Week 2 Governance Flashcards
what is the OECD definition of corporate governance?
“corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders… also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined
Why is a banks corporate governance unique?
• Opaqueness: harder to assess performance
and riskiness.
• Heavily regulated due to:
– Information asymmetries
– Externalities and different interests between banks (and shareholders) and society
– Systematic importance
• More diverse stakeholders: depositors, diffuse equity
ownership, regulators, etc.
• Conflicting demand: safety and soundness vs.
innovation and improvement.
explain how diffused shareholders (minority shareholders) have governance over FIs
– Can vote directly on crucial issues, and indirectly by
electing board of directors.
– However for minority shareholders voting right
mechanism may not work efficiently:
• Information asymmetries between managers and
shareholders.
• Lack of expertise to monitor managers
explain how concentrated shareholders (controlling shareholders) have governance over FIs
– Have more incentive to acquire information and monitor managers; can exercise voting rights and negotiate managerial
incentive contracts more effectively.
– However, concentrated shareholders may maximise the private benefits of control at the expense of minority shareholders
(“tunnelling”).
Explain why it is difficult for diffused debt holders to implement governance over FIs
– The difficulties of implementing governance
include:
• Small debt holders may be unable to monitor complex
organisation.
• Free-rider incentive.
• Inefficient bankruptcy proceeding.
Why do concentrated debt holders have more incentive to monitor managers?
– Have more incentive to monitor managers and influence the composition of board of directors; can renegotiate the terms of lending; obtain various control right in the case of default or violation of covenants.
– However:
• The effectiveness relies on legal and bankruptcy systems.
• Large creditors may attempt to shift the activities to reflect
own preference.
What are the board of directors duties in risk management?
– Ensure that the management team to manage
bank’s affairs in a sound and responsible manner.
– Have a sound understanding of the nature of the
business activities and associated risks.
– Ensure that bank has adequate audit
arrangement and risk management committees in
place, and risk management systems are
properly applied.
What are RBNZ minimum requirements for board of directors?
- At least 5 directors
- Majority are non-executives
- At least half are independent
- At least half of independent directors are ordinarily resident inNZ
- Chairperson must be independent
• The board must have a separate audit committee
– At least 3 members, all non-executive, majority independent, a
chairperson who is independent and is not the chairperson of the
board.
• Appointment of director must be confirmed by RBNZ
The audit committee is an extension of what?
• Audit committee can be regarded as an extension
of board’s risk management function, to monitor
and direct the internal audit function.
What are the duties of internal auditors and audit committee in risk management?
– Provide assurance regarding corporate governance,
control systems, and risk management processes,
– Verify the adequacy and accuracy of the information
reported to the board by management,
– Evaluate the external audit function and ensure
follow-up identified in auditors’ reports
What are the managerial duties in risk management?
– Ensure all major bank functions are carried out in
accordance with clearly formulated policies and
procedures.
– Bank has adequate systems in place to effectively monitor
and manage risks.
What is the objective of the external auditors?
• The primary objective is to express an opinion on whether the bank’s financial
statements fairly reflect its financial condition and the result of its operations for a given period.
explain the effect of greater information asymmetries on market participants
• Greater Information asymmetries reduce the efficiency / effectiveness of market discipline:
– Product market competition may be less intense
in banking.
– Takeovers may not be possible due to the
scarcity of liquid/efficient capital markets.
– Takeover is less effective when insiders have
much better information than potential purchasers.
What is the
Regulatory/Supervisory Authority role?
– Creating environment to optimise the quality and effectiveness of
risk management.
– Toughening and overseeing the fiduciary responsibilities and standards regarding bank owners, directors, management
personnel.
– Providing guidelines on risk management and related policies.
– Evaluating compliance and overall risk management in banking
system.
What are the 2 purposes why the RBNZ regulates and supervises banks
1) Promotion the maintenance of a sound and efficient
financial system
2) Avoiding significant damage to the financial system that
could result from the failure of a registered bank
