-
matesoftheirexposureswithinhours.
7. Maintain an ongoing focus on emerging risks by
having a holistic, vigilant view of all major risks,
strategic and product creep, excess complexity,
Toward EffEctivE GovErnancE of Financial insTiTuTions
22
and areas of overperformance. Boards should
take abroadperspectivewhenoverseeing risk,
including operational and reputational risks
thataredifficulttomeasureandmitigate.They
shouldlookforearlywarningsignsofemerging
risksarisingfromincreasinglycomplexorgani-
zational structures and products or businesses
withunexpectedoverperformance.
8. Strengthen the firm’s ability to withstand exog-
enous shocks, recognizing that it is impossible
to avoid financial stresses when they come. No
FIisresistanttoallpossiblecrises,butjudicious
advance planning and testing increases insti-
tutional robustness. Boards and management
teamsshouldalsoexaminehowtheirfirmshave
reacted to actual unanticipated events in the
past, sincehistoricreactionscanbevery infor-
mativeaboutthefirm’sresiliency.
managemenT
Management needs to play a continuous pro-
active role in the overall governance process,
upward to the board and downward through
the organization.
Formanagement toplay its governance role effec-
tively,itmusttakethefollowingactions:
1. Be accountable for the daily effectiveness of
the control architecture. Management must
establish a control framework designed to
preventproblems,activelymonitorthefirmonan
ongoingbasis,andaggressivelyaddressissuesthat
arise. Management must ensure employees and
executivesadheretocompanypolicyonroutine
decisions.Thecontrolframeworkshouldbeable
to elevate issues that fall outside the policy so
thatindividualsdonotnavigatearoundpolicies
withoutproperguidanceandsupervision.
2. Ensure control professionals maintain a compre-
hensive view of the firm’s risks, balancing
prudence with encouragement of sustainable
risk taking. Strongcontrolsrequireindependent
control professionals. In some instances, they
needveto rights.They shouldnotbe seenasa
police force, however, and theyneed to enable
controlledrisktakingaswellasconstrainit.
3. Educate and inform directors on an ongoing
basis. The most important thing management
candotofostergoodgovernanceistogivethe
boardareasonablechanceofunderstandingthe
companystrategy,riskappetite,andmajorchal-
lenges the company faces. Management must
effectively orient new directors and educate
alldirectorsonanongoingbasis to enable the
boardtoaskcriticalquestionsofmanagement.
4. Focus the governance dialogue on the key issues
and bring the board early into management’s
thinking on key decisions. Governance only
worksifmanagementhasaprocessforidentifying
themajorissuesandpresentingthemtotheboard
fordiscussion.Managementmustbeunfailingly
attentive to potential new agenda items for the
board and its committees and must facilitate
effective, ongoing communication between the
boardandmanagementonkeydecisions.
5. Expose directors to a broad set of executives
and employees, both informally and formally,
so they get an unfiltered view of the company.
Nothingshouldhindercommunicationbetween
directors and executives. Directors should be
free to talk to the executives, and they should
feelconfidentandcomfortableindoingso—the
board-managementrelationshiprequiresnoless.
However,directorsshouldexercisetheprivilege
ofinteractionwithmanagementwithcare.
6. Work continually on modeling and supporting
a culture that promotes long-term thinking,
discipline, and accountability. In addition to
explaining what is expected of employees,
members of management should model the
Group of Thirty
23
desired behaviors. Boards and management
shouldarticulatethefoundationalprinciplesor
valuesofthecultureandfostertheiracceptance.
7. Encourage a culture of no surprises, the quick
elevation of issues, toleration of mistakes,
organizational learning, and punishment of
malfeasance. Management must be open and
transparentwiththeboardandshouldpromote
those qualities throughout the organization.
Only when management teams share their
concernsopenly,andinatimelyfashion,canthe
boardunderstandtheissuesandprovideinputor
direction.
8. Build a trust-based environment that supports
critical challenge and is open to change. Executives
have tobeprepared for toughquestioning and
must understand that it is the board’s duty to
challengethem.Executivesmustbereadyforthe
boardtorejectaproposal.Beingopentochallenge
is a sign of quality management. Constructive
challengeiseveryone’sresponsibilityandshould
befosteredacrosstheorganization,upwardand
downward.
supervisors
Supervisors that more fully comprehend FI
strategies, risk appetite and profile, culture,
and governance effectiveness will be better
able to make the key judgments their man-
date requires.
Toenablesupervisorstoplayafullyeffectiverolein
theoverallgovernanceprocess,theyneedto:
1. Understand the overall business, strategy, and
risk appetite of each FI, and focus on FI reactions
to real-world events. The expanded objectives
of many supervisors encourage them to better
understandthestrategies,businessplans,prod-
ucts,andriskappetiteoftheFIstheysupervise.
Supervisorsshouldcontinuetoimprovetheuse
ofstresstestingandhorizontalreviews,butthey
shouldalsolearnhowFIshavereactedtoreal-
worldevents.Supervisorsshouldlookforareas
whereFIsareperformingunexpectedlywelland
considerthesustainabilityofthatperformance.
2. Develop a sophisticated appreciation of how cor-
porate governance works, including governance
structures and processes, board composition
and new director selection, and the internal
dynamics of effective FI boards. Supervisors
shouldseektounderstandhoweffectivegover-
nanceandboardchallengeoccursineachFI,but
supervisorsshouldalsosafeguardtheirindepen-
dence,attendingboardandcommitteemeetings
onlyoccasionally.Theycanreservetherightto
vetandapprovenewdirectors,asmaybelegally
required, while leaving board building to the
boardchairmanandnominatingcommittee.
3. Develop trust-based relationships with senior
executives and directors by regularly engag-
ing them in an informal dialogue on industry
benchmarks, emerging systemic risks, and
supervisory concerns. Supervisors’ increasing
interactionanddialoguewithseniorexecutives
and directors on key strategy, risk, and gover-
nanceissuesisapositivetrend.
4. Ensure boards and management govern effec-
tively by setting realistic expectations of FI
boards and adjusting regulatory guidance
accordingly. Regulatoryguidanceshouldclearly
articulatedistinctrolesandexpectationsforFI
boardsandmanagement.Assupervisorsdevelop
adeeperunderstandingofthecultureandvalues
that drivebehaviors inFIs, theywill bebetter
positioned to discuss their concerns or recom-
mendationswithFIleaders.
5. Avoid overstepping their supervisory role and
allow the board and management to shoulder
their respective responsibilities. As supervisors
expandthescopeoftheiroversight,theyshould
Toward EffEctivE GovErnancE of Financial insTiTuTions
24
reservetherighttostepintodecisionshistorically
lefttomanagementandboardsiftheydetermine
that those decisions present undue risk with
potential systemic consequences. However, they
mustdo soonlyasa last resort.More frequent
intervention risks compromising the clear fidu-
ciaryresponsibilityofmanagementandtheboard.
sHareHolders
Long-term shareholders can and should
contribute meaningfully to effective FI
gover nance.
Tofostergoodrelationshipswithshareholders,FIs
needtoengageinthefollowingpractices:
1. Actively listen to shareholder perspectives and
concerns before issues arise and communicate
clearly the board’s philosophy on governance
matters of shareholder interest, including compen-
sation, succession, and board composition.
Dialoguewithinvestorsiscritical.Byengagingin
active communication, boards will stay abreast
of shareholder concerns, will be aware of the
moodoftheinvestorcommunity,andwillbein
a position to preempt unwelcome shareholder
resolutionsthroughdialogueandearlyaction.
2. Recognize that shareholders are a hetero geneous
group and make every effort to honor share-
holders’ desire to be heard. Shareholders have
diverse interests and perspectives. The wise
boardmustunderstanddivergentobjectivesand
striketherightbalanceforthelong-termsuccess
oftheinstitution.
3. Thoughtfully manage their interactions with
shareholders in the interest of clarity of message.
MostFIsroutinelyinvolveonlyasmallhandful
of non-executive directors in shareholder
conversations,whichisareasonableapproach.
Discussions with shareholders need to be
consistent, and the possibility of confusion or
ambiguityincreasesasthenumberofvoicesin
theprocessgoesup.
4. Decide when to resist shareholder demands,
including those raised by proxy advisers, and
when to accede to them. Not all shareholders
willbehappywiththefirm’sgovernancephilo-
sophy and plans. Unhappy shareholders may
fileor threatentofileresolutionsat theannual
meeting.Theboardmust choose anddefenda
position in the long-term interests of the insti-
tution,whichisitsprimaryresponsibility,even
though that position may sometimes run con-
trarytothewishesofcertainshareholders.
Thefollowingpointsarealsoworthnoting:
5. The UK’s Financial Reporting Council has put
forward a useful shareholder code, 7 and the
International Corporate Governance Network is
supporting similar work. Institutional investors
globally would do well to carefully consider
the work of both organizations. They should
comply with the Financial Reporting Council’s
Stewardship Code whenever compliance is
consistent with the investor’s aims and the
constraintsunderwhichitoperates.
6. Shareholders have an important role to play
in shaping governance arrangements at FIs.
Shareholders can ask probing questions about
governance, offer helpful observations, and
otherwisesupporttheFI.Theynotonlyhavea
righttobeheard,theyhaveanimportantvoice
inthegovernanceprocess.
7 TheUKStewardshipCodecanbefoundathttp://www.frc.org.uk/corporate/investorgovernance.cfm.
Group of Thirty
25
values and culTure
Values and culture may be the keystone of
FI governance because they drive behaviors
of people throughout the organization and
the ultimate effectiveness of its governance
arrangements.
Although values and culture cannot always be
measured quantitatively, they impact governance
effectivenessinpowerfulwaysandthereforeshould
beamajorfocusforthesupervisor.Thefollowing
views and recommendations highlight the impor-
tance of values and culture and the hard work
involvedingettingthemright:
1. Honesty, integrity, proper motivations, inde-
pendence of thought, respect for the ideas of
others, openness/transparency, the courage to
speak out and act, and trust are the bedrock
values of effective governance.
2. It is for the board of directors to articulate and
senior executives to promote a culture that
embeds these values from the top to the bottom
of the entity. Culture is values brought to life.
3. Well-functioning boards set, promulgate, and
embed these values, commonly in the form of
a code, so that directors, senior executives, and
all other employees in an entity are fully aware
of the standards of behavior that are expected of
them.
4. Because of their power to influence behavior
and the execution of the FI’s strategy, values and
culture are essential dimensions of inquiry and
engagement for supervisors. Major sharehold-
ers or their fund managers should be attentive to
the culture of an entity when making investment
decisions and engaging with an investee board.
cHapTer 1
Addressing the Essential Question of Function
Toward EffEctivE GovErnancE of Financial insTiTuTions
28
Well-implemented governance structures and processes are important,
but whether and how well they function are the essential questions.
organizations that assures clear management
accountability
�� Aconstructiveandrigoroussupervisory arrange-
ment
�� Shareholderswhohaveanappropriatevoiceand
whoexercisetheirrightsandobligations.
diversiTy in governance approacHes reFlecTs unique circumsTancesAround the world, there is convergence regarding
the core roles of the board, management, super-
visors,andshareholders,andgeneralconsensuson
the responsibilities inherent in good governance.
For example, it is generally agreed that effective
governancerequiresthatshareholdersmeetperiodi-
cally and have the ability to elect independent
directors;thattheboardofdirectorsbecompetent,
engaged, and capable of challenging management
andreplacing theCEO, ifnecessary; that therebe
rigorous risk controls independent from the rev-
enueproducersinmanagement,andprocessesthat
ensurecompliancewithapplicablelawsandregula-
tions;andthatthoseprocessesandinformationbe
transparenttosupervisorsandboardmembers.
However,thewaythisworksvariessubstantially
fromfirmtofirm,sometimessubtlyandsometimes
quitestarkly.Forexample:
�� Unitaryboards(forexample,inNorthAmerica)
operate very differently from two-tier boards
(for example, inGermany,Switzerland,and the
Netherlands). Additional board structures play
a key role in China, Italy, and Japan. These
approaches have been examined in great detail
over the years, optimized, and found to be “fit
forpurpose.”
FIgovernanceaimstosupportthelong-termsuccess
of the entity and ensure that vigorous entrepre-
neurial initiative is kept in line by a set of checks
andbalancessothatthelegitimategoalsofallstake-
holders are represented, balanced, and satisfied to
the fullest extent possible. Many methods can be
successful: a study of governance arrangements at
36 of the world’s largest FIs reveals a wide diver-
sityofapproaches,drivenbydifferencesinculture,
law, institution-specific circumstances, the people
involved,andprecedent.
Thisreportfocusesprimarilyonthegovernance
of unitaryboards, but the same elements that are
critical to effective governance arise equally for
two-tierboards,albeitwithinadifferentstructure.
These prominently include the quality of strategic
review, thequalityof thedecisionmakingon risk
appetite, andmaintenanceofappropriate relation-
shipswiththesupervisorandmajorshareholders.
While key processes differ in two-tier boards
in Germany, Switzerland, and the Netherlands,
a generic characteristic of governance in two-tier
boards is that the greater the confinement of the
supervisory board role to one of monitoring, the
greaterwillbetherelianceplacedontheexecutive
boardfordecisionsonmattersofstrategy,riskappe-
tite,andsupervisoryandshareholderrelationships.
Any approach has the potential for failure, but
these failures are more often caused by defective
behaviororvaluesthanbybadstructuresorforms.
A governance system should be judged by how
well it functions. A functional governance system
requiresthefollowingelements:
�� Aboard of directorsthatcarriesoutitsvitalrole
�� A set of management protocols for governing
andcontrollingoperationsinhugeandcomplex
Group of Thirty
29
�� How to configure the leadership of the board
(thatis,howbesttodistributerolesandrespon-
sibilitiesamongtheCEO,chair,vice-chair,and
lead or senior independent director) has been
thoroughly debated. Studies prompted by the
financialcrisishavefoundnocorrelationbetween
themodelchosenandrelativesuccess.
�� Boardsizevariesfromfewerthan10membersto
morethan20.
�� Board composition (skills, number of executive
directors, diversity) varies. FIs strike a balance
among the many competing goals in a tight
marketfortalentinmanydifferentways.
�� Depth of directors’ engagement and the con-
comitanttimerequiredofthemandoftheboard
chairvarysubstantially.Thebareminimumtime
requiredofanon-executivedirectorhasincreased
markedly;arequirementof40to50daysayear
is not unusual. Some governance approaches
requirefarmoretime.
�� Depth of supervisors’ engagement, including
theirroleinvettingandapprovingmanagement
leaders and board members, their participation
inboardmeetings,andtheirmodeofinteraction
withmanagementandtheboardvary.
Althoughtosome,thisdiversitymayseemuntidy,
itarisesfromtheneedtodealwithuniquecircum-
stances. Greater homogeneity might in some cases
resultinpoorergovernancebecausetheconstraints
that would have to be introduced to bring about
homogeneitywouldreduceFIs’freedomtooptimize.
governance sysTems are deFined by boTH Hardware and soFTware Ananalogyfrominformationsystemsisinformative
forunderstandinggovernancesystems.Bothinfor-
mationandgovernancesystemsarebuiltarounda
definedarchitecture.Eachcomprisescertain“hard”
components (hardware) and “soft” components
(software). The software enables the hardware to
function.
�� In the case of FI governance systems, the hard-
wareincludestheorganizationalstructuresand
processesinvolvedingovernance.Manyofthese
architecturalfeaturesaredescribedingovernance
guidelines and are amenable to check-the-box
confirmation.Forexample:Doestheboardhave
a risk committee? Is there a chief risk officer,
independent of line-of-business heads? Is there
a duly constituted board, and does it include
independent, non-executive directors? Does the
boardreceivecompleteandtimely information?
Is there a division of responsibilities at the top
of the company (that is, a chair/CEO split)? Is
there a formal process for appointment of new
directors?Isaboardassessmentprocessinplace?
Are risk control processes in place? Does the
boarddiscloseitsremunerationpolicy?Doesthe
boardcommunicatewithshareholders?Apositive
answertoallthesequestions,whileencouraging,
saysverylittleaboutwhethergovernanceactually
functionseffectively.
�� FIgovernancesoftwarecomprisesthearts,skills,
andpeople thatmake thehardware functional.
Judgments regarding the software’s efficacyare
oftensubjectiveandbasedonobservationsthat
arenotalwayseasytomake.Forexample:Does
the board engage with and challenge manage-
ment? Are interactions open and transparent?
Does management give the board a reasonable
chance of understanding the real issues? Is the
CEO’sattitudetowardtheboardrespectfuland
open?IstherelationshipbetweentheCEOand
thechair(wherethoserolesaresplit)aconstruc-
tiveone?Areissuespresentedtotheboardina
useful,practicalmannerconducivetotheappli-
cationofbusinessjudgment?Doesthesupervisor
understandhowaboardworks?
Toward EffEctivE GovErnancE of Financial insTiTuTions
30
Affirmativeanswers to thesequestions tend to
begoodpredictorsofgovernanceeffectiveness.
Theoverallperformance(effectiveness)ofthesystem
isdeterminedbythecombinationofhardwareand
software.Theymustfunctioncoherentlyanddrive
thedesiredbehaviors.Achangeinonecomponent
willcausechangesintheothers.
eFFecTive governance depends on people and How THey inTeracTIt canbe tempting,whenonefinds anFIwith an
effectivegovernancesystem,toholditupasamodel
for others to emulate. But unique circumstances
makethattricky.AdoptinganotherFI’sgovernance
best practice may not necessarily be advisable,
becausewhatworksbest inonesituationmaynot
workatallinanother.
Effectivegovernancecomesdowntothepeoplein
theroomandhowtheyinteract,whetherthatinter-
actionistakingplaceintheboardroom,boardcom-
mitteemeetings,managementmeetings,ormeetings
with supervisors and shareholders. FIs can tailor
andoptimizegovernancearrangements,butifthey
havethewrongpeople,orifthosepeoplebehavein
dysfunctionalways,thearrangementswillnotsave
them.Leadershipmakesahugedifference.
***
Theartofgovernanceisinmakingdifferentforms
function well and adjusting the form to enhance
function.Ittakesmatureleadership,genuineteam-
work,selflessvalues,andcollaborativebehaviors—
allcarefullyshapedandnurturedovertime.There
isnoblueprintthatisapanacea,butthefollowing
chapters of this report, which draw on extensive
discussions of unprecedented scope and breadth
withFI leadership fromacross theglobe,describe
governanceprinciplesandgenerallyacceptedgood
practicesthatcanapplytoallFIs.
TheG30believestheinsightsandrecommenda-
tionsineachoftheremainingsixchapterswillbeof
assistancetoboards,management,supervisors,reg-
ulators,andshareholdersastheygrapplewithhow
toassessandenhancetheefficacyofcorporategov-
ernancestructuresandculturewithintheirfirms.
cHapTer 2
The Vital Role of Boards of Directors
Toward EffEctivE GovErnancE of Financial insTiTuTions
32
Boards of directors play the pivotal role in FI governance through their
control of the three factors that ultimately determine the success of the
FI: the choice of strategy, assessment of risk taking, and assurance that
the necessary talent is in place, starting with the CEO, to implement
the agreed strategy.
4. Appoint the CEO and gauge top talent in the
firm, assuring that the CEO and the top team
possess the skills, values,attitudes, andenergy
essentialtosuccess.
5. Take a long-termviewon strategy andperfor-
mance,focusingonsustainablesuccess.
6. Respect the distinction between the board’s
responsibilities for direction setting, oversight,
and control, and management’s responsibilities
torunthebusiness.
7. Reachagreementwithmanagementonastrategy
andchampionmanagementoncedecisionshave
beenmade.
8. Challengemanagement,vigorouslyandthought-
fullydiscussingallstrategicproposals,keyrisk
policies,andmajoroperationalissues.
9. Ensurethatrigorousandrobustprocessesarein
placetomonitororganizationalcompliancewith
the agreed strategy and risk appetite and with
all applicable lawsand regulations. Proactively
followuponpotentialweaknessesorissues.
10.Assess the board’s own effectiveness regularly,
occasionally with the assistance of external
advisers,andsharethisassessmentwiththelead
supervisor.
These10determinantsofboardeffectivenessare
discussedindepthbelow.
Formanypeople,corporategovernance issynony-
mous with the board of directors, which, indeed,
canbethoughtofasthenexusofgovernance,given
itsmanagementoversightandcontrolfunctionand
itsfiduciaryresponsibilitiestostakeholders.
Duringthe2008–2009financialcrisis,manage-
ment at certain FIs, with the knowledge and
approvaloftheirboards,tookdecisionsandactions
that led to terribleoutcomesforemployees, share-
holders, and the wider economy. Several of those
FIsnolongerexistorhavebeenabsorbedbyothers,
and somehavebeenputunder conservatorshipor
temporarygovernmentcontrolasaconsequenceof
egregiousfailuresofjudgmentand,inmanycases,
the failure of effective governance. What should
their boards have done differently? To answer
that question, it is helpful to consider what is the
mandateofboards.
