The impact of the crises started to diminish. Still, all key players, including top executives, regulators and investors, have much to learn from the global financial failures. The Organisation for Economic Co-operation and Development (OECD) Steering group has issued a report entitled Corporate Governance Lessons from the Financial Crisis. This Report concludes that among major contributors to the financial crisis are failures and weaknesses in corporate governance arrangements. When they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services institutions.
Other key contributors to the global financial crises include failures in transparency, failures in lending standards; failures in prudential standards; failures in risk-management.
As to the remuneration of top executives, the real problem was not the amount they receive; it is how companies pay them. The bad bonus culture encourages a short-term thinking: hit as many deals as you can this year and get a larger bonus! That approach pushed executives to focus their attention to achieving short term objectives at the expense of sustainable growth objectives.
Most financial institutions link compensation to quarterly performance, encouraging short-term gambles. When the bets win, executives get the rewards, but when the bets sour, as they have in the latest financial crunch, the executives who took the risks do not have to return their fat-cat bonuses. The executives were, in most cases, no longer gambling with their own net worth. It was the shareholders who took the hit. Thus the executive greed acted as fuel thrown on the fires of and contributed to the blazing global financial crisis. The right approach if we are going to keep the financial system from being misused by top executives’ greed again is to maintain a partnership between the top executives and have their net worth tied to the organisations’ well-being. As a result, they would be cautious about taking big risks and discourage the malpractice of running after short terms gains. Also, we need to replace bonuses with better, longer-term compensation such as deferred cash pay and restricted stock.
The directors of the troubled institutions appear to have provided only the thin-surfaced supervision to control the greed of top executives. The boards of the collapsed firms carry the full responsibility. Each month they see the numbers. They are also responsible for compliance with regulations. And they set the remunerations packages for the top executives. However the troubled firms just ticked the boxes for good corporate governance in their annual reports. In other words, there organisations presented an obvious example of the cosmetic corporate governance to fool different stockholders including investors, rating agencies and regulators!
The current global financial crisis has shed light on how poor risk management could lead to catastrophic results. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone.
With the advent of new products such as sophisticated derivatives and certificate of deposits, they posed unknown risks. Risk management may not have been up to the task since many of the standard quantitative models and users of these models regularly misjudged the systematic nature of risks. To some extent this was due to product complexity and over-reliance on quantitative analysis. Sadly, many risk evaluations were wrong including those provided by rating agencies.
The directors of the collapsed financial institutions should have better understanding of the risk implication at the time of taking decisions related to sophisticated products such as derivatives. The reality is many board members had inadequate knowledge on the sophisticated new products and likely were embarrassed to show that they lack the adequate knowledge! Here where directors’ education and orientation fails as best corporate governance best practice. On going education is important to ensure that the directors are familiar with all aspects of the company’s affairs with a particular focus on risks. Each director must receive customized orientation programs in areas where he\she lack adequate knowledge in order to be able to effectively undertake the fiduciary oversight role.
Finally, the concept that in bad times companies would be more interested in supporting their profitability and accordingly will not have time for corporate governance is irrational. The integrity cannot be compromised because corporate governance is not seasonal – it is for all times and must be embedded in senior corporate executives and directors. Companies must not put corporate governance on the shelf in bad times. It is like a muscle, must be exercised or it will atrophy
Hany is a seasoned banker with 20 plus year’s general banking experience in the Middle East and considered as a leading subject matter expert with extensive experience in compliance, training and corporate governance best practices and on money laundering and terrorist financing controls. He provides advice and direction to the board and management with respect to corporate governance practices and formulates corporate policies.
Hany is a renowned public speaker and author of articles covering a variety of subjects. He is constantly rated as a ‘passionate,’ ‘dynamic,’ and ‘engaging’ speaker. He writes to local and regional news media is often quoted in the press.
Previously he has held several senior management positions in leading banks in Egypt and the gu