Section 4: Rethinking Corporate Governance

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Bank boards must understand the risks their institutions are taking. A lack of professional experience in complex risk management issues misled boards into an over-reliance on regulatory compliance and risk metrics that failed to spot unprecedented increase in leverage in the years leading up to the crisis.

Stilpon Nestor looks at the failings of bank boards in the run up to the crisis and gives seven suggestions for reform. In a nutshell, he writes, boards of the largest banks should become smaller, more professional and have as an explicit duty the preservation of the long-term solvency of the firm.

Meanwhile, public anger has made bankers’ pay a political issue in many countries and new industry guidelines make it clear that bank remuneration frameworks must ensure pay reflects both executives’ performance and the risks they take.

Paul Kennedy and Robert Jackson tackle the difficult issues involved in setting bankers’ pay. Mr Kennedy writes that incentives matter – they provide the behavioural carrot that works together with the twin sticks of policy and regulation to help drive an organisation safely towards its goals. Incentives should be used to encourage business growth within banks’ risk boundaries, possibly tapering off as risk boundaries are approached.

Mr Jackson considers the moderating influence bank directors and remuneration committees can bring to banks’ pay policies as he outlines implications of the Dodd-Frank Act and new guidelines from the G-20, US Federal Reserve and Committee of European Banking Supervisors indicating remuneration committees should oversee pay policy throughout banks.

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