Well-functioning boards scrupulously discharge
thefollowing10essentialduties:
1. Fashion a leadership structure that allows the
boardtoworkeffectivelyandcollaborativelyas
ateam,unifiedinsupportoftheenterprise.
2. Recruitmemberswhocollectivelybringabalance
ofexpertise,skills,experience,andperspectives
andwhoexhibitirreproachableindependenceof
thoughtandaction.
3. Build, over time, a nuanced and broad under-
standingofallmattersconcerningthestrategy,
riskappetite,andconductofthefirm,andunder-
standingoftherisksitfacesanditsresiliency.
Group of Thirty
33
1. FasHion a leadersHip sTrucTure THaT allows THe board To work eFFecTively and collaboraTively as a Team, uniFied in supporT oF THe enTerprise.Whenconsideringnecessities foraneffectiveboard,
the importance of a skillful chair’s mature, open
leadershipcannotbeoveremphasized.Effectivechairs
manage to get the very best out of the members,
individually and collectively. They respect the
members, preside, encourage debate, and do not
managetowardapredeterminedoutcome.Asforthe
boardasawhole,successfulboardsworkwellasa
team,inthefullestsenseofthatword,achievingfar
greaterimpactthancouldawell-meaningcollection
of talented individuals working on their own. The
choices of leadership structure and board size are
important.
leadership structureThe leadership structureofboardsvaries substan-
tially across countries and companies. Structure
includes defining the roles of the chairman and
CEO; establishing committees and their charters;
anddefiningadditionalroles,suchasvice-chair(s),
deputy chair(s), senior independent director, and
leadorpresidingdirector.
Roles of the chairman and CEO
SplittingtheroleofchairmanandCEOhasbecome
the most common practice globally. A combined
chair/CEOisnotpermittedbylawinsomecountries.
There is compelling logic for splitting the two
roles:
�� Ifthejoboftheboardistocontrolmanagement,
then an irresolvable conflict of interest arises
when the most powerful board member (the
chair)isalsothemostpowerfulmemberofman-
agement(theCEO).
�� In a complex, global FI, the responsibilities
of chairing the board constitute a substantial
workload, requiring a minimum of 35 percent
time commitment, and typically much greater.
Meanwhile,thepressuresandbreadthofrespon-
sibility borne by the CEO have grown almost
beyond the capacity of a single person. To ask
oneperson toably fulfillboth the roleofCEO
andtheroleofchairseemsunreasonable.
�� Combiningrolesconcentratestoomuchpowerin
asingleperson.
Splittingtherolesisstronglyencouraged.Acom-
binedrolemaybeacceptableiftheboardappointsa
leadorseniorindependentdirectorwiththerespon-
sibilityandauthoritytoactasthoughheorshewere
the non-executive chairman under circumstances
thatcallforgreaterindependence.Itisworthnoting
thatthemajorityofexamplesofthecombinedrole
arefoundintheUnitedStates.
Responsibilities, time commitments, and additional roles
Where the board chair and CEO roles have been
split,oneobservesabroadspectrumofapproaches
to the chair’s core responsibilities and the time
requiredtofulfillthoseduties.Ingeneral,theboard
chair, the lead director, and committee chairs are
required to spendmore time in their roles than is
requiredofotherboardmembers.Thisisagenerally
acceptedgoodpracticeandshouldbeencouragedin
allFIboards.
Some chairs serve in a full-time capacity and
others in a part-time capacity. Those that serve
part-time tend toview themselvesas the leaderof
thegovernanceprocessandasamentorandadviser
to theCEO.Those that serve full-timebelieve the
chairmanoftheboardneedstobepowerful,needs
accesstoall information,andmustbe inconstant
dialogue with management and with other board
leaders. Whether a part-time or full-time chair is
Toward EffEctivE GovErnancE of Financial insTiTuTions
34
betterdependsonthevariousdimensionsofboard
structure and process and on how people work
togetherinanygivenFI’sindividualcase.
Board committees
Various regulatory and stock exchange rules and
regulations speak to the committees FIs should
maintain. In addition, certain commonalities are
evident:
�� AlmosteveryFInowhasaseparateriskcommit-
tee,andmanydidpriorto2008.Itsroleiscrucial,
asisthemannerinwhichitengageswithman-
agement,especiallytheCRO,theCEO,andthe
headsoflinesofbusiness.(Formoredetail,please
see Chapter 3: Risk Governance: A Distinctive
andCrucialElementofFIGovernance.)
�� The audit committee plays a substantial role,
evenafterdivestingitselfofsomeriskresponsi-
bilities.
�� The compensation or human resources (HR)
committeehasanincreasinglyhighprofile.
�� The nominating and governance committee
plays a critical role in the oversight and con-
tinuous improvementofboardgovernance,and
alsoinshaping,withthechair,avibrantboard
composedofcomplementary,collaborative,and
committeddirectors.
�� SomeFIshavestrategycommitteesandavariety
ofothercommittees,aswell.
�� Whilemuchoftheworkoftheboardgetsdone
incommittees,alloftheimportantdecisionsare
takenbytheboard.
The exact complement of committees will vary
by FI, but it is important not to have too many,
because that can diffuse the responsibility of the
board, particularly if the committees’ actions are
notwellcoordinated.
Committee chairs play an important role: they
mustsetthecommittee’sagenda,actastheprimary
interfacewithmanagement, lead thecommittee to
a deep understanding of the business issues and
choices before it, communicate the committee’s
messages and recommendations to the chairman
andthentothefullboard,andfollowup.
board sizeAmongtheFIsinterviewedforthisinitiative,board
size ranged fromaminimumof eightmembers to
amaximumof23.Theaverageboardsizewasjust
over14,andthemostfrequentnumberontheboard
was16.Whereexecutivedirectorsarepermittedby
law,itisadvisabletokeeptheirnumberstoabare
minimumrelativetonon-executivedirectors.
Theremaybelegalorpragmaticreasonsforlarger
boards,or largerboardsmay simplybepreferred.
A larger boardmaybenecessary in the following
cases:
�� When important multiple shareholder interests
requirerepresentation
�� When there are executive board members who
areessentialtoeffectivefunction
�� Whengeographicscopemakesforeignnationals
animportantboardasset
�� Toimbuetheboardwithgenderandethnicdiver-
sity,whichcanbeconsideredvital.
However,thebiggeraboardgets,themorediffi-
cultitistomanage.Meetingscangetoutofcontrol
orbecomesostructuredthat it isdifficult tohave
effective debate. Ultimately, the right size of the
boarddependsonthoseseatedaroundthetableand
how they interact, butonbalance, smallerboards
thatrequireagreatertimecommitmentfromtheir
membersarebetterthanlargerboardsthatrequire
amoremodestcommitment.
Group of Thirty
35
Aboardof10to12memberscanoperateeffi-
ciently,cohesively,anddecisively.Itisalsoeasierto
getinputfromeveryoneiftheboardissmaller,and
smallerboardstendtobeamoreintimateandcom-
fortablewith candor.On largerboards,badnews
tends to stay just below the surface. Making just
thispoint,onechairmanobserved,“The bigger the
crowd, the better the news.”
Someboardchairspointtotheneedtopopulate
asmanyassixorsevencommitteesasareasonto
expand theboard,butperhapsmostwouldagree,
uponreflection,thatlettingcommitteestructuredic-
tatethenumberofboardmembersisnotadvisable.
2. recruiT members wHo collecTively bring a balance oF eXperTise, skills, eXperience, and perspecTives and wHo eXHibiT irreproacHable independence oF THougHT and acTion.FIs need balanced boards that include individuals
withdiverseexperienceandperspective.FIexpertise
willbeanasset,butotherexperience isalsoboth
valuableandnecessary.CEOstendtomakeexcel-
lentboardmembers,asdoformerseniorregulators
andsupervisors.Independenceofmindisessential,
asarejudgmentandmaturity.
diversity and expertiseIn thewakeof the crisis, FIs havebeenpressured
toincreasethenumberofboardmemberswithsig-
nificantfinancialexperience.WhileFIperspectives
fromtheboardcanbehelpfulasacounterpointto
executiveviews,theboard’sfunctionisnottoout-
debate the executiveon technical issues.Although
boardandriskcommitteechairscangenerallyben-
efitfrompriorFIexperience,insomecasesaboard
or risk chair with outstanding leadership skills,
credibility, and independence will be a superior
choicetoaformerFIexecutive.
Indeed, in some countries and in someFIs, the
boardmayhavebecomeoverweightedwithFIexper-
tise.ToomanyFIveteranscanleadtogroupthink.
Inaddition,toomanyFIveteransontheboardor
onspecificcommittees,suchastheriskcommittee,
can overwhelm those without extensive FI experi-
ence. Furthermore, it has become very difficult to
recruitoutstandingindividualswithFIexperience,
andinsomejurisdictionsthishasbecomeanover-
whelmingconstraint.
But board members with other sorts of experi-
ence can also benefit the board. Members with
vitallyimportantgeographicandcustomersegment
expertise,forexample,canlendcriticaladviceand
insight. They represent the perspectives of clients
and customers and understand the dynamics of
thosemarkets.Othersbringgreatfunctionalexperi-
ence—informationtechnologyprovidesanobvious
example. Diversity extends as well to gender and
ethnicconsiderations,notasaconcessiontopolit-
icalcorrectness,butbecauseanindispensiblechar-
acteristic of an effective board is its openness to
differentideas,waysofthinking,andpointsofview.
current or recently retired ceosCurrent or recently retired CEOs may bring an
invaluable perspective and the ability to challenge
withcredibility.8Whilemoreboardmemberstoday
are willing to stand up to a strong-willed CEO,
formerorcurrentCEOshaveexecutiveexperience
that gives their criticisms more weight. Unfortu-
nately, a committee chairmanship may demand
moretimethanasittingCEOcanmakeavailable.
Nevertheless, if awilling candidate canbe found,
includingcurrentCEOsontheboardmakessense.
8 Tobeclear,weareadvocatingthegeneralskillsofanexperiencedCEO,notsuggestingthattheformerCEOoftheFIshouldbecomeamemberofitsboarduponretirement.
Toward EffEctivE GovErnancE of Financial insTiTuTions
36
Former senior supervisors and regulatorsFI boards and regulators/supervisors play comple-
mentaryrolesingovernance,combiningtoexercise
prudentrestraintandaddwisdomtokeydecisions.
With due recognition of the latent dangers of
“revolving door” placements of former regulators
and supervisors into firms they once oversaw, the
perspectivesofthosewhohaveheldseniorpositions
in government can be extraordinarily helpful to
effectiveboardgovernance.
independence of mindIndependence is an indispensible trait in board
members:independentboardmemberscanresistthe
pressuretobeaccommodatingandtherebyexercise
uncompromising oversight. With only rare excep-
tions, directors must be economically independent
andnotreliantontheincometheyreceivefortheir
serviceontheboard.Independenceneedstobetem-
peredbyacommon,sharedagendaandasharedper-
spectiveonwhattheorganizationistryingtoachieve.
Judgment and maturityBoard members need the skill and experience to
knowhowtointerveneeffectivelyinagivensitua-
tionwhilenotattemptingtooverstepbounds.They
mustknowhowtochallengewithoutundermining
respect, and they must be able to recognize when
mattersneedfurtherdiscussionandinvestigation.
building the boardIthasbecomeincreasinglydifficulttoassemblethe
skills and personalities necessary for an effective
board,anditislikelytobecomeevenmoredifficult.
TalentedFIexecutiveswithoutcompetitiveconflicts
are scarce. Fewer and fewer CEOs are willing to
allocatethetimeandacceptthelegalaccountability
boardmembershipentails.Thecandidatepooloften
includes many people who have not been CEOs,
whoarenolongerinthebusiness,orwhohavenot
beeninvolvedinglobalbusinesses.Theirabilityto
contribute, basedonother experiences and exper-
tise,tendstobemoretargeted.
Theintangibleelementofchemistryplaysahuge
role in a board’s effectiveness. The personalities
involved are key, so that element, too, must be
considered.
The suitability of each potential new member
mustbeassessedagainst theboard’s current com-
position, theplan foraddingor strengtheningkey
dimensionsoftheboard,andwithadequateatten-
tion to the pool of candidates available and the
delicatebutdistincttrade-offsamongthem.Thisis
anongoingprocessofreviewandrenewal.Therole
of the nominating and/or governance committee
is crucial in this process. The decision requires
balancedjudgment.
3. build, over Time, a nuanced and broad undersTanding oF all maTTers concerning THe sTraTegy, risk appeTiTe, and conducT oF THe Firm, and an undersTanding oF THe risks iT Faces and iTs resiliency.FIboardmembersmustgaintheunderstandingthey
needtomakegoodchoicesanddecisions.Theymust
understand the financial industry, the competitive
and regulatory landscape, the firm’s own balance
sheetandriskprofile,andtheleadershipteam.How
doesaboardarriveatthatunderstanding,andhow
muchunderstandingisenough?
Notsomanyyearsago,boardstendedtobecom-
posedofamixofexecutiveandnon-executivedirec-
tors,with executivesoccupyinghalf or evenmore
of the board seats. Executive members brought
detailed knowledge, and non-executive members
brought external experience. In recent years, the
globaltrendhasbeenawayfromexecutivemembers
ontheboard,thethinkingbeingthatnon-executive
Group of Thirty
37
membersarebetterableandmorelikelytochallenge
managementproposals,whileexecutivescanalways
be called upon to provide expertise as needed
withoutbeinggivenadirectorship.
Withregardtonon-executivedirectors, itbears
rememberingthatFIexperiencealoneisnotenough
to ensure that non-executive directors understand
allthattheyneedtoknowontheboard.Theymay
havecomefromfirmsthatarequitedifferentfrom
theinstitutioninquestion;furthermore,FIindustry
understandingbecomesoutdatedratherquickly.
The board must understand not only the issues
andchoicesFIsface,butalsothequalityandcapa-
bilities of the leadership team.Theboardneeds to
meetthemanagementteam—atdinners,inmeetings,
informally—so it can be sure the members of the
teamarecapableofexecuting their jobs.Whatare
theirweaknesses?Isthereasufficientpoolofsucces-
sorsforkeymanagementroles—notonlytheCEO,
butotherkeypositionsaswell—todrawonwhenthe
needarises?Interactingregularly,butnotintensively,
withmanagementcanyieldmeaningfulinsight.
Understandingcomesfromthreeprimarysources:
initialeducationandongoingtraining,engagement
with management, and engagement with external
constituencies.
initial education and ongoing trainingNew board members, even those with significant
boardroom experience, need a thorough program
of initial education in order to be effective. This
criticalperiodoflearningshouldlastatleastayear
andperhapslonger.
Board members should learn the history of the
institution—notsimplythelastfewyears,butback
25oreven40years.Theyshouldalsobethoroughly
familiar with the position of the FI today and its
aspirationsforthefuture.Familiaritywiththefind-
ings and conclusions of the most highly regarded
equityanalystsisessentialandisaneffectivewayto
gainanexternalperspectiveonissues.
Gettinguptospeedisachallenge;stayingabreast
ofdevelopmentsinthisfast-movingsectorrequires
continual effort. Great boards invest substantial
timeandeffortinongoingtraining,outsideofboard
andcommitteemeeting time, focusedonnewand
newly relevant issues.Thesemight include regula-
torydevelopmentsandtheirimplications,emerging
risks,andregulardeeptutorialsonkeyissuesinthe
environmentorwithinthefirm.
board engagement with managementFIboardsaremoredeeplyengagedwiththedetailsof
thebusinessthantheywerefiveto10yearsago,and
theydependonmanagement for thevastmajority
oftheinformationtheyreceive.Managementmust
providetherightinformation,withtherightlevelof
detail,andwithaslittlebiasaspossible.
Thenatureandlevelofboardmembers’engage-
mentwithmanagementandtheamountoftimethey
committotheirboarddutiesvariesgreatly.Insome
cases,theboardissoactivethattheonlyquestionis
whetheritisgoingtoofar.Theboardmustrespect
thatmanagementrunsthecompanyonaday-to-day
basisandmanagementthereforebearsresponsibility
forthefirm’soutcomes.
For some boards, an intimate relationship with
management works best, while for others, main-
tainingacertaindistance,keepingtheonusonman-
agementtosurfaceissuesandprovideinformation,
hasproventobethebestapproach.Irrespectiveof
style, an effective boardmust engage as deeply as
neededtounderstandhowthebusinessisrunning,
howriskappetite isworking inpractice,andhow
managementisperforming.
board engagement with external constituenciesBoard members should be encouraged to engage
with external constituencies—supervisors and
shareholders.
Toward EffEctivE GovErnancE of Financial insTiTuTions
38
Supervisors are actively seeking a deeper and
more nuanced understanding of how the board
works, how key decisions are reached, and other
factorsrelevanttoeffectivegovernance,anddirec-
tors can respond by engaging in more unscripted,
interactive discussions with supervisors, held on a
moreroutinebasis.Overtime,adirectorcanimpart
substantial understanding of how the governance
systemisworkingandthekeyissuesbeingaddressed.
In return, directors gain an understanding of the
supervisor’s perspectives and concerns, unfiltered
bymanagement.Directorsshouldcloselycoordinate
withmanagementregardingtheseinteractionsand
interactionswithotherexternalconstituents,how-
ever. (For more detail on board engagement with
supervisors, please see Chapter 5: The Role and
ResponsibilityofSupervisors.)
Engagementwithshareholdersmustbe,ofneces-
sity,moreselective,butthebenefitofthatengage-
ment is a deeper understanding of shareholders’
views and the opportunity to share the board’s
thinking on matters of concern. (For more detail
on board member engagement with shareholders,
please see Chapter 6: Relationships between FI
BoardsandLong-termShareholders.)
4. appoinT THe ceo and gauge Top TalenT in THe Firm, assuring THaT THe ceo and Top Team possess THe skills, values, aTTiTudes, and energy essenTial To success.Afundamentalroleoftheboardistheappointment
oftheCEO.Eventhebeststrategymayproveuseless
absentatalentedleadershipteam,headedbyaCEO
whoiscapableofexecutingit.Generally,theboard
playsthepivotalroleofhiringandfiringtheCEO,
although in some jurisdictions regulatory authori-
tiesvetcandidatesandapprove thefinalselection,
attestingtothechosencandidate’s“fitandproper”
credentials.
choosing the ceoSuccessionplanningfortheCEOisofcriticalimpor-
tance. Inmany cases, an internal candidate offers
powerfuladvantagesoveracandidatefromoutside
thefirm.Internalcandidatesaremorefamiliarwith
the FI, its strategy, its strengths and weaknesses,
and its people, and the board is more familiar
withaninternalcandidate’scharacter,capabilities,
weaknesses,internalreputationandrespect,andfit
with thechallenges facing the institution. Inother
cases, particularly where a break from the past is
required,anexternalcandidatewillbethesuperior
choice.Acandidatefieldthatincludesbothinternal
andexternalcandidatestypicallyyieldsthegreatest
confidenceintheultimatechoice.
GivenachoicebetweenaverygoodCEOanda
“star”CEO, the former ispreferable to the latter.
VerygoodCEOstendtogetthe jobdonereliably,
withoutunduefanfare.Theysharecreditandbuild
support internally and externally.They listenwell
and balance decisions carefully. They care much
moreaboutdoingtherightthingthanaboutbeing
right.StarCEOs,bycontrast,mayconflatetheFI’s
successwiththeirpersonalgoals.Theymayadvance
theirownideasinpreferencetolisteningtothegood
ideasofothers,andtheymaystarttobelievetheir
ownpress.Theycancomeintotensionwithboard
members,includingthechair.ACEOshouldavoid
star-likebehaviorsintheinterestoftheFI.
Anessentialdeterminingfactorofeffectivegover-
nanceistheCEO’sattitudetowardtheboard.The
CEOmustrespecttheboard’sroleandprerogatives
and must accommodate and even encourage the
board’schallengesandquestions.
Foritspart,theboardmustmonitortheCEOto
assurehisorhercontinuedsuitability.CEOschange
over time—many for the better, but some for the
worse. Their views on the business may become
rigid, and they are susceptible to hubris. Their
implicitprioritiescansubtlyshiftfromtheFItotheir
ownlegacy.Boardsmustnotblindlyassumethatthe
Group of Thirty
39
CEOremainsfitandproper;theymustnotpermit
a senseof loyalty to interferewithadispassionate
assessmentofperformance.Boardsmustalwaysbe
cultivatingsuccessors.CEOswithoutaviablesetof
successor candidates and a strong executive team
are particularly vulnerable to “imperial” attitudes
andbehavior.
gauging senior leadershipInadditiontohiringandfiringtheCEO,theboard
of directors should be consulted on senior-level
appointments. Building the top team is certainly
a core CEO responsibility, and an effective board
shouldbewaryofmeddling,butawiseCEOwill
seekcounsel.Ataminimum,theboardmustconfirm
the appointments of corporate officers for whom
independencefromlineofbusinessmanagementis
critical.Thesetypicallyincludetheinternalauditor,
thechieffinancialofficer,thechiefriskofficer,the
chiefcomplianceofficer,andthechieflegalofficer.
