However, the financial experience of non-executive directors has increased moderately from 27% to 30% in the same time period.
Additionally, risk communication between the business and board members has been strengthened, with 16 of the top 25 banks having a direct reporting relationship with chief risk offices.<strong> </strong>
Stilpon Nestor, managing director and co-author of the report, applauds the fact that banks are enabling their boards to be more hands, but says there is still a long way to go.
“The crisis taught us that boards need to be more hands on in the areas of strategy and, especially, risk appetite. Although progress on this front is noteworthy and welcome, there are still clouds on the governance horizon. Financial sector experience among bank board members, for example, has increased by 10%, but critically has decreased among chairpersons."
Mr Nestor is concerned that, while boards are playing a more important role in helping to set a bank’s risk appetite, many still do not provide enough ‘top-down’ guidance to management. According to the report, the number of boards that approved their firm’s risk appetite grew from 56% in 2007 to 64% in 2009. But with risk management approaches varying so widely, Mr Nestor suggests some boards may not be providing a forward-looking view as to the appropriate levels of risk for their banks.
Moreover, he fears that bank boards may revert to pre-crisis behaviour, relying too much on regulatory indicators to determine a bank’s health.
“Experience has shown that risk-taking naturally gravitates towards areas of regulatory weakness, meaning that the flood of 2007-2008 might be repeated sooner rather than later if boards focus on regulatory compliance instead of economic substance,” says Mr Nestor. “Boards should start by tackling the question: what can destroy our bank? From there, the bank should work backwards to determine risk capacity and appetite.”
The report also revealed that the boardroom workload is steadily increasing, but directors compensation is not: the number of board meetings has increased 10% annually between 2007 and 2009, while non-executive pay has declined 10% annually on a pay-per-meeting basis.
There are fears that “the growing pile of tasks” being heaped on boards could prevent from reaching a comprehensive view of a bank’s risk profile. “The more the board is asked to meddle in management, the less it will be able to see the forest for the trees,” says Mr Nestor. “A focus on individual controls will trump robust testing of strategy and risk and impede the board’s ability to identify and prepare responses for the fat tail risks that will undoubtedly arise in the future.”
