Corporate Governance at the Crossroads

The Organisation for Economic Co-operation and Development (OECD) has recently published a 30-page report Corporate Governance Lessons from the Financial Crisis  which thoroughly analyses the impact of failures and weaknesses in corporate governance, including risk management systems and executive salaries.

The report indicates that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements. In the report the general term "financial institutions" includes insurance.

The OECD's main conclusions are as follows:

• When they were put to the test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. Several weaknesses have been apparent.
• The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone; information about exposures in a number of cases did not reach the board and even senior levels of management, while risk management was often activity rather than enterprise-based.
• In other cases, boards had approved strategy but then did not establish suitable metrics to monitor its implementation.
• Company disclosures about foreseeable risk factors and about the systems in place for monitoring and managing risk have also left a lot to be desired.
• Accounting standards and regulatory requirements (compliance) have also proved insufficient in some areas leading the relevant standard setters to undertake a review; and last but not least
• Remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests.

 
Under the heading Risk management: accepted by all, but the recent track record is poor, (page 6), the report also indicates that the focus about risk management does not relate to the technical side of risk management but to the behavioural or corporate governance aspect.

Attention in recent years has focused on internal controls related to financial reporting and on the need to have external checks. The OECD strongly feels that it needs to be stressed that internal control is at best only a subset of risk management and the broader context, which is a key concern for corporate governance, might not have received the attention that it deserved, despite the fact that enterprise risk management frameworks are already in use.

In regard to the regulatory framework, [page 26], the report emphasizes the key importance of the regulators in ensuring sound corporate governance. Reference is made to the OECD Principle that "the division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served".

By J.P. Bernier, Senior Vice President, Compliance – Risk Management of the Canadian Life and Health Insurance Association.