Whilesomeseniorappointmentsareplannedand
othersareunplanned,theCEOandtheboardmust
bepreparedforallof them,whichmeansthatFIs
musthave robust talent trackinganddevelopment
programs in place. The best of these systems not
only assess individual performance and capability
compared with peers inside the firm, they include
externalbenchmarking.Thesesystemslettheboard
knowwheretheFIhasoutstandingtalentrelativeto
competitorsandwheregapsmayexist.
In addition, board members must be afforded
manyanddiverseopportunities,overtime,togain
direct, personal familiarity with key senior man-
agers. Board members’ insights into the character
and capability of the leadership team are vital to
effectivegovernance.
Many compensation or HR committees are by
charterresponsibleforleadershipdevelopment.One
unfortunate consequence of the important, and
public, issues related topay structures, levels,and
policies,however,isthatsomeofthecompensation
committee’sattentionhasbeendivertedawayfrom
mattersoftalentdevelopment.Totheextentthatthis
istrue,committeechairsandfullboardsmustpick
uptheslack,sincetalentisacriticalprerequisitefor
thefirm’ssuccessandsafety.
making compensation arrangements for the ceo and executive leadersAlongsidetheboard’sroleingaugingtoptalentin
thefirmisitscrucialresponsibilitytosetthestruc-
tureandlevelsofpayfortheCEOandthetopteam,
and to approve the design of pay arrangements
deeperintheorganization.
Careful structuringof incentivesandcompensa-
tionareessential toproperlyalignthegoalsofthe
executivetalentleadingafirmwiththestrategyiden-
tifiedandchampionedbytheboard.Compensation
practicesappropriateforeachfirmareasignificant
factor in governance and must receive close atten-
tionbytheboardandthecompensationcommittee.
Failure to focus squarelyon thismattercanother-
wiseresult inamisalignmentthatonoccasioncan
imperilthehealthandreputationofthefirm.
The subject of compensation has been amply
studied elsewhere. The G30 commends the FSB
Principles for Sound Compensation Practices and
supportsthefullimplementationofthe19principles
and the steps being taken by the Board to assure
consistentapplicationacrossdifferentjurisdictions,
whilecognizantofdifferingculturalapproaches.
5. Take a long-Term view on sTraTegy and perFormance, Focusing on susTainable success.Whose interests does the board represent? Phi-
losophies, laws, and practices vary around the
world. U.S. law and mindset puts shareholders
first. Employees are expressly included in two-tier
boardswithcodetermination features,whileother
jurisdictionslegallyrequireemployeeintereststobe
Toward EffEctivE GovErnancE of Financial insTiTuTions
40
consideredalongsideothers’.Insomejurisdictions,
boardshaveresponsibilitiestodepositorsandcredi-
tors,aswell.GiventheuniqueexternalitiesofFIs,
society’sinterestsandwell-beingmustalwaysbea
highpriorityfortheboard.
Regardlessofwhomtheprimarystakeholderis,
FI boards in every country ought to take a long-
termviewonstrategy,similartothatofanowner
forwhomitwouldbeimpossibleorinconvenientto
sell.Theboardmusthaveaninviolablecommitment
to the long-term success of the firm. The proper
time frame is five to 10 years or more, because
businessmodelsandtechnologytaketimetochange
or replace. Looking at the next two years is not
strategic; it is tactical. Boards must oversee the
presentandensurethefuture.
This long-term view encourages enduring value
creation in the shareholders’ interests. It elevates
the value of prudence without diminishing the
importance of innovation, and it reduces short-
termself-interestasamotivator. Itbrings into the
foreground the firm’s dependence on its pool of
talentanddemandsthefirmplayapositiverolein
society.Takingalong-termview,allinterests—with
the exception of those of a few short-term share-
owners—tendtoconverge.
6. respecT THe disTincTion beTween THe board’s responsibiliTies For direcTion seTTing, oversigHT, and conTrol, and managemenT’s responsibiliTies To run THe business.Boardsneed toboth increase their governance role
andalsostriketheappropriatebalancethatpermits
managementtoexecuteagreedFIstrategiesandrun
the firm. The board must limit itself to providing
guidance; it cannot run the FI. Management runs
theFI,butboardsprovidean importantcheckand
balance.
The responsibilities of the board and manage-
ment are distinct but should be complimentary.
The board’s primary responsibilities vis-à-vis the
managementofthefirmare:(1)reachingagreement
withmanagementonastrategy,includingthefirm’s
riskappetiteanditscontours;(2)choosingaCEO
capable of executing the strategy; (3) ensuring a
high-qualityleadershipteamisinplace;(4)assuring
appropriate processes, people, and resources are
dedicated to compliance with all applicable regu-
latory, legal, and ethical rules and guidelines and
ensuringthatappropriateandnecessaryriskcontrol
processesare inplace; (5)ensuringall stakeholder
interests are appropriately represented and con-
sidered (including issues of remuneration); and (6)
providingadviceandsupporttomanagementbased
onexperience,expertise,andrelationships.
The pressures of an adverse environment drive
increasing levels of engagement and draw boards
closer and closer to the operations of the firm. In
suchanenvironment,itishardtokeepgovernance
separate from management. It can be especially
hard for board members to resist the temptation
tocrossthelineintomanagementbecausesooften
they themselves have been or still are managers.
However,itisessentialthattheboardremaininde-
pendentandallowmanagementtoexecutetheday-
to-dayactivitiesoftheorganization.
Regulators and supervisors are demanding the
boardsignoffonmoreandmoremanagementpro-
cesses.Bysigningoff,theboardatteststoanimplied
understandingofsubjectswheninfactboardmem-
bers’understandingmaybenomorethancursory.
Asign-offshouldbeunderstoodasmeaningthatthe
boardhasquestionedmanagement intensively and
is now comfortable that the processes in question
haveintegrityandthatmanagementhasperformed
thenecessaryworkproperly.Theboarditselfmakes
few decisions compared to management. It has a
limitedviewintothedetailsofoperations.Itcannot
vouch for detailed compliance; it can only assure
supervisorsandshareholdersthatithasdoneitsbest
Group of Thirty
41
toobtainreasonableassuranceandsatisfyitselfon
theintegrityofcontrolprocesses.
In some cultures, the fundamental division of
responsibilities between the board and manage-
ment can be summarized in easy-to-understand
terms: management runs the FI, and the board
controlsmanagement.Itisasimpleformulationthat
makestheimportantdistinctionthatboardsdonot
manage,theygovern.However,thereismuchmore
subtlety to the board-management relationship,
whichwillbeexploredinasubsequentchapter.
7. reacH agreemenT wiTH managemenT on a sTraTegy and cHampion managemenT once decisions Have been made.Contrary to popular conception, the board rarely
takes the lead in devising the strategy of the FI.
In most cases, management proposes strategy, the
board challenges anddiscusses the proposal, revi-
sionsaremade,detailsarediscussed,and—finally—
the board and the management team arrive at a
strategytowhichallarefullycommitted.Theboard
maychallengemanagement if it feelsmanagement
has been overenthusiastic or if the board thinks
management is shooting too lowor toohigh. It is
ultimatelytheboard’sprerogativeandresponsibility
tomakethedecisiononstrategy,asitiswithcapital,
leverage,risk,andselectingtheCEO.
The strategy must include a well-articulated,
actionable statement of risk appetite. If the risk
appetite is framed clearly, management has the
parameters it needs to make day-to-day risk deci-
sions,andapartfromtheboard’sroleinshapingthe
riskappetiteandapprovingcertainriskpoliciesand
strategies,managementmakesvirtuallyalldecisions
on risk. (Risk appetite frameworks are discussed
in more detail in Chapter 3: Risk Governance: A
DistinctiveandCrucialElementofFIGovernance.)
Theremustberespectonbothsidesoftheboard-
management equation. Management must respect
the board’s role and its challenges. It must do its
utmost to inform the board of issues so that the
boardcanexercisegoodbusinessjudgment.Itmust
supplywhateverinformationandanalysistheboard
feels isneeded.Itmustdevisealternativesforcon-
sideration.And,itmustaccepttheultimatedecision
of the board on matters of strategic importance.
For its part, the board should champion manage-
mentasmanagementexecutestheagreedplan.The
CEOmustbefullyempoweredtoexecutetheplan.
The board must support management in strategy
execution, even when the inevitable problems and
unanticipatedchallengesemerge.
8. cHallenge managemenT, vigorously and THougHTFully discussing all sTraTegic proposals, key risk policies, and maJor operaTional issues.
“A functioning board is one where people feel they
are free to speak and never get the sense that they
are being pushed to the side … Directors should
feel able to ask any questions they want, to upset
the agenda, to get direct answers ... Directors are
entitled to an answer.” —fi chairman
Theexerciseof itsroleasacheckonmanagement
requires that the board challenge management’s
proposals and perspectives. Strategic choices and
risk policies always command a high priority for
board discussion and debate and claim a regular
placeontheboard’sagenda.
Challenging management is more than mere
naysaying.Challengeinvolvesmutuallearningand
progress toward agreement—onan idea, an issue,
a proposal, or a decision. Board members seek
information so that they can understand options,
alternatives, implications, and consequences.They
askprobingquestions.Thesesurfacenewconsider-
ations. They may seek third-party expertise, hold
discussionsinexecutivesession,andschedulemeet-
ings with executives “offline.” On any important
Toward EffEctivE GovErnancE of Financial insTiTuTions
42
decision,theboardandmanagementtypicallyhave
severalopportunitiesfordiscussionanddebate.At
theend,aproposalemergesthateveryoneaccepts,
and the board then supports the decision and the
management teams are tasked with execution.
Althoughthisprocessmayneverhavegarneredano
vote,itnonethelessinvolvedchallenge.
Effective challenge demands integrity from
both the board and management. One chairman
describedthe“perfect question”game:Ifadirector
could ask the perfect question of a manger, the
directorwouldgettheperfectanswer—thatis,one
that contained the real insight sought. Otherwise,
thedirectorwouldsimplygetadirectanswertothe
question asked, with little insight. In a functional
relationship,themanagementleadermightreply,“I
think what you are driving at with your question
is … That is a troubling issue that we have debated
a great deal and not yet resolved. Here is how we
have thought about it …”
Boards must be careful not to undermine their
ownprocesses.Thereareoccasionswhenchallenges
havebeendisingenuous or evendriven byulterior
motives.Boardmemberswhochallengejusttohave
their challenge recorded in the minutes are not
actingintheinterestoftheinstitution,butmerelyin
theirowndefense.
9. ensure THaT rigorous and robusT processes are in place To moniTor organiZaTional compliance wiTH THe agreed sTraTegy and risk appeTiTe and wiTH all applicable laws and regulaTions. proacTively Follow up on poTenTial weaknesses or issues.Oversightandcomplianceinvolvenotonlytheaudit
function,butalsoriskgovernanceandcontrol.The
boardmustensurethatmanagementdecisionsand
actionsremainconsistentwiththechosenstrategy.
Itcanbeexpectedtoensurethatpoliciesandpro-
ceduresare inplace tomonitorcompliance,but it
cannot vouch for compliance. Nor should boards
be required to set risk limits or approve all risk
policies, which might number in the thousands.
Thesearetasksformanagement.
Complianceandauditresponsibilitiesrepresenta
majorroleoftheboardingovernance.Manydirec-
torsarerightlyconcernedthatcomplianceandover-
sightfunctions,manyrequiredbylaw,havebegun
to seriouslycrowdoutothercriticalboardagenda
items.Aboardagendamayincludeasmanyas50
legallymandatedcompliance items,administrative
innature.Butboardsmaymakeacriticalmistakeif
theypermittheirtimeandattentiontobediverted
disproportionately into compliance and advisory
activitiesattheexpenseofstrategy,riskgovernance,
andtalentissues.
Corporatesecretaries,withsupportoftheboard
chair, need to continue to find ways of accom-
modating these legal requirements with optimal
efficiency.Regulatorsandsupervisorsneedtocare-
fullyconsiderwhetherfurtherburdeningtheboard
agenda is wise, especially as they are apt to get
limitedvalueinreturn.Governancecannotbeper-
mittedtobecomeacomplianceexercise.
10. assess THe board’s own eFFecTiveness regularly, occasionally wiTH THe assisTance oF eXTernal advisers, and sHare THis assessmenT wiTH THe lead supervisor.Inmostjurisdictions,boardsarerequiredorstrongly
encouraged by regulators and stock exchanges to
conduct their own performance assessments. The
followingapproachestoassessmentarecommon:
�� Board chairs ask for direct feedback regarding
theirperformanceaschair,signedoranonymous,
Group of Thirty
43
andforsuggestionsforimprovementinprocess,
practice,andleadership.
�� Boardmembersprovideassessmentandfeedback
to one another anonymously. This constructive
feedbackissharedanddiscussed.
�� Committees of the board assess their perfor-
mance,oftenunderthepurviewofthegovernance
committee.
�� An outside board evaluator is employed.
Evaluators’ approaches differ: Some are quite
psychologically inclined and get deeply into
behaviors,whileothersaremoreprocessoriented.
Allmakeuseofextensiveinterviews.
Typically, the insightsarereviewedandworked
throughwiththeboardchairandotherkeyboard
leaders, such as the governance committee chair,
the leaddirector, thevice-chair,andsoforth,and
thentheyarereviewedthoroughlywithboardmem-
bers. The board then develops a plan for driving
improvements.
Mostchangeshappengradually,overtwoorthree
years.Maintainingthesameapproachandthesame
externaladviserpermits longitudinal tracking.On
theotherhand,usingthesameapproachyearafter
yearcanrapidlybecomestale:afterseveralyears,it
maybehardtogarnerfreshinsight.Forthisreason,
manyboardschangeapproachesfromtimetotime.
Theboardshouldpaygreatheedtotheseassess-
mentsandbewillingtodiscuss themwiththe lead
supervisor. Supervisors have a legitimate interest
in governance effectiveness and try to make their
own judgments. Those judgments will be better if
theyhaveaccess to theboard’s assessment.Admit-
tedly,thisrecommendationisnotwithoutpotential
downsides.Iftheboardassessmentissugar-coatedor
evenjustbiasedbythefearthatthesupervisormight
undulycriticize,muchofitsvaluecanbelost.How-
ever,inanenvironmentofmutualrespectandtrust,
thebenefitofsuccesswillexceedtheriskoffailure.
Tonurturetrust,supervisorsneedtoacceptthat
it is a signof effectivegovernance (andnot some-
thingtobehighlightedinasupervisoryletterasa
problem)fortheretobeissuesthathavebeenidenti-
fiedandarebeingaddressedbymanagementand/
ortheboard.
***
Theessentialtasksoutlinedabovearearticulated
fromtheperspectiveofaunitaryboard.Atwo-tier
board addresses essentially the same governance
tasks, though how this is accomplished depends
on the extent to which the supervisory board is
constitutionallyorinpracticecapableofengagingin
coreissuessuchasthedeterminationofriskappetite
andstrategy.
Themorethesupervisoryboardisconfinedtoa
role of monitoring and audit, the greater the reli-
ance on the executive board for governance. This
placeshuge responsibilityat the feetof the execu-
tiveboard,whichmustdischargeitsdutieswithout
thebenefitofthechallenge,guidance,andsupport
that is extended to the executive by the chairman
and non-executive directors in a well-functioning
unitaryboard. Inpractice, however, andnotwith-
standing the continuing formal separation of the
supervisoryboardfromtheexecutiveboardinGer-
many,Switzerland,andtheNetherlands,aprocess
ofevolution, inparticularsincethefinancialcrisis
of2008–2009,has ledtomuchcloserengagement
of many FI supervisory boards in matters of risk
appetiteandstrategy.
cHapTer 3
Risk Governance: A Distinctive and Crucial Element of FI Governance
Toward EffEctivE GovErnancE of Financial insTiTuTions
46
Those accountable for key risk policies in FIs, on the board and within
management, must be sufficiently empowered to put the brakes on the
firm’s risk taking, but they also must enable the firm to conduct well-
managed, profitable risk-taking activities that support the firm’s long-
term sustainable success.
separate risk committees and appointing higher-
quality, empowered chief risk officers (CROs).
Thesenew risk leaders have improved their firms’
riskinfrastructure.
However,fewlargeFIswouldclaimtohavecom-
pletedtheirriskjourney;indeed,thosethatunder-
stand the scaleof the challengeknow the journey
never ends. Improvements are always the order of
day,giventheeverchangingeconomic,political,and
market environment. Risk managers must remain
vigilant to the particular challenges posed by the
risksassociatedwithnewproducts,processes,and
markets.Riskgovernancemustadaptaheadof,or
atleastabreastof,change.
Effective risk governance within FIs requires
severalactionsonthepartofboardsandmanage-
mentteams.
provide independenT, compeTenT risk leadersHip
1. Establishaboard-levelriskcommitteethatsup-
portstheboard’sroleinapprovingthefirm’srisk
appetiteandthatoverseestheriskprofessionals
andinfrastructure.
2. EnsurethepresenceofaCROwhoisindependent,
hasstaturewithinthemanagementstructureand
unfetteredaccesstotheboardriskcommittee,and
hastheauthoritytofindtheappropriatebalance
betweenconstraintandsupportofrisktaking.
Financialriskofsomeform,orameansofhedging
it, is a key ingredient of every service or product
offeredbyanFI,acharacteristicthatdistinguishes
FIs from other types of business. While other
companies bear financial risk alongside and in
complement to their core business activity in, for
example,healthcare,energyexploration,ormanu-
facturing,theassumptionandmanagementoffinan-
cialriskisunavoidablyintegraltothecorebusiness
ofanFI.Onechairmansimplystated,“The essence
of FI governance is understanding risk.”
The history of financial crises, including the
2008–2009crisis, is litteredwithbanksandother
FIs that collapsed or were taken to the brink by
a failure of financial risk governance. The most
recent financial crisis demonstrated the inability
of many FIs to accurately understand, gauge, and
managetheirrisks.Firmsgreatlyunderstatedtheir
inherentrisks,particularlycorrelationsacrosstheir
businesses, and were woefully unprepared for the
exogenousrisksthatunfoldedduringthecrisisand
afterward.
Sincethecrisis,manywelcomeimprovementsin
riskmeasurement,riskmanagement,andoversight
have been made. These improvements have been
driven by a combination of regulatory pressure
andself-evaluation. Initially,manyfirms increased
board engagement in risk and improved the link
to strategy. In addition, most firms improved the
quality of their risk leadership by establishing
Group of Thirty
47
mainTain robusT risk Frameworks, inFrasTrucTure, and inFormaTion sysTems
3. Determine a risk appetite that is clearly articu-
lated, properly linked to the firm’s strategy,
embedded across the firm, and which enables
risktaking.
4. Actively assess and manage the risk culture so
thatitsupportsthefirm’sriskappetite.
5. Ensuredirectorshaveaccesstotherightlevelof
riskinformationsoastoseeandfullycompre-
hendthemajorrisks.
6. Maintainrobustriskinformationtechnology(IT)
systemsthatcangeneratetimely,comprehensive,
cross-geography, cross-product information on
exposures.
Focus conTinually on risk awareness and Firm agiliTy
7. Maintainanongoingfocusonemergingrisksby
havingaholistic,vigilantviewofallmajorrisks,
strategicandproduct creep, excess complexity,
andareasofoverperformance.
8. Strengthenthefirm’sabilitytowithstandexog-
enousshocks,recognizingthatitisimpossibleto
avoidfinancialstresseswhentheycome.
Theseactionsarediscussedindetailinthepages
thatfollow.
1. esTablisH a board-level risk commiTTee THaT supporTs THe board’s role in approving THe Firm’s risk appeTiTe and THaT oversees THe risk proFessionals and inFrasTrucTureMajor FI boards should establish a separate risk
committee of the board, if they have not already
done so.9 Risk committees play a very important
part in the FI control network by improving the
focus and dialogue on risk. The risk committee’s
coremissionshouldbetoshape,andthenpresentto
thefullboardforapproval,thefirm’sriskappetite
withinthecontextof thefirm’schosenstrategy. It
shouldensuretheriskculturesupportsthedesired
riskprofileand that risk leadersandprofessionals
arecapable,empowered,andindependent.Itshould
alsoensurethatthefirmhasthenecessaryriskinfra-
structureinplace.Riskcommitteesshouldprovide
advice,oversight,andchallenge,diggingdeeperand
cross-examining management as necessary. They
shouldplayanactiveroleindrivingthefirm’srisk
agenda.
Risk committees need a mix of skills. Some
committeemembersshouldhaverelevantfinancial-
service-sectorexperienceortechnicalriskexpertise,
so that they have sufficient understanding of the
underlying concepts when approving risk appetite
frameworksandrisklimits.However,asonthefull
board,thereisgreatvalueinhavinggeneralistsfrom
outside the industry on the risk committee. They
oftenaskbasicquestionsthatunearthrealissuesor,
9 OnlyafewlargeFIshavechosennottoestablishaseparateriskcommittee,andmanyarenowrequiredtodoso.InoursurveyoflargeFIs,theaveragesizeoftheriskcommitteewasfivemembers,witharangeofthreeto11.The11-memberriskcommitteecomprisesallofthenon-executivedirectors.
