Governance After the Financial Crisis

Corporate Governance in the Wake of the Financial Crisis: Selected International Views is a publication of the United Nations Conference on Trade and Development (UNCTAD). It contains commentary and analysis by leading experts from around the world, including the OECD, World Bank, ICGN, IOSCO, The Corporate Library, PRI and others with a forward by Mervyn King. The intent is to inform ongoing reform efforts and document the work of major organizations.

Frankly, I haven’t read it yet but it looks great and you can download all seven chapters from the UNCTAD site. Thanks to Jackie Cook of FundVotes.com for giving me a heads-up through the Social Investment Forum… otherwise I may have missed it.

Highlights are touted as follows:

• Multilateral and national financial reform efforts have identified specific areas of corporate governance requiring reform at financial institutions. In particular, reform efforts should focus on:
  1. strengthening board oversight of management;
  2. positioning risk management as a key board responsibility, and;
  3. encouraging remuneration practices that balance risk and long-term performance criteria.
• Weak shareholder rights limit the ability of shareholders to hold boards to account, while fairness and transparency in financial markets inspire investor confidence and facilitate increased investment. Regulators can improve the mechanisms through which shareholders are able to influence corporate governance, and also encourage shareholders to take a more active role in the governance of their portfolio companies.
• Governance-related reform efforts that initially focused on financial institutions have fueled reform efforts targeted also at non-financial institutions. Policy makers can use the momentum created by the financial crisis to address corporate governance problems that prevail more generally.
• There has been a recent international convergence in thinking about corporate governance problems and remedies, which to a large extent has been driven by multilateral financial reform efforts, such as those of the G20. International standard setting bodies can promote convergence by designing principles-based guidance that is globally applicable but can be implemented in particular national and regional contexts.
• While the primary targets of governance related financial reform efforts are financial institutions in developed countries, there is the recognition that the governance principles being promoted are applicable to corporations operating in emerging markets. In tailoring reforms for their own markets, policy makers in emerging markets should take into account certain factors, such as concentrated ownership, rights of minority shareholders, problems in enforcement regimes, and the important role of the state as owner.
• Several national corporate governance reform efforts are, for the first time, using the language of “sustainability” and “stakeholder governance.” There is a need to transform the concept of “sustainability” into more concrete measures of corporate performance and embed sustainability into a new model of “stakeholder governance.”

via UNCTAD.ORG – Corporate Governance in the Wake of the Financial Crisis: Selected international views. What’s not to like in the highlights?

I looked very briefly at Chapter 6 by Stephen Davis, Jon Lukomnik and David Pitt-Watson. Just a quick scan and I could see they are raising issues:

When you look at the capital markets, particularly those in the US where the credit crisis began, there are glaring gaps in accountability. US pension plan governing boards do not include representation from the workers who are contributing to the plan. As noted earlier, credit rating agencies are paid by issuers, not the investors who rely on the ratings. The boards of most financial institutions in the US did not feature independent chairmen who could effectively oversee the CEOs. Shareowners could not easily remove directors.

They put forth several reform proposals such as a new approach to regulation which could “enable the various entities within the system to be accountable to each other and to hold each other responsible.” “Vertical regulation empowers market participants while encouraging them to be responsible  and accountable, with requisite independent information and oversight.”

They do a great job of synthesizing some of the more innovative programs and proposals from around the globe from the Centre for Fiduciary Excellence (CEFEX) in Canada, which has created a certification program to promote best practice in the investment management industry, to the Stewardship Code for institutional investors in the United Kingdom.

Recognizing the global nature of capital flows, they propose some principles for the newly constituted Financial Stability Board (FSB):

• all actors in the financial system have responsibility for the tasks they undertake;
• they are in turn accountable, and those to whom they are accountable must be qualified and take their responsibility seriously;
• those who make them accountable need to be provided with relevant information
• information ought be provided by independent agents;
• all banks, and other financial institutions, need to be “stress tested”, not only for solvency, but also for liquidity; and
• civil society, regulatory institutions,  and central banking authorities should have powers and rights that give practical meaning to the above.

So basic, but we have to start somewhere. This seems like a good start:

A preference for transparency in all transactions, clear lines of authority, coordination amongst regulators, an end to opaque trading in derivatives, and a concern about OTC markets.

They suggest the possibility of an inspectorate invested with the authority of the world’s economic powers to tenaciously ensure that these principles are applied. I like their ideas to build ethos into the architecture of our financial markets. Don’t miss out on their creative thinking.

Corporate Governance in the Wake of the Financial Crisis: Selected International Views just might be a great book to test out on that new iPad 2. Yes, I hold a few shares of stock in Apple. (Disclosures)