Corporate Governance in Financial Services in the UK - Essay Example

?Running head: Corporate governance in Financial Services in the UK Corporate governance in Financial Services in the UK Insert Insert Title Insert Instructor’s Name February 19 2011 Corporate governance in Financial Services in the UK 1. The corporate governance failings of banks that arguably contributed to the financial crisis in the UK The financial crisis in the UK was caused, to a substantial extent, by weaknesses of the corporate governance arrangements. A number of weaknesses were exhibited in the banking sector, which contributed to the financial crisis including “excessive leverage, inadequate and low quality capital, and insufficient liquidity buffers” (Basel Committee on Banking Supervision (b), 2010, p. 7). Most of these weaknesses are attributed to poor corporate governance. Firstly, there has been a poor risk management system. There were no standard risk management procedures while means of information transfer was inadequate. Information about the possibility or occurrence of risks could not reach the management at the right time or at times failed completely. Most banks do not provide necessary and sufficient disclosures concerning their occurrence of risk (Basel Committee on Banking Supervision (b), 2010, p. 14) Secondly, there are cases where the management board could set up a risk management strategy but fail to monitor how the strategies are implemented. Besides, the corporate legal system in the UK is company-based and the directors are elected to represent the shareholders (Rahman, 2009, p. 4). There are no legal provisions that provide for the shareholders to be elected to the board. There is thus poor representation of the shareholders and a possibility of the corporate officers abusing their powers. Excessive borrowing of funds by banks often emanate from a decision that was made by a single authority. Quite often, if the shareholders are actively involved in the process of decision-making, there shall be few cases of high leverage. There are also insufficient accounting procedure and regulatory measures. In addition, there is insufficient information about capital in the institution that can enable them to be assessed against other competing financial institutions (Basel Committee on Banking Supervision (b), 2010, p.14). Moreover, lack of transparency and market discipline and transparency is hampering smooth running of financial institutions (Blundell-Wignall, Wehinger & Slovik, 2009, p.16). There were also cases of poor remuneration systems designed to reduce risks (House of Commons, 2009, p. 10). It is the role of the shareholders alongside the management board to establish standard procedures for hiring executives in the organization. They will set the remuneration standards of the executive positions that are commensurate with performance. In general, it is important to note that good corporate governance provides a set of good relations between the management, shareholders, and the stakeholders of an organization. It is the basis upon which the business goals of a company are set and ensures that the possible strategies made for the achievement of such goals (Basel Committee on Banking Supervision (a), 2010, p.14). 2. Does the solution to the governance failings (identified in part 1) lie with the board of directors or with the institutional shareholders of banks? It is first important to identify the roles of both the shareholders and the board of directors. In a typical scenario, the function of a board is to monitor how the management practices in an organization are correctly carried. It then has the responsibility of making changes wherever necessary. Under effective corporate governance, the institutional shareholders will be represented in the management board and they come in handy during the activities like annual planning and release of financial reports. Thus, it is not only the role of the board of directors to set up the objectives and the strategies of meeting the objectives, but also the responsibility of the shareholders, whether serving in the board or not, to contribute to the good management of the process. The failure of these shareholders to monitor the activities of the board leads to performance failure (House of Commons, 2009, p. 6) Good corporate governance will provide for shareholder based nominating committee. This has a number of advantages to the effective management practices. Firstly, it helps in breaking the monopoly of power in the organizations that are dominated by a Chief Executive Officer or a chairperson. Then, it ensures that the shareholders participate in the nomination of the directors from wide coverage and with the best expertise that is necessary for the members of the board. This will improve the ability to manage risks effectively (Blundell-Wignall, Atkinson & Lee, 2008, p. 10). There are high chances of coming up with the best management board that also serves the interest of every stakeholder of the organization. 