Session 3 Flashcards
What is corporate governance?
It is the system of rules, practices, and processes by which a company is directed and controlled
Why has corporate governance evolved over time?
- under the pressure of scandals and failures.
- in the aftermath of the global financial crisis of 2007-2008.
What did the OECD do in 2015 regarding corporate Governance?
In the G20 they explicitly added stakeholders as part of corporate governance.
Meaning that the stakeholders were recognized as important
Why was bad corporate governance a factor of the global financial crisis?
no oversight on decision making ⇒ very risky choices were made
Management was not capable to supervise because of the activities were too complex ⇒ the mangers could not assess the risk of the activities so they were very risky
Bad internal control systems ⇒ they could not see how all risks were interconnected making them even more dangerous
What were the Key problem drivers found on the 2020 EY report on sustainable corporate governance?
1- Short term shareholder value is still the priority
2- Investors pressure to focus only on short-term gains, costing companies long-term gains.
3- Bad identification of sustainability risk
4- Board remuneration rewards short term gains
5- Boards are composed by old farts against sustainability over profit.
6- Current governance does not voice STAKEholders long-term concerns.
7- Enforcement for directors to act with long term interest is shite.
What is the issue with dispersed owners and corporate governance?
they are not involved in operations
Why is corporate governance and dispersed ownership particularly bad for banks?
Banks are essential for the economy to run and they work based on trust through reliability.
Its hard to be reliable and structured when your owners are sprinkled around the world.
What are some recent measures taken to improve corporate governance in banks?
Separation of banking and financing activities
The Top management of a bank must be broken into two distinct bodies (Board vs Exec Management, aka the CEO)
The Chairman of the board and the CEO cannot be the same person.
What are the duties of a board of directors?
- Strategic operations
- Risk management control
- Financial statements, financial communication and financial projections
- Governance
- Relationship with control functions (govs and intergov organs)
- Wage policy (including corporate officers)
What is the role of a board of director on a company
- Determines the directions of the Bank’s activity,
- Ensures their implementation by General Management,
- and reviews them at least once a year.
How does the board of directors tackle risk management?
Approve strategies and risk appetite
They ensure the management is prudent preventing conflict of interests.
They get informed on all risks incurred by the company
and more
How does the board manage strategic operations ?
It approves the plans for strategic operations, in particular acquisitions or disposals
Any decision that has a big impact on the balance sheet and risk profile.
How does the board manage the governance of the company?
- appoints the Chairman.
- appoints the CEO.
- appoints the Effective Senior Managers.
- sets any limitations on the powers on the CEO and other senior management
Based on which elements the ECB determines the suitability of board of directors?
Independence of mind
Conflict of interests
Good reputation
Knowledge
Skills
Fairness
Experience
Diversity
Limitations of directors
Time commitment
A SPECIFIC FEATURE FOR CORPORATE GOVERNANCE IN BANKS …
…
