Principles of Corporate Governance in Banks
Category: Corporate Governance
There has been a great deal of attention given recently to the issue of corporate governance in various national and international forums and publications. In particular, the Organization for Economic Cooperation and Development (OECD) has issued a set of corporate governance standards and guidelines to help governments “in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries, and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance.”
Sound corporate governance practices emphasize the need for banks to set strategies for their operations and establish accountability for executing these strategies. In addition, transparency of information related to existing conditions, decisions and actions is integrally related to accountability in that it gives market participants sufficient information with which to judge the Supervisory Council of a bank.
The OECD defines corporate governance as involving “…a set of relationships between a company’s management, its Supervisory Council, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the bank and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently.”
Banks are a critical component of any economy. They provide financing for commercial enterprises, basic financial services to a broad segment of the population and access to payments systems. In addition, some banks are expected to make credit and liquidity available in difficult market conditions. The importance of banks to the economy is underscored by the fact that banking is virtually universally a regulated industry and banks have access to government safety nets. It is of crucial importance therefore that banks have strong corporate governance.