3. Recommendations for improving corporate governance There should be a set of rules and regulations concerning committee governance to ensure that the diversity witnessed in such boards is maintained. A good management board will capitalize on diversity in the monitoring process. If there were to be a harmonization in the evaluation of the management processes, then the whole monitoring and evaluation role would be marred due to the conflicting opinions set to emerge (Basel Committee on Banking Supervision (a), 2010, p.21). Secondly, there should be a distinction between the role of the CEO and the chairperson of the management board. This will ensure that there is a balance of power in the decision-making process. The board should be charged with the responsibility of supporting and monitoring the management. The CEO should spearhead the management processes. The remuneration for the executive and non-executive directors should be attractive in relation to the performance standards and should be approved by the shareholders. In order to achieve its goal, the main aim of the banking institutions should be to manage systemic risks (Alexander, 2006, p. 2) An important position referred to as Risk Management Officer should also be created that assists the CEO on matters pertaining to risks (Segerstrom, 2008, p. 3). Thirdly, there are cases whereby a stakeholder, a shareholder, or a client of an organization may perform unethical or illegal act in the name of exercising corporate governance. There have been cases of abuse of power by the corporate officers. There needs to be strongly instituted legal provisions to deal with such criminal cases. There should be provisions on the rights of the shareholders. All the shareholders should be treated in equitable terms. They should also be provided with the information that explains the performance of the organization and have a right to seek clarification wherever necessary. They should have a right to participate in every organizational event like annual meeting or the election of directors to the board. They should be entitled to the profits and benefits like dividends. The organizations also need to be restructured to reach the various low levels. An organization that is instituted at the regional, national, and international level will help in ensuring that the goal of corporate governance of serving the interest of every one is achieved. The members of the board shall then be drawn from across all categories of individuals thereby ensuring a complete representation of every member of the entire organizational community. There should also be a provision that such members should not be members of board in five or more other companies or organizations. These will ensure the effective service delivery by the board members. There is also a need to incorporate use of modern information technology in governance. This will ensure that no information is lost or not passed to the intended destination at the right time (Basel Committee on Banking Supervision (a), 2010, p. 29). It will particularly ensure that accountability is attained that can motivate the investors’ interest in carrying out more investment. In doing this, the management needs to take into account certain factors. There is that urge by the shareholders and the stakeholder to achieve some level of efficiency in operations, and eliminate fear that adopting such technology may only lead to some loss e.g. a failure in important audit. The personnel concerned have to convince the stakeholders that the system is set to succeed by first showing their commitment to ensure that the business processes succeed (Walker, 2009, p. 17). There is need to assure the shareholders that their resources to be spent on such renovations are not lost. There is also need to provide an annual accountability and audit report. The management should provide the shareholders with the annual report that shows the progress that their organization is making. There should be an independent body of auditors appointed by the shareholders at the beginning of every financial year. This will restore the shareholder’s confidence in the business. Reference List Alexander, K., 2006. “Corporate governance and banks: The role of regulation in reducing the principal-agent problem.” Journal of Banking Regulation, Vol. 7. Nos. 1/2, pp. 17-40. Basel Committee on Banking Supervision (a). 2010. Consultative Document Principles for enhancing corporate governance. Basel Committee on Banking Supervision (b). 2010. The Basel Committee’s response to the financial crisis: report to the G20. Blundell-Wignall, A., Atkinson, P. and Lee, S., 2008. The Current Financial Crisis: Causes and Policy Issues. NY: OECD. Blundell-Wignall, A., Wehinger, G. and Slovik, P., 2009. “The Elephant in the Room: The Need to Deal with What Banks Do.” OECD Journal: Financial Markets Trends, Issue 2. House of Commons Treasury Committee. 2009. Banking Crisis: reforming corporate governance and pay in the City. Ninth Report of Session. Rahman, M., 2009. Corporate Governance in the European Union: Firm Nationality and the 'German' Model, Vol.17 No. 4 Segerstrom, J., 2008. “Consent of the Governed: Prerequisite for Good Governance.” Bank Accounting & Finance. Walker, D., 2009. A review of corporate governance in UK banks and other financial Industry entities: Final recommendations. November 2009 Read More