Toward EffEctivE GovErnancE of Financial insTiTuTions
48
ataminimum,forceexecutivestobemorearticu-
lateinexplainingthefirm’srisksandriskapproach.
Theypreventthetypeofgroupthinkthatcanoccur
ifthecommitteeisstaffedentirelybydirectorsfrom
within the industryorwith technical riskexperts.
Regardless of their underlying skills and experi-
ences, all committee members should dedicate
sufficienttimetotheirriskresponsibilities.10
2. ensure THe presence oF a cro wHo is independenT, Has sTaTure wiTHin THe managemenT sTrucTure and unFeTTered access To THe board risk commiTTee, and Has THe auTHoriTy To Find THe appropriaTe balance beTween consTrainT and supporT oF risk Taking.AsstatedinChapter2,boardsshouldapprovethe
appointmentanddismissaloftheCRO.TheCRO’s
compensationshouldberecommendedbytheCEO
andreviewedandapprovedbytheriskcommittee,
in consultation with the board’s compensation
committee. In some of the major FIs that failed
or suffered badly in the crisis, the CRO and risk
professionals struggled to properly influence their
firm’s risk-taking activities. They lacked sufficient
independence from and credibility with the firm’s
topmanagementandbusinessunits.Thatsituation
canbeavoidedbyensuringtheCROhastheinde-
pendence,skills,andstaturetoinfluencethefirm’s
risk-takingactivities,directlyandthroughtherisk
professionalswhotheCROoversees.
Thedelicatebalancingactbetweenindependence
and collaboration in the board’s relationship with
management is especially evident in the operation
oftheriskfunction.FIsdifferonwhethertheCRO
should have absolute veto power. Some firms give
theriskprofessionals the lastwordonrisk.Under
thatapproach,theCEOmustaccepttheriskfunc-
tion’s view. Others take a more nuanced position
andpermit theCEOto support thebusiness,not-
withstanding the CRO’s concerns. In all cases,
opendialoguewithseniormanagementensuresthat
everyoneunderstandshowriskdecisionsarebeing
made and that consideration is given to anyCRO
concerns.TheCROshouldplayakeyroleinmajor
riskdecisions.TheCROandtheriskteamatlarge
should alsomaintain a goodworking relationship
with thebusinessunits, so that theoverall feeling
isoneofcollaborationratherthanantagonism.The
riskfunctionshouldbeseenasfacilitatingdecision
makingandnotstrictlyasacompliancefunction.
CROsneedthefollowingcharacteristicsandcon-
ditionstobesuccessful:
�� Theyneedbusinessacumensotheycanbalance
riskmitigationandbusinessexigenciesandcom-
mandtherespectoftheboard,management,and
employeesatlarge.
�� Theymustbegoodcommunicators,becausethey
needtobeabletotellacompellingnarrativeto
peoplewhoareoften lessqualified in technical
riskmatters.
�� They need courage and conviction, and they
shouldbewillingtowalkawayfromtheirjobif
theirjudgmentonmajorissuesisignored.
�� Theyshouldhavetherightstatureintheorganiza-
tion.
�� Theyshouldbeamemberoftheseniormanage-
mentteamandshouldreporttotheCEO.
�� They should have high visibility in the board-
room and should have unfettered access to the
chairman of the risk committee and the full
boardwhennecessary.
10 Riskcommitteeshavegenerallyincreasedthehourstheydevotetotheiroversightresponsibilities,holdingasmanyas10,12,oreven14meetingsperyear,withmeetingslastingaslongassixhours.Accordingtooursurveydata,mostriskcommitteechairsarespendingbetween20percentand50percentoftheirtimeontheirdutiesasdirectors.
Group of Thirty
49
3. deTermine a risk appeTiTe THaT is clearly arTiculaTed, properly linked To THe Firm’s sTraTegy, embedded across THe Firm, and wHicH enables risk Taking.Theboardneedsafullunderstandingofthefirm’s
strategyandriskappetite.Thechosenriskappetite
frameworkshouldframethechoicesregardingrisks
in terms of the type of institution the board and
management are trying to build and sustain, and
itshouldclearlylinkrisksandreturns.Thisframe-
workneedstobematchedbyacapacitytomeasure,
understand,andmanagethatrisk.
Tobefullyeffective,theriskappetiteframework
mustbeembeddeddeepwithinthefirmandlinkedto
keymanagementprocesses,suchascapitalallocation
decisions, new product and businesses approvals,
and compensation arrangements. Business plans
andgoalsneedtobewrittenwithintheriskappetite
framework.Theframework’skeyparametersshould
be reflected in the firm’s early-warning system, so
thatcorrectiveactioncanbetakentoavoidstepping
outside of the firm’s chosen risk tolerances. Risk
statements should be converted into measurable
actionsthatcanbeeasilycommunicatedtothefront
lineandusedasameanstoreinforcetheinstitution’s
strategythroughoutthefirm.
Resilience to unforeseen events must be con-
sideredalongsideriskappetite.Resilience is linked
tocapitalandliquiditybuffers,stresstesting,living
wills,andrelatedmatters.
There is a danger that complying with the risk
appetiteframeworkcanbecometoomuchofatech-
nical exercise. While a framework provides some
groundrulesforwhatcanandcannotbedone,itsreal
powercomesfromenablingacandidriskdialogue
betweenmanagementand theboard.Ariskappe-
tite frameworkestablishesclearparameterswithin
whichstrategicdecisionscanbemade.Ariskappe-
titestatement,properlyused,shouldenabledecision
making,notstallrisktaking.Inavoidingexcessive
risks,firmsmustnotgotoofarintheotherdirec-
tion:iftheybecometoorisk-averse,theymayforgo
profitable business opportunities that would not
createunduerisk.
4. acTively assess and manage THe risk culTure so THaT iT supporTs THe Firm’s risk appeTiTe.Ultimately, no risk appetite statement, limit struc-
ture,orriskmanagementsystemcanaccommodate
every situation: the institutionmustdependon its
risk culture. The risk committee and full board
playa critical role,withmanagement, in ensuring
that the risk culture is consistent with the firm’s
riskprofileaspirations.Often,however,boardsand
managementteamsstruggletomeasureculture—its
currentstatusanddirection—andfeelhandicapped
onhowtobestinfluenceit.
Inpractice,firmsthatactivelymanagetheirrisk
culture focus attention on individuals’ behaviors.
Culture canbe viewedas ahigh-level aggregation
ofthosebehaviors.Directorsandexecutivesshould
draw on intelligence gathered across the firm in
employee surveys, internalaudit reports, risk-limit
breaches, and so on to evaluate these behaviors.
Eachpieceofinformationcontributestoaportrait
ofthefirm’scultureandthedirectioninwhichthe
cultureismoving.Directorsandexecutivescanthen
addressthosetraitsandtrendsthatdonotreflectthe
culture they want to encourage, while supporting
thosetheydo.
ThetonesetatthetopofanFIisalsoimportant.
Non-executivedirectorsarewellplaced tomonitor
andevaluate toneat the top,given their significant
exposuretoseniormanagement.However,theyalso
needtobeattunedtotheculturedeepintheorganiza-
tion and how the messages at the top are com-
municated and interpreted by employees. As such,
non-executivedirectorsshouldseekouttheviewsof
supervisorsandtheexternalauditor,whospendmore
timewithintheorganizationonaday-to-daybasis.
Toward EffEctivE GovErnancE of Financial insTiTuTions
50
5. ensure direcTors Have access To THe rigHT level oF risk inFormaTion so as To see and Fully compreHend THe maJor risks. Boards need sufficient information to effectively
oversee the firm’s risks and controls and to make
judgments,includingthejudgmentthattheydonot
understandenoughaboutamajorrisktoapproveit.
Such information should includeappropriate sum-
maries of macroprudential assessments published
bycentralbanksandotherregulatorybodiesand,
whereavailable,high-qualitysell-sideordebt-rating
agency research, all of which provide a valuable
externalperspectivefortheriskcommittee.
Riskcommitteesandboardsneedinformation—
especiallyonkeyrisks—inadigestibleformat.The
aim is simple but comprehensive communications.
Risk reporting should highlight key long-term
trends,providetransparentassumptions,andhavea
decisionorientation.Theresultingreportsshouldbe
broadlydistributedamongboardmembers—ideally
toallboardmembers—sothatriskknowledgeisnot
confinedtotheriskcommittee.
6. mainTain robusT risk inFormaTion TecHnology (iT) sysTems THaT can generaTe Timely, compreHensive, cross-geograpHy, cross-producT inFormaTion on eXposures.Ultimately, the quality of risk information that FI
boards and management teams receive depends
largelyonthequalityoftheorganization’sITsystems.
Ideally,FIsneedriskITsystemsthatcangatherrisk
informationquicklyandcomprehensively,producing
global,cross-product,cross-legalentityestimatesof
theirexposurespromptly.Unfortunately,fewglobal
FIsarecapableofthis.Theyarehamperedbylegacy
systemsthatareinefficient,costly,andburdensome.
Boards are well advised to press management to
maintain—and where necessary increase—invest-
mentinriskITsystems,bothasashort-termpriority
andaspartofalong-termstrategicinitiative.
Risk IT investments must not be sidelined by
necessary upgrades to finance and customer data
systems.Instead,theymustbeintegratedandpriori-
tized. Given that for many large firms, necessary
investmentswillruntoseveralbilliondollarsover
thecomingyears,boardsmayneedtorethinktheir
approach to evaluating management’s investment
in core IT spending. While some firms still have
theauditorriskcommitteereviewITinvestments,
othershaveestablishedcommitteesdedicatedtoIT
oversight. That is an interesting trend, and worth
furtherconsideration.
7. mainTain an ongoing Focus on emerging risks by Having a HolisTic, vigilanT view oF all maJor risks, sTraTegic and producT creep, eXcess compleXiTy, and areas oF overperFormance.FIboardsandmanagementteamsmustnotlosesight
ofthecorerationaleforenhancedriskoversightand
management: tospotandadapt toemergingrisks,
asearlyaspossible.Tothatend,boardsshouldtake
abroadperspectivewhenoverseeingrisk.Toooften,
the focus is on financial risks, because they are
measureableandeasiertomitigate.However,oper-
ationalandreputationalrisksarealsoveryimpor-
tant.Operationalproblemscanirreparablydamage
thefranchise.Majorreputationalmistakescantake
years to repair, and boards should be vigilant in
protectingahard-wonreputation.Boardsandman-
agement teams need to understand these various
categoriesofrisksandtheirinterrelationship.They
shouldbeableto identifythemajorrisksthatcan
destroy the institution and ensure the firm is not
exposedtothem.
Group of Thirty
51
Boards must also guard against strategic and
product creep, because sometimes it is the slow
changesthatcreateproblemsforFIs,notfast-paced
shifts.SlowchangeintheFI’sriskprofilecan,inthe
aggregate, be significant. Similarly, a new business
entitymightbesetupforonepurpose(forexample,
for tax) and then get used for other reasons, or a
newproductmightbedevelopedwithoutitsinherent
risksbeingproperlyunderstood,or,onceapproved,
it might be modified without a proper assessment
oftheconsequentchangeinriskprofile.Andsoon.
Monitoring strategic and product creep requires
diligence. Directors should ask questions about
complexorganizationalstructures—whytheyexist,
what the operations do, what risks they present—
andconsidersimplification.Thisalsoappliestobusi-
nessesandproducts.And,intermsofremuneration,
directorsshouldalsoevaluatewhethertheFI’sincen-
tivesundulyencouragestrategicandproductcreep.
Overperformance should spark board-level
inquiry.Managementandboardsoftendonotinves-
tigate overperformance—rather, the tendency is to
applaudit—but itshouldbeexaminedascritically
asunderperformance. Inseveralcases in thefinan-
cialcrisis,itwastheoverperformingbusinessesthat
createdriskswellbeyondwhatwasexpected,causing
problemsfortheoverallentity’sfinancialstability.
8. sTrengTHen THe Firm’s abiliTy To wiTHsTand eXogenous sHocks, recogniZing THaT iT is impossible To avoid Financial sTresses wHen THey come.An institution’sability tomanagecrisesandwith-
standexogenousshocksisofparamountimportance.
NoFIcanpositionitsbalancesheetinadvancetobe
resistanttoallpossiblecrises,butjudiciousadvance
planning and testing does increase institutional
robustness,andforthisreason,stressandscenario
testingarevaluabletools.
All large financial institutions use a variety of
approaches, includingforward-lookingstresstests,
scenarioanalysis,andthereviewofactualperfor-
mancerelativetoriskestimates,thatis,backtesting.
Stress testing improves understanding and reveals
areas that directors and executives should inves-
tigate more deeply. Stress tests also enable a real
dialogue about meaningful economic scenarios,
withafocusonwhatcapitalandliquiditycushions
existinthosescenarios.Reversestresstesting,which
teststhecombinationoffactorsthatcouldcausethe
failureofthefirm,canalsobehelpful.
However, stress testing can be overdone and
becometoohypothetical.Boardsandmanagement
teamsshouldalsoexaminehowtheirfirmsreacted
to actual unanticipated events in the past, since
those reactions can be very informative about the
firm’s resiliency. How did the firm deal with the
event, how well was it prepared to withstand the
consequent stresses, and what course corrections
diditmake?Backtestingthefirm’sriskprofileand
riskappetitecanhelptodetermineifthefirmstayed
withinitsrisklimitsbyaccidentorbydesign,andif
limitswerebreached,whythathappened.
***
RiskgovernanceisessentialtoeffectiveFIgover-
nance. Without an ability to properly measure,
manage, price, and mitigate risk, FIs are destined
to underperform or fail. Effective risk governance
requiresadedicatedsetofriskleadersintheboard-
room and executive suite, as well as robust and
appropriateriskframeworks,systems,andprocesses.
Risk leadersmustperform their roleswith two
competingobjectivesinmind.Theyhavetobesuf-
ficiently empowered that they can put the brakes
on the firm’s risk taking and constrain its risk-
takingcapacitywhennecessary,buttheyalsoplay
acriticalroleinenablingthefirmtoconductwell-
measured, profitable risk-taking activities that
supportthefirm’slong-termsustainablegrowth.
Toward EffEctivE GovErnancE of Financial insTiTuTions
52
Alloftheseconsiderationsplainlyapplyequallyin
atwo-tierboardsituation.Whilethelong-standing
formalstructureinGermany,Switzerland,andthe
Netherlands separates the supervisory from the
executive board, the substantive separation has
narrowedappreciablyinaprocessofevolutionover
thepastdecade.Therehasbeenparticularfocuson
theincreasingengagementofthesupervisoryboard
onmattersofriskstrategysincethecrisisperiodof
2008–2009 which involved, in some importance
instances, the introduction of the public sector as
majorshareholder.
Whiletherearedifferencesinpractice,supervisory
boardsofFIshave increasingly formedboard-level
riskcommittees,andthecleartrendhasbeentoward
enlargementoftheroleandresponsibilityoftheCRO
who, typically, attends supervisory board meetings
andhasdirectaccesstothechairman.Putinother
terms,majorriskissuesthatarefundamentaltothe
sustainabilityofafinancialinstitutionare,througha
processoftransition,increasinglyaddressedintwo-
tierboard situations in substantially the sameway
as in unitary boards, notwithstanding the formal,
constitutional differences between the two gover-
nancemodels.
cHapTer 4
Deep Commitment to Governance: A Requirement
from Management
Toward EffEctivE GovErnancE of Financial insTiTuTions
54
Management needs to play a continuous proactive role in the overall
governance process, upward to the board and downward through
the organization.
5. Expose directors to a broad set of executives
andemployees,bothinformallyandformally,so
theygetanunfilteredviewofthecompany.
acTively sHape Firm culTure.
6. Workcontinuallyonmodelingandsupportinga
culturethatpromoteslong-termthinking,disci-
pline,andaccountability.
7. Encourage a culture of no surprises, the quick
elevation of issues, toleration of mistakes,
organizationallearning,andpunishmentofmal-
feasance.
8. Build a trust-based environment that supports
criticalchallengeandisopentochange.
Theseactionsarediscussedindetailinthepages
thatfollow.
1. be accounTable For THe daily eFFecTiveness oF THe conTrol arcHiTecTure.Internal governance encompasses not only top
management, but also a complex set of control
structuresbelowmanagementthatcontributetothe
firm’sdecision-makingprocesses.These structures
includerisk,compliance,legal,andinternalaudit.
Managementhasresponsibilityfortheeffective-
nessofthesecontrolfunctionsonaday-to-daybasis,
and the board must hold management to account
for control failures.Managementmust establish a
control framework that, where possible, prevents
problems,activelymonitorsthefirmonanongoing
basis,andaggressivelyaddressesissuesthatarise.
Althoughinthefinalanalysis,boardsareultimately
responsible for the effective corporate governance
oftheirinstitutions,goodgovernancealsoincludes
a strong, functioning management team. Beneath
management sits an array of control functions
andbusinessbehaviorsthatdirectly influencehow
risks, both internal and external, are understood,
measured, monitored, and controlled. Failure in
anyofthesesystemscanbecostly.Intheextreme,
itcanputthefirminjeopardy.Whiletheboardand
its committees oversee these controls, executives
managethemonaday-to-daybasis.
Formanagementtoplayitsgovernanceroleeffec-
tively,itmusttakethefollowingactions.
vigorously manage THe conTrol arcHiTecTure.
1. Beaccountableforthedailyeffectivenessofthe
controlarchitecture.
2. Ensure control professionals maintain a com-
prehensive view of the firm’s risks, balancing
prudence with encouragement of sustainable
risktaking.
assiduously culTivaTe direcTor undersTanding.
3. Educate and inform directors on an ongoing
basis.
4. Focusthegovernancedialogueonthekeyissues
and bring the board early into management’s
thinkingonkeydecisions.
Group of Thirty
55
and missing key risks or problems for lack of
coordination.FIsmustthinkholisticallyabouttheir
controlarchitectureandensurecooperationamong
thecontrolprofessionals.Thiswillaidinavoiding
gapsincontrolsandoversight.
3. educaTe and inForm direcTors on an ongoing basis.The most important thing management can do to
fostergoodgovernanceistogivetheboardthebest
meansofunderstandingcompanystrategy,riskappe-
tite, and the major challenges the company faces.
Intelligent,on-targetquestionsfromboardmembers
are the best sign that management has given the
boardtherightkindsofinsightsandinformation.
However, keeping the board informed is easier
saidthandone.Boardsaretypicallyinundatedwith
too much information, so the emphasis in com-
municationstotheboardshouldbeonclarityand
synthesis. Communications should be understand-
able, decision oriented, and should promote open
discussion between directors and management.
Brevityisachallenge.Managementmustsynthesize
issuesinadigestiblefashion,butmustavoidfiltering
out needed information. Metrics are important.
They must be consistent and comprehensive and
shouldenableholisticdecisionmaking.
Management should also expose the board to
outside thinking, to give it direct access to other
perspectives. In addition to gaining external per-
spectivesfromexistingadviserssuchastheexternal
auditor, or risk or other experts, board members
shouldperiodicallyhearfromsourcessuchassuper-
visors,largeclients,sell-sideorcreditratinganalysts,
other expert industry observers, and prominent
out-of-the-boxthinkers.
Management must effectively orient new direc-
tors and educate existing directors on an ongoing
basis. A robust training program will include
ongoingdeepdives intokeybusinesses, risks, and
Further,managementmustensureemployeesand
executivesadheretocompanypolicyonroutinedeci-
sions. Well-written policies that are ignored give a
dangerous illusion of control. By the same token,
eventhemostcomprehensivepoliciescannotdescribe
every situation, so judgment has to be applied to
nonroutinematters.Assuch,thecontrolframework
shouldbeabletoelevateissuesthatfalloutsidethe
policy so that individuals do not navigate around
policieswithoutproperguidanceandsupervision.
2. ensure conTrol proFessionals mainTain a compreHensive view oF THe Firm’s risks, balancing prudence wiTH encouragemenT oF susTainable risk Taking.Strong controls require independent control pro-
fessionals. Management has to ensure that those
working in risk, compliance, audit, and so on are
sufficientlyindependenttomakeobservationsonthe
control approach and, where necessary, influence
thedecision-makingprocess.Insomeinstances,they
needvetorights.
However,thechallengecontrolprofessionalsface
is similar to the challenge directors face, working
with line of business management: they need to
asserttheirindependenceandprovidecriticalchal-
lenge,buttheyalsoneedtobesupportive,andnot
indifferent to the performance of the institution.
They must be seen as supporting—even encour-
aging—sustainable,profitablerisktaking,notasa
police force.Encouragingcontrolled risk taking is
asimportantasconstrainingdangerousrisktaking.
Control professionals also need to be able to
work together effectively. Large financial institu-
tions often have tens of thousands of employees
focusedoncontrol activities, andoften theywork
too independently of one another. The worst case
isasetofsiloedgroupsworkingindependently,not
sharing insight, unnecessarily duplicating efforts,
Toward EffEctivE GovErnancE of Financial insTiTuTions
56
policychangeswithinthefirm,externalchanges,or
newregulations.Theseprogramsshouldbeupdated
routinely. As mentioned in Chapter 1, directors
shouldknowtheFI’shistoryanditskeyeconomic,
risk,capital,andproductconceptssoastobebetter
informed for present-day decision making. While
all directors should be granted unfettered access
tomanagement,newdirectorsespeciallyshouldbe
encouragedtoengagewithmanagement.
