Another piece in the regulatory puzzle - corporate governance in the banking sector

By Brian Salter.

Key Points:
The revised guidelines reinforce key and widely accepted principles, and do not establish a new regulatory framework on top of existing national regulation. They can help banks assess the quality of their existing corporate governance frameworks.

The Working Group on Corporate Governance of the Basel Committee on Banking Supervision first produced its guidelines "Enhancing Corporate Governance for Banking Organisations" in 1999 and revised them in 2004. This most recent revision, released in February, is not intended "to establish a new regulatory framework layered on top of existing national legislation, regulation or codes", according to the Working Group. Its main value lies in giving banks a way of assessing their corporate governance frameworks and, where necessary, enhancing them.

Despite the variation between business structures and legal and regulatory regimes across the world, the guidelines say that there four principles essential to sound corporate governance:

• oversight by the board of directors or supervisory board
• oversight by individuals not involved in the day-to-day running of the various business areas
• direct line supervision of different business areas; and
• independent risk management, compliance and audit functions.

In addition, key personnel must be fit and proper for their jobs (see Narelle Smythe's article in this edition for the latest in Australian fit and proper standards).

Resting on all of this is a belief that, however good the forms and rules are internally, a culture of sound corporate governance is crucial - an attitude mirrored by many regulators (including APRA).

Eight principles of sound corporate governance

The revised guidelines set out eight basic principles:

• Board members should be qualified for their positions, have a clear understanding of their role in corporate governance and be able to exercise sound judgment about the affairs of the bank.
• The board of directors should approve and oversee the bank's strategic objectives and corporate values that are communicated throughout the banking organisation.
• The board of directors should set and enforce clear lines of responsibility and accountability throughout the organisation.
• The board should ensure that there is appropriate oversight by senior management consistent with board policy.
• The board and senior management should effectively utilise the work conducted by the internal audit function, external auditors, and internal control functions.
• The board should ensure that compensation policies and practices are consistent with the bank's corporate culture, long-term objectives and strategy, and control environment.
• The bank should be governed in a transparent manner
• The board and senior management should understand the bank's operational structure, including where the bank operates in jurisdictions, or through structures, that impede transparency (ie. "know-your-structure").

As noted above, these guidelines are not meant to supplant local laws, nor to add another layer. Australia's own prudential standards in this area may well change; last year APRA released draft prudential standards based on the ASX Principles of Good Corporate Governance for listed companies (see our article here). Finalised standards were expected in January 2006 but have not yet been released.