Climbing Out of the Credit Crunch

Corporate Governance

We believe that underlying much of the credit crunch has been a fundamental failure in corporate governance. While the financial institutions involved may have been in compliance with local requirements and codes, they have ignored the key point — good corporate governance is about boards directing and controlling the organisations so they operate in their shareholders’ interests. Boards should be answerable to company owners, to account properly for their stewardship and to ensure both sound internal control and the ethical health of the organisations. The use of overly–complex financial products, which thwarted effective supervisory control, and the unethical advancement, at the point of sale, of loans to people with little realistic hope of repaying them shows a lack of basic corporate governance.

A fundamental role of the board is to provide oversight, direction and control but also to challenge where necessary. This does not appear to have happened in many of the banks. No doubt this is partly owing to a lack of understanding of the complexities of the business, but more training is probably only part of the solution. Further research is needed to understand what inhibited boards and managers from asking the right questions and understanding the risks that were being run on their watch.

A fundamental role of the board is to provide oversight, direction and control but also to challenge where necessary. This does not appear to have happened in many of the banks.

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