Theboardshouldhavefullaccesstoanyandall
informationitneeds.Thecorporatesecretaryplays
a central role in managing information flows and
accesstotheboardandthereforeshouldhavesuffi-
cientresourcestofullyservetheboard’sneeds.Given
theircriticalgovernancerole,corporatesecretaries
musthaveanindependentmindsetandafirmcom-
mitmenttohonortheirdutiestotheboardandthe
company,andtheboardshouldbeconsultedonthe
corporatesecretary’sevaluationandcompensation.
4. Focus THe governance dialogue on THe key issues and bring THe board early inTo managemenT’s THinking on key decisions.Governance only works if management has a
process for identifying the major issues and pre-
senting them to the board for discussion. This
requiresexecutivestobeproactiveandorganizedin
undertakingtheirgovernanceroles.Boardandcom-
mittee topics have to be prioritized, and meetings
mustbewellstructured.Managementmustbeatten-
tivetopotentialnewagendaitemsandkeepaneye
outforneweducationalopportunities (forthefull
boardorpersonalizedforaspecificdirector),andit
mustconsiderotherwaystofacilitateeffectivecom-
munication between the board and management.
Management must prepare well for meetings and
ensuretimelyfollow-up.
Management must discuss the major decisions
with the board, sharing alternative perspectives.
Executivesmustbecomfortablewithairingdiffer-
ences of opinion among the team in front of the
boardsothatdivergentviewscanbeheardanddis-
cussed.Asmanagementhones its thinkingonand
analysis of issues, it must bring the board along,
enabling healthy boardroom debate, as necessary.
Asnotedearlier,board-managementinteractionon
strategysettingisessential.
5. eXpose direcTors To a broad seT oF eXecuTives and employees, boTH inFormally and Formally, so THey geT an unFilTered view oF THe company.The financial crisis revealed that in some cases,
the CEO had created a firewall between directors
and key executives. Executives knew something
was wrong, but they could not speak to the non-
executivedirectors.Ifthosefirewallshadnotbeen
in place, alternative courses of action might have
beentakenoratleastconsidered.
Nothingshouldhindercommunicationbetween
directorsandexecutives.Directorsshouldbefreeto
talktotheexecutives,andtheyshouldfeelconfident
and comfortable in doing so. Without open com-
munication,directorsmayhavelittleideaofthetrue
circumstanceswithintheorganization.
Management needs to be in front of the board
regularly,andleadingboardmembersshouldbein
continuousdiscussionswithkeymanagers.Someof
thefree-flowinginteractionbetweenboardmembers
andexecutiveshappensinthenormalcourseofthe
governance process: the board chairman interacts
withtheCEOorhisorherdirectreports,theaudit
chairinteractswiththefinanceteam,theriskchair
interactswith theCROandrisk team,andsoon.
Group of Thirty
57
These interactions are part of the natural flow of
boardandcommitteemeetings.
But management must create additional oppor-
tunities for interaction. The corporate secretary
canarrangemore targeted,nonroutine interaction
in the form of meetings with the right employees
or, alternatively, the director and executive may
determinethatthewholeboardorcommitteemay
benefitfromknowingmoreaboutthespecifictopic,
inwhichcasethetopiccanbeputontheappropriate
agenda.Byfosteringinformalinteractionsbetween
directorsandexecutives,theCEOplaysakeyrole
inenablingaccess,sinceinformalinteractionsmay
be even more important than formal ones. These
should include business and social components,
whichgivedirectorsanopportunitytogettoknow
theexecutivesbetter.
While interaction with management is impor-
tantandnecessary,directorsshouldexerciseitwith
care. Non-executive directors cannot just insert
themselvesintotheorganizationatwill.Theymust
notwastemanagement’stime,andtheyneedtobe
careful about inadvertently or intentionally giving
direction, because seemingly innocent statements
mayaffectexecutiveoremployeebehavior.Ifdirec-
torslearnsomethingthatcausesthemconcern,they
shouldraise itwith theboardorcommitteechair,
ortheCEO,ratherthancauseconfusionbyasking
employeestostoporaltertheiractivities.
6. work conTinually on modeling and supporTing a culTure THaT promoTes long-Term THinking, discipline, and accounTabiliTy.Management shapes the institution’s culture. The
boardandmanagementshouldarticulatethefoun-
dationalprinciplesorvaluesofthecultureandfoster
theiracceptance.Themessagesneedtobeconsistent
atalllevelsoftheinstitution,foradecadeormore,
tohave full effect. In addition to explainingwhat
isexpectedofemployees,membersofmanagement
shouldmodelthedesiredbehaviors.
Beyond the core ethical values, management
must promote a sustainable, client-driven business,
focused on the long term. Too often, boards and
management teams—and shareholders—are overly
preoccupiedwiththeshortterm,notjustbecauseof
analystpressureforshort-termperformance,butalso
because the short-term objectives make it possible
toreachthelonger-termgoals.Often,management
considersthreetofiveyearstobelongterm.
TheCEOandhisorherteamfeeltheshort-term
pressuresthemost.TheCEOandmanagementteam
needtodealwiththeinevitableandimportantshort-
term objectives that make it possible to reach the
longer-termgoals,but theymustalso focuson the
nextfive to20years.Theymustbe clearonwhat
typeofinstitutiontheywanttobuildandwhatcore
behaviorsneedtobeembeddedintheorganizationto
achievethelong-termstrategicaim.Indevisingtheir
long-termstrategy,managementhastobeattentive
toabroadsetofstakeholdersbeyondshareholders,
including employees, customers, and supervisors.
Once the long-term strategy is determined and
communicated to the firm’s key stakeholders, the
board and management must have the strength
to sayno topressure exertedby short-term share-
holdersandsell-sideanalysts,amongothers.
Management must also instill discipline across
the organization regarding objectives, focusing on
businesses and jurisdictions that the firm knows
well and in which it has or can develop competi-
tiveadvantage.Thisdisciplineisbackedupbyclear
accountability, which requires individuals to take
responsibilityfortheiractionsandforachievement
ofsetgoals.Accountabilitystartsatthetop:CEOs
areaccountabletotheirboardfortheirperformance
andthatoftheirfirms.
Toward EffEctivE GovErnancE of Financial insTiTuTions
58
7. encourage a culTure oF no surprises, quick elevaTion oF issues, ToleraTion oF misTakes, organiZaTional learning, and punisHmenT oF malFeasance.Managementmustbeopenandtransparentwiththe
boardandshouldpromotethatapproachthroughout
the organization. Only when management teams
sharetheirconcernsopenly,andinatimelyfashion,
can the board understand the issues and provide
inputordirection.Executivesandemployeesshould
bringbadnewsforward,nothideit.
Foropennesstowork,boardsandexecutivesneed
tobetolerantofmistakesandofhonestattemptsto
dotherightthing.Everyoneneedstobeencouraged
toescalateissuestotheirmanagers,sodecisionscan
betakenwithmoreinput.Ano-surprisesapproach
isparamount.Elevatingproblemsquicklyandearly
on will give the board confidence in management,
and the same goes for others further down the
organization. The emphasis should be on making
more informed decisions.After problems are dealt
with, the focus should be on determining whether
corrective action is necessary to avoid future
problems and whether systemic issues have been
unearthedthatgobeyondtheissueathand.
However,thereshouldbenotoleranceforthose
who hide or suppress problems. When someone
hasbeendishonestorhaswillfullydonesomething
wrong, management must see that disciplinary
measures are taken, even (or especially) if the
guiltypartiesarerainmakers.Sanctionshavetobe
used, and used consistently, if they are to have a
deterrenteffect.
8. build a TrusT-based environmenT THaT supporTs criTical cHallenge and is open To cHange.Executivesmustbepreparedfortoughquestioning
andmustunderstandthat it is theboard’sduty to
challenge them.Managementmust respond to the
challenge, not cower from or avoid it. Executives
must be prepared for the board to reject a
proposal.Beingopentochallengeisasignofquality
management.
Constructivechallengeiseveryone’sresponsibility
and should be fostered across the organization,
upward and downward. Everyone should refrain
from defensiveness and should be amenable to
changingtheirbehaviorwhenrequired.Executives
must be self-critical, challenging their own views
over time.This isparticularly important for long-
tenuredCEOs,whocanfinditdifficulttocritique
theirownlegacy.
Management’swillingnesstoembracechallenges,
toughquestioning,requestsformoreanalysis,and
evenrejectionshelpsbuildthemutualtrustbetween
theboardandexecutivesthatisessentialforeffec-
tivegovernance.
***
Management must play a continuous proactive
roleintheoverallgovernanceprocess,upwardtothe
boardanddownward throughout theorganization
and, despite the continuing formal constitutional
deficiencies,thepositionofmanagementinatwo-tier
boardstructureisinsubstanceincreasinglysimilarto
thatinaunitaryboard.Engagementongovernance
matters requires management’s commitment and
time,buttheresultsareworththeeffort:theboard
can be confident that it has a strong management
team in place, one that needs overseeing, but not
directing.
cHapTer 5
The Role and Responsibility of Supervisors
Toward EffEctivE GovErnancE of Financial insTiTuTions
60
Supervisors that more fully comprehend FI strategies, risk appetite
and profile, culture, and governance effectiveness will be better able
to make the key judgments their mandate requires.
With trust, in contrast, a mutually beneficial
relationship that involves the sharing of informa-
tion,experience,andviewscandevelopandflourish.
On the sideof theFI, such a relationship requires
a build-up of confidence in and respect for the
capability, professionalism, and style of the super-
visor,whileonthesideofthesupervisor,itrequires
the development of a sense of assurance that the
chairman,board,CEO,andseniorexecutiveofthe
FIarecommittedtoopen,frank,andappropriately
consultativeregulardialogue.Atrust-basedrelation-
shipisnotachievedthroughbox-tickingconformity
butthroughsustainedeffortovertimeonthepartof
bothsupervisorsandFIboards.
All of this is fundamentally attitudinal and
cultural.Thedevelopmentofatrust-basedrelation-
ship isnecessary tocounterbalance thewidespread
currenttendencytoseerepairofthefinancialsystem
purelyintermsofmuchmoredemandingratiosfor
capital, liquidity, and leverage. Although critically
important,thoseelementsalonewillnotenhancethe
health of major FIs or the whole financial system.
Higher-qualitysupervision,basedonasolidfounda-
tionofmutualrespectandtrustbetweensupervisor
andsupervised,isalsoneeded.Trust-basedrelation-
ships will also be very valuable in addressing the
nextpotentialcrisis,whateveritmaybe.
Manysupervisorsrealizethisandhavebegunto
enhancetheireffectivenessinthisarea.Membersof
theFinancialStabilityBoard’sSupervisoryIntensity
and Effectiveness group stated in October 2011,
“More intense supervisory oversight is needed to
evaluate the effectiveness of improved corporate
governance, particularly risk governance, in affecting
behavior and improvements in this area will be
11 FordetailsoftheBaselIIIaccord,itsimplementation,andeconomicimpact,pleaseseehttp://www.bis.org/bcbs/basel3.htm.
FI regulation is undergoing a fundamental trans-
formationglobally.Rule-basedregimes,regulatory
approaches,andenforcementarechanging,but so
tooissupervision,whichfocusesonoversightofthe
board and management. In the years prior to the
2008–2009globalfinancial crisis,whatproved in
theeventtobegreatlyinadequateregulatorystan-
dards,aboveall inrespectofcapitalandliquidity,
were flanked by seriously inadequate supervision.
Theeventualoutcomeofthisregulatoryinadequacy
and supervisory laxity was a series of banking
failuresonanunprecedentedscale.Afterthecrisis,
centralbanksandsupervisorshaverefocusedtheir
collectiveandindividualeffortsonFIregulationand
supervisionofsystemicallyimportantinstitutions.
Global initiatives undertaken within the frame-
workscreatedbytheFinancialStabilityBoard,Basel
III11,andnationalregulatorshavemadesubstantial
progress strengthening requirements for minimum
capitalandliquidity.Theseareessentialandsignifi-
cantstepsinshoringupthesoundnessofthefinancial
system, and they understandably attract political,
market, regulatory, andmediaattention.However,
theyneed tobe complementedby enhancedquali-
tative oversight of the performance and decision-
makingprocessesofmajorFIs.Qualitativeoversight
ofthiskindrequiresstrongmutualtrustamongthe
supervisors,theboards,andtheseniorexecutivesof
majorfinancialentities.
IfanFIlackstrustinitssupervisor,thetendency
will be to communicate with the supervisor only
asmuchas isrequiredandtoholdbackfromany
furtherdegreesofopenness.Theparalleltendency
onthepartofthesupervisorwillbetobesuspicious
andcorrespondinglymoreintrusive.
Group of Thirty
61
ongoing and monitored.”12 If supervisors take the
followingsteps,theywillbeabletodischargetheir
governanceoversightdutiesmoreeffectively:
1. Understand the overall business, the strategy,
andtheriskappetiteofeachFI,andfocusonFI
reactionstoreal-worldevents.
2. Developasophisticatedappreciationofhowcor-
porategovernanceworks, includinggovernance
structuresandprocesses,boardcompositionand
newdirectorselection,andtheinternaldynamics
ofeffectiveFIboards.
3. Develop trust-based relationships with senior
executives and directors by regularly engaging
them in informal dialogue on industry bench-
marks,emergingsystemicrisks,andsupervisory
concerns.
4. Ensureboardsandmanagementgoverneffectively
bysettingrealisticexpectationsofFIboardsand
adjustingregulatoryguidanceaccordingly.
5. Avoid overstepping their supervisory role and
allow the board and management to shoulder
theirrespectiveresponsibilities.
Taking the steps enumerated above will not be
easyandwillhavecostsassociatedwiththem.Super-
visorswillneedtohiretalentcapableofcarryingout
theenhancedandmorecomplextasksbeingrequired
ofthem,whichwill likelymeanincreasedexpendi-
tures,andgovernmentauthoritiesmustbeprepared
for this.Youcannothavegood supervisionon the
cheap.Governmentsmustaddressresourceandskill
gapssothateffectiveandbalancedsupervisionofFIs
canbe achievedon a relatively rapid timetable, in
keepingwiththefinancialreformplansandsupervi-
sionagendasthathavebeenestablishedbytheG20
andtheFinancialStabilityBoard.
1. undersTand THe overall business, THe sTraTegy, and THe risk appeTiTe oF eacH Fi, and Focus on Fi reacTions To real-world evenTs.Supervisorsarepartoftheriskgovernanceframe-
work,representingthepublicinterest.Toeffectively
overseeriskinFIs,supervisorsneedtounderstand
not only the effectiveness of FIs’ controls, risk
limit structures, and compliance, but also their
strategy,businessplan,products,andriskappetite.
Attainingthislevelofunderstandingwilltaketime
and requires that supervisors regularly ask ques-
tionsaboutandexamineFIs’strategyandbusiness
models, risk appetite, risk exposures, potential
killerrisks,andtheFIs’riskculture.Inparticular,
supervisorsshoulddothreethings:
�� understand performance expectations and look for areas of unexpected outperformance.In the build-up to the financial crisis, relative
outperformanceofparticularbusinessesshould
have been a warning sign. Supervisors should
understandtargetreturnsonequityfordifferent
lines of business, where those businesses
make money, which businesses are perform-
ing particularly well, and especially which
businesses are performing unexpectedly well.
Supervisorsshouldaskseniormanagementand
the board whether the returns are sustainable
andcomparethereturnswiththoseofpeersin
similarbusinesses.
�� improve stress testing and increase use of hori-zontal reviews. Cross-industry, cross-border
stress testing is a useful supervisory tool that
couldbefurther improvedthroughbettercoor-
dinationacrossbordersandmoreagreementon
12 FinancialStabilityBoard,Intensity and Effectiveness of SIFI Supervision: Progress Report on Implementing the Recommendations on Enhanced Supervision (Basel:FinancialStabilityBoard,2011),17.
Toward EffEctivE GovErnancE of Financial insTiTuTions
62
keyelementsofthestressscenarios.Byconduct-
ing more industrywide horizontal reviews13 or
deep dives into specific areas, supervisors can
gainabettersenseofrelativeriskanddifferences
inapproachacross institutions.Theyshouldbe
willingtosharewithFIsmoreinformationabout
wheretheFIsstandinrelativeterms.
�� Focus on Fi reactions to real-world events. As
importantasstresstestingandscenarioanalysisis
howFIsreacttoactualstressevents.FIreactions
to emerging risks are an important indicatorof
theirabilitytowithstandexogenousstress.
Through these endeavors, supervisors will
developasenseforwhichinstitutionshavehigher-
riskbusinessmodelsandwillthenbeabletoincrease
monitoring and questioning of those institutions
andwherenecessarytocommunicatetheirconcerns
to board and management. (For more detail, see
Chapter 3: Risk Governance: A Distinctive and
CrucialElementofFIGovernance.SeealsoChapter
7:TheImpactofValuesandCultureonBehaviors
andDecisions.)
2. develop a sopHisTicaTed appreciaTion oF How corporaTe governance works, including governance sTrucTures and processes, board composiTion and new direcTor selecTion, and THe inTernal dynamics oF eFFecTive Fi boards.Supervisorsmustdevelopanunderstandingofhow
governance really works in each FI—not just the
systemsandprocesses,butalsowhothekeypeople
areandhowtheyinteract.Gainingamorenuanced
andsophisticatedunderstandingofhowgovernance
inFIsworksinpracticecanbebrokendownintofour
components: understanding governance structures
and processes, understanding board composition
andnewdirectorselection,recognizinghoweffec-
tive board challenge occurs, and attending board
andcommitteemeetings,butonlyoccasionally.
understanding governance structures and processesSupervisorsshouldreviewthesizeandcomposition
oftheboardanditscommittees,notingwhatskills
and experience individual directors bring. Supervi-
sorsshouldalsoknowthecommittees’mandatesas
laidoutintheirchartersandhowresponsibilitiesare
dividedamongthem.Supervisorscangleaninforma-
tionby reviewingboardbooks, andbyprereading
presentationmaterials,boardandcommitteemeeting
agendas,andboardandcommitteemeetingminutes.
Theyshouldalsodiscusstheresultsofinternaland
third-party board evaluations with the chairman
tounderstandhowidentifiedweaknessesarebeing
addressed. (For more on board evaluations, see
Chapter2:TheVitalRoleofBoardsofDirectors.)
understanding board composition and new director selection Thequalityofthepeopleinvolvedingovernanceis
thekeydeterminingfactorofitseffectiveness.Super-
visors should understand the qualifications of the
peoplewhoserveinkeyexecutiveandboardroles.
Beyond that, they should be aware of how those
peopleinteractandthebehaviorstheydisplay.The
main issue for supervisors is not quantitative, but
13 The Financial Stability Board defines a horizontal review as a review “that is performed across many institutions around a common subject with the goal of revealing the range of practice among the firms.” Financial StabilityBoard, Intensity and Effectiveness of SIFI Supervision: Recommendations for Enhanced Supervision(Basel:FinancialStabilityBoard,2010),7.
Group of Thirty
63
qualitative:Ultimately,arethepeoplepositionedto
makesoundjudgments?(Formoreonboardcompo-
sitionandexpertise,seeChapter2:TheVitalRoleof
BoardsofDirectors.)
Insomecountries,regulatoryapprovalofanynew
directorsandsomeseniorexecutivesisrequired.In
others,supervisorsaregettingmoredeeplyinvolved
in the vetting and approval of new directors and
some executive functions. It is beneficial to have
supervisors informed in a timely fashionofpoten-
tialnewdirectorcandidates,priortothecandidates’
formal nomination. If the supervisor has views on
specific candidates, those views should be shared
with the FI. It is for the board’s nominating com-
mittee to determine how they will incorporate the
supervisor’s feedback. Involving the supervisor in
this way helps enhance the discipline, rigor, and
qualityoftheprocessofdirectorselection—without
appropriating responsibility for the ultimate deci-
sion.Thatresponsibilitybelongstotheboard,andin
particulartothechairmanandthenominatingcom-
mittee.Thereisacasetobemadeforasupervisory
vetoifthesupervisorbelievesthataproposednew
boardmemberwouldbeunsuitable,butanygreater
supervisoryinterventionwouldnotbebeneficial.
At a minimum, supervisors should be familiar
withtheinternalprocessesbywhichFIsselectdirec-
torsandthequalitiestheylookfor.Then,supervi-
sorscan lookat theoutcomeanddetermine if the
board’s decisions reflect what the FI is trying to
accomplish. Supervisors should also be aware of
thedifferentrolesdirectorsplayandhowthedirec-
torsstayinformed.Theyshouldconsiderhowlong
variousdirectorshaveserved,newdirectortraining
andongoingeducationalprograms,andhoweasily
directorswithquestionsorconcernsareabletogain
accesstoinformationandtomanagement.
recognizing how effective board challenge occurs Reviews of governance since the financial crisis
havehighlightedthefailureofboardstochallenge
management sufficiently. Supervisors must under-
stand the key issues that confront the FI board,
gaugewhether theboard is capableofchallenging
management,andlookforevidenceofthischallenge.
