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