The Principles of Banking, 2nd Edition

CHAPTER 17Principles of Corporate Governance¹

Abstract

Corporate governance is defined as the system by which companies are directed and controlled. A bank's board of directors is ultimately responsible for the governance of their companies. There is also a responsibility on a firm's external auditors (appointed by the Board) to satisfy themselves that an appropriate governance structure is in place when signing off the accounts. We review lessons for effective corporate governance learned following the individual bank failures of 2007–2009, and present a recommended structure for a fit-for-purpose governance structure.

We conclude Part IV with a review of principles of bank corporate governance. As any enlightened study of the economic crash of 2007–2009 would conclude, there were perhaps 10 to 12 significant causal factors, interacting over a number of years, that led to the crisis. However, if one had to identify just one factor specific to the banking industry, it would be that the failures of 2008 were a failure of corporate governance. Poor judgement, allied with not inconsiderable incompetence, led to the financial crash being much worse than it need have been.

In this chapter we present case studies of selected bank failures from the viewpoint of corporate governance, and present recommendations on how best to organise bank governance going forward. These can be taken to be good practice, rather than business best-practice, because they are not universal beliefs and ...