However, identifying clear evidence of chal-
lenge isgenerallynot straightforward. It is all too
tempting to relyon indicators suchas thenumber
oftimestheboardsaidnotoorarguedvehemently
against management proposals. In fact, too many
no’s from the board is more likely a sign of dys-
function.Antagonisticbehaviorbetweentheboard
andmanagementisnotasignofchallenge;itisasign
ofdysfunctionalgovernance.Healthychallengemay
comeintheformofaquestionorseriesofquestions,
requests for additional information, a suggestion
thatmanagementreviseaproposalforfurtherdis-
cussion,orfurtherfeedbackinanin-camerasession
withtheCEOormanagementteammembers.
To understand the distinction between con-
structive challenge and dysfunction, supervisors
must become familiar with how the board and
management interact and the full rangeofdiscus-
sion,debate,andinformationsharingwherebythe
boarddirectlyandindirectlyimpactsmanagement’s
decisions. Supervisors should look for signs of
healthytensioninfluencingoutcomesandbeaware
ofmanagementandboardperceptionsofhow the
board has impacted past decisions. Supervisors
often focus on informational inputs to the board,
but they shouldalso focusonoutcomes,which in
the governance process are judgments. In other
words, they shouldunderstand the fullprocessby
whichboardsreachjudgments.Supervisorsshould
Toward EffEctivE GovErnancE of Financial insTiTuTions
64
reviewdocumentsandprocessesandshouldtalkto
management and the board to determine whether
boards are providing challenge and affecting
outcomes.Supervisorsmightask,forexample,for
specific,recentexamplesofhowtheboardimpacted
asignificantdecision.
attending board and committee meetings, but only occasionally Most supervisors lack firsthand boardroom
experience.Oneobviouswaytogainabettersense
of the innerworkingsof theboardroomwouldbe
tosit inonmoreboardandcommitteemeetings.14
However, having supervisors sit in on meetings
hasadrawback:itislikelytoaltertheboardroom
dynamic. Directors may hesitate to ask critical
questionsinfrontofsupervisors,anddiscussionand
debatemaybeinhibited.Itmayevenmovetoother
venuesaltogether.Sittinginonboardmeetingsalso
raises questions of accountability: if supervisors
are present when decisions are made and do not
intervene,theytakeonsomeresponsibilityforthose
decisions. Therefore, although supervisors should
reserve the right to attend board meetings, it is
probablybestiftheydonotdosoasregularly.
Assessing governance effectiveness is not easy.
Onenon-executivedirectorsummeditupbysaying,
“It is near impossible to tell if governance is effec-
tive. Regulators [andsupervisors] should understand
what is truly vital to the [FI’s] success and what
limits need to be applied. They should look at the
corporate body and understand the primary risks
that could kill it. They should check that the board
understands the primary risks that could kill it. They
should check that the board understands that.”
3. develop TrusT-based relaTionsHips wiTH senior eXecuTives and direcTors by regularly engaging THem in an inFormal dialogue on indusTry bencHmarks, emerging sysTemic risks, and supervisory concerns.Supervisors would benefit in their quest to gain
insightintostrategicrisksandgovernanceinFIsby
broadeningthetypesofinteractionstheyhavewith
managementanddirectors.Informalconversations
and sharing of supervisory perspectives are two
examplesofpossiblesupplementalinteractions.
regularly engage senior executives and directors in informal dialogueSupervisoryinstitutionsshouldassignaleadsenior
supervisor tooversee the supervisory staff in each
large FI. This senior supervisor should decide the
priorities of examination and try to establish a
mutually respectful relationship with the board
and senior executives.15 All parties (management,
boardmembers,andthesupervisor)mustbeopen
to building this relationship and commit the time
requiredtodoso.
Senior supervisors should meet informally with
thechairmanorleadorseniorindependentdirector
and key committee chairs two or three times a
year, and with other non-executive directors less
frequently. The lead supervisor should meet with
the full board at least annually. These interac-
tions between non-executive directors—individual
or group meetings—should be conducted with
management present. Supervisors should discuss
anyconcernstheyhavewiththedirectors.
14 Somesupervisors,includingthoseinChinaandGermany,regularlyattendeveryboardmeeting.
15 Domesticsupervisorswillneedtodeterminethecriteriaforestablishingmoreintensivesupervision.Thecriteriamayalignwithglobalandnationaleffortstoidentifysystemicallyimportantfinancialinstitutions,ortheymayextendbeyondthoseFIs.
Group of Thirty
65
SupervisorsshouldmeetwithCEOs,CROs,and
otherkeyseniorexecutivesfromthebusinesslines
andcontrol functionsseveral timesayear toraise
anyquestionsorconcernsdirectlyandtoallowthe
executivesanddirectors torespond.Thisdialogue
shouldbeinadditiontoformalboardpresentations.
This engagement will open channels of communi-
cation and establish regular dialogue in advance
ofany issuesthatmayarise;however, theyshould
avoidoverburdeningmanagement.
Thebenefitsofthisdialogueincludeabetteraware-
ness of how governance works in practice, better
relationshipswithandperspectivesonkeyexecutives
anddirectors,improvedinsightintopotentialsystemic
risks,andanunvarnishedexchangeofperspectives
betweensupervisorsanddirectors.
offer the supervisory perspective and industry benchmarksSupervisors have the competence and authority to
providebenchmarking,whichwillpromptboardsto
pushforimprovementsfrommanagement.Supervi-
sorshaveabroad,cross-industryperspectiveandcan
provideusefulinsighttoFIsthatcanleadtooverall
improvementsintheindustry.Theyshouldleverage
theirglobalnetworktoimprovesharingofinforma-
tion and fruitful comparisons across jurisdictions
andglobalinstitutions.
To facilitate this process, lead senior regulators
and supervisors in each jurisdiction and across
jurisdictions should meet periodically to share
perspectives, highlight potential risks, and dis-
cuss good practice. On an international basis,
coordinationisbecomingincreasinglyimportantto
overseecomplex,globalFIs.
TheBankforInternationalSettlementsandthe
Financial Stability Board and various standards-
setting bodies and agencies that meet under their
aegisareworkingtowardagreatlyenhanceddegree
ofinternationalcoordinationandcooperation,and
theG30commendsandfullysupportsthisongoing
process.
share perspectives on emerging risks Supervisors are uniquely positioned to perceive
emerging trends across institutions and potential
systemic risksand should share concernswith the
institutionstheyoversee.
leveraging supervisory and auditor insightInthecourseoftheirindependentworksupervising
andauditingfinancialinstitutions,thesupervisorand
externalauditoreachgatherimportantinsightsona
broadsetofmatters, including—broadlydefined—
risks,controls,governance,culture,andtoneatthe
top and across the organization. By sharing these
viewswiththeboardandmanagement,supervisors
canhelptheboardandmanagementcarryouttheir
dutiesmoreeffectively.
4. ensure boards and managemenT govern eFFecTively by seTTing realisTic eXpecTaTions oF Fi boards and adJusTing regulaTory guidance accordingly.Some supervisors simply review an FI’s structures
andprocessestoensurecompliancewithregulatory
guidance,butsimple“tick-the-box”evaluationsof
structuresandprocessesdonotsufficientlyevaluate
governance at large FIs. Other supervisors are
electingtogoastepfurther,observingandasking
questions,andtherebypushingboardsandmanage-
ment teams to make improvements and improve
discipline. A realistic and nuanced approach to
supervisionhasseveralcomponents:
Toward EffEctivE GovErnancE of Financial insTiTuTions
66
�� clarity in the messages given. Supervisors need
to deliver a clear, consistent, and reasonable
message regarding their expectations of boards.
Regulators should clarify the distinct roles of
board and management in regulatory guidance
andensurethatsupervisorsdonot interpretthe
guidancesoconservativelythatthosedistinctions
arelost.
�� reasonable expectations. Pressure from regula-
torsandsupervisorscandriveboards toa level
of detail that is beyond their competency. It is
onethingtosupportandencourageanactiveand
engagedboardthatisproperlyfamiliarwiththe
risksbeingtakenbytheorganization;itisanother
todriveboardstoanexcessivefocusondetailed
operational matters that are more properly the
purviewofmanagement.
�� comprehension of the cultures and values that drive behavior in each Fi.Throughtheirregular
interactions with management and the board,
supervisorscangetasenseof thecultureofan
organization. They should consider how open
andtransparentmanagementiswiththeboard,
howquicklyissuesareelevated,andhowtheyare
addressedwhentheycometo light.Supervisors
mayhavebetterinsightintoculturedeeperinto
the organization than the board because they
have staff working daily in these institutions.
Theycangaugehowtoneatthetopistranslated
downthroughtheorganization.
Supervisorsshouldavoidbecomingsofocused
onanauditapproachtoassessingbehaviorsthat
theytakeisolatedmisstepsasevidenceofsystemic
issues,buttheycanofferinsightintowhyisolated
incidents might represent red flags for further
investigation.
�� Thoughtful recommendations regarding gover-nance improvements. Although supervisors will
bettercomprehendhowFIsworkthroughdeeper
engagement,theywillneverhaveaninsider’sper-
spective,andthereforetheyshouldsetarelatively
highbarformakingspecificrecommendationsfor
changes togovernancestructuresandprocesses.
Ifsupervisorsreachtheconclusionthatchangeis
necessary,theformalprocessofinforminginstitu-
tionsaboutrecommended improvementsshould
not be the end of the engagement process. A
healthyrelationshipbetweentheFIandthesuper-
visor shouldallow forbetter communicationof
supervisors’ questions and concerns and should
makepossible improved coordination regarding
addressing those concerns and questions in the
contextofeachFI’suniquecircumstances.
5. avoid oversTepping THeir supervisory role and allow THe board and managemenT To sHoulder THeir respecTive responsibiliTies.Supervisors are becoming more proactive, and
in some cases, more “intensive and intrusive,”16
applying judgment and intervening earlier indeci-
sionshistoricallylefttomanagementandtheboard.
Indoingso,theymustbecarefulnottocompromise
the clear fiduciary responsibility of the board to
takeitsowncommercialdecisionsonthedirection
andstrategyoftheFIwithinestablishedregulatory
parameters.Clarityaroundrolesandexpectations
ofthevariousactorsingovernance—management,
theboard,andsupervisors—isessential.
Because they have a duty to prevent systemic
problems, supervisors must sometimes stop an
16 See,forexample,HectorSants,“ReformingSupervisoryPractices:ProgresstoDate,”speechattheReutersNewsmakersEvent,December13,2010;andFinancialStabilityBoard, Intensity and Effectiveness of SIFI Supervision: Recommendations for Enhanced Supervision (Basel:FinancialStabilityBoard,2011).
Group of Thirty
67
institution from doing something. In this context,
and despite the need to remain independent, in
exceptionalcircumstancessupervisorsmay(andsome
jurisdictionsalreadydo)considertheutilityofdirect
intervention in strategic initiatives, if they believe
the strategic shift presents undue systemic risk. At
a minimum, supervisors should retain the right to
reviewanymajorstrategicinitiativeandtotakesuch
actionifneeded.Improvingengagementwithboards
and senior executives shouldprovideopportunities
toairanyconcernsearlyinthedecisionprocess.This
shouldreducetheneedforinterventionindecisions
alreadymadebymanagementandtheboard.
Asmentionedearlier,involvementofthesupervisor
inFIdecisions raises issuesofaccountability.While
supervisorsmustsometimes intervene, theymustbe
mindfulnot tohave that interventionadjust corpo-
ratestrategyunintentionally.Therehaverecentlybeen
examplesofFIssellingsubsidiariesjusttoavoidinap-
propriatelyintrusivesupervisionthathadoverstepped
theboundarybetweensupervisionandboardprerog-
atives. If supervisorsare tooclosely engaged inkey
decisions,theytakeonsomeliabilityforthosedeci-
sions.Similarly, therearedangers inoverpromising.
If supervisorsclaimtheywill successfully stoprisky
activities,thenanyactivitiesnotexplicitlyprohibited
orstoppedbysupervisorsmaybeperceivedasaccept-
able. Supervisors must also avoid becoming “cap-
tured,” that is,overly influencedbythe institution’s
perspectives. Periodic rotation of senior supervisors
amongFIscanhelppreventthisphenomenon,though
rotationshouldnotbesofrequentastoimpedethe
developmentofknowledge,relationships,andinsight.
Governmentsmustaddressthetalentandresource
challenge created by enhanced supervisory goals
andburdens.Staffingisapotential limitationthat
willneedtobeaddressed,andsoiscompensation.
Regulatory agenciesmaywish to considerways
toattractmoresenioremployeesfromFIs,including
recent retirees, to augment the knowledge and
expertiseofsupervisoryemployees.Whilehiresfrom
FIs may create potential conflicts, the benefits of
greater industry insightandexpertiseoutweighthe
potential drawbacks. Safeguards should be put in
placetominimizeevenperceivedconflictsofinterest.
Regulatory and supervisory agencies may also
wish to augment their independent analyses with
internal work performed by the FIs themselves,
including internal evaluation and audit work.
Obviously, leveraging work performed by FI staff
wouldrequireappropriateverification.
***
Supervisorychangesofthetypeproposedabove
are necessary and must be part of the financial
reform and redesign process already under way.
Takentogether,theoutlinedsupervisorygoodprac-
ticescouldsignificantlyimproveoversightofFIs.
SupervisorsthatmorefullycomprehendFIcorpo-
rate governance structures, strategies and risks,
culture,andoperationswillbebetterabletomake
judgments that support the stability of FIs in the
faceofunexpectedcrisesorshocks.Thisenhanced
supervisorydiscernmentmayalsopaydividendsby
promptingincreasedvigilanceanddisciplinewithin
FIboardsandmanagement.Theoutcomeshouldbe
increasedstabilityofthefinancialsystemasawhole
andeffectivemicroprudentialoversightthatcomple-
ments the macroprudential goals of central banks
andsupervisorsnationallyandinternationally.
Finally,itmustbeunderscoredoncemorethatas
supervisors takeon this expanded role, theymust
be careful to respect the distinct roles that each
stakeholder in effective governance has to play.
The objective is to develop an optimal model of
engagement, one that strengthens the governance
framework overall without unduly burdening the
boardormanagementwithsupervisoryintrusionor
encroachmentonmanagementorboardprerogative.
cHapTer 6
Relationships between FI Boards and Long-term
Shareholders
Toward EffEctivE GovErnancE of Financial insTiTuTions
70
Long-term shareholders can and should contribute meaningfully to
effective FI governance.
Responsive boards and management teams
engage seriously with shareholders, listen closely,
and factor shareholderperspectives intodecisions.
Shareholdersshouldinsistonfulltransparencyand
disclosure on financial, compensation, and gover-
nanceissues.
FIs with constructive relationships with share-
holders:
1. Actively listen to shareholder perspectives and
concerns before issues arise and communicate
clearly the board’s philosophy on governance
matters of shareholder interest, including com-
pensation,succession,andboardcomposition.
2. Recognizethatshareholdersareaheterogeneous
group and make every effort to honor share-
holders’desiretobeheard.
3. Thoughtfully manage their interactions with
shareholdersintheinterestofclarityofmessage.
4. Decide when to resist shareholder demands,
including those raised by proxy advisers, and
whentoaccedetothem.
Thefollowingpointsarealsoworthnoting:
5. TheUK’sFinancialReportingCouncilhasput
forward a useful shareholder code, and the
InternationalCorporateGovernanceNetworkis
supportingsimilarwork.
6. Shareholdershavean important role toplay in
shapinggovernancearrangementsatFIs.
Details of how FIs engage in constructive
relationships with shareholders, and of the other
issuesrelatedtoshareholders,arepresentedbelow.
This chapter offers perspectives on relationships
betweenanFIboardanditsshareholderswithina
frameworkofeffectivegovernance.Thefocusison
suggested principles of general application (as far
aspossible)ratherthanonthespecificsofongoing
debatesintheUnitedStatesandelsewhereonshare-
holderrights(forexample,proxyaccess,staggered
boards,boardmember terms, sayonpay)and the
lawsandregulationsthatenableandconstrainthem
in particular jurisdictions. Similarly, this chapter
doesnotaddresschangeofcontrolsituations.
Significant long-term shareholders generally
have the right to be represented on the board.
These board members exercise their rights as they
seefit, inaccordancewiththelaw,andtheyareto
beapplauded for thepart theycananddoplay in
assuringeffectivegovernance.Thepresenceoflong-
term shareholders on the board leads to vigorous
andsalutarydiscussion,andsignificantshareholders
almostalwaysconsiderthelong-termsuccessofthe
institutiontobeparamount.
Those shareholderswhoarenot representedon
the board express their power and prerogatives
largely(thoughnotexclusively)throughtheexercise
oftheirrighttoelectnon-executivedirectorsofthe
board.Allshareholdershavearighttobeheardby
managementandtheboardand,atanyrateinthe
caseoflong-onlyinvestorsortheirfundmanagers,
aninterestinpromotingthelong-termsuccessofthe
firm.Thisinterestandattendantresponsibilitymay
beseenasacounterparttothecoreaccountability
oftheboardtothemasshareholders.
Group of Thirty
71
1. acTively lisTen To sHareHolder perspecTives and concerns beFore issues arise and communicaTe clearly THe board’s pHilosopHy on governance maTTers oF sHareHolder inTeresT, including compensaTion, succession, and board composiTion. Shareholders can play a very important role in
keeping the board and management honest about
performance. Investorswill forgive a lot, but they
seldomforgivefirmsforfailingtomeettheexpecta-
tions the firms themselves have set and conveyed.
For this reason,dialoguewith long-term investors
is critical. Every major FI has a well-developed
investor relations program, designed to accom-
modateitsparticularprofileofinvestors.Investors
usuallywanttotalkaboutstrategyandoperations,
so these programs are primarily the purview of
management.
However, the board chair, deputy chair, and/or
seniorindependent(lead)directoralsohavekeyroles
toplay incommunicationwith shareholders.Once
ortwiceayear,thechairmanandoneortwoother
non-executive directors (for example, the lead or
senior independentdirector, thechairof thegover-
nancecommittee,orthechairofthecompensation
committee)shouldconsidermeetingwiththelargest
shareholders to cover any remaining questions or
concerns.Theyshouldlayouttheboard’sphilosophy
ongovernanceissues,withaparticularemphasison
identifyingthechair’ssuccessor,planstorefreshthe
board,managementsuccessionplanning,compensa-
tion, andany issuesknown tobeon themindsof
shareholders.
Some institutions invest considerable effort in
framing and communicating their perspectives;
others have a more difficult time justifying the
expensenecessarytodoso.Manyinstitutionsrelyon
proxyadvisersforguidance.Someadvisersarequite
diligent; others are less so. Similarly, the reliance
placedonthemmaybeblindorwellconsidered.
By engaging in active communication, boards
willstayabreastofshareholderconcerns.Theywill
haveasenseofthemoodoftheinvestorcommunity.
Inthose instanceswhenshareholders’ interestsare
not congruent with the long-term interests of the
company,theboardwillbeinapositiontopreempt
unwelcomeproxyresolutionsthroughdialogueand
earlyaction.
2. recogniZe THaT sHareHolders are a HeTerogeneous group and make every eFForT To Honor sHareHolders’ desire To be Heard.The shares of many of the world’s largest FIs are
widelyheldandtradedonthemajorstockexchanges.
Institutionalinvestors(forexample,investmentand
pensionfunds)holdmanyoftheshares,buttypically
nooneinstitutionholdsmorethanasmallpercentage
of the total. These shareholders are a very hetero-
geneous group, and each acts in its own interests.
Someholdsharesfordecades;othersforseconds—
as is thecase forhigh-frequency traders forwhom
board engagement is of little or no interest. Some
shareholdersseekdividends,otherslong-termshare
appreciation. Some have special agendas. Many
shareholders, for perfectly rational reasons, find it
difficulttoactlikeowners:theyaresimplyinvestors,
andasinvestors,sometakeanactiveinterestingov-
ernance,whileothersdonot.
As investors, shareholders’ influence leading up
to the crisis was not always positive. The Walker
reportsummarizedthesituationclearly:
“Before the recent crisis phase there seems to have
been a widespread acquiescence by institutional
investors and the market in the gearing up of the
balance sheets of banks (and also of many other
Toward EffEctivE GovErnancE of Financial insTiTuTions
72
companies) as a means of boosting returns on equity.
This was not necessarily irrational from the stand-
point of the immediate interest of shareholders who,
in the leveraged limited liability business of a bank,
receive all of the potential upside whereas their
downside is limited to their equity stake, however
much the bank loses overall in a catastrophe.” 17
Boardsoftenhavealegalorethicalresponsibility
tostakeholdersotherthanshareholders.Employees
have specific rights under codetermination. Cus-
tomers have rights that are protected by laws and
regulations,andbyethicalconsiderations.Thefinan-
cialcrisissurfacedtheconflictinggoalsandrightsof
thesedifferentsetsofstakeholders.
