toward effective governance of financial institutions · toward effective governance of financial...

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


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).


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


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.


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,


able to make the key judgments their

mandaterequires.

6. RelationshipsbetweenFIboardsandlong-term

shareholders

�� Long-term shareholders can and should


governance.

7. The impactofvaluesandcultureonbehaviors

anddecisions

�� Values and culturemaybe thekeystoneof

FIgovernancebecausetheydrivebehaviors



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


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,


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,


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


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


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



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


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?


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


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


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.


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.


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


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


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


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


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.


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.


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.


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


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,


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.


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


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.


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


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:


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


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


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.


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


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


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


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


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,


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.


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,


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


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


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


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


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

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