The financial crisis exposed serious failings in banks’ corporate-governance arrangements, as neither shareholders nor management prevented firms from building up excessive levels of risk.

A high-level group set up by the European Commission to investigate the causes of the crisis (chaired by Jacques de Larosière, the former governor of France’s central bank), was brutal in spelling out the governance failings. Reporting in February last year, it said that “many boards and senior management of financial firms neither understood the characteristics of the new, highly complex, financial products they were dealing with, nor were they aware of the aggregate exposure of their companies”.

“Many board members did not provide the necessary oversight or control of management. Nor did the owners of these companies, the shareholders,” it said.

Serious reforms

Despite the obvious failings, other pressing issues have prevented the G20 from tackling corporate governance reform seriously. This is likely to change soon, not least because it is a major priority for Michel Barnier, the European commissioner for the internal market and services.

Last month, Barnier told a gathering of business representatives that “all players must be made responsible for the overall success, or indeed the failure, of their company”. He has said that vetting procedures should be used to prevent “incompetent people” from ending up on banks’ boards, and that shareholders should be less focused on making “quick, short-term returns on their investment”.

He is considering giving auditors an expanded role as watchdogs against dangerous risk-taking. Barnier is planning to present a green paper on possible reforms in May. He also plans to review EU legislation on corporate transparency that dates from 2004.

Stewardship code

Barnier has praised a review of bank governance carried out for the UK government by David Walker, a former chairman of Morgan Stanley International. Walker, who completed his review in November, proposed that banks should have board-level ‘risk committees’ and that large shareholders should be pushed to sign a ‘stewardship code’, committing them to play an active and responsible role as the banks’ owners.

There are other signs that the issue is climbing up the international political agenda. Chris Dodd, the chairman of the US Senate’s banking committee, has included reforms to corporate governance in a financial-regulation bill that he presented last month. These would make it easier for shareholders to replace directors on banks’ boards.

On 16 March, the Basel Committee on Banking Supervision published its own set of principles for enhancing banks’ corporate governance. These cover much the same territory as the Walker review.

The banking sector has indicated that it is open to some reform. The European Banking Federation, for example, has said that measures “should be taken…to strengthen internal risk management processes”.

Europe’s banks can be expected to sound the alarm bells, however, if Barnier’s push for greater shareholder engagement seems like a threat to boards’ ability to take tough decisions.

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