More broadly, given the externalities of FIs,
boards have a duty to look after the broader
interestsofsociety,whichtendtosupportthelong-
term interests of the FI and are broadly aligned
withtheinterestsofthelong-termshareholder.All
shareholders must be seen as just one of several
categories of stakeholder, all of whose voices are
important. Furthermore, shareholders themselves
willbedividedintheirviews.Thewiseboardmust
understandallthesemotivationsandstriketheright
balanceamongthem.
3. THougHTFully manage THeir inTeracTions wiTH sHareHolders in THe inTeresT oF clariTy oF message.Conversations with shareholders need to be con-
sistent, which is one reason why involving only a
small number of non-executive directors in those
conversationsmakesgood sense: thepossibilityof
confusionorambiguityincreasesasthenumberof
voicesinvolvedgoesup.Theindependentchairman
is the key liaison board member, with the senior
independentdirectororleaddirectoroftenplaying
an important role as well. In addition, over the
past few years, with so many shareholder ques-
tions arising on compensation, direct engagement
between the remuneration committee chair and
shareholdersandproxyadvisershasincreased.
4. decide wHen To resisT sHareHolder demands, including THose raised by proXy advisors, and wHen To accede To THem.Notall shareholderswillbehappywith thefirm’s
governancephilosophyandplans.Unhappyshare-
holdersmayfileorthreatentofileproxyresolutions.
This may call for more communication and more
informationsharing.
Thefactthatinmostcasesshareholderscansell
their holdings gives pause to board members and
senior managers whom shareholders most want
to influence. Rarely would anyone charged with
building the long-term value of the firm want to
encourageinvestorstoselltheirholdings.Butboard
membersandseniormanagementcannotbeswayed
bynear-termstockpricepressuresattheexpenseof
thelongterm.Inaddition,payingspecialheedtoa
shareholdertodaywhomaysellhissharestomorrow
seemsunjustified.Shareholders’relationshiptothe
FIismorevoluntarythanthatofanyothergroupof
stakeholders.
Theboardmustchooseanddefendapositionin
thelong-terminterestsoftheinstitution,whichisits
primaryresponsibility.Indischargingthisresponsi-
bility,theboardmayfromtimetotimeactcontrary
tothewishesofshort-termshareholdersinorderto
createvalueforlong-termshareholders.
17 DavidWalker,A Review of Corporate Governance in UK Banks and Other Financial Industry Entities(London:HMTreasury,2009),71.
Group of Thirty
73
5. THe uk’s Financial reporTing council Has puT Forward a useFul sHareHolder code, and THe inTernaTional corporaTe governance neTwork is supporTing similar work.InJuly2010,theUK’sFinancialReportingCouncil
publishedtheUKStewardshipCode,which
“aims to enhance the quality of engagement
between institutional investors and companies to
help improve long-term returns to shareholders
and the efficient exercise of governance responsi-
bilities. Engagement includes pursuing purposeful
dialogue on strategy, performance and the man-
agement of risk, as well as on issues that are the
immediate subject of votes at general meetings.” 18
The Code has been implemented in the UK on
a“complyorexplain”basis,whichrecognizesthat
certainshareholdersmayhavegoodandsubstantive
reasonsforoptingout.
In a similar vein, the International Corporate
GovernanceNetworkhastakenupthechallengeof
establishingbestpractice forshareholderresponsi-
bilityandislendingitssupporttothedevelopment
of stewardshipcodesand theirequivalentsaround
theworld.Thisisapraiseworthyendeavor.
Institutionalinvestorsgloballywoulddowellto
carefullyconsider theworkofbothorganizations.
They should comply with the FinancialReporting
Council’s Stewardship Code whenever compliance
is consistentwith the investor’saimsand the con-
straintsunderwhichitoperates.
Under the rubric of shareholder responsibility,
twoareascallforspecialattentionandfocus:
�� The first relates to board composition, new
boardmemberappointments,andtheevaluation
ofboardperformance,whichmanySIFIboards
now undertake on a regular basis, increasingly
with the benefit of external facilitation. Major
shareholders can benefit by factoring appraisal
outcomes and follow-up initiatives into their
dialogue with board chairmen. The chairman
or lead director/senior independent director
of a major SIFI board should give serious con-
sideration to at least informal soundings with
majorshareholdersbeforesignificantnewboard
appointmentsaremade.
�� The second relates to the structure and incen-
tives associated with remuneration. Say-on-pay
measures in place in many jurisdictions invite
shareholder engagement in the vital matters of
howrewardisstructuredandhowitisallocated
toemployees(asopposedtoshareholders).Even
when express provisions for shareholder say-
on-pay are not embedded in law or practice,
shareholderscanbeencouragedtoweighinwith
aconsideredperspective.
6. sHareHolders Have an imporTanT role To play in sHaping governance arrangemenTs aT Fis.Shareholders can ask probing questions about
governance that stimulate thinking, offer helpful
observations, and otherwise support the FI. They
not only have a right to be heard, they have an
importantvoiceinthegovernanceprocess.
Institutionalshareholdersareseldominaposition
tofullyunderstandtheissuesfacingtheFI,bethey
strategicorgovernancerelated.Theyaresimplytoo
far removed from the action. When one considers
thatevenboardmembers,whomayspend30to100
daysperyearintherole,immersedininformation
and engaged with management, sometimes have
difficulty understanding the real issues, one can
better understand the limitations on shareholders.
18 FinancialReportingCouncil,The UK Stewardship Code(London:FinancialReportingCouncil,2010),1.
Toward EffEctivE GovErnancE of Financial insTiTuTions
74
Shareholderstendtoactafterthereisaproblem,but
theyrarelyareabletocontributeinadvance.They
arethereforenotlikelytomakearealdifferenceto
thesafetyandsoundnessoftheinstitutiondirectly.
***
Shareholders can and do contribute meaning-
fullytotheeffectivegovernanceofFIs.Significant,
long-termshareholderswithseatsontheboardhave
both the position and the incentive to contribute
positively to governance. Boards and management
mustdiligentlylistentothem.Buttheroleofinsti-
tutionalshareholdersinsecuringfinancialstability
throughinterventionongovernanceissuesisnone-
thelesslimited.Theprimaryfocusmustremainon
theboard.
cHapTer 7
The Impact of Values and Culture on
Behaviors and Decisions
Toward EffEctivE GovErnancE of Financial insTiTuTions
76
Values and culture may be the keystone of FI governance because they
drive behaviors of people throughout the organization and the ultimate
effectiveness of its governance arrangements.
1. Honesty,integrity,propermotivations,indepen-
denceofthought,respectfortheideasofothers,
openness/transparency, the courage to speak
outandact,andtrustarethebedrockvaluesof
effectivegovernance.
2. Itisfortheboardofdirectorstoarticulateand
senior executives to promote a culture that
embedsthesevaluesfromthetoptothebottom
oftheentity.Cultureisvaluesbroughttolife.
3. Well-functioning boards set, promulgate, and
embedthesevalues,commonlyintheformofa
code,sothatdirectors,seniorexecutives,andall
otheremployees inanentityarefullyawareof
the standards of behavior that are expectedof
them.
4. Because of their power to influence behavior
andtheexecutionoftheFI’sstrategy,valuesand
culture are essential dimensions of inquiry and
engagementforsupervisors.Majorshareholders
ortheirfundmanagersshouldbeattentivetothe
cultureofanentitywhenmakingtheirinvestment
decisionsandengagingwithaninvesteeboard.
Theseideasarediscussedinthepagesthatfollow.
Structures and processes are important, but how
they are made to function is the key. Suitable
structures and processes are a necessary but not
a sufficient condition for good governance,which
critically depends also on patterns of behavior.
Behavioral patterns depend in turn on the extent
towhichvaluessuchas integrity, independenceof
thought, and respect for the views of others are
embeddedintheinstitutionalculture.
FI leaders stress the paramount importance of
valuesandcultureindrivingbehavior.Establishing
proper institutionalarrangements is relativelyeasy,
but embedding the right culture tends to be much
harder.Inthebest-runFIs,positivevaluesandculture
arepalpablefromtheboardtotheexecutivesuiteto
thefrontline.Valuesandculturedrivepeopletodo
the right thingevenwhennoone is looking.They
areafundamentalaspectofthegovernancesystem.
Although values and culture cannot always be
measured quantitatively, they impact governance
effectivenessinpowerfulwaysandthereforeshould
beamajor focus for the supervisor.What follows
are specific views and recommendations designed
toencourageFIboardmembers,executiveleaders,
supervisors, and shareholders to pay heed to the
importanceofvaluesandcultureandthehardwork
involvedingettingthemright:
Group of Thirty
77
1. HonesTy, inTegriTy, proper moTivaTions, independence oF THougHT, respecT For THe ideas oF oTHers, openness/Transparency, THe courage To speak ouT and acT, and TrusT are THe bedrock values oF eFFecTive governance.Allaroundtheglobe,acrosscountriesandcultures,
FIleaderscitedaremarkablyconsistentsetofvalues
thattheyconsideredtobeessential toaculture in
which effective governance could thrive. These
include personal values, values concerning respect
for ideas, values that shape personal interaction,
andtrustandmutualrespect.
personal valuesAbsent impeccable personal values—honesty, per-
sonalintegrity,andmotivation—nothingispossible.
Honestyandpersonalintegrityareself-explanatory
and important in any business, but especially in
FIs,wherepublictrustandareputationforhonesty
andintegrityareessentialtothevalueproposition.
Motivationdeservesashortexplanation.
Behaviorcanbemotivatedbyfactorsbothnoble
and ignoble.Self-interest isnot intrinsicallybad; it
canbeharnessed forgood.Butunless it isaligned
withanorientation toward thefirm, itwillunder-
mine objectivity and corrupt action. Motivation
mattersatthefrontlineandintheexecutivesuite.
Forexample:
�� TheCEOmaypromoteamajoracquisitionasa
waytoadvancethelong-terminterestsoftheFI
anditscustomers—orasawaytocaphisorher
legacy.Theboardneedstounderstandwhatmoti-
vatestheCEO’srecommendationsanddecisions.
�� Frontlineemployeesmayrecommendaloanfor
approvalbecausetheybelieveinthecreditorjust
tofillaquota.Tradersmaymakeariskytransac-
tionbecausetheircompensationistiedtovolume
orbecausetheyareexploringinnovativewaysto
makeaprofitfortheFI.
Motivation,therefore,needstobediscerned.
values concerning respect for ideasIndependenceofthoughtandrespectfortheviews
of others are values that relate to ideas, curiosity,
andcontinuouslearning.Goodgovernancerequires
a certain democracy within the company. More
voicesneed tobeheard,bothwithinmanagement
and at the board level. Consensus is often better
thanmandatedCEOorboarddecisions.
Succumbing uncritically to groupthink or being
tooreadytoaccepttheviewsofothers,however,can
bejustasharmfulashavingaclosedmindtoothers’
ideas.Goodboardmembers,branchmanagers,risk
managers,andCEOsmustallbeopentogoodideas,
butnoideasmustbeabovechallengeanddissection.
TheCEOandchaircarryaspecialobligationto
beopentoideasfromallquartersandtobeoriented
totheinstitutionanditssuccess.OneCEOexpressed
thisideasimply:“I don’t want to be right. I want us
to do the right thing.”
values that shape personal interactionTransparency/opennessandthecouragetospeakout
andact arevalues that shapepersonal interaction.
Effectivegovernancerequirestransparency,starting
withinformationflowsanddiscussionbetweenthe
board and management. The relationship between
the non-executive chairman, the non-executive
directors,andmanagementneedstobeopen,trans-
parent,andhonest.
Transparency is important in all relationships:
between the chair and theCEO,between the risk
Toward EffEctivE GovErnancE of Financial insTiTuTions
78
managersandtherevenuegenerators,betweeneach
levelofmanagement,andbetweenmanagementand
thesupervisors.Allemployeesshouldberesponsible
for risks in the FI; they should all try to act like
auditors.Thisvigilancedemandsacommitmentto
transparencyandopenness.
Courage to speak up and act is the value that
animates insight. A board member, risk officer, or
branch manager might have a tremendously valu-
ableinsightorperspective,butwithoutthecourage
toshareitoractuponit,theinsightisworthless.The
boardshouldbedeeplyawareofwhatistakingplace
andshouldbechallengingstrategyandriskpolicies.
Ittakescouragetomountachallengeintheboard-
room,anditoftencomesdowntothepersonalities
ofkeyplayers.DothechairmanandCEOencourage
challenge?Ifnot,thatauthoritarianattitudeswiftly
corruptsboardbehaviors.
Trust and mutual respectTrustmustbeearned.It isbuiltontheapplication
of the other values and develops over time. Trust
andmutualrespectgohandinhandandarealways
two-way.Theyareafeatureofanystrongorganiza-
tion.Theboardmusttrustandrespectmanagement,
andviceversa.Theremustbemutual trustamong
managementlevelsandamongboardmembers;there
mustbetrustbetweentheFIanditssupervisors.
Anexampleillustratesthepoint.Therearealways
shadesofgreyregardingwhatinformationmanage-
ment shares with the non-executive directors and
when. Early dialogue is most effective, but that is
exactlywhenmanagementdoesnotnecessarilybring
a fullybacked recommendation. If theboard criti-
cizesmanagement forgapsorflaws in itsanalysis,
theseearlydiscussionsbecomeincreasinglyrare.By
contrast, if theboarduses theopportunity topro-
videusefulinputandguidance,managementwillsee
theboardasagenuinevalueenhancer.
Trust has a critical dimension not only at the
boardandseniormanagementlevelsbutalsocloser
tothefrontline.Employeesshouldhaveameansof
raisingquestionsandconcernsandbegivensupport
withoutfearofretribution.Trustdoesnotobviate
theneedforrigorousriskgovernanceandpersonnel
processes, butwithout trust, any systemof gover-
nanceisboundtofail.
2. iT is For THe board oF direcTors To arTiculaTe and senior eXecuTives To promoTe a culTure THaT embeds THese values From THe Top To THe boTTom oF THe enTiTy. culTure is values brougHT To liFe.Culturesaredevelopedfromacombinationofvalues
andpriorities,bothexplicitandimplicit,thattogether
definehowtheorganizationacts.Cultureinfluences
attitude andbehavior. If culture is developedwell,
decisions can be delegated much more deeply into
theorganizationbecausepeoplewillknowwhat is
acceptable andwhat isoutofbounds, even in the
absenceof close supervisionor rules. Four aspects
of FI culture have special relevance to governance
effectiveness: risk culture, performance culture,
customer-centricity,andsocietalresponsibility.
risk cultureAsobservedinChapter3,nurturinganappropriate
riskcultureisveryimportanttoeverysuccessfulFI.
Is the culture risk seeking or risk avoiding? Does
it encourage pushing the envelope or remaining
safely inside defined risk boundaries? Are known
risks mitigated through unique skills or capabili-
ties?Arerisks takenoutsidepermittedboundaries
rewardediftheyproduceprofits,orpunished?Are
riskswidelysyndicated,oristheriskculturemore
entrepreneurial?
Group of Thirty
79
Every FI will have a unique risk culture.
Homogeneityisnotavirtue.Theriskculturemust
beconsistentwithandsupportiveoftheFI’sstrategy
anditslong-termgrowthandstability.
performance cultureStrongperformanceculturescanpromote the suc-
cessofanFI.Settinggoals,measuringperformance
relativetothem,andrewardingthosewhoachieve
goals is a core process in any organization. Every
FI’s performance culture has both organizational
andindividualperformancedimensions.
Strongperformanceculturestendtohavequan-
tifiablegoalsand“uporout”systemsofadvance-
ment, among other characteristics. Steep incentive
compensationarrangementsarefrequentlyafeature
of strong performance cultures, but pay is by no
meanstheonlyrewardforperformance.Advance-
ment, recognition, and respect can also be very
strongincentivesandrewards.
The danger comes when the drive to achieve
economic performance trumps or distorts core
values and other cultural norms. A good perfor-
mance culture will reward those whose successes
uphold the organization’s institutional values and
penalizethosewhosubvertthosevalues.Economic
performanceatanypriceisfailure.
customer-centricityA customer-centered focus (customer-centricity)
drivesbehaviorsnotonlyatthecustomerinterface,
but also in the marketing and product manage-
mentoforganizations.FIsthatwishtodistinguish
themselves through superior customer service
should make customer service the highest priority
of a person’s time. This is a strategic choice, not
a governance issue, which is then translated into
operationaldiscipline.
Thegovernanceissuesdemandingboardandexec-
utiveattentionconcerntherelatedissuesofproduct
suitability and business conduct, which manifest
themselves in both the consumer and corporate
segments.
�� FIsmustrequirethatallproductsservethelegiti-
mate needs of the target customer segment and
bemarketedaccordingly.Informationasymmetry
willalwaysexist—theFIwillalwaysknowmore
than the client—but FIs must not exploit that
asymmetrythroughaggressivemarketing,because
thatmayataminimumcreatetheappearanceof
deception.
�� Morebroadly,ethicalbusinessconductisessen-
tialeverywhere,butespeciallyinanFIlicensedto
operatebythestate.Goodbusinesspracticepays,
and a firm following it will develop mutually
beneficialrelationshipswithallitsstakeholders.
NoFIcanaffordthereputationalriskofmarketing
unsuitable product or engaging in slippery business
conduct. Values and culture speak to both of these
perils.
societal responsibilityFIs, unlike most other corporations, are licensed
by society to serve the needs of society. The
2008–2009 financial crisis demonstrated that an
FI’smismanagementandcollapsecanhaveserious
repercussions for the economy as a whole, which
is why society requires FIs to take their societal
responsibilitiesseriouslyandfactorthemintotheir
culture.FIsmustservenotonlytheirshareholders,
butsocietyasawhole.Thisisabedrockprinciple.
Accordingly, FIs must create a culture that
respects those societal responsibilities and encour-
agesthebehaviorsnecessarytodischargethem.This
essential cultural bias toward society complements
Toward EffEctivE GovErnancE of Financial insTiTuTions
80
the responsibility of the board to deliver value to
shareholders, and itmust shape topmanagement’s
approachtoFIstrategyandrisk,guidetheboard’s
oversight function, and define the supervisor’s
mission.
3. well-FuncTioning boards seT, promulgaTe, and embed THese values, commonly in THe Form oF a code, so THaT direcTors, senior eXecuTives, and all oTHer employees in an enTiTy are Fully aware oF THe sTandards oF beHavior THaT are eXpecTed oF THem.Setting values and shaping a culture takes a long
time and a great deal of work. In discussing the
keys to effective risk governance, one chairman
noted,“The remaining 30 percent to 40 percent is
culture, getting people in the right mindset. How
do you build up the right culture, where people
self-regulate?”
A written code helps preserve and strengthen
the culture: it is the FI’s tangible symbol of its
value system and can be prominently and widely
displayedsuchthatitdrawsattentionandcomment
from employees. The code should emphasize the
positive commercial benefits of high standards of
ethicalbusinessconductandnotsimplythenegative
consequencesofgettingthingswrong.
Constantremindersandrepetitionarethekeysto
embeddingaculture.Apowerfulandessentialway
ofdoingsoistovisiblyintegratevaluesandculture
into the key HR processes of the FI. These pro-
cesses are among themost influential and tangible
reinforcingmechanismsbecausethroughHRactions
aspirationalstatementsbecomereality.Forexample:
�� Recruitingmaterialandinterviewguidesneedto
refer to the code so that candidates understand
whatkindofcompanyitistheyareseekingtojoin.
�� Theemployeeinductionprocessneedstoinclude
substantial attention to the code and how it
affectsexpectedbehaviors.
�� The performance review process needs to
meaningfully incorporate consideration of an
individual’s conformance to the FI’s values.
Metricsmustbeputinplace.Often,360-degree
reviewsonsofter issuescanbring to lightboth
strengthsandweaknesses.
�� Advancement decisions invariably send loud
messages to the organization about who can
expect to do well in the organization. It takes
couragetopenalizesomeoneforsubvertingvalues
when thatpersonhasalsobeen responsible for
greateconomicperformance.Ontheotherhand,
advancinga“culturecarrier”—anindividualwho
notonlyachievesstrongeconomicperformance,
butdoesittherightway—sendsastrongpositive
message.
Whilevaluesandculturemaybethe“soft”side
of governance effectiveness, they canandmustbe
managedwithhardanddedicatedcommitment.
4. because oF THeir power To inFluence beHavior and THe eXecuTion oF THe Fi’s sTraTegy, values and culTure are essenTial dimensions oF inquiry and engagemenT For supervisors. maJor sHareHolders or THeir Fund managers sHould be aTTenTive To THe culTure wHen making invesTmenT decisions and engaging wiTH an invesTee board.Values and culture are legitimate and important
dimensionsof inquiryforsupervisors.Whilethese
soft features defy quantitative measurement, they
cannot be ignored. Anyone spending time in an
organization quickly develops a clear sense for
Group of Thirty
81
whatdrivesit:mostnewemployeesunderstandthe
valuesandcultureoftheinstitutionwithinayear,
andmanyfigureitoutwithinafewmonths.They
instinctivelyobservehowvaluesandculture influ-
ence day-to-day business decisions and personnel
choices.Supervisorscandolikewise.
Supervisors need to understand each FI’s values
andculture.Itshouldbeoneofthethingstheyarticu-
lateabouttheFI,andtheyshouldcompareandcon-
trasttheirperceptionswiththoseoftheircolleagues
whoworkwithotherFIs.Supervisorsshoulddiscuss
theirobservationswithseniormanagersandboard
membersfromtimetotime.Ifthesupervisorshave
concerns,theyshouldexpressthemthroughappro-
priate channels and customary forums, but they
should resist making recommendations regarding
whatvaluesandcultureanFIshouldcultivate.Those
aredecisionsfortheboardandformanagement.
Finally,long-termshareholdersneedtobeatten-
tivetocultureandtreatitasaninvestmentcriterion.
Believinginthelong-termprospectsofaninstitution
involvesbuyingintoitsvaluesandculture.
***
Valuesandcultureshouldbeseenastheultimate
software that determines the behaviors of people
throughout the FI and the effectiveness of its
governancearrangements.Thefactthatthequality
of embedded values and culture cannot readily
be measured does not detract in any way from
their critical significance. Boards, management,
supervisors,andshareholdersmustbecontinuously
and proactively attentive to the maintenance and
reinforcementofvaluesandculturesthatleadtosafe,
sound,innovative,ethical,andhigh-performingFIs.
83
paul a. volckerChairmanEmeritus,GroupofThirtyFormerChairman,PresidentBarackObama’s
EconomicRecoveryAdvisoryBoardFormerChairman,BoardofGovernors
oftheFederalReserveSystem
Jacob a. FrenkelChairmanoftheBoardofTrustees,
GroupofThirtyChairman,JPMorganChaseInternationalFormerGovernor,BankofIsraelFormerProfessorofEconomics,
UniversityofChicagoFormerCounselor,DirectorofResearch,
InternationalMonetaryFund
Jean-claude TrichetChairman,GroupofThirtyHonoraryGovernor,BanquedeFranceFormerPresident,EuropeanCentralBankFormerGovernor,BanquedeFrance
geoffrey l. bellExecutiveSecretary,GroupofThirtyPresident,GeoffreyBell&Company,Inc.
leszek balcerowiczProfessor,WarsawSchoolofEconomicsChairmanoftheBoard,BruegelFormerPresident,NationalBankofPolandFormerDeputyPrimeMinisterand
MinisterofFinance,Poland
mark carneyGovernor,BankofCanadaChairman,FinancialStabilityBoardMember,BoardofDirectors,Bank
forInternationalSettlements
Jaime caruanaGeneralManager,Bankfor
InternationalSettlementsFormerFinancialCounsellor,
InternationalMonetaryFundFormerGovernor,BancodeEspañaFormerChairman,BaselCommittee
onBankingSupervision
domingo cavalloChairmanandCEO,DFCAssociates,LLCFormerMinisterofEconomy,Argentina
e. gerald corriganManagingDirector,GoldmanSachsGroup,Inc.FormerPresident,FederalReserve
BankofNewYork
guillermo de la dehesa romeroDirectorandMemberoftheExecutive
Committee,GrupoSantanderFormerDeputyManagingDirector,
BancodeEspañaFormerSecretaryofState,Ministryof
EconomyandFinance,Spain
mario draghiGovernor,EuropeanCentralBankMember,BoardofDirectors,Bank
forInternationalSettlementsFormerGovernor,Bancad’ItaliaFormerChairman,FinancialStabilityBoardFormerViceChairmanandManaging
Director,GoldmanSachsInternational
group of THirTy members 2012*
* AsofFebruary22,2012.
Toward EffEctivE GovErnancE of Financial insTiTuTions
84
william dudleyPresident,FederalReserveBankofNewYorkMember,BoardofDirectors,Bank
forInternationalSettlementsFormerPartnerandManagingDirector,
GoldmanSachsandCompany
martin FeldsteinProfessorofEconomics,HarvardUniversityPresidentEmeritus,NationalBureau
ofEconomicResearchFormerChairman,CouncilofEconomicAdvisers
roger w. Ferguson, Jr.PresidentandCEO,TIAA-CREFFormerChairman,SwissReAmerica
HoldingCorporationFormerViceChairman,BoardofGovernors
oftheFederalReserveSystem
stanley FischerGovernor,BankofIsraelFormerFirstManagingDirector,
InternationalMonetaryFund
arminio Fraga netoFoundingPartner,GáveaInvestimentosChairmanoftheBoard,BM&F-BovespaFormerGovernor,BancoCentraldoBrasil
gerd HäuslerChiefExecutiveOfficer,BayerischeLandesbankMemberoftheBoardofDirectors,
RHJInternationalFormerManagingDirectorandVice
Chairman,Lazard&Co.FormerCounselorandDirector,
InternationalMonetaryFundFormerManagingDirector,DresdnerBankFormerMemberoftheBoard,
DeutscheBundesbank
philipp HildebrandFormerChairmanoftheGoverning
Board,SwissNationalBankFormerPartner,MooreCapitalManagement
mervyn kingGovernor,BankofEnglandMember,BoardofDirectors,Bank
forInternationalSettlementsMemberoftheGoverningandGeneral
Councils,EuropeanCentralBankFormerProfessorofEconomics,
LondonSchoolofEconomics
paul krugmanProfessorofEconomics,WoodrowWilson
School,PrincetonUniversityFormerMember,CouncilofEconomicAdvisors
guillermo ortiz martinezPresidentandChairman,GrupoFinancieroBanorteFormerGovernor,BancodeMéxicoFormerChairmanoftheBoard,Bank
forInternationalSettlementsFormerSecretaryofFinanceand
PublicCredit,Mexico
raghuram g. rajanProfessorofEconomics,Chicago
BoothSchoolofBusinessEconomicAdvisortoPrimeMinisterofIndia
kenneth rogoffThomasD.CabotProfessorofPublicPolicy
andEconomics,HarvardUniversityFormerChiefEconomistand
DirectorofResearch,IMF
Tharman shanmugaratnamDeputyPrimeMinister&Ministerfor
Finance&Manpower,SingaporeChairman,MonetaryAuthorityofSingaporeChairmanofInternationalMonetary
&FinancialCommittee,IMFFormerManagingDirector,Monetary
AuthorityofSingapore
Group of Thirty
85
masaaki shirakawaGovernor,BankofJapanVice-Chairman,BoardofDirectors,Bank
forInternationalSettlementsFormerProfessor,KyotoUniversity
SchoolofGovernment
lawrence H. summersCharlesW.EliotUniversityProfessor
atHarvardUniversityFormerDirector,NationalEconomics
CouncilforPresidentBarackObamaFormerPresident,HarvardUniversityFormerSecretaryoftheTreasury
lord adair TurnerChairman,FinancialServicesAuthorityMemberoftheHouseofLords,UnitedKingdom
david walkerSeniorAdvisor,MorganStanleyInternational,Inc.FormerChairman,MorganStanley
International,Inc.FormerChairman,Securitiesand
InvestmentsBoard,UK
axel a. weberVisitingProfessorofEconomics,Chicago
BoothSchoolofBusinessFormerPresident,DeutscheBundesbank
yutaka yamaguchiFormerDeputyGovernor,BankofJapanFormerChairman,EuroCurrency
StandingCommission
ernesto ZedilloDirector,YaleCenterfortheStudyof
Globalization,YaleUniversityFormerPresidentofMexico
Zhou XiaochuanGovernor,People’sBankofChinaMember,BoardofDirectors,Bank
forInternationalSettlementsFormerPresident,ChinaConstructionBankFormerAssistantMinisterofForeignTrade
senior members
abdlatif al-HamadChairman,ArabFundforEconomic
andSocialDevelopmentFormerMinisterofFinanceand
MinisterofPlanning,Kuwait
emeriTus members
andrew crockettPresident,JPMorganChaseInternationalFormerGeneralManager,Bankfor
InternationalSettlements
Jacques de larosièrePresident,EurofiConseiller,BNPParibasFormerPresident,EuropeanBankfor
ReconstructionandDevelopmentFormerManagingDirector,
InternationalMonetaryFundFormerGovernor,BanquedeFrance
richard a. debsAdvisoryDirector,MorganStanleyFormerPresident,MorganStanleyInternationalFormerCOO,FederalReserveBankofNewYork
gerhard FelsFormerDirector,InstitutderdeutschenWirtschaft
Toyoo gyohtenPresident,InstituteforInternational
MonetaryAffairsFormerChairman,BankofTokyo
John g. HeimannSeniorAdvisor,FinancialStabilityInstituteFormerU.S.ComptrolleroftheCurrency
erik HoffmeyerChairman,Politiken-FondenFormerChairman,DanmarksNationalbank
Toward EffEctivE GovErnancE of Financial insTiTuTions
86
peter b. kenenWalkerProfessorofEconomics&International
FinanceEmeritus,PrincetonUniversityFormerSeniorFellowinInternational
Economics,CouncilonForeignRelations
william mcdonoughFormerViceChairman,Bankof
America/MerrillLynchFormerChairman,PublicCompany
AccountingOversightBoardFormerPresident,FederalReserve
BankofNewYork
shijuro ogataDeputyChairman,PacificAsiaRegion,
theTrilateralCommissionFormerDeputyGovernor,BankofJapanFormerDeputyGovernor,Japan
DevelopmentBank
sylvia ostryDistinguishedResearchFellow,MunkCentre
forInternationalStudies,TorontoFormerAmbassadorforTrade
Negotiations,CanadaFormerHead,OECDEconomics
andStatisticsDepartment
william r. rhodesPresidentandCEO,WilliamR.
RhodesGlobalAdvisorsSeniorAdvisor,CitigroupFormerSeniorViceChairman,Citigroup
ernest sternPartnerandSeniorAdvisor,TheRohatynGroupFormerManagingDirector,JPMorganChaseFormerManagingDirector,WorldBank
marina v n. whitmanProfessorofBusinessAdministration&
PublicPolicy,UniversityofMichiganFormerMember,CouncilofEconomicAdvisors
87
reporTs
SharingtheGainsfromTrade:RevivingtheDohaStudy Group Report. 2004
KeyIssuesinSovereignDebtRestructuringStudy Group Report. 2002
ReducingtheRisksofInternationalInsolvencyA Compendium of Work in Progress. 2000
Collapse:TheVenezuelanBankingCrisisof’94Ruth de Krivoy. 2000
TheEvolvingCorporation:GlobalImperativesandNationalResponsesStudy Group Report. 1999
InternationalInsolvenciesintheFinancialSectorStudy Group Report. 1998
GlobalInstitutions,NationalSupervisionandSystemicRiskStudy Group on Supervision and Regulation. 1997
LatinAmericanCapitalFlows:LivingwithVolatilityLatin American Capital Flows Study Group. 1994
DefiningtheRolesofAccountants,BankersandRegulatorsintheUnitedStatesStudy Group on Accountants, Bankers and Regulators. 1994
EMUafterMaastrichtPeter B. Kenen. 1992
SeaChangesinLatinAmericaPedro Aspe, Andres Bianchi, and Domingo Cavallo,with discussion by S.T. Beza and William Rhodes. 1992
TheSummitProcessandCollectiveSecurity:FutureResponsibilitySharingThe Summit Reform Study Group. 1991
FinancingEasternEuropeRichard A. Debs, Harvey Shapiro, and Charles Taylor. 1991
TheRisksFacingtheWorldEconomyThe Risks Facing the World Economy Study Group. 1991
group of THirTy publicaTions since 1990
Toward EffEctivE GovErnancE of Financial insTiTuTions
88
THe william Taylor memorial lecTures
ThreeYearsLater:UnfinishedBusinessinFinancialReformPaul A. Volcker. 2011
It’sNotOver’TilIt’sOver:LeadershipandFinancialRegulationThomas M. Hoenig. 2010
TheCreditCrisis:TheQuestforStabilityandReformE. Gerald Corrigan. 2008
LessonsLearnedfromthe2008FinancialCrisisEugene A. Ludwig. 2008
TwoCheersforFinancialStabilityHoward Davies. 2006
ImplicationsofBaselIIforEmergingMarketCountriesStanley Fischer. 2003
IssuesinCorporateGovernanceWilliam J. McDonough. 2003
PostCrisisAsia:TheWayForwardLee Hsien Loong. 2001
LicensingBanks:StillNecessary?Tommaso Padoa-Schioppa. 2000
BankingSupervisionandFinancialStabilityAndrew Crockett. 1998
GlobalRiskManagementUlrich Cartellieri and Alan Greenspan. 1996
TheFinancialDisruptionsofthe1980s:ACentralBankerLooksBackE. Gerald Corrigan. 1993
special reporTs
EnhancingFinancialStabilityandResilience:MacroprudentialPolicy,Tools,andSystemsfortheFutureMacroprudential Policy Working Group. 2010
TheReformoftheInternationalMonetaryFundIMF Reform Working Group. 2009
FinancialReform:AFrameworkforFinancialStabilityFinancial Reform Working Group. 2009
TheStructureofFinancialSupervision:ApproachesandChallengesinaGlobalMarketplaceFinancial Regulatory Systems Working Group. 2008
Group of Thirty
89
GlobalClearingandSettlement:FinalMonitoringReportGlobal Monitoring Committee. 2006
ReinsuranceandInternationalFinancialMarketsReinsurance Study Group. 2006
EnhancingPublicConfidenceinFinancialReportingSteering & Working Committees on Accounting. 2004
GlobalClearingandSettlement:APlanofActionSteering & Working Committees of Global Clearing & Settlements Study. 2003
Derivatives:PracticesandPrinciples:Follow-upSurveysofIndustryPracticeGlobal Derivatives Study Group. 1994
Derivatives:PracticesandPrinciples,AppendixIII:SurveyofIndustryPracticeGlobal Derivatives Study Group. 1994
Derivatives:PracticesandPrinciples,AppendixII:LegalEnforceability:SurveyofNineJurisdictionsGlobal Derivatives Study Group. 1993
Derivatives:PracticesandPrinciples,AppendixI:WorkingPapersGlobal Derivatives Study Group. 1993
Derivatives:PracticesandPrinciplesGlobal Derivatives Study Group. 1993
ClearanceandSettlementSystems:StatusReports,Autumn1992Various Authors. 1992
ClearanceandSettlementSystems:StatusReports,Year-End1990Various Authors. 1991
ConferenceonClearanceandSettlementSystems.London,March1990:SpeechesVarious Authors. 1990
ClearanceandSettlementSystems:StatusReports,Spring1990Various Authors. 1990
occasional papers
83.MacroprudentialPolicy:AddressingtheThingsWeDon’tKnowAlastair Clark and Andrew Large. 2011
82.The2008FinancialCrisisandItsAftermath:AddressingtheNextDebtChallengeThomas A. Russo and Aaron J. Katzel. 2011
81.RegulatoryReformsandRemainingChallengesMark Carney, Paul Tucker, Philipp Hildebrand, Jacques de Larosière, William Dudley, Adair Turner, and Roger W. Ferguson, Jr. 2011
80.12MarketandGovernmentFailuresLeadingtothe2008–09FinancialCrisisGuillermo de la Dehesa. 2010
Toward EffEctivE GovErnancE of Financial insTiTuTions
90
79.LessonsLearnedfromPreviousBankingCrises:Sweden,Japan,Spain,andMexicoStefan Ingves, Goran Lind, Masaaki Shirakawa, Jaime Caruana, and Guillermo Ortiz Martinez. 2009
78.TheG30atThirtyPeter Kenen. 2008
77.DistortingtheMicrotoEmbellishtheMacro:TheCaseofArgentinaDomingo Cavallo and Joaquin Cottani. 2008
76.CreditCrunch:WhereDoWeStand?Thomas A. Russo. 2008
75.Banking,Financial,andRegulatoryReformLiu Mingkang, Roger Ferguson, and Guillermo Ortiz Martinez. 2007
74.TheAchievementsandChallengesofEuropeanUnionFinancialIntegrationanditsImplicationsfortheUnitedStatesJacques de Larosière. 2007
73.NineCommonMisconceptionsaboutCompetitivenessandGlobalizationGuillermo de la Dehesa. 2007
72.InternationalCurrenciesandNationalMonetaryPoliciesBarry Eichengreen. 2006
71.TheInternationalRoleoftheDollarandTradeBalanceAdjustmentLinda Goldberg and Cédric Tille. 2006
70.TheCriticalMissionoftheEuropeanStabilityandGrowthPactJacques de Larosière. 2005
69.IsitPossibletoPreservetheEuropeanSocialModel?Guillermo de la Dehesa. 2005
68.ExternalTransparencyinTradePolicySylvia Ostry. 2004
67.AmericanCapitalismandGlobalConvergenceMarina V.N. Whitman. 2003
66.Enronetal.:MarketForcesinDisarrayJaime Caruana, Andrew Crockett, Douglas Flint, Trevor Harris, and Tom Jones. 2002
65.VentureCapitalintheUnitedStatesandEuropeGuillermo de la Dehesa. 2002
64.ExplainingtheEurotoaWashingtonAudienceTommaso Padoa-Schioppa. 2001
63.ExchangeRateRegimes:SomeLessonsfromPostwarEuropeCharles Wyplosz. 2000
62.DecisionmakingforEuropeanEconomicandMonetaryUnionErik Hoffmeyer. 2000
Group of Thirty
91
61.ChartingaCoursefortheMultilateralTradingSystem:TheSeattleMinisterialMeetingandBeyondErnest Preeg. 1999
60.ExchangeRateArrangementsfortheEmergingMarketEconomiesFelipe Larraín and Andrés Velasco. 1999
59.G3ExchangeRateRelationships:ARecapoftheRecordandaReviewofProposalsforChangeRichard Clarida. 1999
58.RealEstateBoomsandBankingBusts:AnInternationalPerspectiveRichard Herring and Susan Wachter. 1999
57.TheFutureofGlobalFinancialRegulationSir Andrew Large. 1998
56.ReinforcingtheWTOSylvia Ostry. 1998
55.Japan:TheRoadtoRecoveryAkio Mikuni. 1998
54.FinancialServicesintheUruguayRoundandtheWTOSydney J. Key. 1997
53.ANewRegimeforForeignDirectInvestmentSylvia Ostry. 1997
52.DerivativesandMonetaryPolicyGerd Häusler. 1996
51.TheReformofWholesalePaymentSystemsandImpactonFinancialMarketsDavid Folkerts-Landau, Peter Garber, and Dirk Schoenmaker. 1996
50.EMUProspectsGuillermo de la Dehesa and Peter B. Kenen. 1995
49.NewDimensionsofMarketAccessSylvia Ostry. 1995
48.ThirtyYearsinCentralBankingErik Hoffmeyer. 1994
47.Capital,AssetRiskandBankFailureLinda M. Hooks. 1994
46.InSearchofaLevelPlayingField:TheImplementationoftheBasleCapitalAccordinJapanandtheUnitedStatesHal S. Scott and Shinsaku Iwahara. 1994
45.TheImpactofTradeonOECDLaborMarketsRobert Z. Lawrence. 1994
44.GlobalDerivatives:PublicSectorResponsesJames A. Leach, William J. McDonough, David W. Mullins, and Brian Quinn. 1993
Toward EffEctivE GovErnancE of Financial insTiTuTions
92
43.TheTenCommandmentsofSystemicReformVaclav Klaus. 1993
42.Tripolarism:RegionalandGlobalEconomicCooperationTommaso Padoa-Schioppa. 1993
41.TheThreatofManagedTradetoTransformingEconomiesSylvia Ostry. 1993
40.TheNewTradeAgendaGeza Feketekuty. 1992
39.EMUandtheRegionsGuillermo de la Dehesa and Paul Krugman. 1992
38.WhyNow?ChangeandTurmoilinU.S.BankingLawrence J. White. 1992
37.AreForeign-ownedSubsidiariesGoodfortheUnitedStates?Raymond Vernon. 1992
36.TheEconomicTransformationofEastGermany:SomePreliminaryLessonsGerhard Fels and Claus Schnabel. 1991
35.InternationalTradeinBankingServices:AConceptualFrameworkSydney J. Key and Hal S. Scott. 1991
34.PrivatizationinEasternandCentralEuropeGuillermo de la Dehesa. 1991
33.ForeignDirectInvestment:TheNeglectedTwinofTradeDeAnne Julius. 1991
32.InterdependenceofCapitalMarketsandPolicyImplicationsStephen H. Axilrod. 1990
31.TwoViewsofGermanReunificationHans Tietmeyer and Wilfried Guth. 1990
30.EuropeintheNineties:ProblemsandAspirationsWilfried Guth. 1990
29.ImplicationsofIncreasingCorporateIndebtednessforMonetaryPolicyBenjamin M. Friedman. 1990
28.FinancialandMonetaryIntegrationinEurope:1990,1992andBeyondTommaso Padoa-Schioppa. 1990
30 Group of Thirty
1726 M Street, N.W., Suite 200
Washington, DC 20036
ISBN 1